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Rh inﬂation in many directions. By October, 1872, the sale of bonds had almost ceased. If Cooke & Company succeeded in putting out a hundred thousand dollars of bonds, they soon had to buy back ninety thousand under cover to support the market. Alas, also, the railroad management had proceeded on the cheerful theory that the golden ﬂood was limitless. It spent money prodigally. As it received only eighty-eight

that time it was beginning to be regarded with some favor in high ﬁnancial circles. In 1880, in fact, Mr. Billings succeeded in enlisting the powerful support of Drexel, Morgan & Company, August Belmont & Companyand Winslow,Lanier & Company.

cents on the dollar for bonds bearing 7.3 per cent interest,

ern Paciﬁc bonds to complete the road —an arrangement that led to interesting and very unexpected developments. In the boom times before the panic, when Northern Paciﬁc was ﬁrst building, there had been quite a brisk railroad

it was actually paying nearly eight and a half per cent interest for the money with which tobuild a road through an unsettled country. When bond sales ceased there was no money to pay interest on bonds already outstanding. September 18, 1873, Jay Cooke & Company failed. Next

spawning industry on the Paciﬁc Coast, supported partly by foreign capital. About

the failure the Northern Paciﬁc owed Cooke & Company

pondent, named HenryVillard, was endeav oring to recuperate his shattered health in

the time Jay Cooke & Company failed, a noted newspaper reporter and war corres

Germany, his native country.

He tells us

in his memoirs that one day in 1873, at

Heidelberg, a gentleman who had invested in some Oregon & California Railroad

they had paid par, issued by a company that had ﬁve

bonds called upon him for advice. At that

hundred and ﬁfty miles of railroad in two pieces. The longest piece ran mostly through a wilderness and a gap of about ﬁfteen hundred miles separated it from the shorter piece. That a railroad so unhappily situated-and bur dened, moreover, with a ﬂoating debt of several million dollars—could earn interest on its bonds was obviously out of the question. The only thing to do was to reorganize.

time Mr. Villard was thirty-eight years old

.8 German Journalist Turned Financier REDERICK BILLINGS addressed himself to the task of reorganization, and devised a plan which provided that the investors should exchange their bonds for preferred stock entitled to eight per cent dividends if the road earned that much. In order to cover two years of arrears of interest on the bonds and to anticipate interest for three years to come, each thousand dollar bond received fourteen hundred dollars in the stock, making the total issue, roughly, forty-two million dollars. There was also to be an issue of forty-nine million dollars of common stock. Some subscribers to the bonds had received as a bonus common stock of the old company, which they were to exchange at par for the new common stock. The remainder of the new common stock was to be distributed among the precious original interests. This plan was carried out in 1875. The Northwest was beginning to ﬁll up with settlers, so the earnings of the incomplete railroad gradually increased. By 1878 earn ings amounted to nearly half a million dollars above opera ting expenses and taxes.

This gave the company some

credit and it ﬂoated two small bond issues, aggregating seven million dollars, to carry construction beyond the Missouri River. Also it made another futile attempt to get a loan from the Government to complete the road. Its slogan for that purpose was “Revival of Industry Employment of Labor—De velopment of the Country." That attempt failed, but the slogan is still in good working order. Nursing its resources and moving cautiously under Mr. Billings’ administration, the company pushed forward until, by 1880, little more

than a thousand miles of its line remained to be built. By

21

These puissant houses formed a syndicate and agreed to ﬂoat forty millions of North

day thirty ﬁnancial houses in New York and Philadelphia followed suit. The New York Stock Exchange closed on the twentieth and the Gold Exchange followed that example. Panic was upon the country. At the time of about a million and a half for advances to continue con struction and so on, but that was only one of several causes of the failure. Some eleven thousand investors, then, found themselves in possession of thirty million dollars of bonds for which

