A study of railroad common stock prices

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Content A STUDY OF RAILROAD COMMON STOCK PRICES A Thesis Presented to the Faculty of the College of Commerce University of Southern California In Partial Fulfillment of the Requirements for the Degree Master of Business Administration by JOHN H. COOK September 1939 UMI Number: EP43142 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI EP43142 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 ‘ Ann Arbor, Ml 48106-1346 0 ( r m Y v \ % to This thesis} written by John H. Cook under the direction of hik&.. Faculty Committee, and approved by all its members, has been presented to and accepted by the Council on Graduate Study and Research in partial fulfill ment of the requirements for the degree of Master of Business Administration t S ean S^wtory^- Date Be p t e mb e r 1939 Faculty Committee ..... Chairman TABLE OF CONTENTS CHAPTER PAGE I. GENERAL STATEMENT . ............ X Statement of the problem.......... 1 Limitations of this study.............. . 2 Organization of the rest of the thesis, ... 3 II. THE EARLY PERIOD OF THE RAILROADS......... . -4 Early mileage . ............................ 4 The canals and the railroads. ........ 7 Method of financing early railroads ..... 9 III. RAILROAD FINANCE, 1860-1900 .......... 13 Railroad stock prices . . . . 13 Speculative finance .................... 18 The railroad builders .................. 18 Effect of speculative activity on stock prices. ...... .................. 20 Railroad expansion. ...... ........... 21 Extension of railroad mileage........... 21 The nature of public aid., ......... 22 The effect of over-expansion. ....... 23 IV. RAILROAD STOCK PRICES DURING THE TWENTIETH CENTURY................................. 26 Decline of the relative importance of railroad securities ......................... 26 ii CHAPTER PAGE Comparison of railroad and industrial stock prices......... 29 The course of railroad and industrial stock prices.......... 31 Fluctuations in railroad and industrial stock prices. ........................... . 33 Railroad revenues, expenses, and earnings . . . 34 Decline in the growth of the railroad .... 37 Railroad revenues and expenses. ....... 38 Earnings and dividends.................... 43 V. THE LEVERAGE FACTOR . . . . ......... 47 High overhead costs in the railroad industry. . 47 The nature of increasing returns. ......... 49 The effect of the leverage factor ....... 50 VI. SUMMARY AND CONCLUSION. ......... 54 The early period of the railroads........... 54 Railroad finance, 1860-1900 . . . ......... 56 Railroad common stock prices in the twentieth century . ....... -....... 60 The railroads and the depression............ 64 BIBLIOGRAPHY ............................. 68 APPENDIX.A - Railroad stock prices used in computing averages, 1863-1903 ........... ... 74 - 5 • • 11X APPENDIX B 1. Computed railroad stock price averages transposed to the equivalents of Dow-Jones averages................... . 81 2. Dow-Jones railroad averages yearly high and low, 1897-1922.................... 82 . 3, Dow-Jones industrial averages yearly high and low, 1897-1922 .................... 83 4. Dow-Jones railroad and industrial averages rallies and declines, 1922-1939 .... 84-86 6. Industrial averages, 1897-1915, calculated to correspond to the basis on which the Dow-Jones industrial averages were figured, 1915-1938. . . . ........ 87 iv LIST OF TABLES TABLE PAGE I. Yearly increase in railroad mileage........... 6 II. Railroads used in computing common stock price averages. ........... . 14 III. Railroad common stock price averages, 1863-1903 . 16 IV. Increases in railway mileage and population, 1860-1900 .............. 26 V. Market value of stocks and bonds listed on New York Stock Exchange, December, 1911.......... 28 VI. Book value of outstanding securities of all corporations in the United States, 1931 .... 29 VII. Yearly fluctuations of railroad and industrial stock prices.................... 36-36 VIII. Average operating revenues in five-year periods, 1900-1937 ....................... 39 IX. Freight and passenger earnings as a percentage of total operating revenues ..... ......... 41 X. Relationship between railroad operating income and interest on funded debt.................. 44 XI. Railroad earnings and dividends................ 46 XII. Fixed nature of railroad expenses ............ 61 XIII. Effect of ten per cent increase and decrease in railroad revenues......... 63 LIST OF FIGURES FIGURE PAGE 1. Railroad common stock price averages, 1863-1903 . . 17 2. Railroad and industrial stock price averages. ... 30 3. Railroad operating revenues, expenses, and income . 42 CHAPTER I GENERAL STATEMENT Railroad securities have for a long time played an important role in the field of American investment. The railroads were among the first enterprises to he conducted under the corporate form of organization. "It might almost be said that investment interest in private corporations before the Civil War was limited to the securities of banks and railroads."-1 ' Although it must be admitted that an ernormous volume of financing in the industrial and public utility fields has resulted from the nation's rapid indus trial expansion in the twentieth century, the fact must be recognized that railroad securities still occupy an impor tant position in American finance. Statement of the problem. It was the purpose of this study (1) to set forth the market prices of railroad common stocks from the beginning of the railroads in the United States to the present time; and (2) to point out some of the basic factors which have influenced these stock prices. 1 Ralph Eastman Badger, Investment Principles and Practices (New York; Prentice-Hall, Inc., 1930), p. 448. Limitations of this study. A study of the prices of railroad common stocks could he expanded into a complete history of railroad transportation, for in the words of Robert Rhea, "Everything that everybody knows about anything with even a remote bearing upon finance finds its way into Wall Street in the form of information; the stock market itself in its fluctuations, represents the sifted value of all this knowledge.However, there is already a prolific array of literature covering every phase of railway econom ics. This study can only set forth some of the factors which have most vitally influenced railroad common stock prices. The government, in its role as a controlling agency, may be in a large measure responsible for the degree of financial success or failure of the railroads as it regulates transportation. Therefore it might be argued that no discus sion of the prices of railroad securities would be complete without considering the characteristics of government control* but' it is only within the scope of this study to consider the results of governmental regulation as they affect stock prices. 2 Robert Rhea, The Dow Theory (New York: Barrons, 1932), p. 2. ORGANIZATION OF THE REST OF THE THESIS 3 Winthrop Daniels suggests that in a study of railroad common stock prices consideration should be given to three distinct periods of railroad finance, 1 1 The first covering roughly the first three decades of railroad history, or from 1830 to 1860; the second beginning with the Civil War decade and ending approximately with the century; and the third comprising the years intervening from 1900 to the present.”3 Chapter II of this study deals with the railroads from their beginning to the Civil War. Chapter III discus ses railroad finance from the Civil War to the turn of the century. Chapter IV considers railroad stock prices during the twentieth century. Chapter V discusses the effect of leverage on railroad stock prices. The summary and conclu sions are contained in Chapter VI. 3 Winthrop M. Daniels, American Railroads (Princeton; Princeton University Press, 1932), p. 23. CHAPTER II THE EARLY PERIOD OF THE RAILROADS Railroad securities as a class derive a good deal of their value from their relative economic status, for it is quite obvious that the transportation system of any country is definitely an integral part of its economic make-up. The railroads, however, did not become definitely established as the foundation of the transportation system in the United States until after the Civil War. The period between 1830 and 1860 was the experimental state in the development of the railroads. The early mileage was exceedingly inconspicuous when compared with our present day railway system. During the greater part of this period the railroads were subordinate in importance to the water ways, and railroad finance until about 1860, was of minor significance. Early mileage. The railroads were begun in the United States about the close of the third decade of the nineteenth century. The first road was built from the granite quarries near Quincy, Massachusetts, to tidewater on the Neponset River, a distance of three miles. Carter points out that, 1 1 The Quincy Railroad, although it was never operated with anything but horses, and carried no traffic but stone, was regarded as one of the wonders of the age."l In 1830 there were 23 miles of railroad in the United States, and by 1840 almost 3,000 miles of track had been laid. During this decade the expansion of the country saw a 32 per cent increase in population, from twelve million in 1830 to seventeen million in 1840.2 From such insignificant beginnings the percentage of railroad mileage increase means nothing, but for the two years between 1838 and 1840, a 47 per cent increase gave promise of the transformation in transportation that was impending. By the year 1850 there were over 9,000 miles of rail road in the United States, and by 1860 there was an increase to 30,635 miles. The population of the United States in 1850 was 23,108,000 and by 1860 it was 31,668,000. Railway mile age more than trebled during both decades while population increased only 34 per cent between 1840 and 1850, and 35 per cent between 1850 and 1860. Thus by the Civil War the rail road was becoming the most important form of transportation in the United States. Table I, taken from The Commercial 1 Charles Frederick Carter, When Railroads Were New (New York: Henry Holt and Company, 1910), p. 13. 2 S. N. D. North, A Century of Population Growth (Washington: Government Printing Office, 1909),p. 461. TABLE I YEARLY INCREASE IN RAILROAD MILEAGE 1830-1860 Year Miles 1830 23 1831 95 1832 229 1833 380 1834 633 1836 1,098 1836 1,073 1837 1,497 1838 1,913 1839 2,302 1840 2,818 1841 3,535 1842 4,026 1843 4,185 1844 4,377 1846 4,633 1846 4,930 1847 5,598 1848 5,996 1849 7,365 1850 9,021 1851 10,982 1852 12,908 1853 15,360 1854 16,720 18 55 18,374 1856 22,016 1857 24,503 1858 26,968 1859 28,789 1860 30,635 7 and Financial C h r o n i c l e shows the increase in railroad mile age from 1830 to 1860. However, the railroad was not readily accepted as a desirable means of transportation— public confidence favored the canal. Carter says: In a nation of magnificent distances, the need of transportation became urgent at an early period. But attempts to supply the need were resisted as a matter of course, by that considerable part of every community which is forever under arms, ready at a moment's notice to defend established conditions against encroachments of progress.4 The canals and the railroads. It is true that the railroads for the first twenty years of their existence, roughly down to 1860, played a role so humble and inconspic uous "that it may fairly be said they had hardly reached their adolescence."^ During the early years of their exist ence they were wholly subordinate in importance to the waterways• Moulton comments that the era of greatest canal build ing in the United States was between 1826 and 1840.6 It was 3 Commercial and Financial Chronicle, XXIX (July, 1879), 117. 4 Carter, op. cit., p. 3. 5 Winthrop M. Deuiiels, American Railroads (Princeton: Princeton University Press, 1932), p.3. 