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The Papers of Eugene Meyer(mss52019)
1 120 01_001-

Subject File, Federal Reserve Board, Railroad Financing, 1931-32


December 30th, 1931

1624 Crescent lace
':ashington, . C.
Dear Mr. Meyer:
Enclosed herewith is a memorandum on the financial problems of th . railroads, together with a covering letter. You will
appreciate that I have not access to any figures on bank loans
given to me, in
of individual railroads except such as have
a few cases, by Mrb Anderson. The figures on bank loans which
I have used throurjiout the inemorandun are thosi: which he gave me
in confidence for your use.
7ith this memorandum out of the way, I m.
study for you on the copper industry and one on the-oil industry
from the standpoint of emergency financial requirements. In a
general way, I do not feel that either of these industries present any appreciablo financial protlems except to the extent th: t
they may come in incidentally through banks. The problems of
the operating companies themselves, whether in copper or in oil,
are brought on by low prices and in earnings rather than by maturiting obligations or new capital requirements.
:31ncere1y yours,


December 30th, 1931
Per a)nlal

r. rtvlOne :eyer
1624 Crescent Place
7ashinston, D. C.


Enclosed borewith is a summary .of problems affecting
particular railroads during the next tNo years, based on such
data as 17 have been able to obtain from the Bureau of Railway
E0Onomies, .;tandard 3tat1stlea, and a few personal contacts. '
You will realize that this is prepared along broad general lines
so as to c:ct a quick survey of the moat important aspects of the
railroad problem fron a financial standpoint.
in a broad Lenrel way, it may Weald that the rnilroads
of the T:nited State3 as a whole will just about show their aggregate fixed charge:; of '700,000,000 earned in 1931. During the
closing months of 1931 business was solneWhet worse than for the
averaoo of the ye,, though not as much worse as one mizht have
expected. Am an illustration, oar loadings are off 20.0; as
aompared with ion during the first six 'Ionths of 1931, off
33.0 for the five months ending with liovemter, and 26.9 for
tie your to 'ectember 12th. Therefore, it would appear that the
showing of the last few months, as co-%pared with 1929, is reflected only by about $% difference in our loadinge as compared
lith the avemce of the yeara Projecting this ratio forward and
allowing for la aomewhat greater rnte of decline in passenger
and oxOese business, the indications are that on the basis of
railroad traffic conditions during the last few ulontha, th rzAilroads night fall around 200,000,000 to 25ot000000 short or
earning their interest charges.
It is expected that the rate inevease granted by the
Interstate Commree Comission would bring in about :120,000,000
annually and a 10 wage cut shoule reduee operatinc eosts by
approximately .7200,000,000 annually. Therefore, it aopears that
the railroads or the United L1tates as n thole laiat be able to
cover their fixed charges on the basis of business conditions as
they have been during the latter half of 1931, with the benefit
of the rate increase - already authorized and the benefit of the
expected 10;S wage reduction.

' '2


The fact that the railroads as a group midht show such a
an that evnry railroad could earn its interresult would not
eat dharge, for sore will show substantially more than interest
earned and others will show substantial deficits, but tho picture as r: 7:hole is not without definitely ano)uragin aspects.
"lif:ro arc, of course, certain broad aspects of the rail-

road problem which require action coing far beyond financial relief, such as reculation of true:: and waterway competition or
adjustment of state on local taxes vihich now aggregate around
320,000,000 annually, but those problems ore part of the nore
distant rather than of the immediate future,

The situation resrectine, the it ediste financial necessities of the railroads is fairly clear. In 1932 there are
17roximetely 300,000,000. Of these,
bond maturities of a000,000 represents the Three Year !Totes of 27ickel ilate which
present a special nroblem disouseed in detail in the accompanymenorandum, and '20,000,01)0 represents a mortgage issue of
3t. Louis 3outhwestern, also invelvinc certain problens in eonneetion -ith the relations oC this road to outhcrIA
The remainint7 ..20,000,000 represents mostly small underlying
iawsles of oads in ',(scd condition, and it is to be TTesumod that
the aturities of many of these issues could be extended if stch
a course were thought advisable.
In 1933 bond maturities total abou“181,000,000 am', these
involve soTle very largo situations such as :A8,000,000 Baltimore
tf. Ohio, :14,000,000 Ohicam & northwestern, nearly A2,000,000
Irect 'brthern, and Y66,000,000 Assouri Pacific, which represent so cthinc, much nem than possibilities of extension or
refinaneing of wzor1yinr lions.
quipmrnt oblizationo mature to the extent of ::,110,000,000
in 1932 and '. 107,000,000 in 1933. It is of interest to note tIvA
the railroads as a whole in 1930 charged against oper-Aion some
.130,A0,000 for depreciation and retirements and even on a
greatly reduced scale of write-offs, the railroads of the United
Jtates as a whole, it earning thcir operating expenses and interest, should be able to meet equipment maturities out of current
depreciation accruals. Even aside from this passibility, equipment -trust obligations repres-mt the beat form (If security and
therefore the simplest financing problem involved in the thole
railroad sitwition.
Bank loans may aggregate somewhere around :1200,000,000 .
and these, plus construction requiretients, nay represent th.
largest items to be dealt with durin,7 the 1932. Apparently
the largest single piece of financing Which involves both bank





