"N. Y. C. & H. R. R. R. Co.,
By J. H. Rutler,
General Traffic Manager.
Schoellkopf & Mathews."

It will be noticed that this agreement was based upon the expressed condition that Schoellkopf & Mathews treat it as "confidential," and use all reasonable precaution to keep it secret. It is difficult to account for this strong injunction of secrecy except upon the assumption that the managers of the road, conscious of the great wrong which they inflicted upon the body of the people by their discriminations, hoped to escape public criticism by adopting a policy of secret dealing. Much as special rates were sought after, but few shippers to whom they had been granted were contented with their lot, for none was confident that his rivals did not have better rates than himself.

Discriminations between localities had their origin in the natural desire of competing roads to increase their business at the expense of their rivals. When two or more railroads touched the same point each would attempt to secure the largest possible share of the through business by holding out every possible inducement in rates to the shippers of that place. Indeed, the freight rates at competitive points were often so low that railroad managers found themselves placed in a rather unpleasant dilemma. They either had to admit that the rates charged by them at non-competitive places were exorbitant or that they were carrying the freights of competitive points at a loss and were thus squandering the money of their stockholders. They preferred as a rule to admit that they were doing competitive business at a loss, but asserted that, inasmuch as they were compelled to run their trains, they could better afford to do competitive business temporarily at a loss than not to do it at all. The same logic might with equal propriety be employed by the grocer. To draw to him distant customers, he might offer to sell to them at cost or even at a loss; and then, to recuperate, he might advance the prices of his goods for his regular customers. If there is any difference between the grocer and the railroad company, it lies in the fact that the former's old customers would soon find relief at a rival store, while the patrons of the railroad at non-competitive points are like the traveler in the hands of a highwayman, without immediate redress. The railway company which discriminates between competitive and non-competitive points forgets that its line is a common highway for all points tributary to it; that all have equal rights, and that the only differences in tariff which the principles of the common law permit are those which arise from a difference of service and cost. All other differences that railroad companies may make are unjust discriminations in violation of their charter and expose them to a forfeiture of the franchises conferred upon them.

The nature and extent of the discrimination practiced between different places are often such that no interest of the company can possibly be subserved by them, and the conclusion is forced upon us that the advantages granted by railroad managers to certain places are designed to serve chiefly personal and selfish interests. The great fortunes amassed in a brief period of time by railroad managers can in almost every case be traced to stock, real estate, commercial and other speculations directly or indirectly connected with railroad construction or management. And where other than personal interest cannot be shown, this is the only basis upon which the many apparent absurdities of railroad discrimination can be harmonized.

It is claimed by railroad men that transportation by water is a regulator of railway rates which they must respect. It is contended, for instance, that, although the cities situated on our large lakes enjoy superior commercial advantages which are mainly due to their having at their disposal water communication with the Atlantic Ocean, inland towns have no cause to complain against the railroads for not equalizing those differences which nature has largely created. It might be more difficult to meet this argument if, owing to peculiar combinations, these water rates were not made to extend their influence to almost every inland city north, east and south in the Union, and if those cities were not given much lower rates than hundreds of places much nearer the lakes. The teamster who, half a century ago, found it impossible to compete with the canal, river or lake boats, simply surrendered the field to them and confined his operations to such a territory as could give him assurance of a profitable business. Let the railroads do likewise. No company has a right to destroy a rival route, water or rail, by adopting special tariffs for competing points. There are at points accessible to water transportation certain freights requiring speedy carriage which will go to the railroads at profitable rates, but the heavier freights, as coal, lumber and even certain kinds of grain, should go to the carrier by water if he can afford to transport them at lower cost.

There have been but few legislative investigations of railroad abuses in this country, but the disclosures which they have made to the public are astounding. The most noteworthy of these were made by the Hepburn committee, of New York, to which reference has already been made. It is difficult to understand how a free and enlightened community could so long and so patiently bear railroad despotism. Individual discrimination might, under the veil of secrecy, long escape notice, but that a system of open and widespread discrimination affecting every non-competitive and even many a competitive point in the State, doing visible and irreparable injury to thousands of shippers, and infringing upon the rights of millions, should long be borne by a free and enlightened people, is a strange phenomenon of democratic endurance.

It would lead us too far from our subject to review in detail the many and glaring instances of local discrimination which the report enumerates. A few will suffice to show their scope and nature.

William W. Mack, of Rochester, a manufacturer of edged tools, testified that, in order to save fourteen cents per hundredweight on his freights to Cincinnati, he shipped his goods to New York and had them shipped from there to their destination, via Rochester; and that he availed himself of the same roundabout route for his St. Louis shipments, and saved thereby eighteen cents per hundredweight. In both of these cases the railroad company carried the goods 700 miles farther than the direct distance for a less charge.

Port Jervis millers had their grain shipped from the West to Newburgh, a point fifty miles to the east of them, and then had it returned to Port Jervis on the same line, at a less rate than that charged for a direct shipment.

The grain rates from Chicago to Pittsburgh were 25 cents per hundred in March, 1878, and only 15 cents from Chicago to New York.

Flour was carried from Milwaukee to New York for 20 cents, while the rate from Rochester to New York was 30 cents at the same time. It was also carried from East St. Louis to Troy at the same rate as from Rochester to Troy. The rate on butter from St. Lawrence County, N.Y., to Boston, over the Ogdensburg and Lake Champlain and Vermont Central, was 60 cents per hundred; from the nearer county of Franklin, 70 cents; it then continued to increase as the distance decreased, until it reached 90 cents at St. Albans, Vermont.

Soap shipped by Babbit & Co., of New York, to Crouse & Co., of Syracuse, paid 8 cents per box when the freight was paid in Syracuse, but 12 cents per box when paid by the shipper in New York.

