The Gulf, Mobile and Ohio
By James H. Lemly

 

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CHAPTER XVIII

The Importance of Consolidation in the Growth of the Gulf, Mobile and Northern - Gulf, Mobile and Ohio

 

THE GM&N OF 1920-25

Company PicnicCONSOLIDATION in itself would not have solved the short-run problems which beset the Gulf, Mobile and Northern of 1920.  It is true that, had the GM&N been purchased by the Illinois Central or the Louisville and Nashville at a price commensurate with its earning capacity, the management and the Board of Directors of the GM&N would have shifted their problems to other shoulders.  The purchasing road, however, would have had to set itself to the tasks of rearranging the affairs of the road and of clearing up the headaches which would still exist on the sector of line between Jackson, Tennessee, and Mobile.

The short-run problems which confronted the management of the GM&N have been discussed at length in earlier chapters.  Briefly, they were as follows: (1) The Company, in spite of having no bonded debt, was debt-ridden and almost bankrupt.  (2) The roadbed and equipment of the company were unfit for efficient operation.  (3) The operating department of the road was inefficient and was unable to persuade its employees that a change was needed.  (4) The Company had such poor public relations with its territory that, at one time soon after 1920, the Mississippi Public Service Commission seriously considered issuing an order to abandon the entire operation.

This was a sorry state of affairs for the GM&N to be in, only three years after it began its existence as the successor to the defunct New Orleans, Mobile and Chicago.   In January, 1917, the Company had begun its operations with no bonded debt and with high hopes of expanding into a more important place in railroad affairs.  The stockholders of the GM&N were the former bondholders of the New Orleans, Mobile and Chicago, who had been persuaded to exchange their depreciated bonds for common and preferred stock.  This plan was evolved as the most feasible means of putting the new Company on its feet.  It was thought that the GM&N with no bonds outstanding would be able to borrow funds to build needed extensions and to rehabilitate its roadbed and rolling stock.

The road did begin the extension of its line from Middleton to Jackson, Tennessee, in 1917.   The work progressed slowly, however, and it was 1919 before the 40-mile extension was completed.  This extension was vitally necessary to keep the road alive, for it gave the line a workable northern terminal.  The 40-mile addition in effect added 83 miles to the line, for, prior to this time, most of the traffic of the road left the line at New Albany, Mississippi, some 43 miles below Middleton.  This single action by the GM&N increased the average number of miles each ton of freight was hauled by about 20 per cent.  At the same time that the effective haul was lengthened, the GM&N was able to reach a point where it could hope to bargain for traffic with the three roads which went beyond Jackson.

One other action was completed prior to 1920 which improved the chances of the survival of the road.  In 1918 the Company had purchased control of the 30-mile Meridian and Memphis which gave the line an entry into Meridian, Mississippi, at that time the most important rail junction, as well as the largest city, in the state.

The completion of these moves prior to 1920 did not solve the road’s problems.  Had these steps not been taken, however, the road would have had little chance to remain an independent rail line.

Hard and intelligent work seemed to be the only solution to the problems which faced the GM&N in 1920, and the new management resolutely, set to work to see what it could accomplish.  The short-term debt of the Company was juggled to prevent foreclosure; then the Company began to try to improve its operations with the slim resources at its command.   As fast as its financial condition would permit, the Company began to rebuild its roadbed and equipment.  When this program was well under way the Company started its other drives to create a loyal, able and eager working force to support the growth program.  At the same time the Company inaugurated plans to secure the confidence and loyalty of the people served by the road.  Shippers were encouraged to use the GM&N for a variety of reasons, but one of the most persuasive was idea that a stronger railroad could help create a stronger economic community.

Through careful execution of these and other programs the Company made large gains in traffic volume, operating efficiency, and net income in the years from 1921 to 1926.  For a number of years, however, the problems looked so formidable that even the optimistic managers of the GM&N periodically were ready to quit.  Probably the only thing which prevented the GM&N from being sold to the IC was the fact that the IC would not make an offer worth considering!