loans and iraperativo construction requiroments, will be presented
by 1.ew York Central, Htich is said to be desirous of raisinL;
:71.00,000,000 at a conparativoly early date, partly to cover 40,
000,000 bank loans, partly to cover a for small itens of maturities and 1)art1y for rinancinc, the 1monse construction program
involved in .thr
inprovemont in New York City.
railroads have boon spondinc somewhere around :)500,
000,000 annually on now capital expenditures in recent years.
It is difficult to arrive at any. figure representing the itreduorarmslee,
ible minim= of cap.ital expenditures, but
in a letter to the .17riter, :Antes that he would place ths 'figure
of minimum necessary capital .expenditures at not less than $2b0,
000,000 annually, stating that in his judgement this is the figure below *Joh th: railroads could not go in any year "without
showinz.sio of such a elecre,- of inanition us would lead to their
final decoy".
From all of the above it would appoar thu t the railroud
financial requirements for 1932, to be taken ogre of in one
or anothAr micht aggregy,te p pro ximatoly3. 30,000,000, made up of
80,000,000 bond maturities, :110,000,000 equirriont maturities,
!'.260 90009000 bank loc.= and •'4`..250000 000 new ettpital requirements.

:sanoerely yours,


The following is based on the financial position
of the railroads as far as it can be determined here from the frogmen-,
tary information avnilable, which


necessarily not complete or up to

date with respect to bank loons or chances in maturity dates as a result
of any transactions since icoember 31st, 1930.

The menorandum in most

cases deals with ficures in rolpd millions, except where the items are
too small to warrant such treatment.

The list of maturities eliminates

certain items which nre technical only.

?or exazvle, the list of .r.ztatui-

rities prepared by the Bureau of Railway Economies includes for 1932 a
naturity of the Chioam & Alton which nortcage was foreclosed and purchased by the Baltimore

Ohio f(-)r around. :;3,900,000 and

the entire amount is therefore omitted from this summary.

The same

list includes a maturity in 1933 of ti Seaboard .kir Line acc;rcgtting
'.'8 1198,000 and since ;onboard is already in the hands of receivers, its
maturities are also omitted from this list.
Bank loans are avnilable in rough totals for the principal
railroads as a group, with only fragmentary details regarding o6rtain
roads, for the purpose of this memorandum.

There is nothing available

as to proboble minimum new capital requirements except a very genoral
estimate th -lt these may total about ':250,000,000 annually.
jubject to the above qualifientions, the financit-31 requirements of the railroads, Ilithout regard to deficits '.7hich may accrue

during the next tmo yoars as n result of t'oficiencies in earntags in
excess of any alounts which can be handled by the Railroad Credit :orporation, are cs





fond ::aturities
7:quipment nbligation "aturi ties


(about) 1260,oOO,000

oans, r1rt . Year

•*"..e17 Capital 7equirements

$2501000,000(?) :,9250

000 2000 ?

7ith respect to equipmant obligation maturities, those
should repreaelt the easiest financing problem of nil, first, because
in the case o.7 .- ost roads the ohares for dopreciation and retirc:Ients,
included in operntin

expenses, probably °Over all or


part of the current equiplent trust meturities, and, second, equipment
trust oblications stand protically at the base of railroad oredit and
enjoy a preferred market position as well as a preferred position with
regard to safety of the investment, though perhaps with exeeptions
as to certain typos of passenger equipment.
In recent years the railroads have been spendinc; uroun6
4500,000,000 annually on new capitol requirements, thouh these expenditures in the future need not be anywhere near as treat if the business
is to be adjusted only to the maintenance of the status quo with a minimum amount of expansion and improvement.

This question, ();' course,

ties in Aoo to matters of state and Governnont policy, since it invo1ve:3
work such as :Tad() crossirvIs, etc., done under the order of Federal,
State or 7unicipa1


The following discussion covers in eetail the situation with
respect to bond maturities of principal road 3




bank loans where data

is available.

It i

riven in alphabetical order, except that -iekel

Plate(7 ork, Ihicago

nt, ;,ouis '41ilroad lompany) is disous3ed

ITT7 Yo::, TTICA00

The New York, Chicago & $t. Louis Tailroad Com


pany faces a maturity on Cotober lot, 1932, of



20,000,000 Three Year 6',1 Notes isaw7;d in 1929.

Lake 7xie


also a rlaturity of a divisional bond,

:ostorn Railroad 6's, April 2Gth, 1032, in


amount of

3130,000 and there are certain other ainall maturities in 1932 aczregating en additional .‘130,000,
of maturities in th
maturities listed

Afl of those items are included in Lilo total

table earlier in this nomorandura.

or 1900.

Tli...)re are no

In ctddition, there is a bunk loan, apparently

handled throw;h the Guaranty Trust Company, of H11,000,000 due 7A)bruary
22nd (23rd?), 1032.

This is not included in the :laturity total above

for the reason thnt it is considered an a short-term bank obligation
rather than nn it


funded debt.

As far as data in avnilable for the

purpose of this memorandum, this road is not in the banks to any appreciable extent outside of the foregoinc loan.
The t6,000,000 loan naturing next February was raised prirr
tartly on account of the dbortage of incame 6urinG 1931, anei tiwrefore
represents in large part tho financino of current deficits after distributions.

It in

ecured by U0,500,000 7Tew York, Chicago & 3t.

