| Before reorganization | Principal | Interest | |
|---|---|---|---|
| Sterling convertible 6s, | $4,457,714 | $267,463 | |
| First consolidated 7s, | 12,076,000 | 845,320 | |
| Convertible 7s, | 10,000,000 | 700,000 | |
| Second consolidated 7s, | 15,000,000 | 1,050,000 | |
| $41,533,714 | $2,862,783 | ||
| Old Mortgages, | 13,155,500 | 921,062 | |
| Guaranteed bonds, etc., | 6,003,360 | 449,411 | |
| $60,692,574 | $4,233,256 | ||
| Rentals, | 742,226 | ||
| $4,975,482 | |||
| After December 1, 1883 | Principal | Interest | |
| Consolidated 7s, | $20,005,794 | $1,400,405 | |
| Consolidated 6s, | 33,516,666 | 2,011,000 | |
| $53,522,460 | $3,411,405 | ||
| Old bonds, | 13,155,500 | 921,062 | |
| Guaranteed bonds, etc., | 6,003,360 | 449,411 | |
| Rentals, | 742,226 | ||
| $72,681,320 | $5,524,104 | ||
| Total before reorganization | 60,692,574 | 4,975,482 | |
| Increase, | $11,988,746 | $548,622 |
It thus appears that this reorganization plan contemplated an immediate increase in the cumbrous capitalization of the company to the amount of nearly $12,000,000, and an eventual increase in fixed charges of over $500,000. It offered no reasonable assurance that the solvency of the company could be maintained under the average conditions existing in the past, and left no margin for contingencies of any kind. The trouble lay in the unwillingness of bondholders to sacrifice any part of their holdings to meet difficulties caused largely by inflation over which they had had no control. This reluctance was natural,—it should have been met, however, by the realization that the question was now of the future and not of the past, and that the best interests of the bondholders themselves demanded a reconstruction sufficiently radical to leave no doubt of the ability of the new company to pay its debts.
The plan adopted, foreclosure was in order, and suits which had been begun as early as 1875 were taken up and pushed. In November, 1877, a decree of foreclosure under the second consolidated mortgage was obtained, appointing a referee to conduct the sale, and providing for the sale of the road to representatives of the bondholders in case they made the highest bid. The opposition, which had not been able to prevent the approval of the plan, now appeared with a multiplicity of suits to prevent its consummation. In January, 1878, demands were made to secure a re-accounting from the receiver, and the reopening of an earlier suit of the people against the Erie which had been previously discontinued. On January 18 the postponement of the sale to March 25 was obtained. On January 19 a suit demanded the removal of Receiver Jewett, making sweeping charges of fraud; and on January 30, in still other proceedings, Mr. Jewett was arrested on a charge of perjury for swearing to incorrect statements in the annual report to the state engineer;—a culmination as disgraceful as it was absurd. In February a suit in Orange County, New York, demanded the removal of the receiver, and the appointment of a special receiver during the pendency of the action, with an injunction to prevent the sale of the road. In March a petition of one Isaac Fowler, a stockholder, for permission to examine the company’s books, was granted; argument was heard on the petition of James McHenry to intervene in the foreclosure suits and further to postpone the sale; the application of Albert Betz and others to be made parties was granted; and postponement of sale to April 24 obtained. Last of all, on April 23 and 24, arguments in behalf of John F. Brown and F. W. Isaacson were heard, asking for postponement to a still later date. The litigation availed nothing. Judge Potter in the Brown suit held that the courts could relieve against any injustice occasioned by the sale, and on April 24 the property of the Erie Railway was sold for $6,000,000 under foreclosure of the second consolidated mortgage.[112] The new corporation formed to take over the railroad was called the New York, Lake Erie & Western Railroad Company, and had its articles of incorporation regularly filed at the office of the Secretary of State. Mr. Jewett was elected president. In May the receiver was discharged,[113] and a new stage in the history of the road began.
For about seven years the Erie was to be free from the necessity for further reorganization. This result, unexpected from the nature of the adjustment of 1878, was due to the vigorous policy of Mr. Jewett, first, in developing the coal traffic for which the Erie was well located; second, in improving the condition of the road; and third, in securing connections with Chicago.
