Charter—Early prosperity—Reorganization of 1880—Conservative policy—Extension—Pays dividends throughout the nineties—Moores obtain control—Reorganization of 1902—Further extensions—Impaired credit of the company.

The original Rock Island Railroad, chartered in 1847,646 was completed between Chicago and Rock Island in 1854. Construction was continued from Rock Island to Council Bluffs across the state of Iowa, under the charter of the Mississippi & Missouri, until 1866, when this company was merged with the original Rock Island Railroad Company, and after 1866 under the Rock Island charter until the extension was completed in 1869. Unlike the Atchison, the Rock Island passed through a fairly well-settled territory, which was at the same time one of the most fertile in the United States. In 1870, according to the census returns, Iowa produced 28,708,312 bushels of spring wheat out of a total for the United States of 112,549,733 bushels, more than any other state in the union; while Illinois in its yield of winter wheat was surpassed by Indiana and Ohio alone. Of Indian corn Iowa and Illinois together produced 198,856,460 bushels against 562,088,089 for all other states combined. Manufactures were well begun, and even mining had attained a considerable development, particularly in the extraction of bituminous coal in Illinois. Naturally the road was prosperous; gross earnings increased from $3,154,236 in 1866 to $5,995,226 in 1870, and to $9,409,833 in 1879; while net earnings attained the very considerable sum of $4,548,117 in 1879, being 48 per cent of the gross receipts. At the same time the capitalization was very moderate, due to the relatively level character of the country through which the road ran, and, not less important, to the absence of speculative financial operations in the course of its construction. To build 1231 miles had cost in 1879 but $35,664,200, of which $4,702,202 had been supplied from earnings; leaving a total of bonds and stocks of312 $30,962,000, or $25,151 per mile. Fixed charges were, therefore, low. In 1875, when net earnings were $3,853,676, interest on bonds, taxes, and all other necessary disbursements took but $1,065,395; and in 1879 the payments were markedly less. Is it strange that the troubles of the road came from too great earnings rather than from too small, and that instead of striving to maintain solvency the directors had to seek ways and means for concealing or getting rid of earnings without arousing the hostility of legislators to whom 10 per cent dividends seemed high, and anything over 10 per cent proof of extortion? Between 1866 and 1876 four cash distributions of 10 per cent were made to stockholders, five of 8 per cent, one of 8? per cent, and one of 7? per cent. The dividend for 1879 was again 10 per cent, that of 1878 8 per cent, and that for 1879 9? per cent. Meanwhile large sums were carried to surplus. The balance, after all disbursements, never after 1873 fell below $665,000, and in 1879 was nearly equal to the dividend declared; that is, while distributing $1,993,086, or 9.5 per cent, the road earned, over and above charges, $3,947,065, or 18.8 per cent.

It was inevitable that some attempt should be made to increase the distribution to stockholders; and the most obvious method was the one adopted, viz., a watering of the stock. The plan devised in 1880 was as follows: It was proposed to consolidate various branches of the railroad company, hitherto operated as separate corporations, with the main line; and to do this through the formation of a new company, which should exchange its stock for the stock of the previously existing corporations in the ratio of two to one. Practically all the stock retired was owned by the Chicago, Rock Island & Pacific Railroad Company, so that the only increase in stock outstanding came through the distribution to the stockholders of the parent company. In March the executive committee of the Rock Island passed the following resolution: “Resolved, that the proposition to consolidate the capital stock, property, rights, franchises, and privileges of the Chicago, Rock Island & Pacific Railroad Company with the capital stock, property, rights, franchises, and privileges of the Iowa Southern & Missouri Northern Railroad Company, the Newton & Monroe Railroad Company, the Avoca, Macedonia & Southwestern Railroad Company, and the Atlantic & Audubon313 Railroad Company into a consolidated Railroad Company, with an authorized capital of $50,000,000, and such powers as shall be assumed in the articles of consolidation, be submitted to a vote of the stockholders of this company at their annual meeting.”647 Of the roads named only the Iowa Southern & Missouri Northern was of importance, extending 270 miles from Washington, Iowa, to Leavenworth, with branches which raised its total to 347 miles. This company had been organized as the Chicago & Southwestern Railroad Company, and the main line had been completed in 1871. The Chicago, Rock Island & Pacific Railroad Company had guaranteed its $5,000,000 main-line bonds, with a provision that it could demand foreclosure if called upon to pay either interest or principal, and in return had secured a lease in perpetuity. The road had been sold under foreclosure and reorganized in 1875 as the Iowa Southern & Missouri Northern, and had issued its stock to the Rock Island in return for money advanced by that company, the stock to be held in trust to 1926, and then to become the property of the lessee. The other roads did not together possess more than 80 miles of line, so that the operation was a genuine case of stock-watering. The opinion of the stockholders may be inferred from the quotations of their shares. Between January 2 and June 1, 1880, the quotations of Rock Island common rose from 149 to 189, with few sales, in anticipation of the distribution. On June 2 the stockholders formally gave their approval, and on June 4 the Chicago, Rock Island & Pacific Railway started on its career.648 The price of the new stock was of course less than that of the old. It started at 106?, but by December it had reached 122?, and by June the following year had risen to over 141.

