And yet, for all its size, the Terminal group was perilously near collapse. Its physical condition was poor and much of its mileage was unprofitable; its capitalization was tainted with dishonesty; and the legality of its recent combinations had not been tested in the courts. Let us quote from the results of an examination made by a well-known banking firm three years later.
“While in a general way the main lines of the Richmond & Danville [West Point and Alexandria to Atlanta],” said this firm in its report, “are in fair condition—better than those of the East Tennessee, excepting parts of its main line between Bristol and Chattanooga, the Cincinnati, New Orleans & Texas Pacific, and the Alabama Great Southern—nearly all the rail in both systems is too light (50 to 60 lbs. while on the main lines it should be 70 to 75 lbs.), many of the trestles need renewing, and a large number of the bridges, principally on the East Tennessee system, are not sufficiently strong to warrant the use of heavy engines, which are essential to hauling long trains and operating with economy. To a very large extent ballast is altogether lacking or insufficient in quantity. Excepting that portion of the equipment represented by equipment bonds or notes, the engines and cars are generally small and weak and unsuitable for main-line service, and are also insufficient in quantity for any considerable enlargement of business. Other appointments, such as shops, yards, etc., are, with but few exceptions, crude and uneconomical.
“On the branches and secondary lines, especially those of the Richmond & Danville system, the condition is even worse, little or no effort having been made to maintain them at proper standard, even for a moderate traffic. About 700 miles of the Richmond & Danville secondary lines and branches (including about 200 miles of narrow-gauge lines) are still laid with iron rails. On July 1st, 1892, there were 72 miles of iron rails in the main lines of the East Tennessee.
“An expenditure of several million dollars should be promptly made on these properties for equipment alone, but it is no use to do so, even if it were possible, unless additional track and yard facilities are also provided, nor unless such enlargements of engine and car shops be made as will permit of the equipment being kept in order.”[347]
This verdict was only reinforced by the characterization in detail of a number of the subsidiary lines. Thus the Columbia & Greenville was termed “a collection of weak lines of constantly decreasing value”; the Mobile & Birmingham “of no value whatever to the East Tennessee”; and the Memphis & Charleston “valuable, but in a condition totally unsuited to modern requirements.” How the capitalization of the system was tainted with fraud has already been pointed out. The legality of the recent combinations had not been tested in the courts. In January, 1889, counsel for certain unnamed parties had a plea for a quo warranto presented to the Attorney-General of Virginia.[348] The petition alleged that the purchase of the control of the East Tennessee, Virginia & Georgia Railway and of the Virginia Midland was an abuse of the powers of the Richmond & West Point Terminal ... a violation of public policy, and an usurpation to the great damage and prejudice of the constitution and laws of Virginia. This petition the Attorney-General dismissed on technical grounds. The legality of the various mergers was soon, however, to be attacked again, and in 1889 the question was decidedly unsettled.[349]
The storm broke in August, 1891. On the eighth of that month the New York Herald published a vigorous onslaught upon the company. It maintained that the Richmond & Danville system had failed to earn its fixed charges by $526,560 in the year ending 1890; that this fact had been concealed by deceptive or false entries on the books which made a fictitious profit emerge by covering up the losses on auxiliary lines; that the 8 per cent dividends which had been paid on the Central of Georgia had not of late years been earned, and that the price paid for the Georgia Central stock had been grossly excessive; that the East Tennessee was just about paying its way; and, finally, that the other recent acquisitions were either just paying their way or were showing annual deficits.[350] Color was given to the charges by the trouble caused by the floating debt. Though denied by the officials of the company, the sale of 2000 shares of Baltimore & Ohio stock held in the Terminal treasury;[351] the negotiation of a short time loan at 6 per cent and 2½ per cent commission for the Central of Georgia and the extension of another loan;[352] the placing of $500,000 at 6 per cent for the Richmond & Danville; and the active financial support which General Thomas felt obliged to render the East Tennessee showed the anxiety which it occasioned.
On November 25 the directors held a meeting and appointed Messrs. Eckstein Norton, late president of the Louisville & Nashville; Wm. Solomon, of Speyer & Co.; Jacob H. Schiff, of Kuhn, Loeb & Co.; Chas. S. Fairchild, president of the New York Security & Trust Company; and Louis Fitzgerald, president of the Mercantile Trust Company, a committee to carefully inquire into and examine the condition of the Terminal properties and to aid the company in perfecting a plan of readjustment. Owing to the financial depression, they explained, “the company has been unable to sell securities based upon engagements they had made prior to the period of depression and to pay for necessary equipment and improvements. A large floating debt has in this way been accumulated, but each of our important railroad systems is solvent.... After maturely considering the whole situation, we felt it wise to invite the gentlemen whose names appear ... to aid us in perfecting the best plan for a permanent adjustment of our affairs.”[353]
The committee reported provisionally on December 8. It then stated that it was essential to the proposed plan of relief that the elections of all the subordinate companies in the Richmond Terminal system should be postponed till after the Richmond Terminal affairs were settled, and requested that financial provision be made for the employment of an expert or experts in the examination of the properties and accounts. It was understood that the committee’s plan was to make a considerable assessment on the stockholders. The board of directors refused to respond and the committee therefore withdrew.[354]
The next day the stockholders selected Mr. F. P. Olcott to appoint a new committee to take up the work.[355] They were not in favor of radical action, and Mr. Olcott expressed the opinion that there was no necessity for measures so stringent as those which the Schiff-Norton Committee had had in mind. It was but natural that at this point there should have been some delay. Meetings were held, expedients for raising cash discussed, and a reorganization plan was gradually whipped into shape. It was not, therefore, until March 19, 1892, that the public were informed what Mr. Olcott and his backers did consider that the situation required. The main points of the elaborate scheme which was then proposed were as follows:
First, a consolidation of the Richmond Terminal, Richmond & Danville, and East Tennessee properties. The Central of Georgia and the Erlanger systems were not to be included in the reorganization, but the interest of the Richmond Terminal and the East Tennessee in their stock was to be made subject to a new mortgage.