For some time the Erie had been a considerable carrier of coal and a large owner of coal lands as well. In 1877, the first year in which the figures were separated in the annual report, roughly 273,000,000 out of 1,113,000,000 ton miles reported, or something over one-quarter, were due to the carriage of coal; and $2,697,776 out of a total of $10,647,807 of the freight earnings came from that business. The lands owned by the company consisted of 8000 acres in fee, and large tracts in leasehold and mining rights in the anthracite territory in the northeast corner of Pennsylvania; together with 14,000 acres in fee and 13,000 acres of mining rights in the bituminous territory in the northwest portion of the state.[114] Mr. Jewett felt that this property could be made of great value to the road, and it was under his administration as receiver that steps were taken to extend the holdings of bituminous land, and to control branch roads leading into the district. The result appeared in a remarkable extension of the company’s business. While the total freight ton mileage from 1878 to 1884 increased 103 per cent, the ton mileage of coal increased 190 per cent, or nearly tripled; and while the gross earnings on ordinary freight grew from $7,950,031 to $11,687,520, those on coal increased from $2,697,776 to $5,437,000. At the same time McKean County, directly north of the coal lands, and containing large tracts purchased by the Erie in the course of its other negotiations, turned out to be an abundant oil-producing district, and made the Bradford branch, which tapped it, Erie’s most valuable collateral property.[115]
It was partly because of the success of the policy in respect to coal lands that the Erie was enabled to spend large sums in the improvement of its road. In the six years from 1878 to 1883 the company put nearly $14,000,000 into improvements of the road, property and equipment, and of this about one-half was paid out of surplus earnings. In December, 1883, alone, $304,565 were spent, and in the three succeeding months nearly double that amount; making a total of nearly $1,000,000 in the four months previous to April, 1884. The money went toward reducing grades, straightening curves, increasing weight of rails, etc., including the completion of a third rail to Buffalo by which the serious disadvantage of an exceptional gauge was removed. Its result was seen in the decrease in the ratio of operating expenses from 75.13 in 1875 and 77.16 in 1876 to 64.78 in 1883; and in the rise of net earnings per ton mile from .251 cents to .261 cents, while the gross earnings per ton mile decreased from 1.209 cents to .780 cents. No policy which the Erie managers pursued met a more crying need, and none did so much toward maintaining the solvency of the company.
The project of controlling a line of their own to Chicago was brought actively to the attention of the Erie managers by the danger of being cut off from a connection with that city. The original line of the Erie had run to Dunkirk on Lake Erie, from which a branch to Buffalo had soon been built. For western traffic the Erie had had to rely largely on the Atlantic & Great Western (later the New York, Pennsylvania & Ohio), which connected with the main line at Salamanca, New York, and extended by 1884 west to Dayton, Ohio. In 1857 the Erie first leased this property. Placed in receivers’ hands in 1869, the Atlantic & Great Western was re-leased to the Erie on January 1, 1870; sold July 1, 1871, it was again leased to the Erie in May, 1874, only to enter upon a new receivership on December 9 of that year. The persistent attempt to control the road showed the value which the Erie placed upon it, and in fact it was invaluable as a link in a prospective line to the West. Even while the leases were in force, however, the Erie lacked that connection of its own with Chicago which seemed necessary to make it a successful competitor for trunk-line business. In 1882 it was forwarding passengers over not less than five different routes, over no one of which could it feel assured of the continuance of contracts of a favorable nature. In 1881 Mr. Jewett relieved the situation by acquiring control of the franchise of the Chicago & Atlantic Railway, extending from Marion, Ohio, on the line of the New York, Pennsylvania & Ohio towards Chicago, and soon after he entered into a contract with certain private parties for construction of the road. In 1883 he executed a new lease of the New York, Pennsylvania & Ohio, which he hoped would secure for the Erie permanent control of the property, and about the same time (1882) he purchased a controlling interest in the stock of the Cincinnati, Hamilton & Dayton, which extended the Erie system to the important city of Cincinnati. These operations put the Erie upon a footing which was secure so long as the obligations which they entailed could be met, and showed a broad-minded appreciation of strategic necessities. The terms of the arrangement with the Chicago & Atlantic were as follows: For the construction of the road the Erie agreed to give to the directors the entire proceeds of the mortgage bonds of that branch ($6,500,000), and its entire capital stock ($10,000,000); making an aggregate of $61,710 per mile of line. The proceeds were, however, to be deposited with the president of the New York, Lake Erie & Western in trust, together with certain subsidies which had been voted by the counties and townships along the line, and upon him was to devolve the duty of seeing to the proper application thereof; and besides this, 90 per cent of the stock was to be deposited and an irrevocable proxy given thereon for the thirty years’ life of the bonds.[116] The obligation which the Erie assumed amounted in practice to guaranteeing that the road should be constructed for the sum provided, and that interest on the bonds should be paid. In leasing the New York, Pennsylvania & Ohio the Erie involved itself more heavily. As lessee it agreed to pay the minimum sum of $1,757,055 yearly (the net earnings of 1882); the actual rental to be 32 per cent of all gross earnings up to $6,000,000 and 50 per cent of all gross earnings above $6,000,000, until the average of the whole rental should be raised to 35 per cent, or until the gross earnings should be $7,200,000. If 32 per cent of the gross earnings should ever be less than the $1,757,055 to be paid yearly, then the deficiency was to be made up, without interest, out of the excess in any subsequent year. Out of the rental the New York, Pennsylvania & Ohio was to pay the interest on its prior lien bonds, the rentals of its leased lines, the expenses of maintaining its organization in Europe and America, and for five years a sum of $260,000 each year to the car trust.[117] Finally, in purchasing the Cincinnati, Hamilton & Dayton, the Erie gave to the holders of the $2,000,000 of stock which it bought beneficial certificates to the amount of $1,500,000, on which it agreed to make good any failure of the Cincinnati company to pay 6 per cent per annum.