This may be called Rock Island’s first reorganization. It doubled the stock of the road, and increased its indebtedness by the assumption of the $5,000,000 bonds of the Iowa Southern & Missouri Northern; but the new stock involved no increase in fixed charges, and the new bonds a nominal increase only. Instead of being occasioned by too little prosperity it was caused by too much; and instead of being carried through after active opposition from many of the interests concerned, and reluctant acquiescence from the others,314 it occasioned a rise in price of the common stock of 27 per cent in six months.

Between this date and 1902 no reorganization occurred. A rapid review of the period brings out, however, certain interesting features: First, that the stockholders and the directors were extremely conservative; second, that this conservatism did not keep the road from sharing in the expansion of mileage from 1887–9, which was so general in the Middle West; third, that this expansion decreased the average receipts per mile, and consequently the rate of dividends, and occasioned a fall in stock quotations from 140? to 63?; fourth, that though weakened the road went through the panic of 1893 and the subsequent depression without suspending dividends; and fifth, that the year 1901 saw the beginning of a new expansion of the system, accompanied by a change in control and the carrying out of more ambitious plans than had ever occurred to the men of the previous generation.

The conservatism of the stockholders is shown in the election, year after year, of the same men to positions of authority. Rock Island was not a speculative road; the high price of its stock forbade. Stockholders regarded their shares as permanent investments, and, satisfied with the returns secured, loyally supported the management in good times and in bad. Between 1875 and 1897 there were but two presidents, Mr. Riddle holding the position until 1883, and then giving way to Mr. R. R. Cable, who, after directing the policy of the company for fourteen years, served as chairman of the board of directors from 1898 to 1901. Among the five members of the executive committee, if the reckoning is begun with the year 1881, three had been in office five years by 1886, one 2 years, and one 1 year, or an average of 3? years. In 1891 two members had been in 10 years, one 7 years, one 6 years, and one 1 year, or an average of 6? years; and in 1901 one member had been in 20 years, one 17 years, one 8 years, one 3 years, and one 2 years, or an average of 10 years. The board of directors showed the same general tendency. In 1890 seven of the thirteen directors had served for 9 years, and the average service was 6-3/13 years; in 1897 four of the directors had served for 16 years, and the average was 9-10/13.649 It was but natural that men315 working under these conditions should have been apt to err on the side of caution rather than on the side of recklessness; and we find them, therefore, slow to extend their system, and slow to stretch into new territory where traffic returns were uncertain, and where the road had to create its business as it went. At the date of the consolidation the company had become the owner of 1038 miles and operated under lease 273 miles more, or a total of 1311 miles. By 1883 this had been increased to 1381; but in 1887 the total was only 1384.2, showing a total construction of little over three miles in four years.

