It is evident that the prices of the above stocks were not materially lower on September 1, 1897, than on October 1, 1892. The exact average was 73¾ for the earlier month, and 71⅛ for the later. The comparison may fairly, however, be carried further than this, and considerable pains have been taken to arrive at general figures which are conclusive. Such, it is believed, are the following. The market value of thirty-nine different bond issues of seventeen companies, taken at random from among those frequently bought and sold upon the New York and Philadelphia exchanges, was in October, 1892, $388,628,968. This differed little from the market value of the same securities in September, 1892, which was $388,198,432, or that in November, 1892, which was $390,170,323. The market value of these issues in 1897 was $371,125,135 in August, $373,875,293 in September, and $372,962,239 in October. Represented in tabular form the situation appears as follows:

Market Value of Securities

In other words, the quotations for this large mass of representative securities were within 4½ per cent in 1897 of what they were in 1892. If to these are now added the same proportions of stock that existed for the disturbed securities of the seven reorganizations from 1893–8 there appears the following result:

Market Value of Securities

This is, as nearly as possible, a computation comparable with figures already cited. It is made up the same way, has too broad a basis to give a non-typical result, and is not dependent upon the selection of a single month for its conclusion that security prices had nearly regained their former level by the last half of 1897. A decrease in value of 16.2 per cent for the securities of seven reorganized railroads has been determined. Less than one-fifth of this can be attributed to general causes. The significance of the decrease therefore remains.

In conclusion, two other points of interest may be mentioned. First, the provision which sound reorganization plans should make for the future development of their properties, and second, the creation of voting trusts to prevent sudden changes in control. It has been seen that restrictions on new mortgages have accompanied the issue of income bonds and of preferred stock, in order to afford to these latter a desirable protection. If old bondholders demand these clauses, a certain amount of new issues is required by the interests of the corporation. A railroad is never finished. New extensions and improvements which shall increase earnings are generally called for to a degree which current earnings are insufficient to meet. Some provision for regular increments of new capital, without the need of stockholders’ approval in each case, is highly advisable, and implies no lack of conservatism. In fact, some such provision is often forced upon a railroad. Take the case of the successive reorganizations of the Atchison properties. In 1889 no new bonds were to be allowed to be inserted between the income and the mortgage issues, but it was left optional with the management to deduct all improvements before estimating the earnings applicable to dividends on the former bonds. This proved quite inadequate, and the reorganization of 1892 provided definitely a fund of $20,000,000 second mortgage bonds, which were to be issued to a limit of $5,000,000 each year, for specific improvements on the Atchison, exclusive of the Colorado Midland and the St. Louis & San Francisco. The right was reserved to the company, when all the above should have been used up, to issue more bonds of the same sort for the same purpose, and on the same mileage up to a limit of $50,000,000. Finally, in 1895, there were reserved $30,000,000 general first mortgage bonds, to be issued each year to a limit of $3,000,000, and $20,000,000 adjustment bonds, to be issued each year to a limit of $2,000,000, after the general mortgage fund should have been exhausted. In each of the reorganizations in the nineties considered in this study, in which restrictions on new bond issues were imposed, there was concomitant provision for regular increments of mortgage bonds to be used for improvements, betterments, and new construction. Thus the Baltimore & Ohio in 1898 reserved $5,000,000 prior liens and $27,000,000 general mortgage bonds, of which the latter were to be issued at the rate of not exceeding $1,500,000 for the first four years after the organization of the new company, and not exceeding $1,000,000 a year thereafter; and the former were to be put forth at the rate of not exceeding $1,000,000 a year after January 1, 1892, for enlargements, betterments, and extensions. The Erie in 1895 provided $5,337,208 in cash to be spent at once, and $17,000,000 in general lien bonds to be issued during the years following the reorganization. The Northern Pacific in 1896 set aside $25,000,000 prior lien bonds, of which not more than $1,500,000 were to be issued in any one year, and $4,000,000 general lien bonds, presumably to be used as needed. The Reading in 1895 reserved $20,000,000 general mortgage bonds for new construction, additions, and betterments, of which not over $1,500,000 were to be used in any one year. And, finally, the Richmond Terminal reserved $20,000,000 in 5 per cent bonds to be used at the rate of $2,000,000 per year, and has recently authorized a $200,000,000 4 per cent mortgage which will raise the yearly limit of expenditure to $5,000,000.724

Before the nineties, as after, provision for new capital accompanied restriction on the future issue of bonds. In 1886 the Reading provided a lump sum of $9,792,000 general mortgage bonds for future use in the improvement of the railroad; and in 1875 the Northern Pacific contemplated the issue of first mortgage bonds to an average of $25,000 per mile of new road actually completed. Where, as with the Atchison in 1889, some such provision did not accompany the general restrictions placed upon new bond issues, or where, as with the Northern Pacific in 1875, the provision proved inadequate, fresh measures of relief were compelled. The Atchison reorganization of 1892 has been mentioned; in 1889 a financial operation of the Northern Pacific, which according to our definition was not properly a reorganization, provided $20,000,000 5 per cent consolidated mortgage bonds for additional branches at a rate not to exceed $30,000 per mile, and a like sum for betterments, etc.

Even where no restrictions on future bond issues are imposed, it is highly advisable that some provision for future capital requirements be made, and that the management have at its disposal a fund of bonds issuable without the approval of stockholders in each case. It is probable, therefore, that some such provision would have been a feature of some, at least, of the reorganizations even had the restrictions described not made the clauses an imperative necessity; but if we may judge from the rather restricted basis on which we are here at work, the provisions would have been far less liberal than we have found to be the case. In 1895 the Union Pacific set aside $13,000,000 4 per cent bonds and $7,000,000 preferred stock to dispose of equipment obligations, and for reorganization and corporate uses. Of these, corporate uses were stated to be those which would be proper to the corporation thereafter, such as the issue of securities in extension of the property. This, of course, was quite inadequate. Similarly the Rock Island in 1902 and the Erie in 1875–7 provided for a certain issue of stock or bonds to be applied to future capital requirements. It is undoubtedly true that both the Erie and the Reading railroads were hampered by the lack of adequate provision of this nature; though as the main difficulty of each corporation was the continued existence of heavier charges than it could bear, an automatic increase of indebtedness would not have proved a solution of their troubles.

The essence of a voting trust is the deposit of stock in the hands of trustees (most frequently five in number). These trustees issue certificates in return. All dividends declared on the stock are paid over to holders of certificates, but all the voting power is exercised by the trustees so long as the trust endures. Of the reorganizations which we have described, ten reorganizations with foreclosure included five voting trusts and one proxy committee; eight reorganizations without foreclosure included two voting trusts; ten reorganizations before 1893 included two voting trusts (though a third was proposed for the Atchison in 1889); seven reorganizations in 1893–8 included five voting trusts and one proxy committee. The use of voting trusts has therefore become more general, denoting a realization of the dangers of fluctuating and speculative control at critical periods in a railroad’s history. This desire to secure conditions of stable control has been the dominant one in the cases under consideration. “In order to establish such control of the reorganized company for a series of years,” said the reorganization plan of the Baltimore & Ohio in 1898, “both classes of stock of the new company shall be vested in ... five voting trustees.” “The importance of vesting in the present creditor class the management of the properties until their productiveness is considerably increased ... is manifest,” said the syndicate reorganization plan of the Reading in 1886. It is of supreme importance that a reorganized company be well started on its way by men who have an interest in making the reorganization plan permanently successful, and that conservative direction be assured until danger of bankruptcy be past. For this reason we should expect the use of voting trusts to increase in direct relation to the seriousness of the difficulties experienced, and to the vividness with which the need for stability is felt. If we may generalize, and say that a railroad which cannot be reorganized without a foreclosure sale is usually in more desperate straits than one which can be saved by voluntary concessions, we have an explanation of the coincidence of foreclosures and voting trusts. The teachings of experience, which have shown both the usefulness of voting trusts as tools, and the necessity of a solution such as they offer, further explain the increased prominence of the trust in later years.

It is not true that voting trusts are always used for the purposes indicated. In 1892 certain stockholders of the Baltimore & Ohio agreed to deposit their certificates in a trust for one year and five months. The stock deposited amounted to $8,975,000 out of a total outstanding of $25,000,000, and a limit of $11,000,000 was set to the amount to be so placed, the object of the arrangement apparently being to increase the influence of the stockholders concerned by concentration of their holdings.725 Again, in 1895, to take an outside example, the stock of the Oregon Railway & Navigation Company was placed in trust with the Central Trust Company in order better to protect the preferred stock. It was provided that during the continuance of the trust the Central Trust Company should vote all the stock: first, against any increase in the preferred stock unless the holders of all the voting trust certificates of both classes should give their unanimous consent at general meetings; second, against all propositions relating to the mortgaging, selling, or leasing of the railroad and telegraph lines of the company, or to the consolidation thereof, unless a majority of each class of certificates should consent; third, on all other questions as directed by the holders of a majority of the aggregate of all voting trust certificates of both classes represented at general meetings.726 Further provisions gave to the preferred stock control of a majority of the board of directors. These instances are of interest; but the principal purpose of the voting trusts in the reorganizations which we have considered has been nevertheless the securing of stability of control for a definite period after the rehabilitation of the bankrupt companies.

The duration of the voting trust varies from company to company. The most usual provision is for five years. Frequently the voting trustees may terminate the trust earlier at their discretion, as in the case of the Baltimore & Ohio trust of 1898, the Richmond Terminal trust of 1894, or the Northern Pacific trust of 1896. Frequently, also, certain conditions must be fulfilled before termination. In the case of the Erie in 1895 no stock certificates were to be due or deliverable before December 1, 1900, nor until the expiration of such further period, if any, as should elapse before the Erie Railroad Company in one year should have paid 4 per cent cash dividend on the first preferred stock.727 In the case of the Reading in 1896 4 per cent cash dividends on the first preferred stock were required for two consecutive years, and this delayed dissolution three years beyond the time originally contemplated.728 The Richmond Terminal trust had provisions similar to those of the Erie.

The number of trustees also varies. The scheme proposed for the Atchison in 1889 contemplated a trust of seven; the Baltimore & Ohio in 1898 and the Richmond Terminal in 1894 provided for five; and the Erie in 1896 for three; but this point is not material. When the reorganization plan requires the consent of stockholders to an increase in the issue of securities the consent of holders of trust certificates is apt to be required on similar occasions during the existence of the trust. Thus the Northern Pacific agreement of 1896 forbade the trustees to increase the preferred stock or to issue any new mortgage, except with the consent of the holders of a majority of the whole amount of preferred stock trust certificates, and of the holders of a majority of the common stock trust certificates represented at the meeting.

This ends the present treatment of the subject of railroad reorganization. The results of the discussion may be briefly summed up as follows:

First. Reorganization is most frequently an attempt to extricate an embarrassed company from its difficulties.

Second. These difficulties can generally be traced either to an unrestricted freedom of capitalization, or to destructive competition.

Third. The shape in which trouble appears is likely to be that of a large floating debt or of excessive fixed charges; either or both of which may have brought the corporation to a critical condition some time before the actual collapse.

Fourth. The best practice favors the retirement of floating debt by assessments on securityholders, though sales of securities are sometimes resorted to, or a combination of sales and assessments is employed.

Fifth. Fixed charges are composed chiefly of interest and rentals. Interest payments are reduced by the retirement of outstanding bonds by new bonds which bear a lower rate of interest, or by income bonds or stock, or by a combination of securities with a fixed rate of interest with securities upon which payment of interest is optional. Rentals may be reduced by direct negotiation, or the leased roads may be absorbed into the main system, and their securityholders receive new stocks and bonds as above.

Sixth. The new bonds are of fewer kinds and have longer terms to run than the bonds which they displace.

Seventh. This reduction in fixed charges imposes a loss on the greater part of securityholders, both in respect to the annual interest which they can claim, and in respect to the selling price of their holdings. A similar loss is suffered by those securityholders who pay the required assessments.

Eighth. The loss falls on securityholders according to the seniority of their holdings,—those bonds escaping which can expect to satisfy their claims from the selling price of the railroad at foreclosure sale.

Ninth. The most important development in reorganization practice has been the increasing use of new securities bearing a fixed rate of interest with new securities bearing a conditional rate of interest; a use which may make the losses of junior securityholders temporary instead of permanent, and yet safeguard the interests of the corporation. In this connection preferred stock has gained in popularity over income bonds.

Tenth. This development, and the issue of new securities for floating debt and for other purposes, have caused the capitalization after reorganization in all but one of the cases which we have examined to exceed the capitalization before.

Eleventh. In order to perfect a reorganization additional provisions are often inserted, which protect junior securityholders against the reckless issue of new bonds, supply the corporation with ability to make necessary betterments from capital account, protect the corporation from sudden changes in control, and similarly supplement the main clauses.