agreed to oversee the construction, furnish the necessary rolling stock, and lease and operate the road for 10 years following its completion, paying as rental $20,000 per annum plus 15 per cent of gross receipts except upon pine. Its minute books show that the Kalkaska road was to be constructed by William Alden Smith, under a contract dated October 21, 1897, by which the constructor was to receive as payment $200,000 in bonds and $254,000 in stock, less such as had been subscribed by him. According to the State railroad commissioner's reports the entire sum of $434,000 was treated by that carrier as cost of road and equipment. In 1903, a few years prior to the expiration date of the lease, the Pere Marquette, through a contract with George A. Fernald and others, purchased the entire capital stock of the Kalkaska road for $107,000, payable in Pere Marquette consolidated 4 per cent bonds, and assumed its $142,000 of first mortgage 5 per cent bonds then remaining outstanding. The result was a standing minimum fixed charge against the Pere Marquette of $11,380 annually for what was originally a tap line and undoubtedly diminishing in value as the timber was being cut out. Speaking of this branch in May, 1915, the chief operating officer of the Pere Marquette said: "It is bad. There are 14 miles of the track from Eastman Junction to the end at Stratford that is so bad that we operate it under caution, and I am about to ask the railroad commission for the authority to take it up. There is no business on the branch. to warrant our continuing in operation, and we are now going up there twice a week to bring out what little business there is." Morgan's purchase was on behalf of the Erie Railroad Co. The incidents of that purchase, its speedy rescission by the Erie, and the assumption by Morgan of the obligation, are later set forth. Immediately after the control had been returned to Morgan a receivership was asked, and it began December 4, 1905. * VIII. MORGAN MANAGEMENT, FROM 1905. It seems proper to treat these years as one period in the history of the Pere Marquette. During this period there were extensive changes in the stock ownership, particularly in the transfer of the C., H. & D. holdings of 110,000 shares of Pere Marquette common to J. P. Morgan & Co., and there were changes in the Pere Marquette directorate as a result of the purchase of control of the C., H. & D. first by the Erie and then by the Baltimore & Ohio, while the C., H. & D. still held that common. But from December 4, 1905, when George W. Perkins went on the Pere Marquette board, representing Morgan & Co., that firm seems at all times to have been the guiding hand in Pere Marquette affairs. The first event of importance, following the acquisition of C., H. & D. control by the Erie on October 20, 1905, and the reorganization in its interest of the Pere Marquette board, was the receivership under Judson Harmon, commencing December 4, 1905. This was coincident with the receivership of the C., H. & D., and on behalf of Morgan & Co. it is insisted that the step was necessary in order to separate the two corporations. However that may be, it is apparent that the Pere Marquette of itself was then well on the way toward a receivership. It continued under a receiver until December 14, 1907. The losses to the stockholders under Morgan control exceed $22,000,000.The following is from page 59 of the commission's report: Through this Morgan reorganization the Pere Marquette emerged from receivership in 1907 carrying a load of outstanding capital stock and funded debt heavier by $7,000,000 than that under which it was staggering when the receivership began two years before. It never succeeded in carrying itself thereafter. A proper reorganization would have included reduction and not increase of fixed charges. The plan of reorganization dated October 30, 1916, carries marked decrease in fixed charges. Other losses carried through the profit and loss account in addition to the results of operation must be considered. In the aggregate the showing to June 30, 1914, was as follows: Debits: Falsification of accounts.-Under the above heading the commission reports in detail certain accounts which proved to be false, respecting which they make the following remarks: 12. Falsification of accounts during Zimmerman-Hollins control.-The following statement presents a condensed income account covering the year ended June 30, 1905, for the C., H. & D., including its proprietary line, the Cincinnati, Indianapolis & Western, 1,038.24 miles operated, as recorded in the carrier's books of account: Gross earnings from operation. Operating expenses.... $6,008, 917.65 $1,913, 032.54 316, 061. 12 1,596, 971. 42 59, 688.65 1,656, 660.07 $517, 288.35 372, 273. 11 1,009,515. 63 348.52 Total deduction from income.... 1,899, 425. 61 242,765.54 Net deficit.... The 4 per cent preferred stock bore guaranteed dividends, which makes the accrual of the dividend more in the nature of a fixed charge than a division of profits. If these dividends are so considered, the net deficit for the year was $251,969.20. The foregoing income account bore little resemblance to the truth. The fact is that large sums properly chargeable to the income for 1905 were ordered to be charged to various other accounts and were so charged in a way to conceal the true state of the company's affairs. These entries violated commonly accepted accounting principles in such a flagrant manner as to make it evident that the purpose was to deliberately falsify the accounts in an effort to avoid showing the utter failure of the company to earn anywhere near its fixed charges. The charges against the income of that year thus willfully omitted included interest on loans made to retire preferred