To the above bonds and stock the committee wished to add $61,000,000 common stock, on which dividends might be paid if it seemed advisable.

New common stock exchanged at par for old; new bonds and preferred stock exchanged for old bonds, with a residue which was to be set off against the government debt and to be used for cash requirements. The cardinal principle of the reorganization was that no new 4 per cent bonds should be issued in exchange where the old mortgage did not contribute the full value; or, to put it more accurately, that no securityholders were to be given the right to claim a sum greater than their property could earn as judged from past experience. At the same time enough preferred stock was distributed to give bondholders the same returns as before when the road should earn it. A $15 assessment was levied upon stockholders. This was several times the quoted price of the stock early in 1896, but was not more than the stock would probably soon sell for after reorganization. A syndicate agreed to advance $10,000,000 to $15,000,000, for payment of coupons as they fell due and for expenses, in return for which they received $5,000,000 in preferred stock quoted at 59, or 19 per cent on a capital of $15,000,000 at current prices. In addition the bankers who managed the syndicate received $1,000,000 in preferred stock; making a total expenditure of $6,000,000, a not exorbitant commission. Besides the bonds and stock for strictly reorganization purposes, there was reserved to dispose of equipment obligations, and for reorganization and corporate uses, $13,000,000 in 4 per cent bonds and $7,000,000 in preferred stock. Reorganization uses, as defined by Mr. Pierce, were those which might arise unprovided for and of an extraordinary character, all of which could not be foreseen. Corporate uses were those which would be proper to the corporation thereafter, such, for instance, as the issue of securities in extension of the property.[522]

After all the securities of the old corporation had been accounted for there remained $35,755,280 of the first mortgage bonds and $20,864,000 of preferred stock as a fund or resource for the settlement of the government debt; or, in round numbers, an amount of 4 per cent bonds equal to the principal of that debt and an amount of preferred stock equal to the accrued interest. Just how this was to be used the committee did not pretend absolutely to say. “We desire to meet any proposition of the Government,” said Mr. Pierce, “or to suggest any proposition which, after investigation, we believe will meet the approval of the Government within the limits of the financial possibilities of the property based upon this plan. In other words, we have made no sort of a hard and fast rule.” In case the Government should prove obstinate and should refuse settlement on reasonable terms, it was the idea of the committee that it would be entitled on foreclosure to its share as a second mortgage bondholder only, and that the property would pass under the sale free from all liens, including that of the United States. “Our view upon that point,” said Mr. Pierce, “is that when the Government subordinated its lien to that of the first mortgage bondholders, it did so deliberately and in terms effective for that purpose. The Government then consented to all remedies that were necessary for the protection of this prior lien; and an indispensable element of such priority would be the right of foreclosure. And unless there was a concealed purpose on the part of the Government, that right of effective foreclosure was undoubtedly impliedly granted.”[523]

Subsequent negotiations with the bondholders brought a reduction in the proposed issue of mortgage bonds from $100,000,000 to $75,000,000, affecting the Kansas Pacific consols and the Union Pacific Sinking Fund 8s. Thus the former were allotted 50 per cent in first mortgage 4s and 110 per cent in preferred stock, instead of 80 per cent in 4s and 50 per cent in preferred as before; and the latter 75 per cent in 4s and 100 per cent in preferred stock, instead of 100 per cent and 50 per cent respectively. This reduced the proposed charges $1,000,000, and proportionately strengthened the scheme.

On the whole, the plan was a strong one. It reduced fixed charges from over $7,000,000 to under $4,000,000, with an eventual lower limit of $3,000,000, and this amount such good authorities as Messrs. Mink and Clark pronounced the road safely able to earn in spite of the reduction in its mileage.[524] During the receivership, moreover, the system had become purged by the cancellation of onerous contracts and the lopping off of unprofitable branches, and though some lines were lost which it was desirable to retain, the Union Pacific was not precluded from the repurchase of these, and did in fact regain the most important. The bondholders were put in no worse position than before, for they could never permanently get more than the earnings of the road, and this the new distribution of securities generally assured them. The position of the common stockholders was improved, for whereas between 1883 and 1893 fixed charges had only once fallen below $7,300,000, now less than $7,000,000 were to be taken before their claims were heard, while both the gross and the net earnings of the road promptly regained their old level. Finally, the general principle was sound, as has been emphasized several times before. It gave to each class of securities a claim to interest strictly proportional to the earning capacity of the road, and added to this a preferred stock on which no payment was to be made unless earned; while it provided for a liberal assessment upon stockholders, and attempted no funding of the current liabilities incurred during the past troubled years.

