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[Illustration: “The Golden Gate”]




                        CHAPTERS ON THE HISTORY

                                OF THE

                           SOUTHERN PACIFIC

                                  By

                         STUART DAGGETT, PH.D.

            Professor of Railway Economics and Dean of the
            College of Commerce, University of California;
                  Author of “Railroad Reorganization”

                         [Illustration: LOGO]

                               NEW YORK
                       THE RONALD PRESS COMPANY
                                 1922




                          Copyright, 1922, by
                       THE RONALD PRESS COMPANY




PREFACE


So far as the author knows there is no published study which discusses
in detail the important business problems connected with the history
of the Southern Pacific Railroad lines. Most of the books which
contain references to the Southern Pacific or to the Central Pacific
limit themselves to a few chapters upon the romantic aspects of their
construction. The few works which treat of the later period confine
themselves chiefly to particular episodes in Southern Pacific history,
often with the deliberate attempt to discredit the railroad company.
The truth is that most writers upon the Southern Pacific have relied
upon the reports of the United States Pacific Railway Commission or on
Bancroft’s “History of California,” and very few have done original
work from source material.

Yet the usable material dealing with the subject of Pacific railroads
is abundant. The Southern Pacific has left a broad trail in California.
The record of its doings is to be found in court reports; in state,
city, and federal records; in the public testimony, or still better,
in the private letters of owners or managers of company enterprises;
in the reports of the company itself and of its engineers or other
representatives; in pamphlets without number; in files of newspapers.
It is true that much of the data is partisan and unreliable as to
details. Yet a partisan statement is serviceable if one knows it to be
partisan, and, if one has reliable information with which to check the
unreliable, the extent of partisan exaggeration in a given case becomes
itself a fact of no insignificant importance.

Most of the documents used in the following pages have been consulted
in one or another of three large collections: that of the Bancroft
Library of the University of California; that of the Hopkins’ Railway
Library of Stanford University; and that of the State Library at
Sacramento. Use has also been made of data in the office of the
Secretary of State of California and of the State Railroad Commission.
In certain cases the manuscript has been submitted to officials of
the Southern Pacific Company for their comment, or to shippers or
business men who were believed to be well-informed. The work has been
more or less actively in progress over a period of eight years so that
there has been more than usual opportunity for checking, comparison of
views, and the testing of material. It is the author’s hope that he has
at least examined all the significant classes of information on the
particular subjects which he has discussed. With a subject so extensive
it is rarely, if ever, possible to reach all the fugitive literature,
or to consult all the living men from whom opinions or scraps of
information might be obtained. The most that can be said is that there
has been a diligent search, with good facilities, through a number of
years.

The conclusions which the writer has himself reached with respect
to the political and business activities of the Southern Pacific in
California, he has explained in the book at length and will not now
repeat. There is claimed for them no more conclusiveness than the facts
presented in each particular case may justify, although the conclusions
are free from conscious bias, and the author’s own interests are
engaged on neither side.

Acknowledgment is hereby made of the courtesies extended by the
libraries of Berkeley, Palo Alto, and Sacramento, and of the patient
attention which individuals have given to particular portions of the
book.

  STUART DAGGETT

  Berkeley, California,
  February 1, 1922.




CONTENTS


  CHAPTER                                                     PAGE

        I INCEPTION OF THE PROJECT                               3

       II RESOURCES FOR CONSTRUCTION—STATE AND LOCAL AID        21

      III FEDERAL LAND GRANTS AND SUBSIDIES                     45

       IV PROGRESS OF CONSTRUCTION—CONSTRUCTION COMPANIES       65

        V THE SEARCH FOR A TERMINAL                             83

       VI ACQUISITION OF THE CALIFORNIA PACIFIC                104

      VII BUILDING OF THE SOUTHERN PACIFIC                     119

     VIII ORGANIZATION OF THE CENTRAL PACIFIC-SOUTHERN
            PACIFIC SYSTEM FROM 1870 TO 1893                   140

       IX THE CASE OF DAVID D. COLTON                          154

        X FINANCIAL DIFFICULTIES FROM 1870 TO 1879             169

       XI THE RAILROAD COMMISSION OF 1880 TO 1883              181

      XII THE SOUTHERN PACIFIC AND POLITICS                    199

     XIII WATER COMPETITION                                    222

      XIV THE RATE SYSTEM OF THE CENTRAL PACIFIC               237

       XV LOCAL RATES IN CALIFORNIA                            257

      XVI THE TRANSCONTINENTAL TARIFF                          275

     XVII THE TRAFFIC ASSOCIATION OF CALIFORNIA                293

    XVIII THE SAN FRANCISCO AND SAN JOAQUIN VALLEY
            RAILWAY                                            317

      XIX OPERATING CHARACTERISTICS OF THE SOUTHERN PACIFIC
            LINES                                              347

       XX THE THURMAN ACT                                      370

      XXI FINAL SETTLEMENT OF THE CENTRAL PACIFIC INDEBTEDNESS
            TO THE GOVERNMENT                                  395

     XXII THE SOUTHERN PACIFIC MERGER CASES                    425

    XXIII OIL AND TIMBER LAND LITIGATION                       441

     XXIV FINAL REMARKS                                        454




ILLUSTRATIONS


                                                              PAGE

  “The Golden Gate”                                (_Frontispiece_)

  Theodore Dehone Judah                                 (opposite)      6

  Sketch of train on the Sacramento Valley Railroad 1860      ”        10

  Leland Stanford                                             ”        16

  Henry  P. Coon                                              ”        32

  Chas. Crocker                                               ”        66

  Summit Valley, Emigrant Mountain and Railroad Pass          ”        72

  Summit tunnel before completion—Sierra Nevada Mountains      ”        80

  Map of Oakland and Brooklyn                                          93

  Boundaries of Railroad Tide-Land Grant, as proposed in 1868          96

  Map of California Pacific Railroad                                  106

  Map showing northern end of the San Francisco and San José
    Railroad in 1862                                                  121

  Proposed route of the Southern Pacific Railroad, January 3, 1867    124

  View south from over the San Fernando tunnel—Southern Pacific
    Railroad                                          (opposite)      128

  David D. Colton                                         ”           160

  Mark Hopkins                                            ”           176

  George Stoneman                                         ”           192

  C. P. Huntington                                        ”           208

  Chart showing rates on second-class freight and on grain in the
    Sacramento Valley, 1876                                           260

  Chart showing rates on miscellaneous commodities in the San
    Joaquin Valley, 1892                                              261

  Diagram showing adjustment of freight rates between San Francisco
    and Stockton,  1916                                               266

  Diagram showing adjustment of freight rates between San Francisco,
    Santa Rosa, and Sebastopol, 1916                                  268

  Diagram showing adjustment of freight rates between Los Angeles
    and points north and east of Los Angeles, 1916                    269

  Map showing the line of the San Francisco and San Joaquin Valley
    Railway, together with portions of the systems of the Southern
    Pacific and of the Atchison, Topeka and Santa Fé, 1898            325

  Map showing mileage owned in 1913 by the Central Pacific Railway
    and the Southern Pacific Railroad                 (opposite)      432




                        CHAPTERS ON THE HISTORY

                                OF THE

                           SOUTHERN PACIFIC




CHAPTER I

INCEPTION OF THE PROJECT


Significance of the History

The history of the Southern Pacific and the railroad companies
connected with it affords one of the many examples in American economic
life of a great industrial organization built up from small beginnings
within the lifetime of one group of men. It is a story full of the
interest which attaches to constructive achievement in any line. When
we remember that as late as 1870 there was no railroad west of the
Mississippi-Missouri River except the Northern, Union, Kansas, and
Central Pacific railroads, which possessed a mileage as great as 300
miles, and when we recall that in 1860 the total railroad mileage of
the states in this same territory amounted to only 6,000 miles, we are
able to form some idea of the successful energy which created a system
of 861 miles of railroad in the course of six and one-half years,
across an unsettled country, in the face of obstacles due to climate,
altitude, and distance from centers of traffic and of finance.

The history of the Southern Pacific is significant, however, for still
other reasons than because it illustrates what men can do in spite of
serious difficulties. The company’s record is important to the student
of transportation problems because there is embodied in it much of the
experience of the Pacific Coast with respect to railroad construction,
railroad finance, railroad rate-making, and the relation of railroad
corporations to the public at large, as represented by local, state,
and national governments. What the Pacific Coast, and what in
particular the state of California know, first hand, of the habits and
policies of railroad corporations, is mainly derived from contact with
the Southern Pacific Railroad and its auxiliary companies.

The narrative that follows is offered as a contribution from the far
western portion of the United States which may help to explain the
attitude of that section toward transportation matters; as well as an
account of some phases of the earlier development of a railroad system
which is now one of the most powerful in all the country, whether we
compare this system with the railroads of the East or with those of the
West.

The Southern Pacific system today embraces lines from Ogden and New
Orleans on the east, to Portland, San Francisco, and Los Angeles on the
west. The part of the system first built, however, and at all times the
most important part of it, is that section reaching from a few miles
west of Ogden, Utah, to the cities of Sacramento and San Francisco.
This portion of the larger system was built and is owned by the Central
Pacific Railroad Company.[1] It is therefore to the circumstances
attending the construction of this portion of the line that attention
will first be directed.


Early Activities of Theodore Dehone Judah

The promoter of the Central Pacific Railroad was a young engineer named
Theodore Dehone Judah. Judah was born in Bridgeport, Connecticut. He
obtained his first experience in railroad building on the Troy and
Schenectady Railroad in New York. Later he built a railroad down the
gorge of the Niagara River to Lewiston, served as resident engineer
on the Erie Canal, and in 1854 had charge of the Buffalo and New
York Railroad then building to connect with the Erie. This was a
responsible position for a man with so brief a period of training.
When Judah came to California in 1854 he was only twenty-eight years
of age. He was soon to make it evident, however, that he possessed
more than respectable engineering ability, while he also displayed a
capacity for sustained enthusiasm in connection with the project for
a transcontinental railroad which eventually overcame all obstacles
and resulted in the formulation of definite and successful plans for a
transcontinental line.[2]

Judah began work in California as engineer of the Sacramento Valley
Railroad. He left the service of the company, however, before the
road was finished to Folsom. Subsequently he made a survey for a
railroad from Sacramento to Benicia, and also one for a short branch
on the California Central Railroad. Still later he was employed by
the trustee of the Sacramento Valley Railroad, J. Mora Moss, and the
superintendent, J. P. Robinson, to explore the Sierra Nevada Mountains
for wagon road routes north of the south fork of the American River,
and at the same time to act as agent for the Sacramento Valley Railroad
in soliciting freight.

Details of Judah’s activities between 1854 and 1860 are difficult to
obtain. We know that he visited Washington in order to procure the
passage of a bill making grants of land to California for railroad
purposes. In 1859 he was the delegate from Sacramento to the Pacific
Railroad Convention, where he urged the importance of a thorough
survey before any decision should be made regarding the route of a
transcontinental railroad. When the convention adjourned he was sent to
Washington at his own expense to urge the passage of a bill such as
the convention favored. He returned in 1860 without having accomplished
his purpose, but convinced that Congress was in favor of granting
federal aid to a railroad to California from the East, and that it
would act when more important matters had been disposed of.[3]


Discovery of Transcontinental Route

It was after Judah’s return from Washington in 1860 that he undertook
the explorations for the Sacramento Valley Railroad to which reference
has been made. Doubtless while engaged on this work he visited Dutch
Flat, and doubtless also his enthusiasm for a transcontinental railroad
became generally known. Judah was no mountaineer, but he could readily
profit by the knowledge of men acquainted with the country. Such a man
he found in Daniel W. Strong, a druggist at Dutch Flat, who accompanied
him on his explorations. We have Strong’s statement that he himself
conceived the idea that immigrant travel could be diverted through the
Dutch Flat country by the construction of a railroad, and that he hired
assistants, made a reconnaissance, and found a continuous divide over
which he thought a road could pass. Knowing that Mr. Judah was trying
to find a pass over the mountains, he wrote to him, and Judah came from
Sacramento to Dutch Flat. Strong says that he showed Judah the route he
had discovered, and that Judah thought well of it.[4]

[Illustration: Theodore Dehone Judah]

Such is Strong’s testimony given years afterwards, when the Central
Pacific had proved a success, and it was a distinction to have been
connected with it. It is possible that Strong overestimated his
contribution to the work. Yet the essential fact is that Judah was in
the mountains in August, 1860, and that he or Strong, or both of them
hit upon a route which Judah pronounced practicable. One may hazard
the guess that Strong pointed out a pass and Judah tested it with
instruments.[5] Mrs. Judah repeats the story as she heard it:

 It was in the drug store of Dr. Strong at Dutch Flat that the first
 profile was marked out from notes taken by them (Judah and Strong).
 Judah could not sleep or rest after they got into town and the store,
 till he had stretched his paper on the counter and made his figures
 thereon. Then, turning to Dr. Strong, [he] said for the first time,
 “Doctor, I shall make my survey over this, the Donner Pass, or Dutch
 Flat route, above every other.”[6]


Appeal for Funds

Judah drew up articles of association for a company late in 1860, and
endeavored to get subscriptions for stock, but without much success.
Meanwhile, the publication in the newspapers of information relating
to the Dutch Flat route cost him his position with the Sacramento
Valley Railroad, for the trustee of the company, J. Mora Moss, took the
position that the information acquired by Judah while an employee of
the Sacramento Valley belonged to the railroad company, and should not
have been published without its consent. It is said that Judah was very
indignant, but to no avail.[7]

By October or November, 1860, the record thus shows that Judah had
satisfied himself of the existence of a railroad route across the
Sierras, and that he was intensely interested in having this railroad
built. He was not personally a man of capital, although not entirely
without means, and success in transforming his bare project into an
actual operating line depended entirely upon the financial support
which he could obtain. In November, accordingly, we find Judah
endeavoring to give wide circulation to the results of his discoveries.

Under date of November 1, 1860, a circular letter was issued directing
the attention of the public to “some newly discovered facts with
reference to the route of the Pacific Railroad through California.”
This letter asserted that a practicable line had been discovered “from
the city of Sacramento upon the divide between Bear River and North
Fork of the American, via Illinois Town and Dutch Flat, through Lake
Pass on the Truckee River, which gives nearly a direct line to Washoe,
with maximum grades of 100 feet per mile.” The estimated length of
line in California was 115 miles. It was said that if the Pacific
Railroad bill then pending in Congress should be passed, providing an
appropriation of $13,000 per mile from the navigable waters of the
Sacramento River to the base of the Sierra Nevadas; thence $24,000
per mile to the summit; thence an additional $3,000 per mile for
each degree of longitude crossed until the 109th degree was reached,
the entire road could be graded without appeal to private investors,
leaving only the iron, rolling stock, etc., to be provided from private
means. The projected railroad might connect with the Sacramento Valley
Railroad at Folsom, or with the California Central Railroad at Lincoln.
Subscriptions were asked to an amount of $1,000 per mile for 115 miles,
with 10 per cent paid in, to allow the organization of a company under
the state law; and it was promised that the money subscribed would be
used to make a thorough, practical railroad survey.[8]

In a letter dated the previous day, and addressed to John C. Burck,
member of Congress from California, Judah added a few details:

 We go out of Summit Valley through what I call Lake Pass, while
 Fremont’s route, or the old Emigrant road, goes over Truckee Pass,
 which is about 700 feet higher, and a few miles off my route. We
 strike the foot of Truckee Lake, or the cabins of the Donner party,
 nine miles from the summit, and from there it is an easy grade down
 the Truckee River, descending about 40 feet per mile, over a smooth
 country. The elevation of the pass is 6,690 feet. There are two other
 passes leading out of Summit Valley, which I had not time to explore,
 but either of them are practicable, although a little higher. This
 route is at least 150 miles shorter than the Beckwourth route; crosses
 the state at the narrowest point, and is on a direct line to the
 Washoe mines. I will undertake to build a railroad over this route in
 two years, for $70,000 per mile, from Sacramento City to the state
 line or Washoe. Thus the question of crossing the Sierra Nevada, I
 consider solved.

After the tentative organization of his proposed railroad, and
the publication of the news of his discoveries in the newspapers,
Judah went to San Francisco. He managed to get in touch with some
capitalists, but was unable to secure their support. If Congress did
not pass a Pacific Railroad bill, they said, no railroad could be
built; if a bill was passed, the road still could not be completed for
ten or twenty years. They had other interests, and were disinclined to
consider a scheme of this sort, however technically feasible. If we may
believe the newspapers of the time, no inconsiderable reason for the
reluctance of the men approached was the provision of the constitution
of California making stockholders liable for their proportion of all
the debts and liabilities of any company in which they held stock.[9]


Sacramento Meetings

When he failed to secure support in San Francisco, Judah went to
Sacramento. The city of the plains, as it was then affectionately
called by its inhabitants, was less wealthy than San Francisco, but for
that very reason might be expected to take an interest in a project
which promised her, for some years at least, a position of relative
advantage with respect to the trade of the interior. The leading
newspaper in that city, the _Sacramento Union_, could be counted on to
support any plausible Pacific railroad scheme for political reasons.
The citizens had further the advantage of first-hand experience with
the workings of the Sacramento Valley Railroad, which had been opened
from Sacramento to Folsom in 1856, and was still the only railroad in
the state.

It does not, however, appear that these various factors stirred the
people of Sacramento to any extraordinary enthusiasm over Judah’s
scheme, or that they regarded him in any other light than that of an
engineer with a risky plan, which it was very desirable to have someone
other than themselves finance. Judah, however, called a meeting at a
local hotel, and people came. He told them he had made twenty-three
barometrical reconnaissances over the Sierras, and had found a line.
He needed money to carry the project further, in particular to make
a thorough instrumental survey, and he asked them what they would
subscribe. Nobody subscribed very much. Huntington says that some gave
a barrel of flour, and some a sack of potatoes. Still, the additional
subscriptions necessary to the legal organization of Judah’s company
probably amounted to as much as $56,500[10] on the 115 miles of line
contemplated, and small miscellaneous offerings were not likely to
carry the promoter very far.


Collis P. Huntington

It is at this juncture that we first hear the names of Collis P.
Huntington, Leland Stanford, Charles Crocker, and Mark Hopkins, all
prosperous business men in Sacramento. Huntington and Hopkins ran
one of the largest hardware stores in the town. Stanford and Crocker
were merchants, and in addition, Stanford had dabbled in California
politics to the extent of becoming a candidate for the position of
state treasurer in 1857 and for that of governor in 1859, getting badly
beaten on both occasions. It is difficult, even at this late date,
to estimate the qualities of the four men with confidence. Beyond
question, Huntington had the greatest genius for business of the four.
Born in Connecticut, and self-supporting from the age of fourteen, he
was a trader _par excellence_. In his youth he peddled watch findings
from New York to the Missouri River. Later, it is related of him that
he started for California with a capital of $1,200, which he increased
to $4,000 during an enforced stay of three months on the Isthmus of
Panama. He was cool, calculating, unscrupulous, a tireless worker,
and a man with few interests outside of work. Enterprise for the
public good interested him little. He had few friends, and some of
these he lost in later years. Narrow in his sympathies, vindictive,
sometimes untruthful, sarcastic, and domineering, he gained his success
through the keenness of his mind and the energy and persistence of his
character, and also through qualities of courage and imagination which
were not absent from his business plans.

[Illustration: Sketch of train on the Sacramento Valley Railroad,
1860]


Leland Stanford

Stanford was a New York lawyer, who had practiced four years in
Wisconsin between 1848 and 1852, and had emigrated to California in the
last-named year to seek his fortunes in that state. Stanford came to
California poor as the proverbial church mouse. Bassett, who was later
his secretary, and who was likely to know the facts, says that two of
Stanford’s brothers set him up in business in El Dorado County, near
Latrobe, with a stock of miners’ supplies. Here Stanford remained a
while, in partnership with a man named Smith. Stanford and Smith were
said to have done a good business. They thought they were making money
until they found that the San Francisco firm with which they dealt was
charging them interest on unpaid balances; whereupon they promptly
closed up, retiring with their debts paid, but with very little cash.

From El Dorado County Stanford went to Michigan Bluffs, in Placer
County, still trading, and in 1855 he moved to Sacramento to take over
the business which his brothers had established there. Presumably his
operations in Michigan Bluffs had provided him with a little capital.
What was quite as much to the point, he had made a number of friends
in the mining district, and it is not unreasonable to suppose that his
attention had been directed toward politics. In 1857 and 1859, as has
been mentioned, he ran for office, but without success. About this time
a prospector in the vicinity of Auburn struck a rich pocket of decayed
quartz. He knew Stanford, and put his name down for an interest in the
claim. From this mine Stanford is reported to have cleaned up about
$60,000, a sum which put him in comparatively easy circumstances. In
1861 Stanford ran again for the office of governor, and this time was
elected on the Republican ticket. He cannot be said to have yet shown
any talent for statesmanship, but he was known as a staunch Union man
and a faithful Republican, and he had a local popularity besides, which
could be trusted to bring in some votes. After his term of office as
governor, Stanford held no political position until 1885, when he
was elected United States senator in place of A. A. Sargent. This
office he retained until his death. He appears at one time to have had
aspirations towards the presidency of the United States, though his
candidacy could hardly have been considered seriously. Certainly he
served with distinction neither as governor nor as senator.

Stanford’s most marked traits were tenacity of purpose, and a certain
rude energy in execution. His associates credited him with great
solidity of judgment. Like Huntington, he was unscrupulous in the
methods which he employed to reach his ends, but, unlike him, he showed
ambition if not capacity outside of the business field. In private
life, Stanford was distinguished by his love of horses, and by his
donations to the university founded in memory of his son. One must hold
him inferior to Huntington in business affairs, vain and extravagant.
Yet not only his political influence, but the virile power of the man,
the attitude of mind which once led an enemy to say of him that “no she
lion defending her whelps or a bear her cubs, will make a more savage
fight than will Mr. Stanford in defense of his material interests,”
were invaluable to the transcontinental railroad project in the years
of its development.[11]


Crocker and Hopkins

The other two members of the quartette may be dismissed with fewer
words. Charles Crocker had no more education than Huntington. He
had been peddler, iron maker, gold miner, and trader. In 1855 he
was alderman of the city of Sacramento. First and last, his strong
point was the handling of men. It was Crocker who drove the work of
construction, roaring up and down the line, as he put it, like a mad
bull. In deciding the larger problems of policy which arose later,
there is no evidence that he had an important part. Indeed, Crocker
endeavored to sell his holdings to his associates in 1871, and only
continued in the organization because the others proved unable to buy
him out.[12]

Last of all, we have to mention Mark Hopkins, the “inside man.” Hopkins
died in 1878, so that his connection with railroad work lasted only
fourteen years, and during part of this time he was ill. Less is known
of him than of any of his associates. He was the man of detail, the
careful scrutinizer of contracts. He was Huntington’s partner in the
hardware business for twenty-four years, and yet in all that time,
according to Huntington, he never bought or sold as much as $10,000
worth of goods.[13] That is to say, he was no trader. Bancroft speaks
of him as the balance wheel in the business. We hear of him later as
objecting to personal indorsements by the partners of Central Pacific
notes. Mr. Crocker once said of him that he was a long-headed man
without much executive ability but a wonderfully good man for an
executive officer to counsel with. Possibly such a man played a useful
part in the Central Pacific organization.


Survey Financed

Huntington, Stanford, Hopkins, and Crocker knew each other as merchants
will. Crocker and Stanford may also have met in a political way. The
four of them seem to have been friends, at least as early as 1860.
Now it appears that Huntington and Crocker, and possibly Stanford and
Hopkins also, attended one of Judah’s meetings in Sacramento, and were
somewhat impressed by his statements. This was the second stage in the
Central Pacific enterprise, when the promoter was in the presence of
capitalists, and was seeking to convince them that a probability of
profit lay in his plans. Huntington says that he spoke to Judah after
the public meeting, and that Judah came to his house the following
evening. He adds that subsequently he, Huntington, talked with Hopkins
and Stanford, and persuaded them to join him in contributing the money
necessary to finance an instrumental survey across the mountains. Other
persons who agreed to share in the expense were Charles Marsh, James
Peel, L. A. Booth, and Judah himself—each assuming one-seventh of the
cost.[14] Charles Crocker was brought in a little later.

The attitude of all these men was of course cautious. Judah had caught
their attention, but as yet they would not commit themselves very far.
The survey might cost them fifteen or twenty thousand dollars apiece,
and they might never go further with the scheme. They thought they
could build a railroad if anyone could, and there might be money in
it, yet they knew that even to finance surveys involved considerable
risk.[15]


Likelihood of Government Aid

Although we have no direct evidence to this effect, it seems very
probable that the chance of profit to be secured in building a
transcontinental railroad under government auspices stood out more
prominently in the eyes of Huntington and his friends than any
consideration of the ultimate earnings of the railroad, once it should
have been built. What should two dry goods merchants and two dealers
in hardware, who knew nothing first hand about railroad operation,
have cared about the administration of a railroad 800 miles long?
If they wanted interest on an investment, why money commanded 2 per
cent a month in Sacramento itself. Only the prospect of still greater
gains was likely to attract a speculative trader like Huntington, and
the source of such profit could be found only in construction of the
road. If this was the real inducement, and if the likelihood of a
government subsidy was kept in mind from the first, it was fortunate
for Mr. Judah that, owing to his familiarity with conditions both
at Washington and in California, he was in a position to inform his
prospective clients of the likelihood of government aid no less fully
and authoritatively than he could advise them concerning routes over
the Sierras.

Indeed it was only on the question of government assistance that
Judah could supply business men of Sacramento with information of a
definite sort. He really knew little about the probable cost of a
transcontinental line. In his original report of November, 1860, he had
declared that the Central Pacific could be built for an appropriation
ranging from $30,000 to $72,000 per mile, varying with the difficulty
of the ground; but this was an estimate based on a very cursory
examination of the line, and could pretend to no exactness. Possibly
he was influenced by the fact that the Sacramento Valley Railroad had
been contracted for in 1854 at $45,000 per mile, payable 44 per cent
in capital stock of the company, 39 per cent in 10 per cent bonds, and
17 per cent in cash. This was equivalent to perhaps $33,000 in cash.
The contract price in this case did not include, however, the cost
of right-of-way, depot grounds, and engineering expenses, for which
additional stock was reserved.[16] Only one year later, when the first
instrumental survey of the Central Pacific was completed, Judah was
forced to change his estimate to $88,428 per mile for the first 140
miles of that railroad, including 51 miles estimated at $1,000,000 per
mile or above. Even these figures were later revised.


Estimating Probable Earnings

Nor was Judah’s information about probable earnings a great deal
more trustworthy than that relating to probable costs. There are
various ways of estimating the earnings which a new railroad is
likely to secure—yet all of them may give curious results when
applied to territory which has never enjoyed the benefits of any rail
transportation at all, as was substantially the case with California
before the Civil War. In general, engineers in California had to reckon
with the facts that the population of the state was small; that it
had only three cities of importance—San Francisco, Sacramento, and
Stockton; that there was but one important business, mining; and that a
dense traffic could accordingly be expected only in the distant future
after the development of the country served. As a practical expedient
most engineers in California who desired elaborate data had some more
or less careful count made of the business moving over their projected
route by pack train, wagon train, stage, or boat, and then made the
broad assumption that this same volume, or this volume increased
by an assumed factor, would move over a railroad during its early
years. Such was the nature of the estimate made by the incorporators
of the Sacramento Valley Railroad in 1853,[17] of the Stockton and
Copperopolis in 1862,[18] of the Placerville and Sacramento Valley
Railroad in 1863,[19] and of the North Pacific Coast in 1873.[20] Judah
had no greater facilities than other engineers of the time, and in his
own estimates followed the prevailing custom.[21]

[Illustration: Leland Stanford]

Estimates of this nature were not accurate, and it was unreasonable to
suppose that they should be accurate. Judah in 1862 put the probable
gross receipts of the Central Pacific on the first 160 miles out of
Sacramento at $4,654,240, or $29,089 per mile. Mr. Montague, who
succeeded him, estimated the annual receipts as far as Dutch Flat at
$27,209 per mile and for the whole road, as far as Nevada Territory, he
named the figures of $5,456,050, or $34,100 per mile. These were very
optimistic figures. As a matter of fact, the earnings of the Central
Pacific never much exceeded $14,000 a mile, and during the early
period, up to 1870, were as often below $10,000 a mile as they were
above it. If it had not been for an operating ratio which in 1866 and
1867 touched the extraordinary figure of 23 per cent, and which did not
reach 50 per cent until 1877, the owners of this road could scarcely
have kept it out of receivers’ hands, so great was the miscalculation.


Organization of Company

We may assume, then, that Huntington and his friends went into the
Central Pacific project as a speculation from which they hoped to
retire with a profit derived largely from construction paid for out of
government funds. Adopting this assumption, the next steps in advancing
the enterprise may be briefly described. The meetings in Sacramento
which have been mentioned took place in the winter of 1860-61. No
progress in surveys could be made at that time, while the Sierra passes
were covered with snow. In April, however, a meeting of subscribers
to the stock of the Central Pacific Railroad was held in Sacramento,
and on the 28th of June, 1861, a company was organized under the
general law of the state, to be known as the Central Pacific Railroad
of California. The capital of this corporation was set at $8,500,000,
divided into shares of $100 each. The railroad contemplated was to
run from Sacramento to the eastern boundary of California, over an
estimated distance of 115 miles. Huntington, Hopkins, Stanford, and
Crocker subscribed to 150 shares each, as did James Bailey and Theodore
Judah. Charles Marsh took 50 shares, and other parties varying, but
lesser amounts, to a total of 1,245 shares, or more than the $1,000
per mile required by the law. Leland Stanford, Charles Crocker, James
Bailey, Theodore D. Judah, L. A. Booth, C. P. Huntington, Mark Hopkins,
D. W. Strong, and Charles Marsh were the first directors.


Instrumental Survey Made

As soon as the season permitted, Judah was sent back into the
mountains, and in October, 1861, the directors had before them the
substance of his second report, this time based on an instrumental
survey. Judah now thought that a railroad from Sacramento to the state
line would cost $12,380,000, or $88,428 per mile. He did not push his
surveys beyond the point at which he reached the Truckee River, but
from his general knowledge of the country he estimated that the 451
miles between Lassen’s Meadows and Salt Lake could be built for $45,000
per mile, and that the whole road of 733 miles could be constructed for
$41,415,000, or an average of $56,500 per mile.[22]

In every way this second report was a more careful piece of work
than the one which had preceded it. The new route differed from that
recommended in November, 1860, mainly in that it ran from Sacramento
through Lincoln and Centralia instead of through Folsom, and also in
the greater detail of its location. The principal characteristics of
the line were two: (1) that it followed a nearly continuous ridge from
Lincoln to the summit of the mountains, and (2) that east of the summit
the road wound down the side of the mountain to Lake Truckee, following
the Truckee River from the lake in the direction of Humbolt Sink, and
entirely avoiding the second summit of the Sierras and the crossing of
the Washoe Mountains.

This is substantially the line of the Central Pacific today. The
maximum grade which Judah allowed himself was 105 feet to the mile.
Judah did not at this time re-examine alternative routes via Georgetown
and via Henness Pass, which he had considered and rejected the previous
fall. Nor did he refer to the line via Beckwourth’s Pass, the present
route of the Western Pacific, which he later admitted to be easier in
grade, if longer in distance, or to the possibility of a route directly
east from Folsom via Placerville around the south end of Lake Tahoe. It
is probable, however, that these two last-named routes were familiar to
him in a general way, as considerable quantities of freight consigned
to the Nevada mines were already moving over them.

Emphasis should be laid upon Judah’s survey of October, 1861, because
the continuance of the Sacramento capitalists in the enterprise
depended upon its favorable outcome. After it was completed Huntington
and his friends became, on the whole and except during certain
intervals of weakness, inclined to see the project through even at
the risk of their personal fortunes, provided reasonable government
assistance could be secured. It was with this understanding that Judah
went back to Washington in 1861 to procure the passage of needed
legislation, and it was in this spirit that a formal beginning of
construction upon the Central Pacific was made at Sacramento on January
8, 1863.




CHAPTER II

RESOURCES FOR CONSTRUCTION—STATE AND LOCAL AID


Source of Funds

Some years after the Central Pacific and Western Pacific railroads were
completed, Leland Stanford laid before a committee chosen by Congress
the following memorandum showing the receipts of these two roads from
all sources up to December 31, 1869:

MEMORANDUM SHOWING THE RECEIPTS OF THE CENTRAL AND WESTERN PACIFIC
RAILROADS FROM ALL SOURCES TO DECEMBER 31, 1869

                                                               Approximate
                                                   Par             Sum
        Source of Funds                           Value          Realized

  United States bonds issued to Central and
    Western Pacific                            $27,855,680     $20,735,000
  Central and Western Pacific first mortgage
    bonds                                       27,855,560      20,750,000
  Central Pacific convertible bonds              1,483,000         830,000
  Central Pacific state aid bonds                1,500,000         980,000
  City and County bonds:
    San Francisco to Central Pacific               400,000         300,000
    Sacramento to Central Pacific                  300,000         190,000
    Placer County to Central Pacific               250,000         160,000
    San Francisco to Western Pacific               250,000         175,000
    San Joaquin County to Western Pacific          250,000         125,000
    Santa Clara County to Western Pacific          150,000         100,000
  Land sales, balance Central  Pacific                             107,000
  Profit and loss balance, January 1, 1870                       1,610,000
                                                  ————————     ———————————
        Total                                                  $46,062,000
  Company owed Contract and Finance Company                      1,827,000
                                                               ———————————
        Grand total                                            $47,889,000

We have in the foregoing table a summation of the resources on which
Judah and the Huntington group were able to draw in order to build a
transcontinental road. It will be noticed that there is no mention
in the table of the personal fortunes of the associates, unless the
contribution of these gentlemen appears in the profit and loss balance,
or in the debt to the Contract and Finance Company—none of the
earnings of the railroad during construction, and none of the proceeds
of the sale of Central Pacific capital stock. Under these categories
some slight addition to Stanford’s list must probably be made, though
the importance of the addition will not be great.

Collectively the fortunes of the associates, while considerable, were
not sufficient to cover more than the preliminary expenses of the work.
Judah had but little capital, while, according to Huntington’s own
statement some years later, the combined assets of Stanford, Crocker,
and the firm of Huntington and Hopkins, amounted to something like
$1,000,000 when the construction of the Central Pacific was begun.[23]
Other estimates put the figure at $160,000,[24] or even as low as
$109,000.[25] We do not know, as a matter of fact, how much property
the associates possessed, but we do know that it was slight compared
with the undertaking which they had in hand.


Earnings and Stock Issues

Probably, indeed, the earnings of the Central Pacific Railroad during
construction were more important than the contributions of the
partners. Between 1863 and 1869, according to the calculations of the
United States Pacific Railway Commission, the gross earnings of the
Central Pacific amounted to $10,807,508.76, its operating expenses
to $4,700,625.56, and its net earnings to $6,106,884.20. The surplus
after the deduction of interest and taxes for this period amounted to
$2,427,533.80.[26] Most of these earnings came from local business,
although an attempt was made to provide facilities for through travel
before 1869, by arranging stage accommodation for stretches not yet
covered by rails.

If we add three or four million dollars to the receipts listed in
Stanford’s table, we shall have made liberal allowance for railroad
earnings and partnership contributions up to 1869. This allowance
would not be materially increased if account were taken of sales of
Central Pacific stock. The authorized stock issue of the Central
Pacific Railroad in 1862 was $8,500,000. In 1864 this was raised
to $20,000,000, and in 1868 it was made $100,000,000. In spite of
these large issues, the evidence is perfectly clear that there were
substantially no cash subscriptions to Central Pacific stock, nor any
market for this stock when issued. It is on record, for example, that
one M. D. Boruck opened an office at the corner of Bush and Montgomery
streets in San Francisco on behalf of the company, and kept it open,
off and on, for about twenty-two days in November and December, 1862,
and in February, 1863. He secured three subscriptions to an aggregate
of twelve or fifteen shares.[27]

We know also that Crocker went personally to Virginia City to sell
stock, but without success. He says of this experience:

 They wanted to know what I expected the road would earn. I said I did
 not know, though it would earn good interest on the money invested,
 especially to those who went in at bed rock. “Well,” they said, “do
 you think it will make 2 per cent a month?” “No,” said I, “I do not.”
 “Well,” they answered, “we can get 2 per cent a month for our money
 here,” and they would not think of going into a speculation that would
 not promise that at once.[28]

Stanford says that he bought 2,300 shares of Central Pacific at
ten cents on the dollar at one time, in order to accommodate a
stockholder,[29] and it appears that Charles and A. B. Crocker
transferred their stock to Huntington, Hopkins, and Stanford in 1873,
for $13 a share.[30] No attempt to sell Central Pacific stock generally
was made until 1873, and it was not listed on the Stock Exchange until
1874.[31]


Bond Sales

As a matter of fact, there was no sale at the beginning even for
Central Pacific mortgage bonds. Huntington went to New York to get
these securities started among the moneyed men there, and after a while
he had some small success. But D. O. Mills gave it as his deliberate
judgment on a later occasion that there was the greatest difficulty in
securing loans on the bonds the Central Pacific had to offer—including
government, county, convertible, state aid, and first mortgage
bonds—to as much as 75 per cent of the face value of the issues.[32]
Iron for the first 50 miles out of Sacramento was delivered to the
associates only after they had given their own personal obligations
secured by deposit of the company’s bonds. An agreement was entered
into, besides, that Huntington and his friends would be responsible,
as individuals, for ten years, for the payment of interest on these
bonds.[33]

After 1864 conditions improved somewhat, and first mortgage bonds were
disposed of at about 75, while convertible and state aid bonds brought
56 and 65 respectively.[34] Yet at the time when the construction of
the Central Pacific Railroad was finished the private property of every
one of the directors of the company was mortgaged up to the limit of
all his individual credit would possibly allow and bear. The notes of
the four associates were outstanding everywhere, many of them bearing
interest rates as high as from 10 to 12 per cent, and the statement is
made that Leland Stanford alone upon one occasion had his account at
the bank overdrawn to the extent of $1,300,000.[35]

The consideration of possible Central Pacific Railroad receipts, other
than those derived from government aid and perhaps from the sale of
the company’s first mortgage bonds, brings us back to Stanford’s list
as containing substantially all the assets upon which the promoters of
the Central Pacific were able to rely. Almost half of these assets were
derived directly from political bodies of one type or another, and the
value of the remainder of those assets was dependent for the most part
upon the security which was afforded by the government donations made
to the company.


State and Local Grants

Let us now consider with more care the circumstances under which
the local and federal authorities extended such generous aid to the
transcontinental project, and the extent and quality of the aid given.
We may begin with the state and local grants, and in order to assist
the reader, a portion of the table which was printed on page 21 will
be set forth again at this point in slightly changed form. As thus
presented the table is as follows:

AID DERIVED BY CENTRAL AND WESTERN PACIFIC RAILROADS FROM STATE AND
LOCAL GOVERNMENTS IN CALIFORNIA

                                                                Approximate
                                                    Par             Sum
                Source of Aid                      Value          Realized

  Aid by Cities:
    San Francisco, donation to Central
      Pacific                                     $400,000        $300,000
    Sacramento, subscription to Central
      Pacific                                      300,000         190,000
    San Francisco, donation to Western
      Pacific                                      250,000         175,000

  Aid by Counties:
    Placer County, subscription to Central
      Pacific                                      250,000         160,000
    San Joaquin County, subscription to Western
      Pacific                                      250,000         125,000
    Santa Clara County, subscription to Western
      Pacific                                      150,000         100,000

  Aid by State:
    Assumption of interest for twenty years on
      $1,500,000 7 per cent bonds.


Arguments for Local Aid

Aid from local political bodies was considered legitimate in the early
sixties, and was extended freely to a great number of corporations.
Voters were told that the construction of railroads increased land
values. Until transportation should be improved, it was argued,
agriculture could make but little progress, because the products of
agriculture could not be brought to market. The mining interest was
depressed in 1870, and in partial explanation publicists pointed out
that freight charges to the mines ranged from $50 to $180 a ton. Nor
was even more precise calculation lacking. An advocate of subsidies in
1870 stated:

 It costs for passage to San Francisco from Visalia $25 and consumes
 generally a day and a half. By rail the trip could be made in eight
 hours, at a cost of $10, thus saving $15 and nearly a day in time.
 If on the average, each adult makes one visit per annum to the upper
 country, and taking 1,300, the number of registered voters, as the
 adult population, it costs every passenger for the round trip $50 in
 cash and three days in time—excess over railway fare, $30; board for
 two extra days, $4; value of time at $2 per day, $4; total excess,
 $38; total loss to 1,300 passengers, $49,400. I contend, therefore,
 that the people of Tulare County are now actually paying, in addition
 to the loss or inconvenience resulting from isolation from market,
 the sum of $77,780 per annum, for the privilege of being without a
 railroad.

There was little that was novel in this sort of argument, or in the
further contention that the increase of the tax roll of the counties,
due to railroad construction, would yield a revenue more than
sufficient to cover the taxes incident to the granting of a subsidy.
Better transportation meant wider markets, denser population, higher
values. Increasing values and volume of sales meant larger profits,
higher wages, lower prices, and generally growing prosperity. These
things were matters of reasonable anticipation, so that hard-headed
business men had quite as much ground as usually underlies business
action to approve of even a considerable pledge of state and county
property in order to hasten the building of a railroad system. It could
not be known whether or not railways would be constructed without
subsidies. As we look at the situation today it seems probable that
this would have been done, and that railroad building would not even
have been greatly delayed. The risk in waiting was, however, great,
and the difficulties of a conservative policy were enhanced by the
competition of towns, each seeking priority of railroad connection.


Playing Towns Against Each Other

There is evidence that the promoters of the Central Pacific were
perfectly aware of the possibilities of securing local subsidies by
playing one California town against another. Huntington wrote David D.
Colton in 1871 that the company ought to get a large amount of land and
other good things from parties having interests along the line between
Spadra and San Gregorio Pass, if it would build them a railroad on
which to get out.[36] T. G. Phelps, president of the Southern Pacific,
speaking in the same vein, told Colonel Baker, of Tulare, that it was
his private opinion that if that county would donate $100,000 to the
company, it would run its road through the town of Visalia. We also
know that pressure was brought to bear upon the city of Stockton, to
induce that city to grant a right-of-way, as well as other privileges,
to the Western Pacific,[37] and it is notorious that the fears of San
Francisco were played upon in order to obtain terminal facilities on
San Francisco Bay.

How this policy appeared from the point of view of the opponents of the
Central Pacific, may be gathered from a description offered by a member
of the Constitutional Convention of 1878:

 They start out their railway track and survey their line near a
 thriving village. They go to the most prominent citizens of that
 village and say, “If you will give us so many thousand dollars we will
 run through here; if you do not we will run by,” and in every instance
 where the subsidy was not granted, that course was taken, and the
 effect was just as they said, to kill off the little town. Here was
 the town of Paradise, in Stanislaus County; because they did not get
 what they wanted, they established another town 4 miles from there.
 In every instance where they were refused a subsidy, in money, unless
 their terms were acceded to, they have established a depot near to the
 place, and always have frozen them out. As stated by the gentleman
 from Los Angeles, General Howard, they have blackmailed Los Angeles
 County $230,000 as a condition of doing that which the law compelled
 them to do.


County Stock Subscriptions

Perhaps the earliest California statute in aid of railway construction
was the act approved May 1, 1852, granting to the United States a
right-of-way through the state for the purpose of constructing a
railway from the Atlantic to the Pacific oceans.[38] In 1857 the
supervisors of Yuba County were authorized to submit to the electors
of that county a proposal to subscribe $200,000 to a railroad between
Marysville and Benicia.[39] And during the following two years the
San Francisco and Marysville Railroad not only received a land
grant,[40] but secured an enactment, making it the duty of the Board
of Supervisors of Sutter County to submit to popular vote the question
of a $50,000 subscription to its capital stock,[41] and the duty of
the supervisors of Solano and Yolo counties to call elections in those
counties with similar intent.[42] No subscriptions were made under
these acts.

It seems to have been the intention of the legislature to treat the
Central Pacific and the Western Pacific railroads after the same
general fashion as other railroads had been treated—that is to say,
to allow counties and cities interested to subscribe freely to their
stock. By virtue of an act dated April 16, 1859, any county could so
subscribe up to 5 per cent of its assessment roll when popular approval
had been secured.[43] This was not, however, enough. Between March 21,
1863, and April 4, 1864, the legislature passed eight acts granting
special concessions to the Central Pacific and to the Western Pacific.
Mr. Stanford had become governor of the state in January, 1862, and
this legislation had of course his cordial approval.

In March, 1863, the supervisors of San Joaquin County were authorized
to hold a popular election on the question of subscribing $250,000 to
the capital stock of the Western Pacific.[44] In April, Placer County
was authorized to consider a subscription of equal amount to the stock
of the Central Pacific.[45] Next, Santa Clara County was authorized to
hold an election and to subscribe $150,000 to the Western Pacific, if
it so desired.[46] Sacramento received the same privilege in April,
to the extent of being permitted to take 3,000 shares of the Central
Pacific,[47] and was in addition allowed to give away rights-of-way
and certain rights of construction of considerable though indefinite
value;[48] while San Francisco was permitted to subscribe $400,000 to
the stock of the Western Pacific and $600,000 to that of the Central
Pacific, making $1,000,000 in all.[49]

Invariably subscriptions contemplated in the acts were to be made in
bonds running twenty or thirty years, and bearing 7 or 8 per cent
interest. Counties were to enjoy the usual privileges of stockholders,
but were protected by special clauses against the proportional
liability for debts of the corporation resting upon the ordinary
stockholder by virtue of state law. The proceeds of county bonds issued
in subscriptions were to be used for construction of the road, and it
was provided that at least an equal amount of other funds obtained
from stockholders was to be so used. It was thus the intention of the
legislature that funds for construction should not be entirely derived
from county subsidies.


Direct State Aid

In addition to the acts permitting county subscriptions, mention
should be made of two important acts by which the state granted direct
assistance. The first of these laws was dated April 25, 1863. It
authorized the comptroller of the state to draw warrants in favor of
the Central Pacific to the extent of $10,000 per mile, the warrants to
be issued when the first 20 miles, the second 20 miles, and the last 10
out of 50 miles were finished. These warrants were to bear 7 per cent
interest if not cashed, because of lack of money in the treasury to pay
them.[50]

The second act, dated April 4, 1864, repealed the act just quoted, and
proposed that the state government, instead of drawing warrants, should
assume interest on 1,500 of the company bonds, bearing 7 per cent, and
running for twenty years. This grant, like the earlier one, was made
on certain conditions, such as that the company should transport free
of charge public convicts going to the state prison, material for the
construction of the state capitol, troops, munitions of war, and the
like, that it should construct at least 20 miles of line annually,
and in the case of the Act of 1864, that it should deed over certain
granite quarries in Placer County.[51]

On the face of it this grant was illegal, because of clauses in the
state constitution which forbade the legislature to create liabilities
in excess of $300,000 without submitting the proposal to popular vote,
or to loan or give the credit of the state in any manner, in aid of any
individual, association, or corporation.[52] But it was sustained on
the theory that the act amounted to an appropriation in anticipation of
revenue, and so did not create a debt at all. Thus the company was able
to draw its first interest money in January, 1865.[53]


Opposition to Aid in San Francisco

The various acts just referred to were of course permissive, yet in
general the counties seemed very willing to give up to the limit of
their legal power. The two exceptions were the county of Placer and
the city and county of San Francisco. In Placer County there was a very
active campaign against the bonds, supported by newspapers such as the
_Placer Herald_ and the _Advocate_. The proposal for a bond issue was
carried, but only by a majority of 409 in a total vote of 3,810.[54]

In the case of San Francisco, the city delegation in the legislature
divided five to five on the proposal to authorize the city to
subscribe. When the law was finally passed, a long and interesting
struggle ensued. The first step after the passage of the act was to
hold an election in San Francisco in order to ascertain whether the
people would approve of a subscription to railroad bonds. This election
took place in May, 1863, and the necessary popular consent was secured.
There is reason to believe, however, that illegitimate means were
employed to carry the election. We have affidavits that Philip Stanford
went to the polls at San Francisco in a buggy, carrying a bag of money;
that the said Stanford put his hand frequently in the bag of money
and took money, some $20 pieces and some $5 pieces, to a considerable
amount therefrom, and scattered the said money among the voters at
the said polls, at the same time calling on them to vote in favor of
the said subscription. Another eyewitness confirmed this account,
adding that while the sum of money spent by the said Stanford was
considerable, he could not tell how much as the crowd around the buggy
of the said Stanford was so great. Still another testified to having
received a written order on Stanford and others for $20, in return for
which he and a man named Ross were to endeavor to influence voters at
the polls to vote for the subscription.[55]

These affidavits were later supported by the assertion of Hon. William
A. Piper, on the floor of the House of Representatives at Washington,
to the effect that he, Piper, was an eyewitness at the election, and
saw the brother of Leland Stanford openly going about the polling
places, scattering gold and silver to influence and buy votes for
the municipal subsidy. Statements of this sort are too detailed and
circumstantial to be brushed lightly aside.

[Illustration: Henry P. Coon]


Resort to Court

Whether or not the election of 1863 was tainted with corruption, as
soon as it was concluded, San Francisco became bound, on or about the
25th of May, 1863, to subscribe $600,000 and $400,000 to the stock of
the Central Pacific and Western Pacific railroads, respectively. The
fight against subscriptions, however, did not stop at this point. In
an attempt to prevent action, suit was brought by a man named W. N.
French against the Board of Supervisors, in the case known as “French
v. Teschemaker.” French was a resident of San Francisco and a taxpayer.
Teschemaker was a member of the Board of Supervisors. The suit alleged
certain irregularities in the city election, but rested mainly on the
contention that the act authorizing the city and county to subscribe
was void and of no effect, because it provided that the city and county
should not be liable for any of the debts or liabilities of either the
Central Pacific or the Western Pacific railroads beyond the amount
subscribed, and that this provision as to liability should be a part of
all contracts made by the companies for the construction and equipment
of their roads. According to counsel, this was an attempt to create an
exemption from the proportionate liability imposed on all stockholders
by the state constitution, and was not only void in itself, but its
lack of force invalidated the whole subscription, since it was not to
be supposed that the legislature would have passed the other clauses of
the act without the section in question.

On the 23d of May, 1863, Judge Sawyer of the Twelfth Judicial District
granted a temporary injunction. On appeal to the Supreme Court,
however, this injunction was overruled. The court said:

 True, the legislature cannot exempt the city and county from
 liability, but it can authorize the corporation to refuse to contract
 with persons who do not waive the proportionate liability established
 for their protection. How the individual liability of a stockholder
 of a corporation can be a matter of public concern any more than the
 liability of a copartner, we are unable to perceive, and we are not
 aware that it has ever been claimed that the latter liability had its
 foundation in public policy. It is merely a liability created by law,
 as it might be by contract, and is intended only for the benefit of
 those who may deal with corporations. It is but another fund to which
 the creditor may look when the social fund has been exhausted, and
 whether he chooses to look to it or not is a matter of no concern to
 the public.... There being, then, only a question of private right
 involved, there can be no question but that the party interested in
 the enforcement of the right may contract to waive it.[56]


Compromise Plan

The opponents of municipal subscription now turned to the legislature,
and secured the passage of an act authorizing the Board of Supervisors
of San Francisco to compromise and to settle all claims upon the part
of the Western Pacific Railroad and the Central Pacific Railroad for
cash or other security, in place of bonds claimed by the companies,
provided the power to make such compromise should rest in the Board of
Supervisors only after and in case said board should be compelled by
final judgment of the Supreme Court to execute and deliver the bonds
specified in the act.[57]

Pursuant to this act of April 14, 1864, the Board of Supervisors
appointed a special committee from among their number to consider and
report a plan for a compromise. This action was taken on May 23, and
the mandamus requiring the supervisors to subscribe $600,000 to the
stock of the Central Pacific, which was essential to the adoption
of any compromise, was issued on June 7.[58] The committee met with
Stanford, reported back to the board, and on June 20 the board passed
order No. 582 providing that the city of San Francisco order, execute,
and deliver to the Central Pacific 400 bonds for $1,000 each, in full
discharge of all obligations on the part of the city and county to make
any subscription to the capital stock of said company.

Order No. 582 was duly approved by the mayor on June 21, and became
law on that day. On June 29 the acceptance of the Central Pacific was
signified to the board, in due form, and on June 27 the supervisors
appointed Messrs. Torrey, Bell, and Titcomb a committee to deliver to
the Central Pacific the 400 bonds, with interest coupons attached.
Nevertheless the mayor, Henry P. Coon, the auditor, Henry M. Hale, and
the treasurer of the city, Joseph S. Paxon, constituting the Pacific
Railroad Loan Fund Commissioners, refused to issue the bonds. The
result was a petition for a mandamus directed against these persons
individually, which developed into the case of People v. Coon.


Agreements in Mandamus Proceedings

The main legal points raised in this new litigation were three:

1. The conditions precedent to the issuance of the bonds under the act
of 1864 had not been fulfilled, said the petitioner, in that the board
of supervisors had not been compelled by final judgment of the Supreme
Court to execute and deliver the bonds.

2. The second contention was that the railroad company could not call
upon the supervisors to issue bonds on the city’s subscription unless
the railroad should call in from other subscribers the whole amount of
their respective subscriptions, or until, under the Act of 1863, a sum
at least equal to the amount of the bonds should have been expended on
the road from other sources. That either of these things had been done,
the defendants vigorously denied.

3. It was also declared by defendants that the Act of 1864 had
been misconstrued—that it did not relieve San Francisco from her
subscription, but simply authorized the city to liquidate that
subscription “in cash or other security” instead of in bonds. “We
claim,” said counsel, “that the act authorized no more than the
reduction of the amount of subscription and a change of the mode of
payment to cash or other security in place of bonds. It does not
authorize a donation of $400,000 or any other amount. In other words,
it authorizes a subscription for any amount less than $600,000, payable
in cash in place of bonds.”[59]

One has the feeling that at this stage of the proceedings, the first
and third of these propositions were not well taken. It was too plainly
the intention of the legislature to allow the city of San Francisco to
withdraw from its subscription for a consideration, to permit weight
to be given to technical points like these. On the other hand, it is
very doubtful if the railroad had at this time either called in from
other subscribers the whole amount of their respective subscriptions,
or had expended on the road from other sources a sum equal to the
amount of the bonds. The Supreme Court, however, did not make even this
concession, but promptly issued a mandamus against Coon, Hale, and
Paxon, commanding and requiring them to execute and deliver without
delay, to the Central Pacific Railroad of California, the 400 bonds
of the city and county of San Francisco, described in the ordinance
before referred to.[60]


Further Litigation

Upon the issue of this mandamus, Coon, Hale, and Paxon signed the 400
bonds. According to a subsequent complaint by the railroad, the bonds
so signed were presented by the president of the Board of Supervisors
to William Loewy, clerk of the city and county of San Francisco, at
a meeting at which a quorum of the supervisors was present. Loewy
refused or failed to countersign. On September 27, 1864, a regular
meeting of the supervisors was held, at which resolutions were
offered requesting Loewy to countersign the bonds, and providing for
the affixing of the seal of the city and county to the bonds when
countersigned. These resolutions failed of passage, and instead a
resolution was adopted requesting the clerk to deposit the 400 bonds
with the county treasurer, which he did forthwith. The treasurer then
refused to deliver the bonds to the railroad, and fresh proceedings
were instituted before the Supreme Court, this time asking for a writ
of peremptory mandamus commanding Loewy or his successor to obtain
possession of the bonds, and to countersign and assist in delivering
them to the Central Pacific; commanding the Board of Supervisors or
their successors to call a meeting of the board, to notify the clerk
of a time and place at which he might complete the countersigning in
the presence of a quorum of the board; to cause the seal of the city
and county to be affixed to the bonds; and to appoint a committee to
deliver the bonds to the Central Pacific; and commanding the members of
the Board of Supervisors who might be appointed such a committee, to
deliver the bonds to the Central Pacific. It was obviously hoped to tie
things down so that no further delay would be possible.

There seems to have been a split in the Board of Supervisors at
this time. Six of the twelve members made individual returns to the
complaint, and alleged that they had no part in the refusal to deliver
the bonds. The other six and the mayor voted to employ counsel and to
defend the suit.


Contentions of Defendants

The case came to a hearing January 7, 1865. In some respects the
defense now rested on new ground; in some new emphasis was given
matters previously brought forward.

The supervisors in January alleged that the election in San Francisco
held May 19, 1863, at which the electors of San Francisco had approved
the subscription to the stock of the Central Pacific, had been carried
by corruption and bribery. This assertion was given great prominence in
the answer of the supervisors, though less in briefs of counsel. Nine
instances were cited where A. P. Stanford had given sums ranging from
$5 to $40 apiece to electors, or had thrown handfuls of money among the
electors “and thereupon they scrambled among themselves for the same.”
It was urged that these bribes had had great influence upon the vote
and that the election was void. These facts had not been known to the
supervisors on June 20, 1864, when order No. 582 had been passed, and
defendants believed that knowledge of them would have prevented the
passage of the ordinance.

Besides this, the supervisors declared that the passage of ordinance
No. 582 had been procured by false and fraudulent representations by
the railroad company. More important, it was now contended that the
Act of 1863 was unconstitutional, in that the legislature was without
power to “impose on a municipal corporation of the state the burden
of exclusively building or aiding to build a work of general interest
to the state, which is in no sense a work of local interest to the
corporation on which the burden is imposed.”

It was pointed out that the Central Pacific was a work of general
interest to the Pacific Coast. It did not come within 100 miles of San
Francisco. It had received large subsidies from the federal government
on the ground that it was of national importance. Counsel declared that:

 The true test of whether a tax can be exclusively laid on a municipal
 corporation, is to be found in the purpose for which municipal
 government is confined within local limits. Citizens living within
 those limits are exposed to exclusive taxation because, and only
 because, a peculiar benefit is conferred upon this locality. When the
 benefit is shared in by the rest of the state, then a state tax is
 levied, because the citizens of San Francisco received advantage, not
 in their character as citizens of San Francisco, but as citizens of
 the state. The state government is as much a benefit to San Francisco
 as its own municipal government. Yet no one would contend that she
 could be compelled to support the entire expenses of the former, or
 that any other city should be compelled to contribute towards the
 expenses of the latter.


City Compelled to Subscribe

These and other more technical objections were considered by the
Supreme Court and were swept aside in a decision rendered at the April
term of 1865. The court now held that the legislature had imposed
no burden on San Francisco by the Act of 1863, because under that
act the city got a consideration, namely, the company stock, for its
subscription. The court added:

 Nor does it make any difference as to the validity of the compromise
 whether the bonds were payable in instalments or in gross, nor whether
 a legal assessment has been laid on the capital stock of the company,
 for irrespective of the time the bonds under the Act of 1863 might
 become due, the company held a claim against the city which was a
 proper subject of and formed a good consideration for a compromise.[61]

This ended the case. It may perhaps be pertinently inquired why it
was, if the subscription required by the Act of 1863 imposed no burden
on the city of San Francisco as the Supreme Court said, that the city
could afford to give $400,000 to get rid of the obligation. Yet,
perhaps it would be fruitless to follow too closely the windings of the
judicial mind. Stanford later declared that the litigation had injured
the Central Pacific very much,[62] while E. H. Miller, secretary of
the company, estimated that the suit cost the Central Pacific not much
less than $100,000. Of the bonds issued, 315 were sold at $751.60
each, amounting to $236,754, while 85 were paid out at par for rolling
stock.[63]


Subscribing Counties Embarrassed

The reluctance of San Francisco to subscribe was not typical of the
general attitude toward the Central Pacific in 1865. But it became more
typical as the years went on. For this, there were several reasons.

In the first place, the state was much disappointed by the fact that
the completion of the Central Pacific did not inaugurate a period
of prosperity. The year 1870 was not a particularly good one in
California, and the panic of 1873, with the intense depression which
resulted, was soon to occur. Among the first effects of the two rail
connections with the East, was an influx of eastern manufactures,
unemployment, lower prices, and dissatisfaction. This in no way
meant that the construction of the Central Pacific had not benefited
California, but it gave evidence of a serious though temporary
maladjustment.