stocks; interest * But what the Zimmerman-Hollins management accomplished along that line was little compared with what it attempted. On pages 161-162 are the following, showing how false and "fake" telegrams were used: Further, in connection with this financial statement, on which such great reliance was placed, we must refer to an exchange of correspondence which occurred between August 15 and 24, 1905, concerning a certain statement then being prepared at the direction of the Hollins firm by President Zimmerman, and one copy of which eventually went to that firm and another to George W. Young. This statement is described in the correspondence as one showing "capitalization, fixed charges, estimated earnings, etc., of the C., H. & D. and P. M.." the figures for the Chicago, Cincinnati & Louisville to be omitted, and this description fits well the document placed in this record on behalf of J. P. Morgan & Co. It was prepared in and forwarded from Cincinnati by N. B. Hersloff, an employee of Hollins & Co., but evidently did not show as favorable results as were desired, for on August 24 the firm wired Zimmerman as follows: "Better not have Young show statement you sent him; estimate earnings too poor; telegraph him in two separate telegrams, one not use statement sent him, as you have another corrected one, and another telegram saying have not mailed statement because will bring on figures with me early next week." One of the startling disclosures in this investigation is the ease and informality with which one man, in a leisure hour at his home, can, on a sheet of note paper, either buy or sell a great railroad, as happened in the case of the Pere Marquette. After referring to instances of the maladministration of this system, showing losses of the stockholders of about $16,000,000, the following story of the sale of this system is found in the report of the Interstate Commerce Commission, on page 166: What had happened in the 24 hours meanwhile was that J. P. Morgan and H. B. Hollins had met at the former's New York residence on September 9, 1905, and closed an agreement for the purchase by Morgan of Hollins's C., H. & D. stock holdings, involving an expenditure of some $12,000,000. Francis Lynde Stetson was present as Morgan's counsel and wrote the agreement on a sheet of note paper. Its text follows and its significance will be further considered: 9 Sept. 1905. 219 MADISON AVENUE, H. B. Hollins & Co. will sell and J. P. Morgan & Co. will purchase 56,000 shares of C. H. & D. R. R. Co. Common Stock at the price of 160% with interest at the rate of 4% per annum from December 7th, 1905, until date of delivery, all dividends to be credited against the interest and to J. P. Morgan & Co. This delivery may be made by H. B. Hollins & Co. at any time, and must be made by them upon October 1st, 1906, or at such time thereafter as shall be specified by J. P. Morgan & Co. by three months' notice in writing. If so requested by H. B. Hollins & Co., J. P. Morgan & Co. will lend to them upon their obligations secured by C. H. & D. stock or syndicate subscriptions at 135% such sums as they may find necessary to carry such stock or subscriptions, to an aggregate amount not exceeding 56,000 shares, the rate of interest to be 41%. This contract and all obligations of J. P. Morgan & Co. mav be terminated by them at any time after October 1, 1906x, by three months' notice in writing by J. P. Morgan & Co. x1906 H.B.H. J.P.M. J. P. MORGAN & CO. *In addition we gave H. B. H. & Co. order to buy about 16,000 sh. participation ctfs. at about 135. In working up this new syndicate it seems that all concerned were informed as to the true financial condition of the properties, so that it would appear to have been a difficult matter to induce subscribers to embark in the new venture. Even though certain of the obligations were recapitalized so as to reduce the fixed charges to the level of the earnings, as seems to have been proposed, the proposition would still seem to have been too uncertain to attract such substantial subscriptions as were needed. It may well be that the following sentence from Erb's letter of September 20, 1905, addressed to one of the original subscribing interests of May 19, 1904, suggests one, if not the underlying. purpose of this syndicate: "Messrs. Edwin Hawley and John W. Gates were unimportant participants in this syndicate and their names were made use of, with J. Pierpont Morgan & Co., to create the impression that the property would go into speculative hands, and they have since stepped forward to take the property from Messrs. H. B. Hollins & Co., thus relieving the entire situation and to the satisfaction of everybody in interest.” Whatever motive lay beneath the new syndicate scheme, there is no doubt as to the effect it had on the Erie management. Mr. Harriman is introduced in the transaction and the president of the Erie Railroad is snubbed by Mr. Morgan. The following is from pages 172-173 of the report: President Underwood's reference to Harriman's whereabouts prior to their interview arose from a question as to the accuracy of a report that the Erie's purchase of the C., H. & D. had transpired during Harriman's absence from the country. This record does not settle this point definitely, but it does show that Harriman did not attend any meeting of the board or executive committee during the period July 26 to November 1, 1905. The record also clearly indicates Harriman's emphatic disapproval of the purchase upon his return in November, with the result that President Underwood obtained another interview with Morgan, as to which he testified as follows: "Then I went down and had an audience with Mr. Morgan, and I told him that practically the C., H. & D. had a floating debt that was not