6 Harold G. Moulton, Waterways Versus Railways (New York: Houghton Mifflin Company, 19125, p. 69. during this period that the idea of railroads as a means of transportation was definitely in an experimental stage, Thompson says: Up to 1840 canals had shown the way in the conquest of the West. They had the inside track with the Federal and State legislators of that day, and the financiers of New York and Philadelphia lent a receptive ear to undertak ings that promised and actually paid 8 per cent on invest ments, where the railway averaged less than 5^r per cent.7 Under such favorable conditions the Erie Canal had already been built as far as Buffalo and paid a very good return on investment. In the state of Ohio there were, by 1840, over 1,000 miles of canals which connected the Great Lakes and the Ohio River. It has been estimated that $250,000,000— or about $30,000 a mile— was invested in American canals before investors saw the rail writing on the map and began to put their money cautiously and grudgingly into the more flexible and speedy means of modern internal communica tion.8 James^ estimates that by 1842 all the states had appro priated or invested $60,000,000 for canals to $43,000,000 for railways* f , It is said that the few were prosperous and the majority were insolvent. But the needs of the country were « such that they continued to raise, beg and borrow— principally borrow— money for both.”10 7 Slason Thompson, A Short History of American Rail ways (New York: D. Appleton and Company, 1925), p. 82. 8 Ibid.* p. 83. 9 Edmund Janes James, The Canal and the Railway (Baltimore: Guggenheimer, Weil and Co., 1890), p. 13. 10 Ibid., p. 15. However, if the railroads in the earlier stages of their growth were subordinate to the canals, they definitely supplanted them as a major means of transportation a few decades later. Of the original 4,633.31 miles of canals in the entire country 2,444.26 miles— representing a cost of $81,171,374— had been abandoned by 1912.H Probably the facts that waterways could not be made to run up hill nor be operated during winter months were influencing character istics which aided their decline. Then, too, an increase in speed year by year as the railroads developed, aided them greatly in attaining their supremacy. Moulton1^ produces a chart in Waterways Versus Rail ways which shows the decline of canal traffic in the State of New York. In 1863 the canal system of the state was carrying 81.1 per cent of the total traffic, in 1873 only 34.9; and in both 1907 and 1908 the percentage carried had dropped to only 3.9 per cent of the total. Method of financing early railroads. Many of the early railroads were begun as community enterprises. For the most part they were organized, promoted, and financed by the citizens of the towns through which they passed. The neces- 11 Moulton, op. cit., p. 68. 12 Ibid., p. 70. 10 sary capital was often obtained from state subscriptions or local government aid. In describing the financing of the Charleston and Hamburg Railroad one author says: The road was financed almost entirely by private sub scriptions. The municipality backed it with a small loan of $20,000. Built on the most economical basis, the bare roadbed and track were estimated to cost slightly under $600,000. When the bills were all paid they figured up to $904,499— or exactly $6,625.92 per mile. The miscal culation arose according to the Annalist from the heightened cost of labor."*3 Adams, in his Railroads: Their Origin and Problems describes the opening of the Boston and Worcester Railroad in 1837. He concludes that, "Capital had to be raised with out the aid of the capitalists who hesitated to embark on so perilous an adventure. The work was commenced and completed by the middling class in the community. "14 In some cases the states themselves took over the con struction of the railways. Seven states undertook to build railways: Georgia, Illinois, Indiana, Massachusetts, North Carolina, Michigan, and Pennsylvania; all sold out at a loss. In 1888, Ringwalt commented that: The results of attempts to operate railways by state officials and at the risk of state tax payers, have been so universally disastrous that modern advocates of state ownership and management would find in the record of 13 Thompson, op. cit., p. 53. 14 Charles Francis Adams, Jr., Railroads: Their Origin and Problems (New York: G. P. Putnam's Sons, 1893), p. 67. 11 these mishaps serious objections to an application of their theories to the railways of the country.15 Capital for the early railway enterprises was obtained almost entirely from the sale of stocks but there was grad ually some reliance upon the sale of bonds. The earnings and dividends of the early railroad enterprises were only moder ate. There was not a great deal of speculation in the rail road securities which were dealt in on the stock exchange, and the prices of railroad stocks were as frequently below par as above. Daniels calls the market for railroad secu rities prior to the Civil War an individual traders* market, stating: In general, therefore, it appears to have been a reasonably quiet, restrained, self-possessed market, largely devoid of corners or manipulations, without dominant leaders of bull or bear faction where the way faring investor could venture in some considerable safety.1^ The first railroad security was listed on the stock exchange in 1830. This was the stock of the Mohawk and Hudson. Gradually, as the railroads developed and became more important to the country's growth, railway stocks were dealt in more extensively. By 1860, according to Meeker, 15 j. L. Ringwalt, Development of Transportation Systems in the United States (Philadelphia: Railway World Office, 1888), p. 125 15 Daniels, op. cit., p. 24. railroad securities had attained a predominant position in the offerings on the New York Stock Exchange, a position which they occupied until about the beginning of the twen tieth century. ^ J. Edward Meeker, The Work of the Stock Exchange (New York: The Ronald Press, 1930), p. 67. CHAPTER III RAILROAD FINANCE, 1860-1900 The period between the Civil War and the beginning of the twentieth century was an era of great expansion for the railroads. Most of the present day railroad systems of the country were rounded out during that period. It was char acterized by mismanagement and over-extension of railroad properties, unsound financing, and security price manipula tion. This was brought about by the struggles between the railroad magnates for control of the various lines through speculative activity on the stock market. I. RAILROAD STOCK PRICES The rapid increase in number of railroad stocks on the market during the latter half of the nineteenth century made it impossible to follow the movement of each stock, while oftimes the diverse fluctuations of different stpcks obscured the general trend of the market. In order to get a clear picture of the entire market for railroad common stocks, an average of stock prices was computed. Table II sets forth the names of the stocks used in computing this average of stock prices. Each stock selected was traded in on the stock exchange continuously between 1863 and 1903. None of the 14 TABLE II RAILROADS USED IN COMPUTING COMMON STOCK PRICE AVERAGES Name of Railroad Date of Inc orporation Central of New Jersey 1847 Chicago and Alton 1849 Chicago, Burlington & Quincy 1849 Chicago and Northwestern 1859 Chicago and Rock Island 1847 Cleveland, Columbus. Cincinnati and Indianapolis 1849 Cleveland and Pittsburg 1836 Delaware, Lackawanna & Western 1832 Illinois Central 1851 Michigan Central 1846 New York Central 1853 15 capital structures were changed in a manner that affected the price of the stock. The prices of the stocks were compiled from issues of The- Commercial and Financial Chronicle. The low price of each stock during the months of January and July was recorded for every year. These prices are contained in Appendix A. The averages of these railroad common stock prices are shown in Table III. Although these averages do not show the daily or monthly fluctuations in the market prices, they do set forth the general trends of the prices of railroad common stocks, as shown in Figure 1, page 17. The averages rose from 96.75 in January— 1863 to 129.61 in July— 1864, and then fell to 95.11 in July— 1865. However, by July— 1869 they had reached 132.11. From July— 1869 until July— 1877, following the panic of 1873, the averages fell to 54.91. In January— 1881, the averages again stood at 124.49 and then fell to 87.68 during the panic of 1884. Between 1886 and 1899 the averages fluctuated between 98 and 122. Following the depression of 1893, the trend of railroad averages was upward from 98.11 in January— 1895 to 170.30 in July— 1902. ^ Commercial and Financial Chronicle Investors Supple ment, 1860-1875; and Commercial and Financial Chronicle, XX - LXXVII, 1875-1903. TABLE III RAILROAD COMMON STOCK PRICE AVERAGES, 1863-1903 Year January July 1863 $ 96.75 $107.91 1864 122.78 129.61 1865 106.84 95.11 1866 99.80 99.61 1867 101.10 100.24 1868 107.25 114.39 1869 126.92 132.11 1870 110.63 115.31 1871 110.12 117.14 1872 112.63 109.00 1873 107.86 100.69 1874 96.34 91.81 1875 91.00 89.98 1876 99.02 83.90 1877 68.61 54.91 1878 65.10 72.67 1879 80.10 84.22 1880 103.33 99.53 1881 124.49 100.50 1882 116.12 112.27 1883 116.26 113.99 1884 109.38 87.68 1885 88.29 93.15 1886 106.31 108.60 1887 112.68 114.68 1888 109.01 104.87 1889 108.71 121.22 1890 112•61 114.06 1891 101.93 100.63 1892 104.00 114.81 1893 111.36 99.18 1894 100.29 101.92 1895 98.11 105.81 1896 99.29 102.78 1897 101.96 102.28 1898 110.61 113.97 1899 124.84 129.53 1900 126.39 120.50 1901 129.29 152.38 1902 160.35 170.30 1903 161.83 141.55 Bemi-uogaritiunic, 2 (Jycles X 20 to the inch. 5-2 4- < 2. 3 S L 18 II. . SPECULATIVE FINANCE The railroad builders. Railroad finance between 1860 and 1900 was characterized by the domination of speculative railroad promoters who controlled and directed the destinies of the railroad enterprises during that period. The names of men such as Gould, Vanderbilt, Drew, Hill, Huntington, Harriman and Villard were prominent in the development of the railroads. A low degree of financial honesty and extraordinary happenings in speculative finance were characteristics of that period. Hicks says: It was a time of organized lawlessness under the forms of the law, of reckless gambling with corporate securi ties as tools, of panics and “corners*1 in stock and in gold. The manipulators, fearless of public opinion, un restrained and even aided by judges, lawmakers and execu tives, treated investors* money as their own to repair fortunes and destroy those of rival operators.2 A great deal of the speculative activity of the period was brought about by the stock market manipulations of rail road financiers. These “robber barons", as they were called by Josephson,^ played an important part in laying the foun dation of our present railroad system. They sought corporate 2 Frederick C. Hicks, High Finance in the Sixties (New Haven: Yale University Press, 1929), p. 1. 3 Mathew Josephson, The Robber Barons (New York: Harcourt Brace and Company, 1934), p. 1, 19 control of the railroads through the purchase of a suffi cient percentage of voting shares in the different companies. Warshow4 points out that these early financiers, especially between 1860 and 1880, were not primarily 1 1 railroad men1 1 who sought to manage the business of the railroad company. In stead, they were stock market speculators who wished to enhance their private fortunes by controlling the railroad enterprises. These "railroad generals of Wall Street1 1 are very well described by Daniels in the following manner: Never before or since has such a motley crew of finan cial pirates swaggered on the boards of Wall Street. There was the old Commodore, illiterate and boorish, a thorough worldling, a lover of fast horses and Becky Sharps, apparently never worried over the turpitude of buying legislation or corrupting approachable judges, but with an uncanny prescience for treasure-trove, and with the redeeming virtue of improving his physical railroad properties and thereby giving the public good service. Over against him stood the sanctimonious hypocrite, Daniel Drew, the 1 1 speculative director1 * of the Erie, as well as its thieving treasurer. Comic relief was af forded by 1 1 Jubilee Jim*1 Fisk, blatant, vulgar, exuberant, of rollicking, cynical humor, with the natural endowment of a Barnum coupled with the audacity of a gunman. And overshadowing the last two worthies came Jay Gould, sal low, weazened, unfathomable, secretive and unprincipled. Nor from the participants in the "Big Barbecue", should we omit "Boss" Tweed who graced the earlier Erie direc torate,— an honor to which even A1 Capone in our day could hardly aspire.