CHAPTER VIII
NORTHERN PACIFIC
Act of 1864—Failure and reorganization—Extension into the Northwest—Villard and the Oregon & Transcontinental Company—Lack of prosperity—Refunding mortgage—Lease of Wisconsin Central—Financial difficulties—Receivership—Legal complications—Reorganization—Subsequent history.
The Northern Pacific Railroad Company was chartered in 1864, and failed in 1875 and in 1893. Besides these bankruptcies it has been in frequent financial difficulty, and on the whole furnishes an instructive chapter in a study of reorganizations.
The Act of July 2, 1864,[542] empowered the Northern Pacific corporation to build a line from some point on Lake Superior, in the state of Minnesota or Wisconsin, westerly on a line north of the 45th degree of latitude, to a point near or at Portland, Oregon. It provided for organization on subscription for 20,000 shares out of an authorized capital of 1,000,000 shares with 10 per cent paid in, and granted forty alternate sections of public land per mile throughout the territories, and twenty alternate sections throughout the states across which the road should pass. This liberal donation was influenced in part by the fact that the value of lands in the Northwest was then low, and in part by the refusal of any money subsidy. The Government was to issue patents on the completion of stretches of twenty-five miles built in “good, substantial, and workmanlike manner,” and was to survey lands for forty miles on each side of the line[543] as fast as the construction of the road should require. The company was to begin work within two years and was to finish the line within twelve years, and it was provided that in case of non-fulfilment of these conditions Congress could do “any and all acts and things which (might) be needful and necessary to insure a speedy completion of the road.” A section which gave trouble till amended forbade the issue of mortgage or construction bonds, or the making of a mortgage or lien upon the road in any way except by the consent of the Congress of the United States. The company was to obtain the consent of the legislature of any state before commencing construction through it, and finally the Act was to be void unless bona fide subscriptions of $2,000,000 to the stock, with 10 per cent paid in, should be obtained within two years.
A project so daring as the construction of a railroad through the unsettled Northwest not unnaturally found it difficult to obtain financial support. The capitalists who at first undertook the work were unable to carry it through.[544] In 1869 and 1870 two developments occurred: the prohibition of bond issues contained in the act of incorporation was removed, and Jay Cooke became interested in the building of the road. Both facts were of far-reaching importance. Mr. Cooke was one of the foremost financiers of his time. He was a man of great personal energy, large fortune, and extensive personal following, and was admirably adapted to the promotion of the work in hand. The removal of the prohibition upon bond issues made it possible, with his support, to secure some funds from a mortgage issue and to allow construction to begin.
In 1869 Jay Cooke & Company were appointed financial agents of the Northern Pacific Railroad Company. On July 1, 1870, issues of $100,000,000 in 7.3 per cent first mortgage bonds and $100,000,000 in stock were authorized. The bonds were to be sold to the agents at 88; the bulk of the stock was to go to the agents as bonus or to the syndicate interested with them. The same parties agreed to raise $5,000,000 in cash within thirty days, in order to commence the building of the line. This made a fair start possible, and by May, 1873, over five hundred miles had been completed. The situation was nevertheless a difficult one because of the reluctance of capitalists to invest in the new first mortgage bonds. In 1870 extensive plans were made to interest the European markets, but all in vain because of the outbreak of the Franco-Prussian war. In America a similar campaign was not much more successful.[545] The high price asked for the bonds,[546] the uncertain nature of the enterprise, the not altogether ill-founded rumors of extravagance and mismanagement of the construction actually under way, the presidential election of 1872, all hindered rapid sales. Failure to sell bonds meant financial stringency for the Northern Pacific. Operating expenses were high, and the interest on outstanding indebtedness was considerable. On the other hand, earnings were very small. No through business could be secured till the completion of the road at least to the Snake River, and local traffic was yet to be developed. As a result, the company borrowed more and more from Jay Cooke & Co., and that firm soon found itself heavily involved.
