Stocks and Bonds of North American Railroads: collectors' guide with values
by Terry Cox
Published by BNR Press. Reprinted with permission.
WHAT THIS PRICE GUIDE IS ALL ABOUT
WHO THIS GUIDE IS FOR
First off, let me say that I am writing this guide specifically for collectors. Not investors. Not dealers. Collectors!
Whether young, old, rich, poor, male, or female, collectors share a commonality. They all start with a passion. If they stick with their hobbies long enough, they evolve from into experts. The lucky ones keep their enthusiasm from beginning to end. Passion is the common thread that connects raw beginners and wizened old timers. Passion the true enjoyment of the hobby - is one of the unstated goals of collecting.
In one respect, beginners also share a common characteristic with investors. Both are obsessed with value. Both investors and beginners will immediately flip to the back of this catalog to check prices. They will want to know, "How much is my collection worth? How much money have I made?"
Throughout this book, I will give you numerous pointers on collecting. One cautionary observation, though, seems worth mentioning a couple of times: If you are in this hobby strictly to make money, you may be seriously disappointed.
I am not saying you cannot make your hobby profitable. You can. But it takes time and careful study. You will find that the pricing of collectible stocks and bonds is not simple. It is not predictable. Prices go down as well as up. Take your time. Gain experience. And keep your passion. That is the surest way to profit from this hobby.
"SCRIPOPHILY" IS A NEW HOBBY
Compared to coin and stamp hobbies, stock and bond collecting is brand new. Few collectors even thought about collecting financial certificates before German bankers Ulrich Drumm and Alfons Henseler published doctoral research catalogs in 1976. Their research showed a fascinating variety of Russian and Chinese bonds available for collecting. By the late 1970s, thousands of European collectors had discovered stocks and bonds and began developing the hobby.
Speculators quickly followed. As with any quick-growing fad, they mistakenly thought the hobby was a perfect place to get rich quick. A British contest named the hobby scripophily just in time for it to experience its 1979 boom and bust. Speculators promptly abandoned the hobby. Serious collectors gradually replaced the speculators throughout the 1980s. Currently, the hobby seems to be enjoying a period of moderate, controlled growth. Since 1990, many collectors have moved over from the coin hobby. For them, rare stocks and bonds are still affordable.
FOCUS OF THIS GUIDE
This guide attempts to quantify one portion of the collectible stock and bond hobby - railroading. The problem with collectible hobbies is that they tend to expand. The more you learn about your chosen hobby, the more it draws you toward related fields. Unless you keep control, your sedate little collecting hobby can turn into a money-gobbling monster.
To prevent the monstrous stock and bond hobby from turning on me, I established definite limits. I limit this guide to:
the countries of continental North America,
railroad companies, regardless of whether they laid track or not, and
companies closely to railroading.
No matter how I narrow the field, items from certain companies cause problems. I include all stocks and bonds from regular railroads, tourist railroads, horse railroads, electric railroads, street railroads, traction railroads, and subways. I include items from logging companies and manufacturing companies if they operated genuine railroads. I include certificates from raked bridge companies if there is evidence they operated locomotives, leased track, or were subsidiaries of railroad companies. Since rail fans collect peripheral material, I also include stocks and bonds issued by manufacturers of locomotives, railway cars, ties, rails, signals, and parts.
Certificates from railroad companies based outside continental North America are beyond the scope of this catalog. I do not list amusement parks, regardless of the fact that many operate full size, antique trains. I do not include trams and subways that operate only within airports, although many are similar to railroads elsewhere. I also avoid listing manufacturers for which railroading is or was only a small part of their businesses. (CF&I Steel, for instance.)
I compile information from collectors, books, auctions catalogs, and dealer price lists with four primary goals in mind. I want to:
describe as many available certificates as possible, provide a price guide, explain variables which affect prices, and explain the original purposes of the various certificates.
PRICES GO UP - AND DOWN
Over a period of several years, prices of stocks and bonds have climbed. However, over the short term, prices fluctuate. Prices for stocks and bonds probably follow a pattern similar to other established collectibles such as coins, stamps, and antiques. In those hobbies, prices generally track the rate of inflation plus or minus a couple of points. Prices for rare items in high demand grow at a high rate. Prices for common items drag along lethargically.
Be aware that, regardless of the stability of any hobby, prices will always rise and fall.
HOW MANY RAILROADS ARE REPRESENTED BY STOCKS OR BONDS?
John Stevens secured the first American railroad charter in 1815 for his Camden & Amboy Railroad. The earliest officially incorporated railroads appeared about ten years later. They included the Granite Railroad, the Mohawk & Hudson, the Mauch Chunk, and the Baltimore & Ohio. Several short lines, both incorporated and unincorporated, operated along the East Coast by 1830.
Canadian lines followed within ten years and Central American lines within another decade.
No one knows how many railroads actually built rail on the continent. So far, I have found names for over 17,000 lines. Collectibles exist for many of those lines, but only officially incorporated companies issued legal stock and bonds. We do not even know exactly how many railroads officially incorporated, but I suspect the number is over 12,000. Of that possible total, certificates from 3,516 companies appear in this guide.
HOW MANY VARIETIES OF RAILROAD STOCKS AND BONDS STILL EXIST?
Collectors usually try to collect one of every known variety within specialized areas that interest them. However, collectors never agree on how to define varieties. Some combine all colors of similar-looking certificates into single varieties, while others argue that all colors should be separate varieties. Some collectors even argue that different signature combinations constitute separate varieties. It is impossible to decide whose definition of "variety" to use.
Since collectors cannot agree on how to define varieties, they will never agree on how many varieties are still in existence. Taking a position in the middle ground, I suggest 12,000 to 15,000 varieties of railroad stocks and bonds still exist. This first edition lists 8,559 certificates of which 7,152 are distinct varieties divided among the various types of certificates like this:
3,897 varieties of stock certificates
2,981 varieties of bond certificates
274 varieties of other certificates
Many of the certificates we see today originally came from company hoards. That is especially true with certificates from the B&O and many of the Penn Central lines. Realizing the origin of their collections, collectors sooner or later worry whether new hoards will be released into the hobby. They see a threat that rare items might become common and the value of their collections might drop.
Undiscovered hoards probably do exist. However, most companies will probably not sell their hoards to collectors in the future. Currently, most companies prefer to destroy their old certificates instead of having potentially negotiable securities remain in the marketplace. Many companies worry that people will repair cancelled certificates and somehow redeem them a second time.
Some companies, of course, will think differently. Their hoards may well reach the market in the future. The Penn Central is a good example. For 120 years, the Penn stored all its old certificates and all the certificates of lines it had acquired. By the 1980s, its basic interest in transportation had changed and the company decided to dispose of its old paper.
At that point, the Penn could have shredded its obsolete certificates and ended its paper storage problem. Instead, the company asked the R. M. Smythe Company of New York to sell its hoard. Starting in 1986, Smythe liquidated thousands of Penn Central items -through auctions and fixed price lists.
As expected, the hoard depressed the prices of common items. Still, the hoard contained a huge number of certificates that had never been seen on the market before. Those pieces, of course, fetched very attractive prices.
In retrospect, the Penn Central hoard may have delivered an effect opposite of accepted wisdom. The hoard possibly h attract new publicity and curiosity to the hobby. Popularity always helps prices increase. By the early I 990s, the prices for almost all Penn Central items had rebounded and began setting new records.
An identical thing happened with a related collectible in 1987. That year, Christie's famous auction house in New York disposed of a hoard of 80,000 Confederate war bonds to a consortium of U.S. dealers. For the next few years, the group "wholesaled" its I piecemeal to dealers in paper money and Civil War collectibles. As expected, prices for common bonds dipped. But just like the Central hoard, the hoard of Confederate bonds held rarities that had seldom been seen.
As with the Penn Central hoard, rare Confederate bonds became affordable for awhile. That affordability attracted more collectors to the hobby than ever before. Then along came Ken Burn's Civil War series on Public Television. Within a year, every related to the Civil War experienced an unequaled popularity. By 1992, prices for even the most common Confederate bond surpassed all previous records.
While hoards can adversely affect prices, do not let that threat ruin your enjoyment. If you are in this hobby for the long haul will sooner or later use hoards for your benefit.
BACKGROUND ON STOCK CERTIFICATES
FINANCIAL DIFFERENCES BETWEEN STOCKS AND BONDS
Since they hear constant news of the stock market on radio and television, most Americans have a rudimentary understanding of stock certificates. By comparison, relatively few people understand bonds. Actually, the differences between the two are simple:
Stocks represent ownership of companies. Bonds represent loans made to companies.
Since financial terminology is confusing, I included two glossaries of stock and bond terms in APPENDIX 3 and APPENDIX 4. I also heartily recommend you read Understanding Wall Street by Jeffrey Little and Lucien Rhodes. (See REFERENCES.)
Until electronic trading came along, companies sold shares of their companies to investors and gave them certificates as proof of ownership. In the United States, collectors call them stock certificates. Collectors outside the U. S. seem to prefer the term share certificates.
VISUAL APPEARANCE OF STOCKS
Stock ownership is normally simple. Consequently, stock certificates need minimal text to explain ownership. Whoever owns a company's stock certificate owns a specific portion of that company.
In the last few years, many major companies have quit issuing paper certificates in favor of fully electronic transactions. Paper stock certificates are becoming extinct among large corporations.
Stock certificates usually measure about 11 inches wide by eight inches tall. Size, however, varies from company to company. Some certificates are as small as today's paper money while others are as large as supermarket tabloids.
With few exceptions, stocks are printed in horizontal format. That means the text is printed across the wide dimension of the paper.
The words stock and share appear on all stock certificates. They are all worded similar to:
This is to certify that __________________ is the owner of_______ shares of the capital stock of the BRAND X RAILROAD...
HOW STOCKS WORK
In starting a railroad, developers typically:
organized their company,
decided what locations to serve,
decided on a distinctive name,
incorporated their company in one or more states,
decided how much money their company needed,
divided company ownership into shares,
and sold shares of stock to raise money.
CLASSIC STOCK TERMINOLOGY
Dividends. Early rail ventures were tiny and extremely risky. Developers could never guarantee that shippers would use their new lines. Nor could they guarantee their lines would make money. The only way developers could entice investment was to offer to share potential profits with investors. Companies shared profits in proportion to the number of shares investors owned. They called their divided profits dividends.
Common and preferred classes. As today, investors always had different motives for buying companies. Some investors wanted predictable dividends. Others wanted to sell their stocks for more than they paid. To accommodate investor motives, as well as their own, company executives developed two main classes of stock: common and preferred.
Common stock dividends. Most investors buy common stock. Common stock is also known as capital or corporate stock. Owners of common stock vote on how executives manage their companies. In return, stockholders receive proportional shares of profits in dividends each year. Stockholders of common shares always have direct stakes in their companies' fortunes. Profits are unpredictable, so dividends vary from year to year. Some years, dividends are high. Some years, there are none at all.
Preferred stock dividends. In contrast, dividends for preferred stocks theoretically remain the same from year to year. When companies pay annual dividends, they give preferred treatment to stockholders of preferred stock. They pay preferred stockholders first. If there is any money left, companies pay dividends to common stockholders. Since preferred stockholders receive predictable dividends, they do not directly benefit when company profits rise. In that respect, "preferred" does not necessarily mean "better."
There are potential problems with preferred stocks. Companies may alter dividends. They may defer dividends and pay them later. They may eliminate dividends altogether. Again, "preferred" does not necessarily mean "better."
Ratio of common stock to preferred stock. Generally, only secure companies issued preferred stock. Consequently, common stocks are about eight times more plentiful than preferred stocks. Curiously, collectors pay almost no premium for preferred stock certificates.
Preferred stock certificates are known from as early as 1836. They gained popularity after 1870, but their issuance probably peaked during the 1930s.
Convertible stocks. You will occasionally see convertible preferred stock certificates. Provisions on these certificates allowed owners to convert preferred shares into common shares under certain conditions.
Other classes. Regardless of the classes of stocks investors bought, stockholders were part owners of companies. Stockholders could vote at annual meetings and could exercise control over how their companies operated. Occasionally stockholders' opinions were at odds with the intent of developers who wanted to retain tight control over how they ran their companies.
Around the turn of the century, railroad executives devised ways to decrease the interference of pesky investors. In some companies, they subdivided common and preferred stocks into voting and nonvoting classes. Investors generally want to feel like they can influence their companies, so they have always been reluctant to buy nonvoting stock shares. Commonly, companies entice purchase through better dividends or other favorable features. In general, only well-run, profitable companies have successfully sold nonvoting classes of stock.
Assessable and non-assessable stocks. Early stocks were assessable. That meant that when companies ran into financial trouble, they assessed stockholders for additional funds. It was not uncommon for shaky companies to request additional funds from stockholders time and again. For that reason, average investors could ill afford the luxury of owning assessable stock.
Eventually, investors drifted away from assessable stocks, leaving the issuing companies to discover ways to keep their stocks attractive as investments. Most made their certificates non-assessable. That designation still appears on modem certificates.
Voting trust certificates. Occasionally, you will come across ordinary stock certificates labeled voting trust certificates. Those certificates arose out of corporate reorganizations. Corporations on the verge of failure often needed to make far-reaching decisions very quickly. That was difficult if companies needed to solicit votes from hundreds or thousands of stockholders.
To streamline voting during perilous financial times, companies occasionally formed "voting trusts" composed of small groups of knowledgeable decision makers. Voting trusts printed special certificates and temporarily traded them to stockholders for ordinary shares. If the trusts successfully rescued their companies from bankruptcy, they returned ordinary stock certificates to their rightful owners.
"BEARER" STOCK CERTIFICATES VERSUS "REGISTERED" CERTIFICATES
Most United States, Canadian, and Mexican stock certificates appear to have been registered. That means companies kept records of investors who owned stock. For a more in-depth discussion of registered versus bearer certificates, see Chapter 4.
PRINTING ON STOCK CERTIFICATES
Vignettes. A vignette (pronounced vin- YET) is an illustration that appears on stocks, bonds, paper money, checks, letterhead, invoices, and so forth. Vignettes are artistic, but they have serious security purposes. In theory, complicated and delicate vignettes are hard to counterfeit.
Artists created the first vignettes on blocks of dense wood. They first sketched designs on smooth blocks and then carved the excess material away. Eventually, the desired images remained as raised surfaces. By inking the wooden blocks, woodcut designs and images could be transferred to paper.
Later, engravers developed ways to create even better images by cutting shallow images into polished blocks of limestone. Lithographs were created by squeezing ink into the grooves of the designs carved in lithograph stones. It took considerable skill to create pleasing lithographs, but the resulting images were superior to woodcuts. Still, the technology was limited and printing was always a little fuzzy. For that reason, lithographs and woodcuts were relatively easy for counterfeiters to copy.
Origin of security engraving. At $100 per share, a 100-share certificate would have represented an investment of $10,000. In the 1850s, $10,000 had the spending power of roughly $50,000 to $60,000 of today's money. With such a large amount of money represented by one piece of paper, both railroads and stockholders needed security. What railroad could have afforded to have their certificates counterfeited?
Stock certificate engraving grew out of an industry that designed and printed paper money. Before 1863, thousands of banks, states, cities, towns, and companies issued their own money. Large bank note companies, with highly skilled engravers and printers had evolved to meet the huge demand for secure paper money.
Bank note companies prospered because they protected their clients' money from counterfeiting. They developed:
special bank note paper,
highly detailed vignette engraving,
and geometric lathe engraving.
After a half century of work, bank note companies had finally perfected techniques for carving vignettes into steel as opposed to wood or stone. By the I 850s, their steel plate engraving methods had begun to replace most woodcuts and lithographs in paper money printing.
In the steel plate process, artists first carved designs into soft steel. Generally, some artists specialized in lettering, while others specialized in borders or vignettes or ornamentation. After the images were completed in soft steel, the metal was hardened by h treating. Through series of similar steps, several design elements were transferred to master plates and ultimately to printing plates. Even though several transfers might take place between the artist and the final product, steel plate printing allowed incredibly crisp details.
Countless millions of bank notes had been printed from superb steel engravings by the late 1850s, but stock certificates were often printed by older woodcut and lithograph technologies. By 1863, driven by Westward expansion and the Civil War, the U.S. government decided it needed a uniform currency. In order to force acceptance of federal currency, it passed a tax that drove privately issued money from circulation.
Once the tax law went into effect, most printers lost all of their domestic money printing business. A few companies survived printing money for foreign governments Is. The remaining printers restructured their security printing around stocks and bonds.
Suddenly, bank note companies had larger pieces of paper to decorate. Not surprisingly, the artistry of security engraving creased dramatically after the Civil War and reached a pinnacle of perfection by the I 880s.
It took tremendous skill to create highly detailed engravings in steel, whether for anti-counterfeiting purposes or for purely artistic reasons. That specialized skill was expensive. Once companies had invested in special and expensive artwork, companies used their custom designs for decades.
While enjoying the security that steel plate engravings offered, companies quickly capitalized on their certificates' promotional qualities. What kind of company would an investor rather buy a share of? A company whose shares were crudely printed? Or a company so profitable and secure that it printed only certificates of unassailable quality?
Colors. To make redemption and sorting easier, companies differentiated denominations and classes by various colors of border designs. Some companies issued as many as eight different colors for stocks of the same issue.
Handwritten denominations. Stock denominations depended on how much money investors wanted to risk. Denominations ranged from partial shares to millions of shares Initially, company clerks wrote by hand the buyers' names and numbers of shares on every certificate their company sold. In large companies, that hand work was expensive. Eventually companies reasoned that preprinted denominations would save time and wages.
Preprinted denominations. The first stock certificates with preprinted denominations appeared in about 1870. That year, both the Milwaukee & St. Paul Railroad and the International & Great Northern Railroad issued certificates preprinted with 100-share denominations. Jay Gould's heavy selling forced introduction of preprinted 10-share certificates for the Missouri Kansas & Texas line in 1880. About five years later, companies started experimenting with 500-share certificates, but they found little demand large-denomination certificates.