Other provisions were as follows: The Rock Island common stock might be increased from time to time according to law, but the amount of the preferred stock could not be increased except with the assent of the holders of two-thirds of the entire preferred stock and two-thirds of the entire common stock at the time outstanding, given at a meeting called for that purpose. Preferred stock was to be preferred as to principal as well as to interest; it had the right, as has been said, to elect a majority of the board of directors, but this right could be surrendered by the affirmative vote of the holders of two-thirds in amount of the preferred stock at the time outstanding at a special meeting of the holders of the preferred stock called for that purpose. A Finance Committee might be appointed from and by the directors which should have such powers as the directors and stockholders should choose to give it, and which should have all the powers of the directors when the board was not in session. The directors might accumulate working capital, but no reservation for working capital should be made in any year out of the surplus or net profits of such year until after the payments for such year of the dividends on the preferred stock of the company. The directors might also use the working capital in purchasing or acquiring the shares of the capital stock of the company as they might deem expedient, but shares so purchased might be resold unless retired for the purpose of decreasing the capital stock of the company.[664] This last provision aroused so much criticism that the directors gave up the right of dealing in the shares of their own company by resolution of November 5, 1902.

The important features of this reorganization were, as has been indicated, those in connection with the inflation of the capitalization and with the control of the property. In this connection it may be asked, first, whether the Moores made a profit by the deal; second, how large an investment they have had to keep in the property in order to retain control; and third, what cost to them this investment represents.

On January 2, 1902, Chicago, Rock Island & Pacific Railway Company common was quoted at 154. On February 1 it was 162¼, on April 1, 179, on July 1, 172½, on August 1, 190, on October 1, 200, and on November 1, 199½. It is safe to assume that the rise from 172½ to 200 was due to the publication of the plan, and it may be that some of the earlier increase in value was owing to purchases by insiders, or by people who had obtained some inkling of what was being considered; but a comparison of the aggregate value of the securities given for the railway common stock on January 3, 1903, with the price of the stock on July 1, 1902, shows that the former exceeded the latter by 22.3 points, with the error tending toward an understatement of the excess. That is, for every $172½ invested in July, 1902, the Moores, and other stockholders with them, held securities worth $194.8 in January of the following year. During 1903 the Rock Island securities fell with others upon the market, till on January 2, 1904, the aggregate value of the stocks and bonds in question was only $132.2; but the decline was temporary, and by January 3, 1905, recovery to $176.6 had taken place. The operations therefore did result in a chance for large profits, and gave renewed evidence that the public demand for stocks and bonds does not fall off proportionately to an increase in their volume.[665]

It is obvious that neither before nor after the reorganization could the Moores have sold all their holdings and yet have kept control. Starting again with the price of 172½ for Chicago, Rock Island & Pacific Railway common on July 1, 1902, it may be calculated that the cost of a majority of the issue then footed up to $64,687,672. If this had been carried on margin, and the brokers had demanded on every share a deposit of $40, with $40 more instantly available if needed, the total investment required for control would have been $15,000,040, with as much more held in readiness for any emergency. On January 2, 1903, Rock Island preferred stock was selling at 83½, and the cost of a majority of the whole issue would have been $22,545,083; which, if carried on margin with a deposit of $20 a share, would have represented an investment of $5,400,020, with as much more in reserve. In other words, while all went well, less than $11,000,000 sufficed to control properties with a total mileage of 7718 miles of line, a bonded indebtedness of $201,660,475, and an outstanding capital stock of $118,249,007. It is of course improbable that the Moores in 1903 carried all, or even a large part of their holdings on margin; supposing, therefore, that all of their stock was bought and paid for, the fact still remains that with $22,545,083 they were able to control a system capitalized at $319,909,482.

In examining the cost to the Moores it is at once to be said that these gentlemen did not pay 172½ for their old Railway stock. What they did pay is of course uncertain. It is known that much of their holdings was acquired in the early months of 1901, when prices ranged from 116⅞ to 136. An average of 140 would represent a conservative estimate of what they paid, at which price a majority of the $75,000,000 would have cost $52,500,140. In return for this stock, at the prices of January 2, 1903, they obtained

$18,375,049in Rock Island Company common stock, 
 21,918,808in Rock Island Company preferred stock, and 
 32,765,712in Chicago, Rock Island & Pacific Railroad Company 4 percent bonds. 

Since the preferred stock sufficed for control, there were left $18,375,049 of Rock Island Company common, and $32,765,712 of Railroad Company bonds, or a total of securities with a nominal market value of $51,140,761. Deducting this from the original investment, which has been estimated at $52,500,140, there is left $1,359,379 to represent the actual cost to the Moore crowd of control of the great Rock Island property. Beneath all of these figures lies, of course, the erroneous assumption that it would have been possible to unload large blocks of securities upon the market without causing a break in price; and yet, though large deductions must be made on this account, the figures are eloquent of the skill with which the Moores have manipulated Rock Island issues, and of the slender basis on which their control rests. It has been truly said that the question is raised anew as to what is legitimate in corporate finance.

All this is very different from anything described before; and so far as motives go, the two Rock Island reorganizations stand by themselves. In the matter of methods some similarities appear. The great increase in capitalization resting on the Rock Island system was accomplished mainly by an inflation of stock, not of mortgage bonds, and involved a comparatively slight increase in fixed charges; the Rock Island Company closely resembled other holding companies in its method of operation, and seemed likely to offer some facilities for the consolidation of competing lines; and though the extraordinary privileges given the Rock Island preferred stock have perhaps never been paralleled in degree, the practice of granting such stock preferential treatment in other things than dividends is not unknown. On the whole, however, this kind of reorganization stands apart, and is rather instructive as showing what may be done in the handling of corporation securities than in indicating any sound principles on which bankrupt roads may proceed.

The reorganization plan aroused sharp criticism both from Wall Street[666] and from the wider public, but met no opposition sufficient to prevent its being carried through. In September Attorney-General C. W. Mullen, of Iowa, in an opinion filed with the Governor of that state, held that the acts of the new Iowa corporation of the Rock Island, i. e. the Chicago, Rock Island & Pacific Railroad Company, were not outside the powers conferred by statute.[667] The Governor, in concurring with the opinion from a legal point of view, added, “the thing done is neither a merger nor a consolidation. Not a mile of track nor a dollar in value is added to the Rock Island property. It is simply a new device for watering securities; it is for the next General Assembly to say whether it is wise to permit our laws to so remain that such things are possible.”[668] The various corporations were, therefore, organized, and the various issues of stocks and bonds put forth.

During the past four years the events which require mention are four: First, the acquisition of the St. Louis & San Francisco; second, the connection of the Rock Island with the Gulf; third, the temporary control of the Chicago & Alton; and fourth, the issue of a new refunding mortgage.