The time limit for deposits under the plan was originally set at December 31, 1895. It was then extended to January 15, 1896, and later to January 29 of that year. By January 8 the reorganization committee was able to announce that it had secured majorities of all of the first mortgage bonds outstanding except an inconsiderable shortage in one class. This was followed, in spite of some opposition among London brokers, by the deposit of a majority of the shares of the company, and by the assent of other securities. In January, 1896, in a letter to the chairman of the House Committee on Pacific Railways, Mr. Fitzgerald stated that his committee embraced a substantially single representation of all Union Pacific mortgage bonds in circulation except those held by the United States.[525]

Foreclosure proceedings had been long under way. In January, 1897, the Government agreed to join in them in consideration of a guarantee of a bid at least equal to the original amount of government bonds, less payments made by the company to the Government, with interest at 3⅓ per cent per annum.[526] The guarantee was to be of cash, so that the Government’s relations with the property would terminate completely upon confirmation of the sale. This was the first affirmative action which the Government had taken, and the reorganization committee accepted it, despairing of better terms. The guaranteed payment was in part offset by sinking-fund assets of $17,062,664, leaving a net amount to be provided of $28,691,336.[527] By August, 1897, foreclosure of the main line had been ordered by the courts in all the states through which the Union Pacific passed, both under the first and the government mortgages. Previous to this the plan of reorganization had been declared operative, and articles of incorporation for the new company had been filed; while the first instalment of the assessment on the stock was called by the middle of the month. An unexpected development now occurred. Although willing to join in foreclosure proceedings, the Government found the decrees of foreclosure to some extent unsatisfactory, and prepared the papers for an appeal. Objection was particularly made to the fact that the Omaha Bridge mortgage, amounting to about $1,200,000, was adjudged superior to the lien of the Government on that part of the road between Omaha and Council Bluffs, and that the money and assets in the hands of the receivers accruing from the operation of the roads were ordered to be sold instead of being reserved to meet a deficiency judgment expected to be obtained. Learning this, the reorganization committee increased its guarantee by over $4,000,000, making the total guaranteed bid $50,000,000 instead of $45,754,060. “This increase,” said the Attorney-General, “removed the objections to the decrees so far as the money contents were concerned. In all else the decrees were just and satisfactory.”[528] Even so, perhaps partly for political reasons, the Government was not ready to allow a sale, and later in the year gave notice that it would apply for a postponement to December 15, in order to give Congress an opportunity to consider the matter. The prospect of renewed congressional agitation stimulated the reorganization committee to prompt action. “The Committee,” it declared, “has reached the conclusion that the interests of the securityholders represented by it and of the syndicate furnishing the funds to finance the reorganization demand reorganization without any further delay. In this situation the committee contemplates ... to oppose any adjournment of the sale of the main line and to bid it in, if need be, for the full amount of the Government’s claim, the additional sum involved in this being $8,000,000.”[529] Postponement of the sale of the Kansas Pacific was to be allowed, the committee meanwhile making up its mind on what terms to bid it in. This proposition was telegraphed to Washington and quickly accepted. It constituted a complete surrender on the part of the committee, so far as the Union Pacific proper was concerned. Instead of being refunded, the government debt was paid off in cash; instead of compromising for the principal alone, both principal and interest were paid in full. The result reflects credit on the sharpness of the Attorney-General, but the method was scarcely worthy of the Government which he represented.

November 1st and 2d, 1897, the property was sold under foreclosure of the government and first mortgage liens, and the prices were:

For the Union Pacific main line,$40,253,605  
For bonds in the government sinking fund,13,645,250  
$53,898,855  
In addition the Government received in cash in the sinking fund as of November 1st,4,549,368  
$58,448,224  
In addition to this sum the committee was obliged, under its agreement with the Government, to buy up the first mortgage, amounting to$27,637,436  
The total of the first and second mortgages was67,891,041  
Adding13,645,250  
Of securities purchased for cash, the total payment aggregated over81,500,000[530]