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Author: 



Dixon, Frank Haigh 



Title: 



Railroads in their 
corporate relations 

Place: 

[Cambridge] 

Date: 

[1 908] 



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Dixon, Frank Haigh, 1860- 

Railroads in their corporate relations, by Frank H. Dixon. 
Reprinted from the Quarterly journal of economics, vol. xxni, 
November, 1908. fCambridge, Mass., 1908j 

cover-title, p. i34j-65. 23"". 



l^JEtailroads- 



-U. S.— Intercorporate relations. 2^olding companies. 



Bur. of railway econ. Llbr. 
for Library of Congress 



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BIBLIOGRAPHIC IRREGULARITIES 

MAIN ENTRY: Dixon. Frank Haiqh 



Railroads in their corporate relations 



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RAILROADS IN THEIR CORPORATE 

RELATIONS 



BY 



FRANK H. DIXON 



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reprinted from 

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9 m • A MA JCf • • • 

QUARTERLY JOURNAL OF ECONOMICS 

Published for Harvard University 

Is established for the advancement of knowledge by the full and free discussion 
of economic questions. The editors assume no responsibility for the views of 
contributors^ beyond a guarantee that they have a good claim to the attention of 
well-informed readers. 

Communications for the editors should be addressed to the Quarterly fournal 
of Economics^ Cambridge, Mass.; business communications and subscriptions 
($j.oo a year), to Geo. H. Ellis Co., 2^2 Congress Street ^ Boston, Mass. 



CONTENTS FOR AUGUST, 1908. 

I. SUBSTITUTES FOR CASH IN THE PANIC OF 1907 ... A. Piatt Andrew 

II. ON THE NATURE OF CAPITAL Thorstein Veblen 

III. THE STREET RAILWAY SETTLEMENT IN CLEVELAND . . E. W. Bemis 

IV. AUSTRALIAN ECONOMIC PROBLEMS. II. THE TARIFF . Victor S. Clark 
V. THE NATIONAL GOLD BANKS G. D. Hancock 

VI, COMPETITIVE AND MONOPOLISTIC PRICE-MAKING . . Harry G. Brown 

NOTES AND MEMORANDA: 

The Massachusetts Anti-Stock- Watering Law Grosvenor Calkins 

Professor Carver's Concept of an Economic Quantity George Ray Wicker 

RECENT PUBLICATIONS UPON ECONOMICS. 
APPENDIX : The Currency Legislation of 1908. 

CONTENTS FOR NOVEMBER, 1908. 

I. THE STATISTICAL COMPLEMENT OF PURE ECONOMICS Henry L. Moore 

n. RAILROADS IN THEIR CORPORATE RELATIONS . Frank H. Dixon 

III. A STATISTICAL SURVEY OF ITALIAN EMIGRATION . . R. F. Foerster 

IV. ON THE NATURE OF CAPITAL : INVESTMENT, INTANGIBLE 

ASSETS, AND THE PECUNIARY MAGNATE .... Thorstein Veblen 

V. TWO EXPERIMENTS IN PUBLIC OWNERSHIP OF STEAM 

RAILROADS p. w. Powell 

REVIEWS AND SURVEYS : 

Davenport's Value and pjstributio^ ' , * T.N. Carver 

The Civic Federat-oh Report- on ^ly^ic' ownership W. B. Munro 



• • 



*< 



NOTES AND MEMCRANDA: 

' ■ » ' 

Sex Ratios at B^rth ir Town ind Qo^nti^y ' . 
The Aufjtr.^lian I'arltf : ,A Si^pplemeiftary Note 
The Cleveland Rrferenduin on Street' Railways 



W. Z. Ripley 

Victor S. Clark 

E. W. Bemis 



a • 
» * 






i 



STATISTICAL COMPLEMENT OF PURE ECONOMICS 33 

ticularlv Professor Clark, Professor Marshall and Pro- 
fessor Pareto. 

When we turn to the department of dynamic economics, 
we find that only two problems are receiving adequate 
treatment. These problems are the theory of population 
and the theory of crises. The manner in which the theory 
of crises is taking on a scientific form has already been 
described. That the theory of population has in recent 
years made tremendous strides toward perfection is 
common knowledge. The correlation with economic 
factors of changes in population due to changes in birth- 
rates, marriage-rates and death-rates, has been exten- 
sively investigated and exactly described. The change 
in the quality of the population, together with the causes 
of the change, is being properly investigated in the work 
of the school of eugenics. These two departments of 
dynamic economics, the theory of population and the 
theory of crises, which alone among dynamic problems 
are assuming an approximately satisfactory scientific 
form, and which should therefore serve as models for 
the development of other departments, owe their present 
scientific forwardness to the utiUzation of recent statistical 
methods in the treatment of questions which had re- 
mained in the realm of pure theory. 

If it is allowable to base an inference upon the opinion 
of masters of the science and upon the record of accom- 
pUshed results, it is not unreasonable to say that at the 
point which economics has now reached further fecund 
scientific ideas and abiding practical results are to be 
found in the development of the Statistical Complement 
of Pure Economics. 

Henry L. Moore. 
Columbia University. 



i 









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INTENTIONAL SECOND EXPOSURE 






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. . . 77/^ . . . 

QUARTERLY JOURNAL OF ECONOMICS 

Published for Harvard University 

Is established for the advancement of knowledge by the full and free discussion 
of economic questions. The editors assume no responsibility for the -vie^s of 

contr'butors, beyond a guarantee that they have a good claim to the attention of 
well-informed readers. "^ 

Communications for the editors should he addressed to the Quarterly fournal 
ofEconomus, Cambrid^e^ Mass.; business communications and subscriptions 
{$300 a year), to Geo. H. Ellis Co., 272 Congress Street, Boston, Mass. 

CONTENTS FOR AUGUST, 1908. 



I. SUBSTITUTES FOR CASH IN THE PANIC OF 1907 
II. ON THE NATURE OF CAPITAL 

III. THE STREET RAILWAY SETTLEMENT IN CLEVELAND 

IV. AUSTRALIAN ECONOMIC PROBLEMS. IL THE TARIFF 
V. THE NATIONAL GOLD BANKS 

VI. COMPETITIVE AND MONOPOLISTIC PRICE-MAKING '. 

NOTES AND MEMORANDA: 

The Massachusetts Anti-Stock- Watering Law 
Professor Carver's Concept of an Economic Quantity ' 

RECENT PUBLICATIONS UPON ECONOMICS. 

APPENDIX : The Currency Legislation of 1908. 



A, Piatt Andrew 

Thorstein Veblen 

E. W. Bemis 

Victor S. Clark 

G. D. Hancock 

Harry G. Brown 

Grosvenor Calkins 
George Ray Wicker 



CONTENTS FOR NOVEMBER, 1908. 

I. THE STATISTICAL COMPLEMENT OF PURE ECONOMICS 
IL RAILROADS IN THEIR CORt ORATE RELATIONS 
III. A STATISTICAL SURVEY OF ITALIAN EMIGRATION 

'''• ^^^^^'i^^^.J^A'^U^EO^ CAPITAL: INVESTMENT. INTANGIBLE 
ASSETS, AND THE PECUNIARY MAGNATE 

V. TWO EXPERIMENTS IN PUBLIC OWNERSHIP OF STEAM 
RAILROADS »>ic«m 

REVIEWS AND SURVEYS: 

Davenport's Value and .Djstwbuiio^' % ' *" . . . 

