Monday, June 25, 2012

Mr. Ryan on Metropolitan Traction Finance.

May 2, 1908, The Outlook, Vol. 89, No. 1,

Mr. Ryan on Metropolitan Traction Finance.

The Grand Jury which has been investigating charges of criminal wrongdoing in the management of the surface transit lines comprising the Metropolitan system in New York City reported last week that it found no basis in any of the charges for indictments. In its statement the Jury said that at the beginning of its inquiry its members were “impressed with the deplorable condition of the street surface railways of the city, both on the physical and financial side,” and that at the end of its work “much had appeared in methods and expenditures which, in the light of experience, sound business judgment would not sanction, and there were disbursements deserving severe condemnation.” Nevertheless it had not been able to obtain any evidence showing the commission of a crime on which it could act. On the same day a statement was issued by Mr. Thomas F. Ryan, the leading figure in the recent history of the Metropolitan System, in defense of the actions of his associates and himself in connection with the associated transit lines. Mr. Ryan summarized the accusations against the Metropolitan managers and directors as follows:

1. That the stock of the company consists chiefiy of “water.”

2. That enormous profits were made by “ insiders ” through construction contracts and otherwise.

3. That in the purchase by the Metropolitan Securities Company of the Wall and Cortlandt Street Railway the “insiders” appropriated $111,000 each to his personal use.

Each of these charges he characterizes as false. In refutation of the first, he tells of the formation, in 1885, of the Metropolitan Traction Company of New Jersey, with an authorized capital of $10,000,000. for which $6,000,000 was paid into the treasury in cash. By subsequent operations, which included the formation of two other companies, the exchange of stocks of new companies for those of old, the increase of the capitalization of the succeeding companies, and the sale of additional stock for cash, the stock capitalization of the system became in 1900 $52,000,000, representing cash paid into the treasury of $43,240,000. The difference between the whole amount of cash paid into the company’s treasury and the whole amount of stock issued Mr. Ryan considers to be a perfectly legitimate difference in view of the newness of the venture and the precariousness of the investment. The second charge Mr. Ryan meets with a description of what actually happened in a typical case. The Lexington Avenue Railroad Company was organized in 1893 and authorized to issue $5,000,000 of stock and $5,000,000 of bonds. The Metropolitan Traction Company contracted to build the road and to obtain for the Lexington Avenue Company the right to operate its cars on Twenty-third Street and Broadway in return for the stock and bond capital of the road. The $10,000,000 worth of securities were handed over to the Metropolitan, which sold the bonds at par and with the proceeds built the road. The stock remained in the treasury of the Metropolitan and was subsequently transformed into stock of the Metropolitan Street Railway Company. The same procedure was followed with the Columbus and Ninth Avenue Company, which issued to the Metropolitan $3,000,000 of stock and $3,000,000 of bonds. “There was no increase in capitalization to the public in any instance,” says Mr. Ryan, “'all of the issued shares of subordinate companies being held in the treasury of the Metropolitan Company, or pledged under mortgage, and never offered for sale.” With regard to the third charge, Mr. Ryan asserts that the payments of $111,000 each to Messrs. Whitney, Dolan, Ryan, Widener, and Elkins were in repayment of sums advanced by them to the company “to cover expenditures which had been made for the benefit of the property.” In concluding his statement Mr. Ryan ascribes the failure of the surface lines to outside causes, “mainly the results of State interference.” Among these causes, he asserts, are :

1. The extension of the free transfer system.

'2. Enormous increase in taxes, “the special franchise tax alone having almost doubled the system’s burden of taxation.”

3. The extraordinary congestion of street trafiic, resulting in greatly increased cost of operation and maintenance, and also in an abnormal burden of accident claims, this item alone amounting to $2,000,000 a year, or about ten per cent of the gross receipts.

4. The competition of subway lines, built with the aid of the city’s credit.

“The company was not looted,” says Mr. Ryan; “it was throttled.”

Some Things Mr. Ryan Did Not Explain

The findings of the Grand Jury must be accepted as final in so far as the question whether crimes have been committed by the men in control of the Metropolitan system is concerned. But it should be noted that the Jury was not engaged in making a comprehensive examination of the affairs of the surface railways, but only investigating certain definite charges brought by individuals. It should also be remembered that the fact that there has been nothing criminal done does not prove that there has been nothing unbusinesslike, unfair, or dishonorable. But Mr. Ryan’s statement we are by no means compelled to accept without examination; and examination reveals it as inadequate and misleading. The figures which he presents, showing the relation of the stock capitalization of the Metropolitan to the cash actually paid in, are probably accurate. But, in the first place, Mr. Ryan’s story stops with the year 1900, since when, by the formation of the Metropolitan Securities Company and the Interborough-Metropolitan merger, the stock capitalization of the surface system has been more than doubled, with the addition of only a very small amount, if any, of new cash. In the second place, it gives no intimation of what the cash paid in was used for, a question which, in a case of this sort, is even more important than the question whether any cash at all was paid in. Mr. Ryan’s statement shows that in 1893 the newly formed Metropolitan Street Railway Company bought from the Metropolitan Traction Company, givirg in exchange its own stock, the stocks of several subordinate lines, aggregating $16,500,000. In another portion of his statement, doubtless not intended to be read in connection with the first, he shows that in the case of at least two of these subordinate lines the stocks represented not one single cent of actual cash paid in; the stocks of the Lexington Avenue and Columbus Avenue Railway Companies, amounting to eight millions, were all “water,” and had cost the Metropolitan Traction Company nothing in cash; and Mr. Ryan states that there were “many other precisely similar transactions.” What, then, was the $18,000,000 of cash paid into the Metropolitan Traction Company for its capital stock, used for? But, in the third place, Mr. Ryan has not answered the real accusation which is made with regard to the over-capitalization of the Metropolitan. The over-capitalization consists not so much in the issuance of stock for which cash has not been paid in, as in the burdening of the system with a tremendous load of indebtedness. Let us accept for the moment Mr. Ryan’s explanation of the stock capitalization of the system as satisfactory. We would then like to have his explanation of the following facts: In 1886 the total liabilities of the roads now included in the Metropolitan system amounted to thirty-five and a half million dollars. In the next ten years the extensions and improvements actually made on these roads could have cost, on the most liberal basis possible, not more than five million dollars. In 1896, therefore, the total liabilities of the system might reasonably have been forty and a half millions. As a matter of fact, they were over seventy-six millions. Where, we would like to ask Mr. Ryan, did the additional thirty-five millions go ? But now let us accept this figure of seventy-six millions as a new basis. In the next ten years the extensions and improvements actually made on the lines of the system might have cost, on an exceedingly liberal basis, somewhat over fifteen millions, and new cars, adapted to the use of electric power, which were bought, might have cost twelve millions more. Let us take these two figures together and increase their total to thirty-five millions for good measure. The liabilities of the system in 1906 would then have been less than one hundred and twelve millions; but, as a matter of fact, they actually were over two hundred and thirty-four millions. What, Mr. Ryan, became of the additional one hundred and twentytwo millions? We suspect that a full and complete answer to this question would make much more interesting reading for the public than Mr. Ryan’s published statement, although it might not afford him so much satisfaction to prepare. Mr. Ryan’s answer to the second charge may avail to defend “insiders” against the accusation of having made personal profit directly from the construction of new lines, but it certainly reveals, as we have shown above, that the stock capitalization of certain of the subordinate lines consisted not “chiefly” but entirely of “water.” His explanation of the third charge is sustained by the evidence brought out before the Grand jury. The payments of one hundred and eleven thousand dollars each to five men were made for the purpose of retuming advances made by those men. But this explanation, while it may clear the skirts of the gentlemen who advanced the money, does not in the slightest degree explain what the money was originally spent for. The fact remains that five hundred and sixty-five thousand dollars went out of the treasury of the Metropolitan, ostensibly for the purchase of a road whose only assets were a charter and an injunction forbidding that charter to be used, but actually for some purpose unknown. It has been suggested that the money was probably used for political contributions, but Mr. Whitney, who spent the money, is dead, and all the survivors who had anything to do with the transaction are most marvelously ignorant of its details.

The System Throttled.

Mr. Ryan's attempt to ascribe the failure of the surface lines to outside causes also repays examination. His causes are four:

1. Universal free transfers. But if this condition were to influence the finances of the system, it would show its effect in the proportion of annual operating expenses to annual gross earnings. This ratio was 54 per cent in 1897, and in 1906 it had increased only to 57 per cent, an increase which needs no other explanation than the increased cost of labor and materials during the period in question.

2. Increase in taxation, especially the franchise tax. But the Metropolitan has never paid its franchise taxes, which are still the subject of litigation.

3. Congestion of traffic, resulting in $2,000,000 of accident claims a year. But it has been shown that a great part of the congestion is directly due to the crippled condition of much of the Metropolitan’s rolling stock. A large proportion of the accidents, which cost $2,000,000 a year, could be avoided by the adoption of adequate fenders or wheel-guards. The city of Liverpool has in use a wheel-guard which has a record of having pushed over four hundred persons off the track without injury and of having permitted not one to be run over. This wheel-guard is the invention of the municipal engineers and is unpatented. It could be installed on all the surface cars in New York for not over $600,000. It is estimated by experts that its adoption would reduce the accident claims by one-half. The expenditure, then, once for all, of a sum equal to one-third of the annual accident bill of the Metropolitan would cut down that bill one-half every year. It is claimed, however, that this wheel-guard cannot be used on the New York lines because the pavement between the rails is too rough. But the railway company is responsible for that pavement; if it is rough, it has only itself to blame.

4. Competition. Doubtless the subway has taken. some passengers from the surface roads. But the finding of the Public Service Commission that practically none of the surface lines parallel to the subway were running enough cars, and the plea of the company that it could enough cars to take care of the tratfic, would not seem to indicate that the loss from this cause was of dangerous proportions.

Against Mr. Ryan’s four causes we would set a single fact. Between 1898 and 1906 the Metropolitan’s annual net earnings increased 102 per cent; its annual fixed charges increased 250 per cent. We are glad to accept Mr. Ryan’s phrase. The gigantic millstone, in the shape of liabilities aggregating $234,000,000, which Mr. Ryan and his associates have hung about the neck of the Metropolitan, have “throttled ” it.

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