The scheme fell through, according to Mr. Gould, who was a party to the agreement, because securityholders outside of the pool refused to consent to so drastic a reduction of their holdings; and at his suggestion a consolidated mortgage was substituted for the issues of stock. This mortgage was for forty years at 6 per cent. The total issue was to be for $30,000,000, of which $24,000,000 were to be issued at once for the retirement of earlier bond issues and for payment of arrears of interest.[469] Like the previous proposition the scheme contemplated a scaling in the principal of the junior securities, and the same rates of commutation were retained; but in this case the old Kansas Pacific stock was withdrawn from the operation of the plan, and certain reservations were made for other purposes, so that an actual increase in indebtedness was finally to result, and even the interest charges were certain to increase.[470] For the time being, however, by force of the reduction of interest on the funding mortgage in January, 1879, from 10 to 7 per cent, and by the disallowance of some claims for overdue interest, relief was obtained, while the consolidated mortgage was duly issued.
The Kansas Pacific ran west to Denver. Between Denver and Cheyenne the Denver Pacific, 106 miles long, served as a connecting link between the larger systems. The Denver Pacific stock was held by the Kansas Pacific, and 29,979 shares of it were pledged in 1877 as part security for an issue of 10 per cent funding mortgage bonds.[471] The total earnings of the Denver Pacific from 1870 to 1879 had been $3,122,141; the expenses had been $1,709,477, and the net earnings from operation $1,412,664, or an average per annum of $141,266; while for the first eight years of that time the annual interest charge had been about $185,000. The only value of the Denver Pacific stock lay in the control which it secured over a connecting link between Denver and Cheyenne.[472]
Under the conditions of competition existing between the Union Pacific, Kansas Pacific, and Denver Pacific, some sort of agreement or consolidation was both desirable and likely. The Kansas Pacific was entirely dependent on its competitor for access to western business, and this was soon perceived to be equivalent to continuous bankruptcy. Extension to Ogden would have removed the dependence; but this, while to be dreaded by the Union Pacific, was beyond the power of the Kansas Pacific for financial reasons, and no capitalist or group of capitalists before 1878 or 1879 seemed interested in the undertaking. On the other hand, rates were low, and the very success of its exclusive policy forced the Union Pacific to meet the competition of a road which, with no interest charges to pay, was able to cut all rates to the very verge of the cost of operation.
As early as 1875 there was talk of an agreement whereby the Kansas Pacific was to give up its claims for a pro rate on its Pacific business in return for a monopoly of the local business of Colorado, and in connection with the deal was to acquire the Colorado Central Railroad on issue of $10,000,000 Kansas Pacific stock to parties designated by the Union Pacific Company; but this was never carried out. In 1878, when Gould began to be interested in the property, a union by means of stock control seemed feasible. Gould’s first purchases were of bonds, and it was as a bondholder that he entered the pool of 1878; but with the purchase of the holdings of the “St. Louis parties,” he and his friends obtained control of a majority of Kansas Pacific stock. In fact one of the provisions of the pool was that if on the first day of June, 1878, it should be found that Messrs. Gould, Dillon, and Ames, all large stockholders in the Union Pacific, had not a majority interest in said pool, then they should have an option on such an amount of other interest ratably and for cash as on the basis of the schedule should give them such an interest; and though this majority did not necessarily involve a majority of stock, the operations of the pool aided Gould in the acquisition of control. The union between the Union Pacific and the Kansas Pacific thus secured was, however, of the frailest kind; for Mr. Gould at no time had the permanent interest of either road at heart, and looked for his personal profit rather in their struggles than in agreement between them. For this reason, as he bought Kansas Pacific, Gould sold Union Pacific stock, reducing his holdings from about 200,000 to about 27,000 shares.[473] In 1879 the situation of the two roads was thus much the same as before, and the harmony apparent was of the most superficial kind. One change, however, had taken place to the serious disadvantage of the Union Pacific; for the Kansas Pacific, although still badly built and dependent upon its rival for an adjustment of rates sufficiently favorable to let it into the western business, had now interested in it a group of capitalists quite capable of financing an extension to Ogden, and even of securing connections from Kansas City to the East.
