These accusations and counter-accusations, justified though many of them were, had little direct bearing on reorganization. In this progress had completely ceased. At the same time some progress was urgently required. The Richmond Terminal, the Richmond & Danville, and the Central of Georgia were in the hands each of a different set of receivers, unpaid interest was piling up, and the year 1893 was to show a marked decline in earnings. Necessity and mutual distrust dictated a second appeal to Drexel, Morgan & Co. to undertake the rehabilitation of the property. On February 2, 1893, the following letter was addressed to the firm in question:

Messrs. Drexel, Morgan & Co.,

Gentlemen: Since the time you were previously requested to take up the reorganization of the Richmond Terminal system much time and thought have been devoted to its affairs, and we realize that adverse financial conditions and also the present general distrust of all plans for the restoration of this system require that, to be successful, its reorganization must be undertaken by parties possessing the confidence of both the securityholders and the public, and also the financial strength sufficient for its accomplishment. We therefore ask you to take up this reorganization of the Richmond Terminal and its allied properties, each pledging you our personal support and aid in full confidence that the securityholders will support us in this request.

We appreciate the labor and responsibility connected with this undertaking, and are therefore willing to do all in our power to give you full control of the reorganization, as suggested in your letter of June 28,374 and to advise our friends and the securityholders generally to deposit their securities, without requiring the assurances customary in such cases.

Very respectfully,
Wm. P. Clyde,
Geo. F. Stone,
Wm. E. Strong,
J. C. Maben,
Thomas F. Ryan.

This letter was accompanied by a letter from F. P. Olcott, president of the Central Trust Company, pledging his support. Inasmuch as lack of the assurances contained in this correspondence had alone prevented Drexel, Morgan & Co. from undertaking the task proposed the previous year, their prompt though conditional acceptance was not surprising. A definitive engagement to attempt the work followed on April 12.375 The enlistment of Drexel, Morgan & Co. in the reorganization provoked general satisfaction. Mr. Hollins, of the Central of Georgia reorganization committee, expressed his pleasure in having responsible parties to deal with not connected with any past differences.376 The directors of the Richmond Terminal urged all classes of securityholders to deposit, and the Clyde Committee was emphatic in its recommendation. It was recognized that the situation was the most favorable which could be hoped for. No group of Southern railroad financiers seemed capable of producing a fair reorganization plan, and it was also probable that no plan from such a source, however fair, would have received a sympathetic welcome. Drexel, Morgan & Co., on the other hand, were both capable and sure of a hearing.

There was remarkably little delay in making public the Drexel-Morgan plan. Less than three weeks after their final acceptance of responsibility, though about three months after the correspondence of February 2, the firm published a comprehensive plan, to the examination of which the next few pages may be devoted. The principles of this plan of May 1, 1893, were simple, and were clearly and convincingly set forth. The property to be considered was to be that of the Richmond Terminal, the Richmond & Danville, and the East Tennessee. The Central of Georgia was to be omitted. The imperative needs of these properties the plan declared to be two:

First, the provision of a large sum for the physical improvement of the system;

Second, the reduction of fixed charges to an amount which the companies could earn.377

The physical condition of the above roads in 1893 was extremely bad. “One obvious trouble ... is,” said the plan, “that their maintenance and repairs have been neglected. Another is that, while nearly all the lines in the United States have been steadily substituting solid roadbeds, heavy equipment, and other modern facilities for the light and ineffective appliances formerly in use, these lines, because of the constant drain to which they were subject for the obligations assumed, and from the necessities of the Terminal Company for the payment to it, as dividends, of every available dollar with which to meet its own obligations, have not been in a financial condition to keep up to the times in this respect, and now they find themselves so far behind as to be, to a considerable extent, unqualified to handle business with economy, or to compete successfully with other lines.”378 The financial condition was little better. The absolute fixed charges of the Richmond Terminal, the Richmond & Danville, and the East Tennessee systems, viz., interest on bonds held by the public, rentals, equipment notes, and sinking funds, and interest on floating debts, receivers’ certificates, etc., the plan declared to amount annually to about $9,900,000. The entire net earnings for the fiscal year ending June 30, 1893, were estimated at $7,000,000. The result was a deficit for the year of about $2,900,000. This state of affairs required serious sacrifices from somebody. The Olcott plan had illustrated the folly of laying the burden largely on well-secured senior bonds. The Drexel plan proposed to demand the necessary concessions from the junior bonds and from the stock. “About $74,000,000 of the bonds and guaranteed stocks of the Richmond & Danville and the East Tennessee systems held by the public,” it continued, “are on properties which are believed for the most part to afford adequate security, and for this or other reasons this plan has not sought to disturb them. About $50,000,000 (mostly recent issues) are junior liens, inadequately secured, or else are on new or branch lines of uncertain earning capacity, and the holders, in self-preservation, must make such reasonable concessions as the situation necessitates, taking compensation therefor in preferred or common stock of the new company....”

