It was perhaps traffic conditions such as we have described which led the Garrett family to favor a community of interest scheme which should improve the Baltimore & Ohio connections with the West. In June, 1890, Mr. E. R. Bacon formed a syndicate to control the stock of the Baltimore & Ohio Company. Acting in harmony with the Garrett family, the syndicate was made up of Philadelphia, New York, Baltimore, and Pittsburg capitalists, including the Richmond Terminal, Pittsburgh & Western, Northern Pacific, and Reading interests. The plan was to establish a community of interest between a vast network of lines reaching from the Atlantic to the Pacific, and from New York to the Mississippi. “The buyers,” it was said, “came in simply as investors without condition that their other properties would be benefited, although it was of course intimated that something was to be done.”[56] They were required to pool their stock for three years, and to give an irrevocable proxy for that period to President Charles F. Mayer. The amount of the syndicate purchase was 45,000 shares, of which 32,500 were obtained from the city of Baltimore, and 9686 (preferred) from the state of Maryland;[57] and the purchase brought the incidental advantage of removing city and state from any direct interest in the road. The preferred state stock the syndicate later exchanged for common stock owned by the Johns Hopkins University. The purchase once made, the pool was formed on well-known lines. The stock was deposited with a trust company, trust certificates were issued, and proxies transferred to Charles F. Mayer.[58] The shares to be deposited were limited in amount to 110,000; the actual amount put in was 89,750. The results of the agreement were less sensational than the forecasts made. It undoubtedly did much to promote friendly feeling among the roads concerned. When, in 1891, the Baltimore & Ohio was compelled to vacate the Chicago terminals of the Illinois Central, which it had occupied for years, it was able to make prompt arrangements with a corporation controlled by the Northern Pacific for the use of its facilities both for passengers and for freight. But the influence of the Garrett family was not lessened, and inasmuch as the main competitors of the Baltimore & Ohio were not included there was no check to competition, and earnings showed no striking change.
Matters stood thus at the beginning of 1893.[59] No progress had been made toward restoring the Baltimore & Ohio to a permanently stable condition, and the prosperity which its reports declared was fictitious only. The reorganization to which bondholders had refused to submit in the comparatively prosperous times of 1888 was compelled by the depression following the panic of 1893. In 1894 earnings fell off. The gross earnings for the year ending June 30, 1893, were $26,214,807, and the net income $9,210,666; the following year the same items were $22,502,662 and $8,719,830. The directors reduced the dividend and called attention to the losses incurred through protracted strikes in the coal and coke industry.[60] The following January (1895) President Mayer stated that the fixed charges, including the car trusts, sinking funds, etc., due January 1, amounting to nearly $1,000,000, had been paid without borrowing one dollar. “I name this fact especially,” said he, “because it is not unusual for us to make a loan for the unusually heavy payments January 1. I doubt if the Baltimore & Ohio has owed so small a floating debt for twelve or fifteen years, perhaps longer, and it never had the large volume of stocks and bonds it now has, something over $16,000,000, not put down at their face value but rather at their market value, or far below their intrinsic value. I can safely say the road has not been in so strong a position as now for at least fifteen years.”[61]
It required more than confident statements by the managers, however, to demonstrate the secure position of the road; and this all the more because the acts of these gentlemen belied their public assertions. Dividends on the common stock were passed in 1895, and again in 1896. The ratio of charges to earnings, according to the company’s reports, rose from 75 per cent of net earnings in 1894 to 80.2 per cent in 1895, and to 98.2 per cent in 1896; that is, less than 2 per cent of the net earnings of $6,300,000 was admitted to be available for dividends on $30,000,000 of stock.[62] Some relief was evidently necessary. In January, 1896, it was announced that arrangements had been made with a strong syndicate to provide for all immediate financial requirements; but the appointment of receivers in February could scarcely have come as a surprise. During the two weeks just before the failure Mr. J. K. Cowen, who had succeeded Mr. Mayer in the presidency, spent a great deal of time in New York trying to borrow money to meet the pressing demands. On his eventual failure and return to Baltimore the directors felt that a friendly receivership was the only resource.[63]
To the well-wishers of the road this failure may have seemed an opportunity as well as a disaster. It was now possible to accomplish what the management in 1888 had refused to attempt, i. e. a reduction in the fixed charges of the company which should remove the burdens under which the road had labored, and should open up the way for a long period of improvement and prosperity. At least one more unpleasant experience was, however, to be passed through. With a view to determining the Baltimore & Ohio’s real position, an expert accountant, Mr. Stephen Little, had been set to work upon its books, and from time to time notices had been appearing that he was at work, that his examinations confirmed the statements of the company, and that questions raised by hostile critics would be considered in his report. Thus in April a reorganization committee, composed of Messrs. Alexander Shaw, C. Morton Stuart, and six others, with whom were deposited the Garrett shares, issued a circular referring to the large amount of new capital, estimated by them at $30,000,000, which had been received by the company since 1888 “without adequate or satisfactory results,” and to the floating debt, which they asserted had been increased from about $3,500,000 to $16,000,000. “We make no charges, or even intimations of wrongdoing,” wrote their secretary, “but desire and require that a full explanation of the management of the property from the year 1888, when the road was set on its feet by Mr. Morgan, shall be given, and that the causes which led to the wrecking of the property shall be clearly shown.” To which another committee, which directly represented the management, replied by reference to Mr. Little.[64]