The Civic Federat'ora Report", on ^iSJ^iV ownership 
NOTES AND MfiMCRAFDA: " *** . « • '. 
Sex Ratios at B^irth ir 'lowu ^cf Qowntjy ' 
The AuSjtrAliaii tarlfT: ;A S^ppleinerftary Note 
The CleA^tiandRHerendum' on Street Raifways 



Henry L. Moore 

Frank H. Dixon 

R. F. Foerster 

Thorstein Veblen 

F. W. Powell 



T. N. Carver 
W. B, Munro 



W. Z. Ripley 

Victor S. Clark 

E. W^. Bemia 



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^\'*' ''^'1 iiial only I wo prohlcins aiv ivccixiiiir a^loouaie 
1 i"<';^ni!('!ii . 'llic<c jirohlciiis ai'c tlic tlicoi'\- oi" pMiiuJai i. ,n 
'i^i'i 5l^*' ilnorv (^f vv\>v>. The inaiinc]- in which ih.- ■:io..]\- 
"^ 'Ti-i'- i-^ lai-.in^ on a scicntihc toi-m ha^ ahvaox- Imm n 
(Ic-crihoiL Th;tl the th(H)ry of j;0})u!alion ha- in ivcrnt 
}-t'ai-< mafic 1 jvnicnfl.,u< sli-idcs iowar<l pcrhTiion i> 
•'<'fiJJ'i"ii i.now].-l^(.. 'ill,, coi-ivlaiion wiiii rcoiinniic 
tacior-- oj chanuv- in popul'ilion nxK^ to chanuv- in hii'ih- 
ralc-. niarria,uc-i-a!t'< and dcath-i-alcs. ha< hccn cxicn- 
sivcly invest i.u'a 1 0.1 and (^xactly dc^ciilu'd. Tho rhan^L' 
in the qnahly of flic population, tojiothcr with the (■au^t^s 
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"^ ^hf scIkh)) (,,f <Miot.}ijc^_ 11if<(' t^^•(^ doprtrt iiicni - of 
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i^J''"^'}' <'^ 'Ti-c-. which alone anionn; dynainii' pi'ohlenis 
are a--i]niinL: an app!'oxiniat«']\- -aii-facio]'\- -'•ionnlie 
h'l'ni. ano winch -hould iheivfuiv -( j-\-c a< ni'MJcl- fui- 
the df^x-clnpnien; of other do; .arnnfni -. nwc tlieii' niv-.-nt 
Sf'ii'ntihc lorwardn*-^ lo the utilizadfCi .,f ivc^nt -laii-tiral 
'^i*'ditMi:^ m ih- Mvatni-ni of (jiic^dun- \\-liirh ha 1 r-- 
ina!!!'- 1 m f h*- i.'ahn oj' p-n-.' \ he. ir\-. 

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RAILROADS IN THEIR CORPORATE RELATIONS.* 

SUMMARY. 

Causes of railroad amalgamation, 34. — Corporate control of rail- 
roads defined, 36. — Control through lease, 38. — Control through 
ownership of securities, 39. — Joint control, 41. — Virtual control, 44. — 
Inactive corporations, 45. — Minority holdings of railroad securities, 
46. — Holding companies: trust companies, intermediate holding com- 
panies, land and improvement companies, 50. — Entanglements of the 
intercorporate relationship, 54. — Holding companies at the head of 
systems: Atlantic Coast Line Company, Reading Company, Rock 
Island Company, 58. — Purpose of the holding company and reasons 
for public opposition, 61. — Suggested remedies, 64. 

For many years, concentration of railroad interests 
in the United States has been recognized as a "growing 
tendency." At the present time, so far has the move- 
ment proceeded, it may ahnost be regarded as an accom- 
pUshed fact. An illustration may be taken from the 
monthly reports made to the Division of Statistics and 
Accounts of the Interstate Commerce Commission. Up 
to August 10 of this year 750 reports had been received 
of May revenues and expenses, covering 226,407 miles of 
line operated. Of this total, 197,600 miles, or 87 per cent., 
were comprised within forty railroad systems, including 
monthly reports from 322 separate railroad corporations. 

The suggested causes for this amalgamation of railroad 
lines have been numerous and diverse. Desire for control 
pure and simple — the satisfaction which comes from the 
exercise of power — has played its part. The wish to 

1 The author of this article was connected during the year 1907-08 with the 
Division of Statistics and Accounts of the Interstate Commerce CSommission, and 
was responsible for the compilation and for the technical portion of the text of 
Special Report No. 1 on Intercorporate Relationships of Railways in the United 
States as of June 30, 1906 (Government Printing Office, 1908). This article pre- 
sents in an informal manner the results of that study, together with comments 
and expressions of opinion for which obviously the author is alone responsible. 






i 



en 



rJ5 

CJ 



RAILROADS IN THEIR CORPORATE RELATIONS 35 

provide opportunities for market manipulation and specu- 
lative gains has been an influential motive. The tendency 
of business in this country to be assembled in large units 
for the promotion of economies in administration and 
general efficiency has unquestionably contributed its 
influence to the movement. But, more than all these, 
the attempt to operate railroads in freedom from legisla- 
tive and judicial interference, and at the same time to 
avoid the disastrous results of an unrestrained competition, 
has been charged or credited, according to one's point of 
view, with being the principal incentive to consoHdation 
or concentration of railroad interests. For the railroads 
were compelled, with the dissolution of pools by the 
passage of the anti-pooling clause of the Interstate Com- 
merce Act, and with the disbanding of the traffic associa- 
tions by the judicial interpretation of the Sherman Anti- 
trust Act, to attain their desired end by more thorough- 
going methods. 

The present discussion has not to do with tracing the 
fife history of this concentration movement among rail- 
roads, nor with presenting a detailed picture of the present 
situation. Because of the multipUcity of detail, such a 
picture would be tedious and confusing, and, as a presen- 
tation of the actual situation, could not hope to be 
accurate for any length of time. This paper is concerned 
rather with such fundamental principles as seem to 
underUe the relationships of railroads, and will therefore 
resort to actual conditions merely for the purpose of 
illustration.^ 

1 Poor's Manual of Railroads and Moody's Manual of Railroads and Corporation 
Securities give the details and the changes from year to year in the intercorporate 
relations of railroads. While they have no power to elicit information and rely 
in the main upon published reports, they are fairly accurate in their statements 
of facts. This paper, while drawn mainly from the Intercorporate Relationship 
investigation, as of June 30, 1906, brings its illustrations, unless otherwise noted, 
down to June 30, 1907. It is impossible to secure official information of a later 
date, as the annual reports of railroads for the year ending June 30, 1908, are not 
required to be submitted to the Interstate Commerce Commission until October 31. 






36 



QUARTERLY JOURNAL OF ECONOMICS 



Consideration will first be given to alliances which are 
sufficiently intimate to effect the control of one corporation 
by another. By control of a corporation is meant the 
power to dictate the poHcy of such corporation. This 
movement for control has assumed various phases. The 
simplest case is that in which a railroad desires to enlarge 
its territory and influence, where efficient railroading 
demands that joint arrangements with branch connecting 
lines be superseded by centraUzed management, or in 
which the constant pushing out of branches to gather 
in new sources of traffic is essential to the very Ufe of 
the main stem of a railroad line. Then there is the exten- 
sion of the main line into sections not before reached, — 
the transformation of a railroad serving a locality into a 
system that traverses a section and then half a continent, — 
illustrated in the policy of Eastern ' 'trunk Unes," which 
early reaUzed the advantages of tapping the producing 
sections and by unified control and management reducing 
to the lowest point the cost of handhng the enormous 
traffic in raw materials. The latest phases of this move- 
ment are seen in the newly constructed and projected 
lines to the Pacific and in the plans of certain interests 
for controlling transcontinental lines that touch both 
oceans. 

Frequently the acquisition of control of an individual 
railroad is a part of some such far-sighted plan which does 
not appear on the surface, but is still only a dream or 
a desired culmination in the mind of a dominating finan- 
cier, and which becomes clear to the pubhc only after all 
the links have been connected and the system takes visible 
form. One has only to read the financial page of the 
daily newspaper and take note of the rumors of new cor- 
porate alignments to realize how alert is the public to 
scent incipient plans of this nature. Only on some such 
theory as this can many of the relationships of widely 



RAILROADS IN THEIR CORPORATE RELATIONS 37 

separated railroad corporations be explained. Rivalry 
between different financial groups has accelerated the 
movement and has forced one group to meet the gigantic 
projects of another or suffer loss of business and of prestige. 

