On their return to London Messrs. Powell and Westlake reported the floating debt to be as follows:
| Unpaid coupons, June 1, 1884, | $1,007,922 | |
| Balance of actual and early maturing liabilities other than the June 1 coupons over and above cash in hand and money assets considered good and available, | $4,447,316 |
“All the purposes, the expenditures on which have caused the floating debt,” said they, “seem to us to have been in themselves wise and politic, but the piling up of a large floating debt for even the best of purposes is always more or less imprudent and dangerous. The company’s credit might have borne the strain of the panic, but it was broken down by the Grant & Ward disaster, and the funding of its floating debt is now indispensable.... We have suggested to the president and directors, and now recommend to the committee that an effort should be made without delay to raise a permanent loan on the securities available for a total of $5,000,000.”[122] This, it will be observed, was the old remedy. Inability to meet current expenses was to be removed by capitalizing the debts which this inability had caused.
The year 1885 was taken up with suits brought against the Erie by certain of its branch lines. In February the directors of the Buffalo & Southwestern Company brought suit to recover $345,000 interest defaulted during the previous January. The complaint alleged that the Erie was insolvent, and asked that it be restrained from using the gross receipts of the road until the default should have been made good. The Erie paid the back interest, but in July, after another default, an injunction was obtained forbidding it to divert any part of the earnings received or to be received from this property. It was recited that on May 24, 1881, the Buffalo & Southwestern had been leased to the Erie for 35 per cent of the gross earnings, subject to certain deductions; that the Erie had delayed payment of the rental due in January, 1885, and had refused to pay that due in July, 1885, but that it was still receiving the gross earnings of the plaintiffs’ road, and had applied these to the payment of its debts other than the rentals of this road.[123] In November, after the Erie’s other troubles were settled, the litigation was terminated by an agreement to reduce the Buffalo & Southwestern rental from 35 per cent to 27½ per cent. Other suits arose, directly or indirectly, because of the control which Mr. Jewett maintained as trustee of the stock of the Chicago & Atlantic and the Cincinnati, Hamilton & Dayton railways even after his resignation from the Erie Company. On the one hand President King was anxious to repossess himself of these important branches for the Erie, and on the other Mr. Jewett was not disinclined to do what damage he could to the managers who had succeeded in supplanting him. In the matter of the Chicago & Atlantic Mr. Jewett gained the first victory in a temporary injunction forbidding the Erie to divert traffic from this line contrary to contract. This injunction was soon, however, substantially vacated, and President King in his turn obtained a decision that Jewett had been made trustee of the Chicago & Atlantic simply because he had been at the time vice-president of the New York, Lake Erie & Western Railroad Company and could be relied upon to control the road as the western outlet of the Erie. A receiver was subsequently appointed and the road reorganized as the Chicago & Erie Railroad Company, the Erie agreeing to guarantee payment of its first mortgage bonds, and receiving in return the $100,000 of capital stock and $5,000,000 in income bonds, besides $2,000,000 first mortgage bonds which were in part payment of old advances.[124] In his action concerning the Cincinnati, Hamilton & Dayton President King was less successful; and Mr. Jewett was sustained in his refusal to deliver proxies for the stock held to the larger company. The result was to turn the Erie to the Big Four, upon which, instead of upon the Dayton road, the management was for some time to rely for an entrance into Cincinnati.
During these various contests the suggestions of the English committee were not lost to view, and in the latter part of 1885 they crystallized into definite propositions. The floating debt then consisted of two parts: first, the defaulted coupons on the second consolidated bonds; and second, the current liabilities accumulated for the purposes before described. The relief proposed was likewise in two parts, and involved the issue of a 5 per cent mortgage, secured by deposit of the second consolidated coupons maturing and to mature in June and December, 1884, June, 1885, and June, 1886, and a 6 per cent mortgage upon the property of the Long Dock Company, comprising the valuable terminals of the Erie at Jersey City.[125] The funding of the coupon issue proved simplicity itself; the funded coupons were exchanged for bonds of the new gold mortgage, which were to be redeemable at 105 at the pleasure of the company.[126] By the end of 1886 these bonds had been accepted by the holders of $32,982,500 of the outstanding $33,597,400 of the second consols, and $3,957,900 of them had been issued. Dealing with the Long Dock Company was slightly complicated by the fact that 8000 shares of that company were pledged as part security for the issue of Erie collateral bonds. To free them $800,000 in cash were deposited with the trustee of the mortgage, which were in turn employed by him to pay off $727,000 of the 6 per cent collateral bonds, thus reducing the interest charge on that issue $43,620 per annum. This done, the Long Dock Company extended the lease of its property and franchises to the Erie to 1935 at a rental of $480,000 per annum, and contemporaneously therewith placed a consolidated mortgage upon its property to secure $7,500,000 of 50-year 6 per cent gold bonds; of which $3,000,000 were reserved to retire existing indebtedness, and the proceeds of $4,500,000 were paid to the Erie for the cancellation of its floating debt. The total result was to increase fixed charges by $270,000 of interest at 6 per cent on the Long Dock bonds, and by $197,895 on $3,957,900 of the new funded 5s, less the reduction of $43,620 on cancelled collateral bonds; leaving a net increase of $424,275.[127] For its ingenuity the scheme was to be admired; from any other point of view it was to be condemned as another example of that borrowing to pay interest which had brought the Erie to its existing straits. The incapacity of the creditors of the company to realize that continued borrowing of money to pay current obligations was only to ensure repeated bankruptcy seemed complete.