Louis 41.7 Refunding 7ortage Bonds and Certificates of 13epo3it for
115,193 sharns prior lien stock, 14,300 shares preferred stock and 168,
000 conmon stock of • heelins7 & Lake Erie aailwnir, this being all of the
Company's holdings in -lheelinc & Lake Erie stock throuch the nediug

- 3-

of a certain deposit agreement growing out of a trunsactions financed
by the '20,000,000 note issue maturing Oetober 1st, 1932.


The latter

aG r011OWS:

This COOS baOk to a transaotion by !::hich tho flaltimore
Ohio, the -e17 York C;entrai and the :AcIml 'Ante purchaJed
This transaction wrts

Lake 13rie stock from the Rockefeller interests.

not approved by the interstate Comzerce ConrAssion and as n result
New York :dontral end the Halti-iera & Ohio turned over their .heeling
& Lake Brie interests to the Ulogheny corporation.

ricked A.ate was

'rie interests, but
also ordered to divest itself of '.':heeling & Lake 7
after rauo

negotiation the stock held by Allegheny :,:orporation was

purehased by !Tiekel Plato and deposited in the hands of 7].
of the :7edera1 :eserve 71ank of Cleveland as Trustee.

$20,000,000 notes for %tio purpose


upper liit of the funded

Tiokel Plate

of purchasing the ileeling

& Lake Erie steak from Allegheny Corporation.
seeur_ed bz_nortf7tge lr collateral.


The notes are not

They, therefore, reproaant Ole ex.

debt structure.

Inelu6ing the above notee, but not incluxlinc any bank loans,
iokcl 'late as of August 1931 had outstanding 3148,000,000 funded
. ebt, of which )8,000,000 represented equipment oblientions, also .2.30,
000,000 preferred stock and - 33,000,000 common stooks

in r.WO earnincs

13,067,0°0000 available for charges aggregeting '6,297,000;

in 1930, '12,324,000 available for dharges totallinc

- 7,027,000; in

1931, the indications ere that income will be Slightly under fixed

It has been calculated that the amount accruin7, tram the

proposed rate increa3o on lie basis or 1931 traffic muld agcregate


31,398,000 annually, which would. show some marGin alpve intcrcot
charges on the basis of 1931 results.
ilowover, it ahould be noted thEt the illcome uOOot, includes
2,070,000 dividend incone In 199 and 15,913,000 diviClend inomo in
1930. !To ficures are available for 1931 but there are indications
thnt dividend income received in this year will have bean very substantial and perhaps almost equal to that of 1930.
A very larcc, if not by far the

7cater, part of this div-

idend income rust be conaidered as non-recurring, for it reprowInts
dividends received from the Pere Marquette rJorporation, v:hich latter
arquette stock

nade profits by the snlo of Pere

Chesapeake Zs Ohio

and distributed part of the profits an dividends in 1950 and part in

There :day also have ben dividend receipts fron enothor sub-

sidiary, the 17icke1 Plate Development Company.

Also, dividends may

have been received from wheeling & Lake .101.0 stock in 1931 since a
distribution on tho prior lien stock was made in that year.

It is of

interest to note that without the credits for Cividendo received this
road would have had available for fixed charges only .10,500,000 in

11,600,000 in lri)29, ;43,400,000 in 130 and, perhaps, only

around3,000,000 in 1931 available for fixed csrges a7;:xecatinc; it
the present rate around ,)8,000,000 annually.
It in evident that th

prob1e7la of Amkel Plato are of a

very special naturn and relnte to the whole scheme of railroad consolidation in the Eastern Territory.

The road finds itself facinc on ;cto-

ber lot, 1932 the maturity of en unsecured obligation, probilbly not held
to any extent by snving5 banlm, insurance companies or trust funds,which



assumed for the purpose of buying Wheelin

stock from

1.1ccheny Corporation.

fAxice 7.rie

sUbetantiql part of the income of

the road has oomo fmm divtelends arising out of security trcnsactions,
and perhaps out of other transactions of a non-recurring nature, and
because of the outside investriont no3ition the fixed charges are high
in proportion to the nornal past earnin

power of the railroad itself.

It is for these reasons that so extended a discussion in :iven in this

!To bond maturities for 1932, but :7;153,000,000 maturing


arch 1st, 1933 and

13,000,000 maturing cotobor 1st, 19'63.

To datrl ns to bank loans.

C:onpany is expeete6 to earn

1.20 tiles fixed charges in 1931.

Bond :laturities


These maturities represent genoral :lortgage bonds or

2,563,000 in 1932,

5,228,000 in 1933.

underlyinc: issues to be refinanced throuLII !,enieral

The firflt maturity of i.lportanee is

2.,400,000 Central :ortgage

3eries T17, 7,Tarch 1st, 1932, next important ismies being . 3,820,000
January 1st, 1933 and 1.,000,000 Pebruory 1st, 1933.

No data available

recording bank loans.
This road is in pretty :s.00d condition, for the six years
ending 1930 rate of earnings was nearly twice present rata of fixed
°harems and the year 1931 will probably show earnings of 37,00,000 to
'8,000,000 available for 3 .6,333,000 interest.

Truck ad passenger auto-

mobile competition is already extensive and hos been effective for some
years past.

It should be possible •to find a very simple und satiL. factory

basis for financing these naturities.



