In the issuance of bonds, our railroads have been very prolific. They are possessed of an insatiable appetite for continuous supplies of new capital, sometimes for the logical purpose of providing for legitimate needs, and on other occasions to satisfy the desire for new worlds to conquer; and in giving their bonds suitable names the makers have almost exhausted the financial vocabulary. The average investor, unless thoroughly acquainted with the difference in bonds, will nowadays need a financial textbook to distinguish one railroad bond from another, and even then he may not be in a position to judge their relative and intrinsic values.

The railroads are not wholly to blame for this situation. As has been pointed out in a previous section, the early builders of our railroads never, for one moment, thought their properties would advance in value with the giant strides that have, characterized their progress. Early in their history, by erring on the side of conservatism in pledging all their assets as collateral for loans, they made it impossible to mortgage their properties directly at a later time. Thus they were compelled to resort to other devices when it became necessary to borrow more money, and this accounts for the many varieties of bonds they have created.

Our great railroad systems are not the result of the original plans of their first builders; these men may have had a nebulous idea, at the beginning of their project, of a system from coast to coast, or covering a certain section of the country, but, realizing that all this would take time, they contented themselves with building their road in sections, allowing the future to take care of the logical development of their property.

While Henry Villard planned the Northern Pacific, other brains completed it. Harriman merely completed the unfinished Union Pacific. He moulded his great Pacific railroads out of what remained of the bankrupt Central Pacific, the construction of which the Government aided by large subsidies. James J. Hill never had any idea, when, for a small sum of money, he secured control of a jerkwater Minnesota railroad, that eventually it would develop into that marvelously rich transcontinental railroad - the Great Northern of today.

It is by a process of evolution that a railroad's capital and obligations grow. The one keeps pace with the other. Twenty years ago it never entered the head of the audacious and far-sighted Cassatt, president of the Pennsylvania Railroad, at the time when the road determined to build a terminus in New York City, that the Long Island Railroad would one day become absolutely necessary for its expansion. This has since proved to be the case, however, for the control of the Long Island has given the Pennsylvania a commanding position over the greater part of the profitable suburban traffic originating out of New York City - a business which alone is regarded as capable of taking care of the huge investment of over $100,000,000 which the Pennsylvania spent to secure a foothold in New York City.

If the histories of our other leading railroads were carefully searched, similar cases would be found in which the roads have expanded in entirely different directions from those planned by their original builders. Their remarkable and rapid development has brought with it, quite naturally, some very unusual phases of financing. The main lines of all the principal railroads, through the enormous development of their traffic, long ago quickly outgrew the funds raised on their first mortgage bonds. Then arose the necessity of providing additional capital to take care of the increased business through some other form of bond against the very same property, although there already existed liens upon it. But as there was sufficient equity above the mortgage, this step was justified.

Railroad Bonds. Classification Of Bonds

A clear idea regarding the several classes of railroad bonds outstanding can be more easily formed by classifying them and giving a brief description of each. It should be borne in mind, however, that these definitions are not specific, but apply only generally to each class. There are so many peculiar features associated with railroad bonds that it would be impossible to treat specifically of each issue unless the bonds of each railroad were described. The description I shall give of each will at least suffice to fix its character in the reader's mind.

Railroad Mortgage Bonds

There are first mortgage bonds, second mortgage, third mortgage and, on some of our large railroad systems, even more mortgage bonds, each, in its turn, being secured by a lien on the property of the railroad in the sequence of its issue. To make it plain, it is best to describe in the beginning what is meant by a mortgage bond. In character it is not different from a mortgage on a parcel of real estate, except in the respect that a real estate mortgage is usually owned by one individual, whereas there are hundreds and often thousands of investors interested in the same mortgage issued by a railroad or some other large corporation on its property. This is brought about as follows: First a mortgage for the amount of the loan is properly drawn up and recorded; then, in turn, it is registered with a responsible trust company which acts as a trustee. It is the mission of this trustee to safeguard the holders of the bonds by carefully scrutinizing the indentures of the mortgage, to ascertain and satisfy itself of their legality, and to see that the collateral described as securing the mortgage is all safely pledged and that there are no flaws.

The same trust company, or it may be another, acts as the registrar for the bonds. Its duty is to exercise proper supervision so that no more bonds than the amount called for by the mortgage are issued. The bankers who have taken the bonds pay to the trust company the price agreed upon and have the bonds authenticated by the registrar. Each bond is stamped or engraved with the statement that it is a certain fraction of a number of fractions, the whole together representing the amount of the mortgage. This is to prevent an overissue. The full terms of the mortgage are seldom engraved upon a bond. They are usually printed separately in the shape of a pamphlet; the actual mortgage is filed with the trustee. The printed copies are for the purpose of distribution among investors.