It cannot even be said that New York fared worse than any of her sister States. There is hardly a business man in any community in the United States who cannot cite many cases of similar discrimination. Hundreds of well authenticated cases have been reported from every part of the country. A few striking ones may be given space here:

The Illinois Central Company hauled cotton from Memphis to New Orleans, a distance of 450 miles, at $1.00 a bale, while the rate from Winona, Miss., to New Orleans, about two-thirds of the distance, was $3.25 a bale. The same company charged for fourth-class freight from Chicago to Kankakee, a distance of 56 miles, 16 cents per hundred, and only 10 cents to Mattoon, 116 miles farther. The rate from New York to Ogden was $4.65 per hundred, and only $2.25 per hundred from New York to San Francisco. The car-load rate on the Northern Pacific was $200 from New York to Portland and just twice as much to a number of points from 100 to 125 miles east of Portland. The Chicago, Burlington and Quincy hauled stock from points beyond the Missouri River to Chicago for $30 per car-load, while it exacted $70 per car in Southwestern Iowa for a much shorter haul.

To what extent local discrimination has been carried by railroad companies is well illustrated by the following incident: A nurseryman residing at Atlantic, Iowa, a station on the Chicago, Rock Island and Pacific Railroad, 60 miles east of Council Bluffs, bought a car-load of grapevines at Fredonia, New York. Finding that the through rate from Fredonia to Council Bluffs, plus the local rate from the latter place to Atlantic, was less than the rate for the direct shipment from Fredonia to Atlantic, he caused the car to be consigned to Council Bluffs, intending to have it thence hauled back to Atlantic. Being short of stock at the time the train containing his car passed through his town on its way to Council Bluffs, the consignee prevailed upon the station agent to set out his car. In due time he received a request from the general office of the railroad to pay an amount equal to the rate per car-load from Council Bluffs to Atlantic. The request was promptly complied with by the appreciative nurseryman, who after all had been saved an annoying delay by the courtesy of the company's agent.

An infinite number of similar discriminations might be cited. They all show the same violation of the fundamental principles of justice and equity, the same despotical assertion of the power of the railroads to regulate the commerce of the country as the caprice or selfish interests of their managers might direct.

Discriminations between commodities, or, as they might also be called, discriminations in classification, are probably the most common of unjust railroad practices. For the purpose of establishing as near as may be uniform rules in all matters pertaining to rates, the various roads operating in a certain territory usually form traffic associations. The general freight agents of the roads that are members of the association in turn form a select body known as the rate committee. These committees of freight agents have for more than twenty years constituted the supreme authority in all matters pertaining to freight classification. The trunk line classification recognizes six regular and two special classes, and every article known to commerce is placed in one of these classes. One whom Providence has not favored with the mysterious wisdom of a general freight agent might suppose that considerations of bulk, weight, insurance and similar factors formed a basis of railroad classification. Nothing, however, is farther from the truth. Freight charges, when permitted to be fixed by railroad companies, are invariably such as the traffic will bear, and freight classifications are arranged on this principle, provided competition by water, rail or other land transportation does not demand a modification. It is, as a rule, not to the advantage of a railroad to entirely starve out any commercial or industrial concern along its line. Hence tariffs are scarcely ever made entirely prohibitory. Railroads proceed here upon the principle of the robber knight of mediæval times, who simply plundered the wayfaring trader to such an extent as to reduce his profits to a minimum. He never stripped him, for by doing so he would have prevented his return and would have destroyed his own source of revenue. In like manner a railroad will never annihilate any weak branch of business along its line, nor will it, if it is in its power, permit any business to prosper without paying to it heavy tributes out of its profits. Every commodity is therefore made to pay a transportation tax based chiefly on its value and the profit which it yields, and all classifications are prepared with this object in view.

The protection which, through exceptionally low rates, is extended by the railroad companies to certain industries, may not be objectionable per se, but the question arises whether the railroad companies or the people should exercise the right to determine when and where such protection is necessary. Moreover, to tax one branch of commerce for the benefits bestowed upon another is a practice of extremely doubtful propriety, and the power to do so should certainly never be conferred upon a private corporation. When customs laws are proposed in Congress ample opportunity is given to the representatives of the various industries of the country to be heard upon the subject. No hasty step is taken. Members of Congress have every opportunity to ascertain the sentiment of their constituents, through the public press, petitions and private correspondence. The subject is discussed in all its phases, both in the committee-rooms and upon the floors of both houses of Congress. Every detail is fully considered, and many compromises are often necessary to secure for a bill the support of the majority. When it finally passes it represents the will of the people, or at least the will of their legal representatives, who may be expected to know their wants and are accountable to them for their acts. Freight classifications, however, while they are fully as far-reaching as customs laws, are made by a few freight agents meeting in secret session, listening to no advice and acknowledging no higher authority.

It is claimed by the railroad men that it is to the interest of railroad companies to do justice to all, and that the best classification for the largest number of people is also the best for the roads. If this be true, it is difficult to see why railroads should fail to consult their patrons in the arrangement of their freight classifications. Intelligent shippers may certainly be supposed to know as well as the railroad companies what classification is to their common interest. Railroad managers are naturally despotical. They do not wish and do not tolerate any outside interference with what they obstinately term their private business. Even if the general policy of the companies designed the greatest good to the greatest number, the opportunities and temptations of their agents to pursue selfish ends or take advantage of individuals in the preparation or application of their tariffs are such that in the practical execution the evil will always outweigh the good.

It is not within the scope of the present inquiry to review in detail the various classifications in force, or to point out the unjust features. The author will confine himself to showing by a few characteristic examples that the power now in the hands of the railroad companies to classify the various commodities of commerce for the purpose of rating is greatly abused and is a potent means of railroad extortion. And that it may not be charged that abuses have been cited which are a thing of the past, the examples will chiefly be taken from cases which have come before the Interstate Commission for adjudication.