The tools of the reorganization were to be the following new issues:

$140,000,000 first consolidated mortgage and collateral trust 100-year 5 per cent bonds, secured by mortgage and pledge of all the property of the new company. This total might be subsequently increased to acquire the whole or part of the Georgia Central system, or to acquire the ownership of the Cincinnati Southern Railway or any other line as a substitute therefor.

$75,000,000 5 per cent non-cumulative preferred stock.

$160,000,000 common stock.

“The general theory of adjustment of disturbed bonds,” said the plan, “is to substitute for them the new 5 per cent bonds to such an extent as is warranted by earnings and situation of the properties covered by the present mortgages, and the new preferred stock for the remainder of the principal. In some cases, where the bonds are on properties of no actual and little prospective earning capacity, a more severe reduction is necessary. In several instances, where the bonds are on properties which are likely to improve more rapidly than other disturbed parts of the system, this fact is recognized, and an extra allowance is made in compensation. Finally, in one or two cases, where the bonds are on properties the loss of which would adversely affect the rest of the system, a proper recognition is made of this fact.” In practice not only bonds and preferred stock, but preferred and common stock, or even common stock alone were exchanged for old securities of little value.

This provided for old securities but not for cash requirements. To raise cash three devices were resorted to, all of which bore entirely on the junior securityholders or on the stock. The most direct was the levying of an assessment. Terminal common stock was assessed $12.50 per share, East Tennessee first preferred $3, second preferred $6, and common stock $9; new preferred stock being in each case given in return. This distribution was based on the idea that the stockholders of each railroad should provide for its floating debt. The floating debt of the Richmond & Danville was about $7,000,000, that of the East Tennessee about $3,000,000, and that of the Richmond Terminal about $100,000. But since the last named held practically all of the Richmond stock and a considerable proportion of the East Tennessee, its stockholders were saddled with a total of $8,300,000 or an equivalent of $12.50 per share, while the East Tennessee was taxed proportionately. The rest of the cash requirements were covered by the sale of $8,000,000 new bonds at 85, and $33,333,000 new common stock at 15. Depositors of all classes of Terminal securities and of all classes of readjusted securities of the other systems were allowed to subscribe to the extent of $1000 in a new bond and $4000 in new stock trust certificates for each $22,000 par value of stocks or bonds deposited. The balance of the issues was looked after by an underwriting syndicate.379

Future capital requirements were provided for mainly by new bonds. $35,383,000 in new 5 per cents were set aside to be used only for new construction, betterments, purchase of rolling stock, and extensions and additions to the system. Not over $2,500,000 of these were to be used in any one calendar year; except that, in addition to this annual appropriation, a total of $3,000,000 in bonds might be specifically appropriated with the unanimous consent of the stock trustees, for the building of branches or extensions, if undertaken within three years after the creation of the new mortgage. All property acquired with these bonds was to be brought under the lien of the new mortgage. $8,000,000 of the cash raised by assessment and sale of securities, moreover, were to be available for new construction and equipment on the Richmond & Danville and the East Tennessee. And, finally, there was provision for the limitation of new bond issues, for a voting trust and for the consolidation of the Terminal system.

“The ultimate object of the reorganization,” said the plan “(excluding the Georgia Central Company from consideration), is to have the new company acquire, so far as practicable, the ownership of the Richmond & Danville and East Tennessee systems, including the various securities now owned by the Terminal Company ... and the securities pledged for the Richmond & Danville and East Tennessee floating debt....

“Both classes of stock of the new company ... are to be issued to three Stock Trustees, who shall be appointed, on or before completion of reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be held by the Stock Trustees and their successors, jointly, for five years, and for such further period (if any) as shall elapse before the preferred stock shall have paid 5 per cent cash dividend in one year, although the Stock Trustees may, in their discretion, deliver the stock at an earlier date....