Moreover, the bonds which had been so lightly voted, proved a real
burden on the scanty population of the counties, which was in no
adequate way offset by increases in the assessment rolls. Indeed, the
railroads in early years were assessed at figures that were remarkably
low. In Placer County, for instance, the Central Pacific insisted
that its road should be assessed at $6,000 per mile, and succeeded in
carrying its point in 1865, 1866, and 1867. In 1868 the assessment was
raised to $12,000 per mile. The railroad protested, and when forced to
submit, increased the rate of freight to all points in Placer County
about 40 cents a ton.[64] Nor were taxes even on such modest valuations
easily collected. Between 1866 and 1887 railroad tax cases were almost
constantly before the courts. At times the Central Pacific refused to
pay any taxes at all, on the ground that it held a “federal franchise,”
and at other times it objected to the terms of the law or to the amount
of the assessment.[65] The result was to throw the local tax system
into complete confusion.


Experience of Placer County

Let us refer again to the experience of Placer County. In 1863 the
Central Pacific asked for a subscription of $250,000, promising to
add $9,000,000 to the taxable property of the county. The county tax
rate as fixed in February, 1863, for the following year, was 35 cents
on $100, and the assessed valuation of the county was $3,071,911.78,
yielding a revenue from county taxes of $10,751.69. The railroad
company issued an address while the matter of a subscription was under
consideration, pointing out that 8 per cent on a bond issue of $250,000
would amount to $20,000, while a tax rate of 35 cents on $9,000,000 of
increased valuation would yield $31,500, or a clear excess of $11,500,
to the county without considering the effect of the railroad in
increasing the valuation of real estate.

These were the results which voters were led to expect. What happened
was that the assessed valuation of the property of the Central Pacific
in Placer County was $6,000 per mile as late as 1870, when the county
sold its railroad stock; that the total railroad valuation was
therefore $553,500, and that the county tax rate rose from 35 cents
to $1.73½. Moreover, the railroad taxes for 1868 and 1869 were still
unsettled and in dispute in 1870 and remained so until 1873. The total
receipts of the county from all sources in 1869 were $127,492.54, of
which $46,499.66 were for the state. Against the $80,992.88 remaining,
the $20,000 of interest on the subsidy bonds was evidently a material
charge.

It was probably not true in general that the financial embarrassment
in which many of the counties of California were plunged late in the
sixties was due to the pressure of interest charges on bonds issued in
aid of railroad construction. The highest rates of taxation for county
purposes uncovered by the special legislative committee of 1868 which
investigated this matter, were $36.70 per $1,000 for Tuolumne County,
and $40 per $1,000 for Calaveras County, neither of which counties had
issued bonds in aid of railroads. Extravagance in assistance tendered
to railroads was only one of the financial sins of which the counties
had been guilty. Nevertheless the burden of outstanding indebtedness
for railroads was often severe on communities of declining industry and
population, and contributed to the later severe revulsion in popular
sentiment with regard to the desirability of local aid to railroad
enterprise.


Opposition by Other Transportation Interests

It is proper to mention at this point, also, as throwing light upon
popular sentiment, the opposition of the smaller transportation
interests of the state to the development of the Central Pacific
project. These interests included the stage companies, the express
companies, the toll roads, and the Pacific Mail Steamship Company. In
the aggregate their influence was considerable, and it was constantly
thrown against the granting of aid to the Central Pacific.

It is a curious commentary upon the effect of government subsidies,
that the Huntington-Stanford group brought part of this opposition upon
themselves by a deliberate refusal to buy up the Sacramento Valley
Railroad for the reason that it was cheaper to build at the expense
of the federal government from Sacramento to Auburn than to buy a
railroad already in active operation for most of the distance between
these points. In cold figures, it would have cost $400,000 to build a
new line out of Sacramento, and $285,000, according to Central Pacific
engineers, to put the Sacramento Valley Railroad in thoroughly good
physical condition. But under federal legislation, to be described in a
later chapter, only $250,000 out of the $400,000 would have to be paid
by the Central Pacific in cash, leaving a clear gain of $35,000 if the
policy of construction were pursued.[66]

The result of this decision was to cause the backers of the Sacramento
Valley project to denounce the Central Pacific enterprise as a
fraud.[67]


End of Local Subsidies

In the year 1868, a resolution was introduced into the California State
Senate urging the appointment of a committee to investigate the use of
moneys contributed by the state toward the construction of the Central
Pacific Railroad. This resolution was indefinitely postponed by a vote
of 18 to 17. The same year notices began to appear in the press, urging
the legislature to oppose further railroad-aid legislation. In 1869,
the _Sacramento Union_, while in favor of a grant to the Stockton
and Tulare Railroad, urged the counties to go slow and to secure an
amendment to the general railway law, reducing maximum transportation
charges to 10 cents per passenger per mile, and 15 cents per ton per
mile, before voting aid.

These were but symptoms of a profound dissatisfaction with the results
of railroad subsidies. In the fall of 1869 both political parties
pronounced against grants of state aid to railroads, but this could
not prevent the passage of the so-called “Five Per Cent Act” of 1870,
authorizing counties to subscribe to railroad stock up to 5 per cent
of their assessed valuation; although it did encourage Governor Haight
to veto two bills in March, 1870, the one authorizing the voters of
certain counties in the San Joaquin Valley to donate their bonds to
the San Joaquin Railroad Company at the rate of $6,000 per mile,[68]
and the other providing for the construction of a railroad by the
Southern Pacific through Monterey and San Luis Obispo counties, and
permitting the counties interested to grant aid. The governor took
the position that the proposed subsidies were not only unwise, but
that they were unconstitutional for the reason that a donation to a
private corporation was not a use of funds for a proper purpose.[69]
After a fight which attracted much popular attention, the vetoes of the
governor were sustained.

In 1871, Governor Haight was defeated for re-election by Newton Booth,
the Republican candidate. In the following year, however, the Five Per
Cent Act was repealed, and the period of local subsidies in California
came to an end.




CHAPTER III

FEDERAL LAND GRANTS AND SUBSIDIES


Government Aid Deemed Necessary

Serviceable as local subsidies were, there is no question that the
most important aid granted to the Central Pacific Railroad came from
Congress.[70] It was perfectly well understood on the Pacific Coast
that no transcontinental railroad could be built without the assistance
of the national government. This was the attitude of the California
legislature in 1852, when it instructed its senators in Congress, and
requested its representatives, to vote for an act providing for the
construction of a railway from the Missouri or Mississippi River to
the Pacific Ocean, the cost of which should be borne by the general
government.[71] It was also the position of the Railroad Convention
of 1853, which sat at San Francisco under the presidency of Governor
Bigler, and of that better advertised gathering known as the Pacific
Railroad Convention of 1859, the resolutions of which concerning routes
and state bond issues in aid of railroads gave rise to so much heated
discussion.[72]


Judah’s Activities in Washington

Not only was it the attitude of the Pacific Coast that federal aid
was necessary, but, still more important, Judah was able to advise
his associates that Congress looked with favor upon the plan. He was
convinced of this of his own personal knowledge, for he had been in
Washington both on his own account and as a delegate of the Convention
of 1859, and had reported to his constituents that only the pressure of
more important matters arising out of the Civil War prevented favorable
action upon the bill which they had sent him east to support. Upon this
information, indeed, much of the plans of the Huntington-Stanford group
was based.

Late in 1861, the Central Pacific Railroad sent Mr. Judah to Washington
to solicit whatever aid the federal government might be disposed to
give. We have in Judah’s report upon this visit, dated September
1, 1862, a very full account of his negotiations. Judah sailed for
the Atlantic states on October 10, 1861. During the trip he busied
himself in talking with Mr. Sargent, Congressional representative from
California, who was his fellow passenger, and in writing up the results
of the survey which he had made during the summer of 1861. On his
arrival in New York he completed this report, caused 1,000 copies of it
to be printed, and distributed the copies widely where he thought they
would do most good. Late in November, after conference with Senator
McDougal, of California, chairman of the Senate Pacific Railroad
Committee, he proceeded to Washington.

From the time of his arrival there to the following July, Judah was
engaged in energetic lobbying. His brief previous visits to the
capitol had acquainted him with the routine of business there, as well
as with the personalities of a considerable number of Congressmen.
He was aided, also, by the fact that Sargent, at the opening of the
session, was assigned to the Pacific Railroad Committee of the House,
and by the further circumstance that, with questionable propriety,
he, Judah—interested in the outcome of the pending legislation as he
was—was made clerk of a subcommittee of the House Committee on Pacific
Railroads and secretary of the Senate Pacific Railroad Committee, with
the privilege of the floor of the Senate and of the House, and charge
of all the papers of the Senate committee.

From this position of advantage Judah was able to watch the progress
of the Pacific Railroad bill which Mr. Sargent presently introduced,
and to guide it to a certain extent. We know that it was Judah who
procured the assent of the Kansas company mentioned in the bill to a
change which required its road to meet the Union Pacific at the 100th
meridian instead of at the 102d meridian. It was Judah also who secured
the passage of the amendment retaining for the Central Pacific the
timber on mineral land. Mineral lands were excepted from the lands
granted to the Pacific railroads, and Judah was afraid lest this clause
should deprive the Central Pacific of all benefit from a large part of
the lands nominally given it. It was probably Judah, also, though this
is less certain, who secured a change in the terms of the government
subsidy increasing the amount and altering the distribution so that the
largest payments were made for the road across the Sierras and not for
the section east of the California state line, where the difficulties
of construction were less. These were important matters, and Judah
should not have been permitted to urge them from the vantage point of
an official position.[73]

It is perhaps natural to ask whether there is any evidence of improper
methods used by the Central Pacific to obtain the passage of the
Pacific Railroad bill beyond that just referred to. The weight of the
record is in the negative. According to Stanford, Judah had $100,000
in Central Pacific stock at his disposal to cover his expenses in the
East. This stock was not worth much, and Judah did not use all of it.
Besides this, Judah made an agreement with Hon. S. A. McDougal and
Hon. T. G. Phelps, according to which he assigned to certain parties
representing the interests of the San Francisco and San José Railroad,
the rights, grants, and franchises of the Central Pacific for the
portion of road between Sacramento and San Francisco. This looks like
an attempt to quiet opposition in California, from which some of the
California delegation may have profited. There is no further evidence,
however, of any improper bargaining in connection with the passage
of the bill, and it is probable that no money was corruptly used. If
there had been, Campbell and Sargent would hardly have been naïve
enough to send a letter to Judah in behalf of sixty-three senators and
representatives, thanking him for his valuable assistance in aiding the
passage of the Pacific Railroad bill.


The Pacific Railroad Act

Let us now consider the terms of the federal legislation of 1862 and
1864. The Pacific Railroad Act in its first form was signed on July 1,
1862,[74] and accepted by the company by letter dated November 1.[75]
Bancroft says that the company was aware that the assistance offered
in this act was not sufficient. The subsidy alone would not build the
road, and capitalists would not subscribe on the security offered.
However this may be, Judah arranged for the purchase of locomotives,
cars, and railroad iron before he left the East, and took measures
also to secure early action by the President on the question of gauge,
and on the establishment of the western base of the Sierra Nevada
Mountains.[76]

In December, after Judah’s departure, a bill was introduced to amend
the Act of July, 1862. This measure passed the Senate but was not acted
upon by the House. A year and a half later, however, a new act was
passed by both houses, and became law on the 2d of July, 1864, amending
the Act of 1862, and materially increasing the aid which the Central
Pacific was to enjoy.[77] To all intents and purposes the Acts of 1862
and 1864 were one piece of legislation, and will be treated as such in
the analysis which follows.[78]


Grant of Right-of-Way

What now were the advantages secured to the Central Pacific by the
Acts of 1862 and 1864, and what were the obligations placed upon that
company? We will take up first the advantages, not necessarily in order
of importance.

The first concession which the Central Pacific received under this
legislation was the authority to complete its line from Sacramento to
the eastern boundary of the state of California and thence eastward 150
miles, provided that the Union Pacific had not by that time built west
to a connection with it. The company was also authorized to build west
and south from Sacramento to San Francisco, or to a point nearby. The
Act of 1862 had contained no limitation on construction eastward beyond
the reference to a Union Pacific connection. Huntington said later that
the restriction of 150 miles should not have been inserted in 1864. He
added, however:

 I said to Mr. Union Pacific when I saw it, I would take that out
 as soon as I wanted it out. In 1866 I went to Washington.... I saw
 probably every member of Congress and the Senate except a few men who
 were interested in the Union Pacific, or had a direct interest in the
 Credit Mobilier.... We passed it through the Senate; I think we got
 thirty-four against eight opposed to it. I took it over to the House
 and old Thad Stevens attended to the bill for me, and it went through
 the House with a vote, I think, of ninety-four for the bill and
 thirty-three against it.[79]

Judah said of the clause as it stood in 1862, that it virtually
conceded to the company the right to construct at least one-half of the
line of the Pacific Railroad. He was positive that it would be found
advisable to undertake construction for about 300 miles easterly from
the state line of California.[80]

In addition to the authority to build, the Central Pacific was given a
free right-of-way 400 feet wide across all government lands, besides
necessary grounds for stations, machine shops, etc., with the privilege
of taking earth, stone, timber, and other materials from the public
lands adjacent to the line of said road for purposes of construction.


Land Grant

The company was also granted ten alternate sections per mile of public
land on each side of the railroad on the line thereof, and within the
limits of 20 miles on each side of the road. The government undertook
to extinguish Indian titles, but did not include in its grant mineral
lands except coal and iron lands, or lands sold, reserved, or otherwise
disposed of by the United States, or lands to which a pre-emption,
homestead, swamp-land, or other lawful claim might have attached at the
time the line of the road should have been definitely fixed. The grant
was thus not of a specified number of acres, and no compensation was
provided to the company for lands which might prove to be occupied;
but in order to prevent speculation and in a measure to safeguard the
company’s interests, it was provided that at any time after the passage
of the act, and before July 1, 1865, without waiting for definite
location of the road, the company might designate the general route and
file a map, whereupon the Secretary of the Interior should cause the
lands within 25 miles of said route to be withdrawn from pre-emption,
private entry, and sale. When any portion of the route should be
finally located, the Secretary of the Interior should cause the granted
lands to be surveyed and set off so far as might be necessary. As a
matter of fact, Judah filed his map and general designation before he
left Washington in 1862. Lands were to be conveyed to the company on
completion of stretches of 20 consecutive miles. A special clause,
never enforced, provided that all granted lands not sold or disposed
of by the company within three years after the entire road should have
been completed, should be subject to settlement and pre-emption like
other lands, at a price not exceeding $1.25 per acre to be paid to the
company.


Government Subsidy

In the way of a subsidy, Congress ordered the Secretary of the Treasury
to issue to the Central Pacific, United States 6 per cent 30-year
bonds, in amounts varying from $16,000 to $48,000 per mile. The
subsidy of $48,000 was granted for the 150 miles east of the western
base of the Sierra Nevada Mountains, this being the most mountainous
and difficult portion of the road. East of this section of line the
Central Pacific bond subsidy was to be $32,000 per mile, but west of
it, it was to be only $16,000 per mile. It was the understanding of the
company that these bonds were not redeemable by the government before
maturity, and that until that time the interest charges were to be
taken care of by the government. This last point was later the subject
of litigation in which the company’s contention was sustained.[81]
The subsidy offered by the government inured to the company on the
completion of sections of 20 consecutive miles over the greater part
of the road, except that bonds might be issued up to two-thirds of the
value of uncompleted work when the chief engineer of the company should
certify that a certain proportion of the work required to prepare the
road for its superstructure had been done.


Company’s Obligations

In return for these very considerable privileges, the demands made
upon the Central Pacific do not seem to have been excessive. First and
foremost, the company was required to build its road at the rate of
25 miles each year after filing its assent to the provisions of the
act, and to reach the state line within four years. The track upon
the entire line was to be of a uniform width, to be determined by the
President of the United States, so that, when completed, cars could be
run from the Missouri River to the Pacific Coast. The grades and curves
were not to exceed the maximum grades and curves of the Baltimore and
Ohio Railroad, and the whole line of railroad and branches, Union
Pacific and Central Pacific included, was to be operated and used for
all purposes of communication, travel, and transportation, so far
as the public and the government were concerned, as one connected,
continuous line.

In the second place, demand was made that the company should pay the
principal of the government bonds at maturity, and should meanwhile
make certain payments on account of principal and interest. The
following section taken from the Act of 1862 shows that there is no
basis for the contention sometimes made that the government originally
expected no repayment of its loan.

 _And be it further enacted_ that the grants aforesaid are made upon
 condition that said Company shall pay said bonds at maturity, and
 shall keep said railroad and telegraph line in repair and use, and
 shall at all times transmit dispatches over said telegraph line, and
 transport mail, troops and munitions of war, supplies and public
 stores upon said railroad for the Government, whenever required to do
 so by any department thereof, and that the department shall at all
 times have the preference in the use of the same for all the purposes
 aforesaid (at fair and reasonable rates of compensation, not to exceed
 the amounts paid by private parties for the same kind of service),
 and all compensation for services rendered for the Government shall
 be applied to the payment of said bonds and interest until the whole
 amount is fully paid. Said Company may also pay the United States,
 wholly or in part, in the same or other bonds, treasury notes, or
 other evidences of debt against the United States, to be allowed at
 par, and after said road is completed, until said bonds and interest
 are paid, at least five per-centum of the net earnings of said road
 shall also be annually applied to the payment hereof.[82]

In 1864 this section was changed by requiring only one-half of the
compensation for services rendered to the government to be applied to
the payment of bonds issued by the government in aid of construction,
but the declaration that the bonds should be paid was not altered. Not
only was this true, but the government demanded security for repayment.
In 1862 it declared that the issue of said bonds and delivery to the
company should _ipso facto_ constitute a first mortgage on the whole
line of the railroad and telegraph, together with the rolling stock,
fixtures, and property of every kind and description. In 1864 the
lien of the United States bonds was subordinated to that of a second
mortgage, but the idea of some security was preserved.

Third, the government reserved the right to reduce the rates of fare
upon the Central Pacific, as well as upon the other railroads provided
for in the Act of 1862, as unreasonable, when net earnings should
exceed 10 per cent upon cost, exclusive of the 5 per cent to be paid to
the United States.

Fourth and last, an annual report was asked for, which was to set forth
earnings, expenses, indebtedness, the amount of stock subscribed, a
description of the lines of road surveyed, and the names and residences
of the stockholders.


Amounts Granted

It is evident that these demands were very moderate indeed. Under
the provisions of the Acts of 1862 and 1864, the Central Pacific and
Western Pacific railroads received $27,855,680 in government bonds,
and 10,081,945.18 acres in public lands (up to June 30, 1920). From
the bonds the companies realized $20,735,000, or $24,092 per mile.
From the lands, the Central Pacific received, up to June 30, 1919, the
approximate sum of $17,430,000, about equally divided between receipts
from sales and receipts from other sources, including leases, stumpage,
timber, and miscellaneous. The expenses of the land department may be
estimated at $7,000,000, and the net return therefore was $10,000,000.
The yield of the bond subsidy not only exceeded the returns from the
granted lands, but the subsidy was ten times the aid received from
the state and counties put together, and of course many times the
contribution of the partners themselves. What was almost as important,
the grant of this federal assistance at once raised the company’s
credit, so that it could sell its own first mortgage bonds. The sale
of company bonds yielded $20,750,000, or a total of $41,485,000, for
government and company bonds together, directly attributable to federal
aid, and almost immediately available.

From the point of view of serviceability, the land grant referred
to in the Pacific Railroad legislation was much less important than
the subsidy in bonds. Government lands along the line of the Central
Pacific had no value until the road was completed, nor even then
until the slow process of settlement had filled up in a measure the
territory through which the railroad ran. Nor was the amount of the
grant so definite as to make it a satisfactory basis for credit,
although land grant bonds were sold in and after 1870. The theoretical
grant was twenty sections, of 12,800 acres to the mile. The grant did
not, however, follow the sinuosities in the track, so that in the
mountain sections it was quite possible for two miles of railroad to be
constructed and yet only one mile of land grant to be obtained.

Not only was this true, but the exceptions provided for in the
legislation were important. The records show that the saving clauses
in the statutes, coupled with the inaccessibility of some of the lands
within the nominal grants, and the differences between the actual
mileage of the railroad and the mileage upon which land was awarded,
reduced the area passing to the railroad by many hundred thousand
acres. In California the Central Pacific was entitled to a nominal
grant of 1,843,000 acres, at the rate of twenty sections per mile
for a mileage of 144 miles. At least 887,000 acres of this amount
were known to be lost to the grant as early as 1895, while the final
adjustment will scarcely secure for the company more than half the
amount originally expected. In Nevada the company’s losses approximated
one-ninth and in Utah one-quarter of the nominal grant. The losses on
the California and Oregon up to 1897 were 962,703 acres out of a total
grant of 3,266,729 acres, but in this case the law permitted the
company to select additional lands within “indemnity” limits.


Delays in Transferring Title

How far the government lands failed in providing the Central
Pacific with funds with which to build its road, however, can best
be understood when attention is paid to the delays incident to the
transfer of title. The general procedure in transferring title from the
government to the company was as follows:

Under the Act of 1864, the Central Pacific was entitled to receive its
lands upon completion of stretches of 20 consecutive miles in a fashion
acceptable to commissioners appointed by the President of the United
States. Upon acceptance by the government, the sections of land to
which the company was entitled were listed and mapped and sent to the
United States Land Office in the land district in which the land was
located. The lists were examined there by registrars and receivers, and
when declared cleared, the railroad company paid for the surveying,
selecting, and conveying. Upon the payment of the fees, the lists were
certified by the Surveyor-General of the state, and forwarded to the
General Land Office at Washington for further examination. If found
correct by the office in Washington, patents were issued. If there was
doubt, the questionable cases were held for further examination.

In all this procedure delays were frequent. The initiative in the
process of conveyance of land lay with the railroad company and not
with the government, so that failure to file lists with the local land
office or failure to pay into the United States Treasury the cost of
surveys of listed lands prevented progress in the distribution of the
grant. On the other hand, the slowness of the government in making
surveys hindered the railroad in its selections. Still another reason
for delay was the fact that within the mineral belt the Commissioner
of the General Land Office required the railroad to file affidavits
defining the mineral or non-mineral character of lands by 40-acre
tracts. This requirement arrested the selection and patenting of lands,
because the government survey did not subdivide tracts of 640 acres,
and there was no way of identifying any particular sixteenth section
of a tract. There were delays also in determining the title to lands
claimed by homesteaders and pre-emptors, and there were delays due to
the faulty organization of the Federal Land Office.


Land Office Responsible for Delays

Opponents of the Central Pacific freely charged that the company
refrained from patenting its land in order to avoid the payment of
taxes. This the company denied, pointing to the fact that the lands
listed to June 1, 1887, exceeded the lands patented by 622,612.54
acres, and that the cash deposited with the United States Land
Department to cover the cost of surveys exceeds the amount charged
against the company up to January 15, 1886, by $28,771.92.[83] Mr.
Stanford declared that it was the policy of the company to select its
lands and present lists as promptly as possible, in order that lands
might be disposed of to settlers, and it does appear that it was to
the advantage of the Central Pacific to secure title as quickly as it
could in the mineral belts, because the company was protected in its
possession of land, which later turned out to contain minerals, if at
the time of patenting no minerals had been discovered.

The evidence is clear enough that the delay in the patenting of lands
to the Central Pacific Railroad was due mainly to the inadequacy of
the staff in the General Land Office at Washington and not to the
policies of the railroad itself. This is shown by the wide disparity
between listings and patents. The excess of lands selected over lands
patented averaged 57,000 acres during the five years ending June 30,
1869. During the next five years the average excess was 64,000 acres,
and during the five years ending June 30, 1886, it rose to 248,000. In
1887, as has been pointed out, there was a difference of 622,612.54
acres between the amount of acres which had been listed and those
which had been passed to patent. Between 1887 and 1897, there was no
year in which the Central Pacific had less than 300,000 acres of land
listed and selected and the selections on file in the General Land
Office for land in California alone. Yet it is not so important to fix
responsibility in this matter, as to observe that the construction
of the Central Pacific was not aided to any material degree by the
lands offered to it under the legislation of 1862 and 1864. Up to
the beginning of 1870, the company had received only four patents,
totaling 144,386.63 acres,[84] which if sold at $2.50 per acre would
have brought it $360,966.57. As a matter of fact, less than this was
disposed of in the early years, and what was sold was on terms, not for
cash in hand. In the later period, land-grant bonds with a lien on the
land grant were sold to investors. The first issue of such bonds was,
however, in 1871.

The bearing of these conditions on the land-grant policy of the United
States is very plain. Congress was legislating in order to get a
transcontinental railroad built. Every form of assistance which could
be immediately transmuted into funds facilitated construction to the
full value of those funds. In contrast with this, assistance which
could be realized on only after a lapse of years, served not as an aid
to construction, but as a reward to promoters for having taken risks.
While to some extent the land grant to the Central Pacific may have
aided the sale of Central Pacific first mortgage bonds, in the main its
effect was to give a grossly excessive and unnecessary profit to a
few persons who held most of the stock of the company, without having
invested any considerable capital of their own. Such a policy needs
only to be understood to be condemned.


Fixing Western Base of Sierras

Both the subsidy and the land-grant clauses of the Acts of 1862
and 1864 were to receive interpretation by the courts. The subsidy
provisions will be discussed again in a later chapter, so that the
provisions designated to secure repayment of the government loan need
not be considered at this time. Mention may be made, however, of
President Lincoln’s action in fixing the western base of the Sierras at
the point where the line of the Central Pacific crossed Arcade Creek
in the Sacramento Valley, a location 7 miles east of Sacramento, in a
country which a casual observer would not be likely to call mountainous.

It is not at first sight evident why this point was chosen. The
junction of Arcade Creek and the Central Pacific Railroad happens to be
at about the edge of the alluvial plain of the Sacramento River, and so
is marked by a slight rising of the ground. The rise is not, however,
great. The beginning of the Sierra granite is at Rocklin, 22 miles
east of Sacramento, and this spot rather than the one selected has the
better right to be considered the real beginning of the mountains, so
far as any single point can be fixed. As a matter of fact, the advisers
of the President, who were in this instance the political authorities
of the state of California, made their recommendation on the strength
of what they conceived to be the purpose of the federal act rather
than on scientific grounds. Mr. Whitney, state geologist, told the
government that the intent of Congress was clearly to give a subsidy
of $48,000 per mile over the most mountainous section of the road. If,
therefore, he said, a distance of 150 miles measured east from the
point in the Sacramento Valley where the ascent commenced would clear
the most difficult and mountainous portion of the Sierra Nevadas and
reach the valley on the eastern slope, then it seemed reasonable that
the base of the Sierra Nevadas should be taken as beginning at that
point. He recommended the place where the line of the Central Pacific
crossed Arcade Creek as such a point.

The same place was selected by the Surveyor-General of the state of
California, on the principle that the two extremities of the 150
miles upon which the maximum subsidy was to be given should rest upon
corresponding grades, the one to the west, the other to the east of the
mountains. These two recommendations seem to have been controlling,
although the United States Surveyor-General for California suggested a
location further east, where the ascending grade of the Sierras became
plainly perceptible to the naked eye.[85] Since this interpretation of
the act increased the bond subsidy which the Central Pacific was to
receive, the company naturally made no objection.


Conditions of Land Grant

In regard to the land grant, the Land Office was called on for a great
many decisions after 1864, mostly in interpretation of the exemptions
carried in the federal legislation. The cases were not all brought by
or against the Central Pacific, but they nevertheless affected its
rights.

In general, the grant of land to the Central Pacific was held to be
an absolute unconditional present grant. The route not being at the
time determined, the grant was in the nature of a float, and the title
did not attach to any specific sections until they were capable of
identification. When once identified, however, the title attached to
specific sections as of the date of the grant, except in the case of
sections which were specifically reserved.[86] While the grant was
a present grant, it conveyed only land which was public land, that
is to say, portions of the public domain which were open to sale or
other disposition under general laws at the time the grant was made.
This definition did not include lands which became public subsequent
to the date of the grant, or lands reserved by competent authority for
any purpose or in any manner, whether or not the reservations were
mentioned in the granting act.[87]

It followed from the theory that the land grant was a present grant,
that a valid homestead entry existing at the date of the passage of
the Land Grant Act excepted the land covered from the area granted to
the railroad even though the entry were canceled prior to the definite
location of the railroad line.[88] The same effect was produced by an
uncanceled and unexpired pre-emption claim, or by any other valid claim
or reservation which was alive at the date of approval of the granting
act. In cases like these the cancellation of the claim restored the
land in question to the public domain, but did not operate to replace
it within the railroad grant.[89]

Yet, although the theory that the grant took effect as of the date of
the granting act was strictly applied against the railroad, the settler
enjoyed the protection of a milder rule laid down in the statute
itself. Section 7 of the Act of 1862 required the railroad company
to designate the general route of the road within a stated time, and
instructed the Secretary of the Interior thereupon to withdraw lands
within 15 miles (changed to 25 miles in 1864) of the route designated
from pre-emption, private entry, and sale; and Section 3 provided that
the land grant to the railroad should not include lands to which a
pre-emption or homestead claim might have attached at the time the
line of road was definitely fixed. Pre-emption or homestead claims
might therefore be established after the passage of the land-grant
statute, provided that this was done before the lands were withdrawn
from settlement.[90] Indeed, the Secretary of the Interior ruled that
settlement and occupation exempted land from the grant even though
the settler failed formally to assert his claim.[91] After the lands
embraced in the grant were withdrawn from pre-emption, private entry,
and sale, a settler could not secure acreage by subsequent occupation,
although he settled prior to the time when the Central Pacific acquired
actual title.


Losses Due to Spanish and Mexican Grants

A class of cases distinct from those of ordinary settlers arose in
connection with Spanish and Mexican grants. It appeared that when
California became a state, the Spanish and Mexican grants were both
indefinite and unrecorded, so that it was not known just what lands
were public domain and what lands were private. On March 3, 1861,
Congress passed an act creating a Board of Land Commissioners in
California, and provided that all persons claiming land in California
by virtue of any right or title derived from either the Spanish or
Mexican governments, should present the same to the board within two
years for adjudication, with privilege of appeal to the United States
courts.[92]

Following this act, many claims were presented. The United States
Supreme Court held that land within the boundaries of alleged Spanish
or Mexican lands which were _sub judice_ at the time the Secretary of
the Interior ordered the withdrawal of lands along the route of the
road, were not embraced in the land granted to the company. There were
many sections of California lands which were _sub judice_ on August
2, 1862, and this fact caused serious loss to the Central Pacific in
its grant in California. In addition to losses from the cause just
mentioned, the company suffered from the indefiniteness of the Spanish
and Mexican grants, and from the delay in determining the extent and
boundaries of the Spanish and Mexican claims.


Policy Toward Settlers

It was the policy of the company to invite settlers upon its lands
before the lands were patented, and then to select and apply for
patents on lands which settlers desired to buy.[93] Sometimes, indeed,
the company leased unpatented land to cattlemen at low rates, in spite
of its lack of title. Actual transfers were made by bargain and sale
deed warranting to the purchaser the entire title acquired by the
company from the federal government. The prices ranged from $2.50 to
$20 per acre, but little was sold at a price above $5. Usually land
covered with tall timber was held at $5, and that covered with pine at
$10. The actual cost to the purchaser was slightly greater, because
he was compelled to pay for the acknowledgment of three signatures to
the deed, and for the recording, amounting in all to perhaps $5.50
or $6. On the other hand, the company granted as much as five years’
credit, and through the practice of selling land seekers’ tickets
from San Francisco, Sacramento, San José, Lathrop, and Los Angeles to
points along the line of railroad, which were accepted as cash on the
purchaser’s first payment for his land, it practically furnished free
transportation for California terminals to the sections bought. This
last practice, at least, was in force on the Southern Pacific in 1880,
and presumably on the Central Pacific also.

All in all, the Central Pacific does not seem to have attempted to
withhold its lands from the market, and there is no evidence that the
settlement of the coast was retarded by the inability of prospective
settlers to get land. The price which the Central Pacific could exact
was held in check by the retention by the government of alternate
sections, while the large sums which the company spent for advertising
redounded to the advantage of the government as well as to that of the
railroad. To the general statement that the Central Pacific was not
unreasonably grasping in its capacity as landed proprietor, exception
must be made of its treatment of timber lands in the North, of which
mention will be made elsewhere.

The land-grant policy of the government was a mistake, but it was a
mistake because it unnecessarily enriched a few men by securing to them
an extravagant share in the unearned increment due to the development
of the state of California, without aiding them materially in the task
which the government most desired them to perform—not because the
grantees endeavored to build up landed estates or to discourage the
growth of population. Compared with the land grant, the bond subsidy
was distinctly the better policy.




CHAPTER IV

PROGRESS OF CONSTRUCTION—CONSTRUCTION COMPANIES


Commencement of Construction

The construction of the Central Pacific Railroad of California was
begun at Sacramento on the 8th of January, 1863. The day the work
started was rainy and calculated to damp the most cheerful of spirits.
There was, however, a brass band, banners, flags, speeches, and a
crowd standing on bundles of hay near the levee to keep its feet dry.
Two wagon-loads of earth were driven up before the platform on which
were gathered the dignitaries present, and Stanford, then governor
of California, seized a shovel and deposited the first earth for the
embankment. The enthusiastic Charles Crocker promptly called for nine
cheers. The sun smiled brightly, and everybody, for the moment at
least, felt happy that after so many years of dreaming, they now saw
with their own eyes the actual commencement of a Pacific railroad.[94]

It was fortunate that Mr. Crocker was enthusiastic, for the
difficulties which the Central Pacific had to overcome were serious.
The chief difficulties were as follows:

_Gradients._ Some reference has been made in the previous chapter to
the elevations which the Central Pacific had to surmount. The highest
point which the company had to reach was Summit Station, 105 miles from
Sacramento, at an altitude of 7,042 feet. Since Sacramento lay only 56
feet above sea level, to reach this point required an ascent of 6,986
feet in a distance of 105 miles, more or less, according as the route
chosen was longer or shorter. The company’s engineer said in 1864 that
if it had been possible to maintain a continuous ascending grade, the
maximum grade, from the foothills to the summit of the Sierras could
have been reduced to 80 feet per mile.

In the attempt to approach this ideal condition the Central Pacific
surveyed and resurveyed continuously until its rails were actually on
the ground. Barometrical reconnaissances were made in 1862 and 1863 on
lines via Downieville and Yuba Gap, and via Oroville and Beckwourth’s
Pass, in addition to the surveys via Georgetown, Dutch Flat, and
Henness Pass, to which earlier reference has been made (page 20).[95]
Location surveys reached Alta in 1863, the state line in 1866, and
Ogden in 1868.[96] After Mr. Judah’s death almost an entire relocation
of the line from the 31st to the 48th section was made in 1864 in
order to avoid tunneling, and to reduce cost,[97] and still later
it was found desirable to shift the whole route between Dutch Flat
and Emigrant Gap from the Bear River side of the ridge, up which the
Central Pacific was proceeding, to the American River side. This change
avoided some 20 miles of 116-foot grade, together with a great deal of
curvature.[98]

The final result of these various surveys was a line with maximum
grades of 116 feet to the mile. This does not compare unfavorably
with most of the transcontinental routes subsequently built. It is
interesting to observe, however, that the Central Pacific summit is
some 2,000 feet higher than the altitude of Beckwourth’s Pass, and
that the maximum grade of the Western Pacific Railway, built years
afterwards through that pass, is only 52.8 feet to the mile, or one per
cent. Neither Judah nor his immediate successors, therefore, discovered
the best route across the Central Sierras.

[Illustration]

_Temperature._ A second physical difficulty incident to mountain
construction was found in the mountain climate. The summer climate of
the Sierras is delightful, at least at altitudes of about 6,000 to
7,000 feet. At lower elevations the temperature is often uncomfortably
warm. But the winter climate is quite different. As early as August the
nights begin to get cold, the first snows come in November, while in
January the trails become impassable, and the high levels are unvisited
by man until the following year. The official record shows that the
greater part of the mountain construction on the Central Pacific
occurred between July, 1866, and July, 1868.

Mr. Stanford has testified that both the winter of 1866-67 and that of
1867-68 were unusually severe, and his engineers have dwelt in great
detail upon the consequent impediments to their work. Not only did the
frozen earth resist pick and shovel, but there were snow banks from
30 to 100 feet deep. It was necessary to remove this snow to permit
excavation, and to keep clear the space to be occupied by embankments
in order to prevent settling. When the summit was approached tunnels
had to be driven through the snow to the rock face. As the whole
working force could not be employed in the tunnels, the surplus labor,
with all its supplies, was hauled beyond the summit and put to work,
at great expense, in the cañons of the Truckee River. The first snow
sheds were built in the summer of 1867, and in the following years it
was decided to cover all the cuts and points where the road crossed
the paths of the great avalanches beyond the summit. The total length
of sheds and galleries built by the fall of 1869 was 37 miles, and the
cost was $2,000,000.[99]

In addition to the difficulties caused by snow, it must be remembered
that the frozen earth, though uncovered, was difficult to work.
Not only was it necessary to blast out material which could have
been cheaply moved at a more favorable time, but, when piled into
embankments, the ground settled in the spring as the frost was leaving,
and required constant attention.[100]

All the various obstacles raised by climate would have been minimized
if construction had proceeded more slowly. Indeed, Mr. Hood and Mr.
Strobridge, engineers in charge of construction, agreed that if the
Central Pacific had been built at less speed, and as such railways are
usually constructed, the expense would have been from 70 to 75 per
cent less than the actual cost. The saving would not have been due
altogether to the abandonment of winter construction, but this would
have been an important factor. The Central Pacific, however, preferred
speed to economy, in the hope of outstripping the Union Pacific in the
race for the business of Nevada, and for the subsidies and land grants
offered by Congress.

_Supplies._ A further obstacle in the way of successful construction
of the Central Pacific lay in the difficulty of getting supplies. Wood
and stone could be procured in the mountains, but iron, coal, and
manufactured articles of all sorts, including rails, locomotives, and
cars, were brought from Sacramento or from the East. Prices in general
were high, in part because of the war. The first ten locomotives
purchased by the Central Pacific Railway cost upwards of $191,000; the
second ten upwards of $215,000. Iron rails cost $91.70 per ton at the
mills. The price of powder increased from $2.25 to $6 during the period
of construction. The cost of food was exorbitant. Hay was worth $100 a
ton out upon the line, and oats about 14 or 15 cents a pound. Stanford
says he sold one potato for $2.50.[101]

In the cases cited, high cost of transportation often played an
important part in determining the final prices, and in general,
indeed, the expense of moving supplies was comparable with the initial
cost. Among many possible illustrations one may mention the fact that
shipments of rails via the Isthmus of Panama as late as 1868 cost, for
transportation alone, $51.97 per ton, making the total cost of the rail
delivered at Sacramento, $143.67, not including charges for transfer
from ships at San Francisco, nor for transportation up the Sacramento
River. Nor was this freight rate high when compared with the cost of
wagon hauls in the mountains, when material had to be transported away
from the finished track. Mr. Huntington tells of meeting some teams
with ties in the Wahsatch Mountains. He continues:

 They had seven ties on that wagon. I asked where they were hauled
 from, and they said from a certain canon. They said it took three days
 to get a load up to the top of the Wahsatch Mountains and to get back
 to their work. I asked them what they had a day for their teams, and
 they said $10. This would make the cost of each tie more than $6. I
 passed back that way in the night in January, and I saw a large fire
 burning near the Wahsatch summit, and I stopped to look at it. They
 had, I think, some twenty to twenty-five ties burning. They said it
 was so fearfully cold they could not stand it without having a fire to
 warm themselves.

Fortunately for the company, the cost of labor on the Central Pacific
and transcontinental lines does not seem to have been excessive. The
total number of men employed ranged from 1,200 in 1864, to 14,000 or
14,500 in 1867, when construction was at its height. White men, of whom
there were some 2,500 or 3,000 in 1867, received $35 a month and board
as common laborers, and from $3 to $5 a day as skilled mechanics. Most
of the track laborers, however, were Chinamen, who were paid $35 a
month, and boarded themselves.[102] These Chinamen proved reliable and
willing workers, and, because of his experience with them, it was with
distinct reluctance that Mr. Stanford in later years allied himself
with the friends of Chinese exclusion.[103]


Letting of Construction Contracts

Such obstacles as these made the task upon which the
Huntington-Stanford group had entered a formidable one indeed. Just how
the difficulties should be met, Mr. Huntington himself did not know.
Arrangements were first made with small contractors for the building of
stretches of road from Sacramento towards Newcastle. Charles Crocker
resigned his directorship in 1862 and took the first contract for 18
miles. Then Cyrus Collins and Brothers got a contract which they did
not complete, and other contracts were let to Turton, Knox and Ryan, C.
D. Bates, and S. D. Smith. Mr. Crocker says the people raised a hue and
cry saying that he was a favored contractor, so that the directors told
him that he could not have more than two miles of the road between the
18th and 30th sections.[104] He adds that the independent contractors
got to bidding against each other for laborers, and thus put up the
price. Huntington was told that the smaller contractors quarreled with
each other, and tried to “scoop” labor from each other;[105] while
Mr. Stanford says that the small contractors did not finish their
sections in consecutive order, that they did not hurry, and could not
be sufficiently controlled.[106]

At any rate, after the completion of section 29, no more contracts
were let to anyone except Charles Crocker and Company. According
to the associates, it was not so much a question of price as one
of organization and control. This may be true, or it may be that
the associates finally decided that it would be easier to make a
satisfactory profit out of government subsidies by doing the building
themselves, than by beating down subcontractors to the lowest possible
contract price. It should be noticed that the change in policy referred
to did not take place until 1864, when the federal Act of 1862 had been
passed and that of 1864 was imminent, and that the Central Pacific did
not select any single contractor, but gave all its work to Charles
Crocker, one of the original associates.


Contracts with Crocker

The first contract with Charles Crocker, covering sections 1 to 18,
provided for a lump sum payment of $400,000, of which $250,000 was to
be in cash, $100,000 in bonds of the company, and $50,000 in capital
stock. This was also the type of contract made with other contractors
up to section 30, although the amounts paid varied. At least one bill
for extras was allowed Mr. Crocker. Sections 30 and 31 were built by
Crocker, and after these were completed he was permitted to continue
without a written contract.

In June, 1865, Mr. Hopkins made a report to the president and directors
of the Central Pacific upon the general subject of contracts. In this
report Hopkins dwelt upon the necessity of rapid construction for the
purpose of capturing the passenger traffic between Sacramento and
Virginia City; and also in order to comply with the acts of Congress
and the state legislature, which required rapid construction of the
road. Persons of large capital, he said, seemed unwilling to bind
themselves to construct the road as rapidly as necessary. Charles
Crocker and Company, on the other hand, had pushed and were pushing
the work with extraordinary vigor and success, and had in all cases
complied with the orders and directions of the officers of the company.
He recommended, therefore, that arrangements be continued with that
firm, at rates specified in an accompanying resolution.[107] The
directors thereupon adopted this report, and resolved as follows:

 _Resolved and ordered_ that Charles Crocker and Company be allowed
 and paid for all work done and material furnished, or which may
 hereafter be done and furnished, until the further order of the Board
 of Directors, in the construction of the railroad of the Company, from
 section 43 eastward, subject to and in accordance with the terms,
 conditions and stipulations set forth in the contract with said
 Charles Crocker and Company, dated September 19, 1863, except so far
 as the same are modified or changed by this order, at the following
 rates and prices, and in accordance with the following classification,
 to-wit:

 [Here are inserted the rates for clearing and grubbing, and excavation
 in various kinds of rock, etc.]

 The payments to be made monthly, according to the monthly estimates,
 five-eighths thereof in gold coin, and the remaining three-eighths
 in the capital stock of the Company, at the rate of two dollars of
 capital stock for each one dollar of said three-eighths of said
 estimate, with the privilege of paying said three-eighths in gold coin
 in lieu of said stock, at the election of said Company, to be made at
 the time of such payment.

[Illustration: Summit Valley. Altitude 6,960 feet. Emigrant Mountain
and Railroad Pass in the distance]


Payments in Cash and Stock

The essence of this arrangement was that Mr. Crocker was to go ahead
indefinitely and that he was to be paid not a given sum per mile,
but at a given rate of so much per unit for each class of work which
he might find it necessary to do. Payments were to be made in cash,
and also up to a certain per cent in stock, taken at a valuation of
50 cents on the dollar. Under date of April 16, 1866, Mr. Crocker
requested that stock be given him at a valuation of 30 cents on the
dollar, instead of 50 cents, and this was agreed to.[108]

The change from a 50-cent to a 30-cent valuation was made ostensibly
because Crocker and Company could not realize more than 30 cents on the
stock which they were receiving. As a matter of fact, Crocker could
not sell Central Pacific stock at any price, so that the alteration
of the contract merely increased his chance for a speculative gain,
to be realized after construction should have been completed. Mr.
Stanford has said that the directors did not care very much what the
prices were, so long as the work was done. Under the contract, the
Central Pacific Railroad itself, through Mr. Huntington, purchased
locomotives and cars for Crocker and Company, and charged for them at
cost.[109] Bonds were also sent from San Francisco to Huntington, but
it was Huntington’s impression that they were sold for the company,
not for the contractors. In any case, Huntington rendered an account
every month of what he had done, and Hopkins settled with the company
or with the contractors, as the case might be.[110] Describing the
situation at a later date, Crocker said, “It was decided that I should
go on immediately and see what I could do. I did go on until we got
tied up in suits and I had to stop. I could not get any money. They had
all the money I had, and all I could borrow. That was the time that I
would have been very glad to take a clean shirt, lose all I had, and
quit.”

The total payments made to Charles Crocker or to Charles Crocker
and Company, under the various arrangements just described, were as
follows:[111]


TOTAL AMOUNT PAID CHARLES CROCKER AND COMPANY ON HIS CONTRACT AND FOR
EXTRA WORK

  Cash, or its equivalent, including material furnished
    him                                                $8,853,117.93
  Bonds, taken at par                                     100,000.00
  Stock, taken at 50 cents on the dollar                2,696,200.00
  Stock, taken at 30 cents on the dollar               11,947,530.00
  Stock, taken at par value                                57,980.22
                                                      ——————————————
        Total                                         $23,654,828.15
                                                      ══════════════

If we take the cash payments at par and the bonds at 75, this would
make the tidy sum of $69,210 per mile on 129 miles. When we bear in
mind that Crocker accepted the contract for the first 18 miles out of
Sacramento at a price including a cash payment of only $13,800 per
mile, and that the arrangements with the small contractors who followed
him were distinctly less favorable, it is possible to say with some
confidence that the profits on the Crocker contracts were considerable.
Whatever they were, Mr. Crocker shared them with his associates by
depositing at a later date $14,000,000 in Central Pacific stock in the
treasury of the Contract and Finance Company, (discussed in the next
section) for the benefit of the stockholders of that organization.
Inasmuch as Stanford was one of the principal stockholders in the
Contract and Finance Company, his later categorical denial before the
United States Pacific Railway Commission that he had participated in
the profits of the Crocker contracts makes interesting reading.[112]


“Contract and Finance Company”

When the Central Pacific approached the state line of California in
the latter part of 1867, the associates told Mr. Crocker that they did
not think it best for him to go any further. They said they wanted
more capital—they wanted to engage heavy men in the enterprise.[113]
Crocker had not been successful in persuading capitalists to go in
with him, while it was believed that investors were deterred from
taking stock in the Central Pacific by reason of the liability which
would be thereby incurred under California law. Either Huntington or
Stanford—both claim the credit—conceived the idea that there would be
an advantage in organizing a corporation to undertake the construction
work. The subject was mentioned on the occasion of one of Huntington’s
visits to California, although the company was formed while Huntington
was in the East.[114] The name finally decided upon for the new
corporation was that of “Contract and Finance Company.” Articles of
association were filed in October, 1867. W. E. Brown, Theodore J.
Milliken, and B. R. Crocker attended to the details. Milliken was a
merchant in Sacramento, and the other two were connected with the
Central Pacific.

According to its articles of incorporation, the Contract and Finance
Company was formed for the purpose of engaging in and carrying on
the business of constructing, purchasing, leasing, selling, holding,
maintaining, operating, and repairing railroads, wagon and transit
roads, steamboats, vessels, telegraph lines, and rolling stock of
railroads; the purchasing, holding, hypothecating, and selling of bonds
and stocks issued by railroad and other companies or corporations;
the purchasing and using of iron and other materials for railroad and
telegraph lines; the borrowing and loaning of money; the conducting of
an express and stage business, and any and all other kinds of business
connected with or pertaining to railroads and telegraph lines; the
transportation of persons and property, on land and water; and the
purchasing, holding, leasing, and selling of real estate of all kinds.
The capital stock was set at $5,000,000.


Failure to Attract Outside Capital

It is the unanimous testimony of the associates that the real and
only reason for forming the Contract and Finance Company was that
outside capital might be induced to come in. Huntington says that when
the company was organized, he went with new energy to capitalists in
the East to induce them to take a share in the risks and profits of
construction. Yet from the point of view of attracting outside capital,
the Contract and Finance Company was a complete failure. William
and Commodore Garrison, of New York, A. A. Selover, Moses Taylor,
and William E. Dodge, among others, considered the matter, but all
concluded that the risk was too great. In California, Stanford applied
to D. O. Mills, W. C. Ralston, Haggin and Tevis, Michael Reese—in
short, to everybody whom he thought he might possibly induce to take
an interest—but in vain.[115] The result of the failure to secure
outside subscriptions to the Contract and Finance Company was that the
associates had to take up the stock of that company themselves. Crocker
was made president at an early date, and apparently took the bulk of
the stock in the first instance. Then, when it was evident that no
outside investors would come in, he put the stock back, and Stanford,
Hopkins, Huntington, and E. B. Crocker took equal shares with him—each
subscribing for 10,000 shares out of the 50,000 outstanding.[116] Later
a little stock was disposed of to outsiders, but when the Contract and
Finance Company got into the courts the associates bought this back.

Throughout the whole life of the Contract and Finance Company the
stockholders were the same men who held the bulk of the stock of the
Central Pacific Railroad. Contracts between the finance company and the
railroad company were therefore made by the associates in one capacity,
with themselves in another capacity, a situation unfortunately not
unique in the history of American railroad building. An unusual
feature of the arrangement, however, which was common to arrangements
with other construction companies formed by the associates, was that
the funds of the Contract and Finance Company, over and above the
sums received from the Central Pacific, were derived from loans to
the company by its stockholders and not from payments on the stock
subscribed. There is no evidence that Hopkins, Stanford, Huntington,
or either of the Crockers paid a cent in cash on their subscriptions.
Instead, they gave their notes. To provide the Contract and Finance
Company with funds, they deposited money, sometimes more and sometimes
less, paying interest on their notes, and receiving credit for interest
on their balances, each partner as a rule putting in all the funds
which he could spare, and having an individual account kept of his
transactions. The Contract and Finance Company was, therefore, always
heavily in debt, although the debt was owed to its own stockholders.
The advantages of this arrangement would seem to be two: first, that
it concealed effectively the profits which the company was making; and
second, that it did not limit any stockholder to a proportionate share
in the burdens and gains of the undertaking. If any of the associates
desired to participate more heavily than his friends, or less heavily,
he could do so. Such a privilege was probably not important before
1869, but it became so later.


Contracts with Construction Company

A word may now be said about the contracts which the Contract and
Finance Company secured. Under date of December 3, 1867, Mr. Stanford,
as president of the Central Pacific, reported to his directors that he
had made a contract for the construction and equipment of the railway
and telegraph line of the company lying east of the eastern boundary
of the line of California, and presented a draft of the contract,
which the directors approved.[117] Leland Stanford, E. B. Crocker,
Mark Hopkins, and E. H. Miller, Jr., were present and voted. Mr.
Miller explains that he did not understand at the time who the owners
of the Contract and Finance Company were, and that nothing was said
about it at the meeting. The contract provided that the Contract and
Finance Company should build the road of the Central Pacific from the
state line, eastward, 552 miles. It was to grade the road, build the
bridges, lay the track, build and complete a telegraph line, furnish
telegraph offices and instruments, furnish rails, ties, buildings,
roundhouses, turntables, and a specified number of engines and cars
and running material per mile. On its part, the Central Pacific agreed
to pay $86,000 per mile, half in cash and half in Central Pacific
stock, and in practice the Central Pacific provided the equipment
and the iron, charging them to the Contract and Finance Company at
cost. This statement relative to the terms of the contract with the
construction company is made on the strength of the recollections of
parties interested,[118] for the actual contract is one of the missing
documents characteristic of Central Pacific history. Stanford describes
the contract as an exhaustive one. That is to say, the Central Pacific
turned over all it had and the Contract and Finance Company built the
road and got the profits, if there were any.

The apparent advantages of an arrangement with a construction company
as compared with those of construction by the Central Pacific itself,
were those connected with specialization of the work. A company which
does nothing but construction and which does that all the time, may be
expected to have a force more highly trained in this particular grade
of work, and a more abundant supply of tools and material than an
organization which builds railroads only occasionally. The unfortunate
necessity of hiring men for each new job and discharging them at the
completion of the job is avoided. In the case of the Central Pacific
this advantage was somewhat illusory, it is true, for the reason that
the Contract and Finance Company on its first contract, whatever might
have been the fact later, could scarcely have had an advantage over the
railroad; and as for tools, the Contract and Finance Company had no
machine tools at all at the beginning, and had to rely on the railroad
not only for cars and engines to transport its men, but for equipment
for large construction of any sort. The real reason for using a
construction company in this case was a financial and not an operating
one.


Profits of Construction

Much has been said about the profits of the Contract and Finance
Company. Here, again, books are missing, having been packed into boxes
by the industrious Mark Hopkins in 1873, and never again produced.[119]
A man named John Miller, one-time secretary of the Contract and
Finance Company, and defaulter to the alleged extent of $900,000 at
a subsequent period, was in possession of transcripts from these
books, if we may believe his statement; but even these transcripts
disappeared, if indeed they ever existed.[120] We do not know,
therefore, how much construction cost the Contract and Finance Company,
and we cannot calculate with any accuracy the profit obtained.

It does appear that the work done by the Contract and Finance Company
cost the Central Pacific, in all $23,736,000 in cash and the same
amount in capital stock.[121] If we add to this $100,000 in cash
and $2,900,000 in bonds paid to the Union Pacific for the stretch
of land from Promontory Point to a point five miles west of Ogden,
and $1,072,874.79 for snowsheds and other extra work performed in
1870, we have a total of $51,544,874.79, of which $24,908,874.79 was
in cash. Taken in connection with the Crocker contracts, this makes
an aggregate of $33,761,992.72 in cash, $3,000,000 in bonds, and
$38,437,710.22 in stock. It was the judgment of the United States
Pacific Railway Commission that the total cost of building the 690
miles from Sacramento to Promontory Point, and of purchasing from
the Union Pacific 47½ miles of road from Promontory Point to the end
of the Central Pacific line, 5 miles west of Ogden, did not exceed
$36,000,000, and this included 9 miles built by small contractors, the
payment for which is not included in the figures just given.[122]

[Illustration: Summit tunnel (altitude 7,042 feet) before
completion—Sierra Nevada Mountains]

In a word, if the conclusions of the United States Pacific Railway
Commission are to be relied upon, and they were made by engineers
relatively soon after the completion of the road, the builders of
the Central Pacific were able to accomplish their contracts with the
cash and the proceeds of the company’s bonds that were turned over to
them, and to retain their Central Pacific stock as a clear profit. If
we compare this stock surplus with the probable cash investment in
the road, taking the shares at any reasonable valuation, say at $15
or $20 per share, the profit does not seem excessive. If we compare
it with the contributions of the associates, however, and this is the
more reasonable because the associates received the full benefit of
the difference between cost and receipts, it represents, on the most
conservative calculation, 500 or 600 per cent for an investment which
probably did not exceed $1,000,000, over a period of six years. To
this should be added the proceeds of the land grant and of the local
subsidies.

The federal government seems in these matters to have assumed the
major portion of the risk, and the associates seem to have derived
the profits. Nor is this point of view vitiated by the fact that the
federal government was ultimately repaid its loan in full, for the
reason that the repayment was not at the expense of the associates, but
was made possible by a credit arising out of the earnings of the road,
and represented merely a shifting of the burden of the debt due the
federal authorities to the communities along the line.

Besides the completion of the main line of the Central Pacific, the
Contract and Finance Company built a portion of the California and
Oregon Railroad, part of the Western Pacific, and the entire San
Joaquin Valley branch of the Central Pacific from Lathrop to Goshen.
The arrangements between the Contract and Finance Company and Central
Pacific for this work varied, but substantial additional profits were
secured. In 1874, the Contract and Finance Company was dissolved.
There is some dispute as to whether its assets were divided into
four or five parts, but both Stanford and Crocker have testified that
their dividend consisted of approximately $13,000,000 in Central
Pacific stock, at par.[123] At the same time the stockholders of
the construction company assumed its debts, amounting to perhaps
$1,600,000.[124]




CHAPTER V

THE SEARCH FOR A TERMINAL


Progress of Construction

Under its various construction contracts, the Central Pacific steadily
progressed, between 1863 and 1869, from Sacramento to a junction with
the Union Pacific near Ogden. The official statement of the progress of
construction is as follows:[125]

  Broke ground at Sacramento                   January 8, 1863
  Laid first rail                              October 27, 1863
  Sacramento to Roseville (18 miles)           Constructed in 1863

  Road opened as follows:

  To Newcastle                     31  miles    January, 1865
   ” Auburn                        36    ”      May  15, 1865
   ” Clipper Gap                   42    ”      June 10, 1865
   ” Colfax                        54    ”      September 4, 1865
   ” Secret Town                   66    ”      May 8, 1866
   ” Alta                          78    ”      July 10, 1866
   ” Cisco                         94    ”      November 9, 1866
   ” Summit                       105    ”      July, 1867
   ” State Line                   278    ”      January, 1868
   ” Reno                         294    ”      May, 1868
   ” Wadsworth                    329    ”      July, 1868
  (362 miles constructed in 1868)

   ” Monument Point               667    ”      April 15, 1869
   ” Ogden                        743    ”      May 10, 1869

  Driving last spike, and opened
    for business from Sacramento;
    distance San Francisco to
    Ogden, per time card          883    ”      May 10, 1869


Relations with Western Pacific

It has already been noted that the line from Sacramento via Stockton
to San José was not part of the original plan, and that the rights,
grants, and franchises of the Central Pacific in it were assigned to
other parties in the course of the Congressional fight. The original
assignment of December 4, 1862, was to a group of men which included
Timothy Dane, the original projector, and president of the San
Francisco and San José Railroad, Charles McLoughlin, and A. H. Houston.
In 1864, the first assignees having waived their rights, the Central
Pacific Railroad made the same assignment to the Western Pacific
Railroad of California.[126] The Western Pacific Railroad in turn let
contracts for construction to Houston and McLoughlin, but by 1867,
McLoughlin had become involved in litigation regarding his contracts
and asked that all arrangements between himself and the Western Pacific
be canceled.[127]

This led the Western Pacific to enter into a contract with the Contract
and Finance Company, with the result that substantially all the stock
of the first-named corporation came into the hands of the Huntington
group. McLoughlin retained the federal land grant; the federal subsidy,
however, of $16,000 per mile, reverted to the Western Pacific as did
the local subsidies, and through it passed to the Contract and Finance
Company. The railroad from Sacramento to San José was opened September
15, 1869; on June 22, 1870, the Central Pacific and the Western Pacific
filed articles of consolidation.


Lack of Terminal Facilities

In September, 1869, the transcontinental railroad from Omaha to San
José was in working order. It would be an exaggeration to say that the
line was in good shape. There was little or no ballast, and a good rain
was said to make miles of the road-bed run like wet soap. Little had
been done to eliminate grades and curves, sleeping-car accommodation
at first was insufficient, the journey speed from Sacramento to Ogden
was only 19 miles an hour, while schedules were not always adhered to.
Cars were heated by stoves, and passengers disembarked for their meals.
But in a measure these were conditions to be expected at the start,
and interfered only in a minor degree with the interest and excitement
of a transcontinental trip. The great fact was that a railroad existed
which could be used, and over which relatively direct, rapid, and cheap
communication with the East could be secured.