A complaint was filed with the commission in 1887 by T. J. Reynolds against the Western New York and Pennsylvania Railroad Company, from which it appeared that that company charged a greater price for the transportation of railroad ties from points in the State of Pennsylvania to points in the State of New York than was charged at the same time for the transportation of lumber between the same points. The commission held that this was a case of unjustifiable discrimination and ordered the company to place railroad ties in the same class with other rough lumber. Many Western roads for years have been guilty of the same discrimination. The reasons for such a policy are obvious. A high tariff on railroad ties prevents their being shipped, depreciates their market price at home, to the sole benefit of the discriminating company, which is thus enabled to buy ties at a low price. Prohibitory rates on ties and rails are also often maintained by railroad companies to either delay or render more costly the construction of new lines which threaten to become their competitors. The Union Pacific Railroad Company several years ago even went so far as to make prohibitory rates on steel rails intended for the construction of a road which promised to become a competitor of one of its connecting lines.

From another case decided by the Interstate Commerce Commission it appeared that the Lake Shore and Michigan Southern Railway Company charged for blocks intended for wagon-hubs, and upon which only so much labor had been expended as was necessary to put them in condition, a higher rate than for lumber, claiming that such blocks were unfinished wagon material and were therefore, as articles of manufacture, subject to higher charges than raw material. The commission justly held that these blocks were as much to be regarded as raw material as the boards from which wagon-boxes are made.

In the classification of the Southern Railway and Steamship Association pearline was placed in the fourth class, with a rate of 73 cents per hundred pounds, and common soap in the sixth class, with a rate of 49 cents per hundred pounds. This latter article, when shipped by large manufacturers, enjoyed besides a special rate of 33 cents per hundredweight. Pearline and soap are competitive; there is no appreciable difference between them as regards the cost of transportation; but one commands a higher price in the market than the other, and upon this fact solely did the railroad company base its alleged right to levy upon pearline a transportation tax 120 per cent. in excess of that levied upon soap, though the service rendered by the company was the same in either case. The commission held that the discrimination made by the "special rate" of the Southern Railway and Steamship Association between pearline and common soap was unjust, and ordered that it be discontinued and that, with common soap in the sixth class, pearline be placed in the fifth.

For years the rate from Indianapolis to New York was the same for corn as for its direct products, such as ground corn, cracked corn, corn meal, hominy and corn feed. Such a tariff made it possible for Western mills to compete with similar mills that had been established in the East, since a discrimination of 5 per cent. was sufficient to absorb three or four times the profits of any Western mill. It was shown by the evidence produced that the actual cost of transportation was substantially the same for direct corn products as for the raw corn. The only defense which the railroad company could make for this discrimination was that in the carriage of raw corn they had to meet lake competition. The weakness of this argument will be perceived when it is remembered that Indianapolis is 154 miles from the nearest lake-shipping point. There is but little doubt that this discrimination was made by the railroad company because it was to its interest to haul the raw corn from the West to the East and to return it in altered form. Railroads care, as a rule, little for a waste of force, if such waste is to their own advantage.

In another case brought before the commission in 1889 it was shown that the "Official Classification" placed common soap in carload lots in Class V, while such articles as coffee, pickles, salted and smoked fish in boxes or packages, rice, starch in barrels or boxes, sugar, cereal line and cracked wheat are placed in Class VI. The chief reply of the railroad companies to this complaint was that soap was justly placed in Class V because the components from which it is in part made stood in Class V.

In another case it was shown that one kind of soap was burdened with a higher transportation tax than another, irrespective even of cost, because one had been advertised as toilet and the other as laundry soap.

The principle of charging what the traffic will bear is well illustrated by the relative rates on patent medicines and ale and beer, as maintained by the Official Classification.

In a complaint made by a prominent manufacturer of proprietary medicines against the New York Central and other roads, it was shown that the complainant's products were shipped at owner's risk, and that they were in bulk and intrinsic value similar to ale and beer, but that in spite of these analogies the former were rated as first-class and the latter as third-class goods, simply because they retailed at a higher price.

Another unwarrantable discrimination is that in favor of live stock and against dressed beef. While Mr. Fink, the commissioner of the Trunk Line Pool, himself admitted that the cost of carrying dressed beef from Chicago to New York was only 6-1/4 cents per 100 pounds in excess of the cost of hauling live stock, the trunk lines maintained on dressed beef a rate 75 per cent. higher than that on live cattle. The railroad companies asserted that this was due to those people in the East whose living depended on the live-stock interest. The railroads have in this assumed a paternalism which would not be tolerated even in the Government. To protect the East, railroads will not permit the West to engage in new industries.

The position which the Interstate Commerce Commission has assumed in interpreting the rights of shippers under the law which railroad companies are bound to respect in the preparation of their tariff sheets and classifications cannot but be most gratifying to the people. In a decision relating to the classification and rates for car-loads and less than car-loads, filed March 14, 1890, the commission laid down the following rules for the guidance of railroad companies:

The efforts which the commission has made to bring about a uniform classification throughout the country are in the right direction, while the results of its labor are not yet satisfactory.

In their fifth annual report, the Commissioners, after giving an account of their efforts and the shuffling and double-dealing of the railroad companies with them upon this matter of uniform classification, said:

The present confusion which exists in the classification and rates of the seventeen hundred railroad organizations of the country makes it difficult for the commission to do justice to all interests and localities. With the adoption of a uniform classification it is to be hoped that in time many of the present inequalities will be adjusted, especially if an intelligent public sentiment upon the subject of railroad regulation is maintained. A prominent railroad manager in the East, whose devotion to corporate interest is only equaled by his political ambition, has recently made repeated efforts to convince the people that railroad abuses are things of the past and that, if any such abuses still linger in isolated districts, they are simply unavoidable exceptions to the rule which will soon have to yield to the general spirit of fairness and amity for which, in his opinion, the railroads have of late been distinguished. He reasons that the law has fulfilled its mission, that the railroads have reformed, and that it now behooves the people to relent and to extend to the much persecuted corporations the hand of friendship and good will. The postprandial eloquence of this gentleman has often suavely intimated that the repeal of the Interstate Commerce Act would be the most opportune recognition of restored confidence.

Still bolder champions of the railroad cause do not hesitate to demand the repeal of the law. It is not likely that the sophistry of railroad hirelings will triumph over the practical logic of an intelligent public. No law, be it ever so wise, can in the space of a few years correct all the abuses which half a century of unbridled railroad domination has developed. Yet, since both the friends and the enemies of the law agree that it has been partially successful in its operation, it should be continued and improved to keep it in harmony with new conditions and a progressive public sentiment. It is claimed by railroad managers that the adoption of a uniform classification will remove the only vestige of discrimination still left. This is not true, for by far the largest number of complaints that have recently been brought before the Interstate Commerce Commission charged personal and local discrimination independent of any question of classification.

It is shown by the reports of the commission that discriminations are still practiced by various companies, that annual passes are still illegally issued to bribe or appease men of influence, that discounts are still given to favor shippers under various pretexts, that some large railroad centers still enjoy more favorable rates than smaller towns, and that the long and short haul clause of the Interstate Commerce Act is still violated by railroad companies. There are besides these scores of other devices in vogue among railroad managers to subvert the principles of the common law. No doubt discriminations are now much less frequent, and are possibly the exception where but a few years ago they were the rule, but the fact that such abuses still exist is a strong argument for the retention of the law as well as for the necessity of continued vigilance on the part of the people and those especially charged with the execution of the laws. The railroad acts of Congress and the various States ask nothing of common carriers but just and equitable treatment for all their patrons. If this is freely accorded, these laws are no burden to the railroads. If, on the other hand, there is a tendency on the part of the railroads to resort to subterfuges and evasions, the wholesome restraint of the statute is absolutely necessary for the protection of the shipper.

The repeal of the Interstate Commerce Law, or the adoption of such amendments as are demanded by railroad men, would be interpreted by them as an abandonment of all its principles and would inaugurate an era of unprecedented railroad oppression. History ever repeats itself. Unchecked license will always lead to arrogance and despotism, and any power which is long permitted to defy the state will in time control it. It is not likely that the people of the United States can be induced to demonstrate to the world that democratic government is incapable of profiting in the dear school of experience.

Our railroad legislation contains no principle that is not found in the common law. Its maxims are our birthright and will be the birthright of our children and children's children, and while railroad companies may be able in the future, as they have been in the past, to violate the law temporarily with impunity, they will never be able to prevail upon the American people to abandon the policy of railroad reform which the passage of the Interstate Commerce Law inaugurated.

The Interstate Commerce Commissioners say in their sixth annual report:

Probably no law in the United States has ever before been so fiercely attacked at all of its vital points as has this law. It is not strange that among the great number of National and State courts the railroad companies have found occasionally a judge ready and willing to assist them in breaking it down, but upon the whole the judiciary has been disposed to co-operate with other departments of the Government in their efforts to secure effective regulation of the transportation business.

CHAPTER VI.

STOCK AND BOND INFLATION.

The complaint is frequently heard from railroad men that our freight rates are too low, and in support of it the statement is usually made that the greater part of the railroad stocks of the United States pays dividends considerably smaller than the average interest realized by capitalists on money loaned or invested in other enterprises.

This statement may be true, and yet it is valueless as an argument for higher rates. It may be admitted that the dividends declared upon the face values of railroad stocks are quite moderate, but it is a fact too well authenticated to be contradicted that railroad securities represent to a considerable extent only fictitious capital. The public concedes that liberal returns should be allowed to railroad companies on money actually invested, but it naturally objects to being taxed for the purpose of making dividends on watered stock. The evil referred to is a serious one, and has contributed much to the general demand for railroad reform. Most of the early roads of this country were built for the accommodation of local traffic. They were constructed and managed by business men upon business principles. The stock issued by the companies was in most cases paid for in full and was not unfrequently sufficient for the completion of the entire road, and no incumbrance was permitted by the owners to be placed upon the property. These enterprises as a rule proved very profitable. One of the first roads running west of Chicago will serve as an illustration. The Galena and Chicago Union Railroad Company paid a 10 per cent. dividend within a year after being opened to traffic, and gradually increased its dividends to 15, 20 and 22 per cent. During the first two years of the road's operation its expenses were only 38-1/2 per cent. of its earnings. During the second year the company, after paying a 15 per cent. dividend, diminished its debt nearly $60,000 and increased its surplus $11,700. In 1856 the road had a length of 232 miles, on which the gross earnings amounted to $2,315,787. This revenue exceeded the estimate made by the company's officers the year previous by $300,000. In his annual report for 1856 the president of the company said: "This result shows an increased surplus of $65,000, after paying 22 per cent. in dividends and all expenses and interests chargeable to income account." The report also shows that expensive improvements, such as large permanent bridges and stone culverts, displacing as a rule wooden ones, were charged to current expenses.

The financial success of railroads soon attracted the cupidity of financial adventurers—men of great energy, but small means—whose aim was to secure the greatest possible returns with the least possible outlay of money. With the introduction of these elements into railroad circles the era of speculation commenced. Take the line just referred to. In 1852 the average number of miles operated was 62, and the year following, 90. But while the number of miles operated increased less than 50 per cent., the capital stock of the company grew from $444,193 to $1,362,559, and its debt from $60,145 to $542,287. The capitalization of the road was thereby increased from $8,000 to $21,000 per mile, and this was done for the purpose of making the capital appear adequate to its earnings. Nearly all railroads became in time the foot-balls of shrewd manipulators. They were bonded before they were constructed, and often for more than the value of the completed road. Stocks at the best only represented nominal values and were given as premiums to the bondholders or promoters of the road.

But the science of stock-watering did not reach its fullest development until during the period of railroad consolidation. Fictitious values were now created as often as a new consolidation took place. Watered stocks and bonds were watered again and again, until they represented little more than a purely imaginary capital upon the basis of which dividends might be declared. Take the case of the New York Central and Hudson River Railroad companies, which consolidated in 1869 with a capital of $103,110,137.31. The former of these roads was organized in 1853 by the consolidation of ten smaller roads connecting the cities of Albany and Buffalo. The capital stock of these companies amounted to $20,799,800, of which $16,852,870 was claimed to have been paid in. Their funded debt was $2,497,526. It is impossible at this day to ascertain the original cost of all these roads, but it is certain that the above sums represent about three times the amount actually expended for their construction.

One of the roads entering into the consolidation was the Utica and Schenectady. It was 78 miles long and formed about one-fourth of the consolidated line. It had the heaviest grading and rock-cutting, was the best-equipped and undoubtedly the most expensive, in proportion to its extent, of the ten roads out of which the New York Central was created. The original cost of this line was $2,000,000. Bonds were never issued by the company. The line was profitable from the very beginning, paid regularly ten per cent. dividends,—the limit to which railroad companies were then restricted,—and had a large surplus, which it expended mainly for improvements. No assessment was ever made on the stock beyond the $1,500,000 which was originally paid in by the shareholders and upon which they had drawn regular and liberal dividends. Taking the original cost of this line as a basis, it is but fair to presume that the entire line from Albany to Buffalo, covering a distance of 297 miles, did not cost to exceed $6,000,000. These roads, however, entered into the consolidation with a capital stock of $15,274,800 and a bonded indebtedness of $1,696,326.

Estimating the cost of the branches upon the same basis upon which we have estimated that of the main line, we shall find that the total original cost of the consolidated lines cannot have exceeded $8,000,000. The Mohawk Valley road was put in at $2,000,000 and the Syracuse and Utica direct at $600,000, though the roads only existed on paper and did not represent any value whatever. The Schenectady and Troy road, which went into the consolidation with $650,000 stock and $90,000 bonds, had been bought for less than $100,000 two months previous to the consolidation.

It will thus be seen that already nearly one-third of the stocks and bonds of the consolidated companies was water. The consolidation agreement fixed the capital stock of the New York Central at $23,085,600 and its funded debt at $11,564,033.62, increasing the stock over $2,000,000, and the bonded debt over $9,000,000. The latter was more than quadrupled, and $8,000,000 worth of bonds were, under the name of consolidation certificates, given as a present to the stockholders of the new road. The capital stock of the New York Central grew steadily up to the time of its consolidation with the Hudson River road, when it was $28,795,000. All improvements made during this time were paid for out of its surplus earnings, with the single exception of the Athens branch, for which the company issued $2,000,000 of its stock.

The gross earnings of the New York Central in 1854 were $5,000,000, and its net earnings $2,830,000. In 1863 its gross earnings were in round numbers $10,000,000, and in 1869 they reached $15,000,000. The dividends paid during that year amounted to $4,300,000, and the interest to $894,000. In view of the fact that the bonded indebtedness of the road was from two to three million dollars more than the original cost, this dividend of 15 per cent. upon a wholly fictitious capital must be regarded as an unwarranted tribute levied upon the commerce of the country. But we shall soon see that in railroad hydraulics, as well as in other branches of human industry, success stimulates to still greater energy.

The Hudson River Railroad Company was organized in 1847. It extended from New York City to East Albany and was 144 miles long. There are no data extant upon which could be based a reliable estimate of its original cost. Estimating it upon the basis of that of the Utica and Schenectady, we should have to place it somewhat below $3,000,000. While such an estimate may be too low, the amount of its funded indebtedness in 1851, which was $5,640,000, probably more than covers the amount actually expended in the construction of the road. In 1851 the capital stock of the Hudson River road was $4,000,000. In 1853 the funded debt had increased to $7,000,000, and in 1862 to $9,000,000. In 1869 the bonded indebtedness had decreased to $4,309,000, but the capital stock had grown to over $16,000,000. Between 1853 and 1869 the company increased its stock and bonded indebtedness nearly $11,000,000, while the assessments paid by its stock and bondholders during this time did not exceed $1,000,000. Improvements were made, but these were chiefly paid for out of the surplus earnings of the road. It has been shown by experts that $6,640,000 is a high estimate of the actual original cost of the Hudson River road to its stock-and bondholders, and that securities to the amount of more than $13,000,000 represented surplus earnings and water. At the time of the consolidation of the Hudson River and New York Central railroads the capital stock of the two roads had grown to $44,800,000. Under the consolidation agreement the stock was fixed at $45,000,000. The new company also assumed all the bonded and other indebtedness of both roads. If the consolidation manipulators had paused here, the capital of the new company would have been somewhat less than $60,000,000, or more than three times the cost of the property. But the road was, under existing rates, capable of earning dividends on a much larger capital, and this emergency was met by the issuance of consolidation certificates to the amount of $45,000,000. The total capital of the road was thus increased to and made to pay dividends on over $103,000,000, while the total cost of the road and its equipment, as claimed by the company in 1870, was less than $60,000,000, their estimate being based upon assumed consolidation values and the expenditures made from surplus earnings. During the same year the gross earnings of the company were $22,363,320, and their net earnings $8,295,240. In 1880 the gross earnings had increased to $33,175,913, and the net earnings to $15,326,019. The company was able to declare in that year 11.82 per cent. dividend on its $89,500,000 of fictitious stock. In 1890 its gross earnings were $37,008,403, or $26,050 per mile, while its total net earnings were $12,516,273. The gross earnings have largely increased during the years 1891 and 1892. It is safe to say that $2,000,000 per annum would pay very liberal interest and dividends on the amount of money expended upon the construction of the New York Central and Hudson River Railroad from the proceeds of its bonds and stocks. By the creation of fictitious values the managers of the company have attempted to impose an exorbitant tax upon the commerce and travel of the country for all time to come. The Government guarantees an inventor a monopoly only for a limited space of time, upon the expiration of which his invention becomes the common property of the people; but railroad managers endeavor to collect, under the protection of our laws, an exorbitant royalty from our people forever.

The case of the New York Central and Hudson River Railroad Company is only one of the innumerable instances of stock watering in the history of American railroads. Indeed, it can be shown that stock-watering reached a still higher degree of development in the case of the Erie road. It has been demonstrated that the actual original cost to the stock-and bondholders of the New York Central Railroad Company, which was, with its branch lines, 593 miles long, did not, including the Athens branch, exceed $10,000,000. Its cost to its owners, in 1869, including the bonuses, premiums, commissions and fictitious equalization values of several transfers, was reported by them to be only $37,600,000, or about $63,400 per mile. At about the same time the main stem of the Erie Railway, extending from New York to Dunkirk, a distance of 459 miles, was represented by a capital of $108,807,687, or $237,000 per mile. Considering the inferiority of this road to the New York Central, we are forced to the conclusion that nearly 85 per cent. of the capital of the road represented water, or, in other words, that the commerce of the United States was taxed to pay dividends on about $90,000,000 of watered securities. In 1863 the Erie Railroad had outstanding $11,437,500 of common stock. In 1864 this had been increased to $15,693,000, in 1868 to $37,765,000, and in 1869 to $70,000,000. Not one-tenth of this enormous increase of capital was ever expended on the property of the road. The stock was sold at from 20 to 40 cents on the dollar, and the proceeds disappeared in the hands of its managers. To what extent this freebootery was carried will probably never be known. An idea of the rottenness of the Erie management may be had from the fact that the courts at one time ordered its president to restore to the company $9,000,000 of diverted securities, which order was complied with. Vast private fortunes were amassed by nearly all the men who directed the affairs of the road, and the mismanagement became in time so notorious that the legislature of the State of New York was appealed to, to remove the directors of the road for the protection of its stockholders, and to reduce the capital stock of the company to the amount actually paid for it. This movement failed, however, because it was opposed by the very stockholders whose interests were supposed to have suffered by directorial mismanagement. They preferred to continue to draw dividends on the face value of stocks which they had purchased at 20 cents on the dollar. The capitalization of the company has since been increased to $163,679,825, and it is by no means a secret among those familiar with railroad values that the bonded indebtedness of the Erie road represents alone many millions more than the total amount that was ever invested in the property.

The principal competitor for through traffic of the two companies whose financial operations we have just reviewed is the Pennsylvania Central Company. It has often been asserted by the managers and friends of this company that its capital is free from water; but this is not true. In 1864 a dividend of $4,130,760 was made out of the surplus earnings of the road. This dividend was payable in capital stock and was equal to 30 per cent. of the then outstanding capital. Similar surplus dividends, each equal to 5 per cent. of the company's outstanding stock, were declared in 1867 and 1868. The people were thus taxed to pay dividends on a capitalized surplus which had been derived from excessive charges previously imposed on them. I shall not attempt here to determine whether the capital represented by the Pennsylvania Railroad Company has been honestly invested. A committee of Congress has expressed the opinion that the capitalization of its main line exceeds the amount of the actual cost of the property by more than eleven million dollars. There is, however, a system of inflation practiced by the Pennsylvania Railroad Company which is simply a new form of bond and stock watering. More than one-half of the capital of this company has been invested in the stocks and bonds of other corporations. In 1891 the amount so invested was $154,319,240, and the income derived from it $4,852,181. This does not only cause the stocks and bonds of certain companies to be counted twice, but exacts a double tax from the commerce of the country, interests and dividends upon the same capital being paid both to the bond- and stockholders of the Pennsylvania Central and to the bond-and stockholders of the roads in whose securities it has made investments. The income of the company is thus swelled far beyond the amount which the traffic reports indicate. It will be seen that, to perpetuate extortionate rates, this process of manifolding securities might be continued indefinitely.

The cost to its stock-and bondholders of the Baltimore and Chicago line of the Baltimore and Ohio Railroad, which has a length of 795 miles, was estimated by the company's officers at about $57,000,000. The actual cost of this road, owing to its expensive mountain grades, was probably greater than that of any of the other through lines between the sea-coast and Chicago, but there can be no doubt that the capitalization of this road represents from one-half to one-third pure water. At the time of the completion of this road to Chicago the surplus earnings of the company, after the payment of interest and dividends, amounted to over $29,000,000. This had been charged to "profit and loss" and used in the construction of branch lines. Thus an amount equal to more than half of the reported cost of this line had at the time of its completion been returned to its owners in other railroad values.

The Select Senate Committee on Transportation Routes to the Seaboard in 1874 estimated the excess of the capital over actual cost of the Erie road, from New York to Dunkirk, at $68,807,000; that of the New York, Lake Shore and Michigan Southern line to Chicago at $115,188,137, and that of the Pennsylvania and Fort Wayne line to Chicago at $11,290,374. If this estimate was correct the entire over-capitalization of these lines, on which the commerce between the West and the East was forced to pay a dividend of 8 and 10 per cent. per annum, was no less than $195,000,000. The committee assumed the actual cost of these roads to be $182,000,000, or about $78,000 per mile. They based their estimate upon the cost of the main branch of the Baltimore and Ohio, as reported by their officers, supposing it to represent the actual outlay made by its stock-and bondholders. Various revelations which have since been made to the public, as to the real cost of railway construction, justify the belief that the estimated cost of $78,000 per mile for those roads is far too high. Mr. Henry Poor, several years ago, estimated the average cost of the roads of the United States at $30,000 a mile. Making allowance on one hand for Mr. Poor's tendency to favor the railroad side of the question, and on the other hand for the more expensive grades, double tracks and better terminal facilities of these trunk lines, $50,000 per mile may be considered a fair estimate of their average cost. Upon this basis the total cost of the three lines in question would amount to $116,450,000, and the excess of their capital over actual cost would be the enormous sum of $261,000,000, or 325 per cent. of their actual cost, and probably not less than 400 per cent. of the original cost to their stock-and bondholders. The capital of these companies has since been considerably increased, to enable their managers to increase their dividends, and with it the tax levied upon the commerce of the country.