In 1879, doubtless relying upon the strength of Kansas Pacific’s new backing, Gould proposed to the Union Pacific a consolidation of the Union, Kansas, and Denver Pacific roads, in which the shares of each were to figure equally at par. The terms were absurd by every test of productive capacity which could have been applied. The relative earning power and annual interest per mile of the three roads at this time were given by a government accountant as follows:
| Annual Net Earnings per mile | Annual Interest per mile | ||
|---|---|---|---|
| Union Pacific | $5617 | $3185 | |
| Kansas Pacific | 1602 | 2295 | |
| Denver Pacific | 1333 | 1750[474] |
The Union Pacific had reported an annual surplus, the other two roads an annual deficit; the Union Pacific had not defaulted, the Kansas and Denver Pacific had done little else; the highest mark which the Kansas Pacific stock had touched in January, 1879, had been 13, that of the Union Pacific had been 68½. But the question, as Gould well knew, was not one of productive but one of destructive capacity, and the means of coercion which he employed was a demonstration of the ease with which the Kansas Pacific could be made formidable as a competing line. In November, 1879, he purchased the Missouri Pacific from Kansas City to St. Louis; about the same time he bought two minor roads between the Kansas Pacific and the Union Pacific in Kansas, and announced his intention of extending the Kansas Pacific to Salt Lake City, there to connect with the Central Pacific and to form a third transcontinental route. The story is clearly told in the report of the United States Pacific Railway Commission.[475] The result was the consent of the Union Pacific directors to the terms imposed, and the execution of an agreement dated January 14, 1880, whereby the Union and the Kansas Pacific, with all their respective assets and liabilities, were put together at par of their respective capitals,—$36,762,300 and $10,000,000,—to which was added the capital of the Denver Pacific, $4,000,000, forming a new company called the Union Pacific Railway Company, with a capital of $50,762,300, and a bonded indebtedness of $92,984,624.[476] This corporation was larger in every way than the old Union Pacific Railroad, except in one particular—earnings above fixed charges. It had 1821 miles of line instead of 1042; $22,455,134 gross earnings instead of $13,201,077; $10,545,119 operating expenses instead of $5,475,503; and yet, since the consolidation was a union of some strength with a vast deal of weakness, there were few who profited by it save the holders of Kansas Pacific or Denver Pacific stocks. Those lucky and skilful individuals saw the quotations of Kansas Pacific common rise from a high level of 13 in January, 1879, to one of 59 in June, and of 92½ in December; and the stock which had been a football in the market thus become of such value that in 1887 Gould was able to lay before a committee of Congress, in justification of the terms described, a table which showed for 1880 market prices of Kansas and Union Pacific stock which were approximately the same.[477]
It was to Gould, as chief owner of Kansas Pacific and holder of practically all of the Denver Pacific stock outstanding, that the lion’s share of the profits went; but Mr. Gould was not satisfied with a harvest on these stocks alone. In the course of his operations he had become possessed of certain branch and minor roads in whole or in part. Thus he held $945,887 in bonds of a company known as the St. Joseph & Western Railroad Company, and 5013 shares of its stock; $634,000 in bonds of the St. Joseph Bridge Company; and $59,000 in St. Joseph & Denver Pacific Railroad receivers’ certificates; while to convince the Union Pacific directors of the wisdom of accepting his plan of consolidation he had acquired the Missouri Pacific, the Kansas Central, and the Central Branch Union Pacific railroads.[478] The earning capacity of none of these lines was large, that of the Missouri Pacific being the greatest. The St. Joseph & Western had been sold in foreclosure in 1875, and had continued to be managed thereafter by a receiver. What value it had was due to the fact that, as extended to Grand Island, it gave to the Union Pacific an outlet to the East other than the one at Omaha. The value of the Bridge Company bonds and of the receivers’ certificates was dependent upon this same property. The Kansas Central was a narrow-gauge road and had been sold under foreclosure in April, 1879. The Central Branch Union Pacific had been designed to join with the Kansas Pacific, but had been left without western connection when this latter road had failed to meet the Union Pacific at the hundredth meridian. At the time of the consolidation, according to the United States Pacific Railway Commission, “the coupons for six years were in default, and were retained uncancelled as security for the income mortgage. The company had never earned sufficient to pay its own coupons, without taking into account the accruing interest to the United States in any form.”