By, the end of 1925 the situation of the GM&N had improved to the point that: (1) the road was in a strong condition financially; (2) its roadbed was greatly improved and its equipment adequate to carry its tonnage at low unit costs; (3) the operating and traffic personnel were excellent and were proud of “their” road; and (4) the road was spoken of as, one of the most enlightened corporations operating in Mississippi.  These operating improvements, however, did not alter certain basic situations which made the GM&N’s long-run future look very dark.  The GM&N was still a small sectional road which had several fundamental weaknesses.  First, the line was not of sufficient length to secure a haul which by railroad would be called long or highly profitable, except on freight which moved all the way from Mobile to Jackson.  Second, the road did not operate between traffic points which were important enough to allow the Company to make rates on its own account.  The GM&N was compelled to secure the concurrence of competing lines in making its rates, which, in effect, forced the Company to take, any division of joint rates which it could wheedle from its bigger connections, the IC or the Louisville and Nashville or the Mobile and Ohio.  The third weakness of the GM&N of 1925 was a lack of permanent sources of traffic along much of its lines.  The timber of Mississippi was rapidly being cut out and Mobile alone could not be counted upon to keep the entire line to Jackson, Tennessee, prosperous.

At this stage in the affairs of the GM&N, its management decided that the Company was strong enough to undertake an expansion program which, it was hoped, would remove some if not all, of the weaknesses of the line.  The decision to expand the operations of the GM&N was no sudden, spur-of-the-moment thing.  On the contrary, growth had been the long-range goal of the Company ever since its inception in 1917.  In keeping with the idea that eventual expansion was necessary, the management in 1923 began making loans to certain smaller connecting roads so that these roads could survive and become either connecting links or at least feeder lines to the GM&N of the future.  In 1925 the management decided that the time had come to make larger, bolder moves toward the basic goal of an expanded GM&N.

 

  THE BURLINGTON-GM&N-NEW ORLEANS GREAT NORTHERN AGREEMENT-1926

Early in 1926 the Company acquired control of the Jackson and Eastern which gave the GM&N a franchise to enter Jackson, Mississippi, from Union, Mississippi, some 70 miles to the east.  This seemingly unimportant road had only a little more than 30 miles of track in operation in 1926, but when the GM&N completed the line in 1927 it made contact with the New Orleans Great Northern which ran from Jackson to New Orleans.  The New Orleans Great Northern originated a substantial volume of tonnage along its line which generally moved to northern markets; therefore, the GM&N increased its traffic volume on northbound shipments.  At the same time, the GM&N secured access to the South’s major seaport, which was the primary objective of the move.

At the same time that the GM&N arranged to acquire the Jackson and Eastern for entry into Jackson, Mississippi, and access to New Orleans, the Company negotiated a trackage agreement with the Nashville, Chattanooga and St.  Louis to reach Paducah, Kentucky.  This move allowed GM&N trains to operate with their own crews from Jackson, Tennessee, to Paducah.  At Paducah the GM&N was able to make contact with the Chicago, Burlington and Quincy, thus creating a community of interest in a freight route from New Orleans and Mobile to St. Louis and Chicago.  The GM&N did not hope to earn much additional net income by operations between Jackson and Paducah, but the Burlington agreement promised to increase tonnage greatly on the line from Jackson, Tennessee, through Jackson, Mississippi, to New Orleans.  By operating over the NC&STL tracks from Paducah to Jackson, the GM&N created a “bridge” for the purpose of adding to net income produced on its line south of that point.

The development of the New Orleans Great Northern-GM&N Burlington traffic route helped produce additional tonnage for the GM&N but it brought problems also.  For one thing, the GM&N ceased to be thought of as a small sectional road which had no importance.  GM&N employees who formerly had worked under simpler rules and pay scales below the national level were encouraged by their brotherhoods to seek “big company” rules of work and pay.   Neither was the IC willing to continue to act as a rather benign big brother, always ready to lend a helping hand to solve operating or other problems.

As a result of these and other changes, the GM&N was not so prosperous in the years 1927 to 1930 as it was in 1923-26.  In fact, the GM&N was never again to experience the level of profits per mile of road which it possessed prior to its expansion program in 1926, but this is not meant to imply that the road made a mistake in undertaking the 1926 expansion program.  Had it depended only on its original traffic territory, the road certainly would have fallen into bankruptcy in the depression and perhaps would have passed out of existence.

ACQUISITION OF THE NEW ORLEANS GREAT NORTHERN - 1930-33

The best evidence that the GM&N did not want to return to its pre-1926 status was its decision to buy control of the New Orleans Great Northern, in 1929.  After the first effects of the stock market crash, the New Orleans Great Northern began to look shaky, and the GNMN decided to acquire control by a stock exchange plan.  This was a defensive measure primarily, because the GM&N felt that it had to keep its route to New Orleans open at almost any cost.  In 1932 the GM&N saw its stock in the New Orleans Great Northern wiped out by a receivership, but the New Orleans route remained in the hands of the GNI&N because of a 99-year lease which was taken on the revamped New Orleans Great Northern.

During the early, years of the depression of the 1930’s, the GM&N barely had enough strength to survive as a functioning transportation company.  All plans for further development were shelved in the effort to remain solvent.  The future was not ignored entirely, however, for it was in 1932 that the management of the GM&N had its first thoughts of merging with the M&O.  Nothing was accomplished at that time because the Southern Railway was not willing to release the M&O from its system, but the idea remained and bore fruit at a later date.

Throughout the depression years the road made many adjustments in an effort to reduce expenses.  Steam passenger train service was reduced and later was discontinued, with Diesel electric units, gas electric units, and highway motor busses taking over this task.  In this same period the GM&N began its extensive highway freight service which has revolutionized LCL freight operations of the Company.  In addition to these efforts toward reduction of expenses, the GM &N tried to lower its rental payments on the trackage between Jackson, Tennessee, and Paducah.  Although the costs were lowered, this service later erupted into one of the biggest problems which the GM&N (and later the Gulf, Mobile and Ohio) management has had to face, and it very nearly caused the road to revert to its pre-1926 status.

EFFORT TO KEEP THE TRACKAGE ENTRY INTO PADUCAH - 1932-38

In mid-1932 the GM&N made a new trackage agreement to continue its operations from Jackson, Tennessee, to Paducah.  The NC&STL had been unwilling to reduce its rental charge for the use o£ its tracks; as a result, the GM&N turned to the IC.  A new contract was signed which saved the GM&N an appreciable amount of money.  This new contract was opposed, however, by the employees of the IC as a violation of their agreement with the IC.  In 1936 the IC acceded to the demands of its unions and informed the GM&N that it could no longer use the IC tracks.  The GM&N resorted to the courts to keep its entry into Paducah.  In 1938 the courts finally sided with the IC and its unions and ordered the GM&N to cease using the IC line.  The GM&N was saved from disaster by making a preferential agreement with the M&O to haul all GM&N’s controlled freight from Jackson, Tennessee, to St.  Louis in place of the former service between Jackson and Paducah.  Under the agreement, the GM&N was to get a profitable division of the joint rates, and all published rates were to be protected.  This arrangement strained the relations between the GM&N and the Burlington, but it kept the GM&N from reverting to the status of a sectional line at the mercy of its bigger, and longer, connecting roads.  (At this point, it may be well to say that the only reason the M&O was willing to make an agreement so advantageous to the GM&N was that the GM&N at the same time entered into an agreement to merge with the M&O as soon as all legal difficulties could be removed.)

MERGER OF THE GM&N AND THE M&O

When the president of the IC informed the GM&N in 1936 that it was canceling the Paducah trackage agreement, the management of the GM&N began to redouble its efforts to merge with the M&O It seemed that there was no hope for the GM&N to survive as a rail unit unless it become a part of a bigger system.  Thus the turn of circumstances which had forced the GM&N to change from the NC&STL tracks to those of the IC also drove the GM&N into its efforts, which finally succeeded, to find a way to merge with the M&O In 1932, when the M&O first slipped into bankruptcy and receivership, the management of the GM&N began a careful investigation of the desirability of merging the two companies into one transportation system.  The more the matter was considered, the more it became evident that both lines would profit by the union.  Such a consolidation, if carefully arranged, would go a long way toward solving all of the long-run traffic problems of the GM&N and at the same time would strengthen the M&O.

The biggest obstacle to the merger would be the fact that the two roads were paralleling, and hence competitive, from Mobile to Jackson, Tennessee.  Normally, no such action as a merger could ever be expected.  In this instance, however, there were factors which encouraged and almost demanded the merger.  Individually, both of these lines were weak and apparently could not stand alone against their stronger competitors.  As a combined unit, without abandoning service to any section, the two roads should be able to survive and render a superior type of service to their territories.  The GM&N’s line from Union, Mississippi, to Jackson and New Orleans would provide traffic for the M&O line from Jackson, Tennessee, to St.  Louis.  The business of the GM&N which now moved from Jackson, Tennessee, to Paducah and then north on the Burlington would flow over the M&O to St. Louis.  The GM&N in turn, would receive added volume for its Union-Jackson, Mississippi-New Orleans line because the M&O’s former preferred connection was the New Orleans and Northeastern at Meridian, Mississippi.  Thus both roads could add profitable traffic volume to sections of the other.

The most important gain for the GM&N would be a permanent arrangement to enter a major terminal such as St.  Louis.  Since its trackage agreement to Paducah was subject to the dictates of its most active competitor, the GM&N might at some future date be forced back to the position it occupied in the early years of 1920-25.  The merger would give the M&O freedom from the restrictions of receivership.  In addition, it would permanently remove the influence of the Southern, which had at times dictated policy which was injurious to the M&O although profitable to the Southern system as a whole.  At the same time, both roads would be able to realize savings from consolidation of certain facilities at common points on the lines, primarily at Mobile, Meridian, and Jackson, Tennessee; and both roads should be able to effect savings in off-line traffic solicitation offices.

Not until eight trying years had passed did the merger become a reality, but once the consolidation was completed the new GM&O emerged as a major sectional road which held great promise of being a successful, permanent factor in the transportation circles of the United States.  The GM&N management team with a few changes and additions took over the GM&O Immediately it began to institute economies on the M&O side of the Company.  At the same time it began a vigorous campaign to develop new business much in the pattern of its earlier efforts on the GM&N Within a relatively short time the two properties were merged in spirit as they had been in naive.  The transportation world acclaimed the consolidation as one of the most important events in modern rail history, but the managers of the old GM&N were satisfied to know that they had solved the problems which had been facing them ever since March, 1920.

 

THE ALTON ACQUISITION-1947

A new rail system stretching from Chicago to the Gulf was formed in 1947 when the GM&O merged the Alton Railroad into its operations.  This end-to-end consolidation was quite unlike the M&O-GM&N combination.

The Alton sector of the new Company could expect to gain large amounts of traffic from the GM&O because of the ability of the GM&O’s traffic solicitors to control the routing of much of the freight that originated on the GM&O lines.  The Alton also secured the services of an ambitious management team which had made a name for itself by cutting expenses and building traffic.

