Deducting from this amount the sums paid to the Government and the company’s credits for mail and carriage, and adding arrears of interest, the sum due the Government at the last of 1893 was approximately $52,000,000.[496] It was obviously highly difficult for the company to pay this sum in 1892 or 1898 or any other time, and for some years both the company and the Government had been earnestly discussing schemes for refunding, and the advantages and disadvantages of the ownership and operation of the road by the United States. Thus in 1892 an overwhelming obligation was hanging over the Union Pacific; and did not crush it only because the inability of the road to pay was so evident, and the inadvisability of government ownership was so strongly believed in, that every one felt that the necessary concessions would be made.
In 1893 the sinking-fund 8 per cent bonds matured to the amount of $5,176,000, and were partially extended and partially paid off through the medium of an underwriting syndicate; but this was the last attempt to meet indebtedness coming due. During the year both gross and net earnings fell off enormously, owing to the general depression of business, and particularly to the stagnation upon the Pacific coast. Freight rates were said to be in a state of chaos; and the Union Pacific served notice that it would withdraw from the Western Passenger Association on October 10. As the year wore on the continued decrease in earnings made the situation desperate. “The company for the year ending December 31, 1892,” said Mr. John F. Dillon, counsel for the Union Pacific, in November, “had a surplus of $2,000,000. In the month of September (1893) there was a loss of net revenue of $1,500,000 as compared with the preceding year, and from January 1 to August 31 there has been a falling off in net revenue of over $2,500,000. The company is indebted for labor and materials on October 1 to the amount of $1,500,000; and its sinking-fund and interest charges for September would be more than $1,000,000; for October $750,000, for November $850,000, for December $1,000,000, and for January $1,000,000. There will be a deficit for the year 1893 of at least $3,000,000 and the company is without money or means to meet these obligations....”[497]
Under these conditions a receivership was the only device which could prevent the dismemberment of the system and protect the interests of all the creditors; and accordingly, on application of parties friendly to the company, Messrs. S. H. Clark (president of the Union Pacific), O. W. Mink (comptroller), and E. E. Anderson (government director), were appointed in October;[498] Mr. Clark taking charge of the operation of the road, and Messrs. Mink and Anderson of the financial and legal business.[499] One month later, on application of the Attorney-General, Messrs. John W. Doane and Frederick R. Coudert were appointed additional receivers to safeguard the government interests and to assist the other receivers in the general administration of the property.[500] These gentlemen remained in office until the reorganization was complete, though various portions of the system passed from their jurisdiction from time to time.
The appointment of receivers closed a long struggle to maintain the solvency of the road. A reorganization was now in order, and in this it was to be possible to do what Mr. Adams had not been able to do,—namely, to rearrange the capitalization of the road, thereby permanently lessening the fixed charges and securing a reserve of earning capacity sufficient to avoid bankruptcy when receipts for any cause should show a considerable decrease. This was the fundamental condition of future prosperity. Besides, the debt to the Government had to be settled, cash raised to pay the floating debt, including the three-year notes of 1891, and the system held together so that its earning capacity should not be destroyed.
As might be expected, it was the debt to the Government which was most publicly and persistently discussed. There seemed to be four ways in which this might be handled:
First, the Government might have cancelled the obligation and have remained satisfied with the enormous economies which it had secured in the transportation of mails and other government business. In the seven years between 1867 and 1873 alone the Quartermaster-General estimated that the Union Pacific had saved the Government $6,507,283 in the cost of moving troops and supplies,[501] and there was no doubt that by 1896 the investment of the Government, with interest, had been many times regained. But it was pointed out not only that the Union Pacific deserved little consideration, in that its earnings had been wrongfully diverted from the payments demanded by the Thurman Act by the manipulations of Gould and others, but that the precedent of renouncing a just claim would be an extremely bad one for the Government to set.
Second, the Government might have exacted larger payments to the sinking fund, and have extended the debt at an unchanged rate of interest until it should be automatically discharged. This was the proposal of Mr. Hampton, Commissioner of Railroads, who suggested the amendment of the Thurman Act as follows: it should embrace all the United States bond-aided Pacific railroads; it should compel the contribution of 50 per cent of net earnings to a sinking fund instead of 25 per cent, and should extend the indebtedness to the Government until discharged as provided. If any company should abandon a portion of a subsidized line or divert its business from a subsidized to an unsubsidized line, that company should transfer the conditions which were attached to the former to the latter, in order to protect the interests of the United States Government.[502] The weak points in this scheme were many. Among them may be pointed out the fact that contributions to the sinking fund under the Thurman Act had been necessarily invested in government bonds, which, in view of the premium at which they were necessarily purchased, yielded a very small return. To double the contributions would have been to double the amount of the railroad’s funds sunk in but slightly remunerative investments; and the Government did not seem inclined to permit the company to adopt the only practicable alternative, that of investing its sinking fund in its own securities. Also, Mr. Hampton’s amendment would have continued to an enhanced degree the constant suspicious supervision of the company by the Government which had been, perhaps, the chief evil result of the Thurman Act.
Third, the Government might have consented to a refunding of the indebtedness to it at a lower rate of interest. This was most urgently pressed by representatives of the road. Mr. A. A. H. Boissevain, representing the Dutch bondholders, proposed to redeem the first mortgage by the securities in the sinking fund so far as possible, and to renew the rest at a lower rate of interest;—after which the Government was to be given a 100-year 2 per cent bond for the principal and interest of its claim.[503] Attorney-General Olney similarly suggested a renewal of the first mortgage bonds at a rate of not over 5 per cent, and an exchange of 100-year 2 per cent bonds for the government claim; though he differed somewhat from Mr. Boissevain as to the lien which these bonds should have.[504] Congress and the Government Directors in 1894 were inclined to insist on harder terms. The latter, in their annual report, proposed that the first mortgage bonds be paid off in cash, and that a 100-year 3 per cent instead of a 2 per cent bond be given to the Government, with elaborate provision for a sinking fund; and the former had before it in the Reilly Bill a very similar suggestion.[505] As a counter-proposition the railway company offered to pay off the first mortgage bonds in cash if the Government would take a 50-year 2 per cent instead of a 3 per cent bond for its claim. “The petitioners further represent,” it said, “that it will be utterly impossible to obtain the very large sums referred to from the stockholders unless it be possible to offer to them in satisfaction of their assessments reasonable security for the moneys so advanced. At a meeting recently held, at which were present representatives of a large amount of the stock of the said company, the conclusion was reached that if the debt to the Government could be funded substantially on the terms of the Reilly Bill, but at a rate of interest of 2 per cent per annum instead of 3 per cent, the said stockholders would endeavor to raise the funds needed for the purpose of meeting the requirements of the Reilly Bill.”[506] Finally, Mr. Pierce, on behalf of the Fitzgerald Reorganization Committee, proposed that the Government either take 4 per cent bonds for the principal of its debt, and preferred stock for the interest, carrying into the settlement with the Government the scheme which was found best adapted to the satisfaction of other creditors; or that it take a 3 per cent first mortgage bond for its principal, and a second mortgage non-interest-bearing bond for its interest; or that it accept a lump sum of money equal to the value of its lien, which he informally estimated as 50 per cent of the total amount due.[507] The plan of refunding was the most obvious as well as the most practicable of all suggestions. It had, however, the disadvantage from the point of view of the Government of surrendering some part of the government claim, and from that of the company of continuing the relations of the Government with the road.
Fourth and last, the Government might have demanded payment in cash. The sum which the company would have had to obtain was extremely large, but the accumulated sinking fund reduced it considerably, and many thought that the balance could be raised. In March, 1896, before a Senate committee, Mr. John Rooney, for the first mortgage bondholders, proposed that the Government, through a commission, should buy in the Union Pacific at foreclosure sale, should issue a new general mortgage at a lower rate of interest than the existing prior liens, and should pay off both the first and the government mortgage with the proceeds;—the road to be turned over to the subscribers.[508] This suggestion took place among many others which were in the nature of a compromise. Thus the reorganization committee, in 1895, offered to pay the principal of the government debt provided that the interest were cancelled;[509] and Receiver Anderson proposed in 1896 that the company pay the principal of the debt by adding funds raised by it to the amount of the sinking fund, and settle the arrears of interest with a 50-year 2 per cent bond. Full payment in cash was, of course, what the Government desired, and everything short of that it hesitated to accept; but equally, of course, full payment was what the bondholders of the road were most unwilling to concede; and hearing after hearing took place before committees of the Senate and of the House without definite result.
Meanwhile the general reorganization of the company was going on. In November, 1893, the various interests and factions of the road held a conference in New York, which resulted in the choice of a reorganization committee as follows: Senator Brice, chairman; Mr. A. H. Boissevain, for the foreign holders; General Louis Fitzgerald, president of the Mercantile Trust Company, for the Gould interests; Mr. Carr, for the estate of F. L. Ames; General Dodge, for the Denver and Gulf roads’ interests; and Colonel H. L. Higginson, for the Oregon Railway & Navigation interests.[510] Subsequently Mr. J. P. Morgan accepted a place.[511] This committee was the only comprehensive one appointed until 1895; but numerous other committees sprang up to represent special interests of one kind or another, appearing frequently as interest on new classes of bonds was defaulted, and having, with the main reorganization committee, to deal specifically with the payment of the floating debt and the reduction of fixed charges. Upon the ability of the committees to agree depended the retention of the Union Pacific in something like its existing shape.