The Northern Pacific has been openly dominated by the Hill-Morgan interests for the last six years, and probably has been under their control since its reorganization. From the financial as well as from the traffic point of view its position is secure. The voting trust was dissolved in 1901 “by reason,” in the words of the trustees, “of the evidence of financial strength, conservative management, skilful and profitable operation, superior physical condition of the property, and the reasonable prospect of continued prosperity.”[644] In 1907, out of a net income of $33,208,840 only $9,575,183 were paid out for interest, rentals, and taxes, and $23,473,929 were left for dividends, improvements, and reserve. This whole sum, which amounts to 33 per cent of gross income, is available as a protection for the mortgage bonds; and a considerable portion could be dispensed with without forcing a decrease in the present rate of dividends.[645] It is likely that the coming years will see a check in the advance of national prosperity, but the Northern Pacific is in excellent condition to stand the strain.
CHAPTER IX
ROCK ISLAND
Charter—Early prosperity—Reorganization of 1880—Conservative policy—Extension—Pays dividends throughout the nineties—Moores obtain control—Reorganization of 1902—Further extensions—Impaired credit of the company.
The original Rock Island Railroad, chartered in 1847,[646] was completed between Chicago and Rock Island in 1854. Construction was continued from Rock Island to Council Bluffs across the state of Iowa, under the charter of the Mississippi & Missouri, until 1866, when this company was merged with the original Rock Island Railroad Company, and after 1866 under the Rock Island charter until the extension was completed in 1869. Unlike the Atchison, the Rock Island passed through a fairly well-settled territory, which was at the same time one of the most fertile in the United States. In 1870, according to the census returns, Iowa produced 28,708,312 bushels of spring wheat out of a total for the United States of 112,549,733 bushels, more than any other state in the Union; while Illinois in its yield of winter wheat was surpassed by Indiana and Ohio alone. Of Indian corn Iowa and Illinois together produced 198,856,460 bushels against 562,088,089 for all other states combined. Manufactures were well begun, and even mining had attained a considerable development, particularly in the extraction of bituminous coal in Illinois. Naturally the road was prosperous; gross earnings increased from $3,154,236 in 1866 to $5,995,226 in 1870, and to $9,409,833 in 1879; while net earnings attained the very considerable sum of $4,548,117 in 1879, being 48 per cent of the gross receipts. At the same time the capitalization was very moderate, due to the relatively level character of the country through which the road ran, and, not less important, to the absence of speculative financial operations in the course of its construction. To build 1231 miles had cost in 1879 but $35,664,200, of which $4,702,202 had been supplied from earnings; leaving a total of bonds and stocks of $30,962,000, or $25,151 per mile. Fixed charges were, therefore, low. In 1875, when net earnings were $3,853,676, interest on bonds, taxes, and all other necessary disbursements took but $1,065,395; and in 1879 the payments were markedly less. Is it strange that the troubles of the road came from too great earnings rather than from too small, and that instead of striving to maintain solvency the directors had to seek ways and means for concealing or getting rid of earnings without arousing the hostility of legislators to whom 10 per cent dividends seemed high, and anything over 10 per cent proof of extortion? Between 1866 and 1876 four cash distributions of 10 per cent were made to stockholders, five of 8 per cent, one of 8½ per cent, and one of 7½ per cent. The dividend for 1879 was again 10 per cent, that of 1878 8 per cent, and that for 1879 9½ per cent. Meanwhile large sums were carried to surplus. The balance, after all disbursements, never after 1873 fell below $665,000, and in 1879 was nearly equal to the dividend declared; that is, while distributing $1,993,086, or 9.5 per cent, the road earned, over and above charges, $3,947,065, or 18.8 per cent.