®. 4 Robert Irving Warshow, The Story of Wall Street (New York: Greenberg, Publisher, Inc., 19297, p. 217. 5 Winthrop M. Daniels, American Railroads (Princeton: Princeton University Press, 1932), pp. 17-18. Effect of speculative activity on stock prices. The speculative activity of the railroad magnates had a pro nounced effect upon the prices of the securities in which they dealt. The f , Erie Raids”— so ably described by Adams**— are classic examples of how the earlier stock market opera tors influenced the stock price, "milked” the treasury, and left a railroad saddled with debt* From the corner on Harlem Railroad stock in 1862 to the Northern Pacific corner in 1901, speculation in railroad securities was the common prac tice. When Vanderbilt was cornering the market the price of Harlem Railroad stock rose from 76 to 286 in a few days time. The Northern Pacific corner resulted from the struggle be tween Hill and Harriman for the control of the railroad property. On May 9, 1921, the stock opened on the exchange at 170. By twenty minutes after ten Northern Pacific was quoted at 206. All sales were for cash and the next transactions were at 225, 230 and 280. A sale for cash came out at 300, then one at 650, 700, and finally one desperate short bought at $1,000 a share cash. The rest of the market in the meantime had dropped 50 to 76 points.? The period comprising the last four decades of the nineteenth century was the most pronounced era of speculation * > Charles Francis Adams, Jr., "An Erie Raid,” North American Review, 112:241-291, April, 1871. 7 ' Warshow, op. cit., p. 265. 21 in the history of the stock exchange. This, however, was not only the period in which prices of railroad stocks were most noticeably influenced by speculative activity, but was also a time of great railroad expansion. III. RAILROAD EXPANSION Extension of railroad mileage. Most of the great railroad systems of the country were rounded out between 1860 and 1900. During this period the trunk line railroads of the country grew into great systems; the first transcontinental railroad was completed at Promontory Point, Utah in 1869; and the railroads were extended into every section of the country. "Never in history has there appeared another such long-sus tained orgy of railway building and it is doubtful if the world will ever again witness such a mad forward drive of the •end of the rails* as characterized this era in America.1 1 ® The Civil War checked the building of railroads only temporarily and during that decade the mileage almost doubled — from 30,635 in 1860 to 52,914 in 1870. The years 1868-1872 in particular were years of rapid growth. In 1872 alone almost 7,500 miles were built. Railroad extension was inter- O Sidney L. Miller, Inland Transportation Principles and Policies (McGraw-Hill Book Company, Incorporated, 1933), p. 93. 22 rupted by the panic of 1873* This crisis, according to Ha d l e y ,9 was caused largely by too rapid railway construction and the intense speculation accompanying it. However, by 1880 there were 92,317 miles of railroad in the United States, almost twice the mileage in 1870. During the decade 1880-1890 an exceedingly spectacular expansion of the railway net occurred. The increase was from 93,317 miles to 163,597— an increase of 70,280 miles in ten years, or an average of 7,000 miles a year. The constimetion was carried on chiefly in the central and western states, where the agricultural and mining wealth was being developed, and where transportation facilities were most needed. The crisis of 1884 was brought about by the too rapid and speculative railroad building of the years immediately p r e c e d i n g . 10 The crisis of 1893 and the resulting depression also retarded railway growth, but by 1900 there were 193,346 miles of railroad in the United States. The nature of public aid. The rapid increase in mile age which featured the period between the Civil War and the turn of the century was largely the result of the extensive public aid enjoyed by the railroads during those years. Land ® Arthur Twining Hadley, Railroad Transportation (New Yorks G. P. Putnam*s Sons, 1903), p. 38. Ernest Ludlow Bogart, Economic History of the United States (New York: Longmans, Green and Co., 1938), p. 373. 23 grants, loans, or subscriptions of stock were the forms of public assistance most usually granted to the railways. The outstanding feature of public aid during this period was the extensive use of the federal land grant policy. Miller points out that, "The total area made available to the rail ways as an incentive to construction is estimated to have exceeded 215,000,000 acres.”!! However, another author sayss These lands have not been the source of wealth to the roads that is commonly supposed. Even in the case of the largest grants, the balance for the whole period is quite small and in many cases the land departments are now a source of expense rather than of r e v e n u e .12 Ripley comments that during this period the railroad t enterprises often did not obtain full benefit from the public aid that was granted them. He says: Yet that aid was, from a railway standpoint, offset all too often by the losses resulting from premature and excessive construction; where not thus offset, the almost criminal failure of the public to control financial poli cies resulted in the enrichment of speculator and pro moter at the expense of those who later came into posses sion of the properties and were charged with their admini strati on.12 The effect of over-expansion. During the last four 11 Miller, op. cit., p. 71. 12 Slason Thompson, A Short History of American Rail ways (New York: D. Appleton~and Company, 1925), p. 127. 12 William Z. Ripley, Railroads Finance & Organization (New York: Longmans, Green and Company, 1915), p. 18. 24 decades of the nineteenth century the growth in railway mile age far outran the growth in population. Between 1860 and 1870 railroad mileage increased 72 per cent while the popula tion was increasing only 22 per cent. The decade 1870-1880 saw an increase of 74 per cent in the mileage of railroads and a 30 per cent increase in population; whereas during the ten years 1880-1890, the railroad mileage increased 77 per cent and the population increased 23 per cent. Thus while the population little more than doubled between 1860 and 1900, the railroad mileage in the United States increased sixfold. These data are shown on Table IV.^ The over-expansion of the railway net, with its at tendant evils, was the cause of many of the problems which later beset the railroads. The whole period was character ized by fraudulent practices resulting from complete absence of control over the issuance of corporate securities. There was a great deal of over-capitalization, with excessive bonded indebtedness, which placed a large percentage of the roads in receivership, especially during the depression of 1893; and a speculative tone pervaded that period in which railroad securities were the center of interest in the stock market. S. N. D. North, A Century of Population Growth (Washington: Government Printing Office, 1909), p. 65. 25 TABLE IV INCREASES IN RAILWAY MILEAGE AND POPULATION, 1860-1900 Railroad Per Cent Increase During Decade Year Mileage — RAILROAD MILEAGE POPULATION 1860 30 635 31,443,321 1861 31 286 1862 32 120 1863 33 170 1864 33 908 1865 35 085 1866 36 801 1867 39 250 1868 42 229 1869 46 844 1870 52 914 38*558*371 72.70- 22.62 1871 59 283 1872 66 771 1873 70 278 1874 72 .382 1875 74 096 1876 76 808 1877 79 089 1878 81 776 1879 86 497 1880 92 317 50,189*209 74.47 30.16 1881 101 742 1882 120 613 1883 126 877 1884 133 142 1885 137 998 1886 142 232 1887 148 599 1888 153 336 1889 157 912 1890 163 597 62,979*766 77.21 23.48 1891 168 403 1892 171 564 1893 176 461 1894 178 709 1895 180 657 1896 182 717 1897 184 428 1898 186 396 1899 189 293 1900 193 346 76,363,387 18.19 21.15 CHAPTER IV RAILROAD STOCK PRICES DURING THE TWENTIETH CENTURY Early in the twentieth century a decline in the rate of growth of the railroad industry became apparent. Railroad mileage reached its peak in 1916, and governmental regulation became established as an important factor in railroad opera tion. In the stock market interest was confined to railroad securities to a much less extent than during the period prior to 1900. Railway traffic grew with the industrial develop ment of the country but fell off precipitously during the 1929-1932 depression, and at that time the prices of railroad common stocks fell to the lowest point in their history. I. DECLINE OP THE RELATIVE IMPORTANCE OF RAILROAD SECURITIES The predominant position on the stock market held by railroad stocks and bonds during the preceding period was challenged during the twentieth century by other classes of securities. There was a rapid growth in the number of secu rity issues offered on the stock exchange by public utility and industrial enterprises. According to the New York Stock Exchange Yearbook,1 the total number of individual security 1 New York Stock Exchange Year Book-1938 (Dept, of Public Relations of New York Stock Exchange, Jan., 1939), p.60. 27 issues listed on the stock exchange increased from 314 in 1868 to 1,269 in 1900 and the greatest percentage of these were securities of railroad companies. In 1938 there were 2,630 individual securities listed on the New York Stock Exchange— an increase of 1,361 issues since 1900* This in crease was largely the result of securities issued by enter prises other than railroads. Meeker says: In the wake of the great railroad lines which earlier decades had established throughout the United States, there had sprung up new and progressive American cities which needed gas and then electric lighting, local trac tion facilities, and telephone service. Accordingly, the thin trickle of public utility securities into the New York stock market broadened into a steady and heavy current. Furthermore, powerful manufacturing industries were being organized both in our older eastern cities and in the new western centers which our railroads had created and nourished into prosperity. Particularly, after the Spanish War, these new industrial companies experienced a rapid growth and tended to evolve into large scale corporate units with a huge capitalization, and thus with shares and bonds to sell to the public through the indispensable market provided by the stock exchange.2 Daniels^ estimated that as late as 1906 almost 85 per cent of the bonds and fully half of the stocks listed on the New York Stock Exchange were those of railroad companies. In 1911 the value of railroad securities listed on the stock 2 j. Edward Meeker, The Work of the Stock Exchange (New Yorks The Ronald Press, 1930), p. 70. ^ Winthrop M. Daniels, American Railroads (Princeton: Princeton University Press, 1932), p.26 28 exchange was thirteen and a half million dollars, 55 per cent of the total. Of this, amount almost six million was in the form of stock, and seven and a half million consisted of bonds.4 TABLE V MARKET VALUE OF STOCKS AND BONDS LISTED ON NEW YORK STOCK EXCHANGE, DECEMBER, 1911 (Millions of Dollars) Stocks % Bonds % Total :% Railroads..... 