The St. Paul

The long-drawn-out debate about the immediate future of the Chicago, Milwaukee & St. Paul R. R. (TIME, Mar. 23) came to a quick and decisive end last week when the line was suddenly placed in a receivership.

The immediate cause of the failure was the road's inability to meet some $48,000,000 of its 4% bonds due June 1 this year. All winter, conferences have been held, but the road's bankers, led by Jerome J. Hanauer of Kuhn, Loeb & Co. and President Charles E. Mitchell of the National City Bank, Manhattan, evidently refused to float a new refunding loan. In this they were no doubt quite justified, since such a loan could not have been placed below 6%, even if at that figure: and since, on that basis, about $1,000,000 additional fixed charges would have been saddled on the already over-burdened company. Accordingly, three receivers for the road were appointed, while separate, protective committees were also organized for its bondholders, its preferred stockholders and its common stockholders. Undoubtedly the next step will consist of a paring down of the stock and junior bond issues, to effect a reduction of capitalization and fixed charges. The bankers will probably produce a "reorganization plan" effecting these painful but necessary changes when the time is propitious and the road's earnings make a better comparative showing. It is estimated that holders of St. Paul securities have suffered a loss of about $500,000,000--the aggregate difference between the par and market value of the road's securities on a recent date.

The basic causes of the St. Paul failure run back many years. In general, they can be summarized as the failure of the road's earnings to sustain its tremendous capitalization. In part, the bankruptcy can be attributed to one of the greatest gambles ever taken in U. S. railroading--the construction of the 1,400 miles "Puget Sound extension" which carried the road from the Middle West to the Pacific Coast, 15 years ago. Previous to this time, the St. Paul had been a prosperous "granger" road in the Middle West. But James J. Hill and others had pressed their lines to the Coast, and the St. Paul faced the dilemma of perishing slowly for lack of through freight, or of entering into transcontinental railroading as a late comer. It assumed the later alternative and, in 1913, assumed the liabilities of the Puget Sound extension, after having advanced $155,000,000 to construct it.

For numerous reasons, most of them unforseeable at the time, the step proved dangerous. The War brought prosperity to U. S. industry but disaster to U. S. railroads. The high cost of the extension, the subsequent post-War agricultural depression in the Northwest, the slow growth of population through that region, the severe competition in the other transcontinental roads and even the Panama Canal--all bore heavily on the St. Paul, already staggering under the necessity of earning fixed charges of $20,000,000 every year. Thus, for several years, the road has been in a most vulnerable position, and only barely able to meet its bond coupons each year, despite able and conscientious management. The necessity of finding $48,000,000 new money to pay off holders of the 1925 loan, and the unwillingness of the bankers to finance a system already overloaded with debt proved sufficient shock to bring the financially top-heavy company crashing to the ground.