The ,16,000,000 issue note' in naturity lists represents a
mortGace which has been foreclosed, eonsequently this item
is onitted from this discussion as noted earlier herein.


Chicago & Northwestern has no naturities in 1932,


but 7111 face a naturity of .6.500,000 ',ay 1st,
o data

1933 nnd1,700,000 October 1st, 1933.
on bank loans.

10,000,000 in 1931 available for

!ill earn only around

fixed charges totallinc, 1.6,000,000.

Past record of road

pod, but

buainess sriously affected by conbinations of industrial and agricultural depressions.

Is particularly affected by fallin• • off in the

moveme:Lt of iron


'ERT1 RAI17nn

7rie has no maturities in 1932, but faces a Tttaturity
of :4,610,000 :Tow York & Erie

gage 4Ps on !arch 1st, 1933,

r.l11ros6 extended :lort-

Is said to owe banks (About .2.,A10,000

now and will have to increase its bank indebtenes
ficiancy in earnin7,s.

on accou.-:t of de-

Apparently earnings for 1931 will be about

of fixed charges (Which ageTegate ::,16,000,000 annually).

las earn

fixed charges with comfortable maroin from 1922 to end of 1930,
The maturity of :6arch 1st, 1933 represents a smfill underlying
issue which has already been extended once.

It is scoured on an essen-

tial pert of the 7:rie system, thow:h by 1 third lien,an( covers 446
miles subject to underlyinc nortgages of oroun



Len: Island Railroad has a maturity of .:332,000
on June 1st, 1932 and one of :1,262,000 on

October 1st, 1032.


Both of these ropresant unCerlyAnc; bond issues.


Long Island has been earninc about threc tiles its interest requirements, pith earnings for 1931 being allost up to those of 19O.


datn in avoilable as to ben% loins or immediate future requirom2nts for
new eapital.
MI3:;011:a PACIFIC

‘:133euri Pacific has no maturi ti es of any particular
importune° in 1932 but there is ono of '34,500,000
(St. Louis, Iron -ountain

4 $) on nay 1st, 1933.

3euthern First :.ortgage

It is said thnt the Company is in fair condi-

tion financially and does not we money to banks, having financed a
maturity of

43,000,000 in 1931, and also its more pressinc and innodi-

ate needs, by the sale of ,G1,000,000 Pirst and RefundinG 5's in February 1931.
COMpftny ha

a large construction program involving the

double trackiw; of its,main line for 126 miles west frai

t. Louis,

which was carried on without interruption from 1925 on at a total cost
3,000,000, And the work was 71ractioa11y completed in 1931.
of In.
This railroad has been put in very cood condition In recent
years and its earnin:7s hsvo shown substrintial improvement*

It has been

fortunate in being the principal outlet, throull its subsidiary,
Intrnational-Great Northern, for the new oil fields in "East Texas.
The f3ompany's eapital structure ia narked by very heavy funded indebtedness in proportion to stock, there beinf; outstandik; :410,000,000 funded
debt, .71,000,000 preferred stook and ',02,000,000 common stock.

Ineleations are that for Ulm year 1931 earnings will be
about 12

in excess of fixed charges, oonsequently the Company is not

as yet faced with the accrual of deficits.

- 8-

Fixed charges are now at

the rate of around :19,000,000 annually.

It is oxpectod that the pro-

posed rate increase, based on 1931 traffic, ',1ou1d incroese revenues by
:2,860,000 annually.
This road seems to offer no inuodiato problem and it 8::-ms
to present the possibilities of a .sounA basis for financing the large
maturity of :ay, 1933.
NEW YOR7 cr!!TTn!J,


On the list of the maturitiew furnished by the
Bureau of Railway 7:;conotttics, ::ow York Central shows
only a nominal amount of

250,000 for 1932.


ever, there is a maturing obligation of a subsidiary, the Pine Creek
Railway First 77ortgage 6's due December 1st, 1932 in the amount of :,)3,

This nart:agc has been assumed by the 3aw York Central

road Company and in tftoreforc part of its obligations.

There arc also

some other sallor items involving bonds of various leased or controlled
companies including the P. Tc
1932 in the amount


& Y. First 6's, which maturo ,Tuly 1st,


Consequently, row York Central has

to make provision on aocount of its subsidiaries for at least .5,750,
000 in refundini7 obligations in 1932, representing amounts not listed
in th. tabulation furnished by th: Bureau of Railway Economics.


figures arc taken into account in artiving at the total slcun .in the
earlier part of this memorandum.
However, the maturities form an oxoeAingly small part of the
Thaw York 14:_mtra1l3 7)roblen.

Thy are said to owe approximatoly

000 to banks, and to have ahead of them very larGo expenditures over
the next few years for the :Jest:Ade improvement in liow York and for
other largo construction programs.

It is estimated that they will need

to raise at an enrly date approximately .:100,000,000 to cover maturities,

- 9-

bank loans and *construction programs.
Durinc 3.931 !row York Control's not income from railway operations has been almost exactly out in half.

Ussuming no change in div-

idend inoom tlin outlook is that they will just cover thir fixed charges
in 1931. Tt is estimate

proposed rate increase will brin


thorn in an additional A.0,150,000 annually on the basis of 1931 traffic,
which amount is approximately ono-sixth of their Preaent annual rate
of fixed °barges.
It should be. noted that 7ew York Central is very laruly
dependant on outside income.
come was

57,000,000 an

income from outside aouroes vas

1iit1y over :,000,000.