As we have seen, the motives underlying the movement 
are not wholly economic, altho this motive is the dominant 
one. The prestige that springs from corporate power and 
financial control is a precious possession, to be guarded at 
all hazards and enhanced at every opportunity. This 
competitive struggle for financial power justifies itself only 
so long as it keeps its feet sohdly on economic ground. If 
the development of systems works for efficiency in trans- 
portation, in the way of better service and lower rates, it 
can be defended; but experience proves that, in most 
cases, such rivalry has led to absorption of railroads merely 
because of their strategic advantage in a warfare of finan- 
cial interests. It is but a short step from this practise 
to stock jobbing, manipulation, and often railroad wreck- 
ing, and, when the interests involved have had enormous 
resources at their command, the influence of such prac- 
tises has not been confined to railroads, but can be traced 
into the management of banks, insurance companies, and 
other financial and fiduciary institutions. Such repre- 
hensible practises have been particularly evident in the 
management of railroads in which boards of directors, 
elected for the purpose of directing a transportation 
agency, have delegated their functions to one dominating 
personaUty, and have then gone about their business. 

Finally, as a cause of railroad control there may be men- 
tioned the motive of pure investment. But this is very 
infrequently a dominating motive. Investments by rail- 
roads in the securities of other railroads are common, 
but, unless some other motive is present, they rarely extend 
to the point of actual control. 



38 



QUARTERLY JOURNAL OF ECONOMICS 



Control over a corporation may be established in a 
variety of ways; but the two principal methods of effect- 
ing the result are control through possession of securities, 
usually stock or its equivalent, and control through some 
form of contract, such as a lease. It is somewhat ques- 
tionable whether a lease contract gives control at all, 
for on its face it usually transfers merely the use of physi- 
cal property of a corporation for a Hmited term of years 
and leaves the corporate organization, with its board of 
directors and its stockholders, untrammelled. The corpo- 
ration, at least formally, continues its existence, main- 
tains its organization, and distributes as dividends on 
stock the rentals received from the lessee company. 
Breach of contract, a receivership, or the termination of 
the contract, may restore the property of the lessor com- 
pany to its stockholders. This is the strict legal relation 
of the two corporations, and from this standpoint it would 
seem proper to disregard such relationships in any consid- 
eration of intercorporate control. Yet a careful study of 
lease contracts reveals the fact that the relationship of 
lessor and lessee extends all the way from an adherence 
to a strict legal interpretation of the independence of the 
two corporations to a virtual absorption of the lessor 
company in the lessee. 

In the latter case, the lease usually runs in perpetuity 
or for a length of time practically equivalent. The stock 
of the lessor is practically all owned by the lessee, the 
lessee has often issued securities of its own to cover the 
absorbed property, and has pledged the stock of the lessor 
company for the new issue, or is carrying it on its books 
merely as a record of title. Frequently the only posses- 
sion remaining to the lessor corporation is its franchise. 
The lessor company becomes, in other words, an inactive 
corporation, existing neither for the purpose of conducting 
a railroad business nor for the purpose of distributing 






RAILROADS IN THEIR CORPORATE RELATIONS 39 

income to its stockholders. It is such cases which can 
properly be classified as forms of control, tho even here 
the lessor is still in law an independent corporation. A 
good illustration of a lease that is merely formal in 
character is found in the Dayton & Western Raih-oad 
Company, which in 1865 leased all of its property of every 
kind to the Little Miami and Columbus & Xenia Rail- 
road companies for the term of ninety-nine years, renew- 
able forever, subject to a mortgage securing the payment 
of $738,000 of bonds due in 1905. The lessee guaranteed 
payment of principal and interest on the bonds and all 
taxes and assessments, the rental payment being the 
interest on the bonds until maturity, and thereafter 5 per 
cent, per annum. But, after the payment of the bonds, 
the lessee might at any time demand a conveyance of the 
raikoad in fee simple without further consideration. 
The Columbus & Xenia Raikoad was subsequently leased 
to the Little Miami, and, by a later lease, the little Miami 
was conveyed to the Pittsburg, Cincinnati, Chicago & St. 
Louis Railway Company. The bonds of the Dayton & 
Western have now been paid, and the corporation exists 
merely for the purpose of formally conveying title when 
that act is demanded. 

But the clearest form of control is that established 
through the possession of securities. Sometimes the pos- 
session of bonds is sufficient where bonds have the con- 
trolling voting power, or where, interest having been 
defaulted, the holders of bonds possess right of foreclosure. 
Occasionally a corporation holds a majority of voting trust 
certificates representing stock deposited with trustees. 
While not in direct control of the corporation whose certifi- 
cates are held, the owning company, nevertheless, names 
the trustees, and comes into possession of the stock when 
the trust is dissolved. An illustration of this relationship 
is the ownership by the Seaboard Company of a majority 



40 



QUARTERLY JOURNAL OF ECONOMICS 



li 



of the voting trust certificates of the Seaboard Air Line 
Railway. 

But by far the greater number of railroad corporations 
are controlled through the ownership of stock, obtained 
sometimes by exchange of securities, either stock or bonds, 
for the stock acquired; sometimes by the sale of bonds 
on the market and the purchase of stock with the 
proceeds; and sometimes, altho not commonly when 
large purchases are involved, by direct appropriation of 
cash from the treasury. It is by the acquisition of voting 
securities that the large systems have in the main been 
built up. This does not, of course, mean that the head 
corporation, which gives its name to the system, necessa- 
rily itself owns the securities of all the corporations which 
it controls. In practically all the large systems the poUcy 
of indirect control is followed to a greater or less extent; 
that is, corporations subsidiary to the head of the system 
in their turn control other corporations, so that a hier- 
archy of corporate interests is created, often of a most 
intricate nature. It is this fact that made so difficult 
the work of compilation in the Interstate Commerce report 
already referred to, and it is the presentation of this rela- 
tionship in tabular form that constitutes perhaps the 
most valuable feature of the report. To take a famihar 
instance, the New York Central & Hudson River Rail- 
road Company controls the Lake Shore & Michigan 
Southern through ownership of a httle over 90 per cent, 
of its stock. The latter in turn controls the Cleveland, 
Cincinnati, Chicago & St. Louis through ownership of 
53 per cent, of its stock, and the New York, Chicago & 
St. Louis through ownership of a Uttle over 50 per cent, 
of its stock. These roads in turn control others, so that 
the influence of New York Central management runs down 
the hne until it reaches the most insignificant branches. 
Thus has this great system been built up until it aggre- 



■«^ 



RAILROADS IN THEIR CORPORATE RELATIONS 41 

gates nearly 12,000 miles and represents a total outstand- 
ing capitalization, both stock and bonds, of over $1,300,- 
000,000. 

In many cases a railroad corporation, in addition to its 
control through title to a majority of the voting securi- 
ties, is also the lessee of the controlled corporation. Usu- 
ally the lease contract comes first in point of time, and 
then, later, stock is acquired sufficient to insure voting 
control, as the advantages of a closer intercorporate 
relationship become clear. But sometimes the lease con- 
tract is subsequent to the establishment of control through 
stock ownership. The execution of a lease under these 
circumstances, or the continuance of an early lease when 
stock control would seem to render such contract unneces- 
sary, finds its explanation in the fact that a railroad cor- 
poration holding a bare majority of the stock of another 
railroad is enabled, through the exercise of its voting 
control, to arrange an advantageous contract with its 
subsidiary corporation which remains fixed during the Ufe 
of the lease, and is thus able to free itself from the impor- 
tunities of a possibly dissatisfied minority of the lessor 
corporation for a considerable length of time. 



Thus far discussion has been confined to control exer- 
cized by a single corporation. But there are frequent 
cases of joint control, the participating corporations 
sometimes numbering as high as twelve. The fact of 
joint control is diflicult to establish, because the Une of 
distinction is not clear between the mere contempora- 
neous investment of several railroads in the same cor- 
porate stock and the acquirement of securities under an 
agreement for joint control. Joint control necessitates, 
of course, an agreement between the parties in interest, 
but these agreements are frequently so informal that they 
escape detection. Moreover, railroads have been very 



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QUARTERLY JOURNAL OF ECONOMICS 



reluctant to admit the existence of such agreements, pos- 
sibly because they fear that the revelation of joint con- 
tracts of any character may render them Uable to prose- 
cution under the Anti-trust Act. In the Intercorporate 
Relationship investigation it was found necessary to adopt 
the wholly reasonable basis of interpretation that when 
railroad corporations invested simultaneously in the 
securities of a corporation in which they were all obviously 
interested, such as a terminal or switching company, and 
particularly when the amount of the investment was 
practically identical for each of the investing corpora- 
tions, the corporation whose securities were acquired was 
to be regarded as jointly controlled. 

