The Gulf, Mobile and Ohio
By James H. Lemly

 

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CHAPTER VIII

          Corporate and Financial Record, 1920-30

 

IN CHAPTER I the statement was made that the greatest task which the Gulf, Mobile and Northern faced in 1920 was to find enough cash to put the road into a reasonable operating condition.   Through the forbearance of its creditors and with much help from the federal government, the Company managed to survive this very difficult year.

 When private control began in March, the road already owed $408,000 in short-term obligations.   These notes were owed to three Eastern banks which were controlled by various members of the Board of Directors.   Although these loans might be extended under stress of circumstances, there was little possibility of increasing them.   Nor, as has been noted previously, were the banks in the Mobile area at all anxious to make loans to the road, although one small bank had indicated its willingness to assist the line in its rebuilding process.

 The Congress of the United States realized that many of the “weak” railroads would be in a precarious position during the period of transition from government control back to private operation.   For this reason, the government, in Section 209 of the Transportation Act 1920, undertook to guarantee the net railway operating income of carriers who chose to accept certain governmental restrictions which were designed to discourage the more prosperous roads from accepting this aid.   There apparently was no question in anyone’s as to what the GM&N would do.   It accepted almost immediately government’s guarantee and went to work to rebuild its lines as rapidly as its resources would permit.  

 Section 210 of the same act provided that the government would, in addition, make loans to railroads for capital improvements, if certain requirements were met.   The Secretary of the Treasury was ordered to set up a revolving fund from which railroads could borrow for improvement projects specifically approved by the Interstate Commerce Commission.   In May, 1920, the Board of Directors authorized Mr. Tigrett to seek a $1,850,000 loan to be used to buy new equipment and further to improve the roadbed.  This turned out to be too ambitious a program for the Interstate Commerce Commission to approve at that time, but the GM&N was able to borrow $515,000 from the U.S.  Treasury under this plan in 1920.   In 1922 the Company was further authorized to borrow more than $900,000 for the purpose of rebuilding its freight car fleet and for other capital expenditures.

 The money obtained in 1920 was used to continue the work on roadbed and equipment improvement.   A sum of $206,050 was allocated to repairing existing freight cars of various types, $98,700 was to be used in partial payment for four “Mikado” type freight engines, and $15,000 went toward the purchase of two more switch engines.   The allocation for improvement of existing locomotive equipment was $51,000.   Ballast for the Jackson extension was allocated $72,000, and $23,000 was to be spent to build an interlocking switch system with the Illinois Central at Jackson, Tennessee.   Two locomotive cranes were to be bought at a cost of $17,500, as well as a new ditching machine for roadbed maintenance, which was to cost $12,500.   The final $20,000 was to be spent on new rail for various weak spots along the line.

 The GM&N had to put up heavy security for this government loan, which was to run for 15 years at 6 per cent interest.   This rate seems high to us now, but at the same time the GM&N was paying 7 per cent on its short‑term notes which were held by private lending institutions.

 The GM&N settled its account with the Director General of Railroads on September 23, 1920.  The road owed the United States Railroad Administration  $100,000 at this date.   Fortunately for the Company, the Director General agreed to allow the GM&N to fund this $100,000 and also allowed the road to borrow $380,000 in addition.   This total amount of $480,000 was to bear 6 per cent interest and was payable March 1, 1930.   The funds which the Company received under this arrangement were to be used for the completion of construction work on the Jackson extension and the Blodgett branch.   Both of these projects had been approved by the U.S.  Railroad Administration during federal control, and the agency felt obligated to help the Company finish the work since the government had authorized the expenditures under wartime conditions.

 These government loans during the year were in addition to the $528,000 which the road received under the provisions of the federal guaranty for operations from March 1 to September l.  It is clear that the GM&N would have been in dire straits indeed without these funds.   The railroads of the country had a strong case when they said that many of their difficulties in 1920 could be traced to government operation during the war period; the GM&N, however, has to give credit to the government for its chance to stay alive after the road was returned to private hands in 1920.

 During the summer of 1920, the GM&N bought twenty-six of the twenty-seven $1,000 bonds of the Mobile, Jackson, and Kansas City which were still outstanding.   The one remaining bond could not be bought, but the road arranged to deposit $1,300 with the trustee under the Mobile, Jackson, and Kansas City mortgage.  Since all obligations under this mortgage were thus satisfied, the mortgage was removed from record.   This move was in preparation for the execution of a new GM&N first mortgage which the road had originally planned to issue when the Company began doing business in January, 1917.   The road finally executed this mortgage on October 1, 1920, and under it issued $4,000,000 in 6 per cent Series A gold bonds.  The Interstate Commerce Commission refused to allow the sale of these bonds at this time, but it did authorize the road to use them as collateral for loans, and $1,030,000 were pledged as collateral for the $515,000 loan from the U.S.  Treasury.   The unused bonds, $2,970,000 in amount, were held in the treasury of the Company at the close of the year.