_

and had been engaged all his life in jour nalism. He tells us frankly that he knew nothing about either the railroad or Oregon. It soon appeared, however, that the com pany had sold about eleven million dollars of its bonds to thrifty citizens of the Fatherland. At Mr. Villard’s suggestion The Management the bondholders formed a committee,which Pu-Ihed Construction With a Lavish Hand sent him to Oregon to investigate. He discovered that his German friends had been sadly the country in connection with his transportation enterprise. misled. While the company had sold eleven millions of It issued ﬁve millions of bonds and a like amount of stock. .bonds only half that amount had been paid into its The stock was given as a bonus with the bonds and in treasury. Instead of having a ﬂourishing road three, a few months it was selling above ninety dollars a share. hundred and seventy-ﬁve miles long, it had only two Thus the noted reporter was becoming a noted ﬁnancier. hundred miles and was earning barely a third of its bond Meanwhile he was keeping an anxious eye on the crippled interest. The company was controlled by Ben Holladay, Northern Paciﬁc, which might become an uncomfortable the famous overland stage man. Mr. Villard met him and competitor of the Oregon Railroad and Navigation Com formed an exceedingly low opinion of him. He says in‘the pany. He offered Mr. Billings an amicable compact; memoirs, which are written in the third person: “That a offered also to raise ten millions of capital for Northern man of such character should have found it so easy to com Paciﬁc construction. He thought Mr. Billings was going mand millions of foreign capital was quite a puzzle and to accept his offer; but afterward he seems to have sus shock to him.” Several other puzzles and shocks awaited pected that Mr. Billings was deceiving him, for negotia him. He discovered that one company, which had sold tions with him were suddenly dropped and then he learned three million dollars of ﬁrst mortgage bonds abroad, had that Mr. Billings had come to temrs with Drexel, Morgan built no railroad at all. On the other hand, it had iued and Belmont. some ten per cent income bonds, which trustful Germans were cherishing as prime securities, although their real Henry Villard‘: Blind Pool worth was whatever they would fetch as old paper. There was much negotiating; but the upshot was that ERE was competition, indeed, with money to burn. Mr. Villard organized the Oregon Railway and Navigation Naturally Mr.Villard was again shocked; but he did not Company to take over the Holladay enterprise and the lose his head, or any time. The large quick proﬁts that he Oregon Navigation Company, which the Northern Paciﬁc had made for his followers in two ventures had raised his had dropped in the smash of 1873. The new company prestige as a ﬁnancier to a high pitch. In February, 1881, issued six millions of bonds and a like amount he sent a conﬁdential circular to some ﬁfty persons inviting of stock. Mr. Villard got his friends to sub them to turn over eight million dollars in cash to him for a scribe for the bonds at ninety cents on the purpose that he would divulge later on. The response was dollar, the stock going as a bonus with the remarkable. Twice the amount of cash that he asked for bonds. With the money thus realized the new was instantly offered him ; indeed some of the subscribers company took over the properties, and Villard lost their tempers because he refused to accept more than sailed for Europe in July, well pleased with his eight millions. With this money he bought a controlling succes. He returned to this country in Novem interest in Northern Paciﬁc stock. The episode still lives ber. The memoirs say: “On reaching the dock in Wall Street memory of Villard’s blind pool. Having he noticed one of his counsel in the crowd waving bought control of Northern Paciﬁc Mr. Villard divulged his a piece of paper at him. It proved to be a plans to the pool members and they then gladly paid in broker's report of a sale at ninety-ﬁve of the twelve millions more with which he bought still more stock that had been given ﬁve months before Northern Paciﬁc stock, as well as a large amount of the stock of the Oregon Railroad and Navigation Company, as a bonus." A man who‘ can thus create ﬁve million insuring his complete domination of both concerns. It seven hundred thousand dollars of good capital was then Mr. Billings’ turn to be shocked. in less than half a year is sure to have followers. Incidentally, Mr. Villard now organized the Oregon and Next summer, in 1880,

Mr.Villard organized the Oregon Improvement Company to develop

the natural resources of

Transcontinental Company, which issued thirty millions of stock. This stock was distributed among the pool mem

bers in return for the twenty millions cash that they had paid in. Within a year it rose nearly to par, showing a proﬁt to the pool members of nearly ﬁfty per cent. The contract with Drexel, Morgan & Company,

August Belmont & Company and Winslow, Lanier & Company, by which those houses agreed to ﬂoat forty millions of Northern Paciﬁc ﬁrst mortgage bonds, was already signed, sealed and delivered. With the proceeds of these bonds Mr. Villard proceeded to complete the road. Northern Paciﬁc preferred stock rose above par, it being assumed, Mr. Villard remarks, that the gigantic land grant would yield a great deal more than enough to pay off the bonds. The last spike was driven before a distinguished gathering on September 3, 1882.

Little more than three months later Mr. Villard . was bankrupt.

Northern Paciﬁc stock had declined

J1 Real Capimiirt i: a Person Who Gel: Other People to Juppiy Capital, While He Controls the

sharply. The Oregon and Transcontinental Company was staggering on the verge of insolvency under a load

Enterprise and Jecuren n Largo Jhnro of the Profit:

¢Continued on Page 57)