[479] The Missouri Pacific was more prosperous, but need not here concern us. Mr. Gould had paid various prices for the above, ranging from $40 for the St. Joseph & Denver bonds to $238 for the stock of the Central Branch Union Pacific. In the case of each road he turned over his purchase to the Union Pacific for the same or a greater price.[480] Thus for the St. Joseph & Western bonds, for which he had paid 40, he received par in Union Pacific stock selling as high as 94 in January, 1880; for $634,000 bonds and 4000 shares of stock of the St. Joseph Bridge Company, costing $480,440, he received 6340 shares of Union Pacific stock; for $479,000 in bonds and 2521 shares of stock of the Kansas Central, he received 4790 shares of Union Pacific; and for 7616 shares of Central Branch Union Pacific, costing $1,826,500, he received $913,500 in Union Pacific six per cent bonds and $913,500 in Kansas Pacific six per cent bonds.[481] The result was the issue of considerable amounts of stock of the consolidated and bonds of the consolidating companies, without equivalent value received.
The Union Pacific Railway Company, therefore, began its career in 1880 in worse shape than the Union Pacific Railroad Company, which had preceded it, for it suffered not only from an initial watering of stocks and bonds, but from a watering of assets which had followed. Including the government subsidy and accrued interest thereon, the total bonds and stocks of the company in 1880 were $179,058,902, or $98,329 per mile, of which $27,876 were stock, $45,372 mortgage bonds, and $25,081 government subsidy and interest. The figures per mile were slightly lower than in 1870, and yet the water in the capitalization was more abundant, for the average value of the assets had declined still more. A dividend-paying road had been combined with non-dividend payers, with the result of large profits to the promoters of the consolidations, but of serious harm to the solvent party.
Between 1880 and 1883 a number of branches were constructed, to provide funds for which the capital stock of the Railway Company was increased $10,000,000. Of these the Denver & South Park was constructed in the years 1881 to 1883, and was the last of Mr. Gould’s gifts to the parent line. This road was handled by several construction companies, in the last of which Gould took a quarter interest, receiving stock of the Denver & South Park Railroad Company as a dividend on his investment.[482] In November, 1880, acting in behalf of the Union Pacific Railway Company, he bought the stock of the Denver road at par for cash, benefiting in his capacity as quarter owner by his action as representative and stockholder of the Union Pacific.[483] In relation to the road Mr. Charles F. Adams, Jr., subsequently said: “The chief source of revenue ... was in carrying men and material into Colorado to dig holes in the ground called mines, and until it was discovered that there was nothing in those mines the business was immense.”[484] A more important and genuinely beneficial project was the organization in 1881 of the Oregon Short Line Railway Company to construct and operate a railway from Granger on the Union Pacific to and into the state of Oregon, a distance of 610 miles, with the intention of securing the Washington and Oregon business. The Northern Pacific was in financial difficulties at the time, and it was not expected that it could anticipate the new road; but even though this expectation was disappointed, and the Oregon Short Line was second in reaching the disputed territory, its value was great and steadily grew.[485] The road was built by the construction department of the Union Pacific, and was financed by the organization of a subsidiary corporation which issued stock and bonds to an amount of $25,000 per mile, one-half of the stock being reserved in the Union Pacific treasury for the purpose of control, and the Union Pacific guaranteeing the payment of interest on the bonds. This branch at least was not unloaded on the main line by interested parties, and forms an essential part of the system to-day. Other branches were bought or constructed at the time, but do not require detailed mention.