The greatest weakness of the Central Pacific Railroad in 1869 lay in
its lack of terminal facilities on San Francisco Bay. When the company
decided to begin work at Sacramento, its reasonable expectation had
been that a railroad under one management would be built from that
city around the southern end of San Francisco Bay to the city of San
Francisco. The Central Pacific was willing to forego the advantage of
this construction itself in order to gain friends, and did it the more
willingly because this stretch of line was likely to be unprofitable
by reason of steamship competition on the bay and on the Sacramento
River. These conditions changed, however, when the Contract and Finance
Company took over the construction of the railroad from Sacramento to
San José. The Central Pacific interest then obtained a connection of
its own with Niles near Oakland, and it was thus led to consider the
question of terminals on the eastern side of San Francisco Bay.

The easiest part of San Francisco Bay for the Western Pacific Railroad
to reach was undoubtedly the shore south of Oakland or Alameda. It
would probably have been possible to build from Stockton to Richmond,
as the Santa Fé did later, or to develop Benicia or Port Costa, or even
to build a terminus on an island in the bay. Yet as compared with
these alternatives, the Oakland terminus had many advantages. It was
near to the Western Pacific main line; it was served by two railroads
which possessed valuable franchises that could be bought at not too
great expense; and, most important of all, the conditions under which
the water-front at Oakland was held were favorable to the acquisition
of the necessary terminal facilities.


Oakland Water-Front

The situation at Oakland was briefly as follows: The first army of
settlers in the city had been squatters on a portion of the Peralta
grant. Among these had been Horace W. Carpentier, Edson Adams, and A.
J. Moon. In 1852 the state legislature had incorporated the town of
Oakland, had fixed its boundary, and had granted to it the land lying
between high tide and ship channel along the whole of its water-front,
with a view to facilitating the construction of walls and other
improvements.[128] There were 75 to 100 inhabitants in Oakland at
this time, with half a dozen residences, two hotels, a wharf, and two
warehouses. There were no streets—only cattle trails.[129]

As soon as incorporated, the town held an election, and chose Adams,
Moon, Carpentier, and two others as trustees. Mr. Carpentier did not
qualify or serve. On May 17 and 18, 1852, the board of trustees made
two important grants: In the first place, it gave to Horace Carpentier
for the period of thirty-seven years, the exclusive right to construct
wharves, piers, and docks at any point within the corporate limits of
Oakland, with the right of collecting wharfage and dockage; and in the
second place, it sold, granted, and released to the said Carpentier
all the town title in the land lying within the limits of the town of
Oakland between high tide and ship channel.

In return for this grant Carpentier agreed to build three wharves
and a schoolhouse, and to pay to the town 2 per cent of his wharfage
receipts—certainly a modest recompense. Mr. Marier, president of
the board of trustees, later testified that Carpentier told him when
the deed was signed that he would be willing at any time to reconvey
the property to the town on being reimbursed for the moneys he had
expended; and this was also the recollection of others.[130] But the
understanding, if any existed, never could be enforced,[131] so that
Carpentier was firmly established in his control of the tide-lands of
the city of Oakland, and in spite of petitions, riots, and litigation,
sat unshaken in 1867 when the Central Pacific became interested in the
matter.[132]


Oakland Water Front Company

Sometime prior to 1867 Carpentier had several talks with Leland
Stanford, and endeavored to persuade him to build north from Niles
across the Ravenswood cut-off. In the fall of 1867, Carpentier and
Stanford talked again, and Stanford came to entertain the idea as a
matter of reasonable negotiation. John P. Felton was engaged by the
city of Oakland to look into its rights. Carpentier says that he
offered the railroad one-half of his water-front if it would make
his property its terminus. He says that this mode of adjustment was
acquiesced in by Mayor Merritt and Mr. Felton, and that about the end
of the year (1867), it came to be understood between them and Governor
Stanford and himself that something should be done on approximately
this basis.[133] Judge E. B. Crocker, however, attorney for the Central
Pacific, asked that outstanding disputes regarding the water-front be
first settled. The legislature was soon to be in session, and it was
urged that all should act together in trying to get an authorization
for the settlement of difficulties.

This was done.[134] On the 27th of March, 1868, as a part of a
series of compromise arrangements, the Oakland Water Front Company
was incorporated. The subscribers and original directors were H. W.
Carpentier, president; Samuel Merritt, vice-president; Lloyd Tevis,
secretary; Leland Stanford, treasurer; E. R. Carpentier and J. B.
Felton. Mr. Tevis and H. W. Carpentier were in the same year directors
of the Southern Pacific Railroad Company. The Oakland Water Front
Company was capitalized for $5,000,000, and the stock was divided into
50,000 shares. Of these shares H. W. Carpentier subscribed for 23,000,
or 46 per cent; Stanford for 17,500, or 35 per cent; and Felton for
4,999, or 10 per cent. Lloyd Tevis took 2,500 shares, E. R. Carpentier
2,000 shares, and Samuel Merritt 1 share.

On March 31, Mr. Carpentier deeded to the new corporation all the
water-front of the city of Oakland, that is to say, all the lands,
and the lands covered with water lying between high tide and ship
channel, being the water-front lands described in and granted in the
act of incorporation of May 4, 1852. He excepted from this deed only
that water-front lying between the middle of Washington Street and the
middle of Franklin Street and extending southerly to a line parallel
with First Street. By Section 2 of an agreement made the following day,
the Oakland Water Front Company agreed to deed this last-named area to
the city of Oakland.[135]


Cession of Land by Water Front Company

On April 1, 1868, two further agreements were signed. One, styled an
indenture, was between the Oakland Water Front Company, the Western
Pacific Railroad Company, Carpentier, Felton, and Stanford. Under this
indenture, and in consideration of the deed of March 31, the Oakland
Water Front Company declared that it held the property conveyed to it
subject to covenants which were particularly set forth as follows:

The Western Pacific Railroad agreed to select within three months 500
acres from the property conveyed by the deed of March 31, including
not more than one-half mile of frontage on ship channel, together with
not to exceed two strips of land over the remainder of the premises
from high-water mark to the parcels selected. The strips running from
high-water mark were each to be not more than 100 feet wide at grade.

The Oakland Water Front Company agreed to convey to the Western Pacific
Railroad the 500 acres selected, and to grant an exclusive right-of-way
over the hundred-foot strips. It undertook, moreover, to sell no
land west of the 500 acres, provided that these were located out to
a westerly water-front of 24 feet depth of water at low tide, and to
place no obstructions in front of them, or to do anything to obstruct
the free approach of vessels to the parcels.

The Water Front Company further agreed to convey to the city of Oakland
on demand “so much of the premises as [lay] between the middle of
Franklin Street and the easterly line of Webster Street, and extending
out to a line parallel with First Street, and two hundred feet
southerly of the present wharf at the foot of Broadway,” with the right
of wharfage, dockage, and tolls thereon, and to designate and dedicate
as a navigable water course for public use, the channel of San Antonio
Creek, from ship channel to the town of San Antonio, to a width of not
less than 200 feet over the shallow water at the bar, and 300 feet wide
above that place.

The Water Front Company, in the third place, undertook to convey 25,000
shares of its stock to Carpentier, 5,000 shares to Felton, and 20,000
shares to Stanford.

Finally, the Water Front Company authorized the city of Oakland, or
other parties, to construct a dam above the Oakland bridge, across the
estuary, so as to keep the land above submerged to high-tide mark, for
the use of the owners of the adjoining lands, and of the public.

The second paper, also signed on April 1, was an agreement between
the Western Pacific Railroad Company, Leland Stanford, and the Water
Front Company. By it the railroad agreed to construct or to purchase
within eighteen months and to complete a railroad from its main line,
then at Niles, to and connecting with the parcels of land described in
the indenture of the same date, together with the necessary buildings
and structures for a freight and passenger depot on the premises. The
railroad agreed to expend in new work within three years $500,000. The
railroad company agreed that in construction across the estuary between
Oakland proper and Brooklyn it would leave a space for forty feet free
for the passage of vessels.[136]


Attitude of City

Up to this point the city had not entered into any contracts. On
April 1, however, the city council passed an ordinance ratifying and
confirming the grants made under the early ordinances of 1852 and
1853, and the conveyance by Mr. Marier as president of the board of
trustees, and granted, sold, and conveyed to the said Carpentier in
fee simple forever, the city water-front, that is to say, the lands
lying between high tide and ship channel. This ordinance further
provided that Carpentier should convey to the Oakland Water Front
Company the property and franchises conveyed at that time by the city
to him, to be used in accordance with the terms and stipulations of the
contract between the Oakland Water Front Company, the Western Pacific
Railroad Company, and other parties. On the following day the council
passed still another ordinance reciting that inasmuch as the terms and
stipulations previously provided had been complied with by Carpentier,
the grant was finally settled upon him.[137]

The result of these somewhat complicated negotiations was that the
Central Pacific acquired 500 acres of water-front property in Oakland,
with a frontage of one-half mile on ship channel, merely as a reward
for coming to the city. In addition, Mr. Stanford, acting presumably on
behalf of his associates, received 40 per cent of the capital stock of
the Oakland Water Front Company, which on its part owned substantially
all of the water-front remaining. The city attorney, who was supposed
to represent the interests of the city, was rewarded with 10 per cent
of the stock of the Oakland Water Front Company, and the position of
director. The mayor of the city, Mr. Merritt, was made vice-president
of the same corporation, although the extent of his personal interest
in it is not known. He seems to have held only qualifying shares.[138]

In subsequent years the relations between the city of Oakland and the
Oakland Water Front Company were repeatedly subjects of most bitter
controversy. Extravagant as had been the consideration of the grant to
the Central Pacific for coming to Oakland, this matter was less serious
than the circumstance that the control of the remaining water-front by
the Central Pacific through the Oakland Water Front Company appeared
to make it impossible for any rival transportation company to gain
a footing in the city. The city long endeavored to free itself from
this monopoly. It contended at one time that Carpentier had secured
the election of his own agents to the board of trustees which had made
his grant, and that in any case Carpentier had agreed to reconvey
the property to the city. Neither statement could be proved. On the
contrary, in 1897 the Supreme Court of California definitely pronounced
the compromise of 1868 binding upon the municipality, although it
interpreted the words “ship channel” to mean the low-tide line and not
a depth of three fathoms at low tide as had at first been supposed.[139]


Water-Front Monopoly Broken

Ten years later the title of the Oakland Water Front Company was
again questioned in a case brought by the Western Pacific Railroad
Company. By this time two jetties had been built by the United States
government extending the lines of San Antonio Creek westward to deep
water. As a result of the deposit of material taken out of the channel
of the estuary and placed north of the northern training wall, and of
additional deposits from dredging operations conducted by the Central
Pacific and by private parties, the line of low tide had been moved
appreciably out into the bay. Under the general rule that accretions
belong to the proprietors of riparian lands, the Southern Pacific, as
successor to the Oakland Water Front Company, asserted title up to
the limit of the new line of low tide. This claim the federal court
denied. The limit of the railroad company’s property was declared to
be the low-tide line of 1852, extending first northwesterly and then
northeasterly from the mouth of the San Antonio estuary at Sand Point
as indicated in the map on page 93.[140]

[Illustration: Map of Oakland and Brooklyn, showing location of Central
Pacific terminals, 1871]

This at one stroke transformed the Southern Pacific’s holding from
a water-front to an interior location, by making it clear that the
title to the substantial area between the bulkhead line of the city
of Oakland and the low-water mark of 1852 lay in the city and not in
private hands. The city had indeed given away its water-front as it
existed in 1852, but the creation of a new water-front during the
following years relieved it of the effects of its negligence. It thus
appears that the alienation of the water-front of Oakland in 1868 did
not permanently vest in the Central Pacific interest control of the
tide-lands to which the compromise of that year referred. For the time
being, however, the company secured a well-nigh complete monopoly. Not
only had it convenient access to tide-water for its own trains, but
it was able for many years to keep other railroads from obtaining a
similar advantage. Up to this point, however, no arrangement had been
completed for a terminus on the San Francisco side of San Francisco Bay.


Proposed Grant of San Francisco Water-Front

In order to establish the Central Pacific with complete adequacy, the
associates accordingly now turned to the western side of San Francisco
Bay and took steps to provide terminal facilities in the city of San
Francisco itself. Possibly this was because they had acquired or were
about to acquire a controlling interest in the San Francisco and San
José Railroad; possibly it was due to Carpentier’s influence, or
perhaps it was merely a recognition of the advantages of a terminal
location in San Francisco.

Unlike Oakland, the city of San Francisco had never received title
to all its tide-lands from the state, and application had to be made
to the legislature at Sacramento, direct. Early in 1868 the Senate
Committee on Commerce and Navigation, of the state legislature,
reported a bill granting to the Western Pacific Railroad Company and
to the Southern Pacific Railroad Company, submerged and tide-lands in
the Bay of San Francisco, from the foot of Channel Street to Point
San Bruno, with the right to extend the railroads of said companies
or construct branches thereof, and to purchase other railroads, and
use the same for the purpose of reaching the place or places on said
premises selected as termini for said railroads, and to maintain and
operate the same by steam or other power from the present lines of said
railroads to the said termini on said premises, and with all necessary
and proper depots, side-tracks, etc.

The boundaries of this extraordinary grant are indicated on the map on
page 96.[141]

The total length from the foot of Channel Street to Point San Bruno was
a little over 8 miles. The maximum breadth was approximately 2½ miles,
and the area was estimated by opponents of the scheme to be not less
than 6,620 acres. The value of such a water-front on the principal city
of the Pacific Coast was to be measured in millions of dollars, and its
importance to the Huntington interests was not limited to a money value
alone. The possession of the San Francisco water-front south of Channel
Street meant the occupation of the only part of the city at which a
first-class railroad could reach tide-water. The reason for this is
that all railroads must come into the city of San Francisco from the
south or the southwest on account of the shape of the peninsula, and
no railroad can conceivably be allowed to cross the main thoroughfare.
Market Street, or to penetrate the thinly settled residential districts
in the north.

[Illustration: Boundaries of Railroad Tide-Land Grant, as proposed in
1868.]

The bill provided that the Central Pacific, Western Pacific, Southern
Pacific, and the San Francisco and San José railroads, which were
the proposed grantees, should pay the fair market cash value of the
submerged lands at the time of the passage of the act, being not less
than $100 per acre for the lands lying north of Point Avisadero. But
it was also provided that the surplus over $100 due for the land north
of Point Avisadero might be spent in reclamation and improvement of
the premises, and the companies were to receive patents if within five
years not less than $1,000,000, in addition to such surplus, had been
spent in this way. In plain English, the tide-lands were to be sold for
$100 an acre, but in the case of some of them the beneficiaries might
be required to spend additional amounts in improvements. The Senate
committee defended its recommendation by saying that it was desirable
to have the water-front improved, and that this was the way to have the
thing done. It expected that the railroads would build a sea-wall; and
observed that this wall, water-front, and docks would be subject to the
control of the state harbor commissioners. How a rival railroad in the
future would get access to the docks, it did not say.[142]


Scheme Opposed

Generally speaking, arrangements for the alienation of city water-front
property into private hands are to be looked upon with suspicion
unless extensive powers of control are reserved by state or city, and
unless there is provision for the reversion of the property, including
improvements, to the public at the end of a stipulated time not too
far removed, on conditions and in a manner clearly stated. In the
particular case in hand there were no such safe-guards to the public
interest, except a general reservation of jurisdiction and control
over the water-front by the State Board of Harbor Commissioners, and
a provision that the grantees should charge no tolls or wharfage on
the water-front sold to them. This was not enough. It was therefore
fortunate under the circumstances that the improvident nature of the
proposed contract was understood and its defects given full publicity
by the San Francisco press. The _San Francisco Bulletin_ commented as
follows:

 The scheme is an outrageous one. A proposition to sell to the Railroad
 Companies at a reasonable price, so much of the southern water-front
 as would be actually necessary for depots, warehouses, workshops,
 etc., might be considered favorably, but a proposal to give to what
 is or will be virtually a single corporation two-thirds of the
 frontage of a city destined to be the second in America, is utterly
 indefensible ... this immense property will be worth eventually as
 much as the Pacific Railroad itself.[143]

The _Alta_ said:

 If the parties who have so modestly presented their humble petition
 for this concession had gone one step farther, and asked for a grant
 of the whole State of California—all its tide and marsh lands—the
 control of all its rivers, bays and inlets, we do not know that the
 public amazement would have been any greater.[144]

Even the conservative _San Francisco Times_ suggested that it would
be well for the railroad companies to submit detailed estimates of
the land needed for terminals and the uses to which this land was to
be put,[145] while it refrained from commenting on the _Bulletin’s_
assertions that it was the intent of the railroads to locate their
terminus well south of the city of San Francisco to the great profit of
parties from Sacramento who were buying lands around Hunter’s Point.


Another Plan Substituted

Whether or not this last accusation was well founded, the opposition of
the city grew so intense that the legislature did not dare to carry
out its original plan.[146] Instead, the Southern Pacific and Western
Pacific were offered each 150 acres, to be located by the companies
within specified limits south of Channel Street, and still later the
amount was reduced to 30 acres apiece, and a donation was substituted
for a sale. So amended, the act became law on March 30, 1868. It
granted and donated to the Southern Pacific Railroad Company and to
the Western Pacific Railroad Company for a terminus in the city of San
Francisco, to each of said companies, 30 acres, exclusive of streets,
basements, public squares, and docks. The land was to be selected by
the railroad companies within ninety days, but it was to lie south of
Channel Street, and outside of the Red-Line water-front of Mission
Bay, and was not to extend beyond 24 feet of water at low tide, nor to
within 300 feet of the line which should be selected by the tide-land
commissioners as the permanent water line of the front of the city. A
200-foot right-of-way was given to the companies to provide access to
their tide-lands. The lands were to be located and $100,000 spent upon
them by each of the grantees within thirty months, or the grant would
revert to the state.[147]

Compared with their original projects, the Act of 1868 represented a
considerable check to the plans of Mr. Stanford and his friends. Yet
the grant in San Francisco was important, and, added to what had been
secured in Oakland, provided satisfactorily for the Central Pacific’s
transportation needs.

In 1871 the San Francisco supervisors granted to the Southern Pacific
and Central Pacific railroads rights on various streets in the city in
order that they might reach and enjoy their lands and depot grounds in
Mission Bay. Late in the same year Stanford indicated his willingness
to make Mission Bay the main terminus of both the Central Pacific and
Southern Pacific, in consideration of a subsidy of $3,000,000 and of
alterations in the terms of the Mission Bay grant so as to make it more
acceptable. Nothing came of these last negotiations, nor of somewhat
similar proposals made in 1872 by a citizens’ committee engaged in
fighting the Goat Island scheme (see below) and submitted to popular
vote. In 1873-74, however, the city granted Stanford additional though
minor franchises, enabling him to run trains on certain city streets.


Proposed Occupation of Goat Island

It will be readily understood that feeling ran high both in Oakland and
San Francisco while the railroad negotiations for terminal facilities
were going on. Nor was the public excitement allayed by the attempt of
the Huntington group to occupy Goat Island, which occurred at the same
time. Goat Island, formerly known as “Yerba Buena” Island, is a small
body of land lying about midway between San Francisco and Oakland.
Reference to the inset accompanying the map of Oakland will show its
exact location. It is obvious enough why the Central Pacific wanted
the use of this island and of the mud flats lying directly north.
It is just as obvious why, in the absence of regulation, the public
should have objected to its exclusive occupation by any single railroad
company. Yet, in March, 1868, one day after the action granting to the
Central Pacific and to the Southern Pacific 60 acres of tide-lands in
San Francisco, the state legislature granted to the Terminal Central
Pacific Railroad Company—a corporation controlled by the associates—a
defined area not to exceed 150 acres of the submerged shoal lands north
of the island, with the right to reclaim these lands for railroad
depot and commercial purposes, and to connect them by a bridge with
the Oakland, Alameda, and Contra Costa shores. The company agreed to
pay the fair appraised value of the lands into the state treasury, and
to put into operation within four years a first-class rail and ferry
communication between the city of San Francisco, the premises conveyed
to it, Oakland and Vallejo.[148]

Two years later the time for the completion of the promised road was
extended, and a railway to the Straits of Carquinez, opposite Vallejo,
was accepted as sufficient to fulfil the requirement of a line to the
town of Vallejo itself,[149] and in 1871 a still further extension of
time was given. The road which the Southern Pacific proposed to build
was probably that indicated in the notice of new construction filed at
Sacramento in March, 1867—that is to say, it was a line running from
Sacramento east of the Sacramento River past Freeport, crossing the
mouth of the San Joaquin River, and continuing west through Antioch and
over the hills to San Francisco Bay. Such a road could easily have been
brought to Carquinez Straits, but it could not have reached Vallejo.
The associates did not at this time intend to enter the territory west
of the Sacramento River.


Project Lapses

Following the vote of the California legislature, a bill was introduced
in Congress, providing for the grant to the Central Pacific Company
of the right to use Goat Island itself. This logical sequence to the
state legislation was opposed by the United States military authorities
and by the city of San Francisco. It appeared that residents of San
Francisco anticipated the permanent loss of a large part of the
transcontinental business if the Central Pacific should occupy Goat
Island. The _San Francisco Bulletin_ insisted that there was room
enough on the island and on the adjacent flat to accommodate all the
warehouses and large shipping, mercantile, and financial establishments
of a seaport of 500,000 inhabitants. It was stated that the advantages
of the location would draw the warehouses, that other firms would
follow, and that men who had business on the island would not live
in San Francisco, but would make their homes on the eastern side of
the Bay where land was cheaper, more level, and more fertile. These
statements were generally believed.

Nothing was done in 1869, 1870, or 1871 beyond the steps just
mentioned. In March, 1872, however, the San Francisco chamber of
commerce passed resolutions and prepared a memorial addressed to the
President and to Congress opposing the proposed grant, and a mass
meeting was held in San Francisco to make public protest. Following
this, conferences were held between a committee of citizens and the
president of the Central Pacific in the hope of arriving at some
general understanding relative to terminal facilities, and eventually
the whole Goat Island project lapsed.[150]


Purchase of Other Roads

By the middle of 1868 the Central Pacific had thus secured satisfactory
water-front facilities in both Oakland and San Francisco, amounting
in the case of the former city, through the Oakland Water Front
Company, to monopoly control. Needless to say, it had also abundant
accommodations at Sacramento. Through the Southern Pacific Railroad it
had also franchises in San Francisco, including the right to maintain
tracks in the vicinity of Third and Townsend Streets. Up to August,
1868, however, it does not seem to have made the connections between
its main line and Oakland that were necessary to enable its trains to
reach San Francisco Bay at all. In that month Stanford, Huntington,
Hopkins, and Crocker bought a majority of the stock of the San
Francisco and Oakland Railroad, and the following year they purchased
likewise the San Francisco and Alameda Railroad. The first-named
company had 2 or 3 miles of track eastward from Oakland’s point. The
Alameda company had about 16 to 18 miles. Both had valuable franchises,
and both owned ferry-boats and piers extending some distance into the
bay. In 1870 both of the companies were joined in the San Francisco,
Oakland and Alameda Railroad, and in the same year this company was
consolidated with the Central Pacific. By 1869 the gap between the end
of the San Francisco and Alameda Railroad and Niles had been filled,
and this in a real sense completed the transcontinental line.




CHAPTER VI

ACQUISITION OF THE CALIFORNIA PACIFIC


Tendency to Monopoly Control

The first intimation that the Central Pacific Railroad was on its way
to something like a monopoly control in the state of California is to
be found in the negotiations for terminals on San Francisco Bay. But
it was not long before more evidence came to light. Looking back with
the advantage of knowledge of the company’s later history, it seems
probable that the possibilities of monopoly control of the railway
business of California were present to the owners of the Central
Pacific as early as 1868. The task of securing such control was not,
after all, so very great. California had few railroads in the sixties,
and those which were in operation were small and unprosperous, and
could be cheaply acquired.

Besides this, the topography of the state lent itself to schemes of
conquest by a sharp separation of the interior valleys from each other
and from the coast. It was not necessary to occupy the whole country,
for an effective control over one valley could be maintained in spite
of the fact that an adjacent valley was in hostile hands. Nor was there
any public opinion in California at the time thoughtfully critical of
monopoly, as such. The country was new. Theories covering the relations
of large corporations to the consuming public had not been developed.
People hated monopolies because monopolies meant high prices; but the
very persons who were most likely to object to monopoly were also
likely to seek positions of advantage for themselves when possible.

Under conditions like these, Stanford, Huntington, Hopkins, and
Crocker were almost sure to attempt to dominate the railway system of
the state as soon as they determined to make their connection with it
more than temporary. This decision was made as the Central Pacific
approached Ogden in 1868 and 1869. Had the associates been able to
sell out before this time, it is likely that they would have done so.
Indeed, it is credibly reported that 80 per cent of the stock of the
Central Pacific was offered to D. O. Mills as late as 1873, for a price
of $20,000,000,[151] and this was probably the last of several offers
made to different parties.

The evidence seems to show, however, that by 1870 the Huntington group
were inclined to remain in the railroad business. Strategically, the
associates then occupied a very strong position. They possessed the
only railroad line from California to the East. They dominated the
Oakland water-front, and held important concessions in San Francisco.
Branch lines, like long tentacles, stretched from Roseville north to
Chico, on the way to the Oregon state line,[152] and from Lathrop south
to Modesto, to be extended to Goshen by August 1, 1872.[153] By 1869
the Sacramento Valley Railroad, with its extension to Placerville,
had been bought, and the California Central Railroad from Folsom
to Marysville was under Central Pacific control. Even the budding
project for a Southern Pacific Railroad had received the attention of
Stanford and his associates. Indeed, the only really weak spots in
the associates’ position were their failure fully to occupy the San
Joaquin Valley, and the fact that they did not control the short line
between Sacramento and San Francisco. We will, accordingly, consider
the situation and the policy of the Huntington group in these respects.

[Illustration: Map of California Railroad, about 1870.]


Competition of California Pacific

The most direct railroad route from Sacramento to San Francisco is by
way of Vallejo or Benicia, across the Straits of Carquinez, and along
the eastern shore of San Francisco Bay. In 1865, after the Central
Pacific had begun work in earnest, the California Pacific Railroad
Company was incorporated to occupy this route from Sacramento as far
as Vallejo. Contracts were let, though no material progress was made
for two years. In 1867 the work was taken up with fresh energy, and
in 1869 the road was finished between Vallejo and Sacramento, with
a branch from Davisville to Marysville. The newly built Napa Valley
Railroad from Adalanta, California, to Calistoga, was acquired at the
same time. In 1870 the system reported 163 miles of road, of which 22
miles consisted of a ferry connection from Vallejo to the city of San
Francisco.

It seems more probable that the California Pacific was originally
intended as a connection for the Central Pacific than that it was built
as a competitor with the larger road. This was satisfactory enough to
the Central Pacific so long as this company terminated at Sacramento.
But there is no manner of doubt that the California Pacific became a
formidable competitor to the Central Pacific when the latter acquired
its circuitous line to Oakland via Stockton. This was especially true
with respect to the passenger business. The distance from Sacramento to
San Francisco via Vallejo was 87 miles, via Stockton 137½ miles; the
time via Vallejo was 3½ hours, via Stockton 5 hours. It appears that
transcontinental passengers on Central Pacific trains often changed
cars at Sacramento, sacrificing the balance of their through ticket and
paying extra fare in order to save time.[154] Of the local passenger
business between Sacramento and San Francisco, the California Pacific
claimed three-fourths. How large a share of the freight went by the
shorter line does not appear, but it must have been considerable, for
Mr. Stubbs later estimated that the cost of operating the Benicia route
could not have been more than 50 per cent of the cost of operating the
Western Pacific,[155] and it is in evidence that the Central Pacific
sent most of its freight via Benicia as soon as it obtained control of
both lines.

It should be remembered also that in addition to its competition for
local business, the California Pacific had ambitious plans in other
directions. We know, for example, that it proposed an extension
eastward via Beckwourth’s Pass to a connection with the Union Pacific,
at or near Ogden. This line was to be built by the California Pacific
Railroad Eastern Extension Company, incorporated at Sacramento in
March, 1871, with a capital stock of $50,000,000.[156] Other reports
credited it with an intention to enter the San Joaquin Valley;[157]
while its influence in Sonoma, Marin and Napa counties was recognized.
In short, by 1870 the California Pacific was not only important in
respect to what it had actually accomplished, but it had in it the germ
of a railroad system in no way inferior to that of the Central Pacific
itself.


Rival’s Weakness

Unfortunately for the California Pacific, the company’s physical and
financial position in 1871 did not measure up to the magnitude of
its ambitions. Counsel for the Central Pacific in later years drew a
vivid picture of the condition of the railroad in 1867 which probably
contained more than a grain of truth. According to this account, the
right-of-way of the California Pacific was unfenced, its sidings were
few, and its stations were insufficient. The road-bed was almost
wholly unballasted, and inadequately supplied with ties. Embankments
were so narrow that the ends of the ties projected on both sides. The
slope of the cuts was insufficient and upon the Napa branch the rails
were fastened to the ties with wrought nails without heads which were
bent back over the flanges of the rails after being partly driven, in
order to hold the rails in position.[158]

On the other hand, in spite of the imperfect character of its
construction, the California Pacific had paid large prices to
contractors in its bonds and stock. In December, 1870, the company was
compelled to borrow money to meet the January interest of 1871. By the
following spring it was indebted to the extent of $8,450,000, of which
$1,200,000 was floating debt, and had to prepare to meet an annual
interest charge of $667,500. This was more than the company’s earnings
could stand.

In 1871 the Central Pacific, taking advantage of the weakness of its
rival, proceeded to the attack by arranging to construct a branch from
Sacramento, by way of Davisville, to Vallejo. In pursuance of this
arrangement it accumulated iron and ties, made surveys, and succeeded
in effecting a contract with an organization known as the Bridge
Company of the City of Sacramento, for the exclusive use of its bridge
for their new enterprise.[159] The California Pacific was already
suffering from the competition of river boats, and the construction of
the new road would have ruined it. The pressing nature of the danger
was appreciated by the managers of the road, and Milton S. Latham,
director and treasurer of the California Pacific, and agent for the
holders of three-fourths of the capital stock of that company, promptly
opened negotiations with the Central Pacific, through Collis P.
Huntington, for an adjustment of difficulties. This was precisely the
situation which the Central Pacific desired to bring about.


Control of California Pacific Acquired

The agreement that resulted from the conditions described may probably
be explained as an elaboration of the Central Pacific’s statement
to Mr. Latham that the company was willing to buy the California
Pacific but did not have the money. It took the form of the following
consecutive transactions:

By agreement dated July 13, 1871, between Latham, Leland Stanford,
and Mark Hopkins, Mr. Latham agreed to deliver 76,101 shares of the
California Pacific Railroad Company, to assign three-fourths of the
capital stock of the California Pacific Eastern Railroad Extension
Company to the other parties to the contract, and to stipulate that
the total indebtedness of the two companies named should not exceed
$8,421,000. In consideration of this delivery, Stanford and Hopkins
agreed to pay to Latham $1,579,000 in bonds of the California Pacific
Railroad Company.

On August 9, 1871, Mr. Latham presented, and the directors of the
California Pacific at a formal meeting approved, resolutions to the
effect that the sum of $1,600,000 was necessary for the purpose of
constructing and completing an additional track, and for strengthening
the California Pacific embankments across the tule lands. The directors
further voted that the money be borrowed, and the necessary bonds be
issued. President Jackson then stated to the board that a contract had
been made, and the execution of this contract was approved.

Under date of August 9, 1871, the California Pacific covenanted with
Stanford, Hopkins, and Huntington for the construction referred to in
the previous paragraph. The associates agreed

 ... to enlarge the embankment of the railroad of the said party of
 the second part, where embankment is required, and erect and widen
 the trestle work, where trestle work is required, from the bridge
 across the Sacramento River to Davisville, in the county of Yolo,
 in the State of California, and place thereon a good and sufficient
 superstructure, consisting of timber and ties and iron railroad
 thereon, so as to make an additional railroad track from said bridge
 to said Davisville, fully equal to the present railroad on the present
 embankment and to connect the same with proper switches with both the
 main track to Vallejo, and the track to Marysville of the railroads
 of the party of the second part. Said parties of the first part to
 furnish all the material for the said additional railroad track, and
 embankment, and trestle work, and to have the same completed and
 ready for use on or before the first day of January, in the year one
 thousand eight hundred and seventy-three.

In consideration of this construction, the California Pacific was to
pay the associates 1,600 second mortgage California Pacific bonds.

On August 19, 1871, the Huntington group, now controlling a majority
of the board of directors of the California Pacific, entered into an
agreement with the California Pacific under which the Central Pacific
undertook to pay the California Pacific $5,000 per month, to furnish
the equipment for passenger business, and to guarantee the interest on
1,600 second mortgage bonds, while the California Pacific in return
agreed to transport to or from San Francisco, passengers beginning or
ending their trips on the Central Pacific or connecting roads, and to
maintain its fare for other passengers at $4 between San Francisco and
Sacramento. On September 1, 1871, the Central Pacific took full control
of the California Pacific, and moved its offices from San Francisco to
Sacramento.[160]


Motives Behind Transactions

Two explanations of these transactions are possible. Counsel for the
Central Pacific, in 1886, maintained that the contracts fell into two
distinct classes or groups. The California Pacific, according to this
point of view, arranged for an additional track between Sacramento
Bridge and Davisville, and for still more important enlargement
in embankments and widening and erection of trestle work, by the
transfer to defendants of second mortgage bonds. These bonds, it was
alleged, though considerable in amount, had little value because of
the desperate financial condition of the California Pacific. In the
second place, the Central Pacific gave value to bonds which it held by
a guaranty, and used them to buy a controlling interest in California
Pacific stock. Of this, the minority stockholders of the corporation
had no right to complain.

Counsel on the other side maintained that the essential feature of the
whole transaction was the purchase of California Pacific stock, and
that the various contracts merely supplied a method of buying this
stock without paying for it. Starting, therefore, with the contract
of July 13, they pointed out that the defendants agreed to purchase
California Pacific stock from Latham with California Pacific bonds
which were not yet in existence, stipulating for full control of
the California Pacific before payment should be made, in order that
they might obtain the purchase price from that company. When Latham
announced that he was ready to deliver the stock, it became necessary
for the defendants to secure about $1,600,000 in California Pacific
bonds. These bonds could be legally issued only for new construction,
hence the contract for a second track from Sacramento to Davisville.
When issued, and in the hands of the defendants, it was necessary to
have the Central Pacific’s guaranty. For this the Central Pacific
required the California Pacific to enter into the traffic agreement
of August 19, obtaining thus a full _quid pro quo_. The result was
that the California Pacific furnished first the bonds and then a
consideration for the Central Pacific’s guaranty, which together served
to purchase the California Pacific stock.


Plausible Explanation

There were several circumstances which made this second version
plausible. It seems extraordinary, for one thing, that a company in
the straits to which the California Pacific was reduced should have
issued bonds for double-tracking 13 miles of road.[161] If it be
answered that the strengthening of the road against the immediate
danger of flood was the real reason for the issue, then it was still
extraordinary that the time limit for construction of the work should
be set as it was, eighteen months away, on January 1, 1873. As a matter
of fact, the section of the California Pacific across the tule lands
was washed away before the associates got around to strengthening it.
This made it impossible for Stanford, Huntington, and Hopkins, or
the Contract and Finance Company, to which they had assigned their
contract, to carry out the original agreement. Instead, Mr. Montague,
chief engineer of the California Pacific, reported to his board that
the cost of restoring the washed-out line would be equal to the cost
of carrying out the original contract, and the board, on November 15,
1872, authorized the substitution of this work for that agreed on in
the contract of August 9, 1871.

Owing to the subsequent destruction of the books of the Contract and
Finance Company, there is no way of telling accurately what the cost
of restoration actually was. The Contract and Finance Company finished
the job, however, in six weeks after the work was actually commenced,
and what information is available leads one to doubt if the expense was
very great. Another circumstance which raises a question as to the good
faith of the consideration offered for the 1,600 California Pacific
bonds, is the coincidence that the par value of the bonds issued for
construction was practically identical with the amount needed to pay
for the 76,101 shares of stock sold by Latham to Stanford, Huntington,
and Hopkins. Still another peculiar incident was that of the execution,
contemporaneously with the main contract, of a supplementary agreement,
under which the Stanford group agreed to pay Latham $250,000 in a six
months’ note, besides the other consideration for California Pacific
stock, if he would visit New York at once, obtain the consent of
the stockholders whom he represented, and personally assume all the
obligations of the California Pacific above the sum of $8,421,000
specified in the bond.

Whatever the true motives for the transaction described, the
coincidence of the stock sale with the other transactions relieved the
representatives of the California Pacific of any intense interest in
the matter, and must inevitably have made them pliable as to terms.
The directors present at the meeting of August 9, when the contract
for the construction of the second track was approved, were Jackson,
Hammond, Latham, Sullivan, and Atherton. Of these gentlemen, Hammond,
Sullivan, and Atherton each held five shares only, transferred to
their names to qualify them as directors; while the shares of Latham
and Jackson were ready for transfer to Stanford, Huntington, and
Hopkins. Hammond, vice-president of the company, as well as a director,
subsequently said, referring to the contract for a second track: “I
don’t recollect that I ever saw or knew what that contract was, until
it was brought into the board.... This contract was made with a party
who was purchasing the majority of the stock of that company, and whose
interest would be to do that work in a workmanlike manner.” Certainly
this was not a desirable point of view for a representative of the
California Pacific to take.


Undisputed Control

The inevitable result of the various contracts and agreements which
have been described was to place the Huntington group in undisputed
control of the California Pacific. On August 10, 1871, Mr. Stanford was
elected president _vice_ Jackson, and on August 2, Mark Hopkins was
elected treasurer _vice_ Latham. The following year Hammond and Moses
Hopkins took the positions of president and treasurer, respectively,
while Stanford and Mark Hopkins and Collis P. Huntington were appointed
general agents of the company, with large powers.

Once in control, Stanford and his associates proceeded to make the
best use they could of the California Pacific in connection with other
roads in their system. It does not appear that they felt any particular
tenderness toward the enterprise. Most of the operating arrangements
between the Central Pacific and the California Pacific were
subsequently arranged by Mr. Towne for both parties, on terms favorable
to the Central Pacific. It is on record that the California Pacific was
allowed but $1 out of $16.75, the fare from Reno to San Francisco, for
its haul from Sacramento to San Francisco, although the total distance
was 240 miles, and the Sacramento-San Francisco haul amounted to 92
miles. Likewise, contracts were made with the Contract and Finance
Company which were later complained of as extravagant. Special mention
is made of lumber which was bought of the Contract and Finance Company
at $30 a thousand when the market price was $18. Mr. Towne was asked in
1886:

 _Q._ You say that you have done all that you could to increase the
 earnings of the California Pacific, do you?

 _A._ Having a due regard for the other company; yes, sir.

 _Q._ Did you make that qualification?

 _A._ I do now.

Perhaps a policy of this sort was to be expected as the result of the
conquest of a dangerous rival. Yet certain other arrangements between
the Central Pacific and the California Pacific went beyond what one
might have expected. It appears, for instance, that soon after the
Stanford group obtained control of the last-named company, that portion
of the contract of August 8, 1871, which provided for the payment of
$5,000 monthly by the Central Pacific to the California Pacific, was
eliminated. This elimination was said to have taken place by “mutual
consent,” a meaningless phrase when the same men had charge of the
negotiations for both sides.


Independent Security Holders

It has been charged, also, that Stanford and Huntington deliberately
endeavored at this time to depress the value of California Pacific
mortgage securities in order to induce independent holders to reduce
their claims. In support of this contention there is evidence that very
strong pressure was brought to bear upon independent security holders
in 1874, and that as a result of this pressure the fixed charges of
the California Pacific were reduced from $763,500 in 1875, to $303,500
in 1886. No part of this burden was borne by the second mortgage
bonds held by Stanford, Huntington, Hopkins, and Crocker, nor was any
assessment levied upon the company’s stock.

As a part of the campaign, during the period mentioned, wide
publicity was given by the management of the California Pacific to
financial difficulties, real or alleged, with which the company was
confronted. Thus in June 1875, the board of directors confessed a
judgment of $1,309,041.84 to one J. P. Haggin, assignee of certain
claims of the Central Pacific, the Contract and Finance Company,
and the associates, for advances previously made. Mr. Haggin had no
interest in the matter, merely allowing the use of his name.[162] The
following month, Vice-President Gray, of the California Pacific, made
an extremely pessimistic report to his directors, declaring that the
company’s deficit to date was $1,370,061.71, and that a large part
of the outstanding bond issues of the company were represented by no
construction that he was able to discover. On July 25, 1874, finally,
a local capitalist named Michael Reese, acting in all probability on
behalf of the associates, filed sensational charges against Mr. Latham,
formerly general manager of the California Pacific, which called forth
as sensational a reply.[163] These various activities roused holders
of California Pacific Railroad Extension bonds to petition to have the
California Pacific declared bankrupt, and drew forth a statement from
the company, on the other hand, that it did not regard these bonds as
constituting a valid legal claim upon it. The result was a compromise.
The extension bondholders surrendered their 7 per cent bonds for a
reduced amount in new 6 per cent securities, and the outstanding
income bonds likewise exchanged their holdings for 3 per cent bonds.
Both classes of bonds were guaranteed by the Central Pacific, and in
consideration of the guaranty the California Pacific was leased to the
Central Pacific on July 1, 1876, for 29 years, at a rental of $550,000
per year, plus three-fourths of the net earnings of the company above
that amount. At a subsequent period in December, 1879, when the Central
Pacific was about to turn a considerable volume of business over the
short line by way of Benicia, the California Pacific gave up its right
to payments over the $550,000 minimum in consideration of a fixed
additional payment of $50,000 a year.[164]

By and large, the California Pacific proved a good investment for the
larger company, especially after the Northern Railway had been built
and a new route established between Oakland and Sacramento. The reason
for its original acquisition was, nevertheless, in all probability,
not the chance of a direct profit, but the advantage expected from a
monopolistic control of the territory north of San Francisco Bay.




CHAPTER VII

BUILDING OF THE SOUTHERN PACIFIC


San Francisco and San José Railroad

The Huntington interests had secured control of the California Pacific.
The next logical step was to strengthen the position of the Central
Pacific south of San Francisco Bay. A start in this direction had
already been made through the construction of a branch from Lathrop on
the Central Pacific to Goshen in the San Joaquin Valley, finished in
August, 1872. But this was not enough. Not only did the Central Pacific
fail to reach the city of San Francisco, but the company was threatened
in 1869 with the possibility that an independent Southern Railroad
system might be created, no less ambitious than the California Pacific,
and penetrating a richer if less developed territory. This projected
system was that of the Southern Pacific Railroad, and in respect to it
Mr. Stanford frankly said some years afterwards:

 Well, the necessity of obtaining control of the Southern Pacific
 Railroad was based really upon the act of Congress providing for its
 construction. It became apparent that if that last was constructed
 entirely independent to those who were interested in the Central
 Pacific, it would become a dangerous rival not only for the through
 business from the Atlantic Ocean, but it would enter into active
 competition for the local business of California. It was of paramount
 importance that the road should be controlled by the friends of the
 Central Pacific; and all our anticipations consequent upon the control
 of that road have been realized.[165]

The small beginning of what later came to be known as the Southern
Pacific Railroad system is to be found in the San Francisco and San
José Railroad, which ran from San Francisco down the peninsula in a
southerly direction to the city of San José. Originally this company
was a local project only, and for some years an unsuccessful one.
Several parties tried their hands at building it, but failed because
they could not raise the necessary funds. In 1860 the project was
taken up by a group of local capitalists of more than ordinary energy
and resources, contracts were let, and four years later a line to San
José was actually in running order. It was to these capitalists that
the Central Pacific transferred its rights in the Western Pacific, and
it seems to have been expected that the San Francisco and San José
and the Western Pacific together would form the western end of the
transcontinental line.

This expectation was disappointed, as was the hope that the San
Francisco and San José would participate in the federal subsidies and
land grants provided in the Pacific Railway Acts of 1862 and 1864. The
city of San Francisco did, however, subscribe $300,000 in city bonds to
San Francisco and San José Railroad stock, and the counties of Santa
Clara and San Mateo, $200,000 and $100,000, respectively. At this time
the Huntington group had no interests south of Sacramento. In 1869 the
San Francisco and San José was extended to Gilroy by a company known as
the Santa Clara and Pajaro Valley Railroad Company.


Southern Pacific Railroad Company

Shortly after the completion of the San Francisco and San José, another
company, the Southern Pacific Railroad Company, was incorporated[166]
by local parties in San Francisco to build a line of railroad in as
direct a route as feasible from San Francisco to the town of San Diego,
through the counties of Santa Clara, Monterey, San Luis Obispo, Tulare,
Los Angeles, and San Diego; thence eastward through the county of San
Diego to the eastern boundary of the state of California. It is quite
possible that this new company was organized in anticipation of further
legislation at Washington. At any rate in July, 1866, Congress granted
to the Southern Pacific Railroad, besides a right-of-way, ten alternate
sections of unreserved and unappropriated public lands on either
side of the road, in the state of California, on condition that it
construct a line, presumably from San Francisco, to a connection with
a projected railroad known as the Atlantic and Pacific Railroad, which
was authorized to extend from the state of Missouri to the Pacific
Ocean. In case any portion of the twenty sections indicated should be
found to be occupied or reserved, the Southern Pacific was to be given
the privilege of selecting other lands within 20 miles of its road. The
company was to begin work within two years, and to complete not less
than 50 miles annually after the second year. No money or bond subsidy
was given.[167] By Act of July 25, 1868, Congress extended the time for
the construction of the Southern Pacific line, requiring the completion
of the first 30 miles by July 1, 1870, and subsequent construction of
20 miles annually.[168] This was plainly an enterprise of first-class
magnitude.

[Illustration: Map showing northern end of the San Francisco and San
José Railroad in 1862.]

The evidence suggests that the San Francisco and San José and the
Southern Pacific Railroad companies fell under the control of Stanford,
Huntington, Hopkins, and Crocker some time in 1868. Mr. Stanford
published a statement on March 6, 1868, to the effect that any rumor
that the Central Pacific or Western Pacific Railroad Company or any
person connected with either of them had purchased the Southern Pacific
or the San Francisco and San José or any property or franchises
connected therewith, or that any negotiations had been made tending to
that result, was utterly without foundation.[169] On the other hand, it
was Collis P. Huntington who signed a letter dated September 25, 1868,
addressed to the Secretary of the Interior, at Washington, transmitting
the annual report of the Southern Pacific Railroad required by the
act of Congress. If Stanford told the truth in March, these two
circumstances would indicate with sufficient precision the time when
the associates took charge. In any case their influence was presently
to appear.[170]


Consolidation

On October 12, 1870, the San Francisco and San José Railroad, the
Southern Pacific, the Santa Clara and Pajaro Valley Railroad, and a
new company, the California Southern, organized on paper only, were
consolidated into a corporation known as the Southern Pacific Railroad
of California. The directors for the first year were Lloyd Tevis,
Leland Stanford, Charles Crocker, C. P. Huntington, Mark Hopkins,
Charles Mayne, and Peter Donahue. Plainly, Central Pacific interests
were in control. The purpose of the new company was stated to be to
construct and operate a railroad from San Francisco to the Colorado
River, through the counties of San Mateo, Santa Clara, Monterey,
Fresno, Tulare, Kern, San Bernardino, and San Diego, together with a
line from Gilroy through the counties of Santa Clara, Santa Cruz, and
Monterey, to a point at or near Salinas City. This was not the line
proposed in the articles of incorporation, as an examination of the
accompanying map will show. It was, however, in the main the route
designated by the Southern Pacific in 1867, upon which land had been
withdrawn from entry by the government at Washington, and it had the
advantage of reaching the eastern boundary of California with less
mileage and fewer grades than the line originally laid out.[171]

[Illustration: Proposed route of the Southern Pacific Railroad,
according to map filed with the Commissioner of the General Land Office
on January 3, 1867.]

In 1871, an additional route from Los Angeles to Yuma was designated
under the authority of the twenty-third section of the act to
incorporate the Texas Pacific Railroad, which authorized the Southern
Pacific Railroad Company to construct a line of railroad from a point
at or near Techachapi Pass, by way of Los Angeles, to the Texas Pacific
Railroad at or near the Colorado River, with the same rights and
privileges, and subject to the same limitations and restrictions as
were provided in the Atlantic and Pacific Act of 1866.[172]


Ambitious Construction Program

Because of the terms of the federal Act of 1866, it was necessary
for the Southern Pacific to proceed steadily in its construction to
the south. The first piece of road offered in satisfaction of the
requirement for a minimum annual construction, was that from San José
to Gilroy. Then came an extension to Tres Pinos, which ended, for the
time being, building on the Northern Division. What happened was that
the associates found the southern end of the San Benito Valley, in
which Tres Pinos is located, relatively poor in traffic, and difficult
to build in. Stanford visited the country personally, and found no
business there, nor, in his opinion, any prospect of business. He
accordingly shifted construction from the Tres Pinos line to the
territory south of Goshen, and caused the Southern Pacific to build
its next 20 miles in that section, expecting to connect with the San
Joaquin Valley branch of the Central Pacific which ultimately came
to Goshen in August, 1872. The Southern Pacific track reached Delano
on July 14, 1873, Caliente on April 26, 1875, and Mojave on August
9, 1876. The stretch of 240 miles from Mojave to The Needles was not
finished until June 22, 1883, but that to Fort Yuma was completed in
1877.

In later years there was discussion concerning the right of the
Southern Pacific to refuse to build the stretch of road lying between
Tres Pinos and Alcalde, connecting the San Benito and the San Joaquin
valleys. It was insisted that the contract implied in the Congressional
land grant of 1866 was an entire one, and that the amount of land
given had been fixed in consideration of the difficulties of mountain
construction between the valleys named. This contention is not,
however, borne out by the terms of the Act of 1866, and there seems to
be no good reason why Congress should have stipulated for the building
of this particular bit of road, when satisfactory connection between
the San Joaquin Valley and San Francisco could be secured in another
way. On their part, the associates never intended to build across the
Coast Range, at least not out of the San Benito Valley. In 1872 the
articles of association of the Southern Pacific Branch Railroad Company
contained provision for a line from a point at or near Salinas City in
the county of Monterey southeasterly to a point in Kern County south
of Tulare Lake, intersecting the San Joaquin Division of the Southern
Pacific. Even this road never was built.[173]

At the time when the Southern Pacific Railroad entered upon its
ambitious project for southern construction, the territory south and
east of Goshen was very slightly developed. Los Angeles was a city of
5,728 persons in 1870, with an assessed valuation of $2,108,061, and an
average of one saloon to every fifty-five inhabitants.[174] San Diego
had a population of 2,300, and Santa Ana 1,445. These were the largest
concentrations of people to be found, and they amounted to nothing more
than little country towns.[175] Nor were the statistics of industry
much more striking. Los Angeles and Kern counties produced respectable
amounts of wool, and in the matter of wine the output from the former
amounted to nearly one-third of that for the entire state and one-sixth
of that reported for the United States as a whole. The number of cattle
was also considerable. But in grain only a beginning had been made,
the yield of the orchards was still small, and the volume of general
agriculture, to say nothing of manufactures, was insignificant.

The railroad construction in the territory consisted of two local
railroads connecting Los Angeles with the harbors of San Pedro and
Santa Monica, to which should be added mention of the Texas Pacific
project of Mr. Scott. The Los Angeles and San Pedro Railroad was
organized in 1868 and was finished on October 26, 1869. The city of
Los Angeles subscribed $75,000 in city bonds, and the county took an
additional amount of $150,000, also paying in bonds. City and county
bonds both bore 10 per cent. The construction of this railroad marked
the fruition of efforts begun as early as 1861, but the credit for
final accomplishment of the work was due to Phineas Banning, the
principal business man of Wilmington.[176] General Banning is said
to have entered the California legislature in order to advance his
project and to have successfully overcome a great deal of opposition
in his own district in order to put it through. The company was
consolidated with the Southern Pacific in 1874.[177]

In addition to the Los Angeles and San Pedro, reference should be
made to the Los Angeles and Independence, a railroad built in 1875 by
Senator John P. Jones, of Nevada, partly to afford an outlet to certain
mines in Inyo County from which the senator expected large results,
and partly to develop property on Santa Monica Bay. This road was also
acquired by the Southern Pacific interests, but at a later date, and at
the instance of Mr. Huntington against the judgment of at least one of
his associates.


Grant by Los Angeles

By the acquisition of the Los Angeles and San Pedro Railroad, the
Southern Pacific provided itself with a southern terminal, in advance
even of the completion of its main line. At the same time it used the
advantage which the location of its mileage in the San Joaquin Valley
gave to it in order to persuade the people of Los Angeles to grant it
aid in the measure they could afford. Speaking after the event, it is
sufficiently obvious that sooner or later the Southern Pacific, or
some other transcontinental road, was bound to seek an outlet on the
Pacific Ocean either at San Diego or at San Pedro, and of these two San
Pedro was the most likely to be chosen. But this fact, clear at the
present time, was not obvious to the inhabitants of Los Angeles; on the
contrary, the possibility that Los Angeles might be passed by caused
them the liveliest concern. This feeling was known to the officials of
the Southern Pacific. In May, 1872, two citizens of Los Angeles wrote
Mr. Stanford stating that they expected to call a meeting of tax-paying
citizens of the county in a few days, for the purpose of selecting
from among them an executive committee which should have full power to
meet the representatives of any railroad company who might visit Los
Angeles, in order to agree upon some plan whereby a railroad to Los
Angeles might be constructed.[178]

[Illustration: View south from over the San Fernando tunnel—Southern
Pacific Railroad]

The meeting was called, and the committee appointed. Harris Newmark,
a prominent business man of Los Angeles, says that before the meeting
he and ex-Governor Downey went to San Francisco and canvassed the
whole situation with Mr. Huntington. A delegation from the citizens’
committee made a second visit and returned with a man named Hyde,
who represented the railroad company. Between Mr. Hyde and the new
committee terms were presently agreed upon. The Southern Pacific
demanded a donation of 5 per cent of the assessed valuation of the
county, which was the maximum authorized by state law. Since the
county valuation in 1872 was set by the State Board of Equalization at
$10,554,592, this meant a gift of $527,730. To cover this the county
proposed to issue $377,000 in new 7 per cent bonds, and to turn over
besides $150,000 in stock of the Los Angeles and San Pedro Railroad,
which it held by virtue of its subscription to that company in 1868.
The city added $75,000 in Los Angeles and San Pedro Railroad stocks,
and 60 acres of depot ground. This made a clear gift in the aggregate
of $602,000, besides whatever the depot ground might be worth, or $100
per capita for a population of 6,000 souls. On its side the Southern
Pacific agreed to build 50 miles of its main trunk line in the county
of Los Angeles, 25 miles to be built northward and 25 miles eastward
from Los Angeles city. Later the company promised to add a branch
to Anaheim. The whole arrangement was submitted to popular vote on
November 5, 1872, and was then approved.


Inconveniences of Travel

Construction in accordance with the terms of the agreement of 1872
was promptly begun. San Fernando and San Pedro were reached in 1874,
Anaheim in 1875, and the Southern Pacific main line in September, 1876.
A vivid picture of the inconvenience of travel between Los Angeles and
the East while the work was in progress, is given in the reminiscences
of Harris Newmark, who has just been mentioned in connection with the
negotiations between the railroad and the county of Los Angeles:

 Before the completion of the San Fernando tunnel, a journey east from
 Los Angeles by way of Sacramento was beset with inconveniences. The
 traveler was lucky if he obtained passage to San Fernando on other
 than a construction train, and twenty to twenty-four hours, often at
 night, was required for a trip of the Telegraph Stage Lines’ creaking,
 swaying coach over the rough roads leading to Caliente—the northern
 terminal—where the longer stretch of the railroad north was reached.
 The stage lines and the Southern Pacific Railroad were operated quite
 independently, and it was therefore not possible to buy a through
 ticket. For a time previously, passengers took the stage at San
 Fernando and bounced over the mountains to Bakersfield, the point
 farthest south on the railroad line. When the Southern Pacific was
 subsequently built to Land’s Station, the stages stopped there; and
 for quite a while a stage started from each side of the mountain, the
 two conveyances meeting at the top and exchanging passengers. Once I
 made the journey north by stage to Tipton in Tulare County, and from
 Tipton by rail to San Francisco. The Coast line and the Telegraph
 line stage companies carried passengers part of the way. The Coast
 Line Stage Company coaches left Los Angeles every morning at five
 o’clock and proceeded via Pleasant Valley, San Buenaventura, Santa
 Barbara, Guadalupe, San Luis Obispo, and Paso de Robles Hot Springs,
 and connected at Soledad with the Southern Pacific Railroad bound
 for San Francisco by way of Salinas City, Gilroy, and San José, and
 his line made a specialty of daylight travel, thus offering unusual
 inducements to tourists. There was no limit as to time; and passengers
 were enabled to stop over at any point and to reserve seats in the
 stage coaches by giving some little notice in advance.

 In 1876, I visited New York City for medical attention and for the
 purpose of meeting my son Maurice, upon his return from Paris. I left
 Los Angeles on the twenty-ninth of April by the Telegraph Stage Line,
 traveling to San Francisco and thence east by the Central Pacific
 railroad; and I arrived in New York on the eighth of May.[179]

The San Fernando tunnel to which Mr. Newmark refers is located 27 miles
north of Los Angeles in the valley of the same name. It lies along the
most direct and convenient route from Los Angeles into the San Joaquin
Valley. Because of its length, nearly one and a quarter miles, and the
unfamiliarity of the people of the coast with projects of this kind,
there was much interest in the work and many doubts as to whether it
could succeed. Governor Stevenson was credited with the statement
that a tunnel could not be constructed. Other critics maintained that
people could never be induced to travel through so long a tunnel, and
that in any case the winter rains would cause it to cave in, to which
Stanford replied that it was “too damned dry in Southern California
for any such catastrophe.” So far as the records now show, however,
there was no unusual obstacle encountered in the work, although the
slowness with which the bore advanced and the large expense connected
with construction caused considerable anxiety to the management of the
Southern Pacific.


Western Development Company

In carrying out their plans for the occupation of Southern California,
the Huntington group naturally followed the same general policy that
had proved profitable to them in the case of the Central Pacific.
That is to say, they organized construction companies, controlled
by themselves, caused these companies to contract with the Southern
Pacific for the construction of specified sections of line, and in
their capacity as stockholders of the Southern Pacific required that
company to issue and turn over large quantities of stocks and bonds in
payment for work done. No further comment upon this method of procedure
is necessary.

The first construction company which did work for the Southern Pacific,
under the plan outlined in the preceding paragraph, was the Contract
and Finance Company. This was the same organization that had completed
the Central Pacific. It appears that the Contract and Finance Company
simply shifted men, teams and equipment from the Central Pacific to
the Southern Pacific line between San José and Tres Pinos. Later it
built the road from Goshen to Sumner, and that from San Fernando via
Los Angeles to Spadra. In all, it built for the Southern Pacific 143.65
miles, including the stretch from Gilroy to Tres Pinos. In 1874 the
Contract and Finance Company was dissolved and the Western Development
Company took its place.

The Western Development Company was incorporated December 15, 1874,
for the announced purpose, among other things, of carrying on
construction, manufacturing, mining, mercantile, mechanical, banking,
and commercial business in all their branches, and also for the purpose
of constructing, leasing, and operating all kinds of public and private
improvements. That is to say, its powers were made as extensive as
could well be imagined. Stanford, Hopkins, Huntington, and Crocker each
held one-fourth of the stock.[180]

Under date of February 2, 1875, the Western Development Company agreed
to construct a railroad and a telegraph line on the routes selected by
the Southern Pacific, between certain specified termini. The mileage
actually built was that from Sumner to San Fernando, from Spadra to
Fort Yuma, and from Goshen to Huron. Bills were rendered for this work
on the basis of $72,000 per mile, or $29,153,520 for 404.91 miles, half
in Southern Pacific first mortgage bonds and half in stock.[181]

In addition to its contract with the Southern Pacific, the Western
Development Company undertook certain miscellaneous construction,
including work on the Northern Railway, and the San Pablo and Tulare
Railroad, the building of steamers for the Central Pacific, bridges
and buildings for the Central Pacific and Southern Pacific, general
repairs for the various companies controlled by the associates, and
even finally private residences for Hopkins, Stanford, and Crocker. In
short, during its existence the Western Development Company, besides
completing the major part of the Southern Pacific, did incidental
building of any sort which the associates desired to have done.


Pacific Improvement Company

The death of Mr. Hopkins in 1878, and the temporary unwillingness of
Mrs. Hopkins to participate in the financing of new construction,
together with the death of Mr. Colton in the same year, led Stanford,
Huntington, and Crocker to close up the affairs of the Western
Development Company, and to continue their more or less speculative
building enterprises under a new organization. This new company,
incorporated November 4, 1878, was known as the “Pacific Improvement
Company.” Its relations to the Southern Pacific and to the associates
were the same as those of the Western Development Company, except that
Mr. Colton, who had taken one-ninth of the Western Development Company
stock in 1875, was not a stockholder, and that Mrs. Hopkins at the
beginning took no part. Even the capital stock was placed at the same
amount, $5,000,000.

The main accomplishment of the Pacific Improvement Company was the
construction of the Southern Pacific between Mojave and The Needles.
Besides this, however, it extended the Southern Pacific from Soledad
to San Miguel, built the Southern Pacific in Arizona and the Southern
Pacific in New Mexico, completed the California and Oregon, and Oregon
and California railroads, and continued the Northern Railroad from
Willows to Tehama. The contracts made were similar to those executed by
the Western Development Company, although the consideration varied.[182]

The Pacific Improvement Company is still in existence. After the
construction work for which it was incorporated was completed, Mr.
Huntington sold his stock to the Hopkins estate. This gave to the
Hopkins interest, then represented by Mr. Searles, possession of
50 per cent of the stock of the Pacific Improvement Company. The
other 50 per cent remained in the hands of the Stanford and Crocker
interests. At a later date the Searles stock passed to the University
of California. The Pacific Improvement Company is now in process of
liquidation. It owns some thirty town sites, a considerable amount of
real estate, including much unimproved property in the Potrero district
of San Francisco, land in the Monterey peninsula, and other property
in Buffalo, New York. It has, besides, the stock and bonds of certain
railroad companies, stock of the Carbondale Coal Company of Washington,
and of the Oakland Water Front Company of Oakland, California, and what
is still more important, it holds a large number of bills receivable
covering property of all sorts which it has sold in recent years but
which has not been entirely paid for. The Pacific Improvement Company’s
construction outfit was sold to the Central Pacific in 1883.

The last of the construction companies, the Southern Development
Company, became responsible for construction east of the Arizona state
line when the Pacific Improvement Company left the field. It was of
minor importance and may be dismissed with a word. In respect to
ownership and operation it resembled the Contract and Finance Company,
the Western Development Company, and the Pacific Improvement Company.


Identical Control of Companies

There is a great deal of history about the operation of the various
construction companies mentioned, that has not been, and perhaps
never will be, written. The men out on the road seem to have known
little about any of them. The contact of these men was with Stanford,
Huntingdon, Hopkins, and Crocker. They neither knew nor cared whether
they received orders from the associates in their capacities as
directors of the Central Pacific or of the Southern Pacific, or as
stockholders in one of the construction companies. Nor was it easy
for them to keep informed. The same construction force moved from
place to place. The same man in the same pay-car paid off employees
of the Central Pacific, the Southern Pacific, and the construction
companies indiscriminately.[183] The same general shops furnished track
materials.[184] The same equipment was found on all the different
lines, except perhaps on the northern division. There was small wonder
that even the higher engineering officials were unable to locate
accurately the stretches built for each of the principal companies
which they served, nor that men under them should have been altogether
confused.

As a matter of fact, the various corporations interested in the
building of the Southern Pacific were, after 1870, only different
manifestations of the activities of one group of men. It does not
appear that any attempt was ever made to interest outside investors.
On the contrary, Hopkins, Huntington, Colton, and perhaps the other
partners as well, agreed that if anything happened to one of them,
their stock in the Western Development Company should not go to outside
parties until the existing stockholders had had a chance to take
it.[185]

This was a distinct contrast to the attitude of the same men when
the Contract and Finance Company was formed, and indicates that they
anticipated no such difficulty in raising funds as they had experienced
when they built the Central Pacific. Had this not been true, it
is probable that they would have let the Southern Pacific alone,
competition or no competition.


Construction Financing

Under the terms of their contracts with the Southern Pacific, the
construction companies received substantially all of the stock and
bonds which that company put out. The same parties were, therefore,
directly or indirectly in control both of the railroad and of the
companies which did work for the railroad. These securities had,
however, no market for many years, at any price. County donations,
of which there were a few, also yielded but little, and the federal
land grant was not easily or early sold. The real source of financial
supplies for the Contract and Finance Company and its successors,
the Western Development and the Pacific Improvement companies, in
their work upon the Southern Pacific, were the Central Pacific, as a
corporation, and the associates as individuals.

As in the case of the Contract and Finance Company, the associates paid
no money on their stock subscriptions, but deposited funds in varying
amounts which were credited to them as loans. Interest was paid on
these advances at rates varying from 6 to 10 per cent. It appears that
the contributions by the associates to the Western Development Company
began to be considerable in May, 1876. By January, 1877, they had
reached the sum of $3,421,458.35. By March, 1878, the total advance was
in the neighborhood of $11,000,000. It remained at this figure through
1878, and the major part of 1879. The largest contributions were made
by the estate of Mark Hopkins and by Collis P. Huntington, though both
Crocker and Stanford kept substantial balances. There is no record of
the size of advances made to the Pacific Improvement Company, but we
know that the same general practice was continued.

In addition to the advances made by the Huntington group, the
construction companies benefited substantially by the assistance
rendered them by the Central Pacific. This was a sort of help which the
Central Pacific itself and the persons who built it had never known.
It took a variety of forms. A very obvious service which the Central
Pacific could and did offer was the operation of sections of the
Southern Pacific as fast as completed in connection with the Central
Pacific main line. Besides this, the Central Pacific acted as banker
when the construction companies had spare funds. More important still,
the Central Pacific on occasion lent considerable sums to the Western
Development Company. This was later denied by representatives of the
Central Pacific, but the evidence seems conclusive that the loans were
made.[186]

Similar advances were probably made by the Central Pacific to the
Pacific Improvement Company,[187] and to the Contract and Finance
Company, sometimes without interest. Money in the Central Pacific
sinking fund was invested in this way, at interest.[188] Like use
was made of surplus funds belonging to the Occidental and Oriental
Steamship Company, which the Central Pacific was holding, until the
Union Pacific discovered the matter, and, being interested in the
money, demanded that its share be handed over.[189] There is even
evidence that the associates borrowed money from the Central Pacific
between 1874 and 1878, and that the treasurer of the company entered
the sums taken on so-called “cash-tags,” carrying them as cash in his
accounts.[190] How much all these transactions amounted to, it is very
difficult to say, but it is probable that the aggregate was large.


Profits of Associates

There is no way of estimating the profits which Stanford, Huntington,
Hopkins, and Crocker drew out of the Western Development, Pacific
Improvement, and Southern Development companies. We know they were
great, because the associates died very rich men. Mark Hopkins engaged
in no important enterprise outside of his hardware business, except in
railroad construction and operation, and yet in 1878 he left an estate
appraised at over $19,000,000. Eleven years later, Charles Crocker’s
estate was appraised at $24,142,475.84.[191] Stanford’s estate was
not appraised in 1893, or at least no figures of value were made
public, and Huntington did not die until long afterwards. Inasmuch as
the associates up to 1878 were all interested in the same business
together, and since the most important of their investments were in
railroad construction work, it is fair to assume that the profits
of the construction companies were considerable. Whatever they were
it must, however, be remembered that they consisted in the main of
Southern Pacific securities and of California real estate, neither of
which were immediately salable. As a construction enterprise, the whole
Southern Pacific affair was speculative. It was from the point of view
of the owners of the Central Pacific alone that the construction of the
Southern Pacific presented itself as a necessary policy, both for the
protection of an existing investment, and for the full exploitation of
the possibilities of monopoly in California.[192]




CHAPTER VIII

ORGANIZATION OF THE CENTRAL PACIFIC-SOUTHERN PACIFIC SYSTEM, FROM 1870
TO 1893


Extent of System

By 1877 the Central Pacific-Southern Pacific combination was in control
of over 85 per cent of all the railroads in California, including
all the lines of importance around San Francisco Bay, except the San
Francisco and North Pacific Railroad, and in the Sacramento and San
Joaquin valleys. Not only had the associates established the monopoly
which they desired, but the operations of their system had reached an
extent which they themselves would have thought inconceivable a few
years before. The operated mileage of the Central Pacific-Southern
Pacific line on June 30, 1877, was 2,337.66 miles, the capitalization
$224,952,580, and the gross earnings $22,247,030. There was a
continuous stretch of road from Ogden to Sacramento, San Francisco, and
Oakland, and from these cities to Los Angeles and Yuma, by way of the
San Joaquin Valley; while a line from Mojave to the Colorado River and
The Needles was in course of construction.

Legally and technically, this comprehensive system was divided into
five parts. The original Central Pacific Railroad ran from 5 miles west
of Ogden to Sacramento. In 1870 this company consolidated with the
Western Pacific Railroad, operating between Sacramento and San José
via Stockton, the San Francisco, Oakland and Alameda Railroad, which
connected the Western Pacific with the city of Oakland, the San Joaquin
Valley Railroad branch from Lathrop to Goshen, and the California and
Oregon Railroad, which left the main line of the Central Pacific near
Roseville, and ran in a northwesterly direction to Redding toward the
Oregon boundary. All these lines were directly under one operating
control.

A second important part of the system was the California Pacific
between Sacramento and Vallejo, with a branch from Davis north to
Marysville, and another from Napa Junction to Calistoga. The ownership
of the third portion was vested in the Northern Railway. This company
had been chartered in 1871, and had projected a line from Woodland, on
the California Pacific, to Tehama, of which 82.20 miles were completed
in 1875. In 1878 the company built from Oakland to Martinez, and from
Benicia to Suisun, and still later it constructed a line from Benicia
to Fairfield. This last bit of road enabled Central Pacific trains to
run from Sacramento to San Francisco via Benicia, instead of passing
through Vallejo. The San Pablo and Tulare, completed about the same
time as the road from Oakland to Martinez, connected the Northern
Railway with Tracy on the main line of the Central Pacific.

The fourth part of the Huntington-Stanford system was the Northern
Division of the Southern Pacific Railroad from San Francisco through
San José to Soledad and Tres Pinos. The Tres Pinos line has been
referred to in the previous chapter. The extension from Gilroy to
Soledad up the Salinas Valley was in operation by 1877, and formed
the first part of the route which later became the coast route to
Los Angeles. The fifth and last part of the system was the Southern
Division of the Southern Pacific Railroad from Goshen to Mojave, Los
Angeles, and Yuma, with branches from Alcalde to Huron, and from Los
Angeles to Wilmington. In addition to the main groups mentioned, there
were certain minor extensions, such as the railroads from Sacramento to
Shingle Springs (the Sacramento Valley and Placerville Railroad), from
Stockton to Milton (the Stockton and Copperopolis Railroad), and from
Peters to Oakdale (the Stockton and Visalia Railroad).


Lease and Stock Control

The various parts of the system were held together by a combination
of leases and stock control. The associates in 1877 held all or
a majority of the stock of each railroad company which has been
mentioned. Usually this stock had come to them in their capacity as
shareholders in the various construction companies which had built
the roads. In some cases, however, as with the California Pacific and
the Northern Division of the Southern Pacific, the greater part of it
had been acquired by purchase. But the associates in most instances
preferred to add to their control by stock ownership the further
security of a lease—a procedure which had the additional advantage of
simplifying the conditions under which the companies were operated,
by concentrating operations under a single management. Only in the
case of the Northern Division of the Southern Pacific do they seem to
have temporarily departed from this procedure, and this exception can
probably be explained by the special circumstances of the case.

So long as the same parties held all the securities of all the
companies in the Central Pacific-Southern Pacific system, it made
little difference how payments under the various leases were
determined. Yet the possibility that the Central Pacific might sometime
divest itself of some portion of its property, was kept in mind, and
rentals were fixed so that in most cases they were materially less than
the net earnings of the leased mileage. This was probably not true of
the Southern Pacific in early years, but it had become so by 1880. In
form, the leases showed surprising variety. The rental of the Northern
Railway to the California Pacific in 1876 was at the rate of $1,500
per mile per year.[193] Mr. Stanford thought that this was based on
an estimated cost of construction.[194] In 1879 the same property was
leased to the Central Pacific for a payment of a given sum per mile
for each piece of equipment passing over the road. That is to say, 25
cents per mile was paid for each passenger or freight locomotive, 20
cents for each passenger car, and 8 cents for each freight or caboose
car.[195] This proved to be a very expensive rental, and was changed to
a monthly payment of $47,500.[196]

The lease of the California Pacific to the Central Pacific in 1876
carried a rental of $550,000 per year, plus three-fourths of the net
earnings of the California Pacific above that amount. The Central
Pacific guaranteed principal and interest on $3,000,000 of bonds.
This was changed to a flat payment of $600,000 per year in 1879.[197]
The Central Pacific leased the Amador branch between Galt and Ione
for $3,500 per month. In the case of the Stockton and Copperopolis,
however, it undertook only to pay principal and interest on $500,000
of thirty-year bonds, at 5 per cent, with the provision, however, that
the net earnings should apply on the Stockton and Copperopolis floating
debt.[198] These variations, if they show nothing else, are persuasive
that the associates had no standard method of procedure but suited
their arrangements to the facts in each individual case.


Lease of Southern Pacific

Perhaps the most interesting relations between the different companies
in the Huntington-Stanford system were those existing between the
Central Pacific and the Southern Pacific—the Central Pacific’s most
important extension. It has already been noted that during the early
period of construction the Southern Pacific lines south of Goshen
were turned over to the Central Pacific operating department as fast
as they were completed. At one time the authority of some Central
Pacific officials reached east to New Orleans, though the general
superintendent, Mr. Towne, seems never to have had jurisdiction beyond
Vermillionville, 144 miles from New Orleans.[199] The advantages of
this arrangement were obvious. Under the lease, the Central Pacific
paid the Southern Pacific $500 per mile per month rental, less $250
per mile per month to cover operating expenses, or a net sum of $250
per mile per month. As amended in 1879 and 1880, the leases made
no mention of the $500 payment, but the Central Pacific engaged to
keep the Southern Pacific in good repair, and to pay $250 per mile
monthly.[200] In its first form the lease contained the implication
that the operating ratio of the Southern Pacific was only 50 per cent,
and it has been suspected that this was deliberately arranged in order
to assist Mr. Huntington in disposing of Southern Pacific securities
in New York. The lease was originally terminable on twelve months’
notice, but in 1880, on demand of New York bankers who contemplated the
purchase of Southern Pacific bonds, it was changed to run for at least
five years.

The fact has already been mentioned that the lease of the Southern
Pacific system to the Central Pacific never included what was known
as the Northern Division, running from San Francisco through Gilroy
to Tres Pinos and from Carnadero to Soledad. Its officers reported
directly to the executive officials of the Southern Pacific Company,
and not to Mr. Towne. The difference in treatment of this part of the
line was striking. The Northern Division lay west of the Coast Range,
and was separated to some extent from the lines of the San Joaquin
Valley; yet it gave the main system entrance to the important city of
San Francisco, and should have been operated in close harmony with its
connections at San José.

One suspects that Mr. Huntington desired to separate the Central
Pacific and the Southern Pacific in the public mind in order that he
might more successfully oppose Mr. Scott’s Texas and Pacific plans
at Washington. “I think it unfortunate,” he wrote in 1875, “that he
[Stanford] should so closely connect the Central Pacific with the
Southern Pacific, as that is the only weapon our enemies have to
fight us with in Congress.”[201] “I think it important,” he said in
another letter about the same time, “that the Southern Pacific should
be disconnected from the Central as much as it well can be. And ... I
think it should have a superintendent that does not connect with the
Central Pacific, although I think it would be difficult to get a man
as good as Towne.”[202] Opinions like these were likely to perpetuate
distinctions between the Central Pacific and the Southern Pacific
railroads which could not be explained on other grounds.


Arrangement Reversed

A second stage in the connection between the Central Pacific and
the Southern Pacific companies began in 1885 when a lease of the
Central Pacific to the Southern Pacific took the place of the earlier
arrangement in which the Central Pacific was the lessee. It appears
that Timothy Hopkins, treasurer of the Central Pacific and director of
the Southern Pacific Railroad of California, received a telegram from
Mr. Stanford in the summer of 1884, asking him to come to New York.
When Hopkins arrived he found Stanford, Huntington, and Crocker, and
it was explained to him that the meeting was desired in order to go
over the affairs of the associates generally, and in particular to
take up the question of the organization of a new company for the
purpose of holding and operating the railroad companies that were
owned by the associates and controlled by them, both those under the
management of the Central Pacific and those east of El Paso in Texas
and Louisiana.[203] The meeting was recognized as important and minutes
were kept, which have been preserved.

There were several circumstances which made a reorganization at this
time desirable. In the first place, the period of exceptional profits
for the Central Pacific was passing away with the decline in the mining
business in Nevada and the opening of other transcontinental lines. In
the second place, the Southern Pacific was beginning to realize the
earning power which it was to have as a completed road. It had now a
through line to New Orleans; it reached San Francisco while the Central
Pacific did not; it was handling 45 per cent of the transcontinental
business in 1885; and while it could hardly yet be called a profitable
enterprise, its prospects were bright. Southern Pacific bonds were
first sold in New York in considerable quantities in 1880, when
they brought between 86 and 90. Except on the supposition that the
ownership of the Central Pacific and Southern Pacific was identical,
there was beginning to be reason for the owners of the latter to feel
dissatisfied with a lease like that of 1880, which compelled them to be
contented with a fixed return.


Stock Holdings

On this last point the evidence, though not entirely conclusive, offers
some interesting suggestions. Up to 1880 the number of stockholders in
the Central Pacific remained small. Mr. Huntington had stock of the
four associates for sale, and made efforts to place it in New York, but
without success. In 1878 the report of the Central Pacific Railroad to
the California Railroad Commission showed 82 stockholders, of whom 56,
with a total holding of 432,563 shares, were residents of California.
Mark Hopkins held 102,812 shares when he died in that same year, and
Mr. Huntington, Mr. Stanford, and Mr. Crocker presumably possessed
equal amounts. During the early eighties, however, while the Central
Pacific was paying substantial dividends, large quantities of stock
were sold in Europe. James Speyer has testified that when he came into
the New York office of Speyer and Company, some time between 1883 and
1885, large blocks were held in England and Holland. The sales had been
made before 1884, probably at a price above 50.

No record of the amount disposed of in these years is available,[204]
but it is known that in 1884 the number of shares standing in the
names of Huntington, Stanford, Crocker, and the Hopkins interests was
considerably less than a majority of the stock outstanding.[205] Mr.
Jackson, employee in the secretary’s office of the Central Pacific in
1885, estimated the amount at from 30,000 to 35,000 shares apiece.[206]
According to Mr. Brown, who inventoried the stock of the associates
in 1884, the combined holdings of Stanford, Huntington, Crocker, and
Mrs. Hopkins, including stock in the name of the Pacific Improvement
Company, were 157,535 shares out of a total outstanding of 592,755
shares at this date.[207] Timothy Hopkins later suggested that Brown’s
figures might have included only stock free and available, and that
the associates might have owned other stock pledged as collateral, but
this was only a suggestion, without proof. As final bits of evidence,
it is on record that Crocker possessed 34,049 shares of Central Pacific
stock at his death in 1889,[208] while Stanford told the United States
Pacific Railway Commission in 1887 that he owned 32,000 shares.[209]

The conclusion to which this evidence leads is that Huntington and
his friends did not own as much as 30 per cent of the Central Pacific
shares outstanding when they met together in New York in 1884. Their
control of the company depended on the proxies which were sent them,
and in particular upon the fact that the individual liability imposed
on corporation stockholders under California law led new purchasers
of Central Pacific stock to delay recording their ownership, or even
to place their stock under the name of third persons in New York.
Dividends were collected by presentation of coupons clipped from stock
certificates.[210] Mr. Klink testified that the majority of the stock
was voted by proxy in 1885, and that the bulk of it was in the name
of people in the New York office of the company. On the other hand,
during the period in which the ownership of the Central Pacific became
scattered, the stock of the Southern Pacific continued to be closely
held by the original associates: Stanford, Huntington, Crocker, and the
estate of Mark Hopkins.

It is not difficult to understand why the associates should have
gradually shifted their main interest from the Central Pacific to
the Southern Pacific if we remember that their interests were widely
extended as the result of their building enterprises in Southern
California, and that Central Pacific securities were the only parts of
their holdings on which they could realize in cash. Southern Pacific
stock and bonds had no market in New York; Central Pacific stock and
bonds had such a market. Doubtless, the associates could not have
afforded to dispose of their Central Pacific holdings if this would
have imperiled their control of the Ogden route, but such a result
did not necessarily follow, as we shall see. Having sold Central
Pacific securities in large quantities, however, it was natural
for the Stanford-Huntington group to wish to make the company in
which their main interest now lay a dominant partner in the Central
Pacific-Southern Pacific combination. And this is probably the
explanation of the transaction which we are about to describe.


New York Meetings

Let us return to the meeting of Huntington and his associates at New
York in the summer and fall of 1884, at which the details of the
reorganization were worked out. The first business there considered
was the purchase of the interest of one T. W. Pierce in the Galveston,
Harrisburg and San Antonio Railway and the making of certain
adjustments of interests of the associates in connection therewith.
The next was the taking of an inventory of securities on hand in New
York and those used as collateral for the payment of liabilities
of Stanford, Huntington, Hopkins, and Crocker. On September 11 the
question of the reorganization of the Southern Pacific system was
taken up, and the following order of business was agreed upon: (1)
consolidation of all the lines of the Southern Pacific system in one
company; (2) separation of Central Pacific business from Southern
Pacific business; (3) leasing of the Central Pacific system to the
Southern Pacific system (new organization); (4) general consolidation
of lines from San Francisco to Newport News.

The fourth item referred to a proposal that Stanford, Crocker, and
the Hopkins estate enter with Huntington into the ownership of the
Chesapeake and Ohio Railroad, opening the way for a transcontinental
rail line from coast to coast. This offer was declined; no further
reference need be made to it.[211]

On September 25, the associates came together again, and from that time
until November 7, meetings were held almost daily. From the meager
reports of the proceedings kept by their secretary, we glean that
more than one plan of adjustment was considered. It was agreed at one
time that the Southern and Central Pacific companies might terminate
their leases, and that the Central might lease from the Southern that
portion of the railroad between Goshen and Mojave. Then a running
arrangement was to be made between the Central Pacific and the Southern
Pacific Company (new organization) to cover the line from Mojave to San
Francisco and other California points.[212]

This plan was not finally adopted. On October 1, Leland Stanford was
appointed a committee of one to formulate his proposed method of
leasing the several roads which should form the through line of the
Southern Pacific Company. It was agreed that the stock of the Southern
Pacific Company, which had been organized the previous year, should be
raised to $100,000,000. During the following three weeks the discussion
turned largely about the details of the Southern Pacific organization
and the best methods of liquidating the Southern Development Company.
On November 5, the question of leasing the Central Pacific system to
the Southern Pacific came up. It was agreed to lease the property, and
temporarily to fix the rental at fixed charges and a guarantee of 2
per cent upon the capital stock, plus all the earnings of the Central
Pacific system over and above that percentage until the amount should
reach 6 per cent. All profits beyond 6 per cent were to go to the
Southern Pacific Company. The last meeting was held on November 7.


Reorganization of System

The result of these exhaustive discussions was a threefold operation.
In the first place, the Southern Pacific Company of Kentucky, organized
in 1884 with a charter granting power to do most things in the world
provided it did not operate in Kentucky, issued $100,000,000 in capital
stock, and acquired in exchange for its certificates the stock of the
Southern Pacific Railroad Company and that of the subsidiary companies
completing the through line to New Orleans.[213]

Secondly, the Southern Pacific Company leased the Southern Pacific
Railroad and these same subsidiaries for ninety-nine years from the
10th of February, 1885, undertaking to keep the properties in repair,
and to pay over 93½ per cent of the net profits to the lessors in
specified proportions.

In the third place, the Southern Pacific Company leased the Central
Pacific Railroad for ninety-nine years from the first of April, 1885,
for a rental which might vary from $1,200,000 to $3,600,000 a year,
according as the earnings of the Central Pacific and leased lines north
of Goshen might be small or large. This substantially corresponded to
the 2 per cent and the 6 per cent on the capital stock mentioned in the
minutes of the associates. The Southern Pacific assumed all Central
Pacific obligations except the payment of the principal of indebtedness
incurred or guaranteed by that company, and various minor adjustments
and assignments were made which it is not necessary to describe.[214]

Mr. Stanford has testified that in fixing the rental of $1,200,000 the
business of the previous years and the prospects of competition in the
future were taken into account.[215] The United States Pacific Railway
Commission approved the terms of the lease two years later.

In 1888 the minimum rental was changed to $1,360,000 and the maximum
to $4,080,000, in consequence of the extension of the Central Pacific
from Delta, California, to a connection with the Oregon and California
Railroad at the Oregon boundary. In 1893 the Southern Pacific
complained that it was suffering very considerable losses under the
lease and the terms were once more revised. Instead of a rental with a
fixed minimum, the Southern Pacific now agreed to pay $10,000 a year
for the leased property, plus all net earnings up to 6 per cent on the
capital stock of the Central Pacific Railroad and one-half the excess
over 6 per cent.[216]

It was provided in the fourth article of the new lease that if the
Southern Pacific should make any advances for payment on account of the
Central Pacific, it should be entitled to receive interest on these
advances at the rate of 6 per cent. On the 22d of March, 1894, this
fourth article of the amended lease was again changed by inserting
the words “lawful interest” instead of “interest at 6 per cent per
annum” upon advances which might be made by the Southern Pacific
Company. At the same time it was agreed between the Central Pacific
and the Southern Pacific that if at any time it appeared that, by the
operation of the agreement, either party was being benefited at the
expense of the other, the agreement should be revised and changed.
On the whole the earnings of the Central Pacific were less than were
expected under the lease, particularly during the years 1888-93. Yet
part of the difficulty arose from preferential solicitation of freight
over the Sunset route, and for the rest the rental of the property was
adjustable, as experience showed.




CHAPTER IX

THE CASE OF DAVID D. COLTON


Meeting the Associates

During the seventies the associates took a new partner. This was David
D. Colton, one-time sheriff of Siskiyou County, brigadier-general of
militia, second to Broderick in the famous Terry-Broderick duel, and
still later colonel of United States Volunteers. In spite of these
various military titles, Colton seems never to have seen service.
But he had been active in California politics as a delegate of the
Union Democratic party in 1861, and as chairman of the state central
committee of that organization, and was widely known throughout the
state. He was a man of fine physique, and endowed with a quick if not a
profound intelligence.

Colton first made the acquaintance of Charles Crocker in 1867, when
the latter was on his way to inspect the work of construction of
the Central Pacific beyond Elko. Three years later Crocker invited
Colton to accompany him to Evanston, California, where he intended to
look over, and perhaps to purchase, certain coal mining properties.
According to Crocker, Colton said that he also would like to have an
interest in the mines in question. Crocker, who had in the meantime
completed negotiations for the purchase, replied with an offer to make
Colton president and manager of the coal company if he would buy a
thousand shares of its stock, which Colton immediately did.[217]

The relations thus begun rapidly became more intimate. As early as
1868, Mr. and Mrs. Colton had invitations from Mr. Crocker and passes
to travel on the Central Pacific. In 1869 or 1870 the two families
visited the Yosemite together, and in 1871-72, when the Crockers went
to Europe and the two Crocker boys were left behind at a military
academy in Oakland, the Coltons looked after the children generally,
and had them at the Colton house for week-ends.[218]

It was through his acquaintance with the Crockers that Mr. Colton met
the other members of the Stanford group. Mr. Huntington was favorably
impressed with him; Stanford and Hopkins less so. Huntington was
becoming dissatisfied about this time with the amount of work done
by his associates, and the suggestion soon made that Colton join the
other members of the group and share the burden of managing the Central
Pacific enterprise with them, met his approval. “I was worked,” he said
later, “up to my full capacity, whatever that might be. Mr. Crocker was
in the habit of going to Europe and having a good time and the Governor
owned ranches, and his horses took a great deal of his time; in fact,
the Governor never could confine himself right to the office; that is,
I don’t consider that he could, to close, hard work, and we wanted
somebody there to do that work; and Mr. Colton convinced me that he, of
all men, was just the man that we wanted.” And again, speaking of his
partners and of Colton, Huntington said: “He knew I was not satisfied
with some things that my associate co-directors were doing there. The
way they used to go to Europe and go away from business, while I was
working every day in the year almost, and about fourteen hours a day;
he knew I was not quite satisfied with the hours they put in.”[219] The
fact that Mr. Hopkins’ health was not strong was an additional reason
for taking in a new partner.


Agreement Signed

The result of these preliminary discussions was the conclusion of an
agreement, dated October 5, 1874, whereby Colton received 20,000 shares
of Central Pacific Railroad stock and 20,000 shares of Southern Pacific
stock in return for his promissory note for $1,000,000, maturing in
five years.[220] At the same time it was mutually understood that
Colton should share in all the responsibilities and liabilities of
the associates for five years in proportion to his stockholdings, and
should stand in their shoes, as it were, holding the same positions and
relations which they had to the Central Pacific Railroad, and to the
Contract and Finance Company. The contract called for no cash payment,
for obvious reasons.

Mr. Huntington says he felt in 1874 that Colton was receiving something
very handsome, and the opinion was not without some justification.
Certainly, in the long run the opportunity to share in the profits
of the associates was valuable. Colton was not a man of large means
to begin with, yet after two years and three months with the Central
Pacific, he inventoried his assets at $961,506.18,[221] and at the
time of his death his rent roll alone amounted to $2,500 to $3,000 a
month.[222]

This was a very substantial compensation, even for very valuable
service. But on the other hand, it is evident that Mr. Colton put
himself entirely in the hands of the associates when he signed the
agreement and the promissory note which have been described. He
not only pledged his services for five years, but he assumed an
unconditional liability to pay $1,000,000 at the end of this period, in
return for which he obtained only 40,000 shares of unsalable securities
and a right to participate in the management of the associates’
property which was revocable at the pleasure of Huntington and his
friends at any time within two years. This was a dangerously exposed
position. It was not a wise thing even for the Huntington-Stanford
group to put Colton in such a predicament, and much subsequent
difficulty resulted therefrom.

In 1876 the associates served notice on Mr. Colton, dissevering his
connection with them. Mr. Crocker relates that Colton was very much
affected. He said, according to Crocker, “It is generally known that I
am here with you, and there is no one knows these relations are only
temporary, and it will be next to ruin to me to have them dissevered
now.” In fact, he wept. Crocker later testified that he liked the
general very much, and was touched by his distress. Colton wished him
to go and see the others, and Crocker did so. The result was that the
notice was reconsidered and a second contract made.[223] After this,
Colton bought one-ninth of the capital stock of the Western Development
Company, and commenced to deposit money with that organization in the
same manner as did the other members of the group.


“Financial Director”

During substantially the whole period from 1874 to 1878, Colton took
active charge of the financial affairs of the Huntington group at the
San Francisco end. His office and title beginning August 31, 1875, was
that of “financial director.” Formally he acted under the direction of
the treasurer of the company, Mr. Hopkins. Practically he reported to
Mr. Huntington and perhaps to Mr. Crocker, more than to Mr. Hopkins,
but exercised a good deal of independent initiative.[224] With the
operation of neither the Central Pacific nor the Southern Pacific had
he anything to do. On the other hand, it was either Colton in San
Francisco, or Huntington in New York, as we shall presently see,
who attended to the negotiation of short-time loans, often necessary
to take care of interest on the railroad properties. It was also
Colton who had particular charge of the many affairs of the Western
Development Company;[225] it was Colton who was responsible head of the
Rocky Mountain Coal and Iron Company’s mine at Ione; and it was Colton
who took particular interest in finding a market for the output of this
corporation.[226]

From the tone of Mr. Huntington’s letters to Colton, it seems as though
the former was reasonably well satisfied with the way the business in
the West was conducted after 1874. On his part, Colton cultivated the
idea that the interests of the five associates, himself included, were
inextricably bound together. “I have learned one thing,” he wrote in
1878, “we have got _no true friends_ outside of _us_ five.... People
will profess friendship to one of us, just to either try to find out
something, or when the time comes, lie about the rest of us. We cannot
depend on a human soul outside of ourselves, and hence we must all be
good-natured, stick together, and keep our own counsels.”[227]

Yet, in spite of his assumption of the permanency of his relations
with the Huntington group, Mr. Colton certainly understood that his
position had no legal security whatever. Of this the episode of 1876
must have been a disagreeable reminder. In particular, as has been
observed, there was a reasonable likelihood that he would be called
upon to pay his note for $1,000,000 in 1879, before the Central Pacific
and Southern Pacific shares, which secured it, had become salable. It
is evident that these matters were in Mr. Colton’s mind constantly, and
gave him great concern. No other reason can be offered for his efforts
to secure title to property with such feverish rapidity. How should
he protect himself against the automatic presentation of a note which
might require the sacrifice of all his accumulations to pay? How should
he put himself in a position where his income was not wholly dependent
on the forbearance of four men, with only one of whom he had ties of
personal friendship? If Mr. Colton’s moral fiber weakened somewhat
under the strain of the situation, the fact need occasion no great
surprise.


Western Development Dividend

Some time after 1874 Colton suggested to Crocker that the salaries
of the associates be raised. They were all drawing $10,000 a year,
and were giving all their time for that salary. Colton said it was an
insignificant sum. Men such as the associates ought to have $25,000 a
year, at least. But Crocker replied prudently that a salary of $10,000
could always be justified, while one of $25,000 might not be. He
preferred to let the matter stay as it was.[228]

Three years later, when the period of his contract was drawing to
a close, Colton took more drastic action by causing the Western
Development Company to distribute a substantial part of its assets in
the form of a dividend. This provided him with property, upon which as
security he might have borrowed considerable sums of money. A dividend
was declared on September 4, 1877, which consisted of $13,500,000 in
Central Pacific stock, $6,300,000 in Southern Pacific Railroad bonds,
and $1,562,500 in other securities, amounting to between one-half and
one-third of the holdings of the Western Development Company. Colton’s
personal share was one-ninth.[229]

Ostensibly the Western Development Company’s dividend was a
distribution of surplus profits. In reality it was a division of
capital. Nobody knew, in 1877, how great the profits of the Western
Development Company had been, nor even whether the assets of the
company equaled its liabilities, for the reason that the value of these
assets was speculative and uncertain, and if realized on all at once,
would have amounted to scarcely anything at all. It was known, of
course, that the creditors of the company were also its stockholders,
so that the distribution was not quite so reckless as it otherwise
might have appeared; but yet the various stockholders were not holders
of stock in the same proportions as they were creditors, and the
heavier creditors, such as Huntington, might well have felt that their
interests were not being sufficiently protected.

[Illustration: David D. Colton]

Nothing was said about the Western Development dividend to any of the
associates at the time it was declared. Charles Crocker was in San
Francisco, but knew nothing of it.[230] The fact came out, however,
in August of the following year, when Huntington was in the West.
Stanford, Huntington, and Crocker were all together in one of the
Southern Pacific offices when Colton came in, accompanied by a couple
of subordinates with their hands full of bonds, and said, “Gentlemen,
here are your dividends.” Both Huntington and Crocker became at once
very angry, and hot words seem to have passed. Huntington said that
there was no sense in the dividend—it was wrong, the company ought
to pay its debts before it paid a dividend—the stocks and bonds
were of no particular value, but their distribution would leave the
Western Development Company shorn of its resources, and they must be
returned. Crocker agreed with Huntington. Colton begged the others not
to injure him in the eyes of the employees of the company by compelling
a return of the securities, and pledged his honor that he would not
part with his shares, and would return them if needed. Stanford thought
the matter might be passed with this understanding, and it was so
agreed, not, however, without a good deal of resentment on the part of
Huntington and Crocker.[231]


Misappropriation of Funds

The Western Development dividend and Colton’s request for a higher
salary were, in a measure at least, open and above board. The same
cannot be said of a number of other operations—in general, it is
true, of minor importance—which took place between 1874 and 1878,
and which became known only after Colton’s death. How far Colton was
guilty of positive dishonesty during these years has been a matter of
bitter dispute. There is no question, however, that he drew or credited
himself with considerable amounts of money without the knowledge of
the other partners, and that no vouchers were ever made out which
sufficiently explained these transactions. Charges of embezzlement were
even later made and not disproved. Three of four illustrations of such
incidents may be given.

1. Salary drawn from the Rocky Mountain Coal and Iron Company. Mr.
Colton was made president of this company in 1871 at a salary of $100
a month. In 1874 the associates agreed that Colton should receive a
salary of $10,000 a year, as partner. No separate mention was made of
the Rocky Mountain Coal and Iron Company in 1874, but it is reasonable
to suppose that the new salary of $10,000 covered Colton’s work in
supervising the coal property, as well as his share in the general
administration of the railroad, especially as the coal business took
comparatively little of his time. As a matter of fact, however, Colton
restricted himself to $100 a month only during 1871. In 1872 he drew
$400 a month, except during the month of March, when he took $366.50.
In 1873 he took $23,500, of which a considerable amount was for back
salary. In 1874 Colton drew $12,000, and in 1875, 1876, and 1877,
$6,000 annually. According to the testimony of expert accountants
who later went over the company’s books, Colton took $54,966.50 in
salary during the years 1871-77 in excess of what he should have taken
according to his agreement with Mr. Crocker, and beyond the amounts
which the other associates intended he should have.[232]

2. Interest on Rocky Mountain Company balances. It is admitted that
Mr. Colton deposited the balances of the Rocky Mountain Coal and Iron
Company, running all the way from $30,000 to $90,000, in his own
private bank account, and used them in his own private transactions.

3. Receipts from sale of coal. It appears that the Rocky Mountain
Coal and Iron Company sold coal to the Central Pacific. For some time
this coal was paid for at the rate of $2 and $2.65 per ton. In July,
1874, the Central Pacific made an extra payment of $11,622 to Mr.
Colton for the purpose of increasing the price paid during the months
from January to May, 1874, to $2.85 per ton, and arranged to pay this
increased amount thereafter. In his instructions to the superintendent
of the mine, Mr. Colton made no mention of the retroactive payment, and
apparently pocketed the $11,622.

4. Appropriation of interest coupons. In 1876 Mr. Tevis wished to
exchange some Southern Pacific bonds which he held, for certain
lands owned by the Railroad Company. Colton agreed to facilitate
the transaction by taking the bonds and giving his individual check
for $140,700. Tevis delivered the check and $10.13 in cash to the
Southern Pacific land agent, and got his deed. Colton eventually
redeemed his check by delivery of the bonds to the treasurer of the
Southern Pacific, but when the bonds came in, two interest coupons
were missing. A similar transaction between the same parties, but for
a lesser amount, took place later the same year, and again interest
coupons were clipped from the bonds before Colton turned them in.[233]
In each case Mr. Smith, the treasurer of the Southern Pacific, was
compelled to hold Colton’s check for a considerable period before it
was redeemed, and during this time Colton had, of course, the use of
the money.

In addition to matters such as those here partially enumerated, there
were a multitude of instances in which Colton charged relatively small
sums to various accounts without supplying any evidence that the
charges were legitimate. Doubtless the other associates did the same,
but Colton’s position in the group was peculiar, and he could not
afford to allow himself equal freedom with Huntington and Stanford. It
would serve no useful purpose to discuss these instances in detail.

The aggregate of all the sums which Colton thus gathered into his
control was considerable. The Western Development dividend alone
supplied him with 700 Southern Pacific bonds that might have been used
as collateral security for a loan, as well as with other securities,
mostly of still uncertain value. Items of excess salary, interest
on balances, and miscellaneous unaccounted-for expenses totaled
$130,831.13. Had Colton succeeded in increasing his salary as financial
director to $25,000, he would have added from $75,000 to $100,000 to
his resources. Substantial progress was evidently being made toward
meeting the million dollar note.


Colton’s Death and Mrs. Colton

Upon all the activities which have been described, Colton’s death in
October, 1878, in the prime of life, fell with crushing force. In the
first place, Colton’s manipulations were such as to be unforgivable
by his business friends. Devious as Huntington’s ethical code was
at times, he had no hesitation in pronouncing Mr. Colton guilty of
robbery; that he himself was partly responsible was not likely to occur
to him. In the second place, Colton’s assets at the time of his death
were such as to render immediate liquidation impossible, and yet this
was precisely the thing most likely to be demanded. Mrs. Colton, the
sole heir, was a woman of unusual ability, clear-headed, definite in
speech, and, although inexperienced in business, apparently quickly
able to understand business problems. She had, moreover, a good adviser
in the person of a San Francisco lawyer named S. M. Wilson. Her
position was, nevertheless, one of disadvantage, which was intensified
by her wish to shield her husband’s reputation.

It does not appear that the associates were aware of the true state
of affairs during the weeks immediately following Mr. Colton’s death.
Mr. Huntington wrote cordial though not altogether sincere letters
to Mrs. Colton, expressing willingness to serve her in those matters
in which General Colton was interested with the associates,[234] and
Crocker called at Mrs. Colton’s house and wept there while speaking of
the death of Mr. Colton. This attitude soon changed, however, and Mr.
Crocker became less friendly in his intercourse with Mrs. Colton, and
at last ceased to visit her altogether.[235] In fact, all pretense of
sympathy with Mrs. Colton was presently abandoned, and negotiations
between her and the associates were continued upon a cold business
basis.

The attitude of the Stanford-Huntington crowd was officially that they
were willing to have Mrs. Colton pay her obligations and continue with
them. This meant a settlement of claims arising out of the improper
withdrawal of moneys by Mr. Colton, but also more particularly the
payment of the $1,000,000 note. It involved, also, for the future
continued investment of funds in the Western Development Company, and
the payment of assessments which might be levied upon Southern Pacific
stock. It was insisted, however, that the matter be settled quickly,
partly because Mr. Huntington was about to leave the city, and partly
because the period for filing claims against the Colton estate would
soon expire.[236]

In the event that Mrs. Colton should not desire to continue with them,
the associates demanded an accounting in which the liabilities of
Mr. Colton on account of the $1,000,000 note, his share of the net
indebtedness of the Western Development Company, and the sum of the
alleged embezzlements, should be set against the estimated value of the
stock and bonds of which Colton died possessed. In estimating the value
of Mr. Colton’s securities, moreover, the associates declared that the
question was not as to the amount which could be realized eventually
and after the underlying property had had a chance to prove itself, but
the market value at the time of negotiations.

Mr. Crocker’s testimony on this point expresses very fully the attitude
of the associates. He said:

 Mr. Wilson and I had frequent conversations, and he sometimes asserted
 we could do so and so with these bonds, that we could realize 80 or
 90 cents on them. I said in reply, “Possibly we can; I don’t know; it
 is a matter of speculation; it depends on the future of the roads.”
 Sometimes he would claim they would bring 80 or 85 cents; and then I
 would say, “Very likely they may,” but it would require time to do
 it, and a great deal of management necessarily to bring that out, and
 if Mrs. Colton desired to realize the full value of these securities
 after this lengthy handling of them, all she had to do was to pay the
 amount of the note and continue in the company and we would manage
 them for her, as well as we would for ourselves, of course, and she
 should receive the full benefit of our knowledge and experience in
 handling these securities, and we would get every dollar out of
 them we could, and she should have her share to the last cent. Then
 he would reply: “Well, that can’t be. We are determined to go out of
 this.” “Well,” I says, “then it is a matter of speculation.”[237]

Unquestionably these were hard terms, for it was out of the question
for Mrs. Colton to continue with the associates in 1879, a fact of
which these gentlemen must have been well aware. She did not have
the necessary money, she could not afford in any case to risk her
livelihood in so speculative an undertaking as building railroads in
southern California, and the relations between her and the Huntington
group did not savor of trust and confidence. The expressions of
willingness to continue to treat Mrs. Colton as one of themselves cost
the associates nothing, and were worth as much. Nor was the standard
of valuation of the Colton assets offered by the associates, easily to
be defended on ethical grounds. Mr. Colton had not played fair, it is
true, but on his part he had been led into an improvement agreement and
caused to sign a $1,000,000 note, in at least partial reliance upon the
value of the stock of railroads under the associates’ control, which
was given him in exchange. It was hardly appropriate for the Huntington
group now to insist that the collateral security had no value.


Settlement with Mrs. Colton

Hard as the terms were, Mrs. Colton finally acceded to them. By
agreement dated August 27, 1879, she turned over 408 shares of the
capital stock of the Rocky Mountain Coal and Iron Company, all of
the shares which she held of the Occidental and Oriental Steamship
Company, all claims to the 40,000 shares of Central Pacific Railroad
and Southern Pacific Railroad stock, pledged as collateral for the
$1,000,000 note, all of the capital stock of the Western Development
Company standing to Colton’s credit, and some $587,500 in par value of
bonds of the Central Pacific-Southern Pacific system, of which $500,000
was in first mortgage bonds of the Southern Pacific Railroad itself. In
return for all this, the associates agreed to cancel Colton’s note for
$1,000,000, and to release Mrs. Colton from any claims on the part of
themselves, the Western Development Company, the Central Pacific, and
its allied companies.[238]

This settlement left Mrs. Colton with property reasonably valued
at half a million dollars, and with an income of perhaps $28,000 a
year. That she withdrew with so much to her credit was due to the
interposition of Mr. Tevis on her behalf at the last moment, in
consideration of a contingent fee,[239] and to the fact that the
associates were on the point of floating large amounts of Central and
Southern Pacific securities in New York. Mrs. Colton felt, however,
that she had been robbed, and in May, 1882, commenced suit to reopen
the whole transaction, and to annul the compromise agreement. It has
been estimated that this famous suit cost the parties $100,000 apiece.
Mrs. Colton alleged fraud and the withholding of essential facts which
the associates should have disclosed by reason of the trust relations
which had existed between Colton and his partners. In particular she
insisted that the statements given her in 1879 with reference to the
affairs of the Western Development Company had been misleading and
untrue. She now offered to pay Colton’s $1,000,000 note, and other
liabilities, and asked for the return of the securities which she had
previously surrendered.

The more important facts developed in this litigation have been dwelt
upon in the preceding discussion, and need not be repeated here. The
case went to the Supreme Court of the state, where Mrs. Colton was
finally defeated. A careful reading of the evidence leads to the
conviction that the court was right. Mrs. Colton had done the best she
could under the circumstances and was properly held to an agreement she
had made with her eyes open, some three years before. Yet the fault of
the whole unsavory affair was not hers, nor altogether Mr. Colton’s,
and the reputation of the associates thereby properly suffered in the
public mind.




CHAPTER X

FINANCIAL DIFFICULTIES FROM 1870 TO 1879


Excessive Construction

We may now return to the more general considerations affecting Central
Pacific finance which characterized the years from 1870 to 1879. There
is a good deal of evidence that the years during which Mr. Colton was
connected with the Central Pacific enterprise were years of financial
difficulty for the associates, due in part to general depression, in
part to a disproportionate amount of new construction, and in part to
the continued inability of the Huntington-Stanford group for many years
to interest eastern capital in western railroads.

During the years from 1869, when the Central Pacific was first opened
to Ogden, to 1874, the earnings of the Central Pacific main line, both
gross and net, steadily increased. The following table sets forth the
facts relating to this progress, as well as figures for the succeeding
years from 1875 to 1881.

EARNINGS AND EXPENSES OF THE CENTRAL PACIFIC RAILROAD, 1874-81(*)

  Period                Gross Earnings   Operating Expenses   Net Earnings

  (Calendar years)
  November 6 to
  December  31, 1869     $  1,024,680    $   777,348         $   247,332
  1870                      7,519,983      6,009,426           1,510,557
  1871                      8,862,054      5,937,890           2,924,164
  1872                     11,963,641      8,645,276           3,318,265
  1873                     12,867,600      7,822,638           5,044,962
  1874                     13,726,561      6,468,145           7,258,416
  1875                     15,665,082      9,937,465           5,727,617
  1876                     16,994,216      10,970,599          6,023,617
  1877                     16,471,144      12,761,639          3,709,505
  1878                     17,530,859      12,005,535          5,525,324
  1879                     17,153,163      11,126,298          6,026,865
  1880                     20,508,113      12,814,121          7,693,992
  1881                     24,094,001      14,546,899          9,547,102
                          ———————————     ———————————         ——————————
                         $184,381,097    $119,823,379        $64,557,718
                          ═══════════     ═══════════         ══════════

(*)Report compiled by the Commissioner of Railroads, 47th Congress, 1st
Session House, Executive Documents No. 123, 1882, Serial No. 2030.

The greatest continuous drain upon Mr. Huntington and his friends
during the decade from 1870 to 1880 came from the necessity of raising
funds to provide for construction in southern California as described
in earlier chapters. Had business considerations alone controlled,
there is little doubt that this construction would have ceased. It did
not pay for itself, and could not be expected to be profitable until
the country served had been developed. Indeed, Charles Crocker once
declared that when the Southern Pacific was built through the southern
San Joaquin Valley, the company could have started with a railroad
train at Sumner at the south of the valley and come to Stockton, and
with one engine and one train of cars, hauled every living soul that
lived in the valley out at one haul. The settlers between Yuma and San
Bernardino could have been carried in one carload. This was as late as
1876.[240]


Inability to Get Eastern Capital

It was largely owing to this construction, as well as to the general
hard times, that the gross earnings per mile of the Central Pacific
and leased lines fell from $12,068.63 in 1875, to $7,677.84 in 1879.
The Central Pacific did not dare stop work for fear that the federal
government might be persuaded to subsidize another transcontinental
road, and so deprive it of the monopoly which it was so anxious to
retain; but it built as slowly as it could, and endeavored to make up
by retrenching in other directions. Had the associates been able to
sell securities in New York, the slowness with which the earning power
of their system developed would not have been so serious a handicap.
The territory was after all a rich one, and given time was sure to
yield substantial profits. But a market for their stock and bonds
was impossible to secure for many years. We have seen the opinion
expressed by the associates in the Colton settlement, with respect to
the salability of Southern Pacific-Central Pacific securities. There is
no reason to doubt that this judgment was correct. Before 1880 it does
not appear that there was a market for any of the Huntington-Stanford
issues except the Central Pacific first mortgage bonds, and the sale of
these was very slow.[241]

There is evidence that the associates not only recognized this
situation, but that they took what steps they could to meet it. Central
Pacific stock was listed on the New York Stock Exchange in 1874, and
on the San Francisco Stock Exchange in 1878, not so much with the idea
of selling any large number of shares, as in order to make a beginning
which might ultimately lead to an established market. Arrangements
were made to have the stock called at San Francisco every day, and the
associates stood always ready to buy it back at a slight decline. The
payment of dividends was begun in 1873 and continued until by the end
of 1877 the sum of $18,453,670 had been distributed. Yet all this had
little result for many reasons, among which doubtless should be again
mentioned the personal liability attaching under California law to
holders of stock in California corporations.

Naturally Southern Pacific securities of any type were still more
difficult to sell than Central Pacific stock. Mr. Huntington found
that the Southern Pacific Railroad was not known in the East, even by
parties who had spent some considerable time in California.[242] To
overcome this he advertised Southern Pacific stock and bonds in a great
variety of ways, sometimes by personal conference with eastern bankers,
sometimes by the issue of pamphlets or by the insertion of items in
the newspapers, sometimes by the manipulation of bond sales upon the
Stock Exchange. Occasionally he bought a few outstanding Southern
Pacific bonds in order to support the credit of the company.[243] But
here again, in spite of his efforts practically no bonds were sold, and
Southern Pacific stock could not be disposed of at any price.


Market for Securities

A good deal of specific testimony by New York brokers is available
to show the estimation in which Central Pacific and Southern Pacific
securities were held late as 1879. It is all cumulative, and to the
effect that no market existed at that time for any of these issues
except Central Pacific first mortgage bonds. Thus S. H. Thayer said of
Central Pacific stock: “I don’t think it would have found any market;
I do not think it would have been possible to have sold it at any
price; the stock had no friends, nobody knew of it, nobody traded in
it; that is, in a general market; I do not know what might have been
done by private negotiation; but in the public market nothing could
have been done with 20,000 shares towards selling it.”[244] Similar
testimony was given by D. O. Mills, of San Francisco. Mr. Mills was
asked what price could have been obtained in the San Francisco market
in 1879 for $13,000,000 in Southern Pacific bonds, and replied that he
did not think these bonds were salable then, that it would have been a
matter of bargain and sale, and would not have depended upon any market
value.[245] Mr. Thayer also testified that the Southern Pacific bonds
were on the stock exchange list in New York, but were bonds no one
dealt in, and about which few were informed.[246]

It would probably be a mistake, in spite of this testimony, to
attribute the reluctance of eastern investors to buy Southern Pacific
bonds solely to unfamiliarity with the security. Not only was the
economic development of southern California slight and the probable
earnings of the Southern Pacific for some years small, but the state as
a whole was not in the seventies an attractive field for investment.
During the decade from 1860 to 1870, California had grown rapidly
in wealth and prosperity. Population had increased and manufactures
had begun to develop. In agriculture, fruits, berries, and grapes
had been added to the important quantities of grain and vegetables
already produced. But the immediate effects of the completion of the
transcontinental railroad had been harmful to California, rather than
beneficial.

For this there were several reasons: (1) speculation in real estate
around San Francisco Bay had so discounted the completion of the line
that the actual opening of communication caused a reaction rather
than an advance; (2) the combination of a stimulated immigration
due to greater facilities for travel, with the sudden release of a
considerable part of the labor used in railroad construction, had
forced down wages, while, on their part, California merchants had
become exposed to competition from eastern distributing houses; (3)
droughts in the South, the decline in the production of the mines,
and the collapse of speculation in Nevada silver properties, all had
given rise to acute suffering and discontent. These things in turn
had reacted on political conditions, and had produced, first, the
so-called sand-lot excitement, and then the agitation that led in 1879
to a revision of the state constitution. Meanwhile the passage of the
Thurman Act, and the various disputes between the Pacific railroads and
the federal government had provided special reasons for distrusting the
securities of the Southern Pacific and Central Pacific companies, quite
apart from conditions peculiar to the section in which their mileage
lay.


Short-Term Borrowing

To repeat, it was this failure to dispose of the railroad stock and
bonds which they had to sell that threw the associates back upon the
necessity of raising money by short-time loans at extravagant rates of
interest, and which, in the late seventies, peculiarly exposed them to
the dangers of stringency in the New York money market. The partners
at times paid as high as 12 per cent for loans.[247] Every element
affecting their credit had to be closely watched, lest lenders refuse
to discount their paper, and interest on the company’s bonds go by
default; for it was a customary practice for the associates to take
care of interest, at least over short periods, by loans.

In December, 1876, Huntington wrote that the January interest would
this time have to come out of earnings, as he had been away from New
York so much that he had not been able to secure loans there.[248]
The same month Huntington complained of certain pamphlets which one
A. A. Cohen had been sending East. “If the parties that inaugurate
such fights as we now have with Cohen,” he wrote, “and have with the
_Sacramento Union_ and Senator Booth ... had to raise money outside
of California, where our property cannot be seen, I am disposed to
think such fights would be few.”[249] In May, 1877, Huntington let
his partners know that reports from California to the effect that the
railroad magnates there were spending their money for personal expenses
with unexampled recklessness had hurt the Central Pacific credit.[250]
At another time he reported that the rumor was abroad that the Central
Pacific had no power under its charter to give notes for money, and
that this had been denied.[251]

All through 1877 the letters exchanged between Huntington and his
partners in the West show the strain which the Central Pacific was
under. Huntington was continually wiring for money in lots of $50,000
to $100,000. Colton was sending it, sometimes by telegraphic transfer,
sometimes in coin. As early as in May, 1877, Colton was talking of dull
business and of reducing expenses. On August 23 he said that he did
not exactly like the present financial outlook. The following day he
spoke of the need of keeping credit good. “We cannot afford to ever be
called on for money,” he wrote, “and not be able instantly to respond.
Our affairs are too extended and extensive for us to take any chances
of suspicion. It would hurt us in many ways, and take a long time to
restore confidence.... I will now commence to renew our loans for six
or twelve months, and take in sail everywhere.”[252] In September he
repeated, “I am going to send you, for the next three months, every
dollar I can, and, for God’s sake, keep all you can for the January
interest. That must be paid. We will not pay out a dollar here, I am
not obliged to. I read _every_ department a lecture on economy about
once a week.”[253] Earlier in the year the accounts of the Huntington
group with the London and San Francisco Bank and with the Bank of
California had been overdrawn from $150,000 to $350,000 each, and
Colton was picking up every dollar outside which he could secure
without showing his hand.[254]


Indorsement of Notes

As a general practice the associates seem to have refused to put their
personal indorsement on the notes which they discounted. Huntington was
very insistent that no indorsements be given; yet in January, 1878,
conditions had grown so bad that Huntington asked the associates to
indorse 100 blank notes and send them to him, to be used as a last
resort, and this was done in spite of the violent protest of Mark
Hopkins. Colton wrote Huntington:

 I told him [Hopkins] I felt the wise thing for us _all_ to do, was to
 stand in and protect all interests against the debts now owing, but to
 _all_ agree _not to incur any more, not to build any_ more road, or
 to buy _any_ steamship, or property, either jointly or individually,
 until we got out of debt, and had the money in bank to pay for what
 we bought. That proposition just met his views, and he said that if I
 would agree that we would _all_ live up to that, he would sign 20 of
 the blank notes, which he did, 10 of each.[255]

[Illustration: Mark Hopkins]

Conditions in California grew worse rather than better after the notes
were sent, but those in the East improved, and the indorsed notes do
not seem to have been used. Yet, of course, the large accumulation
of floating indebtedness of the Central Pacific could not be hidden
altogether, and the credit of the company was correspondingly
impaired.[256]


Sale of Securities

The first successful negotiations for the sale of Central Pacific and
Southern Pacific securities were initiated in 1878 with the firm of
Speyer and Company, of New York, and resulted in two agreements, dated
the 27th and 28th of January, 1880, respectively. On the former date
Huntington agreed to deliver, on or before January 31, 1880, as might
be demanded, 50,000 shares of the capital stock of the Central Pacific
Railroad at 72, ex-dividend, to Roswell P. Flower, John D. Prince, and
Daniel Probst, representing a syndicate formed for the purpose. In
case the parties took the stock just referred to, Huntington agreed
further to deliver 50,000 more shares within six months from the date
of the agreement, at 77. In any event, and provided that the syndicate
took the first 50,000 shares mentioned in the agreement, Huntington
undertook that no other Central Pacific stock beyond a stipulated
amount of 40,000 shares should be sold to any other parties for a
period of seven months from the date of the agreement.[257]

The syndicate which took Central Pacific stock at this time seems
to have considered the enterprise a speculation justified by the
resumption of dividends by the company, and by the improving stock
market conditions of the time. Mr. Probst said that the general market
had become so strong in the latter part of 1879 that it was a good time
to sell anything.[258] On conclusion of the agreement a regular stock
market campaign was opened with the usual accompaniment of matched
sales to give an appearance of activity.[259] The stock nevertheless
steadily declined, and the option held by the syndicate to take a
second block of shares was not exercised.

The day after the arrangement for the purchase of the Central Pacific
stock was concluded, and partly because of its conclusion, Speyer and
Company entered into a written contract with the Western Development
Company, containing a variety of provisions which together show the
factors upon which the value of Southern Pacific securities then
depended in the eyes of eastern bankers. Under an agreement dated
January 28, the Western Development Company agreed to sell to Speyer
and Company $1,000,000 in Southern Pacific bonds, within ten days,
at 86. Within the year it undertook, in addition, to sell, if Speyer
and Company should wish to buy, an additional $4,000,000 in bonds, at
87.51, and a still further amount of $5,000,000 at 90. On their part,
the Western Development and Southern Pacific companies agreed not to
sell any of the said bonds within a year to others than Speyer and
Company, and the Central Pacific agreed not to issue bonds under the
mortgage in question, to exceed $40,000 per mile.


Terms of Contract with Bankers

The more important features of the agreement with Speyer and Company in
1878 were, however, the following, relating to the lease arrangements
between the Central Pacific and the Southern Pacific. Under these
provisions the Southern Pacific agreed to secure a new lease from the
Central Pacific within three months, containing (1) a provision that
the lease should continue five years from the 1st of May, 1879; (2)
a provision that the lease should be extended if the Southern Pacific
was not connected with the eastern system of railroads, on the 32d
parallel, within five years, until such connection should be made,
provided that the extension of time should not exceed five years; and
(3) a provision that the Central Pacific should pay a rental under the
lease, sufficient to cover interest.

The Southern Pacific also agreed with Speyer and Company that if at
any time before the expiration of nine years from the date of the
lease contemplated, a railroad should be extended so as to connect
the railroad of the party of the first part with the eastern system
of roads, and the Central Pacific Railroad Company should refuse to
prorate with the party of the first part, then the party of the first
part would, before the expiration of one year from the date of such
refusal, fill up or cause to be filled up one of the two gaps then
unfinished between Tres Pinos and Huron, and between Soledad and near
Lerdo, whichever it might choose to build.

The Southern Pacific finally undertook to furnish to the parties of the
third part, within ninety days from the execution of the agreement, the
written opinion and certificate of the chief engineer of the Southern
Pacific, that the line of road either between Tres Pinos and Huron or
between Soledad and near Lerdo could be completed and put in running
order within twelve months of the commencement of work thereon, and
could be constructed for the bonds reserved per mile.

The stipulation in the agreements relating to the lease of the Southern
Pacific to the Central Pacific, and those anticipating further
construction along the coast route, are of special interest. It is
evident that the credit of the Central Pacific and not that of the
Southern Pacific was the basis of the whole transaction. At the time
the contract was signed, the option to take Southern Pacific bonds at
86 and 90, respectively, was considered valuable, but in fact this
option was not exercised.


Later Improvement

After 1880 financial conditions generally improved. The earnings
of the Central Pacific-Southern Pacific roads were still subject
to fluctuations, but for several years substantial dividends were
declared, and the sale of large quantities of Central Pacific stock in
Europe enabled the associates to reduce their commitments. Moreover,
by 1883 the long delayed extension to The Needles was completed and
the necessary outlay for new construction was greatly lessened. The
year 1883 may be taken as the close of the construction period of the
Huntington system. Henceforth, in the absence of special disaster, and
subject to successful settlement of its indebtedness to the government,
the solvency of the Central Pacific and Southern Pacific railroads may
be said to have been assured. We may therefore at this point turn away
from the more personal and financial aspects of the enterprise, to the
consideration of certain important political matters with which the
associates were long concerned.




CHAPTER XI

THE RAILROAD COMMISSION OF 1880 TO 1883


Early Agitation Against Company

It is more difficult to describe the relations of the Central Pacific
to the legislative bodies of California than it is to trace the history
of the system in most other respects, because the details are less
matters of public record. Some connection between the railroad and
politics undoubtedly existed at an early date. Indeed, Stanford and
Colton were politicians before they became railroad men, and the state
and local aid which the railroad secured at the very beginning of its
construction but confirmed an attitude favorable to continued relations
between the corporation and the body politic which these gentlemen
might have been expected to approve.

Before 1876, the only regulation which the associates had to encounter
was that resulting from the general railroad law, which required a
minimum subscription before a railroad corporation could commence
business, established proportionate liability of stockholders, and
reserved to the legislature the right to reduce rates when the net
income of any company exceeded 20 per cent. These and other provisions
of like tenor were little calculated to interfere with the profitable
operations of a railroad business except perhaps that the proportionate
liability established by the law to some extent discouraged
participation in railroad enterprise. In 1874 and in 1876, maximum
rates and fare enactments were discussed in the legislature but failed
of passage. In 1876, nevertheless, the accumulated resentment of the
California public over what it considered the grasping and monopolistic
policy of a selfish corporation led to important additions to the law.
This resentment had been growing for several years. The Sacramento
reporter for the _San Francisco Bulletin_ wrote, in March, 1868:

 There is a strong prejudice existing here and daily growing stronger,
 against the Central Pacific Railroad Company. The members from Placer,
 Nevada, and El Dorado counties are all of them, I suppose, pledged to
 endeavor to obtain a reduction of the rates of freight and fare on
 the line. Petitions, apparently signed by nearly all the residents of
 the districts which use the road for the transportation of freight
 and travel, have poured in upon the legislature, asking a reduction
 of prices. It is said that traders who complain of the rates are
 discriminated against. A general feeling exists that, considering
 how liberally it has been dealt with by Congress and the State, the
 management of the business and affairs of the company is extremely
 illiberal....

In like vein the _Stockton Independent_ said of the owners of the
Central Pacific in 1871:

 No set of men on the face of the globe were ever placed in a more
 enviable position, or in one where by the exercise of a reasonable
 foresight, they could have retained their popularity and the
 friendship of the people. It is now hardly two years since this work
 was completed, and how remarkable has been the change in public
 sentiment. Along the whole line of their main trunk road from San
 Francisco to Ogden, as well as along the various branch roads of this
 company, nothing is heard but one continuous murmur of complaint, and
 it is safe to assert that this shortsighted, illiberal, and suicidal
 policy of the company has so completely changed the sentiment of the
 people that there is not in a single town on any of their lines of
 road, either in this state or Nevada, one individual who approves of
 this course, nor one who will speak well of the company, unless it be
 one of their subsidized agents or strikers.


Beginnings of State Regulation

It is not necessary to dwell at this point on the reasons for the
opinions voiced in these extracts from the press. The feeling of
the general public, of which these extracts are the reflection, was
doubtless due in part to anger at the methods employed by the Central
Pacific in promoting subsidy legislation, in part to disappointment
over the results of railroad construction, and in part to reaction
against policies of the Central Pacific such as have been outlined in
previous chapters. However this may be, the result was the passage of
the so-called O’Connor bill in 1876, which erected a State Board of
Transportation Commissioners, and defined and prohibited extortion
and unjust discrimination. The commissioners were not only to enforce
these prohibitions, but they were given extensive authority to secure
information from the steam railroads of the state, and were charged
with the duty of supervising all such railroads with reference to the
security and accommodation of the public.[260]

It appears from the report of the commissioners appointed under the
O’Connor Act that the railroads in California, and in particular
the Central Pacific, refused to render the reports required by the
legislature, and that the commission was unable to compel them to do
so.[261] Two years later the commissioners were legislated out of
office, and a single commissioner was appointed in their place, acting
under a statute similar in most important respects to that administered
by his predecessors.[262] Mr. Tuttle, the new commissioner, accumulated
certain statistics during his two-year term of office, but otherwise
did little to which the railroads could object.

The development of railroad regulation was thus temporarily arrested.
Yet for several reasons the check to the progress of public control
was not lasting. Feeling in the state was running high. The times
were hard, both for reasons affecting the whole country, and because
of circumstances peculiar to the Pacific Coast. The rainfall of the
winter of 1876-77 was slight and, as happens in such cases, great loss
of cattle on the ranges occurred, and the grain crop was seriously
deficient. At the same time the yield of the Nevada silver mines
declined—in fact the dividends of the important Consolidated Virginia
mine stopped altogether in January, 1877, to the great disturbance of
the stock market at San Francisco. Under these conditions unemployment
and suffering were the experience of the working classes, while
riots and later, political agitation also resulted. Even the radical
labor leader, Dennis Kearney, in spite of his lack of character and
self-restraint, or even of unusual mental ability, served as the
temporary expression at this time of a real distress, and had some
influence on the course of legislation.


Railroad Question in Constitutional Convention

So far as the railroads were concerned, the effect of the unrest
throughout California and the activity of the Workingman’s party is
seen in the railroad clauses of the Constitution of 1879, and of the
Act of 1880, which carried them into effect. The call for a convention
was issued by the same legislature which passed the railroad control
bill of 1878.[263] Mr. Colton thought the call most unfortunate,[264]
but there is no reason to suppose that the legislature had anything
particularly radical in mind.

When the convention began its sessions, however, its membership
was found to include a majority of persons determined to force
thoroughgoing regulation upon the railroad system of the state, as
well as a minority opposed to government control of any kind. Just how
regulation should be made effective, it is true, few members of the
first-named group knew. Some were opposed to corporations as a class,
and thought that at least unlimited liability should be imposed on
holders of corporate stock. Others were in favor of declaring railroads
public highways, upon which all persons should be allowed to run cars
and locomotives under such regulations as might be prescribed by law.
Still others desired to set a maximum limit of 10 per cent to the
return on investment in railroad property. The extreme position on
the other side was taken by men like McFarland, of Sacramento, who
maintained that the clamor about railroads and corporations was a mania
evolved from the inner consciousness of members of the convention, as
spiders spin their webs.

The discussion of railroad regulation by the Constitutional Convention
of 1879 began on November 18 and ended on December 7. It was
systematically conducted, participated in by men with a wide variety
of views, and resulted in constructive conclusions of importance. More
could scarcely be asked of a deliberative assembly. The main decisions
reached were as given below.


New Regulative Commission

The first conclusion of the Constitutional Convention was that the
regulation of railroads in California should be entrusted to an
elective commission, holding office for four years, and vested with
the power to establish and publish rates, to examine the books and
records of transportation companies, and to prescribe a uniform system
of accounts. Heavy penalties, including fine and imprisonment, were
provided for failure to obey the orders the commissioners might make.

The principal objection made to the establishment of a commission
was that its power would be excessive. It was pointed out that
the commission would combine legislative, judicial, and executive
functions, and that its members could lower rates and increase railroad
expenses at will. Mr. Wilson, of San Francisco, declared:

 Here, then, will stand in our government a constitutional triumvirate
 as great in many respects as that of Rome in the olden time. They may
 raise and lower the rates of freight and fare to suit their powers,
 and thus they can play with the value of the stock in the market,
 and determine the value of the bonds and mortgages on the road....
 They will be sole judges of what are abuses.... They will determine
 complaints on their own notions of right and wrong, and however
 erroneous or malicious their acts, there will be no remedy or appeal.

Reference was made to the English Railway Commission of 1873 and to the
Massachusetts Commission of 1869, and the Wisconsin experiment of 1874
was held up as something to avoid. The reply to this kind of objection
was that the power to control rates must be lodged somewhere, and that
the legislature was inexpert, slow to act, and subject to corrupt
influences.


Other Constitutional Provisions

The second decision of the convention was that a general prohibition
of discrimination should be placed in the fundamental law. The
clauses finally adopted provided that no discrimination in charges
or facilities for transportation should be made by any railroad or
other transportation company between places or persons, or in the
facilities for the transportation of the same classes of freight or
passengers within the state, or coming from or going to any other
state. In addition to this general prohibition, it was enacted that
persons and property transported over any railroad, or by any other
transportation company or individual, should be delivered at any
station at charges not exceeding the charges for the transportation
of persons and property of the same class, in the same direction, to
any more distant station. This amounted to a stringent prohibition of
greater charges for shorter than for longer hauls. Speakers opposed to
the discriminative clauses insisted that only unjust discrimination,
not all discrimination, should be prohibited, and pointed out that
the proposed law was unconstitutional in that it applied to commerce
between the states. Neither objection was sufficient to persuade the
convention that the proposals should not be approved.

Besides the fundamental clauses relating to a commission and those
prohibiting and defining discrimination, the Constitutional Convention
of 1879 forbade railroads to grant passes to persons holding any office
of honor, trust, or profit in the state; forbade them also to agree to
divide earnings with owners of vessels entering or leaving the state,
or, under certain conditions, with other common carriers; granted to
all railroads the right to connect with, intersect, or cross other
railroads; and provided that no officer or employee of any railroad
or canal company should be interested in the furnishing of material
or supplies to such company. One apparently important clause declared
that a railroad which should lower its rates of fare or freight for the
purpose of competing with any other common carrier, should not again
raise these rates without the consent of the governmental authority in
which should be vested the power to regulate fares and freights.


Act of 1880

Special emphasis should be placed upon the constitutional provisions
adopted in 1879 because they created the framework upon which railroad
regulation in California was to hang for thirty years. For a full
understanding of the system the act of the legislature approved April
15, 1880, should also be consulted. This act defined certain terms
used in the law. It also fixed the salary of the commissioners at
$4,000 each, provided a mechanism for enforcement of the commissioners’
orders through the courts, placed the office of the board in the city
of San Francisco, and required rates established by the commission
to be posted in all offices, station houses, warehouses, and landing
offices to or from which the rates applied. Finally, it granted to the
commission, in general terms, all the necessary means and the authority
to adopt any suitable procedure to make effective the powers conferred
by the Constitution.[265]

Harvey S. Brown, attorney for the Stanford interests, once said
that the Constitution of the state of California was conceived in
communistic malice, was framed by unpardonable ignorance, adopted in
frenzied madness, and was valuable only as a beacon to other states and
peoples to avoid its principles and results.[266]

The document certainly compelled the associates to consider the best
method of defence against a political attack which threatened to
sterilize the monopoly control which they were slowly establishing over
the railroad system of the state. From their point of view the danger
was like any other—one to be met by skilful strategy, displayed in a
new field, but resembling in impelling motive and essential character
their action in adjusting rates and in dominating the terminal
situation on San Francisco Bay.


Personnel of First Commission

According to the Constitution, one railroad commissioner was to be
elected from each of three districts into which the state was to
be divided. Elections were held in 1880, and J. S. Cone, C. J.
Beerstecher, and George B. Stoneman were returned. Cone was a ranch
owner, business man, and capitalist at Red Bluff, with an income of
$50,000 a year, and property worth perhaps $200,000. He had been
on friendly terms with Stanford before he became commissioner, and
had known most of the prominent railroad officials of the state for
twenty-five years. By association and point of view he represented the
interests of large business in the state. Stoneman was a politician of
the better type, later governor of the state, a Democrat, and believed
to be a defender of the public interest.[267]

The third member of the commission was C. J. Beerstecher, a San
Francisco lawyer with a miscellaneous practice amounting to perhaps
$50 a month. Judge Lawler, of the Superior Court of San Francisco,
who knew Beerstecher well, says that he came to San Francisco, with
nothing but a gripsack, and built up a small practice, mainly divorce
suits, among the poorer classes in the city. For some time Beerstecher
used Lawler’s office, living in rooms in the same building, for which
he paid $15 a month; Lawler befriended him, and a man named Steinman
advanced him money for electioneering expenses. In return for this,
apparently, Steinman was later made bailiff to the railroad commission.
That is to say, Beerstecher was poor, with no reputation to lose, and
in circumstances in which his good-will had value.

One would scarcely expect effective regulation of a commission composed
of a wealthy farmer, a cheap lawyer, and a man who looked to a career
in the public service. Nor was such regulation in fact secured.
Stoneman once told Judge Reagan, of Texas, that when the California
commissioners were elected, he, Stoneman, was elected because it
was understood that he represented the popular interests; another
gentleman (J. S. Cone) was elected because it was understood that he
represented the feeling of the corporations, and a third (Beerstecher)
was a sand-lot man. He added that, having the sand-lot man with him to
take care of the interests of the people, he thought he was all right,
but in a short time the sand-lot man sold out and did not amount to
anything.[268] Cone also considered Beerstecher a reliable pro-railroad
man. There is no direct evidence that Beerstecher accepted railroad
money, but the probabilities are strong. Before discussing this point,
however, the activities of the new commission may be briefly described.


Indifference of Commissioners

The evidence shows that from the very first the three members of the
California commission devoted but a small portion of their time to the
work of regulation. Mr. Beerstecher was accustomed to visit his office
twice a day, spending perhaps an hour there each time. This was while
Beerstecher was a resident of San Francisco. In the latter part of his
term he lived in the Napa Valley and probably spent even less time
on his official duties. Nor did Beerstecher compare unfavorably with
his fellow appointees in application to his work. Governor Stoneman
devoted five or six days a month to affairs of the commission; Mr.
Cone about the same. Of 127 meetings held by the board between May 3,
1880, and January 8, 1883, Cone was present at 99, Stoneham at 80, and
Beerstecher at 109.[269]

It seems beyond belief that a new commission, established to initiate
public control of a great industry, should have approached the problem
in this indifferent way. The undertaking called for the fullest
exercise of the powers of all the commission’s members; but it was
approached as a casual task to be accomplished in the spare hours of
busy men.

As a natural result of their attitude with respect to the importance
and urgency of railroad regulation, the commissioners failed to
make effective the most primary requirements of the law. Instead of
preparing new rates except as hereinafter stated, the commission
established the existing rates of the companies operating in the state.
Instead of prescribing a system of keeping accounts, the existing
system was adopted. Mr. Stoneman once tried to investigate the railroad
books, but said they were all Greek to him, and he had no authority
to employ an expert. Beerstecher testified that the commission asked
certain questions, but that he did not, as an individual commissioner,
consider that it was his business to go prying around into the business
of the railroad companies.[270]

Some slight attention was paid to the posting of rates, but the only
inspection seems to have been by the bailiff of the commission.
Doubtless the original cause for the failure of the commission in the
respects mentioned was lack of money; but it was for the members to
formulate boldly their ideas of what should be done, and to educate
public opinion as to its necessity, making use meanwhile of all
the authority which they could wield. It was gross negligence and
indifference to rest content while the law stood unenforced.


Adoption of First Rate Schedule

The largest task eventually undertaken by the commission was the
formulation of rate schedules for passengers and freight. During the
spring and summer of 1880, the commissioners traveled through the state
taking testimony and hearing complaints. In the winter and spring of
1880-81, they attempted to formulate results. It appears that in May,
1880, Stoneman introduced a resolution to the effect that maximum
rates in California should not exceed five cents per ton per mile
for distances 100 miles and over, and six cents per ton per mile for
distances under 100 miles, and that maximum fares should not exceed
four cents and five cents per mile within the same limitations. This
was defeated by a vote of two to one. Nothing was done between this
time and February, 1881, when the board unanimously adopted a schedule
of passenger fares with maxima varying from five cents to three cents
per mile.[271]

At the same time that the passenger schedule was introduced Mr. Cone
submitted a freight tariff, which was also adopted. This schedule cut
rates mainly on agricultural products originating in the northern
part of the state. Stoneman objected to it—but later said that he
did not prepare an alternative schedule because he knew it would not
be adopted. He did, however, call the attention of the board to the
fact that southern California was being discriminated against.[272]
Beerstecher had no part in the preparation of the new rates, but made
no opposition to them.


Delay in Enforcement

Armed with the new passenger and freight schedules, Mr. Cone went over
to the Southern Pacific offices and left the figures with Mr. Towne,
general manager, for comment. The railroad people at once objected.
They said they were building the Southern Pacific and selling bonds
to raise the money. The proposed reductions would injure their credit
and could not be accepted. Cone was anxious to avoid litigation and to
get quick action.[273] Moreover, Stanford wished to get away and go
to Europe, and Cone did not like to keep him. As Cone said in another
connection, Stanford was pretty winning in his ways. The result was
that the railroad agreed not to contest the new freight rates and Cone
consented not to press the reduction in passenger rates, at least not
until October, 1881. There is no evidence that Cone possessed authority
from the commission to negotiate with the Central Pacific, but he
seems to have acted in confidence that Beerstecher would support him
in action favorable to the railroad and Stoneman in action of contrary
tenor.

[Illustration: George Stoneman]

As a matter of fact the board did not take further action in regulation
of passenger fares until August, 1882, a year and a half after
the question had first been raised. By this time Cone had become
convinced, so he says, that Stanford would concede no further reduction
in railroad charges. On the 15th of August, Stoneman accordingly
reintroduced his original passenger schedule, but slightly changed.
The matter was laid over for a month, and in September, at a meeting
at which only Cone and Stoneman were present, a substitute resolution
was adopted, setting a maximum fare of four cents per mile. Stoneman
thought the maximum should be three cents, but Cone would not consent.
The new maxima were suspended in October “until further order of the
board” in order to give the railroad companies an opportunity to be
heard. Before the commission came together again, however, Stoneman
had resigned. This left Beerstecher and Cone—with two as a quorum. It
is eloquent of Beerstecher’s attitude that he attended no meeting of
the board after November 22, 1882, and that on that day his action in
respect to passenger rates was to move to postpone consideration.

In two years and seven months the only reductions in rates and fares
secured by the Railroad Commission were certain cuts in the rates on
products of agriculture conceded to the farmer member of the commission
by his railroad friends. The commission formulated no principles and
worked out no effective procedure. Even its reports to the legislature
had little value. The first two were prepared by Mr. Beerstecher, the
third by Mr. Tuttle, former railroad commissioner but no longer in any
official way connected with regulation work. When the commission was
not unanimous in its decisions, the division usually was that of Cone
and Beerstecher against Stoneman—a fact which leads us back to the
question of the nature of the influence which the Stanford group was
able to exert.


Bribery Committed

The charge is made that the Central Pacific bought and paid for
Beerstecher’s services while a member of the Railroad Commission, and
that Cone was so influenced by his personal and business relations
with the managers of the Central Pacific as to be unable to view
their activities in the critical and impartial way which his position
demanded. The evidence in the case is purely circumstantial, but
seems to be convincing. So far as the former is concerned we have the
admitted fact that Beerstecher was richer at the end of his term of
office than at the beginning by at least $12,000 and probably by a
good deal more. As he put it, he thought he saved his entire salary of
$4,000 a year as commissioner, during these years. Beerstecher asserted
incidentally that his legal practice while a member of the Railroad
Board amounted to from $1,200 to $1,500 a year—although the records
of the Superior Court of San Francisco, before which Beerstecher
practiced, show that this was highly unlikely,[274] and the testimony
of the bailiff to the commission is directly to the contrary. $12,000
may be regarded as adequate compensation for a man of Beerstecher’s
type.[275]


Gerke Transaction

Cone’s case is not quite so simple. It seems unlikely that a man of
his standing should have consciously accepted a bribe. There is,
however, direct evidence of a reliable character that Cone was given
unusual consideration by the railroad in connection with the purchase
of certain lands in the northern part of the state, and Cone himself
admitted that while he was commissioner he had bought some lands from a
man named Gerke and had resold them within two or three months to the
treasurer of the Southern Pacific at a profit of $100,000.[276]

What happened in the first of these two instances was this: It seems
that there was a tract of about 34,000 acres of the Oregon grant of
the Central Pacific lying east of Cone’s ranch—rough, chapparal land,
graded at from 50 cents to $2.50 an acre. Cone was running about 20,000
sheep at the time, and was using the land without paying for it, as
certain other individuals were also doing. Among these other persons
was a man named Wilson, who was not only a small sheep owner, but an
actual settler as well. Wilson originally applied to purchase from
5,000 to 7,000 acres of the tract, and was quoted the first graded
price, $1.25 to $2.50 an acre. At this quotation he took some land that
had water on it, but in general could not afford to buy. Later the land
was regraded, and Redding, the Central Pacific land agent, told Wilson
that the regrade price was 50 cents. A few months after, in June, 1881,
Wilson applied to purchase, although he believed that the application
was unimportant, since as a settler he was entitled to second grade. He
had the land fenced by this time.

Meanwhile, on the 21st of April, 1880, Cone had negotiated with the
Central Pacific for a tract of 34,097.45 acres, including the land in
which Wilson was interested. He did not offer to purchase, but asked
to have the lands that were free reserved for him, that he might
ascertain the bounds of his range. In fact, when the statement of the
cost of the lands was made out for him he refused to take them at
the graded price, and abruptly left the Central Pacific land office,
exhibiting considerable ill feeling. This was the situation when Wilson
applied. Properly considered, Wilson seems to have been entitled to
purchase at the new price. His application was subsequent to Cone’s
conference with the Central Pacific land commissioner, but Cone had
then refused to pay the price asked, which left the lands open. The
Central Pacific, however, through Mr. Redding, its agent, refused to
sell. Mr. Redding later said:

 When Mr. Wilson demanded a right to purchase a portion of these lands
 because Mr. Cone had bargained for them and then refused to take them,
 I told Mr. Wilson the circumstances and said to him that Mr. Cone had
 refused under so great an exhibition of temper that it was my duty
 to wait until Mr. Cone became more calm. I also added that the new
 Constitution and the people had given Mr. Cone and his associates
 powers that were more extensive than those of the Czar of Russia; that
 he and his associates could virtually confiscate the property of the
 stockholders of the railroad company, and that I could not afford to
 add to a quarrel which by any possibility might be construed into an
 excuse for unjust action.

The result was that Wilson hunted up Cone and tried to get a
relinquishment. Cone offered to let Wilson have the land at the graded
price—the first graded price, as Wilson understood it. This offer
was naturally refused, and Cone subsequently bought the whole tract
for $29,199.67. Although the facts are somewhat complicated, it seems
clear that Mr. Cone received special treatment, due to his position as
railroad commissioner.

Of the Gerke transaction, Cone testified:

 I would say that the ranch was held under a deed of trust, and parties
 were foreclosing it, and at the time I bought it it would have been
 sold under a deed of trust in fourteen days, and the party came to me
 and asked what I would pay for it and I didn’t dream they intended to
 sell it because I didn’t know the condition the land was in, and they
 insisted on my making an offer that day for it. I made an offer and it
 was accepted.

 _Mr. Storke_: What was your profit on that transaction?

 _A._ I think in the neighborhood of one hundred thousand dollars, and
 the worst trade I ever made when I sold it.


Finding of Legislative Committee

Dealings of this kind were improper, to say the least, and calculated
to interfere with the impartial discharge of a commissioner’s duties.
On the whole subject a committee of the California legislature reported
as follows:

 As to the second subject of inquiry, whether the Commissioners,
 or either of them, during their term of office, may have made any
 extraordinary acquisition of property ... your committee report
 that in their opinion Commissioner Stoneman did not make any
 extraordinary acquisition of property; that Commissioner Cone made a
 large acquisition to his wealth, which was already great when he was
 elected Railroad Commissioner, and your committee believe that such
 acquisition of wealth was largely due to extraordinary and unusual
 facilities afforded by the railroad officers; and that Commissioner
 Cone, in the purchase of thirty-four thousand acres of land for
 twenty-nine thousand dollars, was made a privileged purchaser, and
 received from the railroad company facilities in this regard denied
 to other applicants for portions of the tract; and further, that the
 transaction by which the Gerke farm was purchased by Commissioner Cone
 in April, 1881, and sold in September of the same year to Nicholas
 Smith, the Treasurer of the Southern Pacific Railroad Company, at a
 profit of one hundred thousand dollars, gives rise to the suspicion
 that more was contemplated in the purchase and sale than appears on
 the face of the transaction. As to Commissioner Beerstecher, your
 committee find that by general report, and in the opinion of his
 associates, he was without means at the time of his election, and his
 sudden acquisition of wealth while Commissioner was without adequate
 explanation....

 As to the fourth subject of inquiry, your committee report that
 Commissioners Cone and Beerstecher knew of and permitted both
 systematic and casual discrimination in charges and facilities for
 transportation between persons and places by railroad corporations in
 this State, and that through their conduct in permitting and upholding
 the same, Commissioner Stoneman was unable to accomplish a redress
 of such discriminations while Commissioner. Further, under this
 fourth subject of inquiry, your committee find that Commissioner Cone
 sacrificed the best interests of the State through personal friendship
 for Governor Stanford, and in return therefor received favors from
 him; and that Commissioner Beerstecher’s conduct admits of no other
 explanation than that he was bribed, and that in the opinion of this
 committee Commissioners Cone and Beerstecher acted in the interests of
 the railroad corporations rather than of the people.

This finding of the legislative committee is justified by the facts
elicited in their investigation.




CHAPTER XII

THE SOUTHERN PACIFIC AND POLITICS


Appeals to Public

We may now consider in a more general fashion the political methods
of the Southern Pacific group during the first thirty years of their
railroad history. We have seen that they not only relied upon the
talents of their legal staff in taking advantage of defects in the law,
but that in two cases—the case of the railroad commission of 1880, and
that of the subsidy in San Francisco in 1863—they probably resorted
to the direct use of money to accomplish their ends. Yet a whole state
cannot be bought, though individuals may be, and it would do injustice
to the breadth of view of the associates to suppose that they limited
themselves to any such crude device. Indeed, the frequency with which
money bribes were offered probably diminished as time went on.

Consideration of the general policies of Mr. Stanford and of Mr.
Huntington seems to show that they met the public demand for regulation
of rates and fares in no less than five distinct ways.

The first method consisted of appeals to the general public through
testimony before legislative committees, communications to the
newspapers, letters to private organizations which interested
themselves in the government control of corporations, and other
similar devices. By these various means Stanford, at least, spread his
philosophy of industry widely abroad. He took the general position that
agitation upon the subject of railroads was due to misapprehension of
the facts. Most alleged abuses were imaginary, but the Central Pacific
stood ready to correct any that were shown to exist.[277] Railroad
fares and freights were cheaper in California than anywhere else in
the world, all things considered.[278] In case further reduction were
desired, the true policy was to place as few burdens upon the railroads
as possible, to encourage in this way new construction, and to rely
on competition for the desired result. The interests of the railroad
and of the public were the same.[279] Monopolies in the United States
were possible only to the extent that they were beneficent. There was
properly no right of control in the state. The Granger decisions of the
Supreme Court of the United States were a flagrant violation of the
principles of free government. If the people wanted to exercise control
over a railroad they must do as the state does when it exercises
the right of eminent domain; that is to say, they must pay to the
individual owners the full value of whatever was taken for public use.
Anything else was confiscation. Moreover, at best, regulation could
not be complete, because it could not ever compel the shipper to ship
equally over all lines, and because, while commerce was world-wide,
American governments could regulate but one link in the chain. In
California, regulation was peculiarly inexpedient so long as the
railway system of the state was incomplete.[280]


Huntington’s Views

Mr. Huntington shared Mr. Stanford’s views, or at least approved the
conclusion to which they led, but does not seem to have courted the
same publicity in respect to the matter. Interviews he distrusted. “I
notice,” he wrote in 1875, “that some correspondent of a San Diego
paper has been interviewing Mr. Crocker. It is very difficult for any
one to be interviewed by an infernal newspaper without getting hurt;
and Mr. Crocker is not the most unlikely to get hurt of all the men I
know.”

Yet in spite of this attitude towards the newspaper reporter,
Huntington had a keen appreciation of the importance of shaping public
opinion, and was familiar with the ordinary devices used for the
purpose, including the manipulation of the press. He was concerned over
the attitude of the _Sacramento Record Union_. “If I owned the paper,”
he said, “I would control it or burn it.”[281] “I wish you would have
it sent over the wires as often as you can that the Southern Pacific
is being rapidly built,” he wrote Colton from New York in 1877.[282]
Again, “Yours of November 28 with Northern Pacific clips is received.
Many of the articles are very good. It is much better that all such
articles with petitions be sent direct to members of the Senate and
House, we keeping in the background as much as possible.”[283]

In November, 1875, Huntington wrote Colton that:

 Gwynn left for the South yesterday. I think he can do us considerable
 good if he sticks for his hard money and anti-subsidy schemes; but if
 it was understood by the public that he was here in our interest, it
 would no doubt hurt us. When he left I told him he must not write to
 me, but when he wanted I should know his whereabouts, etc., to write
 to R. T. Colburn of Elizabeth, New Jersey.[284]


Influential Individuals Favored

A second method employed by the associates in their efforts to oppose
public regulation of corporate affairs was that of paying personal
attention to men who possessed or were believed to possess influence.
In its simplest form this involved the employment at liberal salaries
of the ablest legal talent which could be found. The policy was,
however, pushed much further than the statement made would indicate.
Huntington’s letters to his associates in the West were full of
suggestions as to what should be done and of commendations for, or
criticism of, what had been accomplished.

In April, 1875, Huntington wrote Colton that he had given Dr.
Linderman, director of the United States Mint, a letter of introduction
to him, Colton, at San Francisco. This was because the location of
a new building for the Mint might be of importance to the Central
Pacific.[285] In October of the same year Huntington gave a pass to a
certain congressman and ex-governor, but warned Colton that the man
was a slippery fellow and should not be trusted too much.[286] Crocker
wrote to Colton in February, 1875:

 I fully appreciate your position there and need of ... a Senator of
 the United States. We tried to get him off sooner the best we knew. I
 think he did not want to go, and I fear when he gets there he will not
 be earnest in our interest as formerly. Stanford thinks I am mistaken
 and I hope I am.[287]

A letter dated July 26, 1876, shows that Huntington was trying to
get up a party of twenty-five southern members of Congress to visit
California over the Southern Pacific. He wanted none but the best
men—that is, men who would “go for the right as they understand it,
and not as Tom Scott[288] or somebody else understands it,” but he was
willing to pay the expenses of the trip for such men.[289] In order
to help persuade representative men to make this trip, Huntington
telegraphed Colton to have some of the prominent men in San Francisco
wire Senator Gordon, of Georgia, urging that the visit should be
made.[290] “I noticed you are looking after the State Railroad
Commission,” Huntington adds in another letter to the same address, “I
think it is time.”[291] Again:

 I am sorry to learn that the receipts are so very poor south of
 San Francisco, but it is a good time to take the State Railroad
 Commissioners over the roads. I am glad to notice that you are looking
 after the Commissioners. I think it very important.[292]

Still again, in May, 1877, Huntington wrote:

 I am glad you are paying some attention to General Taylor and Mr.
 Kasson. Taylor can do us much good in the South. I think, by the way,
 he would like to get some position with us in California. Mr. Kasson
 has always been our friend in Congress, and as he is a very able man,
 has been able to do us much good, and he has never lost us one dollar.
 I think I have written you before about Senator.... He may want to
 borrow some money, but we are so short this summer, I do not see how
 we can let him have any in California.[293]

Letters like these cover only one period and refer to the activity
of only three out of the five associates, but there is sufficient
outside evidence of a general nature to indicate that this policy was
systematically followed by the Stanford group.


Lobbying in Washington and Sacramento

In addition to the attempt in a general way to gain the good-will of
the public or of influential members of it, the Central Pacific was
regularly represented at Washington and Sacramento when legislation
was pending. Huntington, as has been said, took care of the company’s
affairs in Washington. He had offices in New York and Boston also,
and divided his time between the three places while Congress was
in session—four days in Washington, two in New York, and one in
Boston.[294] Stanford attended to matters in Sacramento, either in
person or through representatives such as William Carr or Stephen T.
Gage. The latter was also for many years the company’s agent in Nevada.
Both Huntington and Stanford, of course, were assisted by a corps of
lawyers and political aides-de-camp, some of whom were very highly
paid. General Franchot, for instance, Huntington’s chief assistant,
received at one time a salary of $20,000 a year, besides a liberal
expense account. Much criticism has been directed at the activity of
Central Pacific agents in the lobbies at Washington and Sacramento, but
a large portion of it was probably legitimate.


Correspondence from Washington

Certainly the watch which the associates kept on legislation was very
close. Huntington’s own activities in 1875, 1876, 1877, and 1878 are
vividly described in the letters which he wrote Colton during these
years, and some few of these deserve to be reproduced if only for
the picture they suggest of the man who wrote them. In March, 1875,
Huntington wrote:

 I notice a bill passed the House some few days since, called up by
 Williams of Michigan. I forget its title, but it called for reports,
 etc., etc., from the Pacific roads. Of course it was something ugly or
 it would not have passed.[295]

This was mere routine. By June, 1876, however, the legislative work had
increased. Mr. Huntington told Colton:

 There is a terrible fight kept up on us in Washington. But while they
 may bite us, they will not eat us up. Sherrell telegraphed me to come
 to Washington in great haste, as Lawrence was to pass his bill at
 once; so I went over and got the committee to recall it from the House
 back to the committee, so the demagogue from Ohio cannot trouble us
 before the 6th of July. In the meantime we will be working on our land
 proposition in the Senate. Just what we can do I cannot say, but I
 shall surely keep trying.[296]

The following month he added:

 I returned from Washington last night. Our matters look better there,
 but we are not out of danger. It has been so very hot here for the
 last few weeks that it has come near using me up. You know I do not
 spare myself when I have anything to do.[297]

In August, 1876, Huntington wrote Colton:

 I have thought I could stand anything, but I am fearful this damnation
 Congress will kill me. Senator Edmunds told another Senator yesterday
 that he would pass his Pacific Railroad Sinking Fund Bill before
 Congress adjourned, but I think he will not, and I have some hope
 Congress will adjourn by the time this reaches you.[298]

And in March, 1877, he was able to say:

 Congress has adjourned, and we have not been hurt, except by the
 paying out in Washington of some money for hotel bills, etc.

 I am quite sure that we stand better in Washington at this time than
 we ever did before.

 The Pacific Mail Steamship Co. got no aid. I will tell you some things
 about that some time. The Sinking Fund Bill did not pass, but is in a
 much better shape to pass than it has ever been before. I stayed in
 Washington two days to fix up the Railroad Committee in the Senate.
 Scott was there, working for the same thing, but I beat him for once
 certain, as the committee is just what we want it, which is a very
 important thing for us. You will no doubt notice before you get this
 that we were not able to pass the Texas-Pacific bill.[299]

The committee with which Huntington was so content was changed somewhat
later, much to his disgust.[300]

It was not until the first part of 1878, however, that his letters show
him again hard at work. In January, 1878, Huntington wrote to Colton:

 I notice what you write of the communists in the California
 Legislature, and am very sorry to know it, but the feeling in Congress
 is not much better, and yet, somehow, I do not think we shall be much
 hurt, although Scott is working hard and developing more strength than
 I supposed he had. He had the Railroad Committee of the House. I think
 we have it now.[301]

The following month he said:

 I returned from Washington last night, and I am as near used up
 as I ever was in my life before. I am spending my last winter at
 Washington. As I feel today, I would not agree to spend another there
 for all the property we all have. Our matters are looking fair in
 Washington, Scott is very bitter in the discussion. He used some
 business compliments and all such stuff, and I am compelled to play
 him; but it is very distasteful to me.[302]


This letter is followed in the record by a series of others of the same
tenor, which will be presented without comment.

 ... I have done all I can to prevent certain bills from being reached,
 and do not think any bills can be that will hurt us, but if there are,
 they will pass, as this Congress is, I think, the worst set of men
 that have ever been collected together since man was created.[303]

 I returned from Washington last night. I am almost happy to think
 I shall not be called there again this session, as Congress has
 adjourned its first session, and may the likes of it never meet again.
 I think in all the world’s history never before was such a wild set of
 demagogues honored by the name of Congress. We have been hurt some,
 but some of the worst bills have been defeated, but we cannot stand
 many such congresses.[304]

       *       *       *       *       *

 Friend Colton: I returned from Washington this morning and found on my
 desk yours of the 10th inst., No. 74. Thurman’s funding bill has not
 passed the House yet, but it will, I think, although I am endeavoring
 to get it to the Judiciary Committee. If I can I think we can get it
 amended, but even that is doubtful. There were some mistakes made by
 us when the bill was in the Senate; the greatest was in Gould going
 to Washington; but it is too long a story to write now. I will tell
 you when we meet, if we have nothing better to talk of. This Congress
 is nothing but an agrarian camp, the worst body of men that ever
 before got together in this country. Scott is making a hard fight
 on his Texas and Pacific bill. He has made a combination with the
 Northern Pacific, which will give him some strength, how much I cannot
 tell. The Northern Pacific are to ask for guarantee of their bonds
 by the United States. I shall come to California soon after Congress
 adjourns. Find some one to buy me out of everything there. I am tired
 and want to quit.[305]

       *       *       *       *       *

 ... I notice what you say of Thurman’s Sinking Fund Bill—of course it
 is bad, but if we could have amended it so as to make it a finality,
 and give us 6 per cent on the fund, it would not have been so bad. It
 may not pass, but I think it will for this is the worst Congress we
 have ever had; if it should, we must beat it in the courts, if we can.

 I go to Washington tonight; I should have gone last night, but for the
 reason that Clara has been quite sick for some days.

 Mr. Sherrell telegraphed me yesterday that I must not fail of being
 there this morning. I cannot attend to this Washington business much
 longer.[306]

 I returned from Washington last night. I hope to get through there
 without being hurt any more; but it seems as though every committee in
 both Houses had something before them that we had an interest in.[307]


Skilled Wire-Pulling

There is no need to comment in any detail upon these letters. Their
occasional indication of discouragement doubtless meant nothing more
than that Huntington sometimes grew tired and hot and angry with the
opposition which he encountered. A characteristic of the man was that
he never really gave up. The Thurman bill referred to will be described
in another connection.

Scott was a railroad man, at one time president of the Pennsylvania
Railroad, who was seeking to persuade Congress to subsidize a
transcontinental railway by the southern route. The land proposition
was a scheme of the associates to induce the federal legislature to
buy back a portion of the Central Pacific land grant at the government
price. As a whole, the letters so far quoted show that Huntington was a
persistent and energetic lobbyist, although the record of Congressional
legislation shows that he was far from uniformly successful.

[Illustration: C. P. Huntington]

On the whole, the railroad managers pulled wires with a skill which
rapidly increased with experience. Sometimes the company was made to
appear prominently, and sometimes it was kept in the background when
legislation was desired. Huntington found that some members of Congress
were disinclined to talk to him concerning Southern Pacific matters.
In such cases he had recourse to third parties—perhaps a constituent
of the member in question, perhaps a friend. The same methods were
employed in dealing with state legislation. In 1875 the Southern
Pacific desired a franchise permitting it to build through Arizona.
Huntington wrote Colton that he thought this would cost less if other
interests than the associates stood at the front while the franchises
were being obtained, but that after the charters were obtained it
should be known that they were controlled by the Southern Pacific.[308]
He said:

 I am inclined to believe that if you could get the right man on that
 line in Arizona to work with the few papers they have there, to
 agitate the question in the territory, asking that some arrangement be
 made with the S. P., at the same time offer the S. P. a charter in the
 territory that would free the road from taxation, and one that would
 not allow for any interference with rates until ten per cent interest
 was declared on the common stock, I believe the Legislature could be
 called together by _the people_ for $5,000 and such a charter granted.
 Then we would take the chances of having such a charter made good by
 Congress or the State when it became one.[309]

At one time Huntington even suggested that the Southern Pacific might
bear the expense of an extra session of the Arizona legislature
in order to hasten consideration of legislation favorable to the
company.[310] The desired legislation was eventually obtained, but not
until February, 1887.


Unethical Dealings

Did or did not the Huntington group, including Stanford at Sacramento
and Reno, and Huntington at Washington, employ improper means in
their endeavor to influence votes? This is another question upon the
answer to which much depends. That passes were issued to members of
the legislature, members of Congress, and judges of courts, and that
gentlemen of these types were entertained at dinner in Sacramento was
generally known. We have Mr. Gage’s statement, at least, that no more
than this took place in Nevada. He told the United States Pacific
Railway Commission of 1887, that his expenditures in that state over a
period of eight years had amounted to $2,000, and added:

 ... and I would like to produce to you the files of the newspapers in
 order to show the existence of the misapprehensions that existed among
 the good people of Nevada, as indicated by their press, concerning
 my relations with the legislature of Nevada, session after session
 for the sixteen years. I remarked yesterday that it was one of the
 greatest sources of regret that I had, the imputations which were
 cast on my character, and which I feel I have not deserved, and which
 I feel I may not live long enough to outgrow. One of these is that I
 have spent money in the Nevada legislature for the Central Pacific
 like water; and those things were constantly asserted, and I believe
 frequently believed by a good many good people in the State, but they
 were not true. As I asserted to you yesterday, I have kept an accurate
 account of the expenses for the first eight years that I was attending
 the sessions of the Nevada legislature, which included my personal
 expenses during that time, and they figure up $2,000, or a fraction
 under it, as it was. Now, if any one thinks that $2,000, or less,
 could corrupt a legislature for eight years, including the personal
 expenses of myself, he must invoice members of the Nevada legislature
 at a very low price, and “buy them by the string.”[311]

Mr. Gage would not say, however, when asked pointblank, whether or not
he had paid any money or made any provisions of advantage or reward to
any member of the legislature of California or Nevada.[312] Nor would
Mr. Stanford say more in reply to the inquiries of the United States
Pacific Railway Commission than that the company would not include in
any settlement with the United States, vouchers to which objections
were made.[313]

On the whole, there is a good deal of evidence that the owners of the
Central Pacific went further in influencing legislation than any
strict system of ethics would allow. Huntington once stated his own
position as follows:

 If you have to pay money to have the right thing done, it is only just
 and fair to do it.... If a man has the power to do great evil and
 won’t do right unless he is bribed to do it, I think the time spent
 will be gained when it is a man’s duty to go up and bribe the judge. A
 man that will cry out against them himself will also do these things
 himself. If there was none for it, I would not hesitate.[314]


Further Evidence

More important than the record of such general expressions of opinion
are the affidavits filed in the San Francisco subsidy litigation
described in an earlier chapter. Nor is anyone likely to read the
letters of Mr. Huntington to Mr. Colton in the late seventies without
becoming convinced that the possibility of purchasing votes was
constantly before Huntington’s mind. Huntington wrote Colton at one
time that the (Southern Pacific) company could not get legislation
unless it paid more than it was worth.[315] In another communication
he said: “If we pass the Sinking Fund Bill and beat Scott and the
Union Pacific, it will hurt us not less than half flora”;[316] and in
still another we find the cheery comment: “Matters do not look well in
Washington, but I think we shall not be much hurt, although the boys
are very hungry and it will cost considerably to be saved.”[317]

In November, 1877, Huntington wrote Colton:

 You have no idea how I am annoyed by this Washington business, and I
 must and will give it up after this session. If we are not hurt this
 session it will be because we pay much money to prevent it, and you
 know how hard it is to get it to pay for such purposes; and I do not
 see my way clear to get through here and pay the January interest
 with other bills payable to January 1st, with less than $2,000,000,
 and possibly not for that.... I think Congress will try very hard to
 pass some kind of a bill to make us commence paying on what we owe the
 Government. I am striving very hard to get a bill in such a shape that
 we can accept it, as this Washington business will kill me yet if I
 have to continue the fight from year to year, and then every year the
 fight grows more and more expensive; and rather than let it continue
 as it is from year to year, as it is, I would rather they take the
 road and be done with it.[318]

In one case where the salary to be paid a certain individual was under
consideration, Huntington wrote Colton frankly that it was important
that the man’s friends in Washington should be on the railroad’s side,
and that if this could be brought about a salary of $10,000 to $20,000
a year would be worth while. Huntington wanted the man to make a
proposition in writing, however, that he would control his friends for
a fixed sum.[319] When asked about the meaning of his correspondence,
Huntington denied that these expressions had any vicious significance.
He said he kept on high ground,[320] and even objected to the free use
of liquor and cigars.[321] Specifically, he gave instructions to his
people never to use money in any immoral or illegal sense. “Buying
votes in a legislature was bad policy,” said he, and his position
in these matters received the formal support of Stanford. But such
assertions are entitled to less weight than Huntington’s less guarded
phrases.


Heavy General and Legal Expenses

There is no question that the control exercised by the Central Pacific
management over the legal and miscellaneous expenses of the company
was informal to the last degree. Huntington had a great deal of
money to spend and he turned it over to trusted agents without too
many questions. He would pay $5,000 or $10,000 at a time to General
Franchot, for instance, without inquiring where it went or how it
was paid.[322] Checks were made out in all cases to I. E. Gates, Mr.
Huntington’s assistant in New York, and were indorsed by him either
to payee or in blank.[323] Vouchers covering such items were made
out simply to “Expense,” or to “Legal expense.”[324] In many cases
expenditures authorized by Stanford, Crocker, or Huntington were
represented by no vouchers at all,[325] the filing of vouchers being
subsequently waived at stockholders’ meetings.

All in all, the general and legal expenses of the Central Pacific
between the years 1875 and 1885 averaged over $500,000 annually. The
only reply to the government inquiry as to what this money had been
paid out for was Stanford’s statement already quoted that vouchers to
which there were objections would not be included in any settlement
with the United States, but that the moneys would be treated as still
in the treasury.[326] This was plainly an evasion of the point at issue.


Company in Politics

Still another question is how far the headquarters of the Central
Pacific in the various capitals were used as agencies for the election
of legislators and other persons who owed their position to railroad
influence. It is the unhesitating popular judgment that the railroad
at an early date “entered politics.” In a long letter dated August
26, 1873, Eugene Casserly asserted that the Central Pacific aimed to
be and was a third party in the politics of the state, holding the
balance of power between the Democratic and the Republican parties, and
controlling or seeking to control at will each or both of them. “This
third party,” continued Mr. Casserly, “has the usual attributes of a
political party, the same apparatus and appliances. It has its leaders,
its managers, its editors, its orators, its adherents. It selects
these from both parties, but mostly from the party in the majority.
Whether they call themselves Republicans or Democrats, and however they
divide or contend on party issues, they move as one man in the cause of
the railroad against the people. To that cause they give their first
allegiance.”


Bassett Polemic

This statement of Mr. Casserly calls to mind another charge or series
of charges made by a man named J. M. Bassett in the years following
1892. Mr. Bassett was one of the early pioneers. He came to California
in 1851, and was at various times miner, printer, newspaper man,
railroad employee, and member of the Oakland city council. At one time
he was Leland Stanford’s secretary. After Mr. Stanford had been forced
out of the presidency of the Southern Pacific, Bassett began to publish
a series of open letters to Collis P. Huntington, and continued them
weekly, with occasional intervals, for several years. The sustained
vivacity and pungency of this polemic, and the systematic virulence
with which Bassett reviewed and criticized the Huntington policies make
the series a noteworthy journalistic achievement. Mr. Bassett denounced
Mr. Huntington for the overcapitalization of the Southern Pacific
system, for its failure to pay taxes, for its carelessness of the lives
of its employees and of the public, for its attempt to evade repayment
of the debt which it owed to the United States government, and for
the general mismanagement which, he asserted, had taken place under
Huntington’s control. With respect to the interference of the Southern
Pacific in politics, Bassett wrote to Huntington in 1895:

 What chief executive of the State, before the present incumbent,
 has there been who did not owe his nomination and election to the
 Southern Pacific Company and in acknowledgment of his debt hasten to
 obey its slightest command? Has there ever been a Board of Railroad
 Commissioners before last November in which you did not own at least
 two members? Have you not named every Harbor Commissioner appointed
 during the past twelve years?

 Have you not hitherto chosen San Francisco’s Police Commissions and
 do you not now exercise a dictatorial power over the city’s police,
 especially the Harbor Police? Were not the Judges of the two United
 States Courts in San Francisco appointed at the instance of Leland
 Stanford? How many Superior Courts are there in the State in which a
 citizen may bring an action against you in full confidence that he
 will be fairly and impartially dealt with? Doubtless there are such
 but the difficulty is to find them. Before the recent elections how
 long did you control the government of San Francisco? Have you not
 dictated the government of Oakland for the past twenty-five years?
 Until last election had you not continuous control of Alameda County’s
 government?...[327]

When one desires to test the accuracy of accusations like those of
Casserly and of Bassett, one has first to remember that they are in
accord with the substantially uncontradicted declarations of men
of all degrees of prominence in California over a period of fifty
years. Political campaigns have been waged on the question of the
railroad versus the people. Not only newspapers like the _Sacramento
Union_ and the _San Francisco Examiner_, but men like John T. Doyle,
at one time state railroad commissioner, General Howard, a leading
member of the Constitutional Convention of 1879, and H. H. Haight,
at one time governor of the state of California, have asserted that
railroad influence was a real and important factor in the politics of
California. While neither a corporation nor an individual can properly
be convicted on the strength of current report, the presence of so much
smoke, over so long a period, is fair evidence of some fire.


Documentary Evidence

Direct testimony relating to the political activity of the Huntington
group comes from Mr. Huntington himself in two ways. In the first
place there have been published certain letters which passed between
Huntington and his associate, Mr. Colton, in the years 1875 to 1878.
These documents have been referred to in other connections. They
came out in the course of court proceedings, and have the weight of
confidential communications, not intended for publication. Extracts
from these letters will presently be given. Besides this, certain
statements were given by Huntington to the press in 1890 which bear
directly upon the point at issue. These statements were intended to
discredit Stanford, but in the course of the heated controversy to
which they gave rise they were not denied by Stanford nor withdrawn by
their author.

On May 1, 1875, Huntington wrote Colton:

 I noticed what you say of Piper; he is a wild hog; don’t let him come
 back to Washington, but as the house is to be largely Democratic, and
 if he was to be defeated, likely it would be charged to us, hence,
 I should think it would be well to beat him with a Democrat; but I
 would defeat him anyway, and if he got the nomination put up another
 Democrat and run against him, and in that way elect a Republican. Beat
 him.[328]

Asked to whom the letter referred, Huntington later said that if he
remembered the person, and he thought he did, he was a man whose views
ran contrary to all human interests.[329]

A letter in June, 1876, reads as follows:

 I hope ... will be sent back to Congress. I think it would be a
 misfortune if he was not.... has not always been right, but he is
 a good fellow and is growing every day.... is always right, and it
 would be a misfortune to Cal. not to have him in Congress. Piper is a
 damned hog, and should not come back. It is shame enough for a great
 commercial city like San Francisco to send a scavenger like him to
 Congress once....[330]

Again, in November, 1876, Huntington wrote Colton:

 I hope ... is elected and ... defeated, as it was generally understood
 here that our hand was over one and under the other....[331]

A still later letter relates to the pending election of a senator from
California. Huntington said:

 We should be very careful to get a U. S. Senator from Cal. that will
 be disposed to use us fairly, and then have the power to help us ...,
 I think, will be friendly, and there is no man in the Senate that can
 push a measure further than he can.[332]


Controversy between Associates

The correspondence which has just been cited is not offered in order
to discredit Mr. Huntington, or for any reason except to show that
it was Huntington’s belief in the years 1875, 1876, and 1877 that
the influence of the Central Pacific should be used to advance the
political interests of persons favorably inclined toward his railroad
system and to discourage those in opposition. The personal controversy
which took place between Stanford and Huntington in 1890 brought
out some additional evidence of the same sort. This dispute arose
ostensibly because of the election of Stanford in 1883-84 as senator
from California in place of A. A. Sargent, one of Huntington’s friends.
In reality it was probably only the final outcome of a growing tension
between the two men, due to dissatisfaction on Huntington’s part with
the small amount of time which Stanford devoted to railroad affairs,
and perhaps to jealousy of the prominence which Stanford enjoyed in
public estimation.[333]

However this may be, Stanford resigned the presidency of the Southern
Pacific Company at the annual meeting of the stockholders on April 9,
1890, and Huntington was elected in his place. In his address to the
board of directors of the company, Huntington used the following words:

 Gentlemen, for the honor that you have done me in electing me
 President of the Southern Pacific Company ... I promise you that I
 will be as true to the interest of the company in the future as I have
 been in the past. I can promise you nothing more, for at all times my
 personal interest has been second to that of the company. It shall be
 so in the future, and in no case will I use this great corporation to
 advance my personal ambition at the expense of its owners, or put my
 hands into the treasury to defeat the people’s choice, and thereby put
 myself into positions that should be filled by others; but to the best
 of my ability will I work for the interest of the shareholders of the
 company and the people, whom it should serve.[334]

This statement attracted attention, and Huntingdon was asked to
explain. In an interview with a reporter of the _San Francisco
Examiner_ he said further:

 From this time on we are going to follow one business. We are railroad
 men and intend to conduct a legitimate railroad business. To do that
 successfully politics must be let alone.... If a man wants to make
 a business of politics, all well and good; if he wants to manage a
 railroad, all well and good; but he can’t do both at the same time.

 I have seen the ante-rooms down here in this building full of men
 trying to learn or get something out of politics. Why should they come
 here? This is no place for them. But then they were not to blame.
 The tip went forth that political work was being done at Fourth and
 Townsend streets, and they merely followed the tip. Well, there won’t
 be any more tips sent out of these railroad offices. Politics have
 worked enough demoralization in our company already, and they have
 gone out of the door never to return....

 Things have got to such a state, that if a man wants to be a constable
 he thinks he has first got to come down to Fourth and Townsend streets
 to get permission. Hereafter people who come to Fourth and Townsend
 streets must have railroad business to transact. The Southern Pacific
 Company is out of politics, and will attend to its business like any
 other private company or individual should do.[335]

Such statements naturally led to an open breach between Huntingdon and
Stanford.[336]

The point at issue was not, however, whether it was proper for the
Southern Pacific to defend itself against political attack. On this
there is every reason to suppose that all parties were agreed. It was
rather whether the company should be used as an instrument to advance
the personal interests of individuals. In the same connection the
question arose whether railroad men should act together in political
matters not connected with railroad affairs. Huntington, who had
little interest in general politics, thought they should not. It is
probable enough that Stanford or some of his subordinates had, on the
other hand, used their influence as railroad men for personal and party
ends.


Unscrupulousness of Associates

One rises from the study of the political activities of the owners of
the Central Pacific with a feeling of indignation at the selfishness
of these men, their indifference to all save considerations of private
gain, and their readiness to use any and all methods which would
advance their financial interests. The associates met the proposal of
government regulation as a threat to rob them of their property and
resisted it as they would have opposed any other attack. They never
conceded that any question of public interest was involved which it was
necessary for them to respect. They frankly defended the use of money
as a method of persuading men to do what was right—which inevitably
meant, of course, what in their judgment was right. They fell out among
themselves, not because any one of them questioned the philosophy which
inspired their opposition to public control, but because one of them
was suspected of using power, developed in the course of the defense of
railroad interests, to advance personal ambitions which ran counter to
the views of his associates. These things should be plainly stated and
their force clearly understood.

It is the writer’s opinion, however, that the amount of money spent
by the Central Pacific in the purchase of legislative or other votes
has probably been overestimated in the public mind. Direct bribery
is a clumsy weapon and one difficult to conceal if practiced on any
considerable scale. It was probably also unnecessary to a corporation
such as the Central Pacific with other favors to bestow. Members of
Congress might, indeed, be employed by the railroad when legislation
was pending. Huntington maintained that this was legitimate,[337] and
Gage once admitted that the company had to employ everybody who could
pull a pound. The practice was more easily defensible than bribery, and
could be applied to a better class of men. Other men might be reached
through patronage, still others through discrimination in rates or
through preferences. The suggestion that unfavorable legislation would
hinder construction was potent with legislators from districts which
still lacked rail connection. Yet Huntington once said of a man who
was opposing him and whom he thought he could bribe, that his better
judgment told him the associates could not afford to take the scamp
into camp,[338] and this probably represented the situation at most
times. Whether this worked for the eventual salvation of the Huntington
group, is for the moralist to say.




CHAPTER XIII

WATER COMPETITION


Rate Policy

We may now pass from the question of the relation of the Central
Pacific-Southern Pacific system to legislative bodies in California
and in Washington, to another matter of general importance in respect
to which Southern Pacific policies profoundly affected the development
of the West—the matter of railroad rates. Just as the associates were
compelled to face the possibility of government regulation soon after
they were fairly launched in their careers as railroad men, so they had
to consider and determine the rate policies which they should adopt,
independent of regulation, with respect to the shipping and traveling
interests of the territory which they served. Their decisions in rate
matters were certainly of no less significance than their attitude
toward political control, and deserve the same broad consideration.

We shall attempt in the following chapters to describe the conditions
which affected the ability of the associates to set rates in California
and on business to and from that state, and to consider the attitude
of the Southern Pacific with regard to the more important questions of
rates and of competition which arose. For reasons which will become
apparent as the discussion proceeds, the scope and importance of water
competition in the West will first be set forth.


Water Transportation

One of the most important conditions affecting railroad business in
California is the ease with which freight and passengers may take
advantage of the water routes. The long coast line of California
affords relatively few good harbors, but it is broken in the center
by the splendid bay of San Francisco, and in the south by the less
commodious but still adequate ports of San Pedro and San Diego. Between
these termini a considerable commerce has long been carried on.

Still more important than the coastwise trade, however, has always been
the deep sea commerce of San Francisco, and to a less extent that of
the other ports. San Francisco is a focus for ocean lines connecting
the Pacific Coast of the United States with the Atlantic seaboard,
with Europe, with South America, and with the Orient. Likewise from
San Francisco steamers ply up the Sacramento and San Joaquin rivers,
carrying traffic well into the interior of the state. A mere mention
of these facilities is sufficient to suggest the part which water
transportation has played in the commercial and industrial life of the
Far West.