This policy had to be abandoned, for other roads were extending their lines in Iowa and Illinois, and the Rock Island’s share of Western business tended to fall off with the construction of rival lines west of the Missouri. As the report of 1889 expressed it, “while the lines of this company terminated at the Missouri its competitors for business had extended beyond, reaching in many cases the extreme western boundaries of population and even further. Thus the volume of traffic received by the company for carriage to and from the West was materially affected, while in order to restore the equilibrium overbalanced by the reduction in rates, the reverse was necessary, a larger rather than a smaller share of the tonnage to and from points west of the Missouri was demanded by the situation.” The directors were forced against their will to take active measures in self-protection. As early as 1884 a bond issue was approved for construction from Minneapolis westward to an eventual junction with the Northern Pacific.650 Building was to be carried on in the name of the Wisconsin, Minnesota & Pacific Railroad Company, and the securities of this company were to be received by the Rock Island as collateral for the issue which it made.651 Two years later more extensive plans were put on foot, and the Chicago, Kansas & Nebraska Railroad Company was organized to carry out construction west of the Missouri. The new company had a capital stock of $15,000,000, and then (1887) of $30,000,000, and an indebtedness in 1889 of $25,141,316000 6 per cent first mortgage bonds; and turned over all of its bonds, and practically all of its stock to the Chicago, Rock Island & Pacific Railway in consideration of advances made to it. The Rock Island Company in its turn reserved the branch-line bonds as collateral, and issued against them its own 5 per cent collateral and extension bonds; agreeing to supply all money needed for construction and equipment,652 and leasing the new railway at a rental of 30 per cent of its gross earnings.653 Under this arrangement 1388 miles were built by 1889 and 276 leased, making a total of 1664.4. In 1889 it was thought more convenient to consolidate the two systems, so interest was defaulted on the Chicago, Kansas & Nebraska bonds, and foreclosure proceedings commenced; resulting in 1891, in spite of protests by municipalities along the route, in a foreclosure sale and union of the two properties in name as well as in fact. The collateral bonds of the Chicago, Rock Island & Pacific now became a direct instead of an indirect lien upon the Kansas & Nebraska mileage.654

Owing to these operations the mileage of the system increased from 1384 in 1887 to 3257 in 1889, and to 3408 in 1891. The greater part now lay in Kansas, Nebraska, and Colorado instead of in Illinois and Iowa, while at the same time the addition of the new mileage through sparsely settled districts decreased the density of traffic and the gross and net receipts per mile of line. In 1887 the Rock Island was earning the very high return of $8899 gross per mile operated; in 1891 this had fallen to $5126; in 1887 the net return was $3478 per mile; in 1891 it had fallen to $1484; in other words, the new mileage brought an increase in traffic, but not nearly so great a traffic per mile as the Iowa and Illinois lines had enjoyed, while the financing of the new construction swelled the annual charges from $1,795,351 to $4,775,601, and even with the larger mileage increased the charges per mile from $1295 in 1887 to $1400 in 1891. We need not, therefore, be surprised that the rate of dividends dropped from 7 per cent to 5? per cent and then to 4 per cent; nor that the price of common stock fell from its high level of 140? in May, 1887, to 63? in March, 1891.

It was in this weakened condition that the Rock Island encountered the panic of 1893 and the years of depression which followed,317 and yet, in spite of the marked decrease in business in the years 1895–6–7, it continued to pay dividends, and showed no signs of financial distress except the lowering of its rate to 2 per cent. As a matter of fact the road was still in these years one of the strongest in the United States. Its lines were well located, its management was conservative, and consequently trusted, and its credit was good; so that at a time when some of the largest systems in the United States were being forced to the wall, it was enabled to preserve its solvency and even to keep up fairly liberal expenditures for maintenance of way and rolling stock. Little new construction was of course indulged in. In 1892 an extension was begun from Minco, the terminus of the Rock Island in the northwest corner of the Indian Territory, southwards;655 in 1893 the southern boundary of the Territory was reached, and the Chicago, Rock Island & Texas Railway Company was organized to build through Texas;656 and in 1894 a combined line was opened to Fort Worth; but exclusive of the Chicago, Rock Island & Texas, the total mileage increased by but 360 miles between 1890 and 1900, being an average of 33 miles a year.