5,969 51 7,539 59 13,508 55 Industrial.... 3,341 29 680 6 4,021 17 All others.... 2.374 20 4 ^ 1 35 6,845 28 Total..... 11,684 12,690 24,374 In 1936 the market value of railroad securities listed on the New York Stock Exchange was $18,336,000. This was only 17 per cent of the total, whereas twenty five years earlier the value of railroad securities constituted 55 per cent of the value of all securities listed on the New York Exchange. In 1931 the total outstanding securities of United States corporations had a book value of $183,017,000,000. Of this amount 34 per cent consisted of securities of indus trial companies and only 12 per cent of railroad securities.® 4 Sereno S. Pratt, The Work of Wall Street (New York: D. Appleton and Company, 1912), p. 52. ® Moody1s Manual of Investments: Railroad Securities (New York: Moody’s Investors Service, 1934) p. a8. 29 TABLE VI BOOK VALUE OF OUTSTANDING SECURITIES OF ALL CORPORATIONS IN THE UNITED STATES, 1931 (Millions of Dollars) Stocks % Bonds % Total % Railroad..... 10,080 10 11,830 14 21,910 12 Industrial... 51,857 63 10,697 13 62,554 34 All others... 36,974 37 61,579 73 98,553 54 Total.... 98,911 84,106 183,017 II. COMPARISON OF RAILROAD AND INDUSTRIAL STOCK PRICES A comparison of railroad and industrial stock prices is shown in Figure 2. This chart sets forth the Dow-Jones Railroad and Industrial Averages from 1897 to 1939, and the ’ ’ computed'1 averages of railroad stock prices, 1865-1897, transposed into the equivalents of the Dow-Jones averages. The high and low for each year from 1897 to 1922 and the rallies and declines of the Dow-Jones averages from 1922 to 1939 were used in making this chart. The averages of railroad stock prices which were computed and shown in Table III, page 16, were transposed into the equivalents of the Dow-Jones averages by the method of le.ast squares.^ In December, 1914, the basis for computing the Dow-Jones indus trial averages was changed from twelve stocks to twenty ^ Mordecai Ezekial, Methods of Correlation Analysis (New York: John Wiley & Sons, 1930), pp. 55-59. FIGURE 2 RAILROAD AND INDUSTRIAL STOCK PRICE AVERAGES 31 stocks. The price averages of the twelve stocks used from 1897 to 1914 were 73.4 per cent of the price averages of the twenty stocks used from 1915 to 1939. All the data used in making Figure 2 are contained in Appendix B. The course of railroad and industrial stock prices. Despite the fact that there were declines during the depres sion years 1903-1904 and 1907-1908, the general trend of railroad as well as industrial stock price averages between 1897 and 1910 was upward. The mean price of the Dow-Jones railroad averages for the year 1897 was 46 per cent of what it was in 1909; and the mean price of the Dow-Jones indus trial averages in 1897 was 52 per cent of what it was in 1909. Thus between 1897 and 1910, the increase in railroad averages was nearly as rapid as the increase in industrial averages. From 1910 to 1921, however, the general trend of railroad stock prices was downward, whereas the trend of industrial averages was upward. The mean of the high and low prices of railroad averages for 1910 was 117.75; in 1920 it was 76.14— or 64 per cent of what it was in 1910. The highest price for that eleven year period was on January 4, 1910 when the Dow-Jones railroad averages closed at 129.90; and the lowest price was recorded on February 11, 1920 when they closed at 67.83. The mean of the high and 32 low prices of the Dow-Jones industrial averages for 1910 was 85*98; in 1920 it was 87*22 or 101 per cent of what it was in 1910* The upward trend of the industrial averages be tween 1910 and 1921 becomes more apparent, however, when consideration is given to the fact that the basis of calcu lating the Dow-Jones industrial averages was changed in 1914. The mean of the high and low prices of the industrial aver ages for 1920 was 138 per cent of what it was in 1910, at which time the averages for both years were calculated on the same basis. In 1921 the averages of railroad and Industrial stock prices were about the same. The mean of the high and low price of railroad averages was 71.54 and the mean price of industrial averages was 72.70. During the "bull market1 1 — 1921 to 1929— railroad averages rose to a high of 189.11 on September 3, 1929. This price was 264 per cent of the aver age price in 1921. On the same day industrial averages reached a high of 381.17 which was 524 per cent of the average price in 1921. During the 1929-1932 depression the decline in rail road averages reached a much lower level than did industrial averages. On June 3, 1932, the Dow-Jones railroad averages closed at 14.10 which was the lowest point in their history; and on June 30, 1932 the Dow-Jones industrial averages fell 33 to 42.84. During the years following the depression, the recovery in the prices of railroad stocks was not as rapid as the price recovery of industrial issues. In 1937 the mean price of the Dow-Jones railroad averages was 46.80 and the mean price of the Dow-Jones industrial averages was 154.02. Thus the average price of railroad shares in 1937 was 144 per cent of the average price in 1932, whereas the average price of industrial shares in 1937 was 239 per cent of what it was in 1932. Fluctuations in railroad and industrial stock prices. In the twentieth century speculative interest in the stock market was turned toward the stocks of industrial enter prises to a greater extent than toward railroad securities. In 1928 Bogen commented that, , f The rails now constitute the most stable of the important groups of stocks listed on the New York stock Exchange. The shares of our big roads . . . are bulwarks of conservative investment.1 1 ? Between 1900 and 1910 the average yearly fluctuation of railroad stock prices was 28.11 per cent while the aver age yearly fluctuation of the Dow-Jones industrial averages was 41.24 per cent. The decade beginning with 1910 saw a 21.41 per cent fluctuation in railroad stock prices and a ? jules I. Bogen, Analysis of Railroad Securities (New Yorks The Ronald Press Company, 1928), p. 37. 34 34.59 per cent average fluctuation of industrial stocks, whereas during the ten years following 1920 the average fluctuation in railroad stock prices was 23.94 per cent as compared with a 42.31 per cent average fluctuation in the industrial averages. Thus for the first three decades of the twentieth century the prices of industrial stocks fluctuated to a greater extent than did the prices of rail road stocks. During the nine year period 1930-1938, however, the fluctuation in industrial stock prices was less than the average yearly fluctuation in the Dow-Jones railroad aver ages. The high average yearly fluctuation of 77.69 per cent for industrials and 103.25 per cent for railroad stock prices may be explained at least in part by the low levels to which the prices of securities fell during the depres sion. Table VII shows the yearly fluctuations in railroad and industrial stock prices., III. RAILROAD REVENUES, EXPENSES, AND EARNINGS The railroads completed their growth in mileage about the second decade of the twentieth century; but the volume of traffic continued to expand with the commercial development of the country, reaching a peak about 1926. By that time railroad rates and expenses had become largely subject to 35 TABLE VII YEARLY FLUCTUATIONS OF RAILROAD AND INDUSTRIAL STOCK PRICES Spread as a Percentage of Year Spread between High & Low Low Price for the Year Railroad Industrial Railroad Industrial 1900 22.00 18.09 30.14 34.16 1901 26.20 11.74 .28.18 27.21 1902 17.63 7.82 15.78 12.90 1903 31.18 25.55 34.61 60.62 1904 28.15 26.82 30.83 57.79 1905 19.02 27.80 16.61 40.43 1906 18.06 17.82 15.01 20.92 1907 50.54 43.37 62.08 81.83 1908 34.01 39.53 29.76 50.77 1909 20.56 20.62 18.05 25.80 10 Year Average 26.78 24.42 28.11 41.24 1910 24.31 24.72 23.03 33.58 1911 14.06 14.12 12.81 19.36 1912 9.43 14.00 8.20 17.47 1913 17.60 16.46 17.51 22.83 1914 20.02 12.01 22.39 16.82 1915 20.43 44.99 23.33 82.98 1916 13.17 25.19 13.29 29.65 1917 35.01 33.46 49.48 50.74 1918 15.70 15.69 20.33 21.38 1919 17.50 40.47 23.77 51.13 10 Year Average 18.74 24.11 21.41 34.59 36 TABLE VII (continued) YEARLY FLUCTUATIONS OF RAILROAD AND INDUSTRIAL STOCK PRICES Year sPrea^ "between High & Low Spread as a Percentage of Low Price for the Year Railroad Industrial Railroad Industrial 1920 16.82 43.13 1921 12.04 17.60 1922 20.56 24.84 1923 13.85 18.47 1924 19.27 32.18 1925 19.95 44.39 1926 20.92 31.44 1927 25.53 47.67 1928 20.10 108.67 1929 61.04 182,48 10 year Average 23.01 55.09 1930 65.37 136.56 1931 80.16 120.57 1932 26.82 43.04 1933 22.57 58.51 1934 18.83 24.05 1935 14.34 51.73 1936 17.59 41.05 1937 35.31 80.76 1938 14.18 50.63 9 year Average 32.80 67.43 24.80 18.38 28.00 18.04 24.02 21.46 20.43 21.40 15.16 47.66 23.94 71.33 255.12 190.21 66.46 56.73 52.15 41.58 121.13 74.63 103.25 64.61 27.54 31.61 21.25 36.41 38.60 23.25 31.21 56.80 91.84 42.31 86.70 163.40 100.47 116.65 27.74 53.44 28.58 71.07 51.17 77.69 Total Average 25.33 39 Years 42.76 44.18 48.96 37 governmental control. After 1.929 the earnings of the rail roads suffered a serious decline, caused by the decrease in traffic and the large proportion of fixed overhead costs which exist in the railroad industry. Beeline in the growth of the railroad. The stage of growth of an industry is an important factor to be taken into account when considering its income possibilities. The railroad industry reached a stage of maturity— at least from the standpoint of mileage growth— over twenty years ago. In 1910 there were 240,293 miles of railroad in the United States, and in 1936 the country’s railroad plant totalled 261,542 miles of track. The peak was reached just before the World War, when at the end of 1916 there were 254,251 miles of railroad. After 1916, however, new construction fell to insignificant figures while abandonments increased steadily. Most of the construction after 1910 was intensive in nature, taking the form of betterments such as increased terminal facilities, double trackage, and track rehabilitation. Jordan sets the saturation point in railway facilities in the United States about 1926. He says: By 1926 the steam railroad industry was, to all in tents and purposes completed in the United States. No part of the country suffered by reason of inadequate railway facilities; in fact, in certain sections of the country, notably the Northwest, the facilities provided were beyond the economic warrant of the territory served. 38 The problem of railroad management became primarily one of operating efficiency— that of procuring a satisfac tory volume of traffic and of moving it at a reasonable cost.8 Railroad revenues and expenses. The amount of busi ness done by the railroads is an important factor which causes their earnings to fluctuate. During the twentieth century railway traffic increased with the development of the country, reaching a peak in 1926— when the gross oper ating revenues of Class I railroads totalled $6,383,000,000. From 1900 to 1929 the average operating revenues, in five- year periods, showed an increase. However, the following five-year period showed a decrease, as shown in Table VIII.