On September 18, 1873, Jay Cooke & Co. closed its doors. The shock to the railroad was great. The quotations of first mortgage bonds dropped from par to about 11. For a time the company struggled on. In December, 1873, a funding of interest was carried through, whereby all coupons up to and including that of January 1, 1875, were made exchangeable for five-year 7 per cent coupon bonds, convertible into the company’s first mortgage bonds at par, and into the company’s lands at 25 per cent off from the regular prices.[547] In April, 1874, settlement was made with Jay Cooke & Co. by the transfer of the railroad’s first mortgage bonds and other securities.[548] These measures offered only temporary relief. Business was at a standstill throughout the country. Gross earnings for the year ending June 30, 1874, were reported to be $988,131, while $30,780,904 7.3 per cent bonds had been issued, and the floating debt stood at $777,335. The Northern Pacific was not only unable to meet its fixed charges, but was in default by a margin which it was hopeless to attempt to overcome. The original project had completely failed; and the only means of continuing the enterprise seemed to lie in a government guarantee of the railroad’s bonds, or in a reorganization so drastic as to sweep away fixed charges and to give the company a fresh start.
In May, 1874, the first plan was tried. A bill was introduced into Congress providing that the company should be authorized to issue its 5 per cent thirty-year bonds for $50,000 per mile on its entire line, complete and incomplete, and that on completed sections of the road twenty miles long it should deliver its 7.3 per cent bonds at a rate of $50,000 per mile, receiving in return $40,000 of the 5 per cent bonds with interest but not principal guaranteed by the Government, which should hold the difference of $10,000 as a reserve fund. Holders of outstanding 7.3 per cent bonds were to have the right of exchanging their bonds for new 5s on the same terms.[549] In return for the guarantee the railroad was to surrender to the United States Government its entire land grant, to be sold under the direction of the Secretary of the Interior, and to turn over semi-annually its entire net earnings. The Government was to have the right in addition to sell the Northern Pacific 5 per cent bonds whenever the combined yield of the land grant and the net earnings should not equal the interest guaranteed. Finally, Congress was to have power to fix fares, etc., provided that the government control did not impair the security of the bonds. In brief, the capitalists who had involved themselves in Northern Pacific affairs were ready to surrender their whole enterprise to the Government if the Government would carry it through. But Congress was so little willing to take the responsibility that the bill never came to a vote.
Early in 1875, while the application for government aid was still pending, the directors called a general meeting of the bondholders. When it assembled President Cass made a statement of the financial condition of the company. The outstanding debt, said he, was $30,441,300. Of the 7.3 per cent bonds issued as collateral for floating debt, mostly in 1875, there had been pledged $1,780,300 at the rate of from twenty-five to forty cents on the dollar. The interest on land warrants, bonds, and scrip given in funding of coupons amounted to $732,632. The floating debt was $634,758, of which $150,000 were arranged for settlement within a few days; and $250,000 were due to directors for money advanced to finish the Pacific section after the failure of Jay Cooke & Co. in 1873. The total net earnings to date had been $124,056, and the capital stock was $25,497,600. By this report it seems that some slight advance had been made since June, 1874, but in no measure which afforded any hope for the continued solvency of the company. Most instructive were the figures for the floating debt, which in less than five years had increased to a sum more than five times the net earnings for the whole period. After some discussion the bondholders elected a committee of seven to report at a future meeting. The committee recommended a receivership, the directors did not oppose, and on April 16 General Cass was appointed receiver, resigning his position as president to accept.
By this time hope of government aid had vanished, and no time was lost in accepting the alternative of a drastic reorganization. Late in May the bondholders’ committee reported a plan which was considered by the bondholders at subsequent meetings. The principle was simple, and the means sufficient. The company had earned .4 per cent on its funded debt:—ergo, the funded debt was to be swept away. Fixed charges had been heavy:—they were now to be completely removed. Scarcely less would have met the needs of the situation, but the merit in refusing to tinker and experiment was considerable. In more extended shape the plan was as follows: Reorganization was to be carried out through foreclosure, and a committee of six was appointed to take charge. All outstanding bonds were to be replaced by preferred stock, and all common stock was to be exchanged for new common stock. Floating debt was to be likewise exchanged for preferred stock, which was to be issued to the amount of $51,000,000 for the following purposes: