first preferred stock was given in exchange, so that in the long run the bondholders were no losers, the preferred stock in 1898 having sold for 63%. In the same way, the consolidated mortgage of the Northern Pacific received 621⁄2 per cent in new prior lien bonds and 621⁄2 per cent in preferred stock. In 1895, before the reorganization, the consolidated bonds did not rise above 36, while in December, 1898, two years after the reorganization, the prior lien bonds sold for 103 and the preferred stock for 78. In exchange for a bond worth $360, the Northern Pacific bondholders received another bond worth $643, besides $780 in preferred stock.

The extent to which conversion of junior bonds into preferred stock has gone appears from the following table, which shows the amounts of preferred stock issued for various purposes by eight of the largest reorganizations since 1893.

A share of preferred stock entitles its holder to receive a specified rate of return before any dividend is declared on the common stock. The exact wording of the contract is expressed in the contract of the Northern Pacific Railroad with its stockholders:

"Preferred stock is entitled to non-cumulative dividends to the extent of four per cent per annum, payable quarterly out of the net

earnings before any dividends for the year shall be declared on the common stock." If the preferred stock is made cumulative, as was formally not uncommon, the following provision was commonly inserted: " and in case said dividends cannot be regularly earned and paid, as above stipulated, all arrears are to be paid as soon and as fast as the net income of the company will allow, and no dividend is to be made on the general stock of the company until all such arrears have been paid."

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Such a provision amounts to a destruction of the common stock, which could have little value if all deficiencies in preferred dividends had to be made good at its expense. Accordingly, a more recent practice has favored non-cumulative provisions. It is not uncommon for the preferred and common stock to share equally in all dividends over and above the stipulated payments to the preferred.

It is also to be noted that the dividends on the preferred stock are payable out of "net earnings "-that is to say, after the expenses of operation, repair, betterment and interest on the funded debt have been paid. In other words, the fixed charge of a mortgage bond whose payment may be enforced by foreclosure, and the anomalous claim of the income bond which had been thoroughly discredited, were converted into a claim for return whose rate is conditioned upon the net earnings of the road. A fixed charge has been converted into a claim upon profits. In the exchange of these so-called "bonds," for stock in the reorganized company, the relation of the quondam creditors to the property is precisely defined, and the element of risk which he assumed when he purchased his consolidated or debenture bond finds expression in the language of the contract which sets forth his relation to the road. The position of the junior bondholder, considered from the standpoint of his own interest, has been vastly improved-whereas before, he was subject to great risk of default without an adequate remedy or protection. The income bondholder, in case of non-payment of his interest, had no recourse whatever, and the junior mortgage bondholder gained nothing by foreclosure. As a

preferred stockholder, however, he has the right to assist in directing the policy of the road, and he can blame only untoward circumstances if all does not go well with him. Moreover, there is the further inducement offered of a larger amount of preferred stock than the par of the bonds for which the preferred stock is given. If the bondholder is not satisfied with the arrangement, he has only to begin foreclosure proceedings to see how helpless is his position. There are but few cases on record, if we except such instances of attempted exploitation as that offered by the Texas Pacific in 1886, or the Wabash in the same year, where junior bondholders failed to see the advantages of the plan proposed as set forth by their representatives, and without delay deposit their securities.

The Voting Trust.

One more feature of recent reorganizations demands attention, and this is the securing of the control of the road for a term of years by a voting trust, elected by the bondholders or their representatives, the mortgage trustees, usually, indeed, by the latter. Thus the plan of reorganization of the Reading Railroad, issued 1895, contains the following provision:

"The stock shall be held by the voting trustees and their successors jointly... for five years and for such further period (if any) as shall elapse before the first preferred stock shall have received four per cent cash dividend per annum for two consecutive years, although the voting trustees may, at their discretion, deliver the stock at any earlier date. Until delivery of stock is made by the voting trustees, they shall issue certificates of beneficial interest entitling the regis tered holders to receive, at the time therein provided, the number of shares stated, and in the meanwhile to receive payments equal to the dividends collected by the voting trustees upon the number of shares therein stated, which shares, however, with the voting power thereon shall be vested in the voting trustees until the stock shall become deliverable."

As just remarked, the voting trustees are usually named by the mortgage trustees, in most cases by the banking firm which carries through the reorganization. In a few in

stances, however, the bondholders themselves may elect the trustees. This practice has now practically disappeared, the difficulty of getting a vote from the scattered bondholders being too great.

The purpose of the voting trust is to secure to the bondholders or the representatives, the control of the reorganized property against the attempt of outsiders to get possession of the road by buying a majority of the low-priced stock. This practice was formerly common. Mr. Henry Villard in this way secured control of the North Pacific in 1880, and Mr. Jay Gould several times captured a railroad by this method. Such exploits were usually detrimental to bondholders, who may soon have another series of defaults to suffer and a large floating debt to take care of. It was to guard against the danger of wrecking that the voting trust was devised. The Erie Voting Trust of 1878 was among the first instances of this institution. In the recent reorganizations, it is an almost universal feature. Until the stock has been raised to an investment level, so that it will be purchased not for speculative manipulation, but for investment, until, in other words, the stockholder has an equal interest with the bondholder, in the conservative and economical operation of the property, the bondholders, to protect their own interest, very wisely retain control through a voting trust. There is no organized action of bondholders in the matter. The bonds are too widely scattered for that, but the holders are entirely willing that a banking house or trust company, of high repute, who are themselves large holders of railway bonds, should have the duty of safeguarding their security until all danger from outside manipulation has passed away. The stockholder is actually benefited by this control, which insures the highest efficiency in the management of the property, and the greatest certainty of continued prosperity for all holders of its securities.

The reorganization of American railways is a more noteworthy financial achievement than the payment of the

French indemnity or the refunding of the United States debt. It is noteworthy not merely in the amount of securities involved, but on account of the excellence of the principles which have guided its managers in their action. Its result has made railway bankruptcy a practical impossibility. Railway indebtedness is now well within the limit of railway earnings. The greatest of all financial interests has been placed on a firm and enduring foundation.

University of Pennsylvania.

EDWARD SHERWOOD MEADE.