CHAPTER V

THE SOUTHERN Richmond & Danville—East Tennessee, Virginia & Georgia—Formation of the Southern Railway Security Company—Growth and Combinations —Failure and reorganization of the East Tennessee—Reversal of position between the Richmond & Danville and the Richmond & West Point Terminal—Acquisition of the Central of Georgia—Failure and reorganization of the whole system—Subsequent development. At the present time there are in the South five great railway systems: the Atlantic Coast Line; the Seaboard Air Line; the Southern Railway; the Louisville & Nashville Railroad; and the Illinois Central Railroad, which cover, in the order named, the territory between the Atlantic Ocean and the Mississippi River. The backbone of the Southern Railway is formed by the old Richmond & Danville and East Tennessee, Virginia & Georgia companies: of which the first formerly stretched with its subsidiary lines from Washington and Richmond on the north to Atlanta, Georgia, and Greenville, Mississippi, on the south and west; and the second reached from Bristol, Tennessee, in a great half circle to the ocean at Brunswick, Georgia, and by means of the Mobile & Birmingham straight to the Gulf at Mobile. The Richmond & Danville was opened in 1856 between Richmond and Danville, Virginia. It was largely aided by the state of Virginia. Three-fifths of its stock were owned by the state in 1867, there was a state loan of $400,000, and a state guarantee of $200,000 besides.[286] In natural consequence the state elected three of the six directors. It was not long, however, before the state was able to relieve itself of a large part of its investment. On the 31st of August, 1871, all of the state shares were taken over by the Pennsylvania Railroad Company.[287] The money sunk in the company’s bonds still remained. From Danville the Richmond & Danville steadily pushed south in the years following 1856. Under the leadership of the Pennsylvania it became its ambition to open direct rail communication from the great Northern cities to the heart of North and South Carolina and Georgia. To obtain a ninety-mile extension to Charlotte the company leased the North Carolina Railroad, 223 miles in length.[287] To get into Atlanta it allied itself with the Atlanta & Richmond Air Line Company, projected to construct a line between Atlanta and Charlotte.[288] In 1878 it bought a controlling interest in the Charlotte, Columbia & Augusta Railroad and secured entrance to the latter city.[289] The Pennsylvania aided the new enterprise by advances from time to time, and when the current liabilities became unmanageable took $1,000,000 of a new refunding mortgage.[290] Meanwhile the East Tennessee, Virginia & Georgia Railroad had been established to the west of the Richmond & Danville, in the heart of the southern Appalachians.[291] This company was a consolidation in 1869 of the East Tennessee & Virginia Railroad, from Bristol, on the boundary between Virginia and Tennessee, to Knoxville, Tennessee; and the East Tennessee & Georgia Railroad, from Knoxville, Tennessee, to Dalton, Georgia. Both roads were aided by the state of Tennessee. In 1870, however, the new company extinguished its debt to the state by the payment of $4,117,761 in state bonds. Not long after the completion of its line from Bristol to Dalton, the East Tennessee fell under the control of the Pennsylvania Railroad, which already dominated its neighbor to the east. To facilitate the control and to unify the interests of the Pennsylvania south of Washington a “Southern Railway Security Company” was formed, with a capital of $5,000,000. This company was entrusted with a majority of the stock of the Richmond & Danville and of the East Tennessee. It also controlled the Coast Line railroads from Richmond to Charleston, and the Memphis & Charleston from Chattanooga to Memphis.[292] Unfortunately the financial results of the combination were disappointing. Of the subsidiary roads the East Tennessee managed to pay at least 3 per cent on its capital stock from 1872 to 1876; but the Richmond & Danville paid nothing, the Coast Lines nothing, and the Memphis & Charleston barely earned the 3 per cent guaranteed under its lease. In 1873, therefore, a special meeting was held at the office of the Southern Railway Security Company to consider the propriety of making sale of certain properties of the company.[293] In 1874 the lease of the Memphis & Charleston was surrendered,[294] and in 1876 the bulk of the securities held, outside of the Richmond & Danville stock, were disposed of.