These are only a few of the many instances of stock watering that might be mentioned. In fact, there are to-day very few railroads in the United States that are entirely free from it. It is a notorious fact that the stock of a large number of railroad companies represents little or no value, having either been sold at a mere nominal price or been donated as a premium or bonus to those who purchased a large amount of the company's bonds. In recommending, in his December, 1891, annual message, Government aid for the Nicaragua Canal, President Harrison said: "But if its bonds are to be marketed at heavy discounts and every bond sold is to be accompanied by a gift of stock, as has come to be expected by investors in such enterprises, the traffic will be seriously burdened to pay interest and dividends." It is not difficult to surmise to what enterprises the President referred. It has for many years been a well-settled principle among railroad incorporators that no larger assessments should be made upon the stockholders than is necessary to float the company's bonds. A company, for instance, is organized with a capital stock of, say, $1,000,000. Five per cent. of this sum, or $50,000, is paid into defray preliminary expenses. The road is then bonded for perhaps $2,000,000, but as the bonds are sold for only 80 per cent. of their face value and as the incorporators allow themselves 5 per cent. for the negotiation of the bonds, only $1,500,000 is realized for the construction of the road. The incorporators now vote to themselves a contract to construct the road for $1,500,000 and at once sublet it to a contractor who is ready and anxious to build the road for $1,200,000. The incorporators thus realize $1,000,000 worth of stock, a portion of which is unloaded upon unsophisticated investors, and $300,000 in cash, at an outlay of $50,000; and the road, which cost $1,200,000, is made to pay interest and dividends on a total capital of $3,000,000, and this is subsequently watered indefinitely if the road proves profitable or a consolidation with some other road justifies the belief that its earning capacity might be increased. Nor is this an overdrawn picture. On the contrary, instances might be cited where only one-half of one per cent. of the company's stock was paid in by the shareholders.

In the days of inflation such transactions did not seem to seriously affect railroad securities. Even when they were no longer a secret to the public, stocks and bonds sold readily, because, owing to the large earnings of the roads, this class of investments was unusually productive.

In 1868 the earnings of the railroads of Massachusetts averaged $15,400 a mile, and were equal to 38 per cent. of the total reported cost of all the lines of the State. The Chicago, Burlington and Quincy earned $15,386 per mile in 1867, and paid a 15 per cent. dividend. Its stocks were quoted 100 per cent. above par. In 1867 the Lake Shore Railroad earned more than 50 per cent., and the Terre Haute and Indianapolis even as much as 57.2 per cent. of the amount of its cost. Previous to the war the inflation of railroad securities was, as a rule, confined to the stock. Where roads were bonded for more than the cost of construction it was, with but very few exceptions, done to make their capital to correspond with their earning capacity, or rather to divert public attention from the fact that the rates in force had outlived their reasonableness. It was reserved to the Union Pacific and the Central Pacific companies to bond their roads from the beginning to an amount equal to twice their actual cost, or, in other words, to virtually receive them as a present from the Federal Government, bond them for all they were worth, and, in addition, issue stock to an amount largely in excess of the cost of construction, and then try to earn interest and dividends on the whole amount of securities issued. The history of these companies forms so interesting and instructive a chapter in the railroad annals of America that a short synopsis of it may not seem out of place here.

The charter of the Union Pacific Railroad Company was granted by Congress on the first day of July, 1862. Shortly after the beginning of the War of the Rebellion it was made to appear to the country that a transcontinental road was a national necessity; that without it we could not hope to retain long the Pacific Coast. It was also very plausibly argued that the political benefits to be derived by the country from the construction of such a road, as well as its great length and extraordinary cost, made it the duty of the nation to aid liberally its enterprising and patriotic promoters in the prosecution of their gigantic task. In those stirring times few people were inclined to question the motives of those who advocated what appeared to be patriotic measures, or to be penurious in the expenditure of public funds when the public weal seemed to demand such expenditure.

The Union Pacific Railroad charter, which in substance was passed by Congress as it had been drafted by the promoters of the enterprise, gave to the new company the right of way through the public lands, and authorized it to take, from the lands adjacent to the line of its road, earth, stone, timber and other materials for its construction. It further granted to the company every alternate section of land to the amount of five alternate sections per mile on each side of its line, excepting only those lands to which preëmption or homestead claims attached at the time when the line of the road should be definitely fixed. In addition to these donations the United States issued to the company subsidy bonds in an amount equal to $16,000 per mile for the distance from the Missouri River to the eastern line of the Rocky Mountains, $48,000 per mile for a distance of 150 miles through the Rocky Mountains, and $32,000 per mile from the western base of the Rocky Mountains to the terminus of the road. Similar franchises were at the same time given to the Central Pacific Railroad Company, a corporation which had previously been chartered by the State of California. Besides its grant of right of way, land, timber, etc., this company received subsidy bonds at the rate of $16,000 a mile for a distance of 7.18 miles east of Sacramento, of $48,000 a mile for 150 miles through the Sierra Nevada, and of $32,000 a mile for the distance from the eastern base of that mountain range to its junction with the Union Pacific. The charters of the two companies provided that, to secure the repayment to the United States of the amount of those bonds, they should ipso facto constitute a first mortgage on the entire lines of the road, together with their rolling stock, fixtures and other property. The franchises and donations thus granted by Congress were most valuable; in fact, the latter were alone sufficient to build and equip the roads. In spite, however, of the liberal grants and in spite of the urgent necessity of the roads in those years of national trial, both of these enterprises made very slow progress. Their promoters were men of small means, and the capitalists to whom they appealed for help failed to realize the value of the franchises. No doubt when these men first engaged in their cause they expected to encounter serious obstacles in Congress, supposing that that august body would consider the proposed measure with much deliberation and to act upon it with still more circumspection. Their success greatly surprised them. They made the discovery that members of Congress could be imposed upon as easily as private citizens, and when they fully realized how readily their demands had been granted, they were greatly provoked at themselves because they had not asked for more.

