three-fourths vote of the entire Board of Directors of the railway company. All the bonds and the entire capital stock of the railway company have been issued with the exception of 4,572 shares of common and 4,560 shares of preferred stock, which have been reserved to acquire, if practicable, the 4,287 shares of common stock of the Chicago & Alton Railroad Company outstanding in the hands of others than the railway company.

The position of the Chicago & Alton Railway Company at this time is as follows:

Interest on $31,988,000 Chicago & Alton R. R. Co. 3 per cent. refunding mortgage bonds (assumed under lease)

....

Annual net rentals of the Chicago & Alton R. R. Co.. Interest on $22,000,000 Chicago & Alton Ry. Co. first lien 3 per cent. bonds....

Total requirements for fixed charges, including

rentals

$959,640.00

233,030.00

770,000.00

.1$1,962,670.00

The gross earnings of the Chicago & Alton Railroad Company for the year ending June 30, 1900, during which year the road lacked much needed improvements and betterments which are now progressing, and suffered from want of equipment now acquired and in course of delivery were $7,796,450; net earnings, $2,964,628.

In the two months of the current year ending August 31, the gross earnings increased over 1899, $432,551; and the nét earnings increased over 1899, $151,783.

In the above figures the earnings of the line from Springfield to Peoria are not included.

New York, October 25, 1900.

The railroad and railway companies have agreed to take over on or before January 1, 1904, if previously not otherwise disposed of, the terminals in the city of Chicago, Ill., leased on October 1, 1898, to the St. Louis, Peoria & Northern Railway Co. by the Chicago Terminal Transfer Co., upon the terms and conditions of the agreement of lease between the two companies as modified by the supplemental agreement of May 25, 1899.

CONDEMNATION OF CHICAGO-ALTON
RECAPITALIZATION1

Now it appears that for many years before the road was acquired by this syindicate in 1899, Mr. Blackstone had managed the Chicago & Alton Railroad; that it had been exceedingly prosperous; that it had paid exceeding 8 per cent. dividends to its stockholders; that it had a low capitalization; that it was a model railroad, as we all understood it in the West, in capitalization and in management. To be accurate, the book cost of the road, as it appeared by the books of the Alton Company, was $34,153,927. It had other assets of a little over $5,000,000. Its total capitalization, including stock, funded debt, and other liabilities, was $33,951,407. It owned over 843 miles of railroad, 6,377 cars, 232 locomotives, and 148 passenger cars. In less than seven years these gentlemen had expanded that indebtedness, according to the last report of the Alton, to about $122,000,000; but as it is claimed there are some duplications, I will take the lowest figures shown by these reports. They had expended it to $113,894,356, an increase of about $80,000,000. And out of this increase they had spent upon the property but $18,000,000, of which $3,000,000 was for a railroad that the men who reorganized it sold to the Alton Company. In other words, they increased its liabilities about $62,000,000 or $65,433 a mile on 946.66 miles of road owned by the company, for which they did not give the company one dollar-not one dollar-of property or money expended.

Now, in all this time it had only increased its mileage 103 miles, and 58 of that was the $3,000,000 road bought of Harriman and his associates; only increased its locomotives 18, its passenger cars 69; and its freight cars 3,730. I have no doubt it improved the quality of this equipment; but to say that it was necessary to expand the liabilities of this company any such sum as that for the purpose of adding $18,000,000 to a road which had a credit so good that its bonds then were selling on a basis of a little over 3 per cent., is to my mind incredible. I do not believe it. Why, the amount of money that these gentlemen added to this capitalization without giving it a dollar of assets is more than the capitalization per mile of the majority of the great western lines of road-the Milwaukee, with $32,000 and a little over per mile; the Northwestern, with $32,000 per mile; the Burlington, about the same or a little more; the Rock Island, $45,000; the Great Northern, $38,000. Of course there are other roads in the United States that far exceeded that.

1 From the report of the oral argument of Frank B. Kellogg, attorney for the Interstate Commerce Commission, before that Commission, April 5, 1907.

It is said they spent $22,000,000. They did not spend $22,000,000 out of this expanded capitalization. Mr. Harriman said they had spent $22,000,000. On cross-examination he admitted his figures were given him by Mr. Felton and that he did not personally know anything about it, except in a general way. When Mr. Felton went on the stand he said that from the day these gentlemen took hold of the road down to the present time this winter, the company had (including the 58 miles of road they bought) expended $22,327,219.04, but that $2,708,000 was equipment trust notes not included in this capitalization made since July 1st last, and $1,000,000 was taken out of earnings and not included in this capitalization. So that, according to his figures, it would be $18,547,219. I said about $18,000,000, for the reason that Mr. Mahl, the comptroller of the Union Pacific road, added this clause to Mr. Hillard's statement, Mr. Hillard now being the comptroller of the Alton road, and that statement was that they added but about $18,000,000, and he was about right.

What is this capitalization and for what was it spent? It is admitted that at the time this road was recapitalized or reorganized it had a bonded indebtedness of about eight and a half million dollars. The report of the Alton-the last one made by Mr. Blackstone, I believe in 1898-showed that these bonds were short-time, high interestbearing bonds. They were bonds which matured a few months less than three years thereafter, some of which were selling in the market at a rate to yield 3 per cent., substantially all of which might have been retired within the next three years, and a number of them within a few months. With the credit of that line of railroad it stands undisputed that it might have sold its 4 per cent. bonds at par, and instead of increasing its fixed charges from $1,000,000 to over $2,600,000 per annum, could have made all of these improvements by increasing its interest account $720,000 or $750,000.

From this report for 1898 it will be seen that $1,785,000 of the Louisiana & Missouri River Railroad first-mortgage sevens matured August 1, 1900, within a year after they sold these $10,000,000 or $32,000,000 of bonds they put upon the road; of Louisiana & Missouri River Railroad second sevens, $300,000 on November 1, 1900; $1,695,000 of the Chicago & Alton sinking fund sixes, May 1, 1903, and $4,379,850 of Chicago & Alton sixes, July 1, 1903.

These included all of the bonds except $491,000, making a total of $8,159,850 in bonds.

Now, what did they do? Mr. Harriman, Mr. Schiff, Mr. Gould, and Mr. Stillman bought the control of this stock.

What became of this $40,000,000 of bonds? Immediately after they acquired this stock they placed a $40,000,000 3 per cent. fifty-year

mortgage upon the property. It does appear, and could not appear in any other way, that if the Chicago & Alton Railroad stock was worth $39,000,000, its 3 per cent. bonds were worth more than 65. They certainly sold for about two years at 90 or above, or substantially that and they certainly could have borrowed all the money the Chicago & Alton wanted at 4 per cent. To take up the eight million six hundred and some thousand dollars of prior mortgage bonds and the interest and for other corporate purposes, this mortgage was placed upon the property. They sold through Kuhn, Loeb & Co. to Goldman, Sachs & Co., who sold then to the New York Life $10,000,000 of these bonds at 96 cents on the dollar.

What was the average price of these bonds? It does appear that the $10,000,000 not only sold for 96 but that Kuhn, Loeb & Co. sold $1,000,000 to the Equitable Life Insurance Company in 1901 at 92 and $550,000 in 1902 at 88 so that for nearly three years-over two yearsthese bonds sold between 88 and 96. As a matter of fact, during the months of October, November and December of 1899, all of 1900, and January, February and March of 1901, these bonds never went below 924.

Now, those men, according to these market prices, could have sold those bonds at 90. Why, the Alton bonds were then selling in the market on a 3 per cent. basis, according to the Financial Chronicle, which is in evidence; and Union Pacific fours, the Northern Pacific fours, and other high-class railroad first mortgage 4 per cent. bonds, with no better credit than the Chicago & Alton were selling in this country above par. We do not deny that at times railroads cannot do that, and they cannot do it now; but they could have done it then, and the Alton had exceptionally fine credit. It was, in fact, a shining mark.

Even had these 3 per cent. bonds been placed on a 4 per cent. basis they would have sold at 78.45—that is, placed on a basis that they would produce during the fifty years 4 per cent. But they were sold to these gentlemen at 65. No amount of explanation will show that to be good conservative railroad financing, and it is no answer to say that it was done in other railroads. It was certainly done in this.

Shortly after the purchase of this stock these gentlemen paid to themselves a dividend of 30 per cent. out of the proceeds of this mortgage. They owned all the stock except 73 shares of preferred and 4,287 shares of common. They controlled the company. If you deduct this dividend which they took out of the mortgage, they really paid about 48 or 49 cents on the dollar for the bonds.

The fallacy, it seems to me, of Judge Lovett's argument that a road should be judged by what it has paid out in dividends and interest

is this: He said, "We haven't paid out in dividends and interest much more since the reorganization than was paid out before." But remember that Mr. Blackstone was paying his stockholders 8 per cent. dividends, while the reorganized Alton was only paying 4 per cent. on its preferred stock and nothing on its common.

Furthermore, the time may come when the Commission would say that 8 per cent. dividends was rather large, if dividends are to be taken as the basis for rate making. I do not say whether it is or not. A railroad should have good earnings. Dividends should not be small. It is not in the interest of the country to make rates so low that railroad securities, which form a large part of the wealth of the people, should not receive a reasonable income, and should be depressed.

If the Commission and the country have no interest at all in investigating the question of overcapitalization, if they have no interest in the stability of securities placed on the market in which people invest their savings and which they buy on the faith of the security, then perhaps Judge Lovett's theory is correct, that the amount of the securities issued is entirely immaterial. I prefer to adopt Mr. Cravath's suggestion that the people have an interest in this, and that there should at this day be reasonable regulations which will insure the stability and the safety of railroad securities and make them a desirable investment.

I do not deny that in the construction of new lines of railroad, especially into new country, it has been necessary to issue bonus stock and sell railroad securities much below par. I do not deny that this has tended to develop the great western country, to furnish it lines of transportation, and to add millions to the wealth of the nation. But I believe the time is coming when Congress should reasonably limit the inflation and manipulation of railroad securities, in order that their stability may be insured and their value maintained. Investors cannot inquire into the history and value of the property and the basis of credit of all railway securities; they must accept them on the faith of their earning capacity and the integrity of the management. This regulation should not be unreasonable. It should not hamper the capitalization or the increase of capitalization of railways; it should not retard the construction of new lines, and the development of the country; but it should prevent great railway systems, which are today reasonably capitalized and have high credit, from being shining marks of manipulation in Wall Street or any other financial market. That is what I say.

There is another thing the Commission should consider, and that is the system of bookkeeping by railroads. What becomes of these dividends? Why, the counsel says they were openly, notoriously paid.