It was inevitable that some attempt should be made to increase the distribution to stockholders; and the most obvious method was the one adopted, viz., a watering of the stock. The plan devised in 1880 was as follows: It was proposed to consolidate various branches of the railroad company, hitherto operated as separate corporations, with the main line; and to do this through the formation of a new company, which should exchange its stock for the stock of the previously existing corporations in the ratio of two to one. Practically all the stock retired was owned by the Chicago, Rock Island & Pacific Railroad Company, so that the only increase in stock outstanding came through the distribution to the stockholders of the parent company. In March the executive committee of the Rock Island passed the following resolution: “Resolved, that the proposition to consolidate the capital stock, property, rights, franchises, and privileges of the Chicago, Rock Island & Pacific Railroad Company with the capital stock, property, rights, franchises, and privileges of the Iowa Southern & Missouri Northern Railroad Company, the Newton & Monroe Railroad Company, the Avoca, Macedonia & Southwestern Railroad Company, and the Atlantic & Audubon Railroad Company into a consolidated Railroad Company, with an authorized capital of $50,000,000, and such powers as shall be assumed in the articles of consolidation, be submitted to a vote of the stockholders of this company at their annual meeting.”[647] Of the roads named only the Iowa Southern & Missouri Northern was of importance, extending 270 miles from Washington, Iowa, to Leavenworth, with branches which raised its total to 347 miles. This company had been organized as the Chicago & Southwestern Railroad Company, and the main line had been completed in 1871. The Chicago, Rock Island & Pacific Railroad Company had guaranteed its $5,000,000 main-line bonds, with a provision that it could demand foreclosure if called upon to pay either interest or principal, and in return had secured a lease in perpetuity. The road had been sold under foreclosure and reorganized in 1875 as the Iowa Southern & Missouri Northern, and had issued its stock to the Rock Island in return for money advanced by that company, the stock to be held in trust to 1926, and then to become the property of the lessee. The other roads did not together possess more than 80 miles of line, so that the operation was a genuine case of stock-watering. The opinion of the stockholders may be inferred from the quotations of their shares. Between January 2 and June 1, 1880, the quotations of Rock Island common rose from 149 to 189, with few sales, in anticipation of the distribution. On June 2 the stockholders formally gave their approval, and on June 4 the Chicago, Rock Island & Pacific Railway started on its career.[648] The price of the new stock was of course less than that of the old. It started at 106½, but by December it had reached 122¼, and by June the following year had risen to over 141.
This may be called Rock Island’s first reorganization. It doubled the stock of the road, and increased its indebtedness by the assumption of the $5,000,000 bonds of the Iowa Southern & Missouri Northern; but the new stock involved no increase in fixed charges, and the new bonds a nominal increase only. Instead of being occasioned by too little prosperity it was caused by too much; and instead of being carried through after active opposition from many of the interests concerned, and reluctant acquiescence from the others, it occasioned a rise in price of the common stock of 27 per cent in six months.
Between this date and 1902 no reorganization occurred. A rapid review of the period brings out, however, certain interesting features: First, that the stockholders and the directors were extremely conservative; second, that this conservatism did not keep the road from sharing in the expansion of mileage from 1887–9, which was so general in the Middle West; third, that this expansion decreased the average receipts per mile, and consequently the rate of dividends, and occasioned a fall in stock quotations from 140⅞ to 63⅜; fourth, that though weakened the road went through the panic of 1893 and the subsequent depression without suspending dividends; and fifth, that the year 1901 saw the beginning of a new expansion of the system, accompanied by a change in control and the carrying out of more ambitious plans than had ever occurred to the men of the previous generation.
The conservatism of the stockholders is shown in the election, year after year, of the same men to positions of authority. Rock Island was not a speculative road; the high price of its stock forbade. Stockholders regarded their shares as permanent investments, and, satisfied with the returns secured, loyally supported the management in good times and in bad. Between 1875 and 1897 there were but two presidents, Mr. Riddle holding the position until 1883, and then giving way to Mr. R. R. Cable, who, after directing the policy of the company for fourteen years, served as chairman of the board of directors from 1898 to 1901. Among the five members of the executive committee, if the reckoning is begun with the year 1881, three had been in office five years by 1886, one 2 years, and one 1 year, or an average of 3⅗ years. In 1891 two members had been in 10 years, one 7 years, one 6 years, and one 1 year, or an average of 6⅘ years; and in 1901 one member had been in 20 years, one 17 years, one 8 years, one 3 years, and one 2 years, or an average of 10 years. The board of directors showed the same general tendency. In 1890 seven of the thirteen directors had served for 9 years, and the average service was 6-3/13 years; in 1897 four of the directors had served for 16 years, and the average was 9-10/13.[649] It was but natural that men working under these conditions should have been apt to err on the side of caution rather than on the side of recklessness; and we find them, therefore, slow to extend their system, and slow to stretch into new territory where traffic returns were uncertain, and where the road had to create its business as it went. At the date of the consolidation the company had become the owner of 1038 miles and operated under lease 273 miles more, or a total of 1311 miles. By 1883 this had been increased to 1381; but in 1887 the total was only 1384.2, showing a total construction of little over three miles in four years.