[295] The retirement of the Southern Railway Security Company marked the beginning of the withdrawal of the Pennsylvania from investment in the South. For the rest, it left the lines north of South Carolina in three main competing groups. There were the Coast Lines from Richmond south, the Richmond & Danville, and the East Tennessee, Virginia & Georgia properties. And stretching from west to east was the Memphis & Charleston, which was already in financial difficulties of a serious nature. All three of these groups were now thrown upon their own resources; and two of them, at least, took vigorous measures in self-protection. The policy of the East Tennessee was the most aggressive. Shut up in the narrow valley between the Clinch and the Great Smoky Mountains, and flanked by hostile roads, it conceived it to be necessary for it to acquire connections to the south, to the east, and to the west. Accordingly, it leased the Memphis & Charleston in 1877 and obtained an outlet upon the Mississippi River.[296] In 1878 it bought the Georgia Southern and the Selma, Rome & Dalton and provided itself with a line as far south as the Flint River in Alabama.[297] In 1881 it bought the Alabama Central, extending some 96 miles west from Selma. The same year it secured control of the Macon & Brunswick in Georgia, and began construction from Macon to Rome to complete a line to the South Atlantic coast.[298] In the north it made an alliance with the Norfolk & Western, which opened that company’s line from Bristol to Norfolk,[299] and arranged with the Louisville & Nashville and the Kentucky Central for construction to a connection at the Kentucky-Tennessee state line which should open to it the business of the Central West.[300] The Richmond & Danville fell under the control of a group of capitalists who already controlled the Atlantic Coast lines and held an interest in the East Tennessee, and who now bought the 24,000 shares of Danville stock still held by the Pennsylvania Railroad.[301] Like its rival, it enlarged its system. It leased the Atlanta & Charlotte Air Line in 1881,[302] with certain minor roads in the Carolinas and in Georgia. In 1882, under the charter of the Georgia Pacific, it began construction westward from Atlanta to the Mississippi. It did not stretch out, as did the East Tennessee, but it secured a very complete control of the territory between Richmond in the north and Augusta, Savannah, and Atlanta in the south. In 1881, also, the Richmond & Danville took a step destined to have important consequences. Since it desired to acquire certain railroads, and since its charter allowed it to hold stock in none but connecting lines, it caused to be incorporated a so-called Richmond & West Point Terminal Railway & Warehouse Company, with authority to acquire stocks and bonds of railroad companies in North Carolina, South Carolina, Tennessee, Kentucky, Georgia, Alabama, Mississippi, and other states. This company increased its stock by October, 1881, to $3,000,000; of which the Richmond & Danville then owned $1,510,000. The most important acquisition which it made at the time was the Virginia Midland Railway, from Alexandria, Virginia, to Danville; but other additions were to follow. The independent action of the Danville and East Tennessee companies was followed by a new consolidation which reunited most of the lines dominated by the old Security Company. In response to queries in August, 1883, Mr. Calvin S. Brice admitted that a syndicate in which he was interested had bought control of the Richmond & Danville. “We have secured,” said he, “about 28,000 of the 50,000 shares of stock issued by the Richmond & Danville Company. Our syndicate controls, besides our new purchase, the East Tennessee, Virginia & Georgia Railway and the Chesapeake & York River line of steamers that ply between West Point, on the Chesapeake, and Baltimore, and has close traffic arrangements with the Clyde steamers, which run between New York and Philadelphia and all Southern points. Our purpose is to confine all our railroad and steamship lines under one management, and to equip and operate the system in the best possible manner.”[303] It appears from this statement that the capitalists who controlled the East Tennessee now again consolidated with the leading interests of the Richmond & Danville and lines east, albeit changes in personnel and transfers of holdings occurred. Return to the old combination was made desirable by the more intimate connection of the two groups of roads. The Western North Carolina had been opened across the mountains of North Carolina in 1882. This had made practicable the diversion of the western traffic of the East Tennessee from the Norfolk & Western to the Richmond & Danville; a traffic which the northern connections of the East Tennessee promised largely to increase. Consolidation was doubtless also prompted by the desire to save the East Tennessee from serious financial difficulty which threatened it. It had become apparent that this company, at least, had