the Cincinnati Southern. But when in 1878 the Atchison leased the Denver and Rio Grande, the agreement provided for a rental beginning at forty-three per cent. of gross earnings, but to be gradually reduced to a minimum of thirty-six per cent.

我

CHAPTER XVI

CONSOLIDATION (continued)

Railroad Trust Proposed.-Charles Fisk Beach, Jr., well known as the author of a number of standard legal treatises, proposed in 1889 the formation of a railroad trust for the operation of all the railroads in a given territory "by means of an association between the share owners of connecting, parallel or competing lines-associations between the railways themselves, or their officials, having proved ineffectual." This suggestion he This suggestion he accompanied with detailed instructions. "The association contemplated must be entirely between the individual stockholders or stock and bond holders," said he, "and not at all between the railway corporations themselves. The corporation must be absolutely independent of the trust, and wholly separate and apart from it." This plan contemplated the division of the country into sections, and the creation in each section of a separate trust.

These several trusts could all be inter-associated and work together to a common end. In each case there might be created a trust board . . which should act as a committee of the whole in determining the policy of the trust, but to be subdivided into as many sub-committees as there are roads to be

operated. . . A majority at least of the stock of each of the
roads should then be conveyed absolutely to the trust, and the title
taken in the names of these sub-committees, the stock of each road
to be in the name of a different committee, to be registered on
the books of the corporation in their individual names, and to
be held by them for the purposes declared in the deed of trust.
For this stock so conveyed to the trust there shall be issued, as
usual, trust certificates.
This majority shall elect a
Each road

board of directors and operate the property.

will thus maintain its corporate organization and carry on its business independently as though there were no trust. Dividends should, in every instance, be declared directly on the stock of each road as earned, and paid over, as usual, directly to each stockholder as the stock books declare. Thus the outstanding stock will receive its dividend directly, and the dividends on the stock included in the trust will be paid into the trust and be re-distributed on the certificates.

In this manner there was to be created "a voluntary unincorporated association between the owners of a majority of the stock of the allied lines," and the inducements to such an organization were declared to be: "economy in the operation of the associated lines; the suppression of the competition of reckless and insolvent rivals, including the prevention of rate wars and rate cutting; the prevention of over-building, involving wholesome restraint upon speculative construction; . . . the protection of each road from the encroachments of its rival; the protection of all the lines in the construction of necessary branches and feeders, and the protection of the public in the construction of new lines; the maintenance of steady rates, leaving the railways to compete in facilities only and not in rates;

the protection of the weaker lines, and an arrest of the tendency toward their absorption by the stronger systems, and finally a stay in the progress now certainly making toward governmental interference and operation.

991

But while this plan was based upon a recognition of the economic truth that the business of a railroad transportation is essentially monopolistic, it was foredoomed to failure, not only because of the unreasoning fear of the public of anything in the guise of a trust, but also because the people and the courts have persisted in regarding unrestrained competition as the sole remedy for all traffic

1 Railway and Corp. Law Jour., VI, 61-3.

2

evils. And, as President Hadley has observed in this connection, the year 1889 was "a bad year for trusts.' The tendency of judicial decisions since about that time has been decidedly averse to any arrangement constituting a partnership of corporations, upon the ground that it is inconsistent with the scope and purpose of a corporation; that it interferes with the management of a corporation by its own officers; that it impairs the authority of shareholders; and that it is contrary to public policy as involving the delegation of corporate powers and the practical consolidation of corporations in defiance of statutory authority.3

Holding Companies.-A most effective agency for bringing about practical consolidation has been found in the holding company-a corporation which holds and deals in the securities of other corporations. Such a company may be a finance company merely, or it may operate the properties which it controls. A railroad company, moreover, by virtue of extensive ownership of securities, may become a holding company in everything but the name. The oldest holding company is also an operating company. This is the Pennsylvania company charted in 1870, to take over the lines of the Pennsylvania system west of Pittsburgh. From the first it has operated the Pittsburgh, Fort Wayne, and Chicago, but the other great subsidiary lines, the Vandalia, and the Pittsburg, Cincinnati, Chicago, and St. Louis are operated by their own organizations. The entire share capital of the Pennsylvania company is held by the Pennsylvania railroad.

The Southern Pacific company, holding fee title to nine miles of railroad, controls through share ownership a system of as many thousand miles. It is a Kentucky corpo

2 Hadley, "Prohibition of Railroad Pools," Quar. Jour. of Econ., IV, 168-9.

3 Noyes, "Intercorporate Relations," §§ 314-5.

4 L. Pa. 1870, no. 949.

ration, chartered in 18845 to concentrate the ownership of the railroads between San Francisco and New Orleans, and to operate these lines controlled by Collis P. Huntington, Leland Stanford, and Charles Crocker. These three, with Mark Hopkins and E. B. Crocker, had been associated in the construction and management of this great system. E. B. Crocker was the first to die, and his interest was bought by the survivors. In 1874 these men, conscious of approaching age and desirous of husbanding their energies, sold an interest to David D. Colton, who was active in the management until his death in 1878. Meanwhile, Hopkins also had died in 1878, and upon the remarriage of his widow, the control of his interest passed into the hands of Edward F. Searles, who having no taste for railroading executed his proxies in favor of Huntington. Colton's interest was purchased from his widow by the survivors." The question again presented itself, therefore, as to a method by which these men could relieve themselves of their responsibilities and at the same time retain their control. To Huntington came the idea of a holding company to take over their shares in the various properties and issue against them certificates of its own. In order to remove themselves as far as possible from the jurisdiction of courts and legislatures whose attitude was often hostile, it was decided to seek a charter in some state entirely outside the section in which their property was located. His connection with the Chesapeake and Ohio had enabled Huntington to acquire influence in legislative circles in Kentucky, and for that reason the charter was taken out in that state." The new company took over the management of the Southern Pacific system proper through what was known as the "Omnibus" lease in 1885, and also leased the Central Pacific the same year, and the Oregon 5 L. 1883-4, c. 403. 6 Colton v. Stanford, 82 Cal., 351. Railroad Debt," 55 Cong. 1 sess., S.

7 Doyle, "Central Pacific rep. V. 1, no. 20, pp. 303-4.