visible and in the statement he showed me. He said: 'Well, we will look at the statement,' and there was some attempt made to find that statement, but it was unsuccessful; it was not produced. I had not kept it because-well, I did not keep it. I said: 'Mr. Morgan, the statement that I made to you of the effect that the acquisition of the C., H. & D. on the Erie's finances is null and void, because the statement was inaccurate.' He looked at me and said: 'Well, sir, if the statement that we made to you was inaccurate, and for any reason you think that the Erie Railroad has made a bad trade, your duty is very simple-you have only to convene your board of directors and rescind it, and I advise you to do it at once.' "I bade him good afternoon and walked out of his office, and as I came out of his office I met Mr. Stetson, and I told him, being counsel, 'Mr. Morgan has just authorized the rescinding of that trade, and I think it was a very unusual and extraordinary thing for him to do. I am surprised that he would do it. And I wonder if it would be bad taste for me to tell him that.' He said: 'He might like to hear it.' So I went back, and Mr. Morgan was standing with a paper in his hand, and I said, 'I would like to speak to you for a minute.' He made no answer. I said again, ‘I would like to speak to you for a minute.' I said, 'I want to tell you I think you have done a very big thing, the biggest thing I ever came in contact with. He said nothing. . I said, 'Did you hear me?' He said 'I did, sir.' And I walked out." In closing the report the Interstate Commerce Commission says as follows: Nothing disclosed in the record before us is to be more regretted than the readiness of great banking institutions in our financial centers to loan enormous sums of money upon exceedingly precarious security in aid of such schemes as have been devised in the wrecking of these railroads. Not only this, but the high officers of such institutions, while acting ostensibly as directors of the railroads, have in fact been little more than tools and dummies for the promoters. The trustees of other people's money seem to have had little compunction about violations of their trusts for the benefit of the promoters, and at their demand. Can the like of what has befallen these two roads. be made impossible hereafter? Perhaps not entirely, so long as financial circles continue complaisant toward financial exploitations which prove successful. But it will help if minority stockholders are more watchful of their interests and if bondholders assert their rights before their security fades away for lack of upkeep, purposely neglected in order to pay interest and dividends unearned. It would, in our opinion, render such exploitation more difficult if the issuance and marketing of all securities of common carriers were subject to Federal regulation. As to that we renew the recommendations repeatedly made to the Congress in our annual reports. We also point to the lesson, here again taught, that access to correspondence files is indispensable for a thorough and accurate understanding of the motives and purposes which underlie the formal entries made in accounts and records. Unwise management contributed to the downfall of these roads, but breach of trust by corporate officials, often for personal gain, was the main cause here, as in the records developed in other investigations. Consolidations and Combinations of Carriers, 12 I. C. C., 277; The New England Investigation, 27 I. C. C., 560; St. Louis & San Francisco Railroad Investigation, 29 I. C. C., 139; Financial Investigation of N. Y., N. H. & H. R. R. Co., 31 I. C. C., 32; Financial Transactions C., R. I. & P. Ry. Co., 36 I. C. C., 43. That downfall, with its deplorable consequences, can be traced only to betrayal within, and not to compulsion from without. Neither rivalry, nor rate level, nor regulation, nor all combined, can be found on this record to have contributed in any appreciable degree to the disaster. In discussion of transportation conditions during the last two years or more much has been made of the fact that over 40,000 miles of our railroads were under receivership. A recent publication lists 69 railroads, among them the Pere Marquette and C., H. & D., as in the hands of receivers on December 31, 1916. Their combined operations cover 34,559 miles. Over 40 per cent of that mileage is in systems which, as shown by our investigations, have suffered principally from financial mismanagement and exploitation. Over 40 per cent more, of which a large part is located in Texas, is comprised in two southwestern systems. The remaining 5,800 miles are distributed among fifty-odd carriers in different parts of the country. The statements of fact herewith presented having all been verified from the official records and sworn testimony taken before the Interstate Commerce Commission, disclose a condition of profligacy, waste, falsifying and destruction of records, and the ignoring and violation of law, both State and National, so vast in its conception and so successfully carried out in defrauding the American people as to be beyond belief. Can it be possible that the American people, after learning how our great governmental functions have been usurped by the few, who have been given such vast and dangerous powers by special privilege, will permit this "invisible government" to destroy democracy and the public welfare in our Republic as here disclosed? The record is before you and the only remedy lies in the ownership by the people and the operation through the agencies of their Governemnt of all those utilities and natural resources which by right belong to the people, and upon the just and democratic administration of which the public welfare and happiness depend. |