000 in dividends,


,50,000,000 and taxes al* othr deductions to-

Fixed charges totalled

?or th,; year 190 total operetinc; in-

The outside ineome_ineluded ;314,000,

et,000,000 interest from

untlee. soourities, 04,000,

000 interact from unsecured securities and 13,000,000 from rents,
also several other large items or income from outside sources.


out full supporting detaibon the outside income, it is imposaiblx LID
form any estimate as to its probable variation in tho near future.
Liew York Central has very large refll ostate'interests in thc
vicinity of Grand Central 3tationi

Th4 appear to have an investment

of ftme :14,000,000 in low York Central Building and nearly :)3,000,000
in the 77ote1 Biltnors.

They also have an investment of 05,000,000 in

the ',Ialdorf Astoria Hotel, in which latter building the New Haven also
has an invostmant of


It is said that the securities held

by thr Am York ',:entral and the 7Tow Maven in connection with their advances to the '7111dorf Astoria are fairly close to the property in order
of lien and that a large 71art of. the investment in that building was
financed with a junior position.

It is also said that most of !low

- 10 -

Yor:: Contral's interest in property in tlw Grand Central area io now
on a basis of c;round rents and that where it does have any interest
in buildings, throuf,h advances made to stimulate construction, the
interest is comparatively mnall and well Troteeted. However, there
nay be a situation here callin

for further investigation if a largo

finanoinl operation is considered in conneetion with New 'fork Central,
for the reason that this company's interests in th .: real estate situation in New York may hove an important benrini7, on its earnin

power in

the immediate future,
flT YOR(, NY !TA=

The Blireau or Railway Zeonomies tabulation
shows 120 maturitios for :Tew Haven in 1932 or
1933, but a leased road, the Old Colony rail-

road, has a maturity of


3Z) Bonds due July 1st, 1932,


amount ta included in the tabulation at the beginning of this mumorarp.

This is a noll s, ourod undorlyin


'2hc maturity is a small

item, but iovz 'lawn has bank loans of around I:10,000,000 to 1.,0(X),900.
They have been paying off several smell bond issues during recent yoaru
and have bosu Jokincl soma advances on real estate'devolopmuntin the
Grand Central area including an investment of :5,000,000 in the Aildorf

.deficit as yet
otel, as noted above. Thy have no earninf;s

and are ,7. :Treoted to earn about

3 per share in 1231.


Uorfelk & '4stern has auturities accreGating

77)77717 RAIL";AY

326,000 in 1932.

The road is in splendid condi-

tion financially and for the first eleven months of
1231 showed earnincs equivalent to 1.3 poi' &aro on the common :;toak
as notAlist 120 p r share fn the correspondirv: p.riod of 1930.
one of th

This is

mundest rnilroad sif,uations in the TInitod :Antes und the

handling of these small maturities should be quite staple.

This road faces no finandial problem as yot and has no


maturities in the next two years, but will be faced
by thi fact that Burlinziton, on Ahich it has ben

dependirw so heavily for dividends, will fnll short of earning its
dividends by at least 1:3,500,000 this year and will eithor have tO
reduce its dividend or borrow money in 1932.

This is a problem which

may own up for later consideration.

ofcnoN :;17)131? LIN1

Oregon Jhor

Lino has no imnainte problems but

on if.uc,ust 1st, 19'63„ will have to moot a



maturity, Ptah & Horth Railway First 4,s.


are very high-arade bonds secure() by first mortgage on 484 miles of
line rxteneing from Ogden, Utah to Butte, "ont:.laa.

Tlere arquette faces a mnturity of '3,000,000 on

Tr1:71, IY

Ally 1st, 1932, the TAke :rie & Detroit River Divisional VI's, a hih-rade bond not disturbrA, in tilt

last reorganization.

The Company 6oes not owe anything to banks and

has enourli cash to take care of its deficits up to the end of 1931,
but it is accumulating a vrJry s rioun deficiency of earninrs on account
.off of th:71 automobile business on which it is

of .



]ore l!arquette has fixed charges arec,atiN; around .:5,000,000
annually, nnd is dependent for thes

principally on operating inc ono,

its outside income being quite mall,

1931, the indications are

that Pore rarquetto will not earn much more than onc-third of its fixed

The pro -osod rate increarv,

- 12 -

based on 1931 traffic, is expected

to add only about

1,000,000 athlitional, so thnt oven with this rate

increaso thr: road will earn only about two-thirds of its 'fixed ()barges.
Thorofor, th: indications are thnt ;:ere -arquette may need as riueh an
36,000,000,in 1932,

3,000,000 for maturities and ‘3,000,000 for operat-

ing deficits and various corporate purposes.

It will be recalled that Reading :;orapany was formerly
a holding company oarryia:: on railroad operations

through the Philadelphia 1 Reading Railroad Company, and co o1 mining
operations through the Philadelphia & Reading Coal (7.: Iron Company.
In recent years the capital structuro has been changed, stock of the
Reading Coal & Iron Company has been distributed and
thr. railroad operations have boon consolidated and arc now carried on
under the rinine at thg Reading


Reading also owns about 53r7)

of tho capital stock of Central Railroad of Jew Jersey.
This company does :tot face any maturities until October 1st,
1933, ififtEn the Philadelphia P: Readinz prior lien extended Ws mature
in the

ElYio lint

of $2,643,000.