^ Passenger revenue accounts for a much smaller propor tion of railway gross operating income than does revenue from freight service. This is especially true since 1920. In 1932 Moulton said: The railroads derive over three-quarters of their operating revenue from freight service. In 1928 for instance, this service contributed 76.8 per cent and passenger service 14.6 per cent. The remaining 8.6 per cent was derived from various sources like the transportation of mail and milk, express service, 8 David F. Jordan, Jordan on Investments (New York: Prentice-Hall, Incorporated, 193677 pp. 113-14. ^ Moody1s Manual_pf Investments: Railroad Securities (New York: MoodyTs Investors Service, 1938), p7 al6. TABLE VIII AVERAGE. OPERATING REVENUES IN FIVE-YEAR PERIODS, 1900-1937 (Millions of Dollars) Years Average Operating Revenue Per Cent INCREASE Per Cent DECREASE 1900-1904 $ 1,736 1905-1909 2,382 37.21 1910-1914 2,981 25.15 1915-1919 4,199 40.86 1920-1924 6,119 45.75 1925-1929 6,207 1.44 1930-1934 3,799 38.79 1935-1937 (3-years) 3,890 2.28 4 0 switching seryice, storage, demurrage, etc.M10 Table IX shows railroad freight and passenger earn- 11 ings as a percentage of the total operating revenues. The amount that the railroads realize from their operations, however, is not determined by the gross revenues alone, for operating expenses have an important bearing on , the net operating income. For example, during the decade between 1920 and 1930, operating revenues increased to a much greater extent than net operating income. Moody at tributes this to the fact that a rising price level forced the operating expenses to increase at a more rapid rate than the gross revenues.^2 The highest point in net operating income was reached in 1929, in spite of the fact that gross revenues were slightly higher in 1926. This was a result of the decrease in operating expenses between 1926 and 1930. Figure 3, page 42, shows the operating revenues, expenses, and income from 10 Harold G. Moulton, and associates, The American Transportation Problem (Washington, D.C.: The Brookings 1 nstitute, 1933}, p. ^74. H Moody* s Manual, 1938, loc. cit. 12 John Moody * The Railroad Builders (New Haven: Yale University Press, 1921), p. 238. TABLE IX FREIGHT AND PASSENGER EARNINGS AS A PERCENTAGE OF TOTAL OPERATING REVENUES Year Per Cent FREIGHT Earnings Per Cent PASSENGER Earnings 1900 70.55 21.78 1905 69.69 22.71 1910 68.56 21.94 1915 68.97 21.99 1920 70.15 20.73 1925 74.47 17.07 1930 77.42 13.61 1935 80.91 10.23 43 1900 to 1938.13 Earnings and dividends. Net earnings and declared dividends are, according to Durand, the two most important factors which influence the prices of railroad common stocks.14 Dividends are dependent on earnings, and net earnings depend to a very great extent on the volume of business done by the railroads. A large funded debt, upon which interest must be paid, exists in the railroad industry. Thus a decrease in income from operations may result in a large decrease in the net earnings. Between 1900 and 1929 the interest which the rail roads had to pay on their funded debt more than doubled. Consequently, during the depression, they were unable to re duce interest requirements in the same proportion that income from operations decreased. The relationship between interest on fuhded debt and the net income from railway operations is shown in Table X.15 The earnings of the railroads reached their highest point in the twentieth century between 1925 and 1929, when i ^ Moody* s Manual. 1938. loc. cit. 14 John Durand, New Technique of Uncovering Security Bargains CNew York: The Magazine of Wall Street, 1929), p. 12. 15 Moody*s Manual. 1938. loc. cit. 44 TABLE X RELATIONSHIP BETWEEN RAILROAD OPERATING INCOME AND INTEREST ON FUNDED DEBT (Millions of Dollars) Years Average Net Operating Income Average Interest on Funded Debt 1900-1904 544 275 50*55% 1905-1909 693 356 51*37% 1910-1914 752 423 56.25% 1915-1919 733 471 64.25% 1920-1924 802 541 67.45% 1925-1929 1,165 582 49.96% 1930-1934 572 495 86.54% 1935-1937 591 476 80.55% they averaged over 12 per cent on the capital stock; the lowest point was reached in 1932 when a deficit occurred. Table XI sets forth the earnings, the per cent earned on capital stock, and the dividends declared by the railroads from 1900 to 1938.^ 46 TABLE XI RAILROAD EARNINGS AND DIVIDENDS (Millions of Dollars) Years Average Net Earnings Average Per Cent earned on Capital Stock Average Dividends Declared 1900-1904 $ 299 6.96% $ 180 1905-1909 434 8.96% 306 1910-1914 505 8.71% 417 1915-1919 525 8.43% 345 1920-1924 506 8.23% 385 1925-1929 846 12.13% 504 1930-1934 135 1.88% 294 1935-1937 124 1.91% 201 47 CHAPTER V THE LEVERAGE FACTOR After 1929 decreased earnings resulted in a low level of railroad common stock prices. The decline in traffic was the principle reason for the decrease in railroad net earn ings. The extent to which the net earnings decreased, how ever, was much greater than the decrease in the volume of business done by the railroads. This occurred because net earnings were influenced by a leverage factor resulting from the large proportion of fixed overhead costs in the railroad industry. High overhead costs in the railroad industry. The depression caused a substantial decline in the revenues of the railroads. This was due to the fact that a definite relationship exists between general business conditions and railroad prosperity. The chief business of railroads is the transporting of goods and passengers from one place to another. During periods of prosperity when business activ ity is at a peak, there is great demand for the services of the railroad; in depression times, with a slump) in commer cial activity, there is a falling off of the gross revenues of railroads. 48 However, the disastrous effect of the depression on railroad stock prices and the great extent to which the net earnings of railroads declined, may be at least partially explained by the fact that railroads have a large proportion, of fixed overhead expenditures. A large part of the original railroad investment, such as the acquisition and preparation of the roadbed, usually needs to be made only once. Large overhead costs are also the result of maintaining facilities to accommodate the peak load of traffic. Railroads, like other public utilities, must maintain available facilities to move the greatest amount of business that is offered at any one time. This results in a great amount of unutilized capacity in the transportation industry. Nourse comments that, 1 1 In the prosperous year of 1929 the trackage and loco motives probably were not used 50 per cent of their practical capacity, while freight cars were not used beyond 70 per cent of capacity.”1 Another reason why railroads have high fixed overhead costs is the fact that, even though traffic is declining, the railroads— like all businesses with large fixed assets — undergo substantial depreciation each year because of wear 1 Edwin G. Nourse, America*s Capacity to Produce (New Yorks Review of Reviews Corporation, 1934), p. 356. 49 and tear and obsolescence. Thus the very nature of the railroad industry gives it a leverage in obtaining net prof its. Coupled with this, however, is the large amount of interest on funded debt to be added to fixed charges. In 1924 Haney said: It is now apparent that a little over two thirds of a railway*s total expenses (including tax accruals and all fixed charges or deductions from income) are rela tively constant, or fixed, with reference to the volume of traffic.2 The nature of increasing returns. The large propor tion of fixed overhead costs makes the railroad industry one of increasing returns. An increase in traffic does not re quire a proportionate increase in expenses or capital outlay. Sakolski expresses this situation by saying: It is clearly demonstrable that under normal condi tions an increase in gross earnings is a greater finan cial advantage than a proportionate reduction in operat ing costs. This is due to the fixity of a large part of operating costs. All railroad expenses do not fluctuate in accordance with the amount of business done. In most undertakings there are certain fixed costs which must be met regardless of the amount of business or the revenue. There are also expenses which fluctuate directly, though not necessarily proportionately, with each increase or decrease in the units of service performed. Hence, in reducing expenses during dull periods only a part of the operating costs can be materially altered.3 2 Lewis Haney, The Business of Railway Transportation (New York: The Ronald Press Company,1924), pp. 174-75. 3 A. M* Sakolski, American Railroad Economics (New York: The Macmillan Company, 1922), pp. 195-96. 50 Some operating expenses are definitely fixed in nature, whereas others are not wholly constant in character* Some are unaffected, some slightly affected, and others fully affected by an increase in business; Ripley^ concluded from his study— the results of which are shown in Table XII— that only about half of the operating expenses are immedi ately responsive to any variation in business. in view of this condition, it is obvious that the total cost of operation in relation to each traffic unit diminishes as the traffic becomes smaller. A greater net return, therefore, is afforded by expansion of revenue than by reduction of expenses. Consequently, as expressed by Taussig, f , The railroad is an industry of increasing returns par excellence."5 The effect of the leverage factor. A reduction in gross revenues has a serious effect on the success of rail roads. Sokolski, in his American Railroad Economicssets forth a table showing the extent to which the net earnings are affected by a 10 per cent increase or decrease in rail- 4 William Z Ripley, Railroads Rates and Regulations (New York: Longmans, Green and Company, 1912), p. 55. 5 Frank W. Taussig, Principles of Economics, (New York: The Macmillan Company, 1928;, I, 203. 6 Sakolski, op. cit., p. 196. 51 TABLE XII FIXED NATURE OF RAILROAD EXPENSES Per Cent of Operating Expenses Per Cent of Total Expenses Both Con- Vari- stant able Both Con- Vari stant able Maintenance of Way 20 13.4 6.6 15 10.0 5.0 Maintenance of Equipment 20 10.0 10.0 15 7.5 7.5 Conducting Transportation 56 28.0 28.0 40 20.0 20.0 General Expenses 4 4.0 — 3 O • CO — Fixed Charges — — 27 27.0 ... 100 55.4 44.6 100 67.5 32.5 52 road revenues. This table is reproduced here as Table XIII. Increasing returns, however, do not operate over long periods of time. Bogen? pointed this out when he criticized the theory of increasing returns by commenting that in the long runj as traffic grows, new facilities must be provided— thus there is more property to maintain, and larger main tenance expenses. 7 Jules I. Bogen, Analysis of Railroad Securities (New York: The Ronald Press Company, 1928), p.~79. TABLE XIII EFFECT OF TEN PER CENT INCREASE AND DECREASE IN RAILROAD REVENUES Normal Base 10% INCREASE in Gross Revenues 10% DECREASE in Gross Revenues Gross Earnings 100.0% $7000 $7700 $6300 Expenses Unaffected 33.3% $2333 $2333 . $2333 Expenses Slightly Affected 26.7% 1867 1870 1850 Expenses Fully Affected 6.7% 467 510 420 Total Expenses 66.7% $4667 $4713 $4603 Fixed Charges 25.7% 1800 1800 1800 Total 92.4% 6467 6513 6403 BALANCE 7.6% $ 533 $1187 $ 103-Deficit 64 CHAPTER VI SUMMARY AND CONCLUSION The prices of railroad common stocks have been great ly influenced by the characteristics of the various periods of railway development. The period between 1830 and 1860 was the experimental stage of railway growth. Between the Civil War and the beginning of the twentieth century rail road securities were the center of speculative interest in the stock market. During the first three decades of the twentieth century, investment stability was recognized as an important characteristic of railroad securities. In 1932, however, the prices of railroad stocks fell to the lowest levels in their history. I. THE EARLY PERIOD OF THE RAILROADS Prior to the Civil War railroad securities were of minor importance on the stock market. This was true for the following reasons: 1. The lines of most of the early railway companies were short and generally ran within the boundaries of a single state. 2. Railroads were not readily accepted by the pub lic as an important means of transportation. 3. Railroads during the greater part of the period between 1830 and 1860 were subordinate in importance to the waterways. 