The use of assessments alone represents the most radical and the soundest method of raising cash. It disposes of the accumulated quick liabilities once and for all; and involves no subsequent increase in interest charges. It was the method of the Atchison and the Union Pacific after 1893, of the Reading from 1883–6, and of the Erie from 1875–7. It was furthermore the method of the Western, New York & Pennsylvania in 1893,[702] of the Norfolk & Western in 1896,[703] and of other railroads which might be named. Probably its most drastic application was in the case of the Houston & Texas Central in 1887, where an assessment of 73 per cent was found necessary to discharge the floating debt and to provide cash payments for interest and bonus to first mortgage bondholders, and to pay the charges, expenses, and other liabilities made or incurred by the Trust Company.[704]
The sale of securities also has been relied upon for the production of cash. The most striking example of the use of securities alone is afforded by the Reading reorganization of 1883, which at the same time illustrates the possible unsoundness of the method. The floating debt of the Reading companies amounted in June, 1880, to $12,155,248, the bulk having been incurred in attempts to maintain solvency. To cover this Mr. Gowen proposed an issue of $34,300,000 deferred income bonds,[705] to be sold at 30 per cent of their par value, and to be entitled to dividends after 6 per cent had been paid on the common stock. These securities were practically worthless, and had to be set aside in favor, first, of new general mortgage bonds, and then of old unissued general mortgage 7 per cent bonds which the company happened to have in its treasury. So ineffective was even this expedient that in October, 1884, the floating debt amounted to a sum nearly one-third greater than that reported in 1880. Another example was the Erie scheme of 1886, which was not, however, a reorganization, according to our definition. The floating debt of the Erie in September, 1884, amounted to $5,455,338, of which $1,007,922 consisted of unpaid coupons. On the suggestion of English securityholders these coupons were funded; and the balance was raised by a new terminal mortgage issued and disposed of by a subsidiary terminal corporation known as the Long Dock Company. The result was an increase in fixed charges, which contributed to the final failure in 1893. The history of the Southern Railway affords a third example. At the end of 1888 the Richmond & West Point Terminal Railway & Warehouse Company found itself with a floating debt of $5,000,000, and proceeded to authorize an issue of $24,300,000 5 per cent 25-year collateral trust bonds, of which $5,000,000 were to be sold to cancel this indebtedness. In subsequent years the current liabilities again increased, and for this and other reasons a general reorganization became necessary, in which both an assessment and a sale of securities were required. On the whole the result of experience bears out the statement as to the unsoundness of reliance on the issue of securities for cash even when the sale of the securities is guaranteed.
Yet another method of raising cash has been the combination of assessments with the sale of bonds or stock or both. In 1898 the Baltimore & Ohio disposed of $3,800,000 Western Union Telegraph stock. It also provided a total of $37,900,000 prior lien and first mortgage bonds and preferred stock, which was in part given for assessments, and in part turned over to a syndicate in return for cash. The Erie, in 1895, besides its assessment sold $15,000,000 in prior lien bonds; while the Reading sold $4,000,000 in new general mortgage bonds and $8,000,000 in new first preferred stock. In each case the success of the sale was ensured by a syndicate agreement. In 1886, to go outside of the reorganizations which have been particularly described, the Texas & Pacific provided funds with which to cancel a part of its floating debt by an assessment of $10 and an issue of $6,500,000 common stock. Three years later, the St. Louis, Arkansas & Texas assessed its second mortgage bondholders 5 per cent and its stock 10 per cent and sold securities to the par value of $4,490,880 to cover $3,400,000 of cash requirements.[706] In 1894 the New York & New England issued $4,355,000 in securities and levied $20 and $25 respectively upon its common and preferred shares.[707] In 1896 the St. Louis & San Francisco planned to raise $821,410 by assessment and $5,500,000 by sale of securities. Such examples might be multiplied indefinitely.[708]
The problem of cash requirements must be met and solved before the parties interested can consider the fixed charges. It is the reduction in charges, nevertheless, which is usually of the more fundamental importance. A floating debt accumulated through inability to pay current expenses is the direct result of excessive charges, and a settlement which did not lower these, as well as pay off the debt, could give but temporary relief. Only when failure has been due to special causes can a decrease in the annual burden be even a matter for debate. The following tables show the absolute changes brought about by those of the reorganizations earlier considered for which precise figures are available:
FIXED CHARGES
| Seven Reorganizations, 1893–8 | |||||
|---|---|---|---|---|---|
| Road | Before | After | Per cent decrease | Per cent increase | |
| Atchison | $9,423,160 | $6,486,842 | 31.16 | ||
| B.& O. | 7,202,855 | 6,359,896 | 11.70 | ||
| Erie | 8,637,700 | 8,126,283 | 5.92 | ||
| N. Pac. | 13,813,945 | 6,761,960 | 51.04 | ||
| Reading | 11,422,054 | 9,043,944[709] | 20.81 | ||
| Richm. Term. system | 7,498,584 | 4,195,925 | 44.04 | ||
| U. Pac. | 7,985,921 | 4,502,134 | 43.62 | ||
| $65,984,219 | $45,576,984 | 30.92 | |||
| Seven Reorganizations before 1893 | |||||
| Atchison, ’89 | $11,157,770 | $7,256,054 | 34.9 | ||
| Atchison, ’92 | 7,189,199 | 9,423,160 | 31.0 | ||
| E. Tenn. ’86 | 1,742,495 | 1,167,000 | 33.0 | ||
| Erie, ’75 | 4,697,802 | 5,215,146 | 11.0 | ||
| Reading, ’80 | 7,734,031 | 11,535,078 | 49.1 | ||
| Reading, ’83 | 8,235,047 | 7,581,032 | 7.9 | ||
| Rk. I. ’80 | 1,508,989 | 1,271,836 | 16.3 | ||
| $43,276,372 | $43,449,306 | .53 | |||
| One Reorganization, 1902 | |||||
| Rk. I. ’02 | $4,780,649 | $10,485,882 | 119.3[710] | ||
From these tables, it appears that each of the reorganizations from 1893–8 occasioned an absolute reduction in fixed charges which varied from 5.92 per cent in the case of the Erie to 51.04 per cent in that of the Northern Pacific. On the other hand the reductions in the earlier reorganizations were more irregular and were exceeded by the increases.[711] Absolute figures, however, reveal little. Charges may be reduced and the road be worse off than before because of more than proportional reductions in mileage or in earnings. The preceding table must therefore be supplemented by one showing the changes in charges per mile of road and changes in the relations of charges to earnings.
FIXED CHARGES
| Seven Reorganizations, 1893–8 | |||||
|---|---|---|---|---|---|
| Charges per mile | Per cent of charges to net income | ||||
| Before | After | Before | After | ||
| Atchison | $1415 | $1001 | 110.5 | 80.9 | |
| B.& O. | 3438 | 3107 | 98.2 | 86.3 | |
| Erie | 4116 | 3824 | 114.7 | 95.8 | |
| N. Pac. | 2630 | 1494 | 106.8 | 50.2 | |
| Reading | 9856 | 6611 | 111.3 | 82.1 | |
| Southern | 1553 | 955 | 105.1 | 81.5 | |
| U. Pac. | 4381 | 1859 | 105.7 | 40.6 | |
| Seven Reorganizations before 1893 | |||||
| Atchison, ’89 | $1603 | $1064 | |||
| Atchison, ’92 | 1079 | 1415 | 85.8 | 110.5 | |
| E. Tenn. ’86 | 1578 | 1083 | 134.3 | 79.5 | |
| Erie, ’75 | 4984 | 5619 | 93.9 | 91.1 | |
| Reading, ’80 | 9138 | 7287 | 98.1 | 83.0 | |
| Reading, ’83 | 8760 | 7185 | 78.3 | 77.0 | |
| Rk. I., ’80 | 1200 | 952 | 13.2 | 10.2 | |
| One Reorganization, 1902 | |||||
| Rk. I. ’02 | 1231 | 1448 | 39.8 | 59.0[712] | |