In 1901 Messrs. William H. Moore and D. G. Reid were elected directors in place of Messrs. H. M. Flagler and H. A. Parker, and a new era in the road’s affairs began. Mr. Moore had not long been interested in railroad matters. Known as a daring and successful promoter of industrial companies, he had made large profits out of the organization of the National Biscuit and Diamond Match companies; had lost almost equally large amounts in speculation which had followed, and had then regained a fortune through the organization and promotion of companies which were absorbed into the United Steel Corporation. In these last operations he had come into contact with Mr. W. B. Leeds, who, though originally318 a railroad man, had acquired wealth through a tin-plate plant which was afterwards turned over to this same Steel Corporation. Mr. Moore was apparently in 1901 seeking for an investment. He was too well acquainted with industrial properties to care to sink his money in them, while he realized that for obvious reasons good railroad property was as safe, and might be made as profitable as anything else to which he could turn. The Chicago, Rock Island & Pacific was at the time the system most available for his purpose. It was not under the control of any large New York interests; it had an excellent financial record; its mileage was so placed as to admit of ready expansion; and, moreover, it is probable that to a man of Mr. Moore’s speculative disposition the very low capitalization of the road opened up vistas of almost indefinite increase.657 Just when Mr. Moore and his friends began their purchases, and what price they paid is of course largely a matter of conjecture: large blocks of stock were, however, undoubtedly secured in the early months of 1901, during which time quotations ranged from 116? to 136; and it is probable that the larger part of the purchases were made nearer the upper than the lower level. During the following year the Moore party increased their holdings. It has been said that in April, 1901, Messrs. Moore and Reid were elected to the directorate. In November, 1901, at a special meeting of the stockholders, the directors were authorized to elect two new members to the executive committee, and Messrs. Moore and Wm. B. Leeds were chosen. In February, 1902, H. R. Bishop, Tracey Dows, and F. E. Griggs resigned, and Geo. McMurtry, F. L. Hine, and F. S. Wheeler were elected directors in their place. Mr. McMurtry had formerly been president of the American Sheet Steel Company, merged in the Moore Steel Combine, and Mr. Hines, vice-president of the First National Bank of New York, presumably brought the backing of that powerful institution.658 Meanwhile Mr. James H. Moore had been chosen a director, and the Moore interest had gained control of the executive committee, so that a majority both of that committee and of319 the board of directors was in their hands. The new group of capitalists were not railroad men; their training had been on the financial side of corporation dealings, and the bulk of what experience they had had in actual management had been derived from industrial and not from railroad operations. It was natural, therefore, that the most striking results from their accession to power should appear on the financial rather than on the operating end, and that their ability to manipulate stocks and bonds should prove more unquestionable than their ability to handle railroad affairs. Results in the development of the Rock Island system were, however, attained, and for two reasons: in the first place, the Moores were able, and above all enterprising men, and untrammelled by traditions of conservatism, they were quick to see and bold to execute plans made possible by the admirable location of their 4000 miles of road; in the second place, they soon had large blocks of securities which they wished to sell, and were impelled to undertake large operations in the hope of raising quotations upon the Exchange.

In June, 1901, the stockholders authorized an increase in the capital stock from $50,000,000 to $60,000,000; stockholders of record June 28, 1901, to have the right to subscribe at par.659 The proceeds were to go in part for extension from Liberal, Kansas, to El Paso, Texas, and in part for a new depot and elevation of tracks in Chicago, and for the improvement of the physical condition of the road. This El Paso extension plan was not new, since in December, 1900, the Chicago, Rock Island & Mexico, and the Chicago, Rock Island & El Paso had been incorporated to build a line from Liberal, Kansas, to Santa Rosa, New Mexico; there to connect with the El Paso & Northeastern, and to afford a through route to the Pacific coast and into Mexico. The other plans were, however, new. In April, 1903, the Chicago, Rock Island & Texas filed an amendment to its charter providing for an extension from Fort Worth to Galveston, 295 miles. The same month the sale of the Choctaw, Oklahoma & Gulf to the Rock Island was officially confirmed. This road has been, with one exception, the most important320 acquisition of the Moores. It stretches from Memphis, Tennessee, through the Indian Territory, Arkansas, and Oklahoma, to the border line of Texas, and furnishes a nearly direct line from those states to the Mississippi River; while a projected extension to New Mexico will connect with the Rock Island main lines to the southward, and make it a valuable link in the through route from El Paso to Memphis and Birmingham. The Rock Island paid $80 a share for the common stock and $60 for the preferred,660 and under the terms of the sale agreed to take at the same price all stock offered. The premium was very large. Choctaw preferred had been paying 5 per cent for some years, and the common had received 2 per cent in 1889, 4 per cent in 1900, and 4? per cent in 1901, plus 10 per cent in stock; but reckoned on a basis of 120 and 160 respectively, these returns sank to a very modest rate. The property is a valuable one, but will have to show great development to justify its purchase price. Payment was made by the issue of collateral trust 4 per cent bonds to the amount of $23,520,000, in return for which practically all of both issues of stock were deposited. Certain smaller roads were also bought in. In June, 1902, the stockholders voted to increase the capital stock from $60,000,000 to $75,000,000; and in July the directors decided to allow the stockholders to subscribe at par for $8,235,000 of the new issue in amounts equal to 12? per cent of their holdings;—the new stock to take up shares of the Burlington, Cedar Rapids & Northern, the Rock Island & Peoria, and the St. Louis, Kansas City & Colorado.661 The first of these roads connected the Rock Island system with Minneapolis and St. Paul.662 The Rock Island & Peoria was a short line in the state of Illinois. The St. Louis, Kansas City & Colorado was to afford, when finished, a more direct route between the important cities of St. Louis and Kansas City.