Joint control may be created by lease, as in the case 
of the joint lease of the Georgia Railroad by the Atlantic 
Coast Line and the Louisville & Nashville, but usually 
such control is based upon stock ownership. An illustra- 
tion of this is the control of the Chicago, Indianapolis & 
Louisville by the Southern and the Louisville & Nashville 
through joint ownership of 88 per cent, of the stock. Two 
interesting cases in which the Harriman interests were 
involved are those of the North-western Pacific and the 
Chicago & Alton. The first-named corporation was organ- 
ized to consohdate all the competing lines of the Santa F^ 
and the Southern Pacific systems north of San Francisco 
Bay, and the board of directors is divided between these 
two controlUng systems. In the case of the Alton, the 
Union Pacific and the Rock Island deposited a controlling 
interest with the Central Trust Company of New York, 
imder an agreement by which the control of the board of 
directors was to be transferred in successive years from 
one to the other.^ 

Agreements for joint control do not always include all 

1 This agreement has been annulled, and control of the Alton passed in August, 
1907, to the Toledo, St. Louis & Western Railroad Company. 



RAILROADS IN THEIR CORPORATE RELATIONS 43 

of the large corporate stockholders. Note, for example, 
the case of the Southwestern Construction Company, the 
holding company for the stock of the Cincinnati, New 
Orleans & Texas Pacific Railway. About 80 per cent, of 
the stock of the former corporation is controlled by the 
Southern Railway and the Cincinnati, Hamilton & Dayton 
through direct ownership and through the holdings of 
their subsidiary corporations. Nearly $450,000 of stock, 
or over 20 per cent., is owned by the Alabama, New 
Orleans, Texas & Pacific Junction Railways Company, 
Limited. Yet this latter corporation has no voice in the 
management of the Southwestern Construction Company. 
The Southern Railway elects four directors, the Cincin- 
nati, Hamilton & Dayton four, and these eight choose the 
ninth and remaining member. 

In agreements for joint control a corporation's influence 
in the affairs of the controlled company is not always 
proportionate to its investment. For example, the stock 
of the Des Moines Union Railway Company is owned five- 
eighths by F. M. Hubbell Son & Co., two-eighths by the 
Chicago, Milwaukee & St. Paul Railway Company, and 
one-eighth by the Wabash Raiboad Company. Yet a 
director cannot be elected, the articles of incorporation 
amended, or the capital stock increased except by a vote 
of more than seven-eighths of the stock, which means 
unanimous consent. 

In rare cases joint control is shared by a corporation 
and an individual, as, for example, in the case of the San 
Pedro, Los Angeles & Salt Lake Railroad Company. 
This line, as projected, threatened the traffic of the South- 
ern Pacific. By legal proceedings Mr. Harriman prevented 
the construction of portions of this road until an agree- 
ment had been effected between himself and the builder, 
Mr. W. A. Clark, as a result of which the stock of the 
raihoad was deposited with the Farmers' Loan and 




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QUARTERLY JOURNAL OF ECONOMICS 



Trust Company as trustee and was to be owned half and 
half by the Oregon Short Line and Mr. Clark and his 
associates.^ 

Most of the cases where control is shared by two or 
more railroad corporations have an obvious explanation 
and are justified on economic grounds. They arise where 
terminal tracks, a union station, or a short connecting 
line, is necessary to the operation of a number of railroad 
systems. Frequently the expense of construction and 
operation of such joint property represents the only invest- 
ment that the railroads make, and stock, if issued at all, 
is distributed to each contributor merely as a matter of 
form. But instances such as the San Pedro case are less 
defensible, and contain within themselves more than a 
possibility of effecting that ''restraint of trade '^ which the 
courts have so frequently denounced. 

Virtual control of a railroad corporation may be main- 
tained even when less than a majority of stock is owned. 
Thus in some cases the stock necessary to convert a minor- 
ity into a majority holding is in the possession of individuals 
or groups of individuals whose interests are identical with 
those of the holding corporation. Well-known instances 
of this kind include the control by the Chicago & North- 
western Railway of the Chicago, St. Paul, Minneapolis & 
Omaha, in which a holding of $1,500,000 of stock by 
F. W. Vanderbilt is necessary to make a majority. The 
ownership of 45i per cent, of the stock of the Southern 
Pacific Company by the Oregon Short Line Railroad 
Company — a part of the Union Pacific system — doubtless 
belongs in the same category, altho the individual financial 
interests which fill the gap are not revealed. A concen- 
trated minority holding is doubtless in many cases fully 
as effective as an actual majority would be, because of 

* The agreement also contains provisions relative to division of traffic and 
territory with which this discussion is not concerned. 



RAILROADS IN THEIR CORPORATE RELATIONS 45 

the scattered distribution of the majority ownership in 
small lots. Yet the occasional market raids during the 
last decade on the stock of prominent raiboad corporations 
have led financial interests to question the security of a 
minority holding, however large and concentrated, and 
to endeavor to ally with the corporate holding a sufficient 
amount of personal holdings to insure an actual voting 
majority. The revised annual report form of the Inter- 
state Commerce Commission, upon which railroads are 
making their returns for the year ending June 30, 1908, 
calls for the ten largest stockholders of each corporation. 
This information gathered currently will enable the pubUc 
to keep accurately in touch with the investments of large 
financial groups, and will make possible in the future a 
clearer understanding of these alUances of individual and 
corporate interests. This method of corporate control 
through the aid of individuals undoubtedly adds an 
element of difficulty to any attempt at regulation or 
judicial interference.^ 

This treatment of intercorporate control has had to do 
with the securities of active railroad corporations ; that is, 
with the securities of those corporations which either 
operate railroad property or, as owners of railroad property 
operated by other corporations, maintain an organization 
for the distribution of income to stockholders. But there 
is a very large number of railroad corporations, whose 
securities are found on the books of the controlling cor- 
poration, that perform neither function and that still 
exist in contemplation of law. In some cases such cor- 
porations still retain title to their property; in other 

1 Were this article not confined to railroad corporations, it woiild be interest- 
ing to discuss the significance of the control by railroads of steamship lines, such, 
for example, as the control of the Pacific Mail Steamship Company by the Southern 
Pacific and of the Old Dominion Steamship Company by the Chesapeake & Ohio, 
Southern Seaboard Air Line, Norfolk & Western, and Atlantic Coast Line. 




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QUARTERLY JOURNAL OF ECONOMICS 



cases they have transferred title to the controlling cor- 
poration, and retain merely their corporate right to be/ 
The property represented by such inactive corporations 
has in almost every case been absorbed into the operating 
system of the controlhng corporation, and it would natu- 
rally be expected that the corporate existence of such 
inactives should be discontinued. To some extent this 
has taken place, and corporations have unified and 
simpUfied their organization by ending the Hfe of their 
''inactives." Nevertheless, these moribund companies still 
exist in great numbers, doubtless because their charters 
give them certain privileges which counsel for the con- 
trolhng roads regard as valuable possessions against a 
future emergency. The total outstanding securities of 
these inactive corporations on June 30, 1906, amounted 
to $412,000,000 of funded debt and $771,000,000 of 
stock. Of the funded debt $120,000,000 was in the hands 
of the pubUc. Some of it was doubtless of no value, 
but most of it had been assumed as a direct obUgation of 
the absorbing road. Only $5,500,000 of the total amount 
of stock was still outstanding, and this doubtless has no 
value at all and could be located with difficulty. The 
absorption of such inactive corporations has been complete. 

Thus far the discussion has been concerned with the 
question of intercorporate control. But there exists to 
an enormous extent corporate ownership of railroad secu- 
rities, which, altho falUng short of control, secures for the 
holding corporation a potent influence in the affairs of 
the railroad whose securities are owned. It would be 
tedious merely to enumerate here the Ust of important 
alliances of this character. Furthermore, official informa- 
tion is available only as late as the year ending June 30, 

iln still other cases corporate existence has ceased, but the stock of the dead 
company is carried on the books of the successor as a matter of record. 