River Traffic

The local river traffic which helps to distribute the cargoes brought
by ocean boats to San Francisco attained some importance as early as
1847. In that year a small side-wheel steamer seems to have plied
between San Francisco and Sacramento. In 1849 and 1850 larger boats
were put on, the Sacramento was navigated to Colusa, and steamers
ascended the San Joaquin to 150 miles above Stockton. In 1856 two
steamers usually left San Francisco for Sacramento each afternoon
at 4 P.M., arriving between 12 and 3 A.M. of the following morning.
Corresponding boats left Sacramento at 2 P.M., arriving between 9 and
11 P.M. Often as many as four boats left San Francisco loaded in one
day.[339]

The total tonnage of steam vessels plying on California rivers and
bays was estimated by the State Transportation Commission in 1878
at 30,704. The bay vessels were all ferry-boats and tugs, but river
vessels with a total tonnage of 10,990 tons made trips of considerable
length. Most of these were small craft, but the larger river steamers
ranged between 400 and 520 tons each, while the ferry-boats sometimes
reached a size of 1,600 or 1,700 tons. Vallejo, Benicia, Napa, Knight’s
Landing, Colusa, Chico, Red Bluff, Antioch, and Pacheco were among
those able to take advantage of the water service.[340]

Generally speaking, the importance of the river traffic was diminished
by the fact that after 1853 most of it fell under the control of one
company, the California Steam Navigation Company,[341] and that in 1869
this company sold its steamships to the Central Pacific. The volume
of river traffic also fell off because of railroad competition. In
spite of these drawbacks competition on the river was lively at times
and rates were low, to the disgust of some merchants in the interior
cities. The California Steam Navigation Company charged $8 and $6 per
ton for freight, and $10 and $8 for cabin fares from San Francisco
to Sacramento and Stockton. Meals were a dollar apiece. These were,
however, the rates in the absence of competition. When the steamer
“Willamette” was brought from Oregon to Stockton, rates were fixed
at $3 for freight, $3 for cabin fare, and $1 for deck passage. In
December, 1860, the fare from Sacramento was $1 in a cabin and 25 cents
for deck accommodation. People traveled because it was as cheap to go
as to remain at home.[342]


Ocean Commerce

The first regular water connection between the eastern and western
coasts of the United States was provided by the clipper ships on
the route around Cape Horn. These swift sailing vessels supplied the
gold miners with the tools and manufactured goods necessary for their
enterprises, and took back such commodities as California was able to
export. Oil, soap, cement, coal, iron, nails, paper, glass, tobacco,
liquors, dry goods, and the like moved west—hides, wool, canned
fruits, salmon, sugar, wine, and grain went east. The business was for
the most part handled by ships chartered for single voyages, not by
lines of ships operating on regular schedules.[343]

As early as October, 1848, however, at least one regular line, the
Pacific Mail Steamship Company, entered the field. The establishment
of the Pacific Mail service was made possible by the grant of a
government contract for the carriage of mails—its profits during the
early years were largely derived from business arising out of the
gold discoveries in California. The business of the Pacific Mail grew
rapidly. In 1851 it operated eleven steamers varying in size from 600
to 1,300 tons, and had a capital stock of $2,000,000. Thirty years
later it operated fourteen ships, large and small,[344] reported gross
earnings of $3,762,083 (1882) and had $20,000,000 in stock outstanding.
At first the Pacific Mail operated steamships between Panama and San
Francisco. Later it extended its service to Astoria; and still later it
established a line across the Pacific to China and Australia. Among
its competitors by sea at one time or another, besides the clipper
ships, were Mr. Vanderbilt’s Atlantic and Pacific Company, the Mexican
Coast Steamship Company, and Messrs. Goodall and Perkins. At one time
Jay Gould, at another Trenor W. Park, of the Panama Railroad, were
dominant in its affairs.


Problem of Water Competition

There is much of romance in the history of ocean transportation into
and out of San Francisco, and in its proper place the story should be
told at length. Some aspects of the water service, indeed, will be
touched on later in this book. Attention is directed to the matter at
present, however, not for its own sake, but because the fact of water
competition raised one of the problems with which the Southern Pacific
had to deal. It seems clear that the associates were compelled to
define their attitude toward water competition as soon as their through
line was completed in 1869.

Broadly speaking, the alternatives were competition or agreement. In
respect to the Pacific Mail, however, the situation was complicated
by the fact that the relations between the railroads and the shipping
lines were of two sorts: In the first place, the Pacific Mail served as
a valuable connection for the transcontinental railroads on business
originating in or destined to China and Japan. Tea and silk eastbound
were usually delivered by the steamships to the rail lines at San
Francisco. Westbound the higher classes of manufactured goods likewise
moved part way by rail and part way by water haul. During the ten years
ending in February, 1881, the Pacific roads carried 177,278,505 pounds
of tea and other Asiatic goods, secured to them by the co-operation
of the Pacific Mail Steamship Company, resulting in earnings of
$3,264,456.44.[345] On the other hand, the rail and water lines were
competitors in important respects.


Steamship Company Organized

In 1874 the Huntington interests organized the Occidental and Oriental
Steamship Company and chartered three steamships to ply between
San Francisco and the Far East. This was said to be the result of
a decision of the Pacific Mail to make Panama the terminus of its
transpacific route, relegating San Francisco to the secondary position
of a port of call.[346]

Huntington wrote to Colton, on November 9, 1874:

 I am surprised to learn that anyone should think it was for our
 interest to put on the China line seven steamers to start with. I
 think three is plenty, and we shall, no doubt, have such an opposition
 on the start that we shall have to run them at a loss, but with those
 three we can make the prices for the old line, and I think there is
 enough to break them with, unless the managers of that company are
 changed, and then we most likely can get their steamers.[347]

Huntington intended to develop the Occidental and Oriental Steamship
Company as a permanent connection of the Central Pacific for Oriental
business in competition with the Pacific Mail. At the time his decision
was made he discussed with his associates the advisability of asking
enough eastern lines to join with the Central Pacific to form a single
transcontinental route from the Pacific to the Atlantic coasts for
export and import traffic, but decided against this project because
it would make enemies of the railroads which were not included, and
because also the admission of partners would make it impossible for the
Central Pacific to control by itself a majority of the shares of the
Occidental and Oriental Company. Huntington’s letter to Colton on this
matter is a model of sound reasoning on a large question of policy:

 I think very likely we could make out a through line. Very likely
 the Baltimore and Ohio would come in, and make up a line that would
 run to Omaha or Fort Kearney, passing through St. Louis and Chicago.
 But if this was done, very likely it would be difficult for us to
 control the steamship Company, and if we make up this line, leaving
 out the roads above mentioned, of course they would not expect any
 of the China business coming over our road, and then would they not
 be likely to work against us by allowing the Pacific Mail Steamship
 Company and any other companies to give bills of lading from China
 and Japan to Chicago, St. Louis, etc., over their roads, and to bring
 freight from those points to the sea coast here, to go by steamer
 and sail to California?... We cannot be too careful in starting this
 steamship line, for it is one of the things that if we go into, I have
 little doubt we shall hold it for years, and therefore the more reason
 why we should hold a majority of the stock of the company, as almost
 every road here is controlled by those that are always short or long
 of stock and endeavor to render everything bend to their particular
 wants. If short, they want to put the stock down, and if long they
 work for the reverse and we cannot afford to be in their power.[348]


Ownership of Shares

Doubtless for financial reasons the policy here laid down was departed
from sufficiently to allow the Union Pacific a half-interest in the new
company. For their part, Stanford, Huntington, Hopkins, Crocker and
Colton subscribed each to 10,000 shares of the stock of the Occidental
and Oriental Steamship Company. The account was charged to the Western
Development Company and was held by that company as an asset. The
remaining 50,000 shares were owned by the Union Pacific, and Mr. Gould
shared with the associates the management of the enterprise.[349]
It may be added that the Occidental and Oriental owned no steamers,
but chartered the “Oceanic,” the “Belgic,” and the “Gaelic.” The
“Oceanic” was a boat of 3,800 tons; the other ships were of 2,600 tons
each.[350] The first dividend was declared in July, 1878, and by 1881
the rate had been raised to 4 per cent. Mr. Stanford has testified that
the company expected to lose $100,000 a year, but that its owners were
pleasantly disappointed.[351]


Agreement with Pacific Mail

There is evidence that as early as 1870 some agreement was entered
into between the Huntington interests and the Pacific Mail Steamship
Company, and that in 1871 a formal contract was concluded by these
companies, defining their relation to each other. The terms of the
contract of 1871 are not available, but a subsequent agreement, dated
October 1, 1872, contained the following principal provisions:

The Pacific Mail Steamship Company agreed to provide every month three
first-class steamers to sail from the port of New York for the Isthmus
of Panama, with connecting steamers on the Pacific Ocean for the port
of San Francisco. The company undertook to supply space in these
steamers for an amount of freight not exceeding 14,700 tons annually.

The steamship company accorded to the railroad company the exclusive
right to fix the rates on freight of every description, moving from
New York to San Francisco during the period of the agreement, provided
that the rates should not exceed the rates then in force, nor in any
event $160 first-class, $140 second-class, $90 third-class, and $60
fourth-class and special.

Out of the gross receipts on the freight westbound the steamship
company was first to draw $735,000, or at the rate of $50 per ton on
14,700 tons. If the amount of the freight handled should not equal
14,700 tons, or if that quantity of freight should be handled but the
receipts therefrom should not amount to $50 per ton, the railroad
agreed to make up the difference, so that the receipts on the first
14,700 tons should always amount to $735,000. If, on the other hand,
the steamship should collect thereon an average rate exceeding $50, the
railroad was to be entitled to the surplus.

In the event that through westbound freight exceeded in volume 14,700
tons, the gross earnings on the excess quantity were to be divided
between steamship company and railroad company as follows: first, $30
per ton was to be taken by the steamship company; additional receipts
up to $50 a ton were to be divided equally between steamship and
railroad; and earnings over $50 were to go to the railroad.[352]

The essential facts in this agreement were that the steamship company
surrendered the power of fixing the westbound rates in return for a
guarantee of $735,000 a year.


Later Contracts

This feature was also characteristic of later agreements between the
same parties, different as the details of the subsequent arrangements
sometimes were. In 1879 the Union Pacific, Central Pacific, and Pacific
Mail companies agreed that the last-named should set aside space for
600 tons of railroad freight in each of its steamers moving monthly
between New York and San Francisco. The railroads were to exercise
full authority over the through rates of the steamship company, and
for their part were to guarantee that the earnings on the railroad
freight shipped were not to be less than $48,000 monthly westbound,
and $35,000 monthly eastbound. In case the earnings on the 600 tons or
less of railroad freight which might be sent in each vessel exceeded
the guaranteed minimum, the balance of freight money was to be paid
over to the railroad, while the moneys received on all freight between
New York and San Francisco and between San Francisco and New York in
excess of 600 tons for each vessel were to be equally divided between
the railroad and the steamship company.[353] An additional clause in
this agreement bound the railroads to pay to the steamship company $5
for each passenger carried whose ticket was purchased at a point east
of Ogdensburg, Suspension Bridge, Buffalo, Pittsburgh, and Wheeling, to
a point west of Sacramento, and vice versa.

An agreement dated June 1, 1885, between the Transcontinental
Association and the Pacific Mail does not differ strikingly from that
of 1879 just summarized, except that the payments per month were to be
$85,000 for a two-way service, instead of $83,000, and that there was
no passenger subsidy. Moreover, the right of the steamship company to
fix rates for the use of its capacity above the 600 tons mentioned in
the agreement was specifically reserved. The $85,000 payment in this
year represented a reduction from the figure of $110,000 contained in
a contract dated March 4, 1880, and from one of $95,000 concluded in
1882. In 1887 the subsidy was set at $65,000, and in 1889, when still
another arrangement between the Transcontinental Association and the
Pacific Mail was signed, it was put at $75,000.[354]

From a statement made to the United States Pacific Railway Commission,
it appears that the aggregate earnings guaranteed by the railroads to
the Pacific Mail Steamship Company from September 30, 1871, to March
21, 1886, were $11,227,939.27. This did not include Central or South
American business. Of the guaranteed sum the steamship company earned
$5,854,113.06, leaving $5,373,826.21 to be made up by the guarantors.
The distribution of the burden among the railroads interested may be
suggested by the fact that out of $146,170.29 which had to be paid
during the three months from January to March, 1886, the Union Pacific
paid $34,652.94, the Central Pacific $31,927.57, the Southern Pacific
$30,172.79, the Santa Fé $15,086.11, the Galveston, Harrisburg and San
Antonio $11,536.82, and seven other companies smaller sums.[355]


Change in Ocean Traffic

The change which took place in the volume of water-borne commerce in
and out of San Francisco coincident with the arrangements between the
railroads and the Pacific Mail which have been described, is clearly
indicated in the following table:[356]

VALUE OF COMMODITIES SHIPPED FROM NEW YORK TO SAN FRANCISCO AND FROM
SAN FRANCISCO TO NEW YORK VIA PANAMA EACH YEAR FROM 1869 TO 1884

              Shipped from New York    Shipped from San
  Year ended    to  San  Francisco    Francisco  to  New
  June 30                                   York             Total

  1869            $50,015,994           $20,186,035       $70,202,029
  1870             15,334,945             3,259,310        18,594,255
  1871              9,391,607             2,161,106        11,552,713
  1872              6,739,563             3,086,874         9,826,437
  1873              3,042,617             3,667,107         6,709,724
  1874              7,049,821             1,752,653         8,802,474
  1875              6,057,202             2,382,928         8,440,130
  1876              4,470,594             1,983,261         6,453,855
  1877              3,398,864             2,205,979         5,604,843
  1878              3,976,358             3,211,245         7,187,603
  1879              2,781,065             2,166,690         4,947,755
  1880              2,963,065             2,865,237         5,828,302
  1881                815,893             2,598,868         3,414,761
  1882              1,270,900             3,153,902         4,424,802
  1883              1,192,912             2,394,430         3,587,342
  1884              1,040,495             1,264,682         2,305,177

If we compare the year 1869—probably the last in which the Pacific
Mail and the Huntington interests were in active competition—with
the year 1884, it appears that the value of commodities shipped in and
out of San Francisco via Panama during these years declined from about
seventy to about two million dollars. Doubtless this falling off was
not all due to agreements between rail and water carriers. For instance
the sudden decline between 1869 and 1870 was occasioned in large part
by the sudden diversion of bullion shipments from the water routes when
the rail lines were opened, while passengers also rapidly deserted
the water for the more speedy and comfortable rail service. Moreover,
at a slightly later date the special contract system played its part
in limiting shipments by sea. Yet it is not unfair to credit the
arrangements between the Huntington group and the Pacific Mail with a
considerable share of the reduction in water tonnage so desirable from
the point of view of the land carriers.


Pacific Mail and Panama Railroad

The difficulty in bringing about a substantial lessening of competition
by agreement with a water carrier is found in the fact that the sea
is free, so that new ships and new shipping companies can readily
take the place of those that are withdrawn. The peculiar strength
of the Pacific Mail in negotiating with the railroad company lay in
the fact that it enjoyed for many years the exclusive privilege of
through-billing freight between San Francisco and New York, including
the privilege of quoting a through rate. From all other steamship
companies the Panama Railroad exacted a local rate for hauling freight
across the Isthmus.[357] Inasmuch as this local rate was very high,
it was impossible for a competing steamship company to handle through
business at a profit. It was thus the railroad which determined whether
competition by way of the Isthmus of Panama should succeed or fail. It
may be added that after the year 1893 the Panama Railroad assumed the
responsibility not only of the rail haul across the Isthmus, but of
the water connection between Colon and New York as well, thus becoming
the preponderant partner in respect to length of route, as well as in
respect to strategic position.

In return for the exclusive right of through-billing, and of quoting
through rates, as well as for its agreements not to operate vessels in
the Pacific, the Panama Railroad was promised a certain division of
the through rate, which was not to be less monthly than a stipulated
minimum. The minimum varied, but always was a substantial part of
the payment which the transcontinental railroads were making to the
Pacific Mail. In 1878 the railroads guaranteed the Pacific Mail $90,000
a month, out of which the Panama Railroad received $75,000. When the
Pacific Mail subsidy was lowered from $90,000 to $75,000, the amount
guaranteed to the Panama Railroad fell off from $75,000 to $55,000.

It is a matter of history also that during the years 1876 to 1878, the
Panama Railroad not only was a party to the elaborate traffic agreement
with the Pacific Mail which has been described, but that it exercised
for a time direct control of the steamship company by domination of
its president and board of directors. This control was the outcome of
a conflict between Jay Gould, then president of the Pacific Mail, and
Trenor W. Park, of the Panama Railroad, which in 1875 resulted in the
election of a board of directors satisfactory to the latter and in the
choice of a new president.

The lever which the railroad used at this time was the cancellation of
its contract with the Pacific Mail, the organization of a company known
as the Pacific Transit Company, the purchase of three old refitted
warships, and the threat to engage in active competition. Mr. Park
was asked if he would desist from his attack on the Pacific Mail if a
neutral board of directors were elected. He consented to this, and was
satisfied by a board composed for the most part of Panama Railroad
men. This was followed by the consolidation of the Pacific Mail and the
Panama Transit Company, by the renewal of contracts between railroad
and steamship, and finally in 1878, by the execution of a bill of
sale by the steamship to the railroad company for twenty-two steamers
to secure a loan of $1,000,000 in Panama Railroad bonds for four
years.[358]


Railroads’ Main Reliance

It thus appears that during the first ten years after the completion
of the Central Pacific, the interests of the Panama Railroad and those
of the Pacific Mail were closely bound together, so that during this
period an agreement with the former was sufficient to control the
route over which both were operating. It was upon this fact that the
transcontinental railroads chiefly relied. Nor was there any important
change in the relations between the Panama Railroad and the Pacific
Mail, or in those between the Pacific Mail and the transcontinental
railroads during the following twelve years. Mr. Park’s control of
the Pacific Mail proved only temporary, it is true, and the terms of
the contracts between the parties changed from time to time; yet the
principle of a guaranty of earnings to the Pacific Mail in return for
the maintenance of rates was always adhered to, and the Panama Railroad
always received the lion’s share of this guaranty for a division. The
amount of the subsidy paid by the railroad has already been given.
When in 1885 the Pacific Mail received $85,000 per month from the
transcontinental lines, it paid over $70,000 to the Panama Railroad.
When the Pacific Mail subsidy was reduced to $65,000 in 1887, the
payment to the Isthmian railroad likewise fell to $55,000. In 1881 the
Panama Canal Company, a French corporation under the direction of De
Lesseps, purchased the Panama Railroad for $20,000,000; but this does
not seem to have affected the relations between the last-named railroad
and the Pacific Mail.




CHAPTER XIV

THE RATE SYSTEM OF THE CENTRAL PACIFIC


City and Country in California

For more than forty years the Southern Pacific interests sought with
varying success to modify the intensity of water competition by
agreement with or by purchase of competing lines. During all this
period the existence of alternative water routes was probably the
principal influence determining the relative adjustment of rates
between different towns upon the Pacific Coast. In deciding upon the
rates which they should charge, the Southern Pacific interests had
other factors to consider, however, besides the presence of water
competition—factors which can be understood only after a careful study
of local conditions in the Far West.

The state of California is characteristically a country of great
distances, occupied by a relatively sparse and unequally distributed
population. Its industry is primarily agricultural and mining. Although
some manufactures have developed since 1870, such as foundries,
woolen and sugar mills, glass, paper, cordage, powder, tobacco, tin,
and hardware manufacturing concerns, yet even today the absence of
adequate supplies of good coal, the smallness of the local market,
and the distance from the great centers of population in the East
hold manufactures within narrow limits. As explained in the previous
chapter, the state is best fitted to produce and export products of the
soil, and raw materials such as grain, fruit, wool, hides, and later
wines, lumber, and oil. To this list should also be added salmon.

In such an economy, the cities of California play the part of
distributing agencies rather than that of centers of industry. Such
was the first function of Stockton, Sacramento, Los Angeles, and
indeed of San Francisco itself, and the work of distribution still
remains these cities’ principal means of support. Originally the chief
profit of the northern towns came from supplying the mining population
of the Sierras with supplies brought by sea from Europe or from the
Atlantic Coast of the United States. The nature of California imports
has somewhat changed since the early days; a larger commerce with the
Orient and with the west coast of South America has developed, and a
large part of the freight handled on the Pacific Coast now comes in by
rail. This has multiplied the number of distributing points, and has to
some degree built up the interior of the state. The character of the
cities has not, however, changed and they remain as before—trading and
consuming rather than producing centers.


Conflict of Interest

It follows from this division of labor between town and country on
the Pacific Coast, and from the rivalry of different cities in the
distribution of finished goods, that striking divergencies in point of
view have arisen, both between individual cities, and also between the
city communities as a whole and the farming and manufacturing interests
of the state. These differences have received free expression in the
discussion of railroad rates. Inasmuch as the articles distributed by
the towns are in large part imported goods, the cities as a group have
demanded low westbound carload rates from eastern sources of supply.
The larger centers of population, however, have opposed low rates on
small consignments, because that tends to deprive them of a rehandling
profit by promoting direct relations between the consumer and the
eastern wholesale house. As compared with the cities, on the other
hand, the farming interests have been relatively indifferent to the
level of westbound rates, so long as they have enjoyed low eastbound
rates on the product of the farm and field; while the struggling
manufacturers have resisted low rates westbound, because these have
exposed them to the competition of eastern factories. The interests of
the consumer have not until quite recent years been represented.


No Settled Rate Policy

Owing to these persistent conflicts between various classes of
shippers, public opinion in California has not been easily enlisted
as a whole in support of any concrete proposals for the readjustment
of railroad rates, although complaints from all sections have been
numerous. There has been, on the contrary, a persistent series of
appeals to the railroad, now to favor one set of interests, now to
favor another—appeals which, when granted, often have resulted in
gross discrimination, and which, when refused, have swelled the tide
of protest against the transportation lines. The serious side of this
situation in California is that the conflict of interest between buyers
of transportation has exposed the railroad to temptations which it has
had neither will nor ability to withstand. Where there is constant
demand for favors there is likely to be discrimination unless the
person or institution to which demand is made is fortified by a clear
view of public policy and a sense of morality more than ordinarily
acute.

It is no secret that the Southern Pacific has had neither the one nor
the other of these qualifications. For its part, it has acknowledged
no duties other than those generally incumbent upon private business.
It has insisted upon complete freedom to follow its own advantage. In
a speech to the men in the railroad shops at Sacramento in September,
1873, Stanford explained his position by asking: “Does Governor
Booth sell at the same per cent of profit his sugar, pork, beans,
bacon, lard, candles, soap, spice, coffee, whiskey, brandy, and other
articles? So with the mechanic, the manufacturer, the farmer, and
others. The market price governs. A farmer takes two and one-half cents
for his grain as justly and as cheerfully as one and one-half cents,
the cost of producing being the same.”[359] “The Southern Pacific,”
said Mr. William B. Curtis, of that company, in 1894, in the same
strain, “sells transportation precisely as a merchant disposes of
his wares, adjusting its tariff to conform to the situation with the
object in view of inducing the largest amount of transportation at fair
rates.”[360]

This announced willingness to differentiate led in the course of time
to the greatest variety of railroad rates in California, some rates
being low, some high, some public, some secret. Generally speaking,
indeed, rates were low where competition was present, and high where it
was absent. The big man was favored over the little man, the shipper
with an alternative route over the shipper confined to one railroad
line. Some of the details of this interesting system will now be
presented.


Separate Rate Classifications

In discussing the adjustment of local charges in California, attention
will be first directed to the absolute level of local railroad rates.
Separate mention must be made of the local classifications and of the
local rates.

As late as 1877, each of the principal railroads in California had its
own classification. These were far from being the same. Baled hops
moved at one and one-half times first-class on the Central Pacific.
On the Southern Pacific compressed hops took third-class. On the
California Pacific pressed hops took double first-class. Liquors took
one and one-half times first-class on the Central Pacific (in jars,
owner’s risk); second-class on the Southern Pacific (in glass, packed,
owner’s risk); double first-class on the California Pacific (in jars
or glass); first-class on the North Pacific Coast (in glass, packed,
owner’s risk); and double first-class on the San Francisco and North
Pacific (in glass or demijohns, owner’s risk). Window glass took
first-class on the Central Pacific, one and one-half times first-class
on the California Pacific, and fourth-class on the Southern Pacific
if not over three feet long. Boiler flues moved first-class on the
Central Pacific, third-class on the North Pacific Coast, and fourth-or
fifth-class according as made of copper or brass, or of iron, on the
Southern Pacific.[361]

Generally speaking, however, the classifications were much less
elaborate than they later became. A committee of the California
Senate observed in 1893 that the theory of the local classification
of the Southern Pacific was to simplify so far as possible. Hence
that classification started out with the announcement, in effect,
that all articles not named specifically therein would be charged for
at merchandise rates. It then continued to indicate the exceptions,
enumerating articles that were light, bulky, of excessive value, liable
to damage, etc., proceeding in this way along the same lines as the
Western classification.[362]

When the Santa Fé later built into southern California it brought
in the Western classification, tariffs, rules, and conditions that
governed its lines elsewhere, and applied the Southern Pacific
schedules of merchandise rates to this classification. Since, however,
the Southern Pacific had only one merchandise class, the Santa Fé
applied the same rates to each of the first four classes of the
Western classification in California. The result of this adjustment
of tariff to the Western classification was to produce practically
the same revenue as would have resulted from the local classification
and merchandise rates of the Southern Pacific Company. In 1893 the
Southern Pacific itself substituted the Western classification for the
one which it had been using.[363]


Local Rates

Under the law the maximum rate which any California railroad could
charge for the transportation of freight, was 15 cents per ton per
mile. In spite of the statement of Mr. Stanford to the contrary,[364]
the evidence is to the effect that this maximum was generally applied
on short-haul local business as late as 1877 and perhaps afterwards.
In some cases, the published rate was even greater than the maximum,
though a note to the schedule provided that when the calculated rate
exceeded the legal maximum, the latter would apply. The rates on the
Central Pacific main line in 1866 were almost exactly 15 cents per ton
per mile.

The report of the California Board of Transportation Commissioners in
1877 showed that generally throughout the state first-class rates for
short hauls ranged from 14 to 30 cents per ton per mile. For the 10
miles from Lathrop to Stockton the tariff charge was $1.60 per ton,
and for the 6 miles from Pleasanton to Livermore, the rate was $1.
The charge from Roseville Junction to Truckee, 102 miles, was $15.20.
When river competition entered in, rates were markedly reduced. The
charge from San Francisco to Stockton, 92 miles, was $3.20 per ton, or
3½ cents per ton per mile; that from San Francisco to Sacramento, 140
miles, was $3.60, or 2⅗ cents per ton per mile. On the other hand, the
rates of the California Pacific were somewhat higher than those of the
other lines, except at competitive points.[365]

In later years the charges of the Southern Pacific naturally declined.
Yet the rate on brick from San Francisco to Soledad in 1892 was 5½
cents per ton per mile on a haul of 143 miles, and that to San Miguel,
64 miles farther on, was almost 5 cents per ton per mile.[366] The
average receipts per ton per mile upon the Southern Pacific system
were 2.04 cents per ton per mile for all freight as late as 1885, in
spite of the large quantity of long distance through traffic. Plainly
the average receipts on local business were much greater. There seems
little doubt but that the local rates in California were always
distinctly higher than in the eastern states, although they have been
lowered in recent years. The reason was in the main the relatively
slight density of traffic upon all except the trunk routes, as well as
the higher cost of coal, and the successful control of competition to
which the Southern Pacific attained.


Rate Discrimination

Turning now from the absolute level of local rates to the question of
the relations which those rates bore to each other, we come to the
question of discrimination in California. Railroad discrimination may
be personal, in which case it involves the quoting of different rates
to different persons for the same or a similar service, or it may be
local, as in instances where the interests of competing localities
are concerned. Either kind of discrimination is of profound social
importance, for, after all, it must be remembered that the significant
question for the producing and distributing interests of a state is
not how much they pay for transportation, but whether this amount,
be it much or little, is less than is paid by their competitors. The
remainder of the present chapter will be devoted to the discussion
of personal discrimination; in the next chapter the topic of local
discrimination will be considered.

The policy of granting special concessions in rates to special shippers
was one which the Southern Pacific followed freely whenever it seemed
likely to increase the profits of the company. There was never any
disposition to apologize for this—it was known to be the practice
of other roads as well, and the Southern Pacific accepted the system
as a matter of course. The methods employed were various. One method
was that of granting passes. Mr. Stubbs explained that passes were
commonly issued in cases where shippers came to the Central Pacific
and represented that they were offered transportation by the company’s
competitors over such competitors’ lines. “They were our patrons,” said
Mr. Stubbs, “shipping our way, and I may say that wherever we were
satisfied that the statement was true, we generally met the case by
giving a pass!”[367]


Sudden Tariff Changes

In addition to granting passes, the Southern Pacific discriminated
by changing open rates suddenly for the benefit of persons fortunate
enough to be advised in advance. Mr. Stanford once explained that
individual items in the company’s tariff were changed whenever by so
doing the company could encourage business in any direction.[368]
Indeed, a tariff would scarcely be in force ten days before the
necessity for changes would be apparent.[369]

How this might work was shown in 1892, when complaint was made of
discrimination in favor of the Standard Oil Company. It was then
alleged that the Central Pacific was lowering oil rates from $1.25 per
hundred pounds to 82½ or 90 cents, when the Standard Oil desired to
make shipments from eastern refining points to the Pacific Coast, the
rates being subsequently raised when the shipments had been completed.
A letter to the vice-president of the Standard Oil Company, bearing
upon an episode of this sort, written under date of December 4, 1888,
got into the public press, and seems to establish the fact that
transactions of this nature were going on. The letter follows and is
self-explanatory.[370]

  SAN FRANCISCO, December 4, 1888

  W. H. TILFORD, Vice-President, Standard Oil Company,
  26 Broadway, New York

 DEAR SIR:

 I herewith hand you copy of a letter I have just received from Mr.
 Sproule, Assistant General Freight Agent of the Southern Pacific
 Company, this city. This letter I interpret to mean the 90-cent rate
 is for us to stock up from time to time, and that the $1.25 rate will
 be in effect whenever we may desire. This $1.25 rate is what Mr.
 Sproule refers to in the latter portion of his letter, as my offer of
 90 cents to Mr. Stubbs was on condition that he has the rate of $1.25
 put into effect when we might ask him. This letter also reads as if
 the 90-cent rate and the $1 rate was to be put in effect January 1st.
 No doubt Mr. Stubbs was unaware that we were stocked up at the present
 rate of 82½.

 The Transcontinental Association adjourned at Chicago yesterday, and
 I understand that Mr. Stubbs is now on his way home. I will see him
 on his arrival here, and if Chairman Leeds of the Transcontinental
 Association has been notified to put the 90-cent rate in effect
 January 1st I will have the same corrected by wire and the $1.25
 rate put in. As soon as Mr. Stubbs reaches home I will telegraph you
 whether it is intended that the 90-cent rate should be put in effect
 January 1st or the $1.25.

  Yours truly,

  E. A. TILFORD


Relations with Standard Oil

The fact that relations between the Southern Pacific and the Standard
Oil Company were very close during the late eighties and early
nineties is well established, not only by the correspondence just
referred to, but also by other available evidence. In June, 1892,
to cite a small but interesting episode, the Union Pacific issued a
circular applying a rate of 78½ cents per hundred pounds on oil from
Colorado points to the Pacific Coast. This rate had been in effect
some years before, previous to the organization of the Western Traffic
Association, under a rule which made Missouri River commodity rates a
maximum on business originating west of the 97th meridian. The rule
in question had never been withdrawn, although it developed that the
Southern Pacific had forgotten it, and believed that a rate of $1.60
applied.

At this time the independent firm of Whittier, Fuller and Company
was endeavoring to find a market for the products of its Colorado
plant upon the Pacific Coast. In order to head off this anticipated
competition, the Standard Oil representative in San Francisco took the
matter up with the general traffic manager of the Southern Pacific, Mr.
Gray. The latter at once wired to Mr. Munroe of the Union Pacific as
follows:

  SAN FRANCISCO, June 10, 1892

 J. A. MUNROE,

 Omaha, Nebraska

 It is reported you are antagonizing Standard Oil Company in Colorado.
 I hope you will do nothing to affect our joint relation with that
 company with regard to Pacific Coast business. Have you observed the
 large tonnage you have lately been handling for them? I think it is so
 great you should be careful how you jeopardize your own interest in
 this direction.

  R. GRAY

Under pressure from the Standard Oil, the Southern Pacific followed up
this telegram by refusing to prorate on any basis lower than $1.60. As
a result the objectionable circular was withdrawn.[371]


Rate Rebates

A third method of granting concessions to shippers whom the Central
Pacific desired to favor, was that of the rebate. Rebates were usually
granted in exchange for an undertaking by the shipper to send all
his freight over the lines of the railroads by which the rebate was
paid. Mr. Stubbs once explained to the United States Pacific Railway
Commission that the granting of rebates was a regular practice, not
only of the Central Pacific, but of all its connecting lines. He
explained the mechanism of the operation as follows:

 Suppose that you were a merchant, and I should go to you to make a
 contract for the rail lines—because all the lines were parties to
 it between New York and San Francisco. It was not a Central Pacific
 affair. You understand that all the lines between San Francisco and
 New York, probably embracing all the roads in the East, shared in
 this reduced rate that was given to the merchant in consideration of
 his exclusive patronage—I should go to you and make a contract, and
 should say that it is impossible for us, in billing, to bill this to
 you at the net rates. We will bill it at the full rates, and when
 you receive your goods at the depot you pay the full rates, and we
 will refund to you the difference between the agreed rate under the
 contract and the rates which you have paid. Of course that is an
 overcharge. We overcharged those goods above the price that you had
 previously agreed to pay for the transportation of them.[372]

In the single year of 1884 the Central Pacific paid out $1,060,275.92
as refunds in behalf of itself and its connections.


Extent of Practice

Evidence showing how radically published rates were reduced by the
practice of rebating is to be found in the following testimony by G.
W. Luce, now freight traffic manager of the Southern Pacific, and long
connected with the traffic department of that company. Speaking before
the Interstate Commerce Commission of the period about 1887, Mr. Luce
said:

 Just prior to that time I had in mind, there had been a very severe
 war in rates. I do not know whether that was the reason for the
 creation of this Commission or not, but the struggle had been very
 disastrous; two or three lines, I think, were very much crippled,
 going into the hands of receivers; and just before the act was passed,
 effective in April, 1887, I think, the lines got together and said,
 “Here, let us stop this foolishness; let us have some standard of
 rates and see what we can do on that basis. I believe the rates were
 made 50 per cent of the old tariff rate that had been used for two
 or three years. I presume the carriers thought that it would not be
 judicious to put their rates right up to standard 100 per cent, so
 they decided on a 50 per cent tariff.”

 THE CHAIRMAN. You mean 50 per cent more than the published rate, or 50
 per cent of the published rate?

 MR. LUCE. Of the published rate....

 THE CHAIRMAN. That means your published rates, which your line had
 published up to that time in the eighties, were probably about twice
 that much?

 MR. LUCE. Yes, sir.

 THE CHAIRMAN. And yet that was an effort to bring together a stability
 of rates, and to get more out of the traffic than you had been getting
 during this war, I suppose?

 MR. LUCE. Yes, sir.

 THE CHAIRMAN. So that, as a matter of fact, prior to that, you had not
 been getting even as much as ... the 50 per cent basis?

 MR. LUCE. No, sir.

 THE CHAIRMAN. It was a general departure from the so-called published
 rates of more than 50 per cent?

 MR. LUCE. Oh, yes.[373]


Concrete Instances

The practice of quoting a lower rate to one person than to another
in order to secure a specific shipment, or in consideration of an
agreement for exclusive patronage of the railroad which granted the
rebate, was clearly a case of personal discrimination. A concrete
case which is illustrative of the general policy with which we are
concerned was brought to public notice in California in the year 1886,
when the Central Pacific was charged with rebating large sums to two
favored shippers named Friedlander and Reed. It appeared in fact that
the railroad had paid $6,000 at one time to Friedlander for rent of a
wharf at Vallejo, and 25 cents a ton on a shipment to a certain Mr.
Reed at Knight’s, on business destined to Vallejo. These payments were
explained by the company as follows:

The Friedlander wharf vouchers were explained by showing that, in
consideration of the rental of said wharf, Friedlander agreed to, and
did, send the whole of his immense grain purchases on the Sacramento
River, and at other competing points on the California Pacific, by
rail instead of by steamer and sail; and when one remembers the
enormous quantities of wheat and barley purchased by him, the “grain
king of California,” there is no doubt that the contract was a source
of much profit to the company. The Reed voucher for 25 cents per ton
for loading wheat from his warehouse at Knight’s Landing, was fully
explained by Reed himself. He had a warehouse at that point on the
bank of the river, and water craft would take his grain at the same
rate charged by the railroad company, loading and unloading the same
at their own expense, while the railroad company required the shipper
to do the loading. When asked to patronize the railroad, Reed told Mr.
Towne, general manager, that he could have the grain carried by water
at the same price that the Southern Pacific demanded, and that the
steamers and schooners would do the loading without charge. In order to
secure the business, Mr. Towne told Reed that if he would ship by rail,
the company would allow him 25 cents per ton for loading, thus securing
business for the road that would have been otherwise lost.


“Special” Contract System

In all probability the Reed and Friedlander cases were but two of a
great many instances of similar favors granted to large shippers, and
to shippers strategically placed on water lines in California. This
is certainly implied in the testimony of Mr. Stubbs before the United
States Pacific Railway Commission. Moreover, there is good independent
evidence to the same effect in the available data concerning the
“seasonal” or “special” contract system which became notorious in
California in the late seventies and early eighties. The outlines of
this last-named arrangement were as follows:

As early as May, 1878, the Central Pacific Railroad offered to
guarantee a maximum rate of $2 per hundred pounds upon all grease wool,
eastbound, moving over its lines from San Francisco to New York. In
consideration of this guaranty it required shippers to undertake to
ship all wool which they sent to destinations east of the meridian
of Omaha by way of the Central Pacific and such connecting lines as
the Central Pacific Railroad Company might elect. In case of failure
to live up to the agreement, the shipper bound himself to pay an
additional rate of 75 cents per hundred pounds upon all shipments made
or which might have been made by rail during the time of the contract.
Before this arrangement was insisted on, shippers were accustomed to
forward their finer wools by rail at the $2 rate, but to send their
low-grade wool by sea at a rate of 50 cents per hundred pounds.[374]

The system of special rates and exclusive contracts was not at first
applied to westbound freight, nor to general merchandise, whether
moving east or west. Late in July, 1878, however, notice was given
of advances in westbound merchandise rates which in many instances
amounted to as much as 100 per cent, and at the same time a tender was
made of rates below the published tariff to shippers who entered into
special contracts with the railroad for exclusive handling of their
freight. The Central Pacific management placed the responsibility
for the rate advance upon the Union Pacific, and gave publicity to
a telegram of protest signed by Mr. Stanford.[375] There is reason
to believe, nevertheless, that the Central Pacific management was
cognizant of the matter from the first, and it is certain that Mr.
Stubbs, general traffic manager of the Central Pacific, warmly defended
the system.


Terms of Contract

Under the special contract plan, the railroad company agreed to
charge not more than certain specified rates on articles named in the
agreement shipped from New York, Pittsburgh, Cincinnati, and Chicago,
and other points taking the same rates to the Pacific Coast. Rates
on freight not specifically provided for were not to exceed those
published in the general tariff. In case rival railroads cut rates,
or in case competition by the Pacific Mail should become active, the
shipper was to be protected. That is to say, it was declared to be the
intent and purpose of the agreement to guarantee to the contracting
merchant rates which should be as low as those charged and collected
upon the same articles, between the same points, by any other all-rail
route which might compete for the traffic of California at any time
during the term of the contract.

The carrier also agreed that in the event of active competition with
the Pacific Mail for the traffic between New York and San Francisco,
the rates charged by rail during the period of competition should not
exceed those current on Pacific Mail vessels by more than certain named
amounts, ranging from 50 cents on goods taken at rates not exceeding
$3.50, to $3 on goods taken at rates exceeding $6. This guaranty was
not to be enforced at times when the rates of the Pacific Mail were
subject to the control of the railroads.

In consideration of these assurances the shipper agreed to forward “by
way of the railroads owned or operated by the contracting carriers
and such other connecting railroads as might be designated from time
to time, all goods, wares, and merchandise handled by the merchants
entering into the agreement which might or should be purchased in or
obtained from any point in the United States or Canada east of the
meridian of Omaha, during the term of this contract, for sale or use on
the Pacific Coast.”[376]


Rates under System

It appears that at the beginning the same rates were quoted to all
shippers signing the contract. That is to say, two rate sheets were
published, one known as the “white list,” and the other as the “pink
list.” The white list contained the open, or public rate; the pink
list contained the contract rate. Contracts were made with individual
shippers that if they would give to the railroad line all of their
traffic for a year to the exclusion of ocean carriers, they would have
a rebate down to the figure fixed in the pink list. Somewhat later,
however, jobbers on the Pacific Coast were individually dealt with, and
the rates began to vary.

Mr. Stubbs says in describing this phase of the matter:

 We tramped the streets here for a couple of months, explaining our
 ideas to the principal importers. By some we were met with cordiality
 and approval. Others were a little indifferent. Where a merchant liked
 the scheme, we would sit down with him, and, by examining his bills of
 lading by Cape Horn and his insurance policies, we would get an idea
 of the quantity he would ship by the several routes and the cost to
 him by the use of the several routes. We would then aim to make the
 rate so that upon the whole it would average about the same. We would
 average the rate while he was using the three routes.

Still later the railroads returned to the one-rate policy. To arrive
at this rate they adopted a plan of “harmonization”; they averaged
the rates upon various commodities which had been charged to various
shippers and made a new schedule of rates, from which they varied as
emergency might require or expediency advise, by the current method of
rebating.[377]


Administration of Contracts

The railroad company reserved from the beginning the option of
way-billing the goods and collecting freights according to the printed
rates, agreeing to return the difference on presentation of vouchers to
the general freight agent of the Central Pacific at San Francisco after
the lapse of a reasonable time for auditing and adjusting the bills.
The carrier also always insisted on the privilege of examining the
shipper’s books in case it suspected a violation of the agreement. In
some respects, the wording and administration of the contracts became
more stringent in the later years. J. T. Doyle, a well-informed San
Francisco attorney, asserts that at the beginning merchants were merely
forbidden to import goods otherwise than by rail. Following this the
prohibition was extended to the handling or buying of goods imported
by sea by other parties. Finally the boycott reached to the offending
importers themselves, and firms signing the contracts were bound not
to sell or deliver goods to anyone who was in the habit of importing
otherwise than by rail.[378]

Probably there was some difference in the treatment of different
shippers in these matters. Mr. Hawley, a large importer of hardware,
told a committee of the California legislature in 1884 that he was at
liberty to buy a great many things “to sort up with,” even goods sent
via the Horn. On the other hand, there were a good many cancellations
of contracts for alleged violations, and shippers lived in continual
apprehension.

Taken as a whole, the special contract system was an exchange of a
rebate by the railroad for an agreement for exclusive patronage on the
part of the shipper. Prior to 1878, bulky, low-grade articles moving
between the Atlantic and the Pacific coasts usually went by sea. Rates
were lower and saving in time not important. High-grade goods and
freight requiring quick transportation went by rail. It was the idea of
the railroad that if compelled to choose, Pacific Coast business men
would prefer to import all their freight by rail rather than to bring
it all in by water, and that this would substantially increase railroad
revenues even though incidental concessions in rates had to be made.


Objections to Contract Plan

This special contract plan was objectionable to shippers for three
reasons. In the first place, it seemed likely to increase the rates
which they would have to pay. Although the railroad undertook at the
inception of the scheme to meet existing rates by water, at least to
such an extent that the total expense to shippers who made special
contracts with the railroads would not be increased, it needed no great
prescience to foresee that the exclusion of water carriers from the
business of the Pacific Coast would sooner or later bring about an
increase in transcontinental rates. When special contracts were offered
to merchants in Stockton, Los Angeles, Marysville, and Sacramento, San
Francisco importers made the additional complaint that their natural
advantages as residents in a seaport town were neutralized.

In the second place, the administration of the plan required a
supervision over the business of individual dealers which was
extremely distasteful. It was asserted that the railroads placed men
on the wharves to take the marks of goods brought in by sea, that
they followed up the drays to see where the goods went, and that they
inspected the books of merchants to make sure that importers who had
signed contracts had no dealings with firms who still patronized the
shipping lines. Nor was this a casual abuse, but a necessary feature in
the plan.

Again, the system lent itself to discrimination. Mr. Stubbs insisted
that contract rates were open to all shippers, large or small, who
would sign the necessary papers, but it was not denied that the first
arrangements were made with large dealers only,[379] nor that during
at least one period the whole scheme involved the abandonment of a
published and open tariff in favor of a system of bargains in which
each shipper’s rate was individually and secretly determined. Under
such a plan it was inconceivable that discrimination should not develop.

Ostensibly the offer of a special contract was one which shippers were
free to accept or to reject as they saw fit. Practically, this was not
so. If A took a contract and B did not, the latter’s ability to compete
was seriously impaired. For B had to import some things by rail in any
case, while the fact that less business in the aggregate reached the
Pacific Coast by sea reduced the shipping facilities which B otherwise
would have had at his command.[380]


Transcontinental Traffic Stimulated

Special contracts seem to have been a distinct success from the
point of view of the western carriers. When they were introduced the
percentage of transcontinental freight carried by the rail lines was
small, probably not over 25 per cent of the whole. At the end of six
years under the new system this percentage had risen to between 60 and
75 per cent.[381] The change was certainly not entirely due to the
policy of special contracts, but part of the change may be attributed
to the plan.

The policy was nevertheless given up in 1884 owing to the refusal of
the eastern trunk lines to take any further part in it. According to
Mr. Stubbs, the eastern companies believed that the advantage of the
system hardly paid them for the confusion in their accounts incident
to this method of conducting business. Moreover, there was legitimate
apprehension lest the contracts provoke antagonistic legislation
at Washington. Mr. Stubbs tried to argue the question, but without
success.[382]




CHAPTER XV

LOCAL RATES IN CALIFORNIA


Charging What the Traffic Will Bear

The general policy of the associates in dealing with problems of
rate-making in which rival towns were interested, was the same as that
which they adopted to meet differences in competitive power between
different individuals. The tests applied were simple. What was the
market to be reached? Had the community concerned an alternative
route? Was there an alternative source of supply which limited the
willingness of the community to pay freight? If so, was this second
source of supply one served by the Central Pacific, or one which had
the benefit of water communication, or possibly one which possessed a
rival rail connection? To what extent should concession be made from
the highest rate which could be charged, in order to promote the growth
of business?[383]

The standard of rate-making just described, which may be summed up as a
policy of charging what the traffic would bear, was not peculiar to the
Southern Pacific at the time it was adopted, nor was it particularly
repugnant to public opinion in California, taken as a whole. The
error must not be made of ascribing to the western communities of the
seventies and eighties a clear conception of the reasons of public
policy which are properly urged today against the unlimited recognition
in railway rate schedules of the competitive forces which still have
free play in private business. Such ideas have slowly developed only
during the last forty years.


Limited Encouragement of Business

Nor was the policy of adapting rates to the ability of shippers to pay
inconsistent with the rendering of important service to business men in
California and elsewhere who were seeking to expand their sales. Only
a few illustrations need be given of the promotion of business by rate
adjustments, but they will serve as examples of many more about which
information is on record.

One case of this sort, which shows the willingness of the Southern
Pacific management to respond to what they considered a reasonable
request, had to do with the shipment of beer from a place known as
Boca, in the state of Nevada, to San Francisco. It appears that a
gentleman named Hess once conceived the idea of establishing a brewery
at Boca. This town was 220 miles from San Francisco, and yet all of Mr.
Hess’s beer had to find a market in the latter place, in competition
with beer from Milwaukee and St. Louis. Mr. Stubbs, general traffic
manager of the Central Pacific, welcomed the proposal to build a
brewery in the West, and put in special rates to help shut out the
eastern product. Every pound of brewery supplies, he reasoned, would
have to go over the Central Pacific. It was all clear gain, like so
much money picked up out of the ditch. In another case the Southern
Pacific quoted special rates on sugar from San Francisco to the
Missouri River, to enable the California Sugar Refining Company and
the American Sugar Refining Company to sell their sugar at the Missouri
River in competition with sugar reaching New York by water and thence
moving westward.[384]

Still again, in 1884 an attempt was made to persuade the St.
Louis-Kansas City lines to participate in a rate of 75 cents per
hundred pounds on cast iron pipe from St. Louis to the Pacific Coast
in order to encourage production in the Middle West in competition
with that on the Atlantic seaboard. The matter of the 75-cent rate was
taken up with J. W. Midgley, Trunk Line commissioner, who declined
temporarily on December 24, 1884, on the ground that the rate would
be a special one, and that there was an understanding that no special
rates should be made prior to January 31 next ensuing, pending an
anticipated agreement between the Transcontinental Association and its
eastern connections.[385]

In the instances which have been given, the impelling motive of the
Southern Pacific was frankly to increase its profit by increasing the
movement of freight over its line. Yet the shipper was also benefited
because his interests were substantially identical with those of the
railroad company, and he warmly welcomed the powerful support of the
railroad lines. These cases are not unimportant. The enumeration of
such isolated instances, however interesting as they may be, affords
no very clear picture of the aggregate of local rate adjustments with
which the Southern Pacific interests were concerned. For this purpose a
more systematic survey of the rate system administered by the Southern
Pacific is necessary, and to this attention is now directed.


Distance the Governing Factor

The foundation of any system of railroad rates is the distance which
commodities are carried. Generally speaking, the Southern and Central
Pacific railroads, like other companies in the United States and
Europe, varied their local charges with the distance between point of
origin and point of destination. To illustrate this point briefly, two
charts are here presented.

[Illustration: Chart showing rates on second-class freight and on grain
in the Sacramento Valley, 1876.]

The first chart depicts the rates on second-class freight and those
on grain in January, 1876, between Sacramento and points in the
Sacramento Valley north of that city. Second-class freight at this
time on the Southern Pacific included articles such as coal oil,
agricultural implements, machinery, furniture, crated glassware, and
wines and liquors. Freight of the description mentioned ordinarily
moved north from the city of Sacramento. Grain, on the contrary, moved
south. It will be observed that rates on the lines of the Southern
Pacific increased with considerable regularity as point of origin or
destination proceeded north into the non-competitive territory around
Tehama and Redding.

[Illustration: Chart showing rates on miscellaneous commodities in the
San Joaquin Valley, 1892.]

The second chart displays rates between San Francisco and stations in
the San Joaquin Valley as far south as Fowler, 205 miles distant from
point of origin. These rates are for the year 1892.

Non-competitive rates in the San Joaquin Valley in 1892 increased as
distance grew greater, much as they had increased in the northern
territory sixteen years before. The rates given are for a few
commodities only, namely, agricultural implements, barbed wire, boots
and shoes, coal, and grain; but these are typical of the construction
of schedules on a much larger number of articles. The extent of the
increase was relatively greater to points beyond Lathrop because of the
effect of water competition on San Francisco Bay.


Grades and Traffic Density

These two schedules illustrate a fact which could be readily proved by
repeated examples, namely, that local rates in California were and are
first based on the element of distance. Possibly such a fact might be
assumed; yet in California, as elsewhere, the statement that railroad
rates have varied with the distance traversed needs promptly to be
qualified in order to be true. For, first of all, it was evident at
the beginning that costs of transportation were not solely determined
by distance, and that other considerations had to enter in. One of
these other considerations was the matter of grades. Because of the
conditions under which the Central Pacific was constructed, to say
nothing of the extremely mountainous character of certain portions of
the Central Pacific lines, differences in the rates per ton per mile
between the valley and the mountain sections were introduced by the
company at the commencement of its history.

A second characteristic of railway traffic which had a profound effect
upon early railroad tariffs was the relative density of business. Mr.
Stanford advanced the theory that the railroad should strive to secure
a certain average earning per car; and in sections where business was
light, as well as upon commodities which were bulky in proportion to
their weight, a high average rate per hundred pounds was accordingly
charged.

Relative grades and relative density of traffic were not the only
conditions relating to cost which influenced the varying level of
transportation rates in California, but, apart from distance, they
were perhaps the most important, and in any case they may be taken
as illustrative of the group of circumstances to which they belong.
In addition to the whole class of facts relating to cost, however,
the Southern Pacific gave heed to matters of value of service in the
fixing of its rates. Nothing will be said here of the principles of
classification of freight, principles which have to do in part with the
value of the service rendered; nor of individual differences between
shippers, which have been alluded to in the preceding chapter in the
discussion of personal discrimination. The effect of competition in
distorting distance schedules in California will, however, be dealt
with at some length.


Water Competition

It has already been pointed out that the presence or absence of water
competition has always been a most important factor in determining the
relative adjustment of local rates in the state of California. This
competition has been extremely pervasive. Although the scarcity of
good harbors and the location of the Coast Range of mountains hinders
access from the sea into the interior of California, yet, on the other
hand, the ports of San Diego, San Pedro, and San Francisco, and the
long stretches of navigable water on the Sacramento and San Joaquin
rivers have opened the possibilities of water shipment to a multitude
of inland towns. Indeed, in 1883 General Manager Towne, of the Central
Pacific, submitted to the State Railroad Commission a list of fifty-two
points in California at which the Central Pacific and its leased lines
met direct water competition. The water routes included San Francisco
Bay and the Sacramento River and sloughs, Suisun Bay, Napa River,
San Joaquin River, Feather River, the Pacific Ocean, Wilmington Bay,
and the Colorado River. In addition, Mr. Towne enumerated eighty-two
points where rates were affected by proximity to the competitive points
previously mentioned.[386] On the face of things, the extent of the
water competition thus indicated was sufficient to warp almost beyond
recognition the simple distance scale of tariffs which a railroad
completely protected from competition would naturally apply.


Low Rates to Competitive Points

An illustration of the effect of the water routes on local rates
is found in the fact that the round trip fare from San Francisco
to Sacramento by rail in 1878 was $3, while that to Woodland was
$4.25.[387] The _San Francisco Chronicle_ declared in 1879 that,
according to a recently published schedule, the movement charge
for grain, potatoes, vegetables, and wool from Lathrop to Mojave
was exactly the same as to Ravenna, Newhall, or Los Angeles. The
first-named distance was 288 miles, making the movement mileage rate
7.2 cents; the second-named distance was 337 miles and the rate per
mile was 6.2 cents; the third distance was 356 miles, the rate being
only 5.8 cents; and the distance to Los Angeles was 388 miles,
or a mileage rate of 5.4 cents. The truth of the statement of the
_Chronicle_ is established by data published by the State Commissioners
of Transportation in 1877, which show the striking contrast that
existed in 1877 between non-competitive rates in the interior valleys
and rates to points which enjoyed the advantage of nearness to the
water routes.

Low water-compelled rates to Sacramento and to Los Angeles were in
force as early as 1877. Yet this was only a beginning, and as time went
on and the number of towns in California increased, the practice of
recognizing the force of water competition was extended. Moreover, the
Southern Pacific began to quote _lower_ instead of merely equal rates
to more distant points which enjoyed the advantage of nearness to a
water location. Since the ability to make use of a competing railway
afforded opportunities similar to those afforded by ability to use a
water route, low rates were also extended to towns served by more than
one railroad line. All this greatly complicated the rate situation in
the state, gave rise to numerous complaints, and renders difficult the
task of concise description.


Rates to Intermediate Points

Official confirmation of the general correctness of the complaint of
discrimination which reached the public press from time to time is
found in a comprehensive investigation of railroad rates in California
which the Railroad Commission of that state undertook as late as the
year 1916. This inquiry was provoked by an application by the Southern
Pacific, Santa Fé, and other railroads in California for relief from
the clauses of the amended state constitution and of the California
Public Utilities Act prohibiting greater charges to intermediate points
than were collected on shipments to more distant points over the same
line. Although the legal aspects of the case were therefore the result
of modern legislation, the facts brought out were typical of conditions
of long standing.[388]

[Illustration: Diagram showing adjustment of freight rates between San
Francisco and Stockton, 1916.]

Exhibit No. 1 in the case in question referred to class rates in
the San Joaquin Valley. It appeared that class rates between San
Francisco, San José, Port Costa, Stockton, Sacramento, Marysville, and
intermediate points to Los Angeles, were 60 cents per hundred pounds
first-class, and corresponding sums less for the lower classes. These
rates were shown to be controlled by the class rate of the Pacific
Coast Steamship Company, which quoted a through first-class rate of 52
cents, including wharfage and handling, between San Francisco and Los
Angeles via San Pedro. On all-rail shipments down the valley, as well
as on shipments over the coast rail route, however, water competition
was not effective. The rate from San Francisco to Simi, 429 miles from
San Francisco, was therefore 80 cents, and that to Acton, 415 miles
from San Francisco, was 83 cents, although shipments from San Francisco
to Los Angeles passed through Simi and Acton on their way to Los
Angeles over the coast and San Joaquin Valley routes, respectively.

A condition similar to that at Los Angeles and at points in the San
Joaquin Valley was developed in connection with shipments from San
Francisco to Stockton. The diagram on page 266 will show the relative
position of these two towns as well as that of an intermediate place
named Banta.

The distance between San Francisco and Stockton was 91 miles, and
the first-class rate was 10 cents per hundred pounds. This rate
was identical with the rate charged by boat lines operating on San
Francisco Bay, and on the Sacramento and San Joaquin rivers. But
although these boats touched at some intermediate points, their
competition was not everywhere effective; so that the first-class rate
from San Francisco to Banta, 74 miles, could be and was 17 cents,
although freight from San Francisco passed through Banta on its way to
Stockton.


Other Instances

Still another illustration of the influence of water competition upon
local rates in California may be drawn from the territory immediately
north of San Francisco Bay. The towns involved in this adjustment were
San Francisco, Sebastopol, and Santa Rosa, as shown in the diagram on
page 268. The first-class rate from San Francisco to Sebastopol on the
Northwestern Pacific was 23 cents. This rate was shown to be limited by
the competition of a rail and water line, including a steamship haul
from San Francisco to Petaluma and a haul over an electric railway
from Petaluma to Sebastopol. The distance from San Francisco to
Sebastopol over the Northwestern Pacific was 58.5 miles. The distances
from San Francisco to the towns of Kenilworth and Santa Rosa, on the
same railroad, were 45.7 and 52.5 miles, respectively. Shipments to
Sebastopol passed through these places, but because neither enjoyed
the advantage of an alternative route, the first-class rate to Santa
Rosa was 25 cents and that to Kenilworth 28 cents—materially more than
was charged for the longer haul to Sebastopol.

[Illustration: Diagram showing adjustment of freight rates between San
Francisco, Santa Rosa, and Sebastopol, 1916.]

While instances of the extreme discrimination of a greater charge for
a shorter than for a longer haul were shown in 1916 to be usually the
result of water competition, it has already been suggested that not
all cases of discrimination were of this sort. A particularly striking
case of unequal rates due to rail competition alone was brought out
in the same proceedings from which the preceding illustrations have
been drawn, by the application of the Atchison, Topeka and Santa Fé
Railway to continue lower rates from Los Angeles to Mojave, California,
a distance of 212 miles, and to Lindsay, a distance of 411 miles,
than were charged to Kramer, an intermediate point 174 miles from Los
Angeles. The relative position of the points is shown in the diagram
given above.

[Illustration: Diagram showing adjustment of freight rates between Los
Angeles and points north and east of Los Angeles, 1916.]

In this case the rate to Mojave at the time application was filed was
52 cents first-class, and that to Lindsay 70 cents, while the rate to
Kramer was 78 cents. But at both Mojave and Lindsay, the Santa Fé had
to meet the competition of the short Southern Pacific line, while at
Kramer this competition was not effective.


Development of State Retarded

The data which have been presented show that, while the system of
local rates in California was based originally upon distance, it soon
became profoundly modified by conditions of cost, and still more by
the presence of competition at strategic points, and by the occasional
necessity of reducing rates in order to stimulate the movement of
freight. The charges for short hauls in the interior valleys where
the Southern or Central Pacific possessed a monopoly were made high,
because traffic was scant and because the railroad was able to exact
a monopoly return. Rates were also regularly progressive under these
conditions. In sharp contrast to the practice which obtained where the
Southern Pacific was the only carrier, rates to points located upon
the coast, on navigable rivers, or on competing railroad lines were
relatively low and were often extremely irregular.

It is generally difficult to criticize a system of rate-making upon _a
priori_ grounds because the test of such a system is to be found only
in the form which it gives to the industrial life of the community to
which it is applied. There is reason to believe, nevertheless, that the
local rate structure created by the Southern Pacific gave an advantage
to a few shippers and to a few towns which affected unfavorably the
development of the state. This is the fundamental objection to any
system of rates in which competitive influences are recognized to an
unlimited extent.

Without going further into the matter at this point, we will content
ourselves with adding to our description of local rates in California
some observations upon the attitude of California shippers with respect
to railroad charges.


Conflicting Claims of Cities

The rates of the Southern Pacific and of the Central Pacific railroads
were unpopular in California because they were believed to be too high.
Beyond this, and when it came to questions of relative adjustments,
each community looked at the relations of rates which interested it
from the narrow viewpoint of its individual advantage. Indeed, when one
reviews the course of the controversy between railroad and shipper in
the state, it seems very clear that, apart from questions of excessive
profit, the objections which California cities entertained toward the
irregular and unequal rates charged by the Southern Pacific Company
were only slightly based on considerations of general policy, but
were, on the contrary, due to the feeling of various towns that their
distributing areas were unfairly circumscribed by the manner in which
railroad rates were arranged.

One small piece of evidence to show that competition between rival
towns or producing districts was the reason for some of the most
bitter attacks upon the railroad, may be found in the complaint of the
anti-monopolists of Tulare County in 1885 that their fruits, which
ought to have found a market in the southern parts of the state and in
Arizona, were subjected to higher freight rates than were the fruits
of Sacramento and of San José, points more than 200 miles to the
north.[389]

A few years earlier the merchants of Stockton insisted that the rates
out of Stockton were extortionate as compared with the rates out of
San Francisco. The distance from Lathrop to Stockton was said to be 10
miles, and the railroad rate per ton on wheat was $1.20, or 12 cents
per mile. The distance from Lathrop to San Francisco was 82 miles, or
more than eight times the distance to Stockton, but the price per ton
for wheat was only $2.50, or about one quarter the price per ton per
mile in the first instance. The price per ton from Lodi to Stockton was
$1.40, and to San Francisco $2.50; but whereas the last-named sum was
less than twice the former, the distance from Lodi to San Francisco was
eight times as great as the distance to Stockton.[390]

In addition to their contention that mileage rates on shipments
into Stockton compared unfavorably with rates on shipments into San
Francisco, Stockton residents made the general charge that rates up the
San Joaquin Valley were generally less than the rates down the valley.
The rate from Stockton to Merced was said to be $6.80 per ton, but the
rate from Merced to Stockton was $3.40. Stockton objected to forcing of
the San Joaquin Valley to make San Francisco its market.[391]


Interstate Commerce Decision

Complaints similar to those voiced by Stockton were registered by the
people of Los Angeles. In the eyes of inhabitants of that city, the
rates on northbound freight from Los Angeles consigned to the San
Joaquin Valley were relatively higher than the rates from San Francisco
south into that same valley. Yet, dissatisfied as Los Angeles was with
the relation which her rates bore to those out of San Francisco, it
seemed to other cities in the south that her position was on the whole
more favorable than was that of her neighbors. In 1889 a dealer in the
city of San Bernardino protested against being forced to pay a higher
rate from eastern points than was charged the city of Los Angeles. He
showed that the rate on agricultural implements from the Missouri River
to San Bernardino was $1.27 per hundred pounds while to Los Angeles it
was $1.07. On stoves the rates were $1.19 and 99 cents, respectively,
and on school furniture $1.55 and $1.35. This preference was alleged to
be discriminative and illegal.[392]

In a decision approving the discrimination against San Bernardino,
the Interstate Commerce Commission in 1890 remarked that originally
southern California had been served from San Francisco direct; and that
San Francisco jobbers had covered its territory. When the railroads
reached Los Angeles they found it to their advantage to grant it low
rates, not so much because it lay near the Pacific Ocean as because
the interests of the Southern Pacific and especially of the Santa Fé
demanded that some point in southern California should be given such
a rate that merchandise from the East could be brought there all-rail
and from that point be distributed. The fact that water competition
was not the only influence which determined the Los Angeles rate from
the eastern states was indeed shown later by the fact that the port of
Los Angeles, San Pedro, did not receive a terminal rate until 1910,
although Los Angeles itself had been given terminal privileges at least
twenty years before.[393]

Stockton, Los Angeles, and San Bernardino thus illustrate in their
conflicting claims the constant effort of cities in California to
extend the area over which they might distribute goods. Among other
instances of dispute between California cities may be mentioned
the demand of Santa Barbara in 1907 to be made a Pacific Coast
terminal,[394] and the angry contentions of Santa Clara, San José,
Marysville, Santa Rosa, and Fresno in 1914 over the question of
relative railroad rates from eastern points.[395] The characteristics
of the system of transcontinental rates which were involved in these
complaints will be discussed in the following chapter.




CHAPTER XVI

THE TRANSCONTINENTAL TARIFF


Market and Railroad Competition

The chief difference between the local situation in California and the
condition of affairs which prevailed in the case of through shipments
to eastern points, lay in the fact that the competition of markets
and the rivalry of competing carriers played a more important part
in the through shipments than they did in local shipments. By market
competition we mean the attempt of geographically distinct producing
centers, each aided by a separate group of railroad lines, to sell in
a common area of consumption. Such competition occurred, for instance,
when California oranges sold in the Mississippi Valley in competition
with oranges from Florida, or when California lemons sold in the same
territory in competition with Sicilian lemons imported at New Orleans
or at New York. We have already seen that cities competed with each
other within California itself, but this competition was less important
within the state than it was in the case of hauls across the continent.

It should be recalled that the Huntington interests possessed a virtual
monopoly of local business, while the extent of the competition between
carriers on through traffic may be briefly indicated by observing that
the Central and Southern Pacific companies had direct relations with
no less than six other transcontinental railroads, namely, the Union
Pacific, completed in 1869; the Santa Fé, which reached the town of
Deming and effected a connection with the Southern Pacific in 1881; the
Texas Pacific, built to El Paso in 1882; the Northern Pacific, opened
from St. Paul to Portland in 1883; the Canadian Pacific, completed in
1887; and the Great Northern, which was finished in 1893. None of these
railroads reached San Francisco except the Santa Fé, which obtained an
independent California connection in the late nineties. The Santa Fé
entered Los Angeles, however, in 1885, and the Union Pacific enjoyed a
connection with Portland through the Oregon Short Line and the Oregon
Railway and Navigation Company as early as 1884. From Portland, Los
Angeles, and Vancouver, freight could be distributed by water all up
and down the Pacific Coast.[396] Moreover, the competitive relations
which Pacific Coast cities bore to each other made it necessary to keep
their rates from the East on an approximate parity, and caused the
Central Pacific to be affected by charges which were not on their face
applicable to any point in which that company had an interest. There
were combinations in respect to transcontinental railroad business from
time to time, but none sufficient to control rates except for short
periods.


Transcontinental Rate Adjustment

These differences in conditions between state and interstate traffic
doubtless influenced Mr. Huntington and his advisors when they came to
establish what is known as the transcontinental rate adjustment. Yet
any examination of the through rates charged by the Central Pacific
will show that in their relation to each other, at least, these rates
were built upon much the same principles as the local rates discussed
in the previous chapter. There is no essential difference between a
rate schedule which applies a lower rate between New York and San
Francisco than it applies between New York and Denver, and one which
provides a lower charge between San Francisco and Los Angeles than
between San Francisco and Bakersfield.

The tendency in public discussion is to regard the transcontinental
rate structure as different from all other structures. It is not
different, either from the rate systems in force in some other parts
of the country, such as the Southern classification territory, or from
the general arrangement of rates in business local to California. The
reason why transcontinental rates to Pacific terminals are low is
that there is competition at terminal points. The reason why rates
to intermediate stations are high is that competition is lacking at
such places. The reason why local rates between San Francisco and Los
Angeles are low is that shipments must be diverted from the water
lines; while the rates from San Francisco to points in the upper San
Joaquin Valley are high either because competition is absent or because
it is less severe. Similar general causes in both cases produce similar
results.


Rate Structure

It is necessary to describe the transcontinental system at this
point in order that the reader may have before him the outlines of
the rate scheme for which the Huntington-Stanford group were in part
responsible; but in view of the very general understanding which the
public has of the system, the description will be brief. A summary
account is as follows:

The primary fact in transcontinental rate-making is that railroad
rates between the Atlantic and the Pacific coasts of the United States
were originally made, and have remained relatively low. The lowest
rates quoted, however, have never until recently been available at
all points in California, Oregon, and Washington, but only at certain
selected cities. The towns to which low rates have been quoted under
the transcontinental adjustment are called Pacific Coast terminals.
Terminals, being mostly located on the seaboard, or within easy reach
of it, enjoy rates low enough to induce their residents to patronize
the rail lines rather than the water lines around the Horn or the
combined rail and water routes across the Isthmus of Panama and the
Isthmus of Tehuantepec. This does not mean, of course, that rail rates
to terminals have been as low as water rates, but it does mean that,
all conditions of shipment, including speed, safety, and regularity,
being taken into account, the advantages of shipment have been
equalized. The rates to and from all terminals have been uniformly the
same.

A characteristic feature of the transcontinental rate system is
that the rates to towns and cities in the vicinity of terminals are
determined by the absence of water competition. Inasmuch as a shipper
located at an inland point is obliged to send his goods to the seaboard
before he can avail himself of the advantage of a water haul, it
becomes possible to charge him a rate equal to the sum of the terminal
rate and the local rate which he will have to pay without causing a
diversion of his freight from the rail to the water lines. It is true
that there is a certain limit to the total charge which can be demanded
from such a shipper, due to the circumstance that at some figure the
expense of a direct haul from the local point in question to the
final destination of the goods upon a non-competitive mileage basis
will be less than the combination upon the terminal, but this limit
is effective only in the case of communities located a considerable
distance to the east of the seaboard shipping point. One result of the
application of this system to local points is that towns situated upon
the direct line between eastern cities and Pacific terminals often
pay higher rates than are charged upon freight passing through these
places and carried possibly several hundred miles beyond to the coast
terminals. Local communities so situated are known as “intermediate”
towns.

These three features of the transcontinental rate structure, namely,
that rates between the Atlantic and the Pacific seaboards are low,
that the lowest rates are charged only to selected towns, and that
rates to places other than terminals are made by combination upon
the terminals, are the elements which have given character to this
adjustment, and are therefore the points in it which are best known. To
make a statement of the broad outlines of the plan complete, however,
two other statements must be added.


Group System in the East

The first additional characteristic of transcontinental rates is that
on eastbound business, particularly in the case of the products of
California agriculture, the same rates are applied from intermediate
as from terminal points. This is to place the shipping communities of
the state all upon an equal footing. The second feature has reference
to conditions upon the eastern end of the transcontinental haul, rather
than upon the western. In the eastern part of the country the system of
terminal and intermediate rates is not applied upon transcontinental
business. Instead, it has been customary to divide the area east of the
Rocky Mountains into a series of great groups, now ten in number, and
to quote to each of these groups rates which are either the same in all
cases, or which increase as the distance grows greater.

This failure to apply in the East the same principles which govern
in the West has been doubtless due to the insistence of cities like
Chicago that her rates be at least as low on shipments to and from the
Pacific Coast as the rates which New York enjoys, as well as to the
desire of railroads which begin at Chicago or the Mississippi-Missouri
River to encourage the growth of business in the Middle West. Mr.
Huntington was credited with the desire to establish rates from the
Missouri River which should be lower than rates from New York, and the
reasons which were in his mind may easily be imagined. Such rates were
actually in effect between 1887 and 1894, but the principle of graded
charges was abandoned as a result of a rate war which broke out in
1894.[397]


Terminal Points

This brief description of a complicated rate adjustment will show
that in through as well as in local rate-making the Central Pacific
management yielded to the unequal pressure of competition, and
particularly of water competition, at different points. Generally
speaking, the most important of all the forms of competition which the
company had to meet was water competition. Common alike to local and to
through transportation, this was important because it was difficult to
control, because it operated on a low cost basis, because it offered
transportation facilities to a very wide variety of classes of goods,
and because its possibilities for expansion were indefinite.

It is a mistake to believe that only low-grade commodities have been
shipped by the water routes. While it is true that the principal
movements by water are of the coarser freights, such as hardware,
rails, pipe, sugar, hardwood lumber, and asphaltum, yet there has
always been also a considerable transportation of higher grade
articles, including cotton ducks and denims, beans, canned goods, and a
large number of kinds of general merchandise. Indeed, all the canned
salmon and a very large percentage of the canned goods, together with
two-thirds of the beans produced in California, originate near enough
to the coast to reach tide-water at an expense not exceeding 20 cents
per hundred pounds. The Interstate Commerce Commission has remarked
that almost every article which moves from the East to the Pacific
Coast has been at times carried by the ocean,[398] and the truth of
this statement is generally conceded in discussions on the water
business.

It was the pervasive character of water competition, and the fact that
such competition was felt upon the Pacific Coast and not at interior
points, which originally established the position of the Pacific
terminal.[399] A terminal point, be it recalled, was, and is, under
the transcontinental system, a place which enjoys rates low enough
to attract traffic from the water to the railroad lines—a point
also upon whose rates the rates to other points are based after the
manner of the “basing point” system. San Francisco was a terminal.
So was Stockton, Sacramento, Port Costa, Richmond, Oleum, Antioch,
San José, Santa Clara, Los Angeles, and a considerable list of other
towns. At the beginning the city of San Francisco received a lower
rate than any other town because the competition of the water route
between New York and San Francisco was most evident. Mr. Stanford,
however, disclaimed responsibility for this limitation. His eastern
connections, he said, were to blame. The Central Pacific was willing
to be more liberal from the start, but the other lines would not join
with it in establishing through rates, and insisted on their locals.
For this reason goods originating at interior points were often hauled
to San Francisco, and then back east, in part over the same line by
which they had come.[400] Such a condition was highly unsatisfactory
to California towns other than San Francisco, yet by 1873 Sacramento,
Marysville, and San José had been given terminal rates,[401] and still
later the list of terminal points was very greatly extended. In 1910
there were 152 terminal cities on the Pacific Coast, of which 97 were
in California.[402]


Dissatisfaction with Rate System

Owing to the peculiar intensity of competition at their doors, Pacific
terminals therefore enjoyed exceptional advantages in rates as compared
with their less favored neighbors. On the other hand, even the terminal
cities expressed some dissatisfaction with the transcontinental
adjustment. It appears, for instance, that the growth of great
distributing centers was difficult under the scheme of rates which
was applied. So long as terminals were few in number, a considerable
concentration in business was possible. But when the terminals
multiplied, the territory controlled by any single city became limited
by the low rates accorded to the nearby terminal cities, and expansion
in any one spot became difficult. This rendered the volume of business
of the Pacific Coast jobbers comparatively small. In the case of the
Business Men’s League of St. Louis v. the Atchison, Topeka and Santa
Fé, already cited, the two eastern firms of most prominence in the
proceedings were the Simmons Hardware Company, of St. Louis, and
Hibbard, Spencer, Bartlett and Company, of Chicago. The former of these
firms then did business in every part of the United States except New
England, while the representatives of the latter testified that the
operations of his house were limited only by the confines of the earth.
Competition by concerns of this magnitude was difficult for California
houses to meet, especially at times when the eastern firms used the
Pacific Coast as surplus territory in which they could afford to
operate at a low margin of profit.

Another ground for dissatisfaction on the part of the coast cities
arose out of their belief that the system as applied, in spite of
its recognition of the advantages of the Pacific Coast, still fell
short of the real equities of the situation. It was insisted that San
Francisco was improperly shut out from Denver, Cheyenne, Salt Lake
City, and Ogden. The Southern Pacific was charged with carrying hats
from New York by way of the Union and Central Pacific routes and then
down the San Joaquin Valley to Yuma at a lower rate of freight than the
San Francisco dealer could send the same goods from his city to the
Colorado River.[403] This same complaint was repeated by Mr. Leeds,
of the San Francisco Traffic Association, in October, 1892, with the
observation that if the same rate per mile were applied on eastbound
traffic from San Francisco that was charged on westbound business from
Chicago to Utah common points, then San Francisco would do the lion’s
share of the Utah business instead of a mere 16 per cent.[404]

There is no doubt that a good deal of dissatisfaction with the
transcontinental system was felt first and last by shippers to and from
the terminal cities. Yet, after all, the situation of these cities as
a group was excellent. The communities which were really handicapped
were the towns intermediate between the Pacific terminals and the East,
towns which paid higher rates for less service than did the terminal
cities, and which found that this condition not only increased the
cost of living to their consumers, but prevented their merchants from
enjoying a profitable distributing trade.

It seems probable that the associates intended from the beginning to
charge the mountain towns more on through hauls than was exacted from
towns on the coast. Huntington relates a conversation which took place
at Carson, Nevada, in 1861, between Stanford, Dr. Strong, Mr. Crocker,
and himself, representing the railroad, and some twenty representative
men of Nevada. The Nevada people observed that Huntington kept a
pretty good hardware store, but that he was likely to leave it in the
mountains if he started to build a railroad in Nevada. Huntington
replied that he would look out for that, but, he continued, when the
road was built he proposed to charge through rates which, while less
than the Nevada people were paying for goods which then came to San
Francisco by boat and were subsequently teamed across the mountains,
would be materially greater than the rates to San Francisco. “We shall
charge you for bringing back,” said he, “almost as much as we shall
charge from New York.” After the road was built Huntington says he met
one of these same men with whom he had talked in 1861. “Said I, ‘You
recollect that talk we had in the Curry House in 1861?’ ‘Yes, oh yes.’
Well, we talked about that. He said, ‘You’ve got me there, Huntington.’
‘Well,’ said I, ‘I said you would grumble. Now,’ said I, ‘you shut
up.’”[405]


Objections

It is to be presumed that Mr. Huntington’s rejoinder was effective
in the particular discussion which he relates. Yet the grievances of
the interior towns found full and repeated expression after 1869,
and indeed are still emphatically presented at the present day. The
more fundamental criticisms of the transcontinental rate system are
the following: The principal objection directed against the whole
adjustment is that it leads to charges to intermediate points which are
prima facie unreasonable. Speaking of the rates on iron and steel, a
representative of the Traffic Bureau of Utah called the attention of
the House Committee on Interstate and Foreign Commerce in 1918 to the
fact that the rate on iron and steel articles for export from Chicago
territory to Pacific Coast terminals was 40 cents per hundred weight or
3.54 mills per ton per mile. He continued:

 They take an identical carload of the same commodity, and when it is
 going to the Pacific Coast for domestic consumption the rate is 65
 cents a hundred, or 5.76 mills per ton-mile. If they were to apply
 that rate at the Utah common points—the same 65-cent rate—it would
 pay 8.65 mills per ton-mile. But they say, “We cannot afford that; you
 must pay 10.84. We haul it for a man in Russia for 3.54, but that is
 only the out-of-pocket cost. We will make you a rate of 10.84, which
 is a lower rate than you are entitled to.

 I think any article, whether it is transportation or anything else,
 that could be produced at some profit at a price of 3.54, when you pay
 5.76 for it you are paying a handsome profit; and if you pay 8.65 for
 it you are paying an abnormal profit; and if you pay 10.84 for the
 same thing you are being outrageously imposed upon, which is what we
 are doing.”[406]

The second objection of the interior cities is that the system of
transcontinental rates limits the territory in which intermediate
wholesale firms can do a distributing business; and the third ground
of complaint, resulting from the other two, is that the policy of
permitting low rail rates to the coast cities has the effect of
building up large cities on the seaboard at the expense of the whole
interior country.


Reply of Railroads

In replying to these objections the coast towns take the position that
they are not especially concerned with the rates to intermountain
places, nor indeed with the rates which the railroads make from coast
to coast, except in the sense that the greater the number of carriers
which participate in transcontinental business, the better the service
is likely to be. Secure in the possession of adequate water connection,
they do not expect to pay higher rates than they have paid in the past,
whatever policy the railroads may adopt. They have no controversy with
the intermediate territory, and only support the present adjustment
because they conceive it to be for the best interests of the country as
a whole.

The burden of the defense therefore falls upon the railroads, and the
railroads assert that the policy of quoting low rates to meet the force
of water competition is necessary if the comparatively moderate rates
to intermountain territory are to be continued. Unless—said Mr. Spence
of the Southern Pacific, in his recent testimony before the House
Committee on Interstate Commerce—the rail lines are permitted to make
rates which will hold the through business, the terminal roads will
lose all of the net revenue derived from the port rate upon what is a
very large volume of traffic. The millions of dollars involved cannot
be withdrawn from the net revenues of the railroads without impairing
their efficiency and usefulness, while to compel the carriers to apply
sea-compelled rates to all traffic would yield an inadequate revenue,
because it would mean that the traffic as a whole would be carried at
rates which were not sufficient to cover all the elements of cost,
including fixed charges and other similar expenses.[407]


Further Comments

The most casual description of any basing system such as the one which
the railroads apply to transcontinental freight, suggests at once
several matters in respect to which special defense and justification
are required. One just cause of complaint arises out of the fact that
the through rate to any point except to a basing point is made up by
the addition of two rates, each of which includes an allowance for the
cost to the carrier of providing terminal facilities, or four terminals
in all, whereas no actual shipment makes use of terminal facilities
at more than two points, namely, the place of origin and the place of
destination.

A second cause for criticism of a basing system is due to the striking
disregard of distance which is inherent in it. Shippers are not only
apt to feel that for reasons of natural right rates for transportation
should vary with the distance moved, but, as we have seen, they are
usually quite incapable of being convinced that the costs of shorter
hauls are not less than the costs of longer ones, so that for this
reason also the nearer places should enjoy the lower rates. Again, and
this also has been suggested in the preceding discussion, a basing
system is attacked because it is said to centralize business unduly by
forcing the distributing business into the control of a few localities
such as the Pacific Coast terminals, to the exclusion of outlying
cities which could handle it more cheaply and more conveniently under a
proper adjustment of rates, by reason of their greater nearness both to
centers of supply and of consumption.

There is no question that the rate system upon the Pacific Coast made
it difficult for intermediate and local towns to import supplies
directly from the East and to distribute them through their own
organization. This was not the result of the difference between
terminal and local rates alone, but was the combined result of the
practice of the transcontinental carriers with respect to rates and
their practice with regard to carload shipments. That is to say,
the carriers not only quoted generally lower rates, carload against
carload, and small consignment against small consignment, to terminal
cities than to intermediate or to interior towns, but they also
granted many carload ratings to terminals which were altogether denied
to their interior competitors. In some cases this occasioned an
extraordinary difference in the total charge.

On the other hand, it should not be forgotten that to encourage
distribution through Pacific Coast terminals was not necessarily
to concentrate the whole business of distribution. The competition
between the Pacific terminal and the eastern jobber was just as real
as that between the Pacific terminal and the intermediate point. It
is sometimes forgotten how active this eastern competition was. That
it continually threatened the western distributor is shown by the
fact that in spite of the advantages enjoyed by western terminals, 50
per cent of the jobbing business in the hardware trade in southern
California was done in 1902 by houses east of the Missouri River, so
that the Interstate Commerce Commission expressed the opinion that in
the absence of some distinct advantage in the rate it would be very
difficult for Pacific Coast dealers to hold their own.[408] In central
California the proportion of the jobbing business done by eastern
firms ranged from 25 to 40 per cent. Certainly no decentralization
in business would have taken place had the California distributors
been compelled to withdraw in favor of men in Chicago and St. Louis,
nor would the aggregate cost of getting goods from producer to final
consumer have been decreased.


Inconsistency

It has been made clear in the discussion of transcontinental rates,
that the transcontinental carriers as a group have not been consistent
in applying the principles upon which they rely in justification of
their charges. Not only have towns like Los Angeles been given terminal
rates for reasons of general policy, but cities in the Mississippi
Valley, upon the other end of the transcontinental haul, have been
granted the same rates as New York on business to and from the Pacific
Coast, in order to place them on an equality with points on the
Atlantic seaboard. As the Interstate Commerce Commission remarked when
the matter was brought to its attention, there is no logical ground
for recognizing the desire of Chicago to compete with New York, and
for refusing to accord the same privilege to Denver.[409] If market
competition is to be recognized in one instance, it should be in
another.

It is a striking fact that when the commission was considering the
question of transcontinental rates in 1910, it appeared that the great
bulk of traffic destined to intermountain cities originated at Chicago
or at points west. Thus out of 21,000,000 pounds of carload freight
moved from eastern territory to Reno, Nevada, during the year 1908,
only 4,500,000 pounds originated east of Chicago, and of approximately
1,000,000 pounds of less than carload freight concerning which data
were available, only 10 per cent originated at the Atlantic Coast
cities of New York, Boston, and Philadelphia. The commission found in
the case in which these facts were brought out that taking traffic
to Reno as a whole, 75 per cent of it had its source between Chicago
and Denver.[410] On this traffic, at least, the effect of water
competition was slight, and yet it is upon the assumed presence of
water competition that the transcontinental system primarily rests.


Not Responsive to Changed Conditions

Nor have the transcontinental carriers been quick to recognize changes
in conditions which, temporarily at least, have eliminated water
competition from coast to coast. When the Panama Canal was opened,
considerable apprehension was felt by the carriers lest the new
all-water route between the Pacific and the Atlantic seaboards should
divert a substantial portion of the transcontinental traffic formerly
handled by the railroads. On this ground the railroads applied to the
Interstate Commerce Commission, and received permission not only to
continue the practice of quoting higher rates to interior towns than
were charged between eastern points and the Pacific Coast,[411] but
actually to increase the difference upon a selected list of eastbound
articles.[412] So much was directly in line with previous action and
was to be expected.

The carriers were not, however, so ready to recognize the interruption
of canal traffic as they had been prepared to take notice of its
beginning, and in spite of slides and war conditions which suspended
water competition, it took an order of the Interstate Commerce
Commission to secure an equality in the treatment of intermountain
and seaboard cities to which the former in accordance with the
fundamental theory of transcontinental rates were entitled under the
new conditions.[413]

In forming an opinion upon the rate system of the Central Pacific,
however, too much weight must not be attached to inconsistencies in
application so long as these are not altogether arbitrary, any more
than to the demand of competing cities for their “fair share” of
the business that is to be done. City ambitions are limitless, and
impossible to reconcile. The question is not how to determine the
territory within which a given city may be said to have a right to
distribute its goods, but whether or not the rate system introduced by
the Huntington group, all things considered, promotes the interests
of the territory which is served better than some system that may be
suggested.


Basing Rate System Necessary

It is the writer’s opinion that the transcontinental rate system has
always had evident defects. In the first place, it has generally
provided low rates to towns and it has quoted low rates on commodities
which have no access to the water routes. In the absence of competition
the distance principle should prevail. Second, it has often failed in
the past to make concessions to the cost basis of rate-making, which
would have removed complaint without altering the plan in principle,
such concessions, for example, as the reduction of rates to interior
points to something less than the sum of through and local rates to
allow for the relatively small amount of terminal service rendered.
And, finally, it has increased the amount of transportation incident
to the distribution of a given amount of freight. While the assertion
of cities without terminal privileges that they have the right to do a
specified amount of business is to be received usually with skepticism,
it does seem probable that the transcontinental railroads would have
reduced the aggregate cost of distributing transcontinental freight had
they encouraged more than they did the growth of the interior towns,
provided that they had supported these towns both against Chicago and
St. Louis and against the Pacific Coast.

This same policy would have had the important advantage, from the
railroad’s point of view, of developing industry at points which were
not affected by every change in the rates of its competitors. The
Central Pacific was not the first railroad in the country confronted
with the problem of how to treat the non-competitive points upon its
lines. Nor, unfortunately, was it the only railroad which adopted the
drifting policy of quoting rates to hold the business, thus favoring
the towns served also by its rivals in preference to towns more
peculiarly its own, and through the stimulus given to such places, in
the end creating a distribution of production which, of all possible
alternative distributions, was the one which rendered its hold upon the
business of its territory the least secure.

In spite of these defects, it is the writer’s judgment that
some basing rate system, in its broad outlines similar to the
transcontinental system actually applied, was necessary and desirable
for the development of the West. The principal advantages of such an
arrangement were that it gave to the Pacific Coast the benefits of
competing rail and water routes as no distance system could have done,
and that it enabled the railroads to fill their trains with traffic
which paid them something over the out-of-pocket costs. It is clear
that the interior cities were mistaken in supposing that this practice
increased the rates which they had to pay. On the contrary, it reduced
them. There is also reason to believe that the transcontinental rate
system decentralized the distribution of goods, while it certainly
afforded western buyers and producers in most instances the important
advantage of access on equal terms to the markets of Chicago and of New
York.

There is little evidence that either Huntington, Stanford, Crocker, or
Hopkins had an active part in moulding the local or the through rate
structures of the Central and the Southern Pacific railroads. The work
was probably done by the traffic experts whom they hired, of whom the
chief was that very able individual, J. C. Stubbs. The contribution of
the associates may be taken to have been a clear appreciation of the
advantage of monopoly to railroad revenues, and the consistent support
which they gave to the efforts of men who knew more about the subject
of railroad rates than they did themselves.




CHAPTER XVII

THE TRAFFIC ASSOCIATION OF CALIFORNIA


Discontent

The discussion of the transcontinental rate structure leads naturally
to a consideration of a very serious controversy in which the Southern
Pacific became engaged in 1891. This controversy arose as the result
of an attempt by certain merchants of San Francisco to secure lower
distributive rates in the interior California valleys. The official
statement of the shippers’ side of the case in this lively conflict of
the nineties has been compiled and published.[414] No similar statement
of the position of the railroad has come out, but the important facts
are pretty well on record.

There is no question that the political and commercial policies of the
Southern Pacific had by 1890 engendered restlessness and discontent
among the commercial classes on the Pacific Coast. It was believed that
railroad rates from the East were high. It was thought that use of the
water lines had been limited by the special contract system while that
was in force, and that water competition had been affected subsequently
by arrangements between the transcontinental lines and the Pacific Mail
Steamship Company. The work of the State Railroad Commission had proved
disappointing. In short, the situation was such that it needed only
the pressure of the business depression of 1890 to 1897 to stir men to
vigorous action.


Coastwise Trade via Foreign Port

The episode which is to be described began with an attempt on the
part of certain San Francisco merchants to use British clippers for
the importation of freight from New York, in spite of the fact that
the right to engage in coastwise traffic was limited by statute to
ships flying the American flag. It appears that in 1891 a consignment
of nails was shipped from New York in a Belgian vessel to Antwerp,
consigned to a commercial house there. At Antwerp the merchandise
was discharged and landed, and from that city it was then shipped
on a British vessel to Redondo, California, where it was entered at
the customs house as a manufacture of the United States, entitled as
an American product to free entry under American law. Nor was this
the only case of the sort. In all, sixteen shipments were sent to
California via European ports between October 16, 1891, and May 28,
1892.

The obvious intent of the whole transaction was to evade the statute
governing the movements of merchandise by water between United States
ports, in order to effect a saving in freight estimated to amount
to $4 a ton. In spite of the somewhat transparent nature of the
business, the District Court of the United States for the Southern
District of California and the Circuit Court of Appeals both held
that the operation had been legally accomplished. According to these
courts the law forbade a method, not a result, and unless goods were
transported from one port of the United States to another port in a
vessel belonging in whole or in part to foreign subjects, no penalty
was incurred.[415]

It may be doubted if the roundabout route followed by the nails, here
the subject of litigation, would ever have afforded a noticeable relief
to importers on the Pacific Coast. Whatever chance existed was removed,
however, by an amendment to the statutes in 1893, specifically
forbidding transportation from one port of the United States to another
port of the United States via any foreign port except in an American
vessel.[416] This ended the first phase of the revived competition of
1891.


Organization of Association

The same month which saw the entrance of the 250 kegs of nails into
the port of Redondo, saw also the establishment of the so-called
Traffic Association in San Francisco. The Traffic Association was
originally conceived as an organization of merchants of San Francisco
for mutual protection, and for overcoming by united effort an alleged
unjust discrimination against the business interests of the city.
In fact the name first proposed for the new body was “Merchants’
Traffic Association,” and it was intended that the executive committee
should be composed of eighteen members of the mercantile community.
These details were, however, changed,[417] the words “merchant” and
“mercantile community” were left out, and when the association was
finally organized on October 30, 1891, the constitution and by-laws
provided merely for the admittance of merchants, manufacturers,
producers, and others interested in and favorable to its objects.
Railroad employees or persons holding free passes over railroads
were the only classes debarred. Subsequently an attempt was made to
interest parties outside of San Francisco, but without large success.
Characteristically the Traffic Association began and remained an
association of San Francisco shippers for their own protection,
particularly in the matter of transportation rates. Fifteen out of
nineteen members of the first executive committee were representatives
of San Francisco firms, and 97 per cent of the membership did business
in that town. The first president was Mr. Stetson, of Holbrook,
Merrill, and Stetson, and from first to last the overwhelming
proportion of the association funds came from San Francisco.

The government of the Traffic Association was placed in the hands of an
executive committee from which were to be selected the usual executive
officers. All power was to be vested in the committee; that is to say,
the executive committee was to have, in general, entire control and
management of the affairs of the association, and in particular was to
appoint a manager and other employees, who were to be relied on for the
active work. By a special section the committee reserved the right to
route all freight of members, should emergency require it and provided
that the action was approved by at least ten members of the committee.
Membership fees ranged from $60 to $150 per annum, payable quarterly
in advance. Moreover, the constitution provided that any unusual work
undertaken for the benefit of any particular line of trade, which
entailed any unusual expenditure, should be charged pro rata to the
firms or corporations most directly affected, and in accordance with
the benefits derived. No membership was to be for a shorter period than
two years.[418]


Functions

Inasmuch as some controversy later occurred with respect to the proper
purposes of the Traffic Association of California, it is necessary
to be explicit regarding the functions which, at the beginning, it
was expected that the association would perform. According to the
statements of its promoters, the association was not formed to fight
the Southern Pacific or any other individual railroad company. The
assertion was repeatedly made, on the contrary, that the intent was,
by organization, merely to enable the shippers of California to deal
collectively with the railroads, instead of one by one as heretofore,
and so to secure a presentation of the shippers’ point of view which
would carry weight by reason of the united sentiment behind it. In
this way the shippers’ bargaining power would be improved without
giving legitimate cause for offense to parties upon the other side, and
without exposing individual complainants to retaliation.

In the invitation to the mass meeting which took up the question of
organization on the 17th of October in San Francisco, it was explained
that merchants, producers, and shippers could accomplish nothing at
that time because they were disorganized. By opposing a solid front to
the railroad combine, it was said, a good deal could be accomplished.
Further, it was declared that the railroad would not resist such a
movement. J. B. Stetson, chairman of the mass meeting, stated:

 Our object ... is to organize a Freight Bureau or Traffic Association
 or whatever it may be termed, whose purpose shall be for mutual
 protection and extension of the interests of San Francisco; for
 overcoming, by united effort, discriminations and inequalities against
 the interests of San Francisco; for representation in conferences upon
 matters of importance to the shipping public to and with railroad or
 transportation companies. Associations similar to the one we propose
 forming here are in existence in all the eastern cities, and great
 benefits have accrued from them, and will not fail to prove successful
 here. We do not meet here for the purpose of waging warfare or
 encouraging antagonisms between the shipping public and the railroads,
 or any transportation lines. We believe that the same theory would
 govern them as would govern ourselves as business men in the redress
 of any grievance of our customers. We believe that by united action
 we can present to the railroad and transportation companies views in
 reference to freights, classifications, etc., that will cause them
 to make changes that will be beneficial both to ourselves and to
 them.... I cannot too earnestly advise prudence and caution in the
 outset, for if this association is started properly, great good will
 come from it and [it will] prove of lasting benefit to the commercial
 community.[419]


First Meeting

The first public announcement that a traffic association was in process
of organization was made late in September, 1891, at which time
merchants were asked to pledge themselves to send representatives to
a mass meeting of merchants, producers, and manufacturers to be held
on October 17 in San Francisco.[420] This mass meeting occurred as
planned. There were speeches, discussion, and amendment of proposed
resolutions, and the final indorsement of a plan for joint action.
That is to say, it was declared to be the sense of those present that
an organization be formed, that the management of it be entrusted to
an executive committee and to the usual officers, and that revenue be
derived from dues. Most of the program was cut and dried. Among the
incidental but interesting features of the meeting, however, was an
address by a gentleman from Fresno calling for the construction of
another competing railroad, and the presentation of a communication
from San Diego, suggesting that the Santa Fé be induced to extend its
line to San Diego, and that provision be then made for connection by
sea between that city and San Francisco.[421]

The net result of the meeting of October 17 was to reveal an interest
in the plan for a shippers’ organization which encouraged the promoters
to go ahead, while at the same time the meeting provided the machinery
which made further progress possible. From now on, matters moved
rapidly. The executive committee was appointed, and its membership was
made public on October 23;[422] on October 30 a complete constitution
and set of by-laws was adopted by the association, and on November 2 a
general call for members was issued.[423]


Interior Towns

It was in securing members that the Traffic Association met with
its first check—a check which consisted in the general refusal of
residents of the country districts and of the interior towns to join
with San Francisco in its fight against the railroads. It has already
been pointed out that 97 per cent of the members of the association did
business in San Francisco, and the check came in spite of a deliberate
and persistent attempt by the Traffic Association to conciliate the
interior. It was partly with the idea of gaining support from outside
of San Francisco, for instance, that the mass meeting of October 17
changed the name of the association from that of “Merchants’ Traffic
Association of San Francisco and the State of California” to the
simpler “Traffic Association of California.” Another concession was
the appointment of four outside members to the controlling executive
committee—a proportion far exceeding either the relative outside
membership or the funds contributed from that source. Still other
attempts to gain support were made through meetings held in Fresno and
San José at which the advantages of the Traffic Association idea were
presented.[424]


Dissension

There appears, however, to have been some difference of opinion within
the Traffic Association itself with regard to the best policy to be
pursued toward the interior. The fundamental complaint of San Francisco
was that her distributing territory was being curtailed. Isidor Jacobs
said quite frankly that San Francisco jobbers believed at the time when
the Traffic Association was formed that the jobbing interests of the
city were in a bad way. It was claimed, and with reason, he said, that
San Francisco had natural advantages, and that in recognition of these
advantages railroad rates from eastern points to San Francisco should
be sufficiently less than to interior points, to enable San Francisco
jobbers to control the distribution even of eastern goods as far as
many Nevada points on the east, and as far as Tucson, Arizona, on the
south.[425]

Ideas the same as those expressed by Mr. Jacobs appeared in a petition
made public in December, 1892, and signed by over 150 firms in
San Francisco, and in an address published at the same time which
purported to be signed by 75 per cent of the membership of the Traffic
Association.[426]

Nor were there lacking specific complaints to the same general effect.
A San Francisco merchant explained that he had a carload rate of
$1.75 per hundredweight on goods which he imported from Chicago to
San Francisco. The rate on a hundredweight of the same commodity from
Chicago to Fresno was $2. The local rate from San Francisco to Fresno
was nearly half the rate per hundredweight from Chicago to Fresno,
being in fact 90 cents per hundredweight. The addition of the 90 cents
to the carload rate of $1.75 made it evident how small a chance he had
to do a jobbing trade with the interior in these goods.[427] Another
San Francisco dealer, a grocer by trade, was reported as saying that
he had been compelled to give up his grocery business because his
customers could buy directly from the East more cheaply than he could
supply them. The same man asserted that his customers could save a cent
and a half per pound on tobacco by dealing direct with Chicago.[428]

It was unfortunate that dissension arose within the Traffic Association
on so fundamental a point of policy as the proper attitude that should
be taken toward interior towns, for the effect was, in spite of the
best efforts of the men in control of association affairs, to deprive
that body of the support of the interior. Moreover, opportunity was
given to newspapers friendly to the railroads to attack the whole
project as a selfish attempt on the part of San Francisco to improve
her distributing position. The leading paper which took advantage of
this opportunity was the _Sacramento Union_. This journal for a number
of months denounced San Francisco as a city of hucksters, seeking a
monopoly of the jobbing and wholesale trade of the Pacific Coast, not
in the interest of the consumer, but in order to widen the margin
between the cost of goods in which they dealt and the price at which
these goods could be sold on the market. The charge was not fair, but
the attitude of Mr. Jacobs and his friends embarrassed the Traffic
Association in denying it.


Traffic Manager

In spite of the unwillingness of the state as a whole to join in a
campaign which appeared to be designed primarily in the interests
of San Francisco, the promoters of the new movement proceeded
systematically with their plans. On November 18, 1891, the executive
committee appointed a subcommittee to select a traffic manager for
the association. Much depended on the choice, and the committee was
fortunate in the man whom it secured, Joseph S. Leeds, of Ohio. Mr.
Leeds was an individual of marked ability, with a valuable railroad
experience behind him. He had been telegraph operator, station agent,
assistant general freight agent, general freight agent, and traffic
manager on various eastern railroad systems, and at one time had held
the position of chairman of the Transcontinental Association. He had
been removed from his post of traffic manager of the Missouri Pacific
some time before on a charge of rate-cutting, and might reasonably be
believed to cherish some animosity toward the railroads which had once
employed him. It may be added, as a fact of some importance to the
future of the Traffic Association, that Mr. Leeds possessed qualities
of energy and aggressiveness which unfitted him for a temporizing or
conciliatory rôle. Under his leadership the association promptly became
a fighting organization, and remained such until its demise. Mr. Leeds
arrived in San Francisco on November 21, 1891, and at once entered upon
his duties.[429]


Policy

For some weeks after Mr. Leeds’ arrival, the policy which the Traffic
Association should pursue remained unsettled. It will be recalled that
the promoters of the association had originally contemplated a policy
of harmonious co-operation with the railroad. This implied negotiation
and exchange of views between shippers and railroad. Mr. Leeds,
however, seems soon to have lost faith in such a method of procedure,
if indeed he ever possessed faith to lose. He once remarked that no one
ever got anything from a railroad just by asking for it. Moreover, the
refusal of the executive committee of the association to push demands
for preferential treatment of San Francisco as compared with other
cities, removed from the field of negotiation a matter which called for
readjustment of rates only, without reduction of railroad revenues,
upon which San Francisco and the Southern Pacific might possibly have
agreed, and left only demands which the railroad was likely to fight
with all its strength. Whatever the reason, no friendly approach to the
Southern Pacific seems to have been made.

The apparent methods of bringing pressure to bear upon the rail
carriers, on the assumption that the plan of friendly negotiation
was to be abandoned, were three: the first was that of appeal to
the Railroad Commission of the state and ultimately to the state
legislature; the second was the encouragement of water competition;
and the third was the construction, or assistance in the construction,
of a competing railroad, if not across the continent, yet at least to
a junction with one of the existing roads, such as the Santa Fé or
the Union Pacific. It must be admitted that no one of these resources
looked particularly promising in 1891, but together they exhausted the
field. To appeal to the Interstate Commerce Commission was not thought
of, and in view of the limited authority and brief experience of that
body it is not probable that an appeal would have produced important
results.


“Merchants’ Shipping Association”

In December, 1891, the report of the Nicaragua Canal Commission to the
federal legislature gave the Traffic Association opportunity to collect
signatures to a petition, and generally to indorse the project for the
construction of an Isthmian canal. The first circular emanating from
Mr. Leeds’ office, however, was dated January 6, 1892, and called the
attention of shippers to a reduction in rates from San Francisco to
Puget Sound points. This was followed later in the same month by a
circular which attracted some attention, and which pointed out that
shippers of freight had the legal right to designate the route over
which their property should move from point of shipment to destination.
It was recommended that all members of the Traffic Association route
their freight in every case where they were the owners of the property
at point of shipment. Meanwhile, a force of clerks was set to work,
and elaborate data relating to railroad expenses and railroad rates in
California and elsewhere were compiled.

The first aggressive step of the new association was taken early in
1892, when the executive committee directed the attention of members to
the possibilities of water competition. This was done after a meeting
of the executive committee in March, at which the committee voted that
a line of clipper ships should be established between New York and San
Francisco, and referred the preparation of plans for such a line to the
president and manager of the association.[430]

In response to the proposal of the Traffic Association, nine of the
larger jobbing firms in San Francisco formed in May, 1892, a so-called
“Merchants’ Shipping Association.” It was the purpose of the new body
to finance a line of clipper ships as proposed, and to cause it to be
operated in free competition with the existing lines of William Dimond
and Company, and Sutton and Beebe, concerns which, it was believed,
were conducted in the interests of the Southern Pacific. This was too
ambitious an undertaking for the Traffic Association to underwrite with
its slender revenues of about $25,000 a year.

Three months later, in August, the membership of the Shipping
Association was largely increased, and a guaranty fund of from $85,000
to $100,000 was subscribed. At this time most of the leading wholesale
firms of San Francisco joined. The Traffic Association lent its full
moral support to the enterprise, and was reported to have contributed
$10,000 to the guaranty fund just mentioned. Actual operation of the
ships was entrusted to J. W. Grace and Company as agents. While the
exact arrangements between the Shipping Association and these agents
have never been made public, the merchants appear to have undertaken
to meet all deficits, and to supply at least two-thirds of the
freight. According to statements made at the time, Grace and Company
were expected to find freight in the open market up to one-third of
the capacity of their boats. Practical details of operation were left
entirely in the agents’ hands.[431]


Effect of Competition

Some hint of the attitude of the older transportation companies toward
this new rivalry may be found in a circular issued by the Traffic
Association under date of June 22, 1892. This circular, after referring
to the new Grace line, and after speaking also of the Atlantic and
Pacific Steamship Company, and of a new clipper line established by
Balfour, Guthrie and Company, continues as follows:

 It has already been given out by the old lines that these new
 competitors in the field will be short-lived, and that shippers
 who desert the old lines at this time will be remembered when the
 competitors are out of the way.

 For your information we desire to state that the new lines have been
 thoroughly investigated by the Committee and we are satisfied as to
 the reliability and stability of the enterprise, and that with our
 support they are here to stay and deserving of our patronage.[432]

In spite of the attempts of the older companies to crush the new
adventure at its inception, the clipper ships thus established in
1892 with the support of the Traffic Association maintained an active
competition with the railroad and older sailing lines over a period
of more than a year. Short as this period was, there is no question
that the effect upon water rates between San Francisco and New York
was tremendous. The former rates of the Sutton and Beebe and of the
William Dimond and Company lines had been about $15 a ton. The rates
charged by all lines during the summer of 1892 were from $3.50 to $6 a
ton, a figure certainly below the cost of operation.[433]

This reduction in rates, and the facility which merchants in San
Francisco enjoyed in securing through bills of lading by sea and rail
from San Francisco to points on the Missouri River by way of Cape Horn
and New York, enabled shippers to reach the interior Mississippi Valley
at a rate and with a convenience superior to that obtainable by rail.
According to the _San Francisco Bulletin_, indeed, it was $2.15 a ton
cheaper to send California canned goods from San Francisco to Kansas
City by sea and rail than to ship them by rail direct. On westbound
freight the results were the same. The rate on canned meats from Kansas
City to New York was $9.40 per ton. The rate from New York to San
Francisco by sea, after adding interest and insurance, did not exceed
$15 per ton, making a total of about $25, which was $10 less per ton
than the direct rail rate from Kansas City to San Francisco.[434]

On heavy iron products the figures were quite as striking. The
all-rail rate on a number of such products was $24 from Pittsburgh to
San Francisco. From Pittsburgh to New York the rail rate on the same
articles was $3 a ton. Adding to this $6 per ton for the clipper rate
from New York to San Francisco, $1.25 per ton for insurance, and $2.50
per ton for interest, the total became $12.75, or $10.25 per ton less
than the all-rail rate.[435]

No wonder that the business of the water lines increased, and that
railroad rates materially declined. Thus the rail rate on canned goods
out of San Francisco, which had been $1 per hundred pounds, was
reduced to 75 cents to Chicago and to 50 cents to New York. The rate on
beans fell from $1.10 to 75 and 50 cents to the same destinations. On
wine, brandy, borax, and wool, rail rates declined from 25 to 35 per
cent.[436]

So far as the quantity of freight moving by water was concerned, it was
estimated in August, 1892, that 42,000 tons of freight were on the way
by sea to San Francisco from New York, and that 15,300 tons more were
on the way via Cape Horn from Philadelphia. Twenty-four vessels were at
sea or loading, bound from the Atlantic to the Pacific coast.[437]


Discontinuance of Pacific Mail Subsidy

The work which fell to Mr. Leeds and to his associates upon the
Traffic Association clipper ship committee in this struggle between
the rail and the water lines, was largely that of propaganda. This
meant interviews with shippers to impress upon them the importance of
the contest which was being waged against the railroads and against
the Southern Pacific in particular. It meant also the soliciting of
subscriptions to the clipper ship guaranty fund. Mr. Leeds threw
himself vigorously into the fight, and as the movement progressed he
allowed his satisfaction to appear. He wrote the Merchants’ Shipping
Association in August, 1892:

 I venture the prediction that if this movement is placed upon a
 permanent footing the Pacific Mail subsidy which has been assessed
 against the commerce of the coast for many years will be discontinued
 ... I predict that this will, if properly supported, prove the
 beginning of the end of commercial oppression for this city and this
 State. The doctrine of helping yourselves by every means you can
 command, holding fast to that which you have and reaching out for
 more, will prove the deliverance of San Francisco.[438]

It was doubtless a considerable satisfaction to Mr. Leeds and to
members of the Traffic Association that the water competition so
vigorously inaugurated by the Merchants’ Shipping Association was
increased late in 1892 by the formation of an independent steamship
line known as the North American Navigation Company. The foundation
of this new company was not directly due to the Traffic Association,
although the Association gave it what support it could. It was
rather the result of the discontinuance of the railroad subsidy to
the Pacific Mail, which actually took place in 1892, as Mr. Leeds
anticipated, and to the consequent separation of the Pacific Mail
and the Panama Railroad Company—a separation which assured to an
independent steamship line upon the Pacific Ocean equal or even
preferential treatment at the Isthmus of Panama. This meant that San
Francisco shippers were no longer restricted to clipper ships and to
the Cape Horn route, but could promote a shorter and speedier line with
reasonable hope of success.

In the year 1892 the transcontinental railroads determined to dissolve
the transcontinental railroad association. The reasons alleged were
the withdrawal of the Northern Pacific Railroad from the association,
and the announcement by the Canadian Pacific of reduced rates to take
effect September 10. The dissolution of the association meant the
termination of the subsidy which the railroads had been paying to
the Pacific Mail, and notice of cancellation was promptly given. The
Pacific Mail was then paying to the Panama Railroad $55,000 per month,
an amount that was more than 70 per cent of the sum which it received
from the association. In spite of the termination of its own relations
with the transcontinental railroads, the Pacific Mail offered to
continue the payment of a subsidy to the Panama Railroad, but the two
companies proved unable to agree on terms. Mr. Stubbs later explained
the break as follows:

 When the contract between the Panama Railroad Company and the Pacific
 Mail Company expired, they found it impossible to agree on terms for
 continuing the business. The transcontinental railroad companies had
 quarreled, and freight rates were demoralized. The Panama Railroad
 insisted on the former basis of traffic, and the Pacific Mail refused
 to go ahead on that understanding. Then there was some bad management,
 and the two companies began to throw mud. The trouble got into the
 courts, and finally it was called to the attention of Congress. The
 Panama road and the Pacific Mail consequently found themselves to be
 bitter enemies, and it didn’t seem that they could agree.[439]


Independent Steamship Line

Now it appears that a San Francisco shipping firm, the Johnson-Locke
Mercantile Company, which was participating in the anti-railroad fight
in 1891 and 1892 to the extent of operating a line of steamships around
the Horn, noticed telegraphic advices in the San Francisco newspapers
announcing the termination of relations between the Pacific Mail and
the Panama Railroad. Describing the episode, Mr. Johnson later said:

 I felt this was our opportunity, and immediately wired General
 Newton, of the Panama Railroad, suggesting that, in view of their
 determination to throw open the Isthmus and put on a line of their
 own steamers from New York to Colon, I thought we could secure the
 co-operation of the merchants of San Francisco, in this movement;
 that we had some steamers we were running between San Francisco and
 New York via Cape Horn, and asking, in the event of our organizing a
 company here, if they would join this company in maintaining a through
 line from San Francisco to New York.[440]

At this time the Panama Railroad was under the control of the official
liquidator of the French Panama Canal Company. The railroad had
already decided to operate a line of steamships between New York and
Colon, and it accepted readily Mr. Johnson’s offer from the West. Yet
Johnson himself lacked capital—as his own statement admits. To raise
the necessary capital a new company—the North American Navigation
Company—was at once organized, and subscriptions were solicited from
San Francisco business men. Not all those approached were enthusiastic.
Some merchants were afraid of antagonizing the Southern Pacific, some
had an interest in it. James G. Fair said: “I am holding some millions
of dollars in Southern Pacific bonds. Do you want me to put my eggs in
a basket, get on a fence and chuck stones at it?”[441]

On the other hand, the promoters of the new company were able to
make a strong plea based on the unsatisfactory conditions of water
transportation in previous years. For the first time in fifteen years
San Francisco shippers had a remedy in their own hands.

 With the successful operation of this company, San Francisco need fear
 no excessive prohibitory rates from the Transcontinental or similar
 associations; the relief in transportation will be immediate and
 ample, which, together with sailing ships via Cape Horn, solves the
 immediate question of cheap transportation, freedom from excessive
 freights, and makes our city again the distributing point, instead of
 an isolated terminus of a long haul by rail.[442]


The Raising of Funds

The original intention was to raise a fund of $100,000, and it appears
that the Panama Railroad agreed to enter into a contract with the
North American Navigation Company providing that sum were subscribed.
When $80,000 had been promised, however, the promoters solicited the
aid of the recently formed Traffic Association, and upon its advice
increased their capital to the sum of $200,000. As is frequently the
case, in such campaigns no subscriptions were binding until the whole
amount should have been subscribed. Before this point was reached
the promoters nevertheless concluded their contract with the Panama
Railroad. Perhaps they were over-optimistic, perhaps they felt that the
chance of making such a contract should not be allowed to pass—at any
rate they signed the contract and thereby agreed to dispatch steamers
from San Francisco on fixed dates to connect with the rail line at the
Isthmus. The text of the contract was not divulged, but the public was
informed that it was to go into effect March 8, 1893, and that it gave
to the North American Navigation Company the exclusive right of through
billing between New York and San Francisco by way of the Isthmus of
Panama.[443]

When the time came to dispatch the first vessel called for under this
contract, the Navigation Company found itself in the uncomfortable
position of a concern with important responsibilities and no money with
which to meet them. Not a dollar of the capital stock had been paid
in, and only $160,000 had been subscribed. Under these circumstances
certain of the individuals most interested personally guaranteed the
charter hire of the first boat, and the same was done for the second,
and for the third, at intervals of twenty days. Before the time arrived
for the departure of the fourth vessel, the entire $200,000 asked for
had been pledged. By December, 1893, this fund was exhausted, and
$100,000 more was raised—not without difficulty, and with some feeling
of discouragement on the part of the promoters.[444] The additional
subscription made possible the continuance of the service approximately
till the 1st of May, 1894, or for a total period of a little over a
year. There is some evidence that the managers of the company desired
a still further extension, but if an attempt of this sort was made, it
met with no success.

During the life of the North American Navigation Company five
steamships were chartered: the St. Paul, Mexico, Keweenaw, Progreso,
and Saturn. The “St. Paul” and the “Mexico” were small boats, with a
net tonnage, respectively, of about 700 and 1,350 tons dead weight. The
net tonnage of the “Keweenaw” was reported to be 2,004 tons, that of
the “Progreso” and “Saturn” somewhat less.[445] Some passengers were
carried by the line, but not many. The Pacific Mail also operated five
vessels with capacity carrying from 2,000 to 2,500 tons. These were all
small craft as compared with steamers of the present day. The original
program, as has been said, called for a twenty-day interval between
sailings, and the total estimated time consumed in shipment from San
Francisco to New York was put at thirty-two days. It could scarcely
have been expected that these ships could accommodate any large portion
of the business of the Pacific Coast, nor indeed was there much chance
for them to earn any considerable profit on the business which they
did carry. The fact that so large a guaranty fund was insisted upon by
the Panama Railroad before any exclusive through billing arrangement
would be made, is evidence that a deficit was expected. As a matter of
fact the total fund of $300,000 was used up before the fifteen months
contemplated in the original agreement had entirely expired.


Drop in Railroad Rates

The principal purpose of the North American Navigation Company was,
beyond question, to compel a reduction in transcontinental rates by
rail and water by demonstrating that the business men of San Francisco
could establish an independent connection of their own. This accounts
for the enthusiasm with which the project was greeted in the community
at large. The Navigation Company was looked upon as a kind of St.
George tilting against the dragon of monopoly. The newspapers printed
columns of description with pictures of the boats chartered by the new
line, the promoters gave out interviews, and crowds gathered at the
wharves to see the vessels leave. And it was by pointing to the rate
reductions accomplished that the company subsequently justified itself.

Mr. Leeds, manager of the Traffic Association, estimated that the
84,000 tons which he thought the new steamship line would handle, added
to what the clipper ships were carrying, would leave about 250,000 tons
for the railroads to transport from coast to coast. On this he expected
to see a decline in rates of not less than 20 per cent. More exactly,
he calculated that the saving to shippers due directly to the operation
of the North American Navigation Company would amount to $660,000;
that due to clipper ship competition would total $1,110,000; and that
secured through a decline in railroad rates would be $1,248,000; or a
total of $3,018,000.[446] Captain Merry, president of the Navigation
Company, declared when all was over that a saving of $3,500,000 had
been made on Pacific Coast products shipped east during the life of the
company, in addition to the saving of perhaps $1,500,000 on westbound
freight.[447]

Undoubtedly the operations of the Navigation Company intensified
the rate war started by the clipper ships, and the reductions in
transcontinental charges were considerable. According to Mr. Leeds the
cuts on eastbound transcontinental freight, all-rail, on representative
articles, by January, 1894, were as follows:[448]

REDUCTIONS IN TRANSCONTINENTAL RAIL RATES TO JANUARY, 1894

                             Old Rate per    New Rate per     Reduction
  Article                     100 pounds       100 pounds      per cent

  Beans                        $1.10            $ .50             55
  Canned goods                  1.00              .50             50
  Barley                         .90              .30             66⅔
  Dried fruits, raisins, and
      prunes (in boxes)         1.40             1.00             28
  Wine                          1.50              .37½            80
  Mustard seed                  1.10              .30             73
  Wool, in grease               1.50              .75             50
  Wool, scoured                 2.50              .75             70


Uncertain Benefit

On westbound freight it was estimated that the reductions amounted to
at least 50 per cent. These estimates, however, do not distinguish
between the results produced by the Navigation Company and those which
were the consequence of the operation of the clipper ships—perhaps no
separate estimate is possible or important. On the basis of the rates
charged, the railroad admitted that it was losing money, at least so
far as eastbound freight was concerned. It maintained, however, that it
continued to make a profit on its westbound freight and on its local
traffic.[449] There was no question that the steamships and the Panama
Railroad lost money, although they declared stoutly that they would
meet any cuts which the railroads might make.[450]

Whether the shippers benefited by the general demoralization in rates
which occurred during the war is uncertain, as it always is under such
circumstances. They certainly lost the $300,000 which they put into the
North American Navigation Company, besides the guaranty fund subscribed
by the Merchants’ Shipping Association. Moreover, they suffered
from the competition of eastern jobbers during the hostilities, a
competition which the railroads encouraged by reducing the differences
between carload and less than carload rates, by the extension of the
privilege of shipping in mixed carloads, and by reduction in westbound
rates. On the other hand, they gained directly through lower rates, and
indirectly by the demonstration that, to some extent at least, their
access to eastern markets was not subject to railroad control.