This is where matters stood when the reorganization plan of August, 1902, was brought forward. There had been a refunding put through in 1897 whereby some simplification of bond issues had321 been secured;663 but this scheme of 1902 was for a different purpose and differed radically in the methods employed. Its explanation is to be found in the character of the men in control. We have seen that Mr. Moore had made his reputation in the speculative promotion of industrial combinations, that he had entered Rock Island in search of an investment, and that he had thrown himself into the extension of the system in part because he saw the opportunity for development, in part because he hoped to pave the way for profitable manipulation of the stock. The time he had awaited seemed now to have arrived. His projects had caught public attention, comment on the whole had been favorable, and the price of his shares was at a high level; all indications pointed to the probable success of a scheme of stock-watering on an enormous scale. At the same time Mr. Moore was too well pleased with the position he had attained to wish to sacrifice it by the sale of his holdings; and his desire was, therefore, to devise an arrangement whereby the stock of the Rock Island should be inflated and large blocks sold to the confiding public, while the control should remain where it had been before,—in the hands of Mr. Moore and his followers. It is to be noticed that there was no call for a reorganization by the creditors of the road, and no question of a default in interest, or even of a cessation of dividends upon the common stock; nor, on the other hand, were earnings so great that the managers felt it unwise to distribute them. The reason for the reorganization was entirely the financial ambition of the Moore group and the chance which its members saw of making larger profits than the earnings of the property would ever bring.

With these objects the following plan was put through. Instead of one Chicago, Rock Island & Pacific Company the Moores now proposed to have three companies, of which one was to operate the railroad, one was to hold the stock of the operating company, and one was to hold the stock of the company which held the stock of the operating company. That is to say, the Chicago, Rock Island & Pacific Railway Company was left undisturbed, while in Iowa a Chicago, Rock Island & Pacific Railroad Company was formed to hold the stock of the Railway Company, and in New Jersey322 a Rock Island Company was organized to hold the stock of the Railroad Company, and of such acquisitions as might afterwards be made. The retention of the Railway Company made unnecessary the consent of creditors, for the lien and interest rate of outstanding bonds remained the same as before; the formation of the Railroad Company served apparently to meet legal requirements; and the organization of the Rock Island Company seemed likely to make more easy the purchase of parallel and competing lines. But the great advantage of the new companies lay in the opportunities for stock inflation which they presented, together with the lessening of the amount of capital required for control. This appears plainly in the following: The old Railway Company had a capital stock of $75,000,000; the new Railroad Company issued stock to the amount of $125,000,000 and 4 per cent bonds to the amount of $75,000,000. The Rock Island Company issued common stock to a total of $96,000,000 and preferred stock to a total of $54,000,000; and the aggregate, excluding the undisturbed bonds of the Railway Company, footed up to $425,000,000 instead of to $75,000,000 as before. From this total must be deducted $200,000,000, which represented issues of stock by one company to another, and $21,000,000 Rock Island Company stock and $1,500,000 Railroad Company bonds reserved for future extension, leaving a net increase from $75,000,000 to $202,500,............