severely taxed its strength in the rapid extension of mileage which had followed 1876. Before that time its position had been secure. It had possessed a monopoly of the somewhat limited local traffic between Chattanooga and Bristol, and had formed part of the most direct route between New York, Philadelphia, Baltimore, and Washington, and towns in Tennessee, Northern Alabama, and Mississippi. Its extensions had changed the situation. They had brought it into touch with the Mississippi River and the Atlantic Ocean, and had increased its fighting power; but they had also endowed it at large cost with a group of poorly equipped, unprofitable lines located in a keenly competitive territory. The Selma, Rome & Dalton had been purchased just after a foreclosure sale. The Macon & Brunswick had never been able to earn much more than working expenses. The Alabama Central had not seen fit to publish its financial figures after 1878, while the Memphis & Charleston, as we have seen, had turned to the East Tennessee only to escape bankruptcy. The East Tennessee had hoped to make profitable the lines which it had so rapidly acquired. Unfortunately the company was poorly equipped for such a task. Its finance had been extravagant. In 1875, on 269 miles of lines there had been $7317 in stock and $15,620 in bonds per mile. In 1883 the mortgage bonds and car trusts outstanding per mile owned amounted to $23,444, the income bonds to $15,404, and the capital stock to $41,079. A grand total of $79,927 as compared with the $22,937 of eight years earlier, and an average of almost $100,000 in securities per mile of new line acquired! Ninety-nine per cent of net income was being absorbed in paying interest on all classes of securities, although maintenance figures were kept as low as $630 per mile of line. This large volume of stocks and bonds made improvement from earnings impossible, and prevented conservative management by taking from the stockholders any chance of dividends, and by reducing the quotations of common stock to less than $5 per share. And though in some respects the location of the system was good, the route which it offered to much of its business was indirect, the competition which it had to meet was severe, and its Atlantic terminal, Brunswick, was of small importance compared with the thriving cities of Savannah and Norfolk. The result was a failure to secure the gains from consolidation which had been expected. Surplus earnings were continuously small, and current bills were left to run; until by 1883 the floating debt had become so large that an issue of $1,200,000 in debenture bonds was required to take care of it. The failure of the East Tennessee to weld its connections into an efficient transportation system left it helpless in face of the panic of 1884. Earnings fell off in that year, a directors’ committee was appointed,[304] and the resulting report revealed a plain inability on the part of the company to meet its charges. “The interest charges proper for the calendar year 1885 are,” said the committee, $1,476,505.85 “To this must be added the principal due on car trusts and debentures in 1885, 280,954.11 ------------- “Or a total of $1,757,459.96 “The payments on similar account will be— in 1886, $1,739,196.28 in 1887, 1,720,932.60 gradually decreasing until the debentures and car trusts being paid off in 1894, the total fixed charges for the year 1895 will be $1,295,970.00 “The net revenue for the year 1883–4 was 1,699,925.84 “The net revenue for 1885 and 1886, allowing for the decrease in earnings following the panic, and supposing the road to be operated for 60 per cent, may be estimated at $1,400,000.00 “This will leave,” said the committee, “an annual deficit of $350,000, to which must be added a total of $1,000,000 required by the general manager for steel rails, iron bridges, and other needed improvements. “The sums for covering these expenses should not be raised by temporary loans, as this would not relieve the company of its embarrassments nor place its finances upon a sound footing. It cannot be raised by an additional mortgage, on account of the provisions of the mortgage securing the income bonds. It must and can be raised from a funding of coupons which shall leave the earnings of the company sufficiently free to meet the demands upon them. The committee therefore recommends: (1) “That the holders of the consolidated 5 per cent bonds be asked to fund four coupons, being those maturing January and July 1, 1885, and January and July 1, 1886, by depositing said four coupons with the Central Trust Company of New York, as trustee, and receiving instead the company’s funded coupon bond dated July 1, 1885, and bearing 6 per cent interest per annum from that date, ... which bond shall run ten years from