55 4. The early railroads were generally financed as local projects. Early mileage. Railroad mileage increased from 23 miles in 1830 to 30,626 miles in 1860. From 1837 to about 1845, construction lagged because business was suffering from the effects of the panic of 1837. When normal condi tions were restored, a period of activity in railroad build ing began, which lasted until the beginning of the Civil War. Van Metre points out that: Even though there were over 30,000 miles of railroad in 1860, the ease of continuous rail transportation was not as great as might be supposed. Each railroad com pany used its own cars and locomotives, and if goods were to be carried over more than one road it was necessary to transfer them from the cars of one company to the cars of another. In the same way, passengers were compelled to change trains frequently when travel ing over several connecting railroad lines.^ Public acceptance. The caliber of the services of fered by the railroads, however, was not the basic reason that they were not readily accepted as a major means of transportation. There was natural reluctance on the part of the public to show preference for a new method over the older established methods of transportation. The waterways enjoyed the public confidence to a greater extent than did 1 Thurman W. Van Metre, Economic Hi story of the United States (New York: Henry Holt and Co., 1921), p. 347. 56 " the railroads. The canals and the railroads. The railroads, espe cially before 1850, were definitely subordinate in import ance to the waterways. The canals were begun in the United States at an earlier date than the railroads, and were doing a profitable business and earning a substantial return on investment during the time that the railroads were in the experimental stage of their development. The financing of the early railroads. Most of the early railroads were financed as local projects. The cap ital was obtained for the most part from the sale of stocks instead of from the sale of bonds. The stocks were sold largely in the communities through which the lines were built. Consequently, prior to the Civil War, railroad secu rities did not hold the predominant position on the stock market that they did between 1860 and 1900. II. RAILROAD FINANCE, 1860-1900 The period between the Civil War and the beginning of the twentieth century was an era of great expansion for rail roads. Most of the present day railroad systems were rounded out during that period, which was characterized by mismanagement and over-extension of railroad properties, 57 unsound financing, and security price manipulation. Rail road securities at that time were the center of interest in the stock market. The prices of railroad common stocks be tween 1860 and 1900 were influenced by.the following charac teristics: 1. The railroads became established as the most important means of transportation in the United States. 2. The stock market during that period was dominated by the speculative activities of the stock exchange manipulators. 3. The economic philosophy of laissez faire was prevalent at that time. 4. The great increase in railway mileage resulted in an over-expansion of railroad properties. The importance of the railroads. After the,Civil War the railroads became the most important means of transporta tion in the United States. The industrial development and westward expansion of the country required the aid of an efficient system of transportation. Although the canals had been the most important method of transportation during the earlier period, they became subordinate in importance to the railroads when the advantages of railway transportation be came apparent. Shannon says: The irony of the canal era was that just as the systems were completed and reaching the point of great est usefulness they were forced into disuse. Railroads were faster and better managed, and they could be used 58 the year round.2 The effect of speculative activity on railroad stock prices. The course of railroad stock prices, especially after the Civil War, was influenced to a very great extent by the speculative activity of the important stock market manipulators and the low degree of financial honesty which characterized the time. The railroad financiers sought corporate control of the railroads through the purchase of a sufficient percentage of the voting shares in order to enhance their private fortunes rather than improve the railroad properties. The result of that era of speculative activity was the panic of 1873 during which the prices of railroad stocks fell to very low levels. In commenting on the panic of 1873, Van Metre sayst The most dangerous symptom of the approaching finan cial crisis was the decline in the earnings of railroad corporations after 1867. The decline was due in large part to the fraudulent practices of the dishonest rail road directors.2 The effect of a laissez faire economic philosophy. Unrestrained competition and the absence of effective governmental control of the railroads during the latter 2 Fred Albert Shannon, Economic Hi story of the People of the United States (New York: The Macmillan Company, 1934), p. 183. 2 Van Metre, op. cit., p. 407. 59 half of the nineteenth century were results of the laissez faire economic philosophy of the time. Since the railroad industry is one of joint costs and high overhead charges, un restrained competition brought about destructive rate wars between the various railroad companies. In some instances the railways were so eager to obtain business that at certain competing points various types of goods were carried practi cally free of charge, while the attempt was made to erase the deficit by charging exhorbitant rates in sections where there was lees competition. These factors greatly affected the earnings of the railway companies and consequently exerted a vital influence on the prices of railroad stocks. The over-expansion of railroad properties. Between 1860 and 1900, while the population of the country was little more than doubling, railroad mileage increased six fold. Schlesinger describes the increase in railway mileage by saying: Bleantime, all over the land, a spider web of metal rails was being spun to draw the remotest outposts into the common whole and everywhere give fresh impetus to commercial enterprises. Not only were the great trans continental roads built, but rail lines multiplied in the older parts of the north and pushed southward to spur the industrial development of Dixie. The 193,000 miles at the turn of the century greatly exceeded in length the railways of all Europe.4 4 Arthur M. Schlesinger, Political and Social Growth of the United States, 1852-1933 (New York: The Macmillan Company, 1935), p. 147. 60 The prices of railroad stocks were affected by rail road expansion due to the fact that huge sums of capital were expended to build railroads into sections of the coun try where often the immediate volume of traffic did not promise an adequate financial return. During the panics of both 1884 and 1893 railroad stock prices were depressed. The panic of 1884, according to Bogart,6 was the direct result of too rapid expansion in the construction of rail roads. Van Metre points out that the commercial crisis of 1893 was precipitated largely by unwise speculation in railroad enterprises. He sayss This crisis was due in part to the lack of confidence in public credit, but its chief cause was unwise specu lation in railroad and industrial enterprises. There had been much railroad speculation throughout the eighties and many of the consolidations effected for the purpose of destroying competition had been accompanied by the issuance of securities in extravagant quantities.6 III. RAILROAD COMMON STOCK PRICES IN THE TWENTIETH CENTURY In the twentieth century the operations of the rail roads became largely subject to governmental control, and railroad securities as a class became recognized as an ex ceedingly stable form of investment. The prices of railroad 6 Ernest Ludlow Bogart, Economic History of the United States (New Yorks Longmans, Green and Company, 1938), p. 373. 6 Van Metre, pp. cit., p. 492. 61 stocks were influenced by the following characteristics: 1. There was a decrease in the relative importance of railroad securities on the stock market# 2. There was a decline in the rate of growth of the railroads. 3# Railroad revenues increased with the commercial development of the country. 4. The prices of railroad stocks fluctuated with general business conditions. The importance of railroad securities on the stock market. With the beginning of the twentieth century other classes of securities began to challenge the predominant position on the stock market held by railroad securities; stocks of industrial and public utility companies were dealt in more extensively. The development of federal control was largely responsible for the shifting of specu lative interest from railroad stocks to the issues of indus trial concerns. Kirshman says: Federal regulatory acts passed in 1906 and later in 1910 ended the upward movement of railroad stocks. From this time onward the scene of speculative interest shifted to the field of industrial stocks. Speculative activity in railroad stocks which had held the field un disputed* for three-quarters of a century now began to wane in favor of industrial stocks. . By 1914, the latter took undisputed possession of the field. Industrial concerns were the only class of corporations that re mained unregulated by governmental authority. The decade 1900 to 1910 shows that the volume of transactions in railroad stocks was 70% of the total transactions on the New York Stock Exchange. After 1914, this condition was reversed, and industrial stocks accounted for 86% of the 62 total transactions on the Exchange.? Decline in the rate of growth of the railroads. From the standpoint of mileage the railroads reached a stage of maturity during the decade between 1910 and 1920. However, railroad managements were constantly alert to development of an intensive nature. The development was generally in the form of betterments such as double trackage, increased ter- . minal facilities and track rehabilitation. The increase in railroad revenues with the commercial development of the country. During the first three decades of the twentieth century the amount of business done by rail roads increased with the commercial development of the coun try, reaching a peak about 1926. However, the net income from railway operations was not entirely dependent on the volume of traffic. Railroad rates and expenses, which are largely subject to governmental control, are also important factors to be considered. For example, between 1917 and 1920 the net income from railway operations decreased while the volume of traffic increased. This resulted from the failure of the Government to grant rate increases in spite of the fact that a rising price level and war-time inflation greatly increased railroad operating expenses. In 1920, the ? John Emmett Kirshman Principles of Investment (Chicago: A. W. Shaw Company, 1926), p. 751. 63 railroads paid out about 94 per cent of their revenues for operating expenses, Burtchett describes this situation as follows: Especially noticeable was the advance in labor costs due to the elevation of wages during the war period of government operation. The average compensation to em ployees rose from around $873 in 1916 to $1818 in 1920. War and inflation accounted for the advance in the cost of material and s u pplies.8 With this exception, however, railroad managements have been able, even in periods of depression, to keep oper ating expenses around 75 per cent of operating revenue? The prices of railroad stocks and general business. conditions. The type of service performed by the railroads was essential to the country*s commercial activity in the twentieth century. This gave railway earnings a degree of stability that did not exist in the case of industrial earn ings. As a result, railroad securities became recognized as an exceedingly stable form of investment, and the fluctua tion in the prices of railroad stocks was less than the fluctuation in the prices of industrial stocks. From 1900 to 1910 industrial development resulted in an upward trend in the prices of railroad and industrial stocks, with temporary declines during the panics of 1903- 8 Floyd F. Burtchett, Investments and Investment Policy (New York: Longmans, Green and Co., 1938), p. 237. 