But though the Erie managers did their best with the conditions which they were called upon to face, they were unable to hold the company up under the enormous capitalization and heavy charges left by the reorganization of 1874–8, at a time when rate wars were sapping its resources, and when contracts which it was being forced to make were entailing an annual loss.[118] In spite of the declaration of sufficient dividends on the comparatively small amount of preferred stock to terminate the voting trust, it is certain that for most of the years from 1874 to 1884 the solvency of the road was a precarious matter, and that there never was a time when any considerable falling off in earnings or any severe shock to its credit would not have driven it to the wall.
Such a shock was preparing in the early months of 1884. For some weeks before the last of April there had been a tendency for the quotations of Erie securities to fall; no reason was assigned, but it was hinted that default might be made in the payment of the June interest on the second consols, and that a receivership was not unlikely. This weakness was accompanied, and perhaps accentuated, by a strike of the brakemen on the New York, Pennsylvania & Ohio in consequence of an order reducing the number of brakemen on each train from three to two. The truth of the matter came out in May, when the failure of the Wall Street firm of Grant & Ward both precipitated a stock exchange panic and laid bare the straits to which the company had been reduced. Investigation showed that a large floating debt had been piling up for four principal purposes: First, advances to the Chicago & Atlantic Railroad; second, advances for coal mines; third, advances for improvements on the Hudson River at Weehawken; fourth, equipment instalments.[119] Attempts to raise funds to cover the debt had resulted in the negotiation of promissory short time notes with the firm of Grant & Ward, for which $2,500,000 of Chicago & Atlantic second mortgage bonds had been deposited as security. The company had been attracted to Grant & Ward by their offer to purchase and dispose of Chicago & Atlantic bonds at a price 15 per cent above that offered by any other parties;[120] and had trusted so implicitly in their integrity as to deposit notes and collateral for its short time loans detached and independent, one from the other, so that Grant & Ward were able to, and did, fraudulently raise money upon them to an amount much larger than the advances they had made. The losses entailed by the transaction were serious, and the blow to Erie’s credit was even more severe. The floating debt which had been so hard to carry became doubly menacing now that the possibility of further short time loans was practically cut off; and to cap the climax, the earnings for the first half of the year 1884 showed an unusually large decrease with the cessation of the fall business. Under these circumstances it was the part of wisdom to take advantage of every loophole of escape, and the peculiar provisions of the second consolidated mortgage, denying to these bonds the right of immediate foreclosure in case of default, were turned to for relief. It will be remembered that by the terms of the reorganization of 1878 no right of action was to accrue to the second mortgage bondholders until on each of six successive due dates of coupons (three years) some interest secured by the second indenture should be in default. This being the case the Erie directors decided to pass the June interest on these bonds. “As a general rule,” said they in a circular, “the business and earnings of the company are much less for the first half than for the last half of the year. The falling off in earnings for the first six months of the previous year has been unusually large. The coupons of the second consolidated mortgage bonds are due and payable on the first of June prox.... Under ordinary circumstances the board might at the present as on the former occasions provide to some extent for the deficit of the first six months, relying on the usual increase in earnings of the last half of the year, but in the present depressed condition of the business of the country and of the earnings of this company, as well as of others, the board does not feel at liberty to deal with anything but the business and earnings as now ascertained, and therefore deems it wise to accept the provisions of the mortgage as the lawful rule for their government in the existing emergency....”[121]
However necessary the action, the bondholders of the company could not have been expected to receive it quietly; and naturally again, the indignation was intense among the English securityholders, to whom, more than to any one else, the existing situation was due. In June, 1884, a meeting of stockholders of the company was held in London, at which much complaint was made of the fall in value of the securities of the company, and an inquiry into the management was demanded. A committee was appointed, and two of its members, Messrs. Powell and Westlake, landed in New York July 15, with protestations of a friendly spirit toward all concerned. The situation was not encouraging. The day before their arrival President Jewett had offered his resignation, and the directors were busy selecting his successor; a large floating debt was demanding most vigorous attention, and confidence in the company was at a low ebb. Beyond a doubt the raising of a large amount of cash, $4,000,000 to $5,000,000, was a pressing necessity, and the English representatives were anxious to make it plain that at least a fair share of this should come from American as well as from English bondholders. Force of circumstances compelled them to give assurance that the money would be raised, and this done, Mr. John King accepted the position which Mr. Jewett professed himself ready to resign. Pending the annual election Mr. King took the position of Assistant to the President.