its date and be redeemable at the pleasure of the company at par and accrued interest after three years, on three months’ notice; such funded coupon bond to be secured by the coupons so deposited, the lien of which will be in all respects preserved. “The total extensions under this clause would be $1,467,400. (2) “That the holders of the $2,000,000 of the Cincinnati & Georgia Division first mortgage 6 per cent bonds be asked to fund four coupons, ... being those maturing March and September 1, 1885, and March and September 1, 1886, ... and accepting in lieu thereof a funded coupon bond ... dated September 1, 1885. “The total amount extended under this clause would be $240,000. (3) “That the holders of the debentures be asked to extend for ten years such of the debentures as fall due during the years 1885 and 1886, and to accept similar debentures running from five to ten years, for the interest.... “The total amount extended under this clause would be $373,200. (4) “That an arrangement be made with the holders of the car trust certificates of the company, series A, for an extension for ten years of all the payments of principal falling due in 1885 and 1886, being $100,000 in each year. “The total amount extended under this clause would be $200,000.”[305] The committee had an apology to offer for the state in which the company was placed. “The actual cost of the 190 miles of the new roads constructed by the company has largely exceeded,” said they, “the estimated cost. The physical condition of the roads purchased by the company necessitated the expenditure of large sums in the improvement of roadway and track; the construction and reconstruction of bridge masonry and bridge superstructure. The facilities for the conduct of the company’s business were entirely inadequate to the requirements of its increasing traffic and had to be enlarged. Unfortunately the company did not fully provide for these expenditures, and the shrinkage of the value of its securities greatly aggravated the evil.” This much was very true. In its criticism of existing facilities the committee was on sure ground. In its suggestions for relief it was less well advised. It seems to have felt that the East Tennessee’s difficulties were due to a temporary inability to raise cash for the improvement of its roadbed and equipment, and that the suspension of certain charges for a few years would allow the expenditure of liberal sums from income, ensure the improvement of the road, and bring about a condition of permanent prosperity. The truth was that the East Tennessee was in too bad a shape to be reëstablished by such means. The heavily burdened and physically defective lines which made up the system were past being restored from income even with the aid of a funding of a few years’ coupons. They required a definitive surrender of portions of the claims against them, extensive new charges to capital account, and a correspondingly complete reconstruction of their whole operating plant.[306] The practical service which the committee rendered was not in suggesting an adequate remedy for existing troubles, but in making plain how serious these troubles were. So imminent, in fact, did they show collapse to be, that the management determined to forestall hostile action by themselves asking for the appointment of a receiver; and on January 7 the Circuit Court appointed Henry Fink to that position.[307] The committee’s funding scheme fell of its own weight. The decrease in the earnings of the company, a truer appreciation of its condition, and, it may be surmised, the influence of New York banking houses, forced it to make room for a thorough plan of financial reconstruction. Action looking toward reorganization of the East Tennessee, Virginia & Georgia began with the year 1886. In January Mr. Nelson Robinson,[308] who had held proxies for a controlling stock interest at the previous election, returned from Europe; and after a conference with certain large bondholders agreed with them to draft a plan for the reorganization of the property. A reorganization committee was chosen from members of large banking firms,[309] meetings were held, and in the first part of February, 1886, a scheme was put forth. This plan comprised the following points: (1) Reduction of fixed charges; (2) Exchange of new bonds and preferred stock for old bonds; (3) Assessment on the junior securities; (4) Foreclosure. Foreclosure was to take place under the consolidated mortgage. A new 5 per cent seventy-year consolidated mortgage was then to be created. Enough of the bonds under this mortgage were to be reserved to retire the liens prior to the existing consolidated mortgage as they should mature, and the balance was to be used for taking up the outstanding consolidated mortgage bonds, the Cincinnati & Georgia division bonds, and the ten-year debentures. It was estimated that the exchanges would reduce the annual interest charge from $1,757,460 to $994,737.[310] This necessitated considerable demands upon old securityholders. Thus the old consolidated mortgage bonds bearing 5 per cent received only 60 per cent of their face value in new consolidated bonds with the same rate of interest; and the old 6 per cent Cincinnati & Georgia division bonds received only 48 per cent in consols, besides suffering a decrease in interest rate from 6 to 5 per cent. The difference was made up by the allowance of preferred stock, to which, moreover, was given the right for five years to elect a majority of the board of directors, unless before that time the new company should have paid out of its net earnings 5 per cent dividends on such preferred stock for two full successive years. To the Cincinnati & Georgia division bonds were given 62 per cent in new first preferred besides the 48 per cent in bonds,—a total of 110 per cent; upon which the yield in prosperous times might exactly equal the yield on the securities which they surrendered. To the consolidated bonds were given 50 per cent in new first preferred, making possible a total return greater than that which they had formerly enjoyed. For the debentures was made the same provision as for the divisional bonds. In order that net earnings might go first of all to the prior liens and to the above securities, new second preferred and common stock was issued for the benefit of the old income bonds and stock. Of these the income bonds received 100 per cent in new second preferred; while the old preferred received 100 per cent and the old common stock 40 per cent in new common. Only in return for their assessments did the income bonds receive first preferred stock, and even for their assessment the common stock took second preferred. Cash assessments were 5 per cent on the income mortgage and 6 per cent on the new common stock. This was expected to yield $2,475,000, which, with a surplus of new securities in the treasury of $1,534,000, was thought sufficient to liquidate outstanding car trusts and to provide the company with a fund available for future use.[311] The plan may be criticised in some respects. It made no adequate provision for future capital requirements. Two millions and a half of cash and two millions of securities were considerable sums in hand, but of these over half a million was in the form of stock, and from the rest had to be deducted at least a million and a half for the liquidation of car trusts. This left, it is true, enough for existing needs,[312] but it did not allow for constantly recurring and legitimate demands for improvements out of capital in future years. Moreover, the securities given for the consolidated, the Cincinnati & Georgia division, and the debenture bonds exceeded by 10 per cent the nominal value of the bonds retired by them. But on the whole the reorganization plan was an excellent attempt to solve a difficult problem. It proceeded on a sound principle, it laid the burden on the proper parties, it avoided a funding of current liabilities, and even in respect to the volume of securities outstanding it accomplished a much needed reform by wiping out 60 per cent of the almost worthless common stock.[313] It was accordingly accepted by the securityholders. On March 18, the reorganization committee obtained a decree of sale.[314] By May 1, practically all the consolidated and income bonds, with a majority of the preferred stock, had assented;[315] and on May 25, 1886, the East Tennessee, Virginia & Georgia Railroad was sold for $10,250,000 to a representative of the reorganization committee. Previous to this the opposition committee, which had been formed by the minority stockholders, had disbanded.[316] The final step was the organization of the East Tennessee, Virginia & Georgia Railway, which on July 1 took over the title to the East Tennessee, Virginia & Georgia Railroad and branches, a controlling interest in the stock of the Knoxville & Ohio, and a controlling interest in the stock of the Memphis & Charleston Railroad Company.[317] During this time the Richmond & Danville had not been standing still. It will be remembered that in 1883 the capitalists who dominated the East Tennessee and the Coast Lines had purchased a controlling interest in this company, with the purpose, according to Mr. Brice, of confining all their railroad and steamship lines under one management and of operating the system in the best possible manner. These gentlemen had found the earnings of the Richmond & Danville sufficiently unsatisfactory and the need for improvements sufficiently great to lead them to pass the interest on its debenture bonds in October,