The much-heralded report came out in December, having been withheld since the previous March for fear of the effect on the company’s securities; and so far from sustaining the management, it contained charges of irregularity almost as sensational as those made against the Atchison at an earlier date. The books of the company, according to Mr. Little, were in error to the amount of $11,204,858. During the period of seven years and two months which his report covered he found:
| An overstatement of net income of | $2,721,068 | |
| A mischarge of worn-out equipment to profit and loss of | 2,843,596 | |
| Improper capitalization of charges to income under the head of construction, main stem, | 2,064,741 | |
| Improper capitalization of so-called improvements and betterments of leased and dependent roads, | 3,575,453 | |
| Total, | $11,204,858[65] |
Deducting these sums from the annual income returns of the company, he found that but $971,447 had been earned which had been properly applicable to dividends, whereas $6,269,008 had been declared in the seven years, of which $3,312,089 were cash and $2,956,920 stock. Earnings had been increased by the most arbitrary of book-keeping devices. In 1892 the value of the Western Union stock held in the treasury since the sale of the Baltimore & Ohio telegraph lines in 1888 had been written up $468,038, and the stock of another company, the Consolidated Coal Company, had been written up $114,300. Not only had advances to branch lines been entered as assets, but the interest on these advances had been credited to income, the only basis being that it was hoped that such interest would some day be paid; and on the other side of the account, charges against operating expenses had been charged to profit and loss on the same principles by which the Garretts had rolled up their fictitious surplus of 1888. Turning to the capital account, Mr. Little showed an increase in liabilities from 1888 to 1895 of $22,180,000, not including $5,481,835 representing chiefly the company’s endorsements of notes of its subsidiary roads which stood here for the first time revealed. This money apparently had been put into the property, and yet Mr. Little’s corrected figures showed net earnings to be actually smaller in 1895 than in the earlier years. Criticisms of the report attached themselves mainly to the last items treated. That the extensive endorsement of branch-line notes, absent as any mention of the practice was from the annual reports, was most misleading and unsound, nobody could deny; but the broad question of what charges during the seven years should have been paid out of income, and what not, gave rise to lively discussion. Severe strictures on Mr. Little’s statements were made by Patterson and Corwin, two accountants appointed to re-examine the books of the company. “It would appear,” said they, “that Mr. Little has made some curious errors, and has been strikingly inconsistent.”[66] Nevertheless the more damaging of the latter’s accusations seem to have been accepted, and the Baltimore & Ohio took its place with other American corporations, the managements of which have indulged in secret juggling with the books.
Pending Mr. Little’s report, reorganization was of course delayed. The receivers were then in control,[67] and under their direction a vigorous policy of improvement was carried out. The rolling stock of the system was found to be insufficient to handle its business, and the motive power was in similar condition. All testified to the consistent desire of the old management to employ every device which might contribute to greater apparent earnings. Contracts for 5000 freight cars were let as early as May, 1896, to be paid for in receivers’ certificates, and bids for 75 locomotives were at the same time received.[68] During their whole administration the receivers purchased over 28,000 freight cars, 216 locomotives, 123,000 tons of rails, besides ties, ballast, new steel bridges, and miscellaneous improvements of various sorts.[69] On the financial side they had to resist an attempt to compel payment of dividends on the preferred stock. The case dragged on through 1897 and 1898, and was finally decided in favor of the company.[70]
After the publication of Mr. Little’s report there remained no serious bar to reorganization, while the needs to be met were more apparent than ever before. If the proportion of charges to earnings had been too heavy on the management’s own showing, how much more burdensome was it when the reported earnings had been proved too high, and the reported liabilities too low! The first step after the appointment of receivers had been the springing up of reorganization committees. The two most prominent were the Fitzgerald Committee, representing the directors, and the Baltimore Committee. There were besides committees representing the 5 per cent bonds of the loan of 1885, the consolidated mortgage 5s, the 6 per cent bonds of 1874, the preferred stock, and others. These were all to some extent antagonistic. It was hoped to secure a reorganization without foreclosure, but to provide against all contingencies a bill was introduced and passed through the Maryland legislature, permitting a new company to succeed, after reorganization, to the property of the Baltimore & Ohio system.
By April, 1898, a reorganization plan was ready, and was withheld only on account, first of the threatened, and then of the actual, war with Spain. Two months later this difficulty seemed no longer serious, and a plan was formally announced.[71] There were contemplated two great issues of bonds and two of stock as follows: