A railroad enterprise is fundamentally different from a large majority of industrial enterprises. A factory is usually built and equipped by means of money which is directly furnished by the promoters of the enterprise. It may be that a mortgage will be placed upon the buildings and machinery, but this will be only a small proportion of the entire capitalization needed to launch the enterprise. On the other hand, railroads are built very largely on the proceeds of borrowed money, which is secured by bonds of the road. Although the amount of nominal capital may be, and generally is, equal to the issue of bonds, the amount of paid-in capital is frequently but a very small proportion of the bond issues. In the early history of railroading, when the whole country was ripe for such work, when railroad facilities were very greatly needed, and when communities became convinced, as was actually true, that almost any railroad would ultimately be a paying investment, it was generally possible to borrow a very large proportion, if not all, of the money required for an enterprise on the basis of the bonds. In theory the capital stock of the road should represent the great bulk of its cost, and the bond issue, if any, should only represent the debt which must be placed on the property after the capital is subscribed in order to complete the work, but in this country the practice seems to have gone almost to the other extreme. Roads are usually bonded to the highest possible limit, while the amount of money actually furnished on capital stock represents the margin between the necessary cost and the confidence of the public in the enterprise as a whole.
The English plan of building railroads appears to have been very different. The railroad charters were modeled largely on the charters of the previously established turn pikes. The turnpike companies did not own their roads, but merely owned the right to operate them and to charge toll for their use. Following this idea, an English railroad cannot mortgage its property in the sense in which it can be done in this country. They may issue debenture bonds, which are merely a lien on the income of the road, but which will not permit the road to be sold under foreclosure, even if the road should default the payments of interest. In this country the mortgage carries with it the right to demand the sale of the road, under a certain legal form of procedure, if the obligations imposed by the bonds are not fulfilled.
It has been declared that charters are not laws, but exemptions from the laws. The term charter, as applied in the time of the Middle Ages, represented a special privilege granted by the king to do some act, to collect some revenue, or to enjoy certain privileges which, were not granted to the people in general. When the turnpike roads and canals were first authorized, each was granted a charter which gave to each company certain peculiar rights and privileges. When railroads were first constructed, they were authorized by special legislation in a somewhat similar manner. To a considerable extent this is essential, since the railroads necessarily must be enabled to exercise the right of eminent domain. The fact that some railroads have been built with little or no difficulty, so far as obtaining right-of-way is concerned, the right-of-way having been donated, and with extensive tracts of lands thrown in as a bonus, does not weaken the general statement that a railroad would be helpless unless it were enabled to exercise the right of forcing its way wherever engineering requirements shall dictate. But as the number of railroad projects multiplied, the forms of charters which were granted were frequently simplified by referring to the terms of a charter which had been previously granted. This gradually led to the adoption of general railroad laws, which thereby changed the granting of a charter into a mere matter of routine procedure instead of a special legislative act. The various States have been gradually coming into line in this respect, so that roads which are constructed in the future will be authorized by a more nearly uniform legal procedure. An examination of the charters on which the largest railroad systems of the present day rest will show a very curious situation with respect to many of them. For example, the Northern Pacific Railroad, with a mileage of over 5600 miles, is operated on the basis of a charter which was granted for the construction of an unimportant line in Wisconsin. Even this little line was not built, but the charter was slightly amended by the State Legislature, and on the basis of this insignificant charter this great system was built and is operated.