After this new “salvation,” the Erie started once more on its laborious attempt to pay interest on its outstanding bonds. From 1887 to 1892 the business increased somewhat, and despite a decrease in the average receipts per ton mile[128] a gain of about $4,700,000 in gross earnings was secured; from which is to be deducted an increase of $310,996 in fixed charges, and of $4,076,111 in operating expenses.
The prohibition of pooling in 1887 affected the company unfavorably. Previous to the passage of the Interstate Commerce Act the other lines had been paying it an annual average of $42,500 on west-bound business from New York for shortages under the operation of the trunk-line pool, besides about $88,000 annually on east-bound dead freight and $19,770 on live stock. These payments ceased when the Act was passed, although a differential on west-bound traffic was subsequently allowed.[129] But the leakage which was most apparent lay in the large rental and heavy operating cost of the New York, Pennsylvania & Ohio. It will be remembered that the Erie had leased that road for 32 per cent of the gross earnings when earnings were $6,000,000 or under, and 50 per cent when they should be above that figure. In 1887 this was amended so as to provide that for every increase of $100,000 over $6,000,000 in the gross earnings the Erie should pay to the lessor an additional one-tenth of one per cent of such gross earnings until the gross earnings should be $7,250,000, and the rental 33½ per cent, after which the percentage was not to increase.[130] Under the old lease the Erie had guaranteed to carry over the line 50 per cent of all its east-bound and 65 per cent of all its west-bound through traffic—under the new lease, these maxima were increased to 55 per cent and 70 per cent; but even this failed to make the branch road pay. Its grades were high, its equipment and sidings were limited, its cost of operation was well above 68 per cent; and the increase in tonnage provided for emphasized each and every disadvantage. Up to 1893 the results of operations were as follows:
| Loss | Profit | |||
|---|---|---|---|---|
| First 5 months to Sept. 30, | 1883 | $199,540 | ||
| Twelve months ending Sept. 30, | 1884 | $270,281 | ||
| 1885 | 239,820 | |||
| 1886 | 51,322 | |||
| 1887 | 91,965 | |||
| 1888 | 343,911 | |||
| 1889 | 331,134 | |||
| 1890 | 77,376 | |||
| 1891 | 19,586 | |||
| 1892 | 425,888 | |||
| 1893 | 197,106 | |||
| $1,827,726 | $420,203 | |||
| Net loss, | 1,407,523 |
It thus appears that the terms of the amended lease were in reality more onerous than the contract which they succeeded, and that whatever the value of the branch as a feeder, its operation involved large and fairly regular deductions from the net income of the parent line. Emphasis on these facts was laid in the annual reports, and frequent demands were made that the New York, Pennsylvania & Ohio bring its road up to the standard of like connections of through trunk lines. Meanwhile improvements were imperative on the Erie’s own lines: new equipment was needed, new rails and new motive power, and at the same time surplus earnings were somewhat less. The directors adopted the expedient of allowing current liabilities to accumulate, and put $8,496,572 into the road from October 1, 1884, to September 30, 1892, of which $3,351,977 represented surplus earnings, $2,375,400 increase in bonded indebtedness, and the balance floating debt. In the matter of traffic policy they paid particular attention to the coal business, which, however, lost ground as compared with other freight, and to the local business, which it was the policy of the management to encourage. In 1890 the board declared that “the time had arrived when extraordinary expenditure for improvements and the necessities of the property were no longer necessary.”[131] In 1891 3 per cent on the preferred stock was paid, the first dividend since 1884.[132]