No data is available as to bank loans.

Indications are thnt for the gear 1931 the Company will earn 1.4 tines
its Axed chargEs,which latter iteri 13 at
600,000 annually.

io rate of approximate,ly ."8,

However, the Company's outside incom is substantial,

aggrecating nearly ? ,5,000,000 annually, made up prinoipally of2,000,
000 in dividends and .C;2,400,000 miscellaneous..

Dividends from Central

or .row Jersey have been aggregating around ::1,750,000 annually.

Central Railroad of 7row Jersey ,has now passed its dividend, Reading
Clompany yriii laok this

o urce of inc one in the immod ia to fu turo . The

,1931 incorte, without the dividends from Central Railroad of ;!.To,7 Jersey,

- 13 -

would have boon equivalent to aprroximately 1.2 times fixed charges.
On Juno lat, 1932, this 37)aLl faces the maturity of


720,720,000 ?irst ConsOlidated :'ortgage 4's.


road has a total funded debt of :5?,000,000 bonds,
:73,000,000 equipm -mt obligations, und has guaranteed
nearly 15,000,000 bonds of subsidiaries and tfis a liability of
000 es its proportion of oth: r bond guarantees.

raw bonds maturinL; on

Juno lst, 1932 arc secured mostly by a third lien ant. may be considered
as representinr: the top 4O, of thc: bonded debt structure.
There ia no data available, for the pUrposes of this memorandumo regarding tlla Company's bank loane, except a statenent quoted from
aoif Ia Copany to a stockholders' committee

a letter of the :;outhrn

on June 18, 1931, to the effect that floating debt approxirnated

outhwestorn is now a part of the problems of

3ouths7Jrn 'Pacific, since the latter oompany has already acquired a substantial part of the outstending stook and has made an offer for additional stock, it belay; reported that 3outhtAm T'acifici owns, holds under
option, or has a, creements for exchange with, 3t. Louis Southwestern
stock up to a total of 35,4 or the outstanding preferred and common.
It is esti -noted tht for thn year 1931


will show earnim-s or opproximatoly 90Y of fixed charges, which latter
are at the rate of around

2,000,000 annually, including income*


It is catimatc4 th-A Vic proposed rate increase, bused on

1931 traffic, - ould add

630,000 annually to earnings available for


The maturity of this bond issue on Juno lot next, apparently

- l -

will necessitate a final settlement of tit whole question of 'outhern
Pacific control of


outhwestern, and, if Southern 7acific

controls and the road is to be taken into the :outhern l'acific system
thnourh the acceptance, by th- romaininc stockholders representing a
15; minority interest, of the offer of r3outhern -acific of three riharos
of the latter company for each 'five shares of St, :,ouis Southwestern
preferred nrW one share ror each three shares of St. Louis' ;outhwestern
common, then youthern !'acifia will beoomo the interested party in the
refunding operation, and the whole problem of collateral, terms, etc.,
will be very different from the one which will be presented if
Louis loutk!astern is to be assisted solely on the basis of Its o7n

.3ourTr'RN IAIL7:N7

Ercept for equipment trust maturities acgrecatinc
$4,000,000 annually; louthern Railway has no maturity

problers over the next four years.

The Company does not owe any :Loney

to brl'iks arIC has been able to anrry itself so far in spite or th _ fuiet
that for 1,7.1

yea snling ;)eceTiber 31st, 1931, its earnings apparently

will be at the rIto o" only 735; of fixed charges, which latter aggregate approximately 017,000,000 annually.

In 1930 earnings qvailable

for dividends were only '9,000,000 and dividends were paid to the extent

13,000,000, leaving n deficit or


strain, the Coripany had I.,000,000 cash ane
notes on


ecember 01, 19n. .Durinf; 1901 to date '

on the common and

In spite of this

per share was paid

5 on the preferred, or a total of :110,800,000 in

dividend disbursements.

Takinc; into account the deficit in earnings

as compared to fixed ()harms, the indications are that .3outh rn



during 1931 will have used up at least :10,000,000 of the


cash and Treasury Notes avnilablc at the ea of 1930.
Apparently 1outhrrn Railway elm carry itself for nom time
as far as deficits are ooncernA, particularly siace the proposed
freicht rate increase woul
1931 traffic.


745,000 annually on the basis of

7o7Tevor, the Company faces the necessity of dragcing

Ohio, which in tarn presents certain special problems, thour,h
they are mlall in their effect on 3outhorn Tailway in proportion to the
great veiwne of' business handled by the lotto; anZ1 enrnins aocruin3
therfrom, under normal business conditions.
3outYrn ilailway guarantees ,;5,650,000
Trust Certificates, calling for dividends at th

obilo & Ohio Zltock
rate of 4


Throuzh the juarantee, these apparently are a definite obligation of
Southern Rail7my Ampany both au to principal and interest.


930,000 in 1930 and in 1931

,7.; Ohio failed to earn fixed charges by


will not even earn operatin[z expenses.

ituation of :.obile & Ohio

is said IAD have been rendered espociAlly critical by tie competition
of Governa,mt operated barges on the :ississippi River and the V!arrior

..',outhern Railway will soon be faced with the problem of eithr

slzpporttn:. :obi1e & uhio to the extent


its entire fixed charges,

which accregate apnro:Aviate1y,1,700,000 annually, or losinG the road
and still bcinc saddled with the burden


thsi stock trust cortifioutes.

:;outhern Tf;ailway le also contesting a suit brought by certain 7!obi1e

Alio minority stockholders claiming that T9,000,000 in

dividends paid by

obile & Ohio to 0outhern Railway should have gone to

Ohio stockholders.

- 13 -

Thus it appears th, t while 3outh :rn :iailway is a fundtmentally
sound situntion, ithich should coMO back quickly with the rf:turn cif normal business conesitions in its territory, and while :outirJrn
in itself has no pressing financial T)robleris, there are collaterta
problems with relation to its interests in -obile & Ohio



call for special consideration.
.7:37 Tr 7...1r7Irl

Tills road has no maturities, but it owes around

RAILROAD•:`,i3s 000.,000 to ::"4,000,030 to banlaa and in addition
- al need about 14,000,000 clurin: the first half of
1932 to take cure of aCcruing deficiancies.

This eo-.:Tany has kept to

the policy of putting the road in good shape end it has been extorting
its lines northward lo connect .nth the Great North.ern extension touthward frori Klamath Fens, Oregon and open up a new lumber proClucinc area,
which 3_attor step is rathOr•unfortuaato in the 11i3ht of the pres,mt
condition or the luriber n7nriv-,t.

The indications are th.%t for 1D31

.estern 7acific will earn only about one-quartt:x of It
which at Pregatc around. 's3,500,000 annually.

fixed chart es,

Tiiis road presents a rather

complicate(, system of holding, and subsidiary companies and has a :ood,
deal of construction work under conaider6tion or under


ond. no doubt

will require a ,:sent deal of special investigation to Coterraine what
typo of security -1(!qfbe evnilable for firianciel transactions.

In addition to the above, tly:re are one or 1;170 other
situations vrhich


As an illustration,

N11.1 1

need ftteth,
...r consideration later

reat northern has nothing 'pressing at t:.

noment but has a ,
;aaturity of nearly .1,42,000,000 in August, 1933 and

- 17 -

U3 the problem of refunling this arises, presumably in the curly part
of 1933, thc, matter of aeficioncies in Burlincten oc.rnings will also
require consiC.,eration,

lturthernoro, :,onver & Rio Grande nay present

SOrre problems at n later date on account of an order from Vile Interstate ,
..oranrree r3orataission to cp throwt, with it:; contract to purchase
Denver &a

l'iaha for

3,000,000, and as Ilmver

facing no maturities, owes about ,1,500,000 to

Rio Grande, while

2,500,000 to banks and

has a deCioioncy in earnings, tate 71‘nolo question of financing this
purch.9,30 in combination with existing• bank loans and accruing deficienCies will require special consideration.




Janw,ry 30, 1932

ion. .]ugene ver,r
1624 Crescent lace
Jashinc;ton, T . 1.
Dear "r. :Tcyer:
Enclosed herewith is a 7Aemorandu covering certain broad
features of tho railroad fina:Icin problan, based on what I have
been able to see in it to date. It seems to ne tivit there are
eertaiyi broad 17)roms calling for tory early consideration, so
that a policy can be adopted in connected with tho applications
as they corn: in. :Ls an illustration, it might be thoutht desirable to call a conference of banking interests and get some understanding as to the attitude of banks in connection with their
loans. I believe that the Interstate Commerce Conmission will
defer action, without prejudice, in connection with applications
for t1L, repayment of bank loans and maks recommendations rearding
other purposes in the thought that oome general policy as to ban
loans can be developed before the specific question of any one
loan is passed upon 1:rr them.
I am of the opinion that we will be able to make some kind
of very satisfactory arrangcments with or throuch Covordalo
Colpitts for assistance in th investigation of railroad applications, and this, I feel, will be a very happy solution, for they
are generally considered outstanding authorities in such matters
and have a nationwide reputation.

3incerely yours,


From the applications being presented, it

8/ 13
S0 1

clear that

many railroads will ask assistance for about the same general type of

7any applications will cover all of these purposes and

some will cover only a few, but it seems important to get a grasp of
the problem as a whole so that some common policy may be developed.
Aside from special nroblems involved in new construction,
completion of large construction programs, or special cases of anall
roads, the purposes covered by the applications will be as follows:

To meet maturities of equipment trust obligations.


To cover earning deficits.


To cover additions and betterments*


For the retirement of bank loans.



To pay up accumulated audited vouchers*

To meet maturities other than equipnent obligations*


This situation is pres-

ented already in the application of the Atbash and in the applicati
of the Erie. ':/abash as!:3

5,000,000 for this purpose and T]rio 12,000,

The -Tabash situation represents the accrual of unpaid

vouchers up to the date of receivership and :rie represents
in excess of normal.

The point made by the applinants is that they

creditors, that
7_re behind on payments, that they are being pressed by
purposes and have
the creditors need the money badly for their own

often assigned their bills to banks, deposited their accounts with
banks as collateral and in various ways become frozen themselves or
assisted in freezing the banking situation generally throughout the

It is stated that many of the large roads are in good shape

in this respect and not behind on their bills, but that many other
roads such as the Van 3weringen lines in general, the

risco, Rock

Island, :lobile & Ohio and dabash, are pretty well behind on paymnt
of bills.

The names of these roads are given without authority except

that of discussion among informed circles, representing comment coming
through from supply men.

It is reported that the amount of money

involved in this situation may be somewhere around :25,000,000 to ;30,

In other words, it is trnotcht th':t the railroads as a whole

are behind on their payments on audited vouchers to this amount
excess of normal, and that they are freezing industry, and
banl:s, to this extent.

It is possible that this proposition may in-

s on the
volve as a collatcral an undue nulling (bun of cash deposit
very close to the
part of a number of railroads, thus making them sail
the depDsits of the
rind from their own standpoints and also affecting
carried all over the
multitudinous banks in which their accounts are

become in receiverIt is obvious that creditors of this type

potential holders of liens
ship, to a considerable extent at least,
al standpoint it does not
underlying!, the bond issueB, yet from a practic
them except on lions junior
appear that it =Till be possible to finance
liens pani passu with those
to loans still paying interest, or at least
of most junior securiies still paying interes

- 2 -



This problem

invI lves in the case of -abaSh, and in the case of Seaboard,if an application should be presented, a comparatively amall amount of maturing
pment obligations already in default.

The total amount of °Quip..

ment obligations maturing during 1932 for all of the Class 1 railroads,
is estimated at


A large part of these no doubt represent

the obligations of strong roads which can neet such payments out of
depreciC tion reserves, or whose credit is still coed enough to permit
financing tnem through existing channels.

However, accruals from depre-

ciation charges are of no use unless the cash is available for the purpose of meeting the maturity, and a very large number of roads may apply
for assistance in meeting these maturities.

The apvlications will be

made on the theory that equipment is vital to th: roads and also on the
theory that the maintenance of the integrity of eouipment trusts is vital
to railroad finance.
The miestion of making advances for the purpose of meeting
such maturities will present some specific problems as to security,
for equipment obligations are, to a certain extent at least, to be
considered as

.ory thqt the
-practical underlying lien, on th,. th,

equipment is necessary for th:s operation of the "pads.

However, there

to continue the
will be certain difficulties presented in attaapting
lien on the equipment if money is advanced for th

mLturing obligation.

of moeting a

If the maturity is paid and catcalled,

it would seem that in many cases the ramainin
subject to later rnturities,


equity in the equipment,

would pass under various mortgages



through the operation of after-acquired property clauses.

If the matur-

ing part of the obligation is kept alive, either through purchase by
the railroad or by assignment to the loaning agency, it may be that a
lien on the equity can still be k)pt, but that this lien will be subordinated to

he lions of all later maturities.

The question of the

dosirability and the practicability of trying to keep a lien on the
equipment will reauire a determination of policy since it will be a
problem common to every application for this purpose.



It is the theory of the Railroad Credit

Corporation that impounded monies resulting from Ex Parte 103, the
order authorizing the freight surcharges, will be available as loans
for the purpose of meeting operating deficits and interest requirements.

This application is not available for roads already in the

hands of receivers, the funds may not be available to


roads at

a sufficiently early date, and the increase in revenues resulting
from these surcharges may not come up to expectations,--oonsequently
there may well be many roads vihich will ask assi3tanco for this purpose
either before, or coincidental with, applications to the Railroad Credit

,1hile each case will present special problams,there may

be a problem common ';() all and warranting discussion as to general


11 :
Ni) TrTrir-- 7 11 -.7).

Aside f-fio,n large special

problems of improvement or new construction, every railroad has a
normal program of small additions and betterments, and these are normally met out of surplus income.


It is therefore probable that each

road making an arraications for an advance, these no doubt beinc_; principally roads having a threatened deficiency of income, will request
assistance for the purpose of carrying on these ordinary minor programs.
It would apPear that such requirements caenot be financed throuflh the
t;11 this poine may require further
Railroad Credit Corporation, thow

At any rate, the problan uill be a comnon one presented






This problem. is being presented

in the aprlications first coming to hand and it is.a very large and
fundamental one.

It involves the question of uhether or not the banks,

which generally speaking are about the same group of large banks, are
going to continue in their present financial position .with respect to
the railroads or whether they are to be repaid.

In a few cases, where

receiverships are involved, the maturity of the bank loans has been
accelerated by legal action su6h as receivership.

In most cases,

however,these are short-term loans not yet matured but perhaps maturing at a comparatively early dates.

It would seem that this problem

not piece-mcal l
must necessarily be reet in principle as a whole, and
though specific problems. will be presented in individual


except a general
exact date is available as to the amount of such loans
statement thet they Ilay total wmewhere around

260,000,000 for all

Class 1 railroads.


This presents

the simplest problem of all since the auounts maturing in 1932 aggreate
only 460,000,000 and for 1933 3181,000,000.

- 5

Each oase is a separate



and distinct one, involving questions of earninL; power, value of physical
property, character of security available, such as the possibility of
extending the mortgages securing the maturing obligations, possible
marketability of the obligations created and such specific questions
of a nature peculiar to each case.

These maturities do not seem to

present the general comnon problems involved in connection aith advances for unpaid audited vouchers, maturing equipment obligations,
or bank loans.