On the side of the GM&O some traffic from the Alton territory could be directed onto the GM&O’s lines, south of St. Louis.  Also, the GM&O secured the Alton’s lines and property without any additions to the fixed charges of the GM&O except for equipment obligations, The GM&O had an opportunity to effect certain economies on the Alton lines at once and to add a substantial tonnage to the Alton’s trains as well as some to the GM&O’s former lines.  The Alton had a foothold in the rich industrial and commercial regions around Chicago, St. Louis, and Kansas City.  If more traffic could be induced to use the Alton-GM&O lines while expenses were held in check, the expanded system should prosper greatly in the long run.

Although the newly enlarged GM&O has not been tested by a major business decline, it appears that the merger of the Alton and GM&O lines is going to be quite successful.  At least the net income figures of the road since 1947 seem to give this indication.

 

ALTERING THE ENTRY INTO BIRMINGHAM - 1950-52

 The most recent important development in the growth of the GM&O has been the move to alter the leased trackage route into Birmingham.  This action was begun publicly in 1,950 but had been desired by management ever since the GM&N merged with the M&O.  In 1950 the GM&O asked the Interstate Commerce Commission for permission to cease using the tracks of the IC and the Southern from Corinth, Mississippi, to Birmingham.  Instead, the GM&O wanted to use the tracks of the L&N from Tuscaloosa to Birmingham, thus shortening the off-line mileage for the GM&O by 117 miles.  This move would also enable the GM&O to give much better service between New Orleans and Birmingham, as well as between Mobile and Birmingham, since Artesia, Mississippi, would be the point of departure from the main line rather than Corinth.

In the spring of 1952 the GM&O with ICC approval, began using the shorter route over the L&N tracks.  The Commission did not free the GM&O from its inherited perpetual contract with the IC, however.  Instead, the Commission advised that only the courts could settle such matters.  As a result, the GM&O is now asking that the contract between its predecessor, the M&O and the IC be terminated.  The GM&O contends that contracts of this type are inimical to the best interests of the parties involved and to society at large.  If there is no way to set aside perpetual contracts, even though generous compensation is offered, then the rail system of the country is frozen into a rigid mold at a time when the transportation needs of the country are changing to keep pace with an ever-developing economy.

Unfortunately, since court decisions come quite slowly, in all likelihood it will be years before the case is settled.  The GM&O will continue to use the shorter L&N route into Birmingham, whatever the outcome of the case for cancellation of the contract.  Meanwhile, the GM&O has ceased making payments which, under the contract, are due to the IC.  The two companies have agreed that further payment should await determination by the court of the GM&O’s obligation under the changed circumstances.

From this statement of the growth program of the GM&N-GM&O, it is easy to see that consolidation has been the visible, spectacular factor in the rise of the road.  Its weak 409-mile line of 1920 has grown into a stable, prosperous system of almost 2,800 miles, and not more than 75 miles of this addition has been by construction.  It is important to remember, however, that the merger program was not carefully planned in 1920 and then executed in later years as conditions permitted.  True, the long-range objective of the Company, ever since the reorganization in 1911, has been to expand into a through rail line.  Only two minor parts of the plans of 1917, however, were carried out: (1) the purchase of the Meridian and Memphis, and (2) the building of the extension from Middleton to Jackson, Tennessee.  The road did get a line into New Orleans and a permanent route to a major interchange point at St. Louis, but the Company had no idea in 1920 that it would expand by way of Jackson, Mississippi, to the south, nor did it dream of merging with the M&O, which at that time was an important part of the very prosperous Southern.

The consolidation program of the GM&N-GM&O may be explained as the careful, intelligent solution of problems which, from time to time, faced a team of dedicated railroad managers.  In 1920 these men were charged with the task of administering the affairs of the weak 409-mile railroad.  Their job was to serve the territory and to improve the earning power of the line as much as possible, both in the immediate present and in the long run.  As they endeavored to render service to the territory traversed by the road and to earn profits by so doing, they saw opportunities to improve both service and long-run profit potential by consolidations with neighboring roads.  The merging of these properties has created the GM&O of today, which is still devoted to its task of serving its public and seeking to earn a return for those who have invested their capital in the Company.

 

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