1904 and 1907-1908, Between 1910 and 1920 the general trend of industrial stock prices was upward, while the prices of railroad stocks tended to decline due to increased operating expenses while the government operated the railroads during the war period. During the era of business prosperity prior to 1929, the prices of industrial issues— largely due to speculative activity— rose to higher levels than did the prices of railroad stocks. The decline in business activity forced the prices of securities on the stock market in 1932 to exceedingly low levels. IV. THE RAILROADS AND THE DEPRESSION During the depression it became apparent that the stability of railroad securities as an investment had been overrated. In 1932 the prices of railroad common stocks fell to the lowest level in their history. This was the result of: 1. A decrease in traffic due to the decrease in busi ness activity and the development of competition from other forms of transportation. 2. The high fixed overhead costs due to the nature of the railroad industry plus large fixed charges in the form of interest on funded debt. Competition from other forms of transportation. In recent years competition from other forms of transportation 65 developed to such an extent that the railroads enjoyed less of a complete monopoly in the transportation field. Compe tition from waterways, airways, and pipe lines increased rapidly after 1920. However, the decline in passenger busi ness as well as short haul and less-than-carload freight traffic resulted from a rapid growth in the use of motor trucks and passenger cars. In 1938, Burtchett commented on the passenger business of the railroads: The future of railway passenger traffic is uncertain, but it seems improbable that rail passenger business will entirely cease for a long time to come. The rail roads are able to co-ordinate rail with other types of transportation so that it may be made supplementary and supporting rather than competitive and destructive.© A large part of railroad business, however, consists of bulky traffic that is hauled for comparatively long dis tances, other forms of transportation finding it difficult to handle this type of traffic. Daniels points out that in 1930 over 57 per cent of the total railroad tonnage consisted of the products of mines, such as coal, coke, and iron. He says: It appears that the wholesale department of land transportation will remain with the railroads; that its aggregate tonnage must indefinitely comprise the greater bulk of freight traffic; and that anything approaching the supersession of railroads by motor trucks is quite beyond rational anticipation.10 ° Burtchett, op. cit.. p. 227. 10 winthrop M. Daniels, American Railroads (Princeton: Princeton University Press, 1932), pp. 112-13. 66 The effect of high fixed overhead costs. Perhaps the most important reason why the prices of railroad stocks fell to such low levels during the depression was the fact that railroad net earnings fell off to a much greater extent than the gross revenues from operations. This was partially the result of the large fixed charge of interest on funded debt, which more than doubled between 1900 and 1929. Railway earnings, however, are affected by high fixed overhead costs other than the interest on funded debt. The character of the railroad industry requires that facilities be maintained regardless of the amount of traffic that is carried. About 60 per cent of railroad operating expenses are fixed charges; and when these are considered with the interest on funded debt, approximately two-thirds of the total overhead costs of the railroads are fixed in nature. Thus a decrease in business results in a much larger decrease in net earnings. The great extent to which the factor of leverage characterizes the railroad industry, therefore, must be taken into account when the prices of railroad common stocks are considered. BIB LI 0 G R A P H Y / A. PRIMARY SOURCES 68 Annalist, New York, July 1, 1938 to December 28, 1938. Commercial and Financial Chronicle, XX - LXXVTI,. 1875-1903. Commercial and Financial Chronicle Investor’s Supplement, 1860-1875, July, 1876. Dow-Jones Book of Charts, New York: Magazine of Wall Street, 1938. Earning Power of Railroads, New York: Oliphant Company, 1909. Moody1s Manual of Investments Railroad Securities, New York: Moody’s Investors Service, 1934 and 1938. New York Stock Exchange Year Book - 1938. New York: Depart ment of Public Relations of New York Stock Exchange, January, 1939. Statistical Abstract of 1938, United States Government Printing Office. Statistics of Railways in the United States - 1937, United States Government Printing Office. B. BOOKS Adams, Charles Francis, Jr., Railroads: Their Origin and Problems. New York: G. P. Putnam’s Sons, 1893. 230 pp. Badger, Ralph Eastman, Investment Principles and Practices. New York: Prentice-Hall, Inc., 1930. 915 pp. Bogart, Ernest Ludlow, Economic History of the United States. New York: Longmans, Green and Company, 1938. 654 pp. Bogen, Jules I., Analysis of Railroad Securities. New York: The Ronald Press Company, 1928. 449 pp. Burtchett, Floyd F., Investments and Investment Policy. New York: Longmans, Green and Company, 1938. 821 pp. Carter, Charles Frederick, When Railroads were New. New York: Henry Holt and Company, 1910. 324 pp. 69 Daniels, Winthrop M., American Railroads. Princeton: Princeton University Press, 1932. 120 pp. Day, Edmund E., Statistical Analysis. New York: The Macmillan Company, 1925. 459 pp. Dewey, Davis Rich, Financial Hi story of the United States. New York: Longmans, Green and Company, 1934. 600 pp. Durand, John, New Technique of Uncovering Security Bargains. New York; The Magazine of Wall Street, 1929. 203 pp. Ezekial, Mordecai, Methods of Correlation Analysis. New York: John Wiley and Sons, 1930. 426 pp. Graham, Benjamin, and David L. Dodd, Security Analysis. New York: McGraw-Hill Book Company, Inc., 1934. 725 pp. Hadley, Arthur Twining, Railroad Transportation - Its History and its Laws. New York: G. P. Putnam’s Sons, 1903. 269 pp Haney, Lewis, The Business of Railway Transportation. New York: The Ronald Press Company, 1924. 613 pp. Hicks, Frederick C., High Finance in the Sixties. New Haven: Yale University Press, 1929. 410 pp. Howard, Ernest, Wall Street Fifty Years after Erie. Boston: The Stratford Company, 1923. 181 pp. Jackman, W. T., Economics of Transportation. Chicago: A. W. Shaw Company, 1926. 818 pp. James, Edmund Janes, The Canal and the Railway. Baltimore: Guggenheimer, Weil and Company, 1890. 316 pp. Jordan, David F., Jordan on Investments. Third revised edition; New York: Prentice-Hall, Inc., 1936. 425 pp. Josephson, Matthew, The Politicos, 1865-1896. New York: Harcourt, Brace and Company, 1938. 760 pp. ______, The Robber Barons. New York: Harcourt, Brace and Company, 1934 . 474 pp. Kirshman, John Emmett, Principles of Investment. Chicago: > A. W. Shaw Company, 1926. 902 pp. Lagerquist, Walter Edwards, Investment Analysis. , Hew York: The Macmillan Company, 1924. 792 pp. Larrahee, William, The Railroad Question. 7th edition; Chicago: The Schulte Publishing Company, 1895. 457 pp. Locklin, David Phillip, Economics of Transportation. Chicago Business Publications, Inc., 1935. 426 pp. Meeker, J. Edward, The Work of the Stock Exchange. Revised edition; Hew York: The Ronald Press, 1930. 720 pp. Miller, Sidney L., Inland Transportation Principles and Policies. Second edition; Hew York: McGraw-Hill Book Company, Inc., 1933. 822 pp. Moody, John, How to Invest Money Wisely. Hew York: Moody* s Investors Service, 1915. 175 pp. ______, The Railroad Builders. Hew Haven: Yale University Press, 1921. 257 pp. Moulton, Harold G., Waterways Versus Railways. Hew York: Houghton Mifflin Company, 1912. 468 pp. ______, and associates, The American Transportation Problem. Washington, D.C.: The Brookings Institute, 1933. 915 pp. Forth, S. H. D., A Century of Population Growth. Washing ton: Government Printing Office, 1909. 303 pp. Hourse, Edwin G., America*s Capacity to Produce. Hew York: Review of Reviews Corporation, 1934. 430 pp. Pratt, Sereno S., The Work of Wall Street. Hew York: Di. Appleton and Company, 1912. 440 pp. Rhea, Robert, The Dow Theory. Hew York: Barrons, 1932. 252 pp. Rice, Samuel 0., Fundamentals of Investment. Chicago: A. W. Shaw Company, 1926. 384 pp. Ringwalt, J. L., Development of Transportati on Systems in the United States. Philadelphia: Railway World Office, 1888. 398 pp. Ripley, William Z., Railroads Finance and Organization. Hew York: Longmans, Green and Company, 1915. 638 pp. ______, Railroads Rates and Regulations. New York: Longmans, Green and Company, 1912. 659 pp. Russell, Charles Edward, Stories of Great Railroads. Chicago Charles H. Kerr and Company, 1912. 332 pp. Sakolski, A. M., American Railroad Economics. New York: The Macmillan Company, 1922. 295 pp. Schlesinger, Arthur Meier, Political and Social Growth of the United States, 1852*1933. Revised edition; New York: The Macmillan Company, 1935. 564 pp. Shannon, Fred Albert, Economic History of the People of the United States. New York: The Macmillan Company, 1934. 924 pp. Smith, Edgar Lawrence, Common Stocks as Long Term Investments New York: The Macmillan Company, 1925. 129 pp. Taussig, Frank W., Principles of Economics. New York: The Macmillan Company, 1928. 2 volumes. Thompson, Slason, A Short Hi story of American Railways covering Ten Decades. New York: D. Appleton and Company, 1925. 473 pp. ______, Cost Capitalization and Estimated Value of American Railways. 3rd edition; Chicago: Gunthorp-Warren Printing Company, 1908. 177 pp. Van Metre, Thurman W., Economic History of the United States. New York: Henry Holt and Company, 1921. 672 pp. Warshow, Robert Irving, The Story of Wall Strhet. New York: Greenberg, Publisher, Inc., 1929. 362 pp. C. PERIODICAL ARTICLES Adams, Charles Francis, Jr., , f An Erie'Raid11, North American Review, CXII (April, 1871), 241-291. Ellsworth, D. W. , "Statistical Position of the Railroads^1, Annalist, L (December 17, 1937), 982-3. Fulton, P. H., "Railroad Fate is up to Congress", Magazine of Wall Street, LXII (February 12, 1938), 19-20. 72 Oliver, F. J., "Railroads in 1937", Iron Age, CDCLI (January 6, 1938), 66-7. McConnell, F. H., "Every Man a Doctor ready to prescribe Medicine for Railroad Maladies", Commercial and Financial Chronicle, XXVII (May, 1938), 163-6. Wheeler, B. K., "What is wrong with the Railroads", Railway Age, CIV (February 12, 1938), 298-9. "Where are the Railroads", Fortune, XVII (April, 1938), 65-7. APPENDICES APPENDIX A RAILROAD STOCK PRICES USED IN COMPUTING AVERAGES, 1863-1903 1863 1864 1865 1866 1867 1868 > J an ,July,Jan, July,Jan. July.Jan, July,Jan. July,Jan. Juiy Central of New Jersey 146 157 134 130 124| 119$ 114 115J 124 118 114 119f Chicago & Alton 59 63 84j 90 89 89f 103 95 105 109 130 129 Chicago, Burlington & Quincy 99 113 118 126^ 114 104 109$ 116 129 132 138 149J Chicago & Northwestern 16 28J 45£ 50 32 23 27 • 28| 32 .33$ 0 0 t o 65$ Chicago & Rock Island 0 0 CO 93 £ 122^ 110 0 0 93 96| 91 91 87| 93 96j Cleveland, Columbus, Cin. & Ind. 147 159 180 167£ 170 128 110 116 105 wj 98 9(£ Cleveland & Pittsburg 56j 80 105 110£ 79h 68| 74£ 80 75£ 75£ 0 0 86| Illinois Central -31 0 0 98 112 129 111 58 115 117 111 117 130 149 Michigan Central 91 106 H8| 142 J 103 103 10l£ 102^ 102 108 106f 119f Delaware, Lackawanna, < S c Western 180 165 195 240 222 175 149 144 132 125 107 123 New York Central 107 115$ 130 130>, 102 88^ 90j 91 96 98i 117i 132f APPENDIX A (continued) RAILROAD STOCK PRICES USED IN COMPUTING AVERAGES, 1863-1903 1869 1870 1871 1872 1873 1874 Jan. July,Jan. July.Jan. July.Jan. July,Jan. July,Jan. July Central of New Jersey 116 120£ 10lf liof 1054 112 113£ 1104 105J ioe£ 104 1084 Chicago & Alton . „ 151 162 146 119 116 120 123 117 115 110 110 104 Chicago, Burlington & Quincy 200 199 153 160 153 153 14l| 1304 138^ 105^ 106 1054 Chicago & Northwestern 84| 93f 75j 85§ 76f 86f 75^ 754 84 74 62| 43? Chicago & Rock Island 135 128 107| 122? 