And yet, with all this prosperity, it cannot be said that the Erie enjoys an assured position. In 1907 it had to pay out 89 per cent of the largest income which it had ever received for operating expenses, fixed charges, and taxes. Of its net income of about $6,000,000 the modest dividends of 4 per cent on its first and second preferred stock absorb some $2,500,000, and the widespread financial difficulties of 1907 have led its management to declare the dividends for that year payable in scrip and not in cash. And although the present period of reaction dates back but a little way the company has been already obliged to the issue of short term notes.
In matters of railroad policy the Erie has accordingly been conservative. In 1898 it acquired control of the New York, Susquehanna & Western, from New York City to Wilkesbarre in northeast Pennsylvania. Three years later it bought the entire stock of the Pennsylvania Coal Company in order to protect its tonnage, and, as the directors expressed it, for other reasons which seemed good; and in 1901 also it bought an interest in the Lehigh Valley. The most sensational episode which has occurred has been the purchase and subsequent release of the Cincinnati, Hamilton & Dayton. It seems that in 1905 Mr. J. P. Morgan bought a majority of a syndicate’s holdings in Cincinnati, Hamilton & Dayton stock, amounting to a majority of the total issue; a purchase which carried control of the Pere Marquette and of the Chicago, Cincinnati & Louisville, or of a total system of 3675 miles. This stock Mr. Morgan turned over to the Erie at a price reported to be $160 a share. From a traffic point of view the deal seemed likely to strengthen the Erie’s position in Ohio, Indiana, and Michigan, while more than doubling the mileage of its system. Because of the financial condition of the new companies, however, the purchase was decidedly unwise; and, after an investigation, Mr. Morgan’s offer to take the road off the Erie’s hands was gladly accepted. On December 4, 1905, Mr. Judson Harmon was appointed receiver of the Cincinnati, Hamilton & Dayton and of the Pere Marquette, and the reorganization of these properties is just being completed.
At present the Erie is operating 2169 miles of road as against 2166 in 1896. Its earnings have greatly increased, its capitalization has grown in less proportion,[154] but it has not yet a sufficient margin of surplus earnings to meet a decline in prosperity without serious misgivings. Dividends on its first preferred stock have been paid since 1901, and on its second preferred since 1905. The common stock cannot expect a dividend in any period which can be foreseen.
CHAPTER III
PHILADELPHIA & READING
Early history—Purchase of coal lands—Funding of floating debt—Failure—Struggles between Gowen and his opponents—Reorganization—Second failure and reorganization.
The Philadelphia & Reading Railroad has been peculiarly unfortunate. Although serving a region of abundant traffic, it failed three times between 1880 and 1895, and was in the hands of receivers ten years. It was reorganized after each failure, and each reorganization was marked by bitter struggles between contending parties, due in part to divergence in financial interests, and in part to personal rivalries.
In 1833 the Philadelphia & Reading Railroad was chartered by the Legislature of Pennsylvania to build a road from Philadelphia to Reading, a distance of 58 miles. Its early history does not concern us. In 1862 it leased, owned, and operated 437.4 miles of track, equivalent, roughly, to 119.4 miles of line; and derived $2,879,419 out of its gross earnings of $3,911,830 from the carriage of coal. Its capitalization was extremely high, roughly, $193,417 per mile of line,[155] and the necessary payments each year, not including dividends, took up $1,454,635. At this time the road owned no coal lands, but, like the Lehigh Valley Railroad and the Schuylkill Canal, remained a common carrier, and relied upon the advantages of its position in respect to the Southern coal fields to secure the tonnage which it required.
From 1862 to 1865 inclusive the Reading enjoyed a period of extreme prosperity. The Navy Department, during the war, required large quantities of fuel, and in the revival of business after the conclusion of peace the Reading took its part. Merchandise earnings increased from $523,416 in 1862 to $1,165,277 in 1865; coal earnings from $2,879,419 to $8,627,292; and though expenses also increased, yet net earnings grew from $2,375,247 to $5,236,655, and the balance of earnings, after all charges had been paid, from $920,612 to $2,632,566. Dividends meanwhile ranged from 14 per cent on the preferred stock in 1862 to 10 per cent on both preferred and common in 1866, though the majority of the distributions were made in stock. On the whole, during the Civil War and for a whole year afterwards, the Reading was able to carry without difficulty the burden of an enormous capitalization. What increase in capital occurred at this time was in stock, and did not add to the load, although the desire to pay dividends on the increased stock led to the piling up of new issues.