New Transcontinental Tariff

The North American Navigation Company operated only a little over a
year, as has been said. Its vessels, however, were taken over by the
Panama Railroad, and competition continued until the end of the year
1895. Not long after that, it seems, negotiations between the shippers
and the railroads began. Representatives of the transcontinental lines
upon the coast were instructed to mollify Pacific Coast shippers so far
as possible, and the shippers in their turn seem to have been anxious
to meet this advance. In 1897 a communication was addressed to the
railways by the jobbing interests upon the Pacific Coast, stating in
substance that rates ought to be readjusted in the interests of the
coast jobbers; that more rigid inspection rules should be enforced
preventing their competitors in the Middle West from obtaining
fraudulent rates; and intimating that if this was done they would not
object to an advance in rates and would find it to their interest to
place shipments largely with the railroads.

For the purpose of effecting some arrangement, a meeting of
representatives of the transcontinental lines was held at Del Monte in
the fall of that year. Representatives of the Pacific Coast jobbers and
also of the jobbers of the Middle West were present. Both parties were
heard separately and much discussion was had but no definite conclusion
reached. The conference adjourned to meet at Milwaukee the following
spring. The final result was a new transcontinental tariff effective
June 25, 1898, which seems to have given reasonable satisfaction until
attacked by representatives of the intermountain towns.[451]




CHAPTER XVIII

THE SAN FRANCISCO AND SAN JOAQUIN VALLEY RAILWAY


Attempt to Fix Maximum Rates

Properly considered, the construction of the San Francisco and San
Joaquin Valley Railway was the complement of the campaign for the
encouragement of water competition which the Traffic Association waged
between 1891 and 1897. The plans for the subsidizing of clipper ships
and for the support of steamship service to and from Panama had from
first to last one grave defect—they afforded no means of distributing
from San Francisco the products which dealers might succeed in having
brought in by sea. That is to say, while the consuming populations
of San Francisco, Sacramento, and Stockton might benefit by securing
their goods at lower cost because of the activity of water competition,
these cities could not extend their markets unless the sum of the
through rate from points of origin to terminal city and from terminal
city to local point should be made lower than the direct rate from
the Mississippi Valley or the Atlantic Coast to the smaller towns in
California, Nevada, and New Mexico.

Now the question of local rates differed from that of through rates, in
that it dealt with a matter over which the state legislature and the
State Railroad Commission appeared to have complete control. In 1892
the Traffic Association accordingly made a serious attempt to persuade
the state legislature to undertake direct regulation of railroad rates
in California, and to insert a provision for certain maximum rates
in the constitution of the state which should affect a considerable
reduction in the rates then charged. This attempt failed, for reasons
into which it is not necessary to go. There remained another method
of influencing local rates, namely, the construction of a competing
railroad which should lead from San Francisco Bay to the interior
counties of the state, and to this alternative the San Francisco
merchants turned in the year 1893. The movement was important, and will
be discussed at some length.


First Proposal for Competing Railroad

The proposal that a competing railroad should be built from San
Francisco Bay to the interior was not a new one in California in 1893.
On the contrary, in February, 1892, President Stetson, of the Traffic
Association, told a reporter that no less than nine propositions had
been submitted to him as president of the organization, looking to
give San Francisco a competing line of railroad. These were successors
to still other plans prepared in earlier years. Most of the schemes
proposed to Mr. Stetson involved the construction of lines out of
San Francisco to a connection with the Santa Fé, but two or three of
them contemplated construction from San Francisco across the Sierra
Nevada Mountains to the termini of the Union Pacific or the Rio Grande
Western. At the time, President Stetson replied that he was a merchant
and had neither the time nor the money to build roads, although he
added that San Francisco merchants desired more railroads and would
under reasonable conditions and at the proper time furnish substantial
encouragement to one or more feasible railway projects.[452]

Soon after this, possibly at the suggestion of Mr. Leeds, steps were
taken to investigate the possibilities of a line from San Francisco
or Oakland to Stockton and thence eastward through Nevada and Utah to
Salt Lake City. In May, 1892, a company was formed under the name of
the San Francisco and Great Salt Lake Railroad Company, to build from
San Francisco to Stockton, with an initial capital of $2,000,000.
This was the moment when the Traffic Association was vigorously
pushing its plans for the encouragement of water competition, and when
it was beginning the legislative campaign mentioned in a preceding
paragraph. Little active support could therefore be expected from
the San Francisco shippers, although the executive committee of the
Traffic Association authorized Mr. Leeds to give the projectors of the
San Francisco and Great Salt Lake the benefit of his advice, and the
California League of Progress formally indorsed the enterprise.[453]

The San Francisco and Great Salt Lake conducted extensive surveys and
was said to have purchased a tract of land at Martinez for a terminal.
The company was overtaken by the panic of 1893, however, before it
had secured the financial support which was essential to its success.
It suffered also from differences of opinion among its friends with
respect to the policies to be pursued. Mr. Leeds insisted that to be
a success the new road must have a through connection. Shippers, he
said, would not patronize a purely local line when a through line was
available, because a competitor with through facilities could afford
them service which a local line could not.[454] On the other hand,
there were capitalists who expressed willingness to subscribe to the
stock of a local system, but who would not put a cent into an overland
line,[455] and between the two parties the necessary subscriptions were
not obtained. The project was finally withdrawn when the promoters
failed to secure certain legislation which they thought necessary to
make their plans a success.[456]


Another Project

Following the failure of the San Francisco and Great Salt Lake
enterprise, plans for railroad construction in California made no
progress for several months. It had now become evident, however,
that the state legislature was not disposed to pass a maximum rate
enactment, and that any reduction in the level of local rates in
California must come either from the good-will of the Southern Pacific
or from the construction of competing lines. Under these circumstances,
plans for railroad construction were revived, this time under the
direct leadership of the Traffic Association of California.

Exactly when the Traffic Association took up the idea of promoting a
competing railroad in the San Joaquin Valley cannot be stated with
confidence. Newspaper reports indicate that the project was discussed
at least as early as April, 1893. Whether or not a beginning was made
in this month, it appears that by June, 1893, plans had progressed
sufficiently to permit the publication of a prospectus, sent out with
the approval of San Francisco shippers. This prospectus invited the
citizens of San Francisco and of the state of California to subscribe
to the capital stock of a railroad which should run from the city of
Stockton to the head of the San Joaquin Valley, in Kern County, a
distance of about 230 miles. The plan was said to be to secure as much
money as possible in the city of San Francisco, and then to ask the
people of the valley, from Stockton up, to add thereto a fair quota.
Construction was to begin at Stockton instead of at San Francisco,
in order to save expense and in reliance upon the effect of water
competition on San Francisco Bay—a competition which was expected to
maintain a low level of rates between Stockton and its larger neighbor.
The cost of a good road from Stockton to Bakersfield was estimated at
something less than $20,000 per mile.

Appealing particularly to San Francisco, the promoters of the new
enterprise declared that a competing railroad was essential to that
city’s prosperity. San Francisco amounted to no more than any other
collection of people unless it used its facilities as a seaport.
Facilities unused might just as well not exist. It had been a part
of the policy of all the transcontinental roads for many years to
neutralize this seaport by all the means at their command, including
the practice of maintaining excessively high local rates between the
sea and the interior. This condition must be remedied. The prospectus
also explained that the new line would benefit the producer and the
consumer in the interior as well as in the city of San Francisco.[457]


Lack of Financial Support

Once the prospectus was out, the project for a local competing railroad
was pushed with all the energy characteristic of Mr. Leeds and the
Traffic Association. It received substantial support also from a
portion of the San Francisco press. In order to test sentiment, a
subcommittee of the executive committee of the Traffic Association
started a canvass of the wealthy men of San Francisco, not to secure
subscriptions, but to seek general assurances of co-operation. With
one exception the citizens interviewed were reported to have promised
to take stock in the road, and to have invited the committee to call
again. Such an indication of unanimity was considered important.[458]
Not only did the moneyed men of San Francisco encourage the enterprise
at this time, but the newspapers printed accounts of the interest taken
by men of small means. Mechanics and laborers were said to be coming
to the offices of the Traffic Association, and offers to subscribe for
small amounts of stock, payable in labor, were received.[459] Yet there
is some question about the warmth with which the original proposal
for a competing line was received. Certainly the minimum amount
necessary to be raised in order to make all subscriptions binding was
small—$350,000—and the slowness with which this sum was approximated
did not indicate enthusiasm.[460] In the valley generally there were
indications of interest, such as favorable newspaper notices, offers of
rights-of-way for the new company, and resolutions of indorsement by
boards of trade, and by meetings of citizens. But here, too, there were
few subscriptions, and after the panic of 1893 the Traffic Association
recognized that their initial attempt had failed.


Failure of Second Attempt

The second campaign for subscriptions to the stock of the Valley
road began about August, 1894, when the executive committee of the
Traffic Association decided to renew its search for funds. It was now
decided to call the new enterprise the San Francisco, Stockton and
San Joaquin Valley Railway Company, and to define its route generally
as between San Francisco, or some convenient point on the Bay of San
Francisco, via Stockton and Fresno by a convenient and practicable
route thereafter to be determined, to some point in Kern County. The
minimum subscription was again set at $350,000, and, as in the earlier
project, a trust was devised to hold the stock of the company and to
preserve its status as an independent carrier.[461]

In October stock subscription books were thrown open to the public
and some thousands of dollars of subscriptions received. Mr. Leeds
went to Stockton to see what could be done there. In San Francisco,
Mr. Van Sicklen, a member of the executive committee, endeavored to
reach the business men of the town in a somewhat systematic fashion.
Large subscriptions and small were invited, but once more small
success was obtained. The members of the executive committee of the
Traffic Association were busy men and disinclined to devote much time
to personal campaigning, while, even had they done so, the chances of
success were not good. The primary defect in the Traffic Association’s
campaign lay in the fact that no man in the group of promoters
interested in the new enterprise had sufficient prestige so to impress
the public imagination as to lead investors to have confidence from the
beginning that the projected railroad would be built. The composition
of the Traffic Association was admirable for the purpose of encouraging
water competition. It was as inadequate to the financing of a large
railroad to be conducted without government support as it had been
shown to be to the management of a political campaign.

Nor was it unimportant that the organization was asking for a sum
which on the face of it was insufficient to accomplish the purposes
which were in mind. Nobody pretended that $350,000 would do more than
permit of the organization of the San Francisco and San Joaquin Valley
Railway. To build the line would cost ten times that sum or more.
Indeed, the company was actually capitalized at $6,000,000, a not
unreasonable figure under the circumstances. Thus a subscription to
a fund of $350,000 merely committed the subscriber to an enterprise
which might involve him, if it was to be successful, in an additional
large and undetermined expense, on the penalty of losing his original
subscription if the additional sums were not forthcoming.


Final Success

We have now seen that two attempts to secure support for a new
independent railroad in the San Joaquin Valley failed between June,
1893, and the end of 1894. The third stage in the progress of the
Valley road began with a meeting called by the Traffic Association on
January 22, 1895, for the purpose of interesting the realty owners
of San Francisco in the construction of a railroad. By this time the
Traffic Association’s second campaign for subscriptions had failed as
definitely as had its first. Only about one-half of the desired sum
of $350,000 was on hand. No more could be secured from the merchants
of the city. There was little enthusiasm in San Francisco, and in the
interior, cities like Fresno were becoming impatient and were turning
to the south instead of to San Francisco for relief from the burden of
high rates.[462]

It was at this point and under these conditions that the management of
the enterprise passed to new men and that a complete reorganization of
its affairs occurred. In the main this change in control and in the
policies of the projected Valley railroad was due to the energy of one
man. Claus Spreckels, of San Francisco, the leading sugar refiner of
the Pacific Coast, was not a member of the Traffic Association, and was
not pledged to the support of the San Francisco and San Joaquin Valley
Railway. He was, however, one of the speakers at the January meeting,
and when the formal proceedings were over he came forward with an offer
to subscribe $50,000 provided that the minimum amount to be raised were
increased from $350,000 to $3,000,000 or to $5,000,000. On Spreckel’s
motion, moreover, the chairman was authorized to appoint a committee
of twelve from among the property owners of the city to solicit
subscriptions from holders of real estate. After the adoption of this
motion the meeting adjourned.

[Illustration: Map showing the line of the San Francisco and San
Joaquin Valley Railway, together with portions of the systems of the
Southern Pacific and of the Atchison, Topeka and Santa Fé, 1898.]

The subscriptions in definite amounts received on Tuesday, January
22, 1895, did not much exceed $20,000. The committee of twelve met,
however, on January 24 and Claus Spreckels was elected chairman.
Soon after this, larger pledges began to appear. Spreckels himself
now subscribed $500,000, or ten times his initial offer, and at
his instance, John D. and Adolph Spreckels, his sons, subscribed
$100,000 apiece. From this one family, therefore, came twice the sum
which the Traffic Association had tried in vain to raise from all
of San Francisco. The whole complexion of the business changed as a
result of this beginning. By January 30 over $1,200,000 was pledged.
Subscriptions through February 2 amounted to $1,536,500, and on
February 8 the $2,000,000 mark was reached. This so encouraged the
committee that it immediately resolved that the sum of $4,000,000
should and must be obtained from the city of San Francisco, and that
with the aid of the interior the competing line could be constructed on
a cash basis. To this end every effort was to be turned.[463]

It is very evident that the substantial wealth of the Spreckels group
and the reputation for success which Claus Spreckels enjoyed, made
a powerful impression both in San Francisco and in the San Joaquin
Valley. The proposed railroad enterprise was the same as before, but
the leadership was different. At the same time the amount of money
necessary to be raised in the first instance was increased from
$350,000 to $2,000,000.[464] Large sums are sometimes easier to secure
than small, for reasons both sentimental and practical, and it proved
so in this case. Claus Spreckels said himself that he had never made
a failure in his life, while with $2,000,000 in hand it seemed so
unnecessary for anyone to fail that people hastened to share in the
anticipated success.


Campaign for Stock Subscriptions

As we look back upon the circumstances attending the construction of
the San Francisco and San Joaquin Valley Railway, it is evident that
after January, 1895, its managers played their cards with considerable
shrewdness. Regarded as a direct profit-making enterprise, the ability
of the new company to earn dividends was questionable. It was all very
well to dwell upon the fertility of the San Joaquin Valley, and to
point out the large proportion of the revenues of the Southern Pacific
derived from this source.[465] Doubtless these conditions would count
in the long run. Yet the fact remained that the new road was entering
a not too highly developed territory already served by a through line
of large capacity. It was expected to reduce rates, and was likely to
be compelled to reduce them; and it was to do this while it was in the
course of developing its own organization and establishing business
relations with a new clientèle. Huntington said that he thought there
was room in California for both the Southern Pacific and the new line.
It required, he said, only a space of thirteen feet from the center
of one track to the center of another, and there was lots of room in
California. The projectors of the new road would have no trouble in
finding room.[466] But this remark was not meant to convey comfort to
subscribers to the stock of the San Francisco and San Joaquin Valley
Railway, and probably did not do so.

What, then, were the conditions of success for the new road? They
were: first, such a popular support as would minimize the cost of
construction and maximize its business; and second, such an alliance
with some other large railroad system as would give stability and
permanency to its traffic relations. If the new company possessed these
advantages it would probably be able to live and to render a useful
service in distributing products brought to California and to San
Francisco by sea; without them it was not likely to survive.

It was in order to increase their popular support, and not alone for
the sake of the money involved, that the promoters of the San Francisco
and San Joaquin Valley Railway early began a campaign for small
subscriptions. Claus Spreckels took pains to say that while large
subscriptions were all right and desirable, it would be the $20,000,
$10,000, and $5,000 stockholders who would control the property and
its policy.[467] In February, after the first arrangements had been
made for reaching the larger business interests of the city, attention
was paid to the offering of facilities for subscription to all classes
of investors in San Francisco. Districts were mapped out and assigned
to canvassers.[468] The following month the _San Francisco Examiner_,
which had taken a prominent part in the fight from the first, began to
print subscription blanks in its daily issues. Arrangements were made
by which persons might subscribe for fractions of shares by joining
with their neighbors in share clubs. The _Examiner_ offered a gold
watch to the first person forming such a club, and when there was doubt
as to priority, compromised by giving two watches. The formation of
the first colored club was given special mention, as was the decision
of a colored club in San Francisco to make one paid-up share in the
San Francisco and San Joaquin Valley Railway a tug-of-war prize to be
competed for at its annual games. The winning team was to constitute a
share club, and was to choose a trustee from among its members.[469]


Appeal to Local Patriotism

While devices such as these were perfectly ineffective as a means
for raising large sums of money, they did give the new road valuable
advertising, and helped to predispose the whole community in its favor.
For the same reasons that actuated the promoters in their attempt
to gain the support of investors of small means, the San Francisco
committee also made appeals to the public which rested upon moral and
patriotic as well as upon financial grounds. Without going into this
aspect of the matter at length, it may be said that there has probably
never been a commercial enterprise launched on the Pacific Coast so
advertised, and praised, and predicted about as was the project of the
San Joaquin Valley Railway. Participation in the movement became a
test of local patriotism. The railroad took the aspect not merely of
a business expedient, to be considered solely from the point of view
of monetary gain, but it also became an expression of the hopes of
expansion entertained by a generation of business men, strengthened
by the accumulated antagonism of years between the Southern Pacific
Railroad and the shipping public.

Nor was this feature of the campaign confined to San Francisco alone.
The main interest from first to last was of course in San Francisco.
Yet the valley towns also showed sympathy with the new development,
rising at times to excitement as construction became imminent, and
questions of route had to be determined. Here, it is true, there was
more business and less sentiment. “What is the new road going to do for
Oakland?” a man asked John D. Spreckels one day in the Palace Hotel.
“It is too early to put that question,” replied Mr. Spreckels, “as it
could only be answered by some theorist. The question is, What will
Oakland do for the new road?”[470]

In spite of occasional skepticism, and here and there active
opposition, the San Joaquin Valley received the new enterprise
cordially. Among the Valley towns from which assurances of support were
received may be mentioned Stockton, San José, Fresno, Madera, Modesto,
Hanford, Merced, Visalia, Selma, and Bakersfield. Oakland also, though
not properly in the Valley, manifested considerable interest in the
work. Generally speaking, the directors of the San Francisco and San
Joaquin Valley Railway asked local committees to select what in their
judgment was the best route over which the railroad could pass. They
then asked them to give rights-of-way, depot grounds, and terminal
facilities, and to subscribe to all the stock that they could afford.
It was announced that the railroad was being built on a business basis,
and that it would go through the best country and where the greatest
inducements were offered.[471]

This did not seem unreasonable to the local communities, and the
company’s requests were generally complied with. The principal reason
for raising money under such an arrangement was to pay local property
owners whose lands were taken for railroad purposes. There were no
money subsidies, and no land grants except to the extent sufficient for
the company’s actual needs. Yet, of course, even so relatively moderate
a provision of local aid materially reduced the cost of construction
which the railroad company had to meet.


Purchase of Road by Santa Fé

Articles of association of the San Francisco and San Joaquin Valley
Railway Company were filed at Sacramento in February, 1895, and
construction was begun at Stockton late in the same year. By the
end of December, 26.1 miles had been built, carrying the railroad to
the Stanislaus River. During 1896 the track reached Fresno, and in
1897 Bakersfield was attained. On June 30, 1898, the company reported
a total mileage of 278.91 miles, including a branch to Visalia. It
had at that time an authorized capital stock of $6,000,000, of which
$2,464,480 was issued and paid in, a funded debt of $2,671,000, and
current liabilities of $110,928. The bonds outstanding were mortgage
securities bearing 5 per cent interest and maturing in 1940. In 1897
the company reported gross earnings of $209,133 (of which $178,494
were from freight), and operating expenses of $153,102, on an average
operated mileage of 123.44 miles. For the year ending June 30, 1898,
the earnings were $411,179 and the operating expenses $282,326, on a
mileage, however, which was considerably greater. These were the only
years for which statistics are available, for the company was purchased
by the Santa Fé in December, 1898.

The circumstance that the San Francisco and San Joaquin Valley Railway
was purchased by the Atchison, Topeka and Santa Fé only a few months
after the company had completed its road to Bakersfield, served as
a dramatic illustration of the fact that alliance with some larger
railroad system was considered by its promoters to be essential to the
road’s success. There is no question but that this sale of the system
came as a shock and a disappointment to many persons whose enthusiasm
had been aroused by the proposal to build an independent railroad
for the service of shippers in San Francisco and in the San Joaquin
Valley. The high hopes of San Francisco merchants could scarcely be
satisfied by anything short of a system permanently under the control
of the commercial interests of that city. When the San Francisco press
declared that San Francisco was preparing to reach out for the trade of
all the western part of the American continent, and when the Spreckels
committee declared that the new road was to be a people’s road, owned
by the people, and operated in the interests of the people,[472] the
implication clearly was that the ownership of the property was to
remain in the hands of the original subscribers to the stock or in the
hands of other persons of like character. Nor was the argument that
the construction of the San Francisco and San Joaquin Valley Railway
would prevent the diversion of eastern freight from San Francisco to
distributing centers of the South,[473] easily to be reconciled with
the sale of the railroad to a company which, like the Santa Fé, had a
terminus in Los Angeles.


Spreckels Interests

There were, on the other hand, indications from the beginning that
the Spreckels group did not intend to commit itself to the permanent
management of a railroad system, but that they regarded connection
with, and perhaps amalgamation between, the San Francisco and San
Joaquin Valley and the Atchison, Topeka and Santa Fé as the natural
culmination of the former road’s career. Like Stanford, Mark Hopkins,
Huntington, and Crocker, Claus Spreckels, his sons, and the persons
most intimately associated with them were not originally railroad men,
and were not, when they began railroad construction, particularly
interested in the railroad business as a business. They were therefore
to be tempted to continue railroad management only by a chance for
extraordinary profits—a chance which the San Francisco and San Joaquin
Valley Railway did not offer. Looking at the matter from a business
standpoint, it is not unreasonable to suppose that they saw that
the best opportunity for withdrawing their capital from the valley
speculation lay in negotiations with the Santa Fé. Of course this is
surmise, and perhaps is mainly plausible as a late interpretation
of happenings which we know took place, but it has a certain
reasonableness in view of all the facts.

The concrete evidence that combination between the San Francisco and
San Joaquin Valley and the Atchison, Topeka and Santa Fé was looked
upon as a possibility from the first, is to be found in the provisions
of the trust agreement entered into by subscribers to the San Francisco
and San Joaquin Valley Railway stock, and in the negotiations between
that railroad and the city of San Francisco and the state government of
California, over what was known as the China Basin lease.


Trust Agreement

Soon after the promoters of the San Francisco and San Joaquin Valley
Railway had successfully organized their corporation, subscribers
to the stock of the company were asked to enter into a certain
trust agreement or pooling plan designed primarily to prevent the
railroad from falling into the hands of the Southern Pacific. Briefly
summarized, this plan contemplated the transfer of the stock of the
company to seven (later nine) trustees. Individual stockholders so
transferring their holdings were to receive trust certificates clothing
them with the powers and privileges usual in such cases. The trustees
on their part were to administer the railway for a period of ten years
unless three-quarters of the certificate holders should request an
earlier termination of the trust, or unless all of the subscribers
should die.

This administration was, however, subject to restrictions, of which two
deserve special notice. In the first place, the trustees undertook to
operate the railroad, when completed, on such a basis that the rates
and fares charged should be the lowest rates and fares which would
yield enough earnings to meet costs of operation, interest, and sinking
fund requirements, and to pay a dividend not exceeding 6 per cent upon
capital stock paid in. This clause was evidently intended to reassure
shippers who had been or might become interested in the new railroad.
But besides this, the trustees agreed that they would not knowingly
vote said stock “for the benefit or in the interest of any person or
corporation or interest hostile to the interest of, or in business
competition with the San Francisco and San Joaquin Valley Railway
Company, or of or to or in favor of any party or parties or company
or companies owning or controlling any parallel line of road to the
detriment and injury of the corporation hereinbefore mentioned.”[474]

To this clause there was later added another of the same import, to
the effect that the San Francisco and San Joaquin Valley Railway
should not be leased to, or consolidated with, any company which
might own, control, manage, or operate any of the roads then existing
in the San Joaquin Valley, and that neither the trustees nor their
successors should have any power as stockholders to assent to any such
consolidation or lease, or in any way to put the San Francisco and San
Joaquin Valley Railway under the same management as that of any other
railroad then existing in the San Joaquin Valley.[475]

In so carefully worded a document as the trust agreement here under
consideration, the prohibition of combination with competing railroads
or with railroads then existing in the San Joaquin Valley had the force
of an affirmative permission to the trustees to consolidate their
property with that belonging to any company not in the prohibited
class. As a practical matter this meant consolidation with the Santa
Fé and with that railroad only, for the reason that there was no other
system with which combination would have been significant. The trust
agreement was approved at a meeting of stockholders held on April 5,
1895,[476] and by the middle of the following month holders of more
than three-fourths of the stock had given written assent to the trust
conditions.

The fair inference from the terms of the trust agreement is that the
promoters looked upon the union of the San Francisco and San Joaquin
Railway and the Atchison, Topeka and Santa Fé as a proper and likely
outcome of the construction of the former road. This same conclusion
is strengthened by consideration of the China Basin lease, concerning
which a few words may be said.


The China Basin Lease

The China Basin lease related to a tract of land on the water-front
between the foot of Third Street and the foot of Fourth Street in San
Francisco. The San Francisco and San Joaquin Valley Railway needed a
terminus in San Francisco even before it entered upon construction west
of Stockton, because it wished to encourage the shipment of freight
from San Francisco up the Sacramento River to the head of its rail line
at Stockton. It also looked forward to the day when it should have a
railroad of its own to Oakland or to some other point on San Francisco
Bay, possibly to the city of San Francisco itself.

According to the precedent set in the southern counties, the San
Francisco and San Joaquin Valley should have applied to the city and
county of San Francisco for terminal privileges. The piece of property
which it desired, however, consisted of certain mud flats at China
Basin, control over which had been specifically vested in the State
Board of Harbor Commissioners by a law passed in 1878.[477] Not only
were the flats in question thus removed from the control of the city,
but the State Board of Harbor Commissioners itself had apparently
no authority to conclude binding leases of this area covering a
substantial period of time, although it did have power to grant
temporary permits for the use of water-front property. Before any
progress could be made, therefore, it was necessary to apply to the
state legislature in order that the powers of the harbor commissioners
might be enlarged, after which negotiations could be continued with the
commissioners direct.

As a first step toward obtaining a lease of the China Basin tract,
Claus Spreckels went to Sacramento in March, 1895, accompanied by other
directors of the San Francisco and San Joaquin Valley Railway. With
characteristic emphasis he declared to members of the legislature that
if the promoters of the new enterprise did not get the mud flats they
might as well give up the road.[478] No senator, he said, who voted
against his bill could dare to face his constituents again. Senators
who voted against the proposed amendment to the law voted to take the
bread out of the mouth of the workingman’s child. They voted to keep
the unemployed out of work, and they voted for their own damnation.[479]


Necessary Legislation Enacted

There was little opposition in the assembly to giving the Spreckels
group what it wanted. Principally the discussion was as to whether it
was better to clothe the harbor commissioners in general terms with the
power to lease water-front property,[480] or whether the board should
be authorized only to lease a described parcel to a specified group of
persons.[481] The fear was expressed in the course of the debate lest
the tract desired by the San Francisco and San Joaquin Valley Railway
might be leased to a corporation controlled by the Southern Pacific,
and that other parcels might go the same way. On the other hand, it was
pointed out that a provision for a lease to specified parties might
prove unconstitutional as an example of special legislation.

In the end the “Gleaves” bill with the so-called “Powers” amendment
passed the assembly by a vote of 60 to 9, and the senate by a narrower
margin of 21 to 17. In its final form it authorized the State Board of
Harbor Commissioners to lease any land belonging to the state which was
required for terminal purposes, at a maximum rental of $1,000 a year.
No land was to be leased for a longer period than fifty years, not more
than 50 acres was to be leased to any one railroad, and no lease was
to be assignable without the written consent of the commissioners. As
a still further protection, it was provided that the beneficiary of
the lease must be a railroad company. Such a company, moreover, must
be incorporated within the state of California, and it might not be
a corporation which, at the date of the passage of the act, had any
terminal facilities in the city and county of San Francisco.[482]


Terms of Lease

Armed with the legislative sanction, Mr. Spreckels undertook
negotiations with the Board of Harbor Commissioners and with Mayor
Sutro, of San Francisco, and Governor Budd, which lasted from the
middle of March, 1895, to the second week in July. In its main outlines
the lease finally agreed upon offered to the San Francisco and San
Joaquin Valley Railway Company the use of a defined area of 24¼ acres
more or less located near the foot of Fourth Street, San Francisco,
and bounded upon the water side by the sea-wall and thoroughfare
established by the legislature of 1878. In return for this considerable
grant, the lessee agreed to reclaim the lands granted from the tide,
to place tracks, warehouses, and freight sheds upon them; to pay a
nominal rental of $1,000 a year; and in addition, to commence within
six months, and to construct and have in operation within ten years,
not less than 50 miles in continuous railroad in addition to the
mileage already constructed in 1895, one end of which was to be at some
point on the Bay of San Francisco south of an east and west line drawn
through Point Pinole.

The improvement of the leased property and the undertaking of new
construction were obviously the real considerations for the lease. For
the rest the terms of the lease carried out the spirit of the Gleaves
Act by providing that the lease should terminate and all rights under
it should cease if the demised premises, or the lessee corporation,
should ever, by or through any corporate act of the latter, become,
during the period of the lease, subject directly or indirectly to the
control or dominion of any person, company, or corporation having
railway terminal facilities on the Bay of San Francisco. Likewise the
lease was to terminate if the party of the second part (the railway)
should enter into any combination, arrangement, pool, trust, or
agreement with any railroad corporation, or individual, having railroad
terminal facilities upon, or adjacent to, the water-front of the city
of San Francisco, for the purpose of preventing or limiting competition
in the business of carrying freight or passengers. This wording
permitted merger or agreement between the San Francisco and San Joaquin
Valley Railway and the Atchison, Topeka and Santa Fé Railway Company,
but not between the former company and the Southern Pacific, and was
quite evidently intended to have this effect. In accordance with the
terms of the Gleaves Act, the lease was made non-assignable.[483]


Reasons for Consolidation

A very interesting statement issued in October, 1898, by a
vice-president of the Valley road, Robert Watts, explains the
development of the relations between the Santa Fé and the San Francisco
and San Joaquin Valley Railway with what appears to have been
considerable frankness. This statement is valuable enough to be quoted
at length:

 I have said that the Santa Fé Railroad was not consulted upon the
 organization of the Valley Road. This is strictly true. But it is also
 true that shortly after we began work that discussions arose among
 ourselves and the public as to a probable connection with that road,
 but we were not organized with that object in view. Wherever we have
 gone in the San Joaquin Valley the people have asked us when we would
 connect with the Santa Fé road....

 For a little time we clung to the belief that we could make a traffic
 arrangement with the Santa Fé road, and from the day that we saw that
 connection with that road was inevitable we worked toward that end. We
 worked to keep the Valley Road in its original form, and give original
 stockholders a personal interest in the terminus of an overland line.
 But we found that our stockholders were not all actuated by the same
 sentiment that actuated the directors and trustees.

 When we began to negotiate with the Santa Fé people we found that
 some of our richest stockholders had sold their stock at 50 cents on
 the dollar; and when we talked traffic arrangement with the Santa Fé
 people they showed us that in that way the Southern Pacific people
 could quietly buy in a control of the stock and could then abrogate
 their traffic agreement at the conclusion of the trusteeship in less
 than seven years and leave them no better off than they were.

 It was only when we saw that there was absolutely no hope of making
 the overland connection without a sale of the stock and there was a
 possibility, if not a danger, that the Southern Pacific Company might
 obtain control of the stock of the road that we decided to talk with
 our stockholders and we laid the whole matter before them and told
 them not to sell their stock at less than par and then the option was
 taken upon the stock and it will undoubtedly be closed.[484]

This statement of Mr. Watts bears out the conclusion at which we
had already arrived, namely, that the promoters of the Valley road
appreciated from the first that they must connect their enterprise with
some larger system in order to be permanently successful. At the same
time the prominent mention of the Santa Fé Railroad in the statement, a
railroad system which had neither rails in the San Joaquin Valley nor
termini on San Francisco Bay, suggests why the promoters were willing
to accept the restrictions imposed by the trust agreement of 1895 and
by the China Basin lease.


Transfer of Control

In the fall of 1898, the directors of the San Francisco and San Joaquin
Valley Railway requested the holders of trust certificates to deposit
these certificates with the Union Trust Company of San Francisco,
and to give an option for the purchase of them at par, valid for a
period of three months. The prospective purchaser was not named, but
the Santa Fé was understood to be the party interested. Certificate
holders responded very generally to the request. Apprehensions were
expressed by a number of shippers at this time, and also by some of
the San Francisco newspapers, that the deposit of certificates under
the conditions required meant an end of railroad competition in the
San Joaquin Valley.[485] The plan was nevertheless considered by the
trustees of the San Francisco and San Joaquin Valley Railway and was
approved by them, Mr. Ripley giving written and verbal assurances in
behalf of the Santa Fé that the Valley road would be continued as a
competing line.[486] In due course the option was taken up and the
expected transfer of control to the Santa Fé occurred.

It may be observed, to conclude this part of the story, that when the
Santa Fé began negotiations with the managers of the Valley road in
April, 1898, its operated mileage ran from Chicago west to Mojave,
Los Angeles, and San Diego (National City). It had no route over the
Tehachapi Pass between Mojave and Bakersfield, and thus no way of
reaching the San Joaquin Valley save by traffic arrangement with the
Southern Pacific. The purchase of the San Francisco and San Joaquin
Railway gave to the Santa Fé control over a system of 279 miles,
stretching from Stockton to Bakersfield, with a branch from Fresno
through Visalia and Tulare, and an extension from Stockton to Point
Richmond which, while not completed, was under way, and funds for
the construction of which were in hand. Actual construction of the
Stockton-Point Richmond line had begun in April, 1898. The work was
continued by the Santa Fé, and the road was opened for freight and
passengers, respectively, in May and July, 1900. There was talk also
of building across the 68-mile gap between Mojave and Bakersfield.
Eventually, however, an amicable arrangement with the Southern Pacific
was concluded in this territory under which the use of the Southern
Pacific line across the mountains was thrown open to both companies.
This finally admitted the Santa Fé to northern California.


Reduction of Grain Shipment Rates

Did the building of the San Francisco and San Joaquin Valley Railway
justify itself? From the financial point of view the answer is clearly
in the negative. To say nothing of the energy spent in its development,
investors in the stock of the railroad received no dividends. They
therefore lost the use of the capital which they contributed for a
period of three years. The principal of their investment they did,
indeed, recover, but the interest upon it was gone. On the other hand,
the enterprise was never regarded as likely to be a money-making affair
in the narrow sense, and the financial point of view was not the chief
one to be regarded. The real benefit expected from the construction
of the Valley road was that which would come from a reduction in
transportation charges between San Francisco and points in the San
Joaquin Valley, and the success of the project was therefore to be
measured primarily by the cuts in railroad rates for which it might be
held responsible. We may consider the problem a moment from this point
of view.

The first reduction in rates which may be attributed to the Valley road
occurred in June, 1896, when the new railroad published a schedule of
charges on wheat and on burlap bags to Stockton from stations upon its
line south of the last-named city. This schedule showed substantial
reductions. On September 15, 1895, the Southern Pacific rate from
Ripon, a town 20 miles distant from Stockton, to Stockton was 95
cents per ton of 2,000 pounds. The Valley road in 1896 filed a rate of
80 cents a ton from Escalon, 21 miles distant from Stockton upon its
own line. The Southern Pacific rate for the 29 miles from Modesto to
Stockton was $1.35 a ton. From Empire, the nearest station to Modesto
upon the San Francisco and San Joaquin Valley, the new railroad put
in a rate of $1.10. The rate from Merced was $1.85 over the Southern
Pacific; it was now made $1.70 by the Valley road. In addition to these
reductions in the rates to Stockton, the new company afforded shippers
a sensible relief by abolishing the switching charge of 15 cents per
ton which the Southern Pacific had been accustomed to demand on grain
handled at that point.[487]

As the Valley road extended itself to the south and added new
stations at which it was prepared to receive business, the policy of
rate-cutting was continued. In September, 1896, a wheat rate of $2.15
per ton was established from Fresno to Stockton, 20 cents less than the
Southern Pacific charge.[488] By 1898 the line had reached Bakersfield,
and grain rates were put in from towns between Hanford and that city
which were from 10 to 15 cents per ton less than the rates which the
Southern Pacific was accustomed to exact.[489] All the rates quoted
were met by the Southern Pacific; moreover, word was sent to Mr. Moss,
traffic manager of the San Francisco and San Joaquin Valley, that the
Southern Pacific would continue to meet reductions as fast as they were
made.


Merchandise Tariff

The first merchandise tariff to be established by the new line was
somewhat slower in appearing than the tariff on grain, because the
formulation of it was a more complicated matter. Nevertheless, such
a tariff was filed with the State Railroad Commission on August
22, 1896. The new merchandise rates were based upon the Western
classification, and were believed to represent reductions of from
10 to 50 per cent as compared with Southern Pacific rates before
the competition of the Valley road had become effective. In the new
schedule the first-class rate from Stockton to Merced was 31 cents
per hundred pounds, or approximately .9 cents per ton per mile. On
class five, the highest carload class, the rate was $4 per ton, or .6
cents per ton per mile.[490] As in the case of the grain rates, the
publication of new merchandise schedules continued as the Valley road
proceeded south. Thus when the company reached Bakersfield it put in
a first-class rate of 83 cents per hundred pounds, a cut of 19 cents
under the Southern Pacific tariff, with rates on other classes reduced
to correspond.[491]

In addition to grain and merchandise rates, the Valley road also quoted
commodity rates. The rate on flour from Merced to San Francisco was
set at $2.75 per ton, and that on potatoes and on lime at $1.85 per
ton, as compared with rates of $4.20 and $3.10 over Southern Pacific
lines.[492] Likewise passengers were carried from Stockton to Fresno
and to intermediate points at a flat rate of 3 cents per mile. Later,
the fare from San Francisco to Hanford was reduced from $7.30 to $4.65,
that to Visalia from $7.40 to $5,[493] and that to Bakersfield from
$9.10 to $6.90.[494]


Relative Position of San Francisco Improved

It should be added that the adjustment both of grain and of merchandise
rates was such as to improve the relative position of San Francisco as
compared with other cities, as well as to reduce directly the freight
bills which she had to pay. Generally speaking, the grain rates between
points in the San Joaquin Valley and San Francisco were made 50 cents
per ton higher than the rates to Stockton. This in itself represented
a reduction of 50 cents under the Southern Pacific rates, inasmuch
as the Southern Pacific had been accustomed to quote a rate to San
Francisco which was $1 per ton higher than the rate to Stockton, in
order to encourage shipments to Port Costa. The Southern Pacific rate
to Port Costa, exceeded its rate to Stockton by only 50 cents, and was
less than the Southern Pacific grain rate to San Francisco by the same
amount.[495]

The differentials in the case of merchandise southbound varied. On
first-class the rate from San Francisco to valley points was 5 cents
per hundred pounds higher than the rate from Stockton. On second-class
the differential was 3 cents, and on third and fourth classes it
was 2 cents per hundred pounds. Groceries and supplies for country
stores generally fell in classes two, three, and four. These figures
compared with Southern Pacific differentials of 5 cents on classes one
and two, and 4 cents on classes three and four.[496] Here again the
relative position of San Francisco was improved, not unnaturally to the
satisfaction of dealers in that city.

It is clear from the facts set forth in the last few pages that the San
Francisco and San Joaquin Valley Railway accomplished a considerable
reduction in rates, at least for a time, in the San Joaquin Valley.
When we bear in mind that this was the principal purpose for which the
road was built, and when we recall that after all its promoters escaped
without considerable financial sacrifice, it is hard to avoid the
conclusion that the enterprise was justified, and may be considered to
have been worth what it cost. The company did not fulfil the hopes of
its projectors; it failed to maintain its independence, and only for
a few years served as an aggressive competitor of the system which San
Francisco business men so cordially disliked. But it did do something
to relieve the mercantile community, at no great expense to the persons
who invested in it, or to the city which promoted it, and so, in a
modest way the railroad may be considered a success.




CHAPTER XIX

OPERATING CHARACTERISTICS OF THE SOUTHERN PACIFIC LINES


Proprietary and Leased Properties

Let us now leave the general questions of rates and competition in
California, and return again to the more intimate history of Southern
Pacific development, and particularly to the story of the later
years. The present chapter describes the organization and operating
characteristics of the Southern Pacific system after 1885; the chapters
next following take up that all-important financial problem which
faced the Central Pacific in the later nineties—the repayment of the
government debt.

A glance at the annual report of the Huntington lines shows that
from the point of view of ownership the system, as early as 1885,
was divided into two parts. The first of these was known as the
“proprietary companies,” and included the Southern Pacific Railroad
of California, the Southern Pacific Railroad of New Mexico, the
Southern Pacific Railroad of Arizona, Morgan’s Louisiana and Texas
Railroad and Steamship Company, the Louisiana and Western Railroad,
the Texas and New Orleans Railroad, the Galveston, Harrisburg and San
Antonio Railway, and the Northern Railway. The second was known as
the “leased companies,” and its principal components were the Central
Pacific Railroad, the California Pacific Railroad, and the Oregon and
California Railroad.

The difference between leased and proprietary lines was not in the
operating relations between the two groups and the Southern Pacific
Company, for as a matter of fact all were “leased lines” in this
regard, but in the circumstance that the Southern Pacific Company
held substantially all the stock of the proprietary companies in its
treasury as the result of the issue of its own stock in exchange; this
was not true of the so-called leased companies. In December, 1896, the
Southern Pacific reported 5,250 miles of proprietary lines, and 2,128
miles of leased properties.[497]

From the standpoint of operation the distinction between proprietary
and leased lines was completely disregarded, and naturally so because,
as has been said, both kinds of properties were operated after the same
general fashion. Instead of being classed as proprietary or leased
companies, the Southern Pacific lines were divided for operating
purposes between the Pacific system including the mileage south of and
including Portland, Oregon, and west of Ogden and El Paso, and the
Atlantic system, including the railroads east of El Paso. In 1889 local
legislation compelled the separate operation of the lines in Texas. In
1896 there were 4,966 miles of main line in the Pacific system, 1,967
miles in Texas, and 445 miles in Louisiana. Mention should also be
made of over 3,500 miles of water routes, chiefly those connecting New
Orleans and Morgan City with the West Indies and with New York.


Bigness of System

The fact concerning Southern Pacific properties that seems to have
most impressed observers was their sheer size. A company controlling
7,300 miles of railroad and 3,500 miles of water lines, and operating
between Portland, New Orleans, and New York, was unusually large even
to men accustomed to the great eastern corporations which operated
in the nineties. The railroad mileage of the Southern Pacific in 1896
exceeded that of the Union Pacific by 2,600 miles, that of the Santa
Fé by 940 miles, and that of the Northern Pacific by 2,800 miles. Even
the Pennsylvania Railroad operated only 6,700 miles in 1896, including
lines both east and west of Pittsburgh, while the reported mileage of
the New York Central and Hudson River Railroad was but 2,395 miles in
the same year.

In respect to earnings also, the Southern Pacific bulked large among
its contemporaries. In the single year 1892, with its affiliated
railroads and ferries, it took in nearly $49,000,000 on 6,486 miles of
line, or more than half the earnings of the Santa Fé, Union Pacific,
and Northern Pacific combined. In 1896 the earnings of the Southern
Pacific were about the same as in 1892 upon a substantially greater
mileage, but the earnings of its competitors had also greatly declined.
Naturally enough, the great extent of the Southern Pacific system made
its problems those of extensive rather than of intensive operation.
Locomotive runs were longer on the Southern Pacific than elsewhere, and
more attention was paid to questions of organization, particularly in
later years.

There were other features about the Southern Pacific lines, however,
besides their length, which deserve at least a passing mention. The
system enjoyed, for example, the advantage of a highly diversified
traffic. The year 1900 was not exceptional in this regard, yet in 1900,
22 per cent of the freight carried by the Southern Pacific fell in the
class of products of agriculture, 17 per cent was manufactures, 15
per cent was products of the forest, 10 per cent products of mines, 8
per cent merchandise, and 4 per cent animal products. When we recall
that in the same year 47 per cent of all the freight carried by the
Pennsylvania Railroad Company consisted of anthracite and bituminous
coal, and that nearly half of the freight transported over the
Chicago, Milwaukee and St. Paul Railroad consisted of products of
agriculture and of the forest, we can understand the unusual position
in which the Southern Pacific was placed.[498]


High Average Earnings

Generally speaking, on a railroad system which handles a large traffic
in manufactured goods, the average return per ton per mile will be
large. This is particularly true when the company’s coal tonnage is
of small proportions. In the case of the Southern Pacific, the effect
of such a distribution of business was increased by the fact that the
company possessed the well-nigh exclusive control of a large local
business on the Pacific Coast, on which high rates could be charged.
This was where the efforts of the associates to maintain a monopoly
of rail transportation in California bore fruit. Eighty-two per cent
in weight of the commercial freight handled in 1883 by the Central
Pacific Railroad was classified as local, and almost two-thirds of
this company’s earnings were derived from local business. Indeed, the
local freight during the early years of operation exceeded expectations
as much as the through freight fell behind what was thought would
be its probable development. Prior to the construction of the Union
and Central Pacific railroads, it was supposed that for many years
the through business of the new lines would constitute by far their
principal source of revenue. It was also supposed that the traffic
of the companies would consist very largely in the transportation
across the continent of the products of Asia in transit to the states
situated east of the Mississippi River and to Europe. Both of these
anticipations proved entirely mistaken.

Partly, then, because of the character of the freight which it handled,
and partly because of the fact that a large proportion of its business
was local, the average rate upon the Southern Pacific was very high.
The average freight receipts of the Central Pacific in 1872 were 3.66
cents per ton per mile. While they declined in subsequent years, the
figure was still 2.75 cents in 1878, and 2.14 cents in 1881. In 1878,
while the Central Pacific was earning 2.75 cents per ton per mile, the
Santa Fé received only 2.12 cents, the Union Pacific 2.27 cents, the
Chicago and Northwestern 1.72 cents, the Pennsylvania .92 cents, and
the Lake Shore and Michigan Southern .73 cents.[499] Fourteen years
later, the average receipts on the entire Southern Pacific system were
exactly twice the average receipts per ton per mile on the Illinois
Central, and materially greater than those of most roads in other parts
of the country.

It is evident that the average earnings of the Southern Pacific system
were superior to those of the other transcontinental railroads, to
say nothing of such eastern properties as the Illinois Central and
the Chicago and Northwestern. To break the force of the comparison,
Mr. Huntington was wont to compare Southern Pacific figures with
the averages reported by the Interstate Commerce Commission for the
so-called Group X, which included the Pacific Coast. These statistics
showed, for example, in 1894, that the average receipts per ton per
mile of railroads in Group X were 1.343 cents, while those of the
Southern Pacific (Pacific system) were 1.316 cents. Territorial
averages, however, made up of returns from small companies and from
large, from local and from through concerns, may reasonably be expected
to be higher than averages which apply only to large systems. The
Southern Pacific received more on the average than its competitors,
and almost as much as the group in which it lay, in spite of the fact
that it enjoyed a through business in which a great many of the small
western lines had no share.


Long Average Haul

The influence of through business on the Southern Pacific lines was,
on the whole, opposed to that of the local business. Not only was the
through business highly competitive, but, as might be anticipated, it
was characterized by an extremely long haul. Indeed, in the year 1895
the average length of haul on the through freight transported over the
Pacific system of the Southern Pacific was 844 miles. The average haul
of freight on the entire business of the company was 279 miles. During
the same year the New York Central Railroad reported an average haul of
169 miles, and the Erie one of 156 miles.

The reason for the extraordinary length of haul on the Southern Pacific
lay in the fact that the company served a rich community far removed
from eastern centers of population, yet relying to a considerable
extent upon these centers both as a market for its produce and as a
source for its supplies. Moreover, the commodities of California, such
as fruit and lumber, wool, fish, and wine, and the imports through the
port of San Francisco, such as tea, sugar, and silk, were sufficiently
distinct in character from the typical products of the East to give
something of the stability of international division of labor to the
movements between the Pacific Coast and the eastern states. Much the
same can be said of the transportation of manufactured goods westbound
in view of the high price of labor in the West and the scarcity of coal.

These matters have been considered in a preceding chapter. Their
effect was to make it easy to secure a great many full cars, or even
trainloads, and to reduce terminal expenses to a minimum. Inasmuch,
however, as the raw products of California were heavier and took up
more space than the manufactured goods received in exchange for them,
a very considerable excess of eastbound tonnage often existed. In
1888, to take a year at random for purposes of illustration, the tons
of through freight carried one mile eastward on the Pacific system
were reported as amounting to 335,330,035, while the through westbound
freight amounted to only 232,682,578. This meant light loads and empty
mileage on the westbound traffic. The difference would doubtless have
been greater had it not been for the large westward moving company
freight. Such a tendency called for constant effort on the part of the
officials of the Southern Pacific to secure eastern manufactures for
westbound transportation, and this effort in turn gave rise to friction
between the railroad and the manufacturing interests upon the Pacific
Coast.

On the other hand, the tendency of the passenger traffic was in the
direction of an excess of westbound business, because of the migration
of permanent settlers to California. During the three years from 1888
to 1890, 328,892 through passengers were reported as moving westward
on the Pacific system alone, and only 241,643 as moving eastward, or
an excess of 36 per cent in favor of the West. The excess of westbound
passenger traffic during these three years reached the large total of
76,580,470 passengers, or more than the total eastbound movement in any
one year of the period.


Earnings Density

The greatest density of earnings on the Southern Pacific system was
on properties such as the Central Pacific and the California Pacific,
which together with the Northern Railway formed the main trunk line
from San Francisco to the East. In 1895 the Central Pacific earned
$9,537 per mile and the California Pacific $9,266, amounts which were
far inferior to the results of the operation of railroads in thickly
settled districts east of the Mississippi River, but which yet exceeded
the returns on the Santa Fé, the Illinois Central, and even those
reported on the western portions of such a railroad as the Baltimore
and Ohio.

Next to the California Pacific in the Southern Pacific system, in
respect to earnings, came, in 1895, the South Pacific Coast Railroad,
with gross earnings of $8,000 per mile; the Southern Pacific railroads
of New Mexico, California, and Arizona, with earnings ranging from
$6,500 to $5,800; the Northern Railway with $5,177; and finally the
Northern California and the Oregon and California Railroad companies,
with earnings per mile of $2,600 and $2,400, respectively. The figures
so far given all relate to the Pacific system. In general it may be
said that the earnings of Atlantic system lines were slightly greater
per mile than those of the western properties. This statement does not,
however, hold good of all the Atlantic companies, nor, on the average,
for the Texas roads, statistics for which are given separately.


Diversion of Traffic to El Paso Route

Unquestionably there was a difference in interest between different
parts of the Southern Pacific system, particularly between the Central
Pacific or Ogden route, and the Southern Pacific or El Paso route.
When the Southern Pacific was first completed to El Paso, the question
was raised as to whether it would be the policy of the management
of the whole system to divert all transcontinental freight via the
southern route. In a letter to a bureau of the United States Treasury
Department, Mr. Huntington observed that it would be necessary to
continue to do a large part of the through business over the Central
Pacific in order that that road might be enabled to meet its interest
charges and the requirements of the government indebtedness. The point
was evidently regarded as one which called for a decision as to policy.
Mr. Huntington further pointed out that it would be injudicious for
the Southern Pacific to push any advantage too strongly which it might
have, lest it provoke retaliatory action by other lines.[500]

The early practice of the Southern Pacific did not, however, altogether
accord with this counsel of moderation, and the company seems not only
to have been very active, but actually to have succeeded in capturing
as much as 90 per cent of the New York-San Francisco business; also,
while it did not permanently retain so large a share of the through
freight which moved by rail, it continued to carry the major portion of
the westbound traffic from the Atlantic seaboard to California until
perhaps the year 1887.[501] Some of the freight which the Southern
Pacific handled during this period was new business, but a considerable
portion of it was taken from the Central Pacific.

There is more or less evidence that it was the practice of the Southern
Pacific management to lay special emphasis upon the advantages of the
southern route, in the attempt to divert as much business as possible
to what was known as a 100 per cent line. That shippers believed such
a policy was being followed, is evident from statements which appeared
in the public press. It was currently asserted, for instance, that
ticket and traveling agents of the Southern Pacific all over the state
of California were instructed to use their best endeavors to induce
passengers to move by way of the southern line instead of by way of
Ogden.[502] It was claimed that better time was made over the Southern
Pacific than over the Central Pacific, and that freight shipments were
more easily traced.

Speaking of westbound freight, a San Francisco merchant was quoted in
1896 as stating that the Southern Pacific delivered freight from New
York to San Francisco in from twelve to twenty days. Should the freight
not come to hand promptly, officials of the company were said to be
exceedingly careful to discover the causes of the delay and to see that
the goods were pushed forward as rapidly as possible. On the other
hand, if freight came via Chicago and Ogden, all the way from 18 to
28 days might be spent upon the journey, while information as to the
causes of delay was difficult to obtain.[503]


Testimony of Employees and Officials

One may readily concede that complaints of the character referred
to are to be accepted only with reservations; yet there is later
information which bears out the substance of the charges in convincing
fashion. When the Southern Pacific system was attacked in 1914 as a
combination in restraint of trade, a great many railroad employees were
put upon the stand, and testimony was secured which related not only
to current policy, but also to practices which had been followed by
members of the Southern Pacific staff for a number of years in the past.

It appears without substantial contradiction from the testimony in
this case, that Southern Pacific, and even Central Pacific employees,
solicited for the Sunset route before its combination with the Union
Pacific in preference to the route via Ogden in order to obtain the
long haul, even when the Sunset route was very roundabout. Mr. Connor,
commercial agent of the Southern Pacific at Cincinnati from 1889 to
1901, testified that his office had directed its exclusive time and
attention to securing traffic from California points for the New
Orleans gateway. Shipments moving via Ogden he regarded as lost and
reported them accordingly.[504] Mr. Sproule said that the same was true
of the whole Central Freight Association territory, from Buffalo and
Pittsburgh on the east, to Chicago and St. Louis on the west.[505]

Mr. Spence, director of traffic of the Southern Pacific Company,
admitted that effort was made to send business to California via New
Orleans when the point of origin was in territory east of a line drawn
from Toledo through Indianapolis and Terre Haute to St. Louis.[506] Mr.
Lovett thought that Southern Pacific solicitors even in Chicago did not
work against the solicitation of lines leading to New Orleans, though
acting independently they would solicit business via Ogden.[507] It is
in the record, also, that Southern Pacific solicitors in 1914 sought
freight from the Atlantic seaboard to Oregon and Nevada through the New
Orleans gateway,[508] and that the great bulk of wool from western and
central Nevada destined to the Atlantic seaboard actually moved west
to Sacramento and then south and east over the Sunset line, instead of
taking the direct route via Ogden.[509]


Complaints of Others

This direct testimony of Southern Pacific employees is in harmony with
repeated assertions made by persons outside of the organization, and
seems to indicate that some discrimination against the Central Pacific
and in favor of the Southern Pacific on transcontinental business
was encouraged by those in control of the Southern Pacific Company’s
affairs. As well informed a man as P. P. Shelby, traffic manager of
the Union Pacific, declared in 1887 that he knew by conversation with
shippers that the Central Pacific had diverted all the traffic they
could control to the Sunset route ever since the Southern Pacific
was completed, commencing in 1882. All kinds of merchandise had been
diverted, especially such goods as canned fruits, canned fish, and
wool. Asked whether the Union Pacific would carry 25 per cent more
freight if the Central Pacific were separated from the Southern
Pacific, Mr. Shelby qualified his statement by saying that it was hard
to answer the question. The Southern Pacific gave the Central Pacific
a good deal of freight which that company would not have received were
the two lines segregated. Had they been two independent lines, under
independent management, the Southern Pacific would not have given the
Central Pacific any freight at all.[510]

Similar charges were made by representatives of interests such as
those of the English stockholders of the Central Pacific, who asserted
that Mr. Huntington wished to ruin the Central Pacific, and dwelt
upon the advantages of bankruptcy to a company from which the United
States government was about to attempt to collect a debt. Knowing as
we do that the Huntington-Stanford group shifted the weight of their
investments from the Central to the Southern Pacific in the eighties,
there is of course ground for suspicion that the diversion of freight,
to which the evidence that has been quoted refers, was part of a
carefully thought-out plan, and that more than traffic matters were
involved.


Real Reasons for Traffic Diversion

Yet the truth of the matter probably is that while some diversion from
the Central to the Southern route occurred, this diversion, although
looked upon with equanimity by Mr. Huntington, was not part of an
attack upon the Central Pacific, but may be explained by certain simple
traffic considerations. There were at least two good reasons why an
attempt should have been made to handle business from New York over
the Southern Pacific rather than over the Central Pacific. The first
reason was that it was more profitable for the Southern Pacific to take
freight from New York by a route which it entirely controlled, than
to divide the earnings on such business with the direct lines between
New York and Ogden. The second reason was that the Southern Pacific
could offer better service on the Sunset route than over the Central
Pacific because of the indifference of the lines east of Omaha. The
Central Pacific business was done on a different classification from
that in use in the East. Also, many classes of freight were taken at
low rates because of water competition, so that the divisions accruing
to eastern lines were very small, and their interest in the traffic
correspondingly slight.

Finally, to the eastern roads the whole business was unimportant
compared with the volume of other kinds of goods which they
were handling. The result was that Mr. Stubbs, of the Southern
Pacific, complained very vigorously that eastern lines neglected
transcontinental business. It took four to six days he said, to get
freight through the city of Chicago, and often thirty to thirty-five
days to transport it from Omaha to New York. Freight had to be
way-billed three times via Ogden as compared with one billing via El
Paso. In fact, in 1885 and 1886 the trunk lines practically withdrew
from the transcontinental business, and to this withdrawal should be
attributed the large proportion of the traffic between San Francisco
and New York which was handled by the Sunset route during these
years.[511]

These two reasons, of which one still has force, and the other was
important for a number of years, are sufficient to account for most
of the diversions complained of, and it is not necessary to attribute
additional motives to the Huntington management.

As a matter of fact, in spite of the traffic policy described, the
gross earnings per mile of the Southern Pacific did not move very
differently from those of the Central Pacific during the years from
1886 to 1895, when the data are distinguishable in the companies’
reports. The advances and recessions in volume of traffic were not
identical for the two companies during these years, nor did they occur
at exactly the same times, but the figures seem to offer no support to
the charge that the prosperity of either company was being sacrificed.

It may also be observed that the policy of freight diversion was
not confined to the period when the Central Pacific was negotiating
with the government for the payment of its debt and with the English
stockholders for the adjustment of their claims, nor to the years when
the management of the Southern Pacific Company owned Southern Pacific
shares and did not own a corresponding amount of the shares of the
Central Pacific. In fact, as has been said, the policy of seeking to
obtain the benefits of the long haul is still followed by the Southern
Pacific Company, and its agents still take credit for sending freight
all the way to New York by company lines, although the financial
control of both the Southern and the Central Pacific has long been in
one set of hands.


Traffic in Early Eighties

Like other systems in the United States, the earnings of the Southern
and Central Pacific railroads fluctuated considerably from year to
year. It has been pointed out in a previous chapter that during the
period from 1870 to 1879 the rapid extension of the Southern Pacific
in the South West, and the temporarily unproductive character of the
new mileage built, well-nigh caused the bankruptcy of the entire
concern. The associates were then saved by the completion of the
Southern Pacific main line to The Needles, and by an improvement in
general stock market conditions which enabled them to sell securities
in New York. In 1885 the Central Pacific retired the greater part of a
floating debt of $12,873,946 by an issue of bonds, and for the first
time in many years was freed from what had always been a pressing
danger.

In spite of this important relief, the years 1882, 1883, 1884, and 1885
were still years of considerable difficulty. Although the mileage of
the system now increased but slowly, the revenue per mile declined.
Thus the Central Pacific earned $9,449 per mile of line in 1881,
$8,437 in 1882, $8,253 in 1883, and $7,496 in 1884. In three years
gross earnings per mile dropped 21 per cent. This decline was due to a
number of causes. The Central Pacific suffered greatly, for one thing,
from the falling off in the tonnage supplied by the Nevada mