On or about March 8, 1906, the Chicago & Alton Railroad Company and Chicago & Alton Railway Company were consolidated. At this time the liabilities on the road were as follows:

Noncumulative 4 per cent preferred stock. 19, 544, 000. 00
Common stock

• Less:

3 per cent refunding bonds, pledged as collateral to the $5,000,000 of 4 per cent collateral trust notes-‒‒‒‒

3 per cent refunding bonds remaining in the treasury

Total liabilities

19, 542, 800.00

$39, 986, 100.00 121, 894, 356. 09

7, 000, 000. 00

1, 000, 000. 00

8, 000, 000. 00 113, 894, 356. 09

Taking the original cost of the property as it stood upon the books of the Alton Company December 31, 1898, as $39,935,887, adding the amount which appears by the testimony of Mr. Harriman, Mr. Felton, and Mr. Hillard to have been spent upon the property out of the new capital issued after Mr. Harriman and his associates obtained control of the road, to wit, about $18,000,000 (including the cost of the 58 miles of the Peoria road at $3,000,000), it shows that the foregoing liabilities of over $113,894,000 were placed upon property which had originally cost approximately fifty-eight millions, or an increase of stock and liabilities upon the road for which not a dollar of tangible property had been added of practically $56,000,000.

It was admitted by Mr. Harriman that there was about sixty millions of stock and liabilities issued against which no property had been acquired, and this is undoubtedly an accurate estimate. It further appears by the testimony of Mr. Hillard that since the Harriman control has ended and the road was turned over to the Rock Island the company has been compelled to issue $2,260,000 of cartrust notes to acquire equipment needed in the business of the company; that the present management found the company without any money to buy necessary equipment or to build 34 miles of railroad which the company had contemplated constructing and on which the Harriman management had placed a mortgage, sold the bonds, but had left no funds in the treasury to complete.

INDEFENSIBLE FINANCING.

From this brief synopsis of the exploitation of the Chicago & Alton, it is evident that its history is rich in illustrations of various methods of indefensible financing. First came the profit to the stockholders arising out of the sale to themselves of $32,000,000 of bonds at 65, which sold for several succeeding years for 821 to 94. Second came the 30 per cent dividend based on amounts expended from income for improvements, much of it nearly thirty years before, and recently capitalized. Third came the psuedo transfer to Stanton, and his contract under which the new company paid $10,000,000 in cash for preferred stock which had cost less than $7,000,000. Fourth came the conversion of 183,224 shares of common stock in the Railroad Company into 195,428 shares of common stock plus 194,890 shares of the preferred stock in the Railway Company, part of which was sold to the Union Pacific at 86 a share. Fifth came the sale of the St. Louis, Peoria & Northern for $3,000,000 cash. Sixth came whatever interest the syndicate may have had in the sale to Kuhn, Loeb & Co. of $22,000,000 of bonds at 60 cents on the dollar. Seventh came the fee of $100,000 to Mr. Harriman for financing the enterprise. This analysis is no doubt incomplete, but it is suggestive.

By way of justification or excuse we are told that the methods of the financing of railroads which prevailed in the year 1900 are now obsolete, owing to a higher degree of conscientiousness among financiers; and, moreover, that the Chicago & Alton should not be regarded as an isolated instance, inasmuch as it was dealt with much as many other roads were at that period.

The first of these statements is, we trust, true; the latter statement is not calculated to uphold the value of American railroad securities. It is true, however, as contended, that a close examination of the method of capitalization adopted in the case of the Chicago & Alton shows that while the total of bonds and stocks was doubled, there was no such proportionate increase in the fixed charges of the rail

road. Under the Blackstone management, when 8 per cent was paid on the stock and but a small bonded debt rested on the property, the yearly charges for dividends and interest amounted to $2,792,986, whereas with the greatly increased present capitalization the yearly fixed charges amount to but $3,471,590. This, of course, takes no account of the present common stock, upon which no dividends are paid. The plan adopted was to substitute long-term bonds and guaranteed stock bearing an exceptionally low rate of interest for common stock which paid a large dividend and for bonds about to mature bearing a high rate of interest. Thus the property was not burdened with an interest payment proportionate to the increase in capitalization, no matter how great the profits made from the reorganization. However, these bonds must some time be paid; they live for fifty years as a debt of the railroad, and the stock will control a property which it did little, if anything, to create.

JOINT CONTROL OF ALTON.

The common stock of the Chicago & Alton Railway has evidently been sold on the market, for it appears by the testimony of Mr. W. H. Moore and Mr. D. G. Reid that the Rock Island Company owns 191,900 shares of common and preferred, mostly common. As before stated, in 1904 the Union Pacific Railroad Company purchased 103,431 shares of the preferred stock of the Chicago & Alton Railroad Company. On or about October 4, 1904, a contract was entered into between E. H. Harriman, Jacob H. Schiff, James Stillman, and R. S. Lovett (who were in fact trustees for the Union Pacific Railroad Company), and W. B. Leeds, W. H. Moore, D. G. Reid, and J. H. Moore (who were in fact trustees for the Rock Island Company), and the Central Trust Company of New York, trustee. The contract was amended by a contract of January 30, 1906, by which Mr. Leeds assigned his interest to W. H. Moore, D. G. Reid, and J. H. Moore. Under this contract the stock owned by the Union Pacific and certain of the stock owned by the Rock Island-constituting a controlling interest in the Alton Companywere deposited with the Central Trust Company of New York, as trustee, under substantially the following arrangement: Each party agreed to deposit 103,431 shares of stock. The trustee was to vote the shares of stock at the annual meeting to be held in 1905 in favor of the election as directors of two persons to be named by Harriman and his associates and of two persons to be named by Moore and his associates. At the annual meeting of 1906 the shares were to be voted in favor of one nominee named by Harriman and his associates and three nominees of Moore and his associates; and at each annual meeting thereafter for the election of directors the trustee was to so

vote the stock for the election of directors of the railway company that in each alternate year the Union Pacific was to have a majority of the directors and the Rock Island Company the minority; and each other alternate year the Rock Island Company was to have the majority and the Union Pacific the minority, thereby giving the control of the road one year to the Union Pacific and the next year to the Rock Island. At the time of the last hearing in this matter this contract was still in force, but notice has been given to the Commission that by agreement between the parties thereto it has been abrogated and annulled. It would appear, therefore, that the Chicago & Alton is now controlled through stockownership by the Chicago, Rock Island & Pacific Railway Company, which owns a line of railway from Chicago to Kansas City, which is parallel and competing with the line of the Chicago & Alton Railway Company between the same points.

Incidentally, it may be observed that the bankers who manage these operations appear to be richly rewarded. The testimony shows that Kuhn, Loeb & Co. received 5 per cent, or five millions of dollars, on the $100,000,000 of Union Pacific convertible bonds above mentioned, one-half of which was retained by them and the other half given to the syndicate to whom the bonds were sold. On the 750,000 shares of Southern Pacific which the Union Pacific purchased at $50.61 per share, the same banking house received a commission of $2.50 a share. They received a like commission of $2.50 per share on the Chicago & Alton stock sold to the Union Pacific at $86.50 per share. It is significant that a member of this firm refused to disclose the extent of its interest in these securities.

CONCLUSIONS.

The effect of the control of the Southern Pacific by the Union Pacific has been to unify and amalgamate the management of these two railway companies and their steamship lines, and to eliminate competition between them in transcontinental business and in business to and from oriental ports.

The Union Pacific, as has been shown, controls the San Pedro, Los Angeles & Salt Lake Railroad, the stock of which is deposited in the hands of a trustee. This line was originally intended as an independent road, extending from Salt Lake, where it connects with the Union Pacific and with the Denver & Rio Grande, to Los Angeles and San Pedro, Cal. There is therefore no competition between this line and the Union Pacific and Southern Pacific.

It appears that the Union Pacific also owns $10,000,000, par value, of the stock of the Atchison, Topeka & Santa Fe Railway Company, and about $30,000,000 more is owned by individuals connected with

the Union Pacific, making $40,000,000, or substantially 17 per cent of the entire capital stock of the Santa Fe Company. Who owns this stock, outside of the $10,000,000, Mr. Harriman declined to state. Two directors of the Union Pacific are also directors of the Santa Fe company; and there is now a division of the oriental traffic by the Pacific Mail Steamship Company between the Union Pacific and the Santa Fe systems. It appears that there has also been a division of the fruit traffic between certain California territory and the east, each taking a certain percentage; and that north of San Francisco the Union Pacific and the Santa Fe have joined and amalgamated their interests in the Northwestern Pacific Railroad, and that a joint control has been inaugurated similar to that of the Alton.

Prior to the acquisition of the Southern Pacific by the Union Pacific, the Denver & Rio Grande system, extending from Denver, where it connects with various lines to the east, to Salt Lake and Ogden, was given equal facilities over the Central Pacific, and thereby practically formed another transcontinental line. Since the amalgamation of the Union Pacific and Southern Pacific, and the construction of the San Pedro road, this line has been denied equal facilities in the receipt and transportation of freight over the Central Pacific and the San Pedro lines. Its business, therefore, has decreased, and its ability to compete with the Union Pacific and Southern Pacific impaired. On this account the Gould lines are aiding the construction of another line from Ogden to San Francisco.

The joint control of the Alton Railway by the Union Pacific and the Chicago, Rock Island & Pacific Railway Company has undoubtedly eliminated competition between the Alton and the Rock Island between Chicago, St. Louis, and Kansas City.

These are conspicuous illustrations of the development of the theory of "community of interest" and "harmony of management," which Mr. Harriman suggested when he demanded representation upon the Santa Fe board.

If the policy of purchasing and controlling stocks in competing lines is permitted to continue, it must mean suppression of competition.

RECOMMENDATIONS.

(1) The function of a railroad corporation should be confined to the furnishing of transportation. Railroads should not be permitted to invest generally in the stocks, bonds, and securities of other railway and of steamship companies, except connecting lines, for the purpose of forming through routes of transportation, including branches and feeders. It is in the interest of the public to facilitate the consolidation of connecting lines. The credit of a railway