108 130? 112 lllf 114f 110? 106 102* Cleveland, Columbus, Cin. & Ind. 59 43 0 0 88 89| 90 954 93f 88 80 78 Cleveland & Pittsburg 98 108 92| no| 1064 122| 129f 91| 90£ 88 894 87^ Illinois Central 144^ 147 142^ 142 1394 138 132 140 126j 114 103 904 Michigan Central 121 136 118 125? 1184 126 118 120 110 102 954 774 Delaware, Lackawanna, < 3 c Western 120£ 119 107 111 104| 110 106 1081 1014 106 1054 105 New York Central 166 197£ 95 102 954 99? 98? 98? 1064 1021 1047 101 -o Ol APPENDIX A (continued) RAILROAD STOCK PRICES USED IH COMPUTING AVERAGES, 1863-1903 1 • * ’ 1875 1876 1877 1878 1879 1880 ,Jam July,Jan, Julyi Jan, July Jan, July,Jan, July 1 Jan, July Central of Sew Jersey 105J 107 103 7l£ 214 6 184 , 38? 334 50f 794 53| Chicago & Alton 105 109£ 1044 98| 924 84£ 75f 77i 814 994 1064 Chicago, Burlington & Quincy 109 112^ 114 114| 1161 95^ 102 104 in? 1144 136 113 Chicago & Northwestern 46 42^- 444 414 394 34 34 441 49? 624 89 0 0 Chicago & Hock Island 102£ 100| 104f 105J 99§ 98? 112 179 138) 140 189 Cleveland, Columbus, Cin, & jnd. 63^ 50 57 42 334 22 34 26& 34| 48 774 62 Cleveland & Pittsburg 88^ 87? 89| 924 89? 72i 70f 79i 844 96f 1064 1124 Illinois Central 197 100| 9?4 96 50 i 43 73 86 80 854 994 100 Michigan Central 78 63 63^ 5l) 454 37^ 584 66? 735. 74| 884 77? Delaware* Lackawanna, & Western 106J 117 1174 104r 674 301 464 55% 43 564 83 71? Mew fork Central 101 100* 104? 105 100? 88 104s 109? 112? 117? 129 1224 APPENDIX A (continued) RAILROAD STOCK PRICES USED IN COMPUTING AVERAGES, 1863-1903 ' 1881 1882 1883 1884 1885 :• aC 1886 Jan. July.Jan. July.Jan. July.Jan. July.Jan. July.Jan. July Central of Hew. Jersey 824 99* 89 64| 68* 74j 834 524 31| 35f 424 61* Chicago & Alton 149 139 128 129f 134* 132* 133f 118 128 1364 138f 140 Chicago, Burlington & Quincy 1671 162* 13 2f 1274 120 122 11&4 107 116* 12o| 134f 132? Chicago & Northwestern 123 1241 124 128* 130 130? 112f 814 84| 103 105 111 Chicago & Rock Island 134* 142 131 128 123 122£ 11s) 1204 106 113* 127 124? Cleveland, Columbus, Cin. & Ind. 88 93 78 65? 77 70f 58 28 31 28 504 60 Cleveland & Pittsburg 127 138 133 134* 139 1294 139 125? 134 141 1464 150 Illinois Central 124 137 12?f 13if 14lf 132 132f 110 119* 124 138f 137 Michigan Central 120 103 834 821 96 92| 85 5lf 64 48 68 69* Delaware, Lackawanna, & Western 107 121* 122? 118 124-| 223* 114f 967 0 3 0 0 93* 115 127^ New York Central 147 145* 12 8f 125f 126? 118* 110? 944 844 81* 102 102* APPENDIX A (continued) RAILROAD STOCK PRICES USED IN COMPUTING AVERAGES, 1863-1903 188? 1888 1889 1890 1891 1892 Jan. JulyJan. JulyJan. JulyJan. JulyJan, JulyJan, July Central of Hew Jersey 55j 73|’ -0 C J 1 0 0 o 94| 1004 — .... , .- - < • * 119 123 106 1054 1114 1354 Chicago & Alton 143 148 135 1354 136 134 133 132 1284 1244 1394 1484 Chicago, Burlington & Quincy 136? 140 127? 109i 107| 100? 105? 104fj 854 854 1064 96? Chicago & Northwestern 111 115 106i 102 106 108| 109? .110 104§ 1034 1145 115? Chicago & Hock Island 125 12?4 lllf 102i 96i 95 94? 911 624 69» 884 754 Cleveland, Columbus, Cin, S t Ind. 604 58 52 43^ 55? 69? 69| 73 59f 57f 704 64 Cleveland & Pittsburg 144 153 158 159 155 160| 156 1564 150 148 150 154 Illinois Central 1324 120£ 1164 1154 113 114? 117f 116 914 92 1074 101 Michigan Central 86 87 824 75 84| 90 9S| 98 91 89 104 107 Delaware, Lackawanna, & Western 133 130 128j 127f 1394 142| 1344 143? 131 1334 138 1544 Hew York Central m i 109 107 103f 107 107| 106J 1074 lOOf 994 112? lllf oo APPENDIX A (continued) RAILROAD STOCK PRICES USED II COMPUTING AVERAGES, 1863-1903 1893. 1894 1895 1896 1897 1898 Jan. July.Jan. July.Jan. July .Jan* July .Jan* July.Jan. July Central of New Jersey 122] 99s Ill 105 84? 97? 94l 1021 98 92| 914 92|- Chicago & kjton 140 13 81 134 139 147 159 150 168| 164 153? 163 157 Chicago, Burlington & Quincy r 96| 82| 73| 76? 69J 80f 7ll 72 69| 774 97 103 Chicago & Northwestern 111! ioo£ 97 104 94f 97i 94j 100 1021 1071 119 1244 Chicago & Rock Island 82| 66 61-J 661 604 68 62 65§ 65 j 66j 88 96 f Cleveland,‘Columbus, Cin, & Ind, 56| 39 37i 39? 37 48j 31 29 264 214 334 344 lin r r L n .iiin n .il in .1.. inn i i r i . ^ r.lr 1 .1 rT ,., , r , n r , . m . in ru n ™ Cleveland S t pittsburg 155 146 147 150 156 159J 155 162 1684 165 168 1694 Illinois Central 99 874 89| 90 81? 95> 891 92 g 92| 964 102 1034 Michigan Central 104 94 96 95 944 99? 94^ 95 90 99 100 1024 Delaware, Lackawanna, & Western 148| 137| 1614 1594 157? 159 155! 154 151 1464 1504 155 New York Central 108J 99| 954 96| 974 lOOf 93f 944 92y 99| 105 114? -o <o APPENDIX A (continued) * RAILROAD STOCK PRICES USED IK COMPUTING AVERAGES, 1863-1903- . 1899 1900 1901 1902 1903 .Jan. July.Jan. July.Jan. July.Jan. July.Jan. July.Jan. July Central of New Jersey 97 114 116 119 1455 160 188| 188 180 163 Chicago & Alton 168 176 123 76 CO c r > ° o \ t n 43 334 364 34 25 Chicago, Burlington & Quincy 124f 1264 119 1204 138 196 202 191 184 170 Chicago & Northwestern 141 148 168 160 168 198^ 204^ 248 218 166 Chicago & Rock Island 113 108 104 102 116 156 152 1704 200 142 Cleveland, Columbus, Cin. & Ind. 42 50J 60 j j 55 73f 83 897 964 95| 83 Cleveland & Pittsburg 184 1884 186 185 191 195 189 172 185 184 Illinois Central 114 110 116 110 128J 142 137 150 146 130 Michigan Central 112 113 104 108 107 116 156 ' '170 126 125 Delaware, Lackawanna, & Western 167 1664 174 175£ 1884 233 253 278 266 245 New York Central 121 127 131| 125 129 154 1594 153? 150 1247 i oo o 81 APPENDIX B-l COMPUTED RAILROAD STOCK PRICE AVERAGES TRANSPOSED TO THE EQUIVALENTS OF DOW-JONES AVERAGES Year January July 1863 47.03 58.88 1864 75.03 83.67 1865 57.88 44.87 1866 50.26 50.26 1867 51.34 50.26 1868 57.88 65.34 1869 79.34 84.73 1870 62.01 66.35 1871 66.35 68.57 1872 64.26 59.95 1873 58.89 48.13 1874 45.46 42.65 1875 39.64 36.41 1876 44.24 32.12 1877 29.11 22.41 1878 26.17 32.94 1879 38.67 41.82 1880 53.49 50.26 1881 76.11 51.34 1882 67.49 63.19 1883 67.49 65.34 1884 59.95 42.34 1885 42.34 49.80 1886 56.75 59.96 1887 64.26 66.35 1888 59.95 56.72 1889 58.89 66.35 1890 64.26 65.34 1891 52.42 51.34 1892 57.57 66.35 1893 62.11 52.19 1894 50.26 52.42 1895 ■ 48.11 56.72 1896 49.19 53.50 82 APPENDIX B-2 DOW-JONES RAILROAD AVERAGES YEARLY HIGH AND LOW, 1897-1922 Year High Low 1897 67.23 September 48.12 April 1898 74.99 December 55.89 April 1899 87.04 April 72.48 December 1900 94.99 December 72.99 June 1901 117.86 May 92.66 J anuary 1902 129.36 September 111.73 January 1903 121.28 J anuary 90.10 November 1904 119.46 December 91.31 March 1905 133.54 December 114.52 May 1906 138.36 January 120.30 May 1907 131.95 J anuary 81.41 November 1908 120.05 December 86.04 February 1909 134.46 August 113.90 February 1910 129.90 J anuary 105.59 July 1911 123.86 July 109.80 September 1912 124.35 October 114.92 February 1913 118.10 January 100.50 June 1914 109.43 January 89.41 July 1915 108•28 November 87.85 February 1916 112.28 October 99.11 April 1917 105.76 J anuary * 70.75 December 1918 92.91 November 77.21 January 1919 91.13 May 73.63 December 1920 84.65 October 67.83 February 1921 77.56 January 65.52 June Year 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 83 APPENDIX B-3 DOW-JONES INDUSTRIAL AVERAGES YEARLY HIGH AND LOW, 1897-1922 High Low 55.82 September 38.49 April 60.97 August 42.00 March 77.61 September 58.27 December 71.04 December 52.96 September 78.26 June 61.52 December 68.44 April 60.62 November 67.70 February 42.15 November 73.23 December 46.41 March 96.56 December 68.76 January 103.00 January 85.18 July 96.37 J anuary 53.00 November 88.38 November 58.62 February 100.53 November 79.91 February 98.34 January 73.62 July 87.06 June 72.94 September 94.15 September 80.15 February 88.57 J anuary 72.11 June 83.43 March 71.42 July 99.21 December 54.22 February 110.15 November 84.96 April 99.41 January 65.95 December 89.07 October 73.38 January 119.62 November 79.15 February 109.88 J anuary 66.75 December 81.50 December 63.90 August 84 APPENDIX B-4 DOW-JONES RAILROAD AND INDUSTRIAL AVERAGES RALLIES AND DECLINES, 1922-1939 Year Railroad Industrial 1922 May 29 June 12 Aug. 21 Sept. 11 Oct. 31 Nov. 27 86.83 81.81 93.05 93.99 89.25 82.17 May 29 June 12 Oct. 14 Nov. 27 96.11 90.73 103.43 92.03 1923 March 3 June 20 June 30 Dec. 19 90.63 80.60 76.85 79.34 March 20 July 12 Aug. 27 105.38 87.64 85.76 1924 Jan. 9 May 20 Sept. 24 83.06 81.37 90.71 Feb. 6 March 29 Aug. 20 Oct. 14 101.31 92.28 105.57 99.18 1925 Jan. 9 Aug. 24 Nov. 14 100.78 103.53 108.10 Jan. 22 March 30 Nov. 6 Nov. 24 123.60 115.00 159.39 148.18 1926 Jan. 7 March 3 July 13 Sept. 3 113.12 103.20 116.29 123.33 Feb. 13 March 3 July 19 Sept. 7 Oct. 19 162.08 144.44 158.94 166.10 145.66 1927 Jan. 18 June 28 Oct. 3 Dec. 3 119.29 133.36 144.82 143.44 Jan. 25 May 21 June 27 Oct. 3 Oct. 22 152.73 172.96 165.73 199.78 179.78 1928 Feb. 20 May 9 June 19 Sept. 4 Nov. 27 Dec. 8 132.60 147.65 133.51 144.34 152.70 143.28 Feb. 20 May 14 June 4 Nov. 28 191.33 220.88 201.96 295.62 85 APPENDIX B-4 (continued) DOW-JONES RAILROAD AND INDUSTRIAL AVERAGES RALLIES AND DECLINES, 1922-1939 Year Railroad Industrial 1929 Feb. 2 161.32 March 16 320.00 March 28 150.90 May 27 293.42 May 27 147.18 Sept. 3 381.17 July 20 Sept. 3 Oct. 29 Dec. 20 179.13 189.11 147.06 143.02 Nov. 13 198.69 1930 Feb. 14 156.26 April 17 294.07 March 9 157.94 June 24 211.64 Sept. 30 121.67 Sept. 10 245.09 Nov. 10 Dec. 29 103.94 93.44 Dec• 16 157.51 1931 Feb. 24 111.58 Feb. 24 194.36 March 16 102. lo June 2 121.70 May 2 se. 31 June 27 156.93 June 2 66.85 Oct. 5 86.48 June 27 Sept. 19 Nov. 30 Dec. 17 88.31 53.08 40.89 31.42 Nov. 9 116.79 1932 Jan. 21 40.92 Jan. 5 71.24 Feb. 9 32.76 Jan. 15 85.88 Feb. 16 40.46 June 30 42.84 April 13 20.94 Sept. 7 79.93 June 1 June 16 Sept. 6 Dec. 23 14.10 17.71 37.99 24.05 Dec. 3 55.83 1933 June 5 44.41 Feb. 27 50.16 July 7 56.53 July 18 108.67 Oct. 19 33.96 Oct. 21 83.64 Dec. 11 43.09 Dec. 9 102.92 86 APPENDIX B-4 (continued) DOW-JONES RAILROAD AND INDUSTRIAL AVERAGES RALLIES AND DECLINES, 1922-1939 Year Railroad Industrial 1934 Feb. 5 June 2 Sept. 17 Dec. 5 52.02 41.68 33.19 37.96 Jan. 8 ‘ Feb. 5 Sept. 17 Dec. 6 96.73 110.74 86.69 103.47 1935 Jan. 7 March 28 April 17 Aug. 17 Dec. 9 37.28 27.50 29.44 36.98 41.84 Jan. 7 March 14 Nov. 19 Dec. 19 105.88 96.71 148.44 138.94 1936 Feb. 20 April 29 Oct. 14 Dec. 22 51.27 42.30 59.89 51.68 March 6 April 29 Nov. 17 Dec. 21 158.75 143.65 184.70 175.85 1937 March 16 Sept. 13 Nov. 24 64.46 40.77 29.15 March 10 June 21 Aug. 14 Nov. 24 194.40 165.21 190.02 113.64 1938 Jan. 10 March 3 Aug. 9 Sept. 26 Nov. 9 32.33 19.00 27.80 23.03 33.18 Aug. 6 Sept. 26 Nov. 31 145.67 129.91 98.95 87 APPENDIX B-5 INDUSTRIAL AVERAGES, 1897-1915, CALCULATED TO CORRESPOND TO THE BASIS ON WHICH THE DOW-JONES INDUSTRIAL AVERAGES WERE FIGURED, 1915-1939 Year High Low 1897 40.97 28.25 1898 44.75 30.82 1899 56.97 42.77 1900 52.14 38.87 1901 57.44 45.16 1902 50.23 45.26 1903 49.69 30,94 1904 53.75 34.06 1905 70.88 50.47 1906 75.60 62.52 1907 70.74 38.90 1908 64.87 43.03 1909 73.79 58.65 1910 72.18 54.04 1911 63.90 53.54 1912 69.11 58.83 1913 65.01 52.93 1914 61.24 52.42

Asset Metadata

Creator Cook, J. H. (author)

Core Title A study of railroad common stock prices

Contributor Digitized by ProQuest (provenance)

Degree Master of Business Administration

Degree Program Business Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Finance,OAI-PMH Harvest,Transportation

Language English

Advisor Snell, Hampton K. (committee chair), Pettengill, Robert B. (committee member), Ragan, Rex (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-109276

Unique identifier UC11260283

Identifier EP43142.pdf (filename),usctheses-c20-109276 (legacy record id)

Legacy Identifier EP43142.pdf

Dmrecord 109276

Document Type Thesis

Rights Cook, J. H.

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA