The formation of the Oregon & Transcontinental Company put Mr. Villard in control of the Northern Pacific. Mr. Villard’s financial strength in later years was due mainly to the support of German interests, notably the Deutsche Bank of Berlin; but his hold on the bank and on his followers was partly due to his real ability and resourcefulness, and partly to his confident predictions of results which sometimes he was but frequently was not able to attain. One of the company’s first acts after his appearance was the declaration of a scrip dividend upon the preferred stock. The question had been raised in the course of his fight for control, and he perhaps felt it incumbent upon himself to show the sincerity of his contentions; at any rate, the annual report for 1882 contained a statement that the surplus earnings since 1875 had been used for construction instead of being distributed as dividends, and that the sum of $4,667,490 was therefore properly due to the preferred stock. On the strength of this the directors resolved that a dividend of 11.1 per cent be declared, for which there were to be issued obligations of the company bearing 6 per cent interest, payable at the end of five years, but redeemable after one year at the pleasure of the company upon thirty days’ notice, in amounts of not less than 20 per cent to each holder. The policy thus initiated was plainly non-conservative and unsound. It may be true that as a general principle new construction should be paid for out of capital rather than out of income account, yet this is subject to qualifications; and the Northern Pacific had been and was in so precarious a condition that not a dollar of its resources could safely have been alienated. The sequel came in 1883 when the annual report admitted that there had been an excess of expenditures on account of construction and equipment of $7,986,508 over the cash receipts from the proceeds of the $40,000,000 general mortgage bonds, sales of preferred stock, and other sources;[562] and when by October of the same year the deficit had been increased to $9,459,921, and a circular from President Villard stated the additional cash requirements to amount to $5,500,000.[563]
Relief had to be sought in an increase of indebtedness. On October 6, 1883, the directors authorized a second mortgage for $20,000,000 upon the property, subject to the consent of three-fourths of the preferred stock, and in a circular explained that they had accepted a proposition of Drexel, Morgan & Co., Winslow, Lanier & Co., and August Belmont & Co. to take $15,000,000 of the issue at 87½, less 5 per cent commission in bonds, with a six months’ option to take $3,000,000 more on the same terms. The stockholders assented,—they could do nothing else,—a suit for an injunction was denied, and the syndicate exercised its option. The result was an increase in bonds issued from $39,522,200 to $61,635,400, of which the greater part was accounted for by the new mortgage.
By August 22, 1883, the gap in the Northern Pacific main line had been filled up, and on September 8 the formal opening occurred. The mileage in operation was then 2365, of which 1952.5 was main line and 412.8 branches, and the rapid construction of the last 1000 miles had done credit to most of those concerned. The total capitalization per mile was $59,304, of which less than one-third represented bonds; and though the following year this percentage was increased, the proportion of mortgage to total issues remained considerably under one-half. This showing was very favorable, and accounts for the success with which the Northern Pacific withstood the panic of 1884. With the completion of its through line, moreover, earnings increased so materially as to cover the interest on the new bonds; and though the road was never to enjoy a monopoly of transcontinental traffic, in February, 1883, it had concluded an agreement with the Union Pacific concerning through rates and a division of territory, and a period of prosperity was hoped for. Meanwhile the Oregon & Transcontinental Company had been hard hit by the decline in Northern Pacific stock, due to the publication of the construction deficit. The straits of his company affected Mr. Villard; and in spite of the relief afforded by the Northern Pacific second mortgage he “became conscious that neither himself nor the Oregon & Transcontinental Company could be saved.”[564] On January 4, 1884, the directors accepted his resignation, and soon after Robert Harris, then vice-president of the Erie, was elected to fill his place.[565]
The years immediately following the issue of the second mortgage and the completion of the road were not uneventful, although it is not necessary to describe them at length. The insolvency of the Oregon & Transcontinental, and continued disputes between it and the Northern Pacific over an adjustment of the two companies’ financial relations, made some other means of binding the Oregon Railway & Navigation with the Northern Pacific seem advisable, and a lease of the former company to the latter was discussed. In July, 1884, an arrangement was said to have been actually arrived at on the basis of a guarantee by the Northern Pacific of 6 per cent on the Navigation stock for two years, 7 per cent for three years, and 8 per cent in perpetuity; but the interest was very high, and an injunction helped to prevent a consummation at the time. In 1885 the idea of a joint lease by the Northern Pacific and Union Pacific railroad companies came to the front. The Oregon Railway & Navigation was serving as the Northwestern outlet for both of these roads, and such a contract would have greatly simplified the competitive situation, besides taking away from the Navigation Company the power to exact an excessive pro-rate because of its double connection.[566] During the next few years negotiations were almost constantly in progress. In 1887, however, the Navigation Company was leased to the Oregon Short Line with a Union Pacific guarantee; and upon the failure of renewed negotiations Mr. Villard, who was again in power, sold the Oregon & Transcontinental Company’s holdings of Oregon Railway & Navigation Company stock at a “satisfactory” price. This consummation was less unfavorable to the Northern Pacific because of its completion of a line of its own to the Pacific coast.[567] From now on the Oregon & Transcontinental Company existed only as a means of obtaining financial assistance for the Northern Pacific, and for making more easy the control of that company’s stock.[568]
While these operations were going on the Northern Pacific once more found it advisable to increase its indebtedness, and added a third mortgage of $12,000,000 to the first and second mortgages which already have been described. Of the issue $8,000,000 were at once taken by a syndicate, and the $4,000,000 remaining were early disposed of to the same parties. The mortgage was said to be for the purpose of completing new work and for paying the floating debt; it also assisted in the redemption and refunding of the dividend scrip which had been issued to preferred stockholders in 1883; and the payment of $3,073,321 of this in cash, besides the extension of $1,567,500 more, now took place. The extended scrip was to be payable in 1907, to bear 6 per cent, and to be redeemable on thirty days’ notice on any interest day on or after 1892; and up to January 1, 1893, holders had the option of converting it into third mortgage bonds.[569] The third mortgage itself required the consent of three-quarters of the preferred stockholders, but this there seems to have been little difficulty in securing.
The years 1886–9 saw also a considerable extension of branch and other construction. It was a time of great general activity. In another place the large additions to the Atchison system have been described; at the same time the Union Pacific grew from a system of 5825.6 miles in 1886 to one of 6996 in 1889, adding over 1100 miles; the Chicago, Rock Island & Pacific increased from 1384.2 to 1592.7; the Chicago, Burlington & Quincy from 4036 to 5140.8; and the St. Paul, Minneapolis & Manitoba from 1509.4 to 3030.1. Meanwhile the Northern Pacific added 656.8 miles, or an average of 219 miles a year.[570] In the far Northwest the great tunnel through the Cascade Mountains was nearly completed by May, 1888; and by the end of the following year a continuous line of road was in operation from Ashland, Wisconsin, to Portland, Oregon, which was of particular service in view of the difficulties with the Oregon Railway & Navigation Company, and was the reason for the willingness of the Northern Pacific to surrender control of that connection.[571] In 1888, also, negotiations were carried on with the Canadian Government for an extension into Manitoba; and the same year the Cœur d’Alene Railroad & Navigation Company was purchased, comprising a steamship and narrow-gauge line in Northeastern Washington which extended through the mining region of the same name.[572] Generally speaking, the Northern Pacific retained its character as a single-track transcontinental route with but few branches. Where it did expand was on the east, where it reached Duluth, Ashland, Superior, St. Paul, and Minneapolis, and on the west, where it joined Wallula, Portland, and Tacoma. The principal other branches were the ones mentioned: namely, those to Winnipeg, and to the mining districts in Montana and Washington.
In spite of its moderation the Northern Pacific was not over-prosperous. Its passenger earnings remained small, being scarcely greater in 1888 than they had been in 1884; and while its freight earnings increased from $7,867,367 in 1884 to $10,426,245 in 1888, and to $15,600,320 in 1889, this was so far offset by increased operating expenses that the increase in net earnings from both passengers and freight was only $2,223,194. Construction meanwhile caused an increase in funded indebtedness outstanding of $15,202,000, to say nothing of $20,981,000 of branch-line bonds which the road by 1889 had guaranteed; and the floating debt began to grow uncomfortably large.[573] At the same time, if Mr. Villard is to be believed, officials in charge of the operation of the road were eager for appropriations for the improvement of the track, the replacement of wooden by metal bridges, additional motive power and rolling stock, enlargement of terminal facilities, and the purchase and construction of new lines. The truth was that the problem of getting the road built had been more important than that of how it was to be built; so that much work had been done in a hasty and imperfect manner which it was now advisable to renew.
Since, then, there was need for additional capital, while it was unsafe to increase the fixed charges of the road, the managers felt called upon to devise a scheme whereby these circumstances should both, at least in appearance, be met. Their solution was the proposal of a large refunding mortgage to retire as soon as possible existing mortgages, and to provide a balance which could be spent upon the line. If, they argued, bondholders could be induced to accept new 4 per cent or even 5 per cent bonds in exchange for their 6 per cent securities, the road would be free to issue new additional bonds until the margin of charges so obtained should have been taken up. The plan was worthy of its ingenious promoter, Mr. Villard, and will be criticised in the proper place.
On September 19, 1889, the managers issued a circular to the preferred stockholders. “In the opinion of the Directors,” said they, “the time has come to make new financial provision on a liberal scale for the growing needs of the Company.” Then followed a statement of gross earnings. “A further corresponding increase may be expected in the present fiscal year, which will bring the gross earnings up to $23,000,000 or $24,000,000.... But the Company could not in the past, and will not be able hereafter, to take full advantage of this auspicious situation without further large investments of capital. Secondly.—The prosperity of the road attracts competition.... The Company must be prepared to build additional feeders wherever and whenever the local developments warrant, and the danger of hostile occupancy appears.... Another strong [motive] lies in the Company’s ownership of a large land grant, the benefits of which cannot be fully realized without the promotion of settlements through the construction of branch lines. The Board is also of opinion that the time has come to make such provision, that the Company may take advantage of its high credit to effect a reduction of fixed charges.”[574]
It was proposed to issue a $160,000,000 one hundred-year consolidated mortgage, bearing interest not to exceed 5 per cent, to cover the entire Northern Pacific Railroad, together with its equipment, land grant, branch lines, and securities of branch lines. This was to be applied as follows: