Railroad bond

“ Stock and bond inflation, it may confidently be asserted, has created from five to six thousand millions of dollars of fictitious railroad capital. In 1890 the average liabilities of the railroads in the United States, including the capital stock and the funded and unfunded debt, were $63,600 per mile. According to Mr. Poor's estimate of the average cost of American railroads per mile, more than 50 per cent. ”

“ Neither the rate of return actually received on the par value of American railroad bonds and stocks to-day, nor the security which can be offered for additional railroad investments in the future, will make it easy to raise the needed amount of capital. ”

“ From 1876 to 1890 the English and European capitalists continued to invest the interest they drew upon their Government and railroad bonds in the new issues of railroad bonds, so that, in 1890, they had secured the enormous sum of $4,828,000,000 of railroad bonds, and it took $219,877,000 to pay the interest annually. ”

“ Within the past year there has been a good deal of uninformed comment about the safety of railroad bonds. Before the era of popular agitation and governmental antagonism, railroad bonds enjoyed a large measure of public confidence; but it can not be denied that some part of this confidence has been shaken as a result of the recent exposures. Even clearheaded men have exaggerated the importance of the developments ”

“ It is over three times the annual gross revenue of the railroads, and it amounts to nearly one half of the existing railway capital represented by stocks and bonds. The question of obtaining the $8,500,000,000 necessary to make railroad facilities equal to the expanding traffic of the country during the next five years, therefore, constitutes the most important problem now confronting business men. ”

“ The financial and political aspects of this great enterprise were as striking as was the construction. Governments have many a time given lavish aid, promoters have often built roads entirely out of the proceeds of bond issues, financiers have dominated great railway systems by a majority or controlling interest in the stock. ”

“ Railroads are not like stages or steamboats, which, if furnishing no profit at one place, and under one prescribed rate of transportation, can be taken elsewhere and put to use at other places and under other circumstances. The railroad must stay, and, as a permanent investment, its value to its owners may not be destroyed. ”

“ If the title from each land owner could be procured only by negotiation and purchase, no railroad could be constructed, for the reason that a direct or continuous line for a road could rarely be secured. Railroads are constructed to aid in the transportation of freight and passengers from one part of the country to another; to promote commerce throughout the whole country; to supply the wants of a people, just as a mill or factory supplies the wants of a particular locality. ”

“ Before we are done with our railroad financing, it may be necessary for no less a hand than Uncle Sam’s to take hold of it, either by assuming the bonded indebtedness of the roads and against this issuing his own bonds at a slightly higher rate of interest, or else by direct and complete ownership of the carriers.
I am not going into this vexing and highly controversial phase of the railroad question in America further than to say that I [Pg 319] do not feel that this country is ready yet to accept government ownership and operation—particularly the latter. ”

“ No relief is provided for the railways which earn less than 6%, but when more than 6% is earned by a railway, the excess is to be evenly divided with the Government. The railway is to hold its proportion of such excess in a reserve fund and the one-half which goes to the Government is to be held by it as a general railroad contingent fund to be administered by the Commission in assisting the weak roads by loans. ”

“ Its investment is permanent and well secured, if it is honestly and intelligently made; and its dividends are net returns after the payment of all expenses, including taxes, cost of management and maintenance. The three per cent. bonds of the United States Government find a ready sale at prices above par. Were there less speculation and more honesty and stability in railroad management, railroad securities yielding a revenue of from 2-1/2 to 4 per cent. on the actual investment would be eagerly sought after by conservative capitalists. ”

“ It is doubtful whether the aggregate plant used in all manufacturing industries can equal it in value. The capital engaged in banking is but a trifle beside it. The world's whole stock of money of every kind—gold, silver, and paper—would purchase only a third of its railroads.
Yet these facts by no means measure the whole importance of the railroad in the modern industrial system. The business methods of to-day are in one sense the direct result of improved means of transportation. The railroad enables the large establishment to reach the markets of the world with its products ”

“ It is difficult, however, for any one not familiar with the technical details of the railway business to fully appreciate the importance and necessity of the consolidations which have been effected, and the grave results that would follow the realization of the mad proposition to set us back a half century by cutting up our railroad systems into short local lines. It must be plain to every one, however, that while the loss of all the benefits of consolidation would be certain, the gain in competition could affect only the few junction points ”

“ This duty falls first upon those charged directly with the ownership, administration, and management of the railways, and in these recent years of rising expenses and taxes they have been obliged to skimp at every corner in order to make both ends meet, while at the same time the rate of interest on new capital has gone up, and federal and state commissions have reduced rates. The people are beginning to realize the fact that railroad-owners and managers need help. ”

“ The aim of all rate adjustment should be, and in fact, so far as possible in American railway practice, is to equalize conditions, so that the widest possible market shall result. Producers or traders in each city demand access on even terms to all territory naturally tributary to them by reason of their geographical location. Each particular railroad sees to it that its own patrons and cities are "held" in all parts of these markets, as against the efforts of competing railways to promote the welfare of their own constituencies. ”

“ Sprague's own house sells goods in New York city, and Chicago is selling groceries in New England. As I say, even the Hudson river doesn't stop them."
All this record implies progressiveness, energy, and ambition on the part of both business men and traffic officers. Nothing is more remarkable in American commerce than its freedom from restraints. Elasticity and quick adaptation to the exigencies of business are peculiarities of American railroad operation. This is due to the progressiveness of our railway managers in seeking constantly to develop new territory and build up business. ”

“ For few practical railroaders will deny certain vast advantages to be gained by the complete centralization of our rail properties—not only in financing and in rate-making, but also in traffic solicitation and control, in expert staff study of mechanical and operating problems, and in the production of proper personnel, particularly for the filling of future executive positions. All of these functions and more too, the United States Railroad could and would undertake. ”

“ A striking characteristic of American transportation history, emphasized by the foregoing account of land grants and subsidies, is its essentially speculative character. Railroads were more often constructed in advance of population and settlement than to accommodate traffic already in existence. Speculation, as will appear in another volume, has permeated all of our railroad finance. In the early days the most extravagant visions of development were indulged in on all sides. ”

“ And the obvious war-time economies—the direct routing of traffic, the pooling and interchange of equipment, the joint representations and the like—came into being.
To accomplish these things nationally and permanently, to lessen competition rather than to increase it (no sane man imagines that we are ever to succeed entirely in removing the [Pg 271] competitive element) , may yet mean the complete reorganization of our national railroad system. Yet even so radical a step need not be regarded as either fatal or impossible. ”

“ The railroad companies have generally a lease for ninety-nine years, and their lines become the property of the state after the expiration of that period. To extinguish the bonded debt and stock, a sinking fund has been created, from which a certain portion of the shares and outstanding bonds is annually paid off and canceled. The government requires of the companies the free carriage of the mails and the transportation of military and other employes at very low rates. Besides this the state levies upon the traffic of the railroads a duty of ten per cent. ”

“ By 1850 the railroad had proved to the American people, and particularly to those who had money to invest, that it was far faster, cheaper and more adaptable to the country’s transportation needs than either turnpikes or canals. As investment flowed in ever-increasing amounts into railroads, the funds available for extending or even maintaining the old horsedrawn facilities became less and less and finally dried up altogether. ”

“ The contract for construction was turned over to the Credit Mobilier Company. This, in turn, engaged subcontractors. The work was really done by these subcontractors with their force of low-paid labor. Oakes Ames and his associates did nothing except to look on executively from a comfortable distance, and pocket the plunder. As fast as certain portions of the railroad were built the Union Pacific Railroad Company received bonds from the United States Treasury. In all, these bonds amounted to $27,213,000, out of much of which sum the Government was later practically swindled. ”

“ Too many railroads are run, not from the offices of practical men, but from banking offices, and the principles of procedure, the whole outlook, are financial--not transportational, but financial. There has been a breakdown simply because more attention has been paid to railroads as factors in the stock market than as servants of the people. Outworn ideas have been retained, development has been practically stopped, and railroad men with vision have not been set free to grow. ”

“ Because our railroads are now private concerns, so far at least as legal title is concerned, it is too often assumed in public discussion that they owe their existence solely to private initiative and enterprise. With all credit to their sturdy builders, to whose vision and courage so much is due, the plain historical fact remains that the people of the United States have had a large share in [Pg 36] the great task of creating our present railway net,—not indirectly alone, through settlement of the virgin territory, but immediately and directly through land grants and subventions. ”

“ Even if we are not going into virgin territory to give whole townships and counties their first sight of the locomotive, but are going to strike into a community already provided with railroad facilities but seemingly offering fair opportunity for profit in a competitive traffic, we shall find capital ready to stand back of us. A railroad will cost much money, the mere cost of single-track construction generally running far in excess of $35,000 a mile ”

“ Nothing but American iron was to be used in the rails. As fast as sections of forty miles were completed and accepted by commissioners appointed by the Government for that purpose, one thousand dollar bonds of the United States bearing six per cent. interest, payable in thirty years, were to be issued to the Company constructing the line. Sixteen thousand dollars in bonds to the mile for the distance east of the Rocky Mountains and forty-eight thousand to the mile for one hundred and fifty miles for the mountain portion of the line. ”

“ In manufactures and construction work the ratios of efficiency are nearly the same; 1 man in the United States does almost as much as 2 men in England, 3 in France or Germany, and 5 in Italy or Hungary. Again our Government subsidizes the railroads by paying very large sums for the carriage of mails, while in Europe the railways are required to carry the mails free or for a very small payment. Moreover our railway capitalization, though larger than it ought to be by the amount of watered stock and fictitious securities, is nevertheless considerably below the capitalization of European roads. ”

“ That is more than all the railroads of the country carry in a week; and railroad injuries run up into the thousands every year. In the Manhattan Syndicate Building, we are going to have the finest system of elevators in the world, all driven by electricity, a regular railroad system, with “locals” and “expresses”—some of them running up to the twenty-eighth floor without a stop.”
“It must take an awful lot of power to lift an elevator,” I remarked.
“Not as much as you think. In fact, it often takes more power to ran an empty car down than a partly loaded one up.” ”

“ It is reasonable that a rich company, owning lands or mines, or requiring for its own purposes some special railway connection, should, if it desires a new line, undertake the financing of it. But at the same time the principle of the ultimate State ownership of all railways should be strictly adhered to, for the very good reason that in the railways we have the chief security for development loans, and the most productive of all the State assets. ”