by sales of shares, the practice was to use the net earnings from operation of the completed sections to pay dividends. After the introduction of bond construction, however, the practice was changed, the net earnings on the completed portions being generally applied to the property as an offset to cost. Many of the roads at the time they were completed had a large floating debt in the form of contractors' bills, unadjusted claims, and construction notes. These obligations, properly chargeable as part of the cost, in some instances were met by appropriations from earnings; in others they were funded by bond issues. Some of the companies attempted to carry them along without distinguishing between the floating debt incurred for construction and the floating debt incurred in operation. AGENCIES OF CONSTRUCTION Construction Directly by the Railroad.-In some instances construction was carried on by the railroad corporation itself as a construction company; as for example the Camden and Amboy, which reserved the work upon some of the more difficult sections of the road in order that they might be more quickly completed.12 Generally speaking, however, there was resort to contracts. Circumstances have sometimes forced railroads into the work of construction. In the building of the Coal and Coke railway of West Virginia, because of the failure of the contractors, it was necessary for the company to take over one unfinished section of the road and with its own forces carry it to completion.13 Early Railroads Built by Small Contractors. The earliest railroads were built by small contractors, but the results of this method were often unsatisfactory. As soon as the line was completed sufficiently to allow the opera 12 Hazard's Register of Pa., VII, 361. 13 Annual report, 1905. tion of trains, it was surrendered to the company, which had then to make large additional expenditures to place the property in proper condition. After the completion of construction work upon the Boston and Maine, the directors reported: "Most of the work on the road was, at first, done by contract, and, of course, was less perfect than that done by the company. A great deal of the masonry, built by contract, has been rebuilt,-many whole bridges and culverts have been built in a much more substantial and thorough manner than they were at first; and on account of the imperfect manner in which the roadbed was graded and dressed, as originally done, it has become necessary to raise large portions of it from one to two feet; giving it a new dressing of gravel to protect it from frost, and keep the superstructure in surface. The ties used are larger and better than those laid down generally when the road was first built."' 14 Large Contractors and Construction Companies.-At a very early period, construction work was let to large contractors, who would engage to build an entire line, subletting different sections to small contractors. Some of these companies also engaged to supply the equipment. In most instances they received part payment in securities of the road, and often in public subsidy bonds. Contracts on the New York and Erie were let subject to the provision that part payment would be made in shares at the market price.15 In such instances part of the shares were carried in the treasury until they were issued under the terms of construction contracts. Contractors on the South Western railroad of Georgia received two-thirds of their payment in bonds and one-third in shares at par.16 Contract Work Paid for in Securities.-Upon the Greenville and Miami railroad, half of the contractors' bills 14 Annual report, 1849. 15 Report of the committee appointed to investigate the New York and Eric, 44-6. (1842.) 16 Annual report, 1853. 17 were paid in cash and half in shares and bonds of the company. The North Missouri railroad appropriated for payment for construction, subsidy bonds issued by the state of Missouri, bonds of the city and county of St. Louis, and a small amount of capital shares.18 A peculiar construction contract was made in 1848 by the New York and Erie with individuals on the section of the route between Binghamton and Corning. It provided that these men should build this section of the road, supplying all materials except the rails, in return for certificates secured upon the income of that section. This agreement was carried out; but bonds were subsequently issued in exchange for the income certificates.19 The Atlantic and Great Western made a contract for the completion of the road between Dayton and Mansfield, under the terms of which interest charges on the bonds paid for construction should begin not at the date of their issue, but at the date of the contractor's receipts and bills of purchase. By this arrangement the company insured itself against the usual loss incurred through interest payments during the progress of construction.20 The Dependent or "Inside" Construction Company.With the extension of railroads into the undeveloped portions of the West and South, the promise of adequate returns from operation was not sufficient to make the securities of the railroad company attractive to those to whom appeal was made for construction capital. Promoters therefore had to share with contractors, grants of government land and subsidy bonds of counties and munici palities, or resort to the organization of subsidiary railroad construction companies. In consequence, the railroads in those sections of the country have been generally built not because they were needed, but because promoters saw 17 Annual report, 1853. 18 Annual report, 1855. 19 Annual report, 1849. opportunity for large immediate profits by building them. The customary procedure has been well described as follows: The railway builder, urged on by the people whose towns, factories, and farms would be benefited by increased facilities of transportation, soon found, shrewdly enough, that he could usually build his road from the bonuses of the future patrons of the road, and the proceeds of the bonds that eastern investors, encouraged by glittering reports of the communities through which it was to pass, would invest in; then he would have the stock of the road and the privilege of operating it for the profit of his venture; if the road should be prosperous, his stock would be valuable; if not, he could at last contrive by some means to declare a dividend or two and unload his stock.21 Large Profits of Promoters.-By strict interpretation of law as announced in judicial decisions, the amount of securities which may be issued has been limited to funds or properties acquired. But the freedom permitted in determining and stating cost has left the officers practically without limitation. The cost, as interpreted by those in control, was the amount of the capital issues. Except for charter restrictions there was no limit to the amount of bonds and share capital which promoters as directors of a railroad company might issue to themselves as proprietors of an inside construction company in payment for the road. Thus the par or nominal value bears little or no relation to the actual cost of the property. To Newton Booth we are indebted for this description of the manner in which railroads were built: For many years it has not been the American fashion for the owners of railroads to put their own money into their construction. If it had been it would have insured a more conservative and businesslike use of that species of property. The favorite plan has been to get grants of land, and loans of credit from the General Government; guarantees of interest from the State gov21 Davis, 198. ernments; subscriptions and donations from counties, cities and individuals; and upon the credit of all this, issue all bonds that can be put upon the market; make a close estimate as to how much less the road can be built for than the sum of these assets; form a ring .. for the purpose of constructing the road, dividing the bonds that are left; owning the lands, owning and operating the road until the first mortgage becomes due and graciously allowing the Government to pay principal and interest upon the loan of her credit, while "every tie in the road is the grave of a small stockholder." Under this plan the only men in the community who are absolutely certain not to contribute any money are those who own and control it when it is finished. The method requires a certain kind of genius, political influence, and power of manipulation, and, furnished one clew to the reason why railroads "interfere in politics." The personal profit upon this enterprise is not a profit upon capital invested, but the result of brain work-administrative talent they call it-in a particular direction.22 Use of Privileged Information for Personal Profit.-Promoters gained or lost upon their ventures in railroad construction as they were able to unload their inflated securities upon the public; but there were many other opportunities open to them which seldom failed to bring a profit. There were the land grants, which they sometimes dissevered from all connection with the other property of the road, and sold or leased. There were also opportunities for large profits from operations in real estate. As individuals, promoters would purchase sites for shops, stations, and terminals before their location was publicly announced, and then turn the land over to the railroad at a large advance in price. In the same manner they would sometimes obtain town sites, and divert the route of the railroad to afford themselves opportunity to sell out to settlers. In locating the line of the Milwaukee and Mississippi railroad, Byron Kilbourn refused to cross the 22 Booth, "The Issue of the Day;" speech at San Francisco, August 12, 1873: 4-5. |