RAILROADS IN THEIR CORPORATE RELATION S'f I ^7 

1907, and a statement of these facts would not picture the 
present situation with entire accuracy. The motives of 
financial interests change as conditions change; legisla- 
tion makes certain holdings undesirable, as illustrated, 
for example, in the sale of stock of "coal roads'' since the 
passage of the Hepburn Act with its "commodity clause"; 
financial difficulties sometimes compel a railroad to con- 
vert its influence in other roads into cash, as in the recent 
reported sale by the Erie of its Lehigh Valley stock. Old 
alhances are dissolved and new ones formed with bewilder- 
ing frequency. As illustrations of these minority holdings 
acquired for the purpose of influencing, if not controlling, 
the pohcy of other roads, may be mentioned the holdings 
of the Pennsylvania Railroad system in the Baltimore & 
Ohio, the Norfolk & Western, and the New York, New 
Haven & Hartford; the holdings of the New York Central 
system in the Chesapeake & Ohio and the New York, 
New Haven & Hartford; the holdings of the Baltimore & 
Ohio, the Chesapeake & Ohio, the Erie, the Lake Shore, 
and the "Panhandle" in the Hocking Valley; the holdings 
of the Lackawanna, the Erie, the Lake Shore, the Reading, 
and the Central of New Jersey in the Lehigh Valley; of the 
Chicago & Northwestern in the Union Pacific ; and of the 
Missouri Pacific in the Denver & Rio Grande, the Texas 
& Pacific, and the Wabash. A most interesting in- 
stance which approaches a condition of joint control is 
the influence of the Pennsylvania and the New York 
Central systems in the Reading Company through the 
holding by the Baltimore & Ohio and the Lake Shore 
of over $30,000,000 each in Reading stock, an aggregate 
of over 43 per cent. 

During the interval between the annual reports to the 
Interstate Commerce Commission for 1906 and 1907 the 
Pennsylvania system disposed of all its Chesapeake & 
Ohio stock, amounting to over $15,000,000, and the New 



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48 QUARTERLY JOURNAL OF ECONOMICS 

York Central system sold $4,500,000 of its holdings in the 
same road. Who the purchasers were does not appear. 
A more interesting case is the reduction in the Pennsyl- 
vania holdings of Baltimore & Ohio stock from $73,000,000 
to $42,500,000. At the same time there appears among 
the new holdings of the Oregon Short Line for the year 
1907 about $40,000,000 of Baltimore & Ohio stock, and 
among the new holdings of the Pennsylvania Company 
$34,000,000 of Oregon Short Line bonds. An inference 
that would be fairly accurate might be drawn concerning 
this particular ramification of Harriman finance. 

As a rule, these minority holdings are in the securities 
of railroads that have traffic relations with the holding 
corporation, and that lie in the same general traffic terri- 
tory,— where, in other words, influence in management 
will promote harmony of operation, if not community of 
interest. But occasionally, as ah-eady noted, a raikoad 
corporation purchases widely in the securities of other 
raih-oads, possibly to some extent for pure investment 
purposes, but more probably with far-reaching plans for 
future coalitions. The most striking instance of this char- 
acter is seen in the case of the Oregon Short Line Railroad 
Company, which is the principal ''holding company" for 
Mr. Harriman's system of raihoad lines, and which he has 
made the depository for a large proportion of his purchases 
during the conduct of his pyrotechnic finance. The im- 
portant holdings of the Oregon Short Line in the securities 
of other railroad corporations on June 30, 1907, were as 
follows : — 

Atchison, Topeka & Santa F6, preferred $10,000,000 

Baltimore & Ohio, common 32,334,200 

Baltimore & Ohio, preferred 7,206,000 

Chicago, Milwaukee & St. Paul, common 3,690,000 

Chicago, Milwaukee & St. Paul, common, 25 per cent, paid, 922,500 

Chicago, Milwaukee & St. Paul, preferred, 25 per cent, paid, 1,845,000 

Chicago & Northwestern, common 3,215,000 



RAILROADS IN THEIR CORPORATE RELATIONS 49 

Great Northern, preferred $9,036,400 

Great Northern, preferred, 50 per cent, paid 3,614,560 

New York Central & Hudson River 14,285,700 

Northern Pacific, common 4,152,800 

Northern Pacific, common, 12 J per cent, paid 2,491,600 

Northern Securities, stubs 724,900 

San Pedro, Los Angeles & Salt Lake 12,500,000 

San Pedro, Los Angeles & Salt Lake, first mortgage bonds, 20,000,000 

Southern Pacific, common 90,000,000 

Southern Pacific, preferred 18,000,000 

Southern Pacific, preferred, 25 per cent, paid 16,200,000 

In addition, it may be noted that the Union Pacific Rail- 
road Company owns $10,343,100 of the stock of the Chi- 
cago & Alton, also $18,623,100 of Illinois Central stock 
directly, and $8,000,000 through control of the Railroad 
Securities Company. 

That this policy of Mr. Harriman's has been deliberately 
entered upon is shown by his testimony in a hearing 
before the Commission, in which he said, "If I thought we 
could realize something more than we have got from these 
investments, I would go on and buy some more things. . . . 
If you will let us, I will go and take the Santa F6 to- 
morrow."^ That he is still pursuing the same poUcy is 
shown in his recent purchase of the stock of the Central of 
Georgia which connects with the Illinois Central at Bir- 
mingham, Alabama, and in the financial aid which he is 
reported to have given this year to both the Erie and the 
Wheeling & Lake Erie Railroads, which have presumably 
given him an influence in their councils. 

That the intercorporate holdings of railroad securities 
reach an enormous aggregate is shown by the Interstate 
Commerce Commission's investigation which presents the 
situation on June 30, 1906. This investigation shows 
that of the total outstanding stock of railroad corporations 

' In the Matter of Consolidations and Combinations of Carriers, Relations 
between such Carriers, and Community of Interests therein, their Rates, Facilities, 
and Practises. Interstate Commerce Commission. 1907. 



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QUARTERLY JOURNAL OF ECONOMICS 



RAILROADS IN THEIR CORPORATE RELATIONS 51 






on that date, amounting to nearly $9,000,000,000, over 
$4,000,000,000, or 46 per cent., was held by railroad cor- 
porations; and that, out of $9,000,000,000 of funded debt, 
$1,440,000,000, or a little over 15 per cent., was held by 
railroads. 

This striking contrast between the percentage of funded 
debt and of stock held by railroads leads to the inevitable 
conclusion that railroads in their purchase of railroad se- 
curities are not primarily seeking investments, but that the 
main consideration is the strategic advantage to be derived 
from the possession of voting stock. The enormous inter- 
corporate holdings of railroad securities also warn the 
student of railroad finance that a considerable duplication 
of securities must be eliminated before the net amount 
in the hands of the public upon which railroads are en- 
titled to earn can be determined. This net amount as 
shown in the 1906 investigation was $7,840,000,000 of 
funded debt and $4,740,000,000 of stock, or $36,173 per 
mile of funded debt and $21,877 of stock. It is probable 
that this net amount will be further reduced by a later 
and still more exhaustive investigation. 

We turn finally to a consideration of the most interesting 
phase of the intercorporate relationship problem, — the 
position and character of the "holding company." This 
"holding" function is not confined to corporations ex- 
pressly organized for the purpose. Almost every large 
operating railroad company acts to some extent at some 
time as a '^holding company" for financial interests that 
direct the system to which it belongs. Occasionally this 
is true to a very considerable degree, as in the case of the 
Oregon Short Line already described. Trust companies 
also have in recent years often acted in this capacity. 
For example, the stock of a large number of railroad cor- 
porations comprising the Reading system was in 1906 held 



by the Central Trust Company of New York as trustee for 
the Reading Company. Sometimes this holding function 
is performed by an individual who, in his capacity as 
president or other officer of a railroad company, holds for 
that company the stock of another railroad corporation. 
Whatever the motive may be for this general policy, it 
increases the government's difficulty in securing full infor- 
mation as to intercorporate alliances. The corporation 
whose stock is held may reasonably insist that its informa- 
tion concerning its stockholders does not extend beyond 
its stock books, and moreover it is at least questionable 
whether the Commission has jurisdiction over trust com- 
panies or over individual trustees who appear to be hold- 
ing stock in their individual capacity. The advantage of 
such a policy to a railroad that desires to conceal its 
control of another railroad is obvious. Such concealment 
may be promoted, however, with a view to deceiving 
business rivals and competitive financial interests rather 
than government authority. Hostihty to government 
interference in matters of this kind is based much less on 
a fear of prosecution for violations of law than on the pos- 
sible effect of pubficity upon the strategic position of the 
corporation among its rivals. 