“No additional mortgage shall be put upon the property to be acquired hereunder by the new company, nor shall the authorized amount of the preferred stock be increased without the consent in each case of the majority in amount of the preferred stockholders.”380

The result of all these provisions was to be a cancellation of the floating debt, a reduction in fixed charges, and a decrease in mortgage bonds; though inevitably also an increase in stock outstanding. The plan proposed to disturb $49,117,900 of outstanding bonds, or, including the Richmond Terminal 5s and 6s, a total of $65,617,900. But the new bonds which it offered in exchange amounted to $19,806,700 only. On the other hand it took $111,819,550 in stock from the hands of the public, and offered $165,559,514 new stock in the course of the exchanges.381 This was very conservative, since the increase in total capitalization through these exchanges was less than 4½ per cent; and less too than the cash assessment for which preferred stock was allowed. Somewhat greater increase in securities appears if we consider, not only the exchanges, but the provisions of the plan as a whole; for here we must include $33,300,000 new common stock and $8,000,000 new bonds issued to retire in part the $12,900,000 of floating debt and for other purposes. Even so the net increase was only 6 per cent.382 The natural result was a considerable reduction in fixed charges. The absolute fixed charges of the system in 1893 the plan stated to be $9,900,000. The fixed charges under the plan were to be $6,789,000. This was certainly a step in the right direction. It was the point, nevertheless, at which the plan was weakest. The clauses which have been outlined made abundant and conservative provision for cash requirements; and the sums which they allowed for future development were not on their face inadequate; but the reduction in fixed charges was less than should have been ensured. The net earnings for the year ending June 30, 1892, were $7,725,000, and those for 1893 were estimated by the plan itself as not likely to exceed $7,000,000. This would have left $936,000 over the proposed fixed charges in 1892 and $211,000 in 1893:—or a surplus of some 3 per cent in the latter year. This was altogether insufficient. It not only put out of the question dividends on the $200,000,000 of stock, but it precluded the partial improvement of the road from earnings, and left the system at the mercy of the slightest decrease in the annual returns. Compared with previous fixed charges the plan proposed noteworthy reductions; compared with the earnings of the lines involved it did not go far enough.383

The reception of the Drexel-Morgan plan was, nevertheless, satisfactory. Certain concessions were made to various classes of bonds, and by June 17, over 95 per cent of the securityholders had given their assent.384 Unfortunately the earnings of the property now steadily decreased. The gross receipts of the Richmond & Danville proper were 15 per cent less in 1893 than in 1892; and Terminal system lines which had earned $6,100,000 in 1892 earned $5,300,000 in 1893, and promised to earn some $4,250,000 only in 1894. This decrease was common to the country at large. It was of peculiar importance, however, in emphasizing the weak point in the Drexel plan. From January 1 to July 1, 1893, the Terminal floating debt, exclusive of car trusts, increased $2,600,000. From July 1 to March 1 it increased at least a million more. The reorganization plan had been prepared “on the assumption that, during reorganization, the receivers of the various properties could provide for the interest charges on the undisturbed securities, as well as accumulate a sum sufficient for the interest accruing on the ‘disturbed securities’ as readjusted.”385 As it turned out, the receivers were obliged to make many defaults among the undisturbed securities, and saved nothing for the disturbed. Some modification of the published plan had perforce to be arranged.

These modifications were detailed in a pamphlet dated February 20, 1894. They comprised three proposals:

(1) To exclude from the reorganization certain unprofitable properties which had previously been included. Certain alterations had already been made toward this end in the exclusion of the Erlanger line, the Memphis & Charleston, and the Mobile & Birmingham. Further modification was to exclude the Northeastern Railroad of Georgia, the Macon & Northern, and five other subsidiary lines.

(2) To fund for a year or two the coupons on new bonds given for certain securities, and to provide in other cases that the new bonds should not bear interest till 1895 or 1896.

(3) To lighten the assessment on Richmond Terminal and East Tennessee common stock, and to allow to all assessed securities one-quarter of their assessment in bonds and three-quarters in preferred stock instead of all in preferred stock.

At the same time a few other modifications allowed to some bonds a more liberal grant of new securities than they had obtained in May. It was hoped by these means to raise the average earning ability of the system, while reducing the new securities to be issued.386 The temporary funding of coupons further lightened fixed charges until business should have had time to revive. “Under the plan as now modified,” stated Drexel, Morgan & Co., “and assuming that one-half of the new bonds to be sold are used in 1894 and the other half in 1895, the fixed charges are estimated at about

$4,100,000 in 1894,     
 4,700,000 in 1895,     
 5,400,000 in 1896.387

“The depression in the South began in 1890–91. There would appear to be no reason why in a comparatively short time these properties should not very easily earn, gross, as much as and more than they earned in that fiscal year, viz., over $21,000,000. Operated at 70 per cent ... there would remain, say $6,600,000 net against an interest charge of $5,400,000.”387

The reduction in assessments was made possible by the decrease in mileage. Although the floating debt had increased $2,600,000 from January 1, 1893, and the equipment notes recorded were greater by $1,048,000,388 yet the debt to be provided for by the modified plan of 1894 was estimated at only $12,200,000. Besides this the cash to be reserved for new construction was reduced $3,000,000, and the surplus for expenses and contingencies $1,380,000. Assessments were therefore set at $10 a share on Richmond Terminal common instead of $12.50; $7.20 on East Tennessee common instead of $9; and $3 and $6 on East Tennessee first and second preferred as before. The new securities to be sold were reduced correspondingly to $8,000,000 of bonds and $25,000,000 of common stock. Finally, the bonds to provide for new construction, betterments, and additions were reduced from $35,383,000 to about $19,000,000, of which not over $2,000,000 (instead of $2,500,000) were to be used in any calendar year. Other provisions of the earlier plan were to remain unchanged.

It was this modified plan which was carried to a successful conclusion. In principle it did not mend the weak spot in its predecessor of May. That plan had contemplated a surplus of $211,000 over fixed charges for 1893. This estimated charges at $4,100,000 for 1894 and net earnings at $4,250,000 on a somewhat reduced mileage. There was not to be more left for dividends and improvements than there had been before, while the cash and bond provisions for improvements were notably reduced. The concession of bonds to stockholders for one-quarter of their assessments was unsound financiering, as was, on the whole, the funding of coupons on the new mortgage bonds. The success which the modification had, nevertheless, in restoring the company to solvency, was due to the improvement in earnings which soon took place. The original plan had based its calculations on the first year of depression; the amended plan kept charges down till three years had elapsed. By that time business had begun to mend, and all danger of bankruptcy was past. Other points in either plan leave little to criticise.

The modifications to the original plan were issued on February 20, 1894. Over 75 per cent of the system bonds had assented by March 24. At one foreclosure sale after another the reorganization committee now bought in the portions of the old system covered by the plan. Suits against the Richmond Terminal had been brought under the two collateral mortgages, and on July 13, 1893, the reorganization committee bid in the pledged securities. On February 6, 1894, it bought the remaining assets of the Terminal Company; on June 15 it bought the Richmond & Danville, and on July 7 the East Tennessee, Virginia & Georgia. Two trustees’ sales, one receivers’ sale, ten foreclosure sales, and six conveyances without foreclosure had occurred by September, 1894, and more minor sales were in progress.389 On June 15 the Southern Railway Company was organized with a charter from the state of Virginia, and took over in succession properties to the extent of 4607 miles.390 Samuel Spencer was elected president. Some thirty corporations were swept away and thirty boards of directors abolished; for the Southern Railway was an operating company, and, unlike the Richmond Terminal and the Richmond & Danville, controlled but an inappreciable fraction of its mileage through the ownership of stock. The new securities were issued at the proper times, and according to the plan the common and preferred stock was turned over to three voting trustees,391 who issued trust certificates in their stead.

This completed the reorganization of the Richmond Terminal Company so far as the principal part of its mileage was concerned. The portions of the system excluded from the plan have been to some extent bought back in later years. Control of the Alabama Great Southern was bought in 1895; the Memphis & Charleston was acquired in 1898; the Richmond & Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899; and the Northeastern of Georgia was bought in 1899. The system has not yet, however, fully regained its old position. The most important loss has undoubtedly been that of the Central of Georgia. We left this company engaged in active disputes with the Terminal management. During 1892 and 1893 efforts to reorganize it were made under the leadership of Hollins & Co. The principal difficulties were the large floating debt and the money required to put the property into good physical condition.392 A plan was actually prepared at the beginning of 1893 and submitted to securityholders, but failed because of that same decline in earnings which had caused the modification of the Terminal reorganization plan. A second plan, prepared in 1894, had a better fate,393 and in modified form was put into effect. The Railroad was sold at auction in 1895, the Central of Georgia Railway was organized to take its place,394 and the corporation entered upon a new career which we have not space to follow.395

As for the Southern Railway, the years from 1895 to 1907 have brought it prosperity. It has extended considerably in mileage. Besides reacquiring lines which formerly were part of the Richmond Terminal system, it has grown south to Jacksonville and Palatka, east to Charleston and to a more direct connection with Norfolk, and west from Louisville to East St. Louis. It has further joined its Louisville-East St. Louis line to Chicago by acquiring a half-interest in the Monon, and to the rest of its system by a half-interest in the Cincinnati, New Orleans & Texas Pacific; and it has bought control of the Mobile & Ohio, which stretches through four states from East St. Louis to Mobile. Instead of 4392 miles as operated on June 30, 1895, it now reports 7546. The earnings of the system have increased more rapidly than its mileage. The revival of business after 1897 occurred with singular force in the South, and seems to have introduced there a new industrial era. As a result, the Southern’s gross earnings have trebled and its net earnings have been multiplied by two. Passenger receipts, which were $4,329,499 in 1895, have become $14,683,006 in 1907. Freight receipts have increased from $10,816,024 to $37,368,095.

It has been this increase in earnings which has at last allowed some of that margin for improvements which the reorganization plans weakly attempted to secure. And accordingly, large sums have been expended. Maintenance of way charges are now over $1000 per mile instead of $630. Expenses per locomotive mile have increased from 4.19 cents in 1895 to 7.54 cents in 1907; expenses per passenger car mile from .83 to 1.03 cents; and expenses per freight car mile from .47 to 2.18 cents. It is true that locomotives and cars are larger to-day and that rails are heavier, but this fact is far from accounting for the difference. Not only has the existing plant been kept in good repair from earnings alone, but distinct improvements have been made. New rail has been laid, additional ballast put in, wooden trestles filled or replaced with steel. It was estimated in 1906 that $5,000,000 had been spent in betterments and charged against income up to that time, besides some $15,000,000 more paid for equipment out of earnings. Meanwhile considerable sums had been spent from capital account. The reorganization plan allowed for some $19,000,000 of new bonds to be sold at the rate of $2,000,000 per year.396 Of these the company had sold $13,000,000 for improvement of the property by February 1, 1906, besides disposing of some $23,000,000 of equipment obligations.

The appreciation of the need for still more liberal expenditure led in 1906 to a comprehensive plan for the issue of new capital. Under date of February 1, the company submitted to its voting trustees397 a scheme for a $200,000,000 mortgage, of which $15,000,000 were to be issued at once and the rest were to be reserved. Of the immediate issue $4,962,774 were to refund payments for equipment hitherto made and charged to capital; $3,501,000 were to refund investments in securities of, and advances to, subordinate companies, as well as to be used for the acquisition of property not heretofore funded; and $6,536,226 were for double track, revision of grades, new yards, shops, etc. Of the securities reserved, $65,164,000 were for refunding purposes: $20,000,000 for certain subsidiary lines: and $99,834,000 to go, first, for betterments and improvements on the entire system and for new equipment in amounts not exceeding $5,000,000 in each year; and second, in exchange for first mortgage bonds not exceeding in amount the actual cost of railroads and terminals hereafter to be acquired. In other words, about one-half of the total issue is to go, sooner or later, for improvements, and the rest for refundings and for new acquisitions.398 It was believed that the Southern could readily pay the interest on the increased immediate issue without endangering dividends on its preferred stock, and that the subsequent increases in earnings would more than provide for whatever additions to charges might occur. Negotiations for the placing of the new securities were concluded with J. P. Morgan & Co. at a reported price of 96½.

The results of the expenditures for improvements have been remarkable. In 1895 the Southern Railway had in use 623 locomotives; in 1907 the number was 1536. In the former year there were 487 passenger cars and 18,924 freight cars; in the latter there were respectively 995 and 56,225.399 Only 370 miles of track in 1895 were over 65 pounds in weight per yard; more than 3100 surpassed that limit in 1907. It is nevertheless in its inability to handle the business offered it that the Southern has provoked sharpest criticism. Over 3600 miles of its system still have rails weighing 62 pounds or less to the yard;—that is, rails incapable of meeting modern operating conditions. Only 206 miles of double and 1981 of side track exist. Equipment appears to be still inadequate. Signals are imperfect, and speed and promptness seemingly impossible to attain. The late tragic death of Mr. Spencer was a forcible illustration of the deficiencies of the road which he had done so much to improve.

The earning power of the system cannot yet, therefore, be said to be secure. Moreover, the capitalization of almost $72,000 per mile,400 as well as the less dense railroad business in the South, the slight construction of many of the Southern Railway lines, the lack of adequate facilities which compels an operating ratio of 76 per cent, and the absorption of minor roads less prosperous than the main stem,—all these factors have kept down the net surplus from operation. On the other hand, the management is making an earnest attempt to raise the standard of the property. Bonds and notes to the par value of over $32,000,000 have been sold to provide for additions and improvements during the past year, and a very great change for the better has taken place. Dividends on the preferred stock have been paid since 1897. As the country develops, and as the sums spent upon improvements come more and more to have their effects, a dividend upon the common stock will be paid. The near future is more likely to witness the cessation of dividends upon the preferred.