building. By limiting risk and liability for the individual stockholder to the investment in his stock ownership, it has made possible the achievement of railroad building by private capital. The very operations of dividing up the ownership and functioning through an artificial person have destroyed, to some extent, the direct responsibility which faces the management of smaller enterprises. The personality of the railroad is typified by the official personnel with which the public comes in contact and not by the security holders the management legally represents. The railroad has been thought of as something apart from its owners. Since the law operates upon the artificial person, the railroad corporation, the fundamental economic responsibility has been hidden. But, in its relations with its owners, a railroad is not different from other business enterprises. If it earns profits, it is a success; if not, a failure.

§ 2. The character of the relationship between the active managers of a railroad and its stockholders is such as to bury deeper the sense of this economic responsibility. The participation of stockholders is presumed in law to be secured by their election of directors. But the typical board of directors is pretty much a self-perpetuating body. The army of small stockholders who cannot attend the annual meeting usually sign printed proxies sent from the company office. The dominant group in a directorate, through votes controlled by the ownership of stock held in their names, or in the names of business associates, augmented by the proxies of scattered holders, controls the road until good reason appears for its ousting. Unless finances become involved dissension is likely to appear only when control is sought for the purpose of creating or perpetuating a strategic alliance. Such

and capital stock to the amount of $12,500,000 also owned by the Flagler estate, the stock increase being the result of issues sold to Mr. Flagler for funds to complete the line.

The Virginian was also largely financed by a member of the "Standard Oil" group, Mr. H. H. Rogers. This railroad, 442 miles long, from Deepwater, a junction with the Chesapeake & Ohio, to Hampton Roads, it was at first announced, would not be financed until completed. In 1908, a $17,000,000 issue of Tidewater Co. 5-year-6 per cent notes was secured by deposit of first mortgage bonds of the railroad and controlled terminal company. The notes were guaranteed principal and interest by Mr. Rogers, who deposited with the trustee securities having a market value of $10,000,000, and an annual income yield of about $700,000. The road was formally opened for traffic April 2, 1909. On May 9, 1909, Mr. Rogers died. In 1912 the permanent financing was done.

FACILITIES, STEAM RAILROADS-TRACK MILEAGE (ACTUAL FIGURES)EQUIPMENT (1913, 100 PER CENT)-TRAFFIC DENSITY (1913, 100 PER CENT)-CLASS I RAILROADS (EXCLUDING SWITCHING AND TERMINAL COMPANIES)

PLATE 20.-Railroad Facilities and Business, 1912-1920.

Joint Commission of Agricultural Inquiry; Transportation, p. 233.

instances have recently been so exceptional as to be dramatic.1 The usual stockholders' meeting is pretty much a cut-and-dried affair: a time for mutual commiseration or congratulation. And the directors, in the eyes of the law, elected by vote of the stockholders are, in practice, elected by each other. The railroad managers, those who dominate its policy, are quite distinct from the rank and file of owners. Yet it is with the management that the agencies of public regulation deal.

§ 3. The course of business since 1900, and especially since 1908, served to emphasize the critical position of railroad credit. Not only has the condition of unused railroad capacity very generally disappeared, but, in its place, has developed an always impending condition of congestion. It has frequently been a case of "trying to force a 3-inch stream through a 1-inch nozzle." The extraordinary demands for service, emphasized in periods of "car shortage," have occurred in the face of considerable increases in road facilities. There has been a startling encroachment of traffic upon unused capacity. In 1908 there were 230,494 miles of first track operated; 23,699 miles of second track or additional main track; 79,453 miles of yard track and sidings. For 1921, corresponding figures were 259,582 miles, 36,657 miles and 109,592 miles. The percentage of increase was, for main line track, 15 per cent; for additional track, 52 per cent, and for sidings, 37 per cent. The number of locomotives had increased from 57,698 to 68,552; the number of freight cars from 2,100,784 to 2,389,264. These were increases of 18 and 14 per cent, respectively. But the number of ton miles had increased 90 per cent and the number

passenger miles, 63 per cent. Only by increasing the tractive power of locomotives, and the average capacity of freight cars, by increasing the tons per loaded freight car, and the tons per freight train, and by increasing the number of passengers per car and per train, was the business handled at all.

Improvements to the permanent way could be financed only by the issue of securities, stocks or bonds, junior to the underly

1 The notable instances of recent history are linked with the name of Mr. Harriman: his ousting of Stuyvesant Fish, for 20 years President of the Illinois Central, in November, 1906, and the Hill-Harriman struggle for the Northern Pacific. The stories are told from the Harriman viewpoint in George Kennan's biography, E. H. Harriman, Vol. 1, pp. 286 to 310 (Northern Pacific); Vol. 2, pp. 42 to 65 (Illinois Central); and see Harriman v. Northern Securities Co., 197 U. S. 244.

ing liens. Most main line track is already well "plastered" with mortgages securing bond issues. For improvements of these lines, as distinguished from extensions, it is seldom possible to offer bonds which are "close to the rails." Occasionally new bonds of a large refunding issue, of which the total amount authorized has not been sold, will, when issued, participate equally with that part of the issue outstanding. For most roads, however, mortgages are piled on the strategic portions of the line. On that portion of the Erie which extends from Piermont to Dunkirk, the original line, there are no less than nine mortgages, laid one on top of the other. This is the extreme case; but even the main line of the New York Central has five mortgages against it; of the Norfolk & Western, four; of the Burlington and Northern Pacific, three; and of the Union Pacific, two. The Delaware, Lackawanna & Western, with large portions of its line unmortgaged, is quite the exception. Since underlying bond issues have not been available, railroad managers have found that they must resort to security issues possessing junior liens. On these it has been necessary to pay a higher rate of interest to compensate for the risk assumed by the purchaser. A few issues were baited with conversion privileges: the right to surrender the bonds for shares of stock at a stipulated price. But this privilege could only be effective when there was reasonable assurance of the maintenance of dividends. As for sales of stock proper, that soon proved out of the question. After 1907 until 1922 when the Illinois Central, a railroad with a very low capitalization per mile, put out an issue of preferred stock, there was substantially no new financing through sale of stock to investors by established railroads. Obviously, investors would not buy shares of stock

1 Reduced Rates, 1922, 68 I. C. C. 676, 682. See also Report of Joint Commission of Agricultural Inquiry: Transportation, p. 7, to the effect: "That sound railroad finance requires that a larger part of the capital necessary for railway development and equipment be secured by stock issues instead of by bond issues;" and further:

"In considering the question as to what return railway companies should be allowed to earn, it should be remembered that in the structure of railway credit a proper relation should be preserved between stock and debt. For the last few years it has not been possible for most of the companies to do any financing through the sale of stock. The moneys

which they have raised for the most part come from the sale of bonds or from the issuance of some other form of evidences of indebtedness. This method of financing cannot be indefinitely continued. Railroads cannot go on constantly increasing their indebtedness and not building up an