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for purchases or construction of additional property and equipment necessary for the proper conduct of its business. The amount of interest to be paid in each year shall be determined by the board of directors."

The powers and duties of the trustee in case of foreclosure were also gravely set down. “But if default shall be made in the payment of the principal of any of the said bonds at maturity, and such default shall continue, etc.,-or if default shall be made in the payment of interest upon any of the said bonds, when earned and declared in accordance with the terms and conditions of said bonds, and such default shall continue for the period of ninety days-after the same shall have been ordered by the board of directors of the said company to be paid, etc., then the said Central Trust Company of New York shall have the right, the written request of one-fourth in amount of said bondsto enter upon and take possession of the railroad's property, etc.” As a piece of unconscious humor, this can hardly be surpassed. Notice the general incongruity of the thing. To begin with, the so-called interest is in plain reality no interest at all, but merely a dividend to be declared by the board of directors after paying all such charges and making such repairs and improvements as they consider necessary for the welfare of the property. Observe the wording—“What remains shall go to the income bondholder." In short, he is the residual claimant. He receives profits and bears losses. He is, to every intent, a stockholder, except that he has no voting power, no share in choosing the board of directors who are to decide whether he shall get something or nothing. He is, to this extent, in a worse position than the stockholder who can exert some influence upon the policy of the road. Furthermore, his right of foreclosure is as flimsy as his claim to fixed income. If the board of directors shall declare that a certain sum is owing to income bondholders, if they shall order that sum to be paid, and then if, through some extraordinary mishap, the money be not forthcoming, for it is to be presumed that the board would have the money in hand before they declared it payable-only in this improbable event, can the trustee of an income mortgage force the road into bankruptcy. The security of the income bondholder is the willingness of a board of directors which he has had no share in choosing, to pay over to him sums of money which they have a perfect right to expend on the improvement of the property, a task which is never completed. In other words, the security of the bondholder is no security at all. He has no means of compelling directors to pay him his interest, for the courts have repeatedly held that the determination of the amount of “net earnings” was the exclusive prerogative of the board of directors on the ground that they were the proper persons to decide how much should be spent upon the betterment of the road. It is not surprising, therefore, to find that out of twenty-nine series of income bonds listed on the New York Stock Exchange Investment Supplement in 1890, only six paid any interest, and that of these twenty-nine issues, aggregating $308,802,000, eighteen issues have since disappeared, while those which remain, with one or two exceptions, are confined to the investment roads, whose policy it has always been to live up to the spirit of the contracts and whose earnings have enabled them to maintain that policy.

After the second and third mortgage bonds had been converted into income bonds, thus relieving the roads of a large part of their fixed charges, the necessities of the railway manager created a new form of security which was equally untrustworthy, but which the magic of the word “bond” enabled him to sell in large amounts. the consolidated or “blanket” mortgage, spread over the swarm of prior liens who, under its friendly shelter, got to their own share the larger part of the income of the road. These general mortgages, in the splendor of their comprehensiveness, impressed the minds of the investing public,

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and brought quite good prices-prices approaching those of prior lien bonds, to which, of course, in point of real security, they were vastly inferior. The consolidated mortgage came in after everything else had been paid, and the principle on which it was issued was the unfamiliar axiom that the whole is not equal to but greater than the sum of its parts. Here was a railway system formed by a consolidation of a number of railroad, terminal, and subsidiary companies of various kinds, each one being subject to mortgage liens up to the point of safety-liens whose amounts were graduated according to the degree of contribution by each part, to the general earnings of the whole. The road was, therefore, before the creation of the general mortgage, bonded up to the limit of absolute security, and in many cases, somewhat beyond it. Nevertheless, the imposing structure of a general mortgage, a “ first mortgage,” be it noted, that is to say, the first of its kind-was built upon a foundation which was ready to cave in and topple down the whole edifice at the first shudder of business depression. Almost every large failure of the period 1893–1896 involved one or more consolidated mortgages, and the defaults of 1884–1886 were also, in most cases, made upon this class of securities. These general mortgage bonds were claims upon profits, and not, in the real sense of the term, claims to fixed rates of return. In flush times, their interest could be

In periods of depression, the company must default on its consolidated mortgages, and, fearing foreclosure, go into the hands of a receiver until the real status of its various securities could be determined by a committee of reorganization. The consolidated mortgage bondholder, just as his predecessors of the second and third mortgages, had to be disillusionized and shown what was his real position. This has been done in the reorganizations of the last few

Besides income bonds and consolidated mortgage bonds, there were the few important instances of default on first mortgages, and the more numerous cases of default on



branch lines to be dealt with by the reorganization committees of 1893-1896.

The principle adopted for dealing with this problem was as simple as it was satisfactory. The net earnings of the road were taken as the measure of fixed charges. The reorganization committee apportioned the net earnings among the various disturbed securities according to the amount that each was judged to have contributed to the net earnings. In so far as the interest on a bond had been earned, its absolute lien was retained. In so far as its interest had not been earned, it was reduced to its true position as a portion of the capital stock, an investment whose return is not guaranteed but is conditioned on the earnings of the system. The results of the apportionment are illustrated in the following tables, which show the basis of exchange of two of the most important among recent reorganizations, the Northern Pacific and the Norfolk & Western :



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It is not required to go deeply into the analysis of these self-explanatory tables. In brief, it may be said that in so far as the specific security of each bond had earned its fixed charges, to that extent it was exchanged for new mortgage bonds. In so far as its interest had not been earned, and in general for the huge mass of incomes and debentures, preferred stock was given usually to an amount greater than the par value of the securities which they displaced. This principle of apportionment is especially well illustrated in the Norfolk & Western reorganization. The bonds of four branch roads were disturbed. Of these, the Maryland & Washington and Roanoke & Southern had earned more than the other two, and the greater earning ability was recognized in a large proportion of preferred stock. The 100-year mortgage bonds also, whose interest had not been fully earned, were cut down 25 per cent, but 55 per cent in

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