But beyond this comparatively simple method of holding 
corporate securities there is the "holding company" char- 
tered expressly for the purpose of performing this function 
and given by the law of the State, usually New Jersey, the 
power to purchase, hold, and sell securities and to issue 
its own obligations in return therefor. Such corporations 
have assumed many different forms and have been assigned 
the performance of varied services, but in principle they 
do not differ. Their variations depend upon their differ- 
ences in location in the railroad system of which they 
are a part and the diversity in the character of the securi- 
ties held by them. 



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Thus there are the holding companies that are at the 
head of railroad systems and that bind together the 
different operating railroad lines under the control of a 
single financial interest/ Then there are the intermediate 
holding companies that hold securities in the interest of 
the railroad corporation or corporations by which they 
are controlled. These companies in turn may be either 
purely railroad holding companies organized specifically 
for the purpose of holding the stock of one or more rail- 
road corporations, or they may be the safety deposit for 
a mass of miscellaneous securities that the railroad does 
not desire to carry on its own books. 

A few examples will make the point of this discussion 
clear. The Michigan Securities Company with a capital 
stock of only $20,000, all of which is owned by the Cin- 
cinnati, Hamilton & Dayton, is the agency through which 
the latter corporation held on June 30, 1907, among 
other securities, $11,000,000 of the capital stock of the Pere 
Marquette and $750,000 of the stock of the Southwestern 
Construction Company. The Illinois Central has within 
its system two holding companies of this character, of 
which it owns the entire capital stock. One, the Mississippi 
Valley Company, has a capital stock of $300,000 and con- 
trols four railroad corporations, including the Yazoo & 
Mississippi Valley with over 1,200 miles of line, and a cap- 
italization of $6,000,000 of stock and $53,000,000 of 
funded debt. The other, the Mississippi Valley Corpora- 
tion, has a capital stock of $5,000 and a funded debt of 
nearly $8,000,000, and controls solely and jointly ten 
terminal, bridge, depot, elevator, and small railroad com- 
panies, with an aggregate capitahzation of $17,000,000, 
besides owning securities in a number of other companies. 
The Union Pacific owns 95 per cent, of the stock of the 

' Such holding companies should not be confused with corporations like the 
Southern Pacific Company and the Pennsylvania Company, which own no mileage, 
but which operate railroad systems. 



RAILROADS IN THEIR CORPORATE RELATIONS 53 

Railroad Securities Company. The latter has purchased 
$8,000,000 of Illinois Central stock, and has pledged this 
as collateral for the issue of an equivalent amount of 
bonds. Its authorized issue of bonds is $20,000,000, but 
the unissued $12,000,000 can only be put out against the 
deposit of an equal amount of Illinois Central stock in 
addition to that already in the hands of the trustee. The 
Southwestern Construction Company, which owns 68 per 
cent, of the capital stock of the Cincinnati, New Orleans 
& Texas Pacific, is similar in character to those already 
described, except that it is controlled jointly by two rail- 
road corporations, the Southern and the Cincinnati, Hamil- 
ton & Dayton. 

The Pennsylvania Company, altho not identical in 
character with the corporations already mentioned, may 
roughly be classified with this group. Its capital stock of 
$60,000,000 is all owned by the Pennsylvania Railroad Com- 
pany. On June 30, 1907, it owned no mileage, but op- 
erated 1,413 miles of road west of Pittsburg. It owned 
over $138,000,000 of railroad stock and $95,000,000 of 
bonds. A large proportion of its holdings were pledged 
for the issue of collateral trust bonds, which form a large 
majority of its funded debt. That it has been used by the 
Pennsylvania Railroad Company as a holding company 
has been shown earlier in discussing the sale of Baltimore 
& Ohio stock. That it is also used as a medium for the 
issue of new obligations may be learned from the state- 
ment of officers of the Pennsylvania Railroad Company, 
who in reply to inquiries have said : — 

In regard to the issues of the Pennsylvania Company obligations, 
the Pennsylvania Company is simply a bureau of the Pennsylvania 
Railroad Company, which owns every share of its capital stock; 
and for the same reason that the Pennsylvania Railroad Company 
takes charge of the issue of the car trust certificates to cover addi- 
tional equipment furnished to all its lines both East and West of 



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QUARTERLY JOURNAL OF ECONOMICS 



I ( 



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I :;i: 






Pittsburg, it feels itself entirely at liberty when short term secu- 
rities have to be issued to use the Pennsylvania Company for that 
purpose, or to use the Pennsylvania Railroad Company as it 
may prefer. . . . 

. . . One of the objects in view when the Pennsylvania Company 
was organized was to enable it to do just the things for which the 
Pennsylvania Railroad Company is now using it; and in granting 
its charter the State gave it certain exceptional privileges which 
are not possessed by the Pennsylvania Railroad Company under 
its charter. It is, therefore, of special value to the Pennsylvania 
Railroad Company for this reason, and, as the reports of the two 
companies state these transactions very clearly, it is not thought 
that any obscurity or misapprehension can exist in reference 
thereto.^ 

Similar in character and purpose to the instances 
akeady noted are many of the so-called development, 
improvement, investment, and land companies. Nearly 
every raihoad corporation of any size has organized 
and owns the stock of companies whose purpose is to 
purchase and sell real estate and other miscellaneous 
properties. It was formerly the practise for this function 
to be performed by an individual, but the complications 
and delays that arose in the transfer of title upon the 
death of any such trustee led to the substitution of corpora- 
tions. In a considerable number of cases these companies 
have also been used as holding companies for securities 
of subsidiary railroads. For example, the Erie Land and 
Improvement Company, the entire capital stock of which 
is owned by the Erie Railroad, owns the entire capital 
stock of the Southern Tier Development Company, which 
in turn owns stock in one steam railroad, two electric 
railways, and a lake line. The Santa F6 Land Improve- 
ment Company, whose stock is all in the possession of the 
Atchison, Topeka & Santa F^ Railway Company, owns 
$309,900 of the capital stock of the CaUfornia-Nevada 

1 Snyder, American Railways as Investments, p. 554. 



RAILROADS IN THEIR CORPORATE RELATIONS 55 

Railroad Company. But the most important illustration 
of this form of holding company is the Northwestern 
Improvement Company, owned entire by the Northern 
Pacific Railway. This company owns securities of steam 
raihoads, terminal, navigation, irrigation, express, land, 
and mining companies amounting to over $27,500,000. 

A most interesting example of the extent to which this 
holding company principle may be carried is that of the 
Lake Superior Company, Limited, an agency of the Great 
Northern Railway Company. No official information is 
available, but it appears from the discussion in finan- 
cial journals that this company is a limited copartner- 
ship, organized in 1899 under the laws of Michigan with 
a nominal capital of $100,000. It has three stockholders, 
James J. Hill, Louis W. Hill, and Robert I. Farrington, 
all officers of the Great Northern Railway Company. 
By a deed of trust, the Great Northern transferred to the 
Lake Superior Company, Limited, securities to a total 
par value of over $8,000,000, including stocks and bonds 
of raihoad, terminal, express, elevator, land, water-power, 
bridge, and mining companies. This partnership has since 
been used as a means of acquiring real estate, lumber, and 
ore lands, the earnings of its investments being largely 
reinvested instead of being distributed as dividends.* 
Of all these interesting transactions not a trace appears 
in the annual report of the Great Northern Railway 
Company to the Interstate Commerce Commission, nor 
even in its report to its own stockholders, except for the 
announcement in the report for 1900 of the organization 
of the company. 

As a rule, the relation between the holding company 
and the railroad is a simple one and can readily be traced 
and understood, but occasionally the entanglements 

iThe ore lands acquired have since been transferred to trustees to be held 
and managed by them for the benefit of the holders of Great Northern ore cer- 
tificates. 





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of the intercorporate relationship are so extensive that 
legal counsel and the courts have had difl&culty in fol- 
lowing their ramifications. Nothing short of a drastic 
reorganization would in many cases be sufficient to dis- 
entangle the maze and reduce the relationship to one of 
simpUcity. 

The Intercorporate Relationship Report of the Inter- 
state Commerce Commission contains a diagram of the 
relations of railroads comprising the Queen & Crescent 
route, which well illustrates the point. The Southwest- 
ern Construction Company, itself a holding company for 
the Cincinnati, New Orleans & Texas Pacific, is owned 
by the Southern, by the Cincinnati, Hamilton & Dayton 
through the Michigan Securities Company, a holding 
company, and by the Alabama, New Orleans, Texas & 
Pacific Junction Railways Company, Limited, another 
holding company, the latter being largely controlled 
by railroads subsidiary to those already mentioned, 
through the possession of a one-fourth undivided interest 
in its stock. 

Another instance is that of the New York, New Haven 
& Hartford, which was merged in 1907 with the Consoh- 
dated Railway Company. The Consohdated Railway 
Company represented in the first place the consoUdation 
of a large number of electric railway companies within the 
State of Connecticut. In addition, it had vested in it 
the control of the New England Investment and Security 
Company, a voluntary association organized to hold the 
stocks of the various traction properties owned by the 
New Haven within the State of Massachusetts.^ Again, 
the Consohdated Railway Company acquired control of 
the Rhode Island Securities Company, which was the sole 
owner of the stock of the Rhode Island Company, the 

1 This device was in May, 1908, declared unlawful by the Supreme Court of 
Massachusetts. 



RAILROADS IN THEIR CORPORATE RELATIONS 57 

latter controlhng through lease electric railway, electric 
hght, and gas companies in Providence and vicinity. 
Finally, the Providence Securities Company was organized 
for the purpose of financing the acquisition of the securi- 
ties of the Rhode Island Securities Company, and the 
stock of the Providence Company is all owned by the 
New Haven. Even without these holding companies 
heaped one upon another, the New Haven system would 
have been sufficiently comphcated, for it is made up of 
merged lines whose obUgations have been assumed; of 
roads controlled through stock ownership, some operated 
independently, some by New Haven management; of 
leased roads; and of roads whose lease contract has been 
assumed in connection with the lease or control of its 
lessee. But the extensive venture of this corporation 
into electric railway ownership and operation has been 
accompanied by a further tangle of intercorporate alh- 
ances that is difficult to justify. In many cases such a 
confused situation as this has doubtless grown up gradu- 
ally, and the diflaculties, legal and otherwise, of getting 
rid of it are greater than those of maintaming the existing 
status. But, notwithstanding all this, it must be evident 
to any one who gives the matter close study that compU- 
cations such as these are frequently looked upon with 
favor because they give opportunity for inflated stock 
issues and market manipulation, for an interminghng of 
interests that will confuse the pubhc and hamper regulating 
bodies, both State and federal, and for a situation that will 
furnish a means of escape to important transportation 
agencies from the jurisdiction of State and interstate 
commissions. 

The holding company frequently performs an economic 
service when it brings small scattered corporations to- 
gether as a preUminary step to consoUdation, or when 
it is used as a convenient device for joint control by two 



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or more railroad corporations of some railroad property 
in which they have a legitimate joint interest, provided 
of course that the financial transactions of such a holding 
company are made as pubUc as those of the railroad cor- 
porations that own it. But, when it is a scheme dehb- 
erately invented for the purpose of avoiding pubUcity 
and inspection and as a means of carrying on business 
not permitted by its charter, its continuance becomes 
a pubhc menace. In such cases the books of the holding 
company are frequently kept by separate officers inde- 
pendent of the railroad accounting officials, and the rail- 
road is able to report that it is not officially informed of 
the financial transactions of the holding company whose 
stock it owns. Thus the Great Northern Railway Com- 
pany reports to the Interstate Commerce Commission 
that its interest in the Duluth, Superior & Western Ter- 
minal Company is merely that of a lessee of a portion of 
its property, altho it appears that the Lake Superior 
Company, Limited, owns $1,999,500 of its stock out of 
a total outstanding of $2,000,000. Thus is the Yazoo & 
Mississippi Valley able to state under oath to the Com- 
mission that it is not controlled by any other railroad 
company, altho it is controlled by the Mississippi Valley 
Company, whose entire capital stock is owned by the 
IlUnois Central. 

But the holding companies that are of the greatest 
interest to the pubhc are those at the head of great rail- 
road systems. Three illustrations will suffice to describe 
this class, the Atlantic Coast Line Company, the Reading 
Company, and the Rock Island Company. The unique 
feature of the Atlantic Coast Line Company is its small 
capitahzation in comparison with the securities it holds. 
This company was organized in 1889 to bring under 
unified control the group of railways later consoUdated 
into the Atlantic Coast Line Railroad Company. It had 



•rsasam 



RAILROADS IN THEIR CORPORATE RELATIONS 59 

a capital stock of $10,000,000, which in 1897 was reduced 
to $5,000,000 by the issue of certificates of indebtedness 
in place of the stock retired. The next year the stock 
was restored to its original amount of $10,000,000 by a 
stock dividend of 100 per cent., representing accumu- 
lated surplus. On June 30, 1907, this company had 
outstanding $12,600,000 of stock and $13,000,000 of 
certificates of indebtedness. It owned $25,266,300 out 
of $50,134,200, or a httle over 50 per cent, of the stock 
of the Atlantic Coast Line Raihoad Company and 
$11,500,000 of its funded debt, the latter being pledged 
for a portion of its own certificates of indebtedness. 
When it is recalled that the Atlantic Coast Line Railroad 
Company in turn holds 51 per cent, of the stock of the 
Louisville & Nashville Railroad Company, and that 
this latter corporation owns jointly with the Southern 
Railway 88 per cent, of the stock of the Chicago, Indianapo- 
lis & Louisville, and is a joint lessee with the Atlantic 
Coast Line Railroad Company of the Georgia Railroad, 
it will be seen that less than $6,500,000 of Atlantic Coast 
Line Company stock, constituting a majority, controls 
solely and jointly a railroad system 11,000 miles in extent 
with a total capitahzation of over $725,000,000. No 
similar instance can be discovered of such wide-reaching 
control on the basis of so small a capital. 

The pecuharity of the Reading Company is that it 
imites under one management railroad and mining prop- 
erties. This company has a capital stock of $140,000,000 
and funded debt of nearly $105,000,000. It owns all the 
stock and a portion of the funded debt of the Phila- 
delphia & Reading Railway Company, all the stock of 
the Philadelphia & Reading Coal and Iron Company, and 
53 per cent, of the stock of the Central Railroad of New 
Jersey. In addition it owns about $20,000,000 of bonds 
and $35,000,000 of stock in sundry other companies, 






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including steam and electric railways, dock, terminal, 
navigation, ferry, bridge, mining, telegraph, real estate, 
and hotel companies, and stock exchanges. In this Ust 
is included the stock of nearly all the roads comprising 
the Philadelphia & Reading Railway system, these roads 
being operated by the latter under lease. Even the rail- 
road and marine equipment used in operation is leased 
from the Reading Company. 

The Rock Island was chartered in 1902, with the State 
of New Jersey as its gracious god-father. It has $139,- 
000,000 of capital stock and no debt. This company 
owns the entire stock issue of the Chicago, Rock Island 
& Pacific Railroad Company, which was chartered in Iowa 
as an operating railroad, but which neither owns nor oper- 
ates mileage and is simply a holding device for the con- 
venient use of Rock Island financiers. This latter corpora- 
tion in turn owns 93 per cent, of the stock of the Chicago, 
Rock Island & Pacific Railway Company — the principal 
operating company of the Rock Island system — and 58 
per cent, of the stock of the St. Louis & San Francisco 
Railroad Company. The Chicago, Rock Island & Pacific 
Railway owns half the stock of the Alton, and the St. 
Louis & San Francisco controls the Chicago & Eastern 
Illinois, which in turn controls the Evansville & Terre 
Haute. Two more facts are necessary to make clear the 
underlying purpose of this gigantic structure. First, 
holders of the preferred stock of the Rock Island Com- 
pany have the right, to the exclusion of holders of the 
common stock, to elect a majority of the board of direc- 
tors, such right to be surrendered only with the consent 
of two-thirds of the preferred stockholders. And, second, 
the amount of the preferred stock cannot be increased 
except upon the affirmative vote of two-thirds of the entire 
preferred and two-thirds of the entire common stock. In 
other words, holders of a majority of the preferred stock, 



RAILROADS IN THEIR CORPORATE RELATIONS 61 

or one share over $27,000,000, have permanently intrenched 
themselves in control of a raihoad system of 15,000 miles 
with total outstanding capitaUzation, stock and funded 
debt, of $1,500,000,000, and they have issued $380,000,000 
of holding company securities in the prosecution of their 
plans .^ 

That such an inflation of securities as is found in the 
case of the Rock Island and other holding companies is 
a pubhc danger cannot be questioned, but that it results 
in a demand for higher rates in order to pay dividends 
on such securities is a charge that can hardly be sus- 
tained. The pure holding companies derive their income 
solely from the securities they hold, and demand no 
direct contribution from the pubhc. Furthermore, so 
far as the actual amount of railroad securities outstand- 
ing in the hands of the pubhc is concerned, the total is 
not as a rule greatly increased by the presence of the 
holding company, for the par value of holding company 
capitalization is in most cases less than the par value of 
the securities which it holds and upon which its own capital 
is supported.* To be sure, in the Rock Island Company 
case the total amount of securities in the hands of the 
pubhc has been increased beyond the amount that would 
have been in existence, had the raihoad corporations been 
left undisturbed. But this is an exceptional instance, and 
there are here two holding companies in action instead of 
one. Justification for pubhc alarm over inflated capitah- 
zation, so far as such increase in securities affects rates, 
should arise not from the attitude of the holding company, 

* A striking example of holding company finance in the municipal field is that of 
the Interborough Metropolitan Company, which, through ownership of the Inter- 
borough Rapid Transit Company, the Metropolitan Securities Company, and the 
Metropolitan Street Railway Company, is in control of the entire local transpjortation 
situation in New York City. 

'This discussion is limited to railroad-holding companies. The statements 
made concerning the apparent lack of inflation of securities would be modified con- 
aiderably, were holding companies in general under consideration. 



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QUARTERLY JOURNAL OF ECONOMICS 



but rather from that of the operating raihoad corporation, 
which is itself the holder of the securities of another rail- 
road. Such a company frequently contends for rates 
adequate to pay a ''reasonable return" upon its entire 
capitalization when a portion of that capital was issued 
to cover the acquisition of securities of other roads. From 
the pubhc can fairly come only the earnings necessary to 
support capital that covers the actual property of the 
corporation employed in transportation; support for the 
remainder of its capital must obviously come from the 
securities it owns. It was with the purpose of determin- 
ing the amount of capital that represents operating railway 
property and of ehminating such dupUcation of securities 
that the Commission's Intercorporate Relationship in- 
vestigation was undertaken. It was found that out of a 
total gross outstanding capitahzation, funded debt and 
stock, of over $18,000,000,000, railroad corporations held 
$5,500,000,000, leaving $12,500,000,000 in the hands of 
the pubhc. This figure, altho subject to correction in 
later investigations, is the one that should be accepted as 
measuring approximately the actual value of railroad 
property. 

That the holding company does influence rates to some 
extent is true, but in a more indirect manner. So far at 
least as the large holding company at the head of a system 
is concerned, its profitable Hfe depends upon the income 
that it derives from the securities in its treasury. It is, 
therefore, of vital consequence to the financial interests 
in command that the railroads controlled shall declare a 
continuous dividend. This may necessitate the main- 
tenance or even an increase of rates that seems unwar- 
ranted from the shipper's standpoint. However, the 
insistence upon dividend payments is more likely to affect 
the road's physical condition by preventing adequate 
charges to maintenance and depreciation, and in this 



,\ 



RAILROADS IN THEIR CORPORATE RELATIONS 63 

respect it menaces the investor quite as much as it does 
the shipping pubhc. 

Pubhc opposition to the holding company has two 
explanations. In the first place, the device makes possi- 
ble the concentration of interests of large pubhc impor- 
tance in a few hands. This seems to be the principal reason 
for its creation, at least so far as the holding company at 
the head of a system is concerned. It has the same ad- 
vantage that a voting trust agreement possesses— but in 
permanent form— of perpetuating the control of a finan- 
cial group whose holdings might otherwise become scat- 
tered. It is evident that, if the majority of the stock 
of a raih-oad company is owned by a holding company 
which votes it in a block, then a majority of the holding 
company's stock, which on a basis of par for par is only 
26 per cent, of the raihoad's capital, is sufficient to control 
the situation. The Rock Island Company is a striking 
case in point. The ill-fated Northern Securities Com- 
pany was not different in principle, but it had the mis- 
fortune to hold the securities of parallel and competing 
roads. If the financial group in control has primarily 
at heart the transportation interests of its properties, such 
an organization need not injure the pubhc. But the danger 
to both pubhc and investor in railroad securities hes in 
the fact that such groups of financiers are too frequently 
interested in speculative finance rather than in raihoading. 
There are present in such a situation conditions that 
amply justify pubhc alarm. 

The second cause for opposition to the holding com- 
pany hes in the fact that it is not apparently subject to 
the regulation of the Interstate Commerce Commission. 
At least, it has not recognized such jurisdiction, and the 
question has not as yet been submitied to judicial deter- 
mination. This makes it possible for a railroad corpora- 
tion or a group of financial interests to refuse all informa- 



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QUARTERLY JOURNAL OF ECONOMICS 



tion concerning the holding company which it controls, 
and under cover of such immunity from pubUc inspection 
to carry out policies that might otherwise be difficult or 
impossible. A railroad may, through the medium of a 
holding company, conceal its control of another railroad 
corporation. It may by the same means engage indirectly 
in businesses, such as mining, that are forbidden by its 
own charter. It may evade specific provisions of statutes 
or administrative orders of a regulating body. For ex- 
ample, the Reading Company, which owns both the Phila- 
delphia & Reading Coal and Iron Company and the 
Philadelphia & Reading Railway, denies the jurisdiction 
of the Interstate Commerce Commission, and does not 
consider itself subject to the provision of the Hepburn Act 
which forbids railroads to transport, except for their own 
use, products which they own or which they have manu- 
factured, mined, or produced.^ Again, an accounting 
order of the Commission requires railroads to charge 
against operating expenses an amount adequate to cover 
depreciation of equipment. If the holding company 
owns the equipment and leases it to the railroad with no 
provision in the lease that such equipment shall be kept 
unimpaired, and, if the holding company is not subject to 
the jurisdiction of the Commission, the administrative 
order is nullified. 

In these campaign days, when specifics are daily offered 
for all forms of economic disease, it is a wise conservatism 
that refrains from the proposal of too sure a remedy. But 
this study of the relations of railroad corporations to one 
another would suggest three lines of approach toward the 
removal of such evils as the situation has brought upon us, 
and they will be stated without discussion in this conclud- 

*The "commodity clause" has been declared unconstitutional by the United 
States Circuit Court of Appeals, but has not yet been passed upon by the Supreme 
Court. 



I 

« 






RAILROADS IN THEIR CORPORATE RELATIONS 65 

ing paragraph. They carry with them legal and possibly 
constitutional difficulties, the discussion of which, however, 
is outside the purpose of this paper. One is a law which 
would bring this increasingly popular device— the holding 
company— clearly and unequivocally under government 
jurisdiction, and compel from it that same publicity of 
accounting to which the railroad corporations are subject. 
The second would require government approval for aU 
new issues of capital, and would define broadly what 
constitutes a legitimate basis for capitaHzation. The 
third would confine railroad corporations strictly to the 
business of transportation. A step will have been taken 
in this direction if the commodity clause of the Hepburn 
Act is finally sustained by the courts. The next step will 
be the prohibition of the exercise by raih-oads of the hold- 
ing company function, and a confining of their ownership 
of securities of other railroad corporations to such as is 
necessary in the conduct of a legitimate transportation 

business. 

Frank Haigh Dixon. 

Dartmouth College. 



' 



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GAYLAMOUNT 
PAMPHLET BINDER 

Mmmm/aehmd hy 

leAYLORD BROS. Inc. 

Syracu»«« N. Y. 

Stecklen, CaM. 



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