According to a story told by my old friend Mr. J. O. Crosby, an experienced member of the brotherhood of tramps late one afternoon chanced to stroll into the city of Alton. Having no visible means of support, he was picked up by the police and brought before the Mayor to give an account of himself and to be dealt with as that dignitary might see fit. The tramp, a printer by profession, and by no means a tyro in meeting such emergencies, so managed to impress the Mayor with his superior accomplishments that the latter concluded it would be a good investment, both for himself and the city over which he presided, to offer the genial stranger a contribution to his traveling fund, upon the condition that he would no longer than absolutely necessary molest the city with his presence. He accordingly told the intercepted tourist that while it had been for years the policy of the city and its officials to entertain all tramps found within the limits of Alton for thirty days at the city jail in exchange for a fair amount of labor, he would, in consideration of the apparent fact that he was of better metal than the average tramp, make an exception in his case, and would, even at the risk of being censured for it by his constituents, hand over to him five dollars from the municipal funds if he would agree to leave the city early next morning. The tramp gladly accepted the proposition, replenished his empty purse with the proffered bounty and withdrew from the City Hall, to take a stroll through Main Street. The city seemed to him as prosperous as the Mayor had shown himself liberal. It occurred to the itinerant typographer that its treasury would not have been the worse off for a ten-dollar levy, and he hastily returned to the Mayor's office to plead for a larger donation. The Mayor, not disposed to argue the question, handed him another five-dollar bill and improved the opportunity to remind him of his previous promise and to give expression to the hope that as a gentleman of honor he would now discharge his obligation. The tramp fairly overwhelmed His Honor with assurances of good faith and bade him an affectionate good-by. The next rising sun found him on his onward journey. His route led through Alton on the Hill, a portion of the city which he had not seen before. He viewed with surprise the many fine residences and other evidences of opulence which this part of the city contained. He passed on in a pensive mood until he reached the summit of the hill, which commanded a fine view of the entire city. Here he turned to cast a farewell glance over the town ruled over by the most generous mayor that it had ever been his privilege to meet. As he beheld before him the fine homes and beautiful yards, and below in the valley the lofty church-steeples, the many school-houses, the massive business blocks, the long and well-paved streets and the spacious and shady parks, an expression of mingled surprise and disappointment stole over his face. He thrice slapped his wrinkled brow and then hurriedly retraced his steps down the hill. When the chief magistrate of Alton came to his office that morning, he met the irrepressible tramp anxiously waiting for him at the door. "Mr. Mayor," said the wily extortioner, "I acted very hastily yesterday when I accepted your second proposition. You have here a much larger town than I ever supposed. I have been constrained to take our last agreement into reconsideration, and I shall not leave this point until you add another five dollars to your consideration. You can certainly better afford to do that than to throw away thirty days' board and the ten dollars which you have already paid me besides."

The diplomacy of the Union Pacific and Central Pacific railway companies was the same as that of the Alton tramp. They had found Congress as generous as the tramp had found the Mayor of Alton, and now reproached themselves for their modesty and resolved to bring the pliability of Congress to a severer test. They again appeared before that body in 1864 and asked that their charter be so amended as to grant to them ten alternate sections instead of five on each side of the road, and also all the iron and coal found within ten miles of their track, which had previously been reserved by Congress. And in addition to this they asked that they be authorized to issue their own mortgage bonds on their respective roads to an amount equal to the bonds of the United States, and that the lien of the United States bonds be made subordinate to the lien created by the companies' bonds. By the act of Congress, July 2, 1864, all these demands were granted, and the two companies were thus virtually presented with their roads and were at the same time given permission to mortgage this gift of the people and divide the proceeds among their shareholders, many of whom had received their stock chiefly in consideration of their influence in and out of Congress. The contribution of the United States to these companies on account of their main lines has not been far from $80,000,000, of which over $52,000,000 was paid in bonds, and the remainder in lands, which aggregated about 23,000,000 acres. The whole line from Council Bluffs to Sacramento is 1,780 miles long. It will thus be seen that the national contribution was about $45,000 per mile, besides the right of way and all timber, iron and coal found within ten miles of the road. There is no doubt that this contribution was equal to, if it did not exceed, the actual cost of the road. There has been an erroneous impression abroad which has likened the Pacific road to those wonderful and very expensive lines which cross the Andes and the Alps. Those who have not crossed the continent can hardly believe that the construction of this line was neither more difficult nor more expensive than that of any of the numerous railroads crossing the mountain ranges of the East, but such is the fact.

Starting from Omaha, the Union Pacific follows for nearly 500 miles, or almost half of its entire length, the valley of the Platte River. A better route for a railroad cannot be found upon the western continent. There are between Omaha and Cheyenne but three bridges worthy of the name. The Platte Valley is almost straight, rising toward the west at a nearly uniform rate of about 10 feet to the mile. Grading was practically unnecessary, and the work of construction consisted of little more than the laying of the ties and track. From the base of the mountains at Cheyenne to their summit is a distance of about thirty-two miles, the difference in altitude between the two points being less than 2,200 feet. The average grade is therefore about 68 feet to the mile, and nowhere are the grades heavier than 80 feet to the mile. There are heavier grades than these in the prairie State of Iowa, and the mountain grades of a number of Eastern roads exceed those of the Union Pacific by from 30 to 40 feet to the mile. The rise is, if not uniform, at least gradual, and the construction of even this portion of the road required, therefore, neither great engineering skill nor any unusual expenditure of money. The road now crosses a plateau which extends almost to the terminus of the Union Pacific at Ogden, and a very large portion of this is as favorable for a roadbed as the average railroad territory of the country.