 Although the GM&N did not stabilize its financial problems entirely in 1920, it did accomplish much in the 10 months of private control.   One strong bit of evidence testifying to this fact was the ability of the road to borrow from Mobile banks in the first months of 1921.   When Mr. Tigrett reported on financial affairs to the Board meeting on June 17, he stated that the road owed $170,000 to Mobile banks, $408,000 to the same three Eastern banks and $995,000 to the federal government.

 There was little change in the capital structure of the GM&N during 1921.   Mr. Tigrett was able to report to the Board on November 18, however, that the cash position of the Company had shown improvement.   In spite of this fact, the Company still held its loans at the $1,573,000 level.

 The improvements which had been made earlier to both the roadbed and equipment had begun to be reflected in the better financial condition of the road.   Much work still needed to be done to put the road in safe and profitable operating condition.   As more and more of the GM&N’s freight cars were returned from “foreign” roads, it was see n that many of these cars were no longer in shape to be used.   The GM&N was also faced with the maturing of its notes which were held by private banking institutions.   In order to care for these needs and to continue work on the roadbed, the Interstate Commerce Commission in March, 1922, approved a further loan to the GM&N, in the amount of $918,500.” Terms for this loan were similar to those on which the earlier federal loan had been granted.   The GM&N was authorized to use $264,000 of the total to pay half of all its private loans.   A total of $354,500 was allocated to additions and betterments to equipment.   Most of this was to be spent on the bad‑order freight cars.   The $300,000 remaining was to be spent on improvements to roadway and structures.   Fortunately for the GM&N, the Interstate Commerce Commission had become impressed with the improvements in the over-all operation and attitude of the road.   By this time the commission was eager to encourage the GM&N and to assist its further development.

 The confidence of the Interstate Commerce Commission in the GM&N’s ability to improve was well founded.   At a Board meeting on September 22, 1922, Mr. Tigrett was able to report that all bank loans had been repaid.   The Company no longer had any short-term loans outstanding.   The road was not yet prosperous, except in a relative sense, but at least it had reached a point where its existence was partially secure.   It was no longer necessary to renew its past-due notes “for 90 days” in an effort to prevent bankruptcy.

 The GM&N was to borrow money many times in later years but has never had to return to the hand-to-mouth existence of these years before 1922.   The management has been very careful to watch its, cash requirements closely and somehow to live within its resources, if not within its income, at all times.

 The GM&N paid its first dividend on preferred stock on November 15, 1923.   Those former bondholders who had become stockholders in 1917 had been forced to wait for seven long years without any income from their investment.   By September, 1923, however, the road appeared to have overcome its worst difficulties, and the future looked much brighter than the past.  it must have been a happy occasion when the Board voted this first small dividend, which was only 1 per cent on the preferred stock of the road.

 After this beginning, the GM&N was able to pay dividends of varying amounts each year for the rest of the decade.   The road always remained in arrears on its 6 per cent annual payments to the preferred stockholders; so, obviously, the holders of common stock were paid nothing during the whole ten years from 1920 to 1930.   The Company was able to pay a full 6 per cent dividend on the preferred stock for several of these ten years, and it also made some payments on the dividends in arrears, but the decade ended with an accumulated unpaid total of 19½ per cent still due.

 If dividends paid on stocks of the Company were the only evidence of corporate strength, then the GM&N would not appear very strong in the years before 1930.   Another indication of corporate worth which is of great importance in financial circles is the value placed on a company’s stocks in the securities markets of the country.   GM&N stocks showed substantial increases during the decade of 1920 to 1930.   Trust certificates representing GM&N preferred stock sold in 1921 at a high point of 26 on the New York Stock Exchange and touched a low of 15 in that same year.” In 1927, GM&N preferred reached a high point of 112¼ before it turned down.   The low point for this year was a record 105.   By 1930, months after the initial stock‑market crash in 1929, GM&N preferred had dropped considerably, but its high for the year was 98¼.   Its low point for the same year was 55⅜.

 GM&N common stock prices ranged substantially below the preferred, but in 1927 the common stock of the road reached a high of 76⅝, with no dividends ever having been paid on it.   Obviously, the people who traded on the stock market felt that the GM&N had shown substantial development.   A more complete comparison of the movement of GM&N stock prices can be made from the material in Table 3.

 By the end of 1924, the GM&N’s financial affairs were in such good shape that the management felt justified in asking the Interstate Commerce Commission to allow it to put some of its bonds on the market.   At a Board meeting on March 20, 1925, it was announced that Kuhn, Loeb and Company had agreed to buy $4,000,000 of GM&N’s first mortgage Series B, 5½ per cent 25-year bonds at 96¾.   This sale had been approved by the Interstate Commerce Commission, and these Series B bonds were to replace the Series A, 6 per cent bonds which the Company had been using as collateral for its various short and long term loans.   These loans were to be paid from the proceeds of the sale, and the rest of the funds received would be held in the Company treasury for the purpose of making further improvements to the road.

  

                                                                                               TABLE  3

                                     COMPARATIVE RECORD OF STOCK PRICES OF THE GULF, MOBILE AND

                                                         NORTHERN AND THE DOW-JONES RAIL AVERAGE

                          PREFERRED STOCK        COMMON STOCK                           DOW JONES

                      Low Point                High Point                Low Point                High Point             Low         High

1920              18 1/8                     35 3/4                     7                              17 1/2                    67.8          85.4

1921              15                            26                           4 3/4                        11 1/2                    65.57        7.6

1922              16                            47                           5                                19                          73.4          94.0

1923              44 7/8                      62 3/4                    9 1/2                        20                          76.8          90.6

1924              50                            99                           11 3 /4                      29 1/2                    80.2          99.5

1925              89 1/4                     109 1/4                    23                            36 3/8                   93.0         112.9

1926              95                           109 1/2                    25 1/8                      41 1/4                  102.4        123.3

1927              105                          112 1/4                    35 1/8                     76 5/8                   119.3        144.8

1928              99                            109                          43                             61 7/8                  132.6        152.7

1929              70                            103                          18                             59                         127.4        190.5

1930              55 3/8                      98 1/4                     10 1/8                     46 1/2                    89.5        158.4

 

SOURCE: GM&N figures from Moody’s.   Dow-Jones Rail Average from The Dow-Jones Averages (13th ed., New York: Barron’s Publishing Company, 1948).

                 The next issue of GM&N bonds was put on the market in the early months of 1927.   Again, Kuhn, Loeb and Company agreed to buy, this time at 97¼ plus accrued interest.   These bonds, totaling $3,500, 000, also were issued under the general mortgage of 1920.   They were Series C bonds due 1950 with an interest rate of 5 per cent instead of the 5½ per cent on the bonds sold in 1924.   Funds from this issue were to be used to complete the work on the Jackson and Eastern line from Union to Jackson, Mississippi, and to reimburse the treasury for money already spent on capital improvements.

                 In the years following 1927, the GM&N continued to make additions to its capital account, but no more bonds were sold to the public until 1930.   No new expansion was contemplated at this time.   The management, however, felt it would be wise to replenish its treasury for capital improvements already made.   The Interstate Commerce Commission gave its approval, and the road sold $3,000, 000 more of its 5 per cent bonds to Kuhn, Loeb and Company at 97.   From the funds thus obtained, the GM&N paid its current indebtedness of $750,000 and put the rest of the money in special interest-bearing accounts.   It could not accurately be said that at this date the GM&N’s management foresaw the full extent of the approaching depression; it is safe to assume, however, that the banking experience of several members of the GM&N’s top management, coupled with the difficulty of acquiring new funds in the early 1920’s, made the road very conscious of the value of an adequate treasury reserve.   It can be said without any fear of contradiction that the funds obtained in this bond sale were very, very welcome in the years which followed! 

                 The GM&N bought up a few shares of its preferred stock and some of its bonds during the decade 1920‑30.   Whenever the Company heard of its securities’ being sold at exceptionally low levels, it tried to return these securities to its treasury.   The only appreciable stock transaction which the road conducted, however, was concluded at the end of the decade.   In the fall of 1929, the GM&N decided that it was necessary to acquire stock control of the New Orleans Great Northern.   ICC approval was secured for a plan to exchange 1 share of GM&N common stock for 2¾ shares of NOGN common.   The New Orleans Great Northern had no preferred stock.   The plan called for the New Orleans Great Northern to continue as a separate corporation, but the GM&N’s top management was to assume complete control of New Orleans Great Northern operations.

                 By February 14, 1930, almost 92 per cent of New Orleans Great Northern stock had been exchanged for GM&N stock.   The GM&N began to assume control immediately, and soon thereafter the New Orleans Great Northern ceased to exist as an operating entity.   It became the Louisiana Division of the GM&N.   The exchange agreement was kept open, and eventually the GM&N acquired more than 95 per cent of the total shares of New Orleans Great Northern. This transaction added slightly more than 25,400 shares of common to the GM&N’s capital structure.   Since the GM&N had about 225,600 shares of stock outstanding prior to this arrangement, the exchange plan gave the former stockholders of the New Orleans Great Northern a little more than a 10 per cent stock interest in the GM&N.   As the New Orleans Great Northern was forced soon after this to go into receivership, costing the GM&N its stockholdings, some might assume that this transaction was not a wise move on the part of the management of the GM&N.   In the light of subsequent events, it does seem apparent that by 1932 the GM&N might have been able to secure control of New Orleans Great Northern without the stock exchange plan of 1929‑30, but few of us could have foreseen the depths to which the depression was to force our economy.    The management of the GM&N knew that the New Orleans line which the New Orleans Great Northern owned was vital to the well‑being of the GM&N’s Chicago, Burlington and Quincy relationship, and an exchange plan such as the one offered seemed quite reasonable to GM&N stockholders in 1929.    If the New Orleans Great Northern had been blessed with a bonded debt structure similar to that of the GM&N, then the New Orleans Great Northern would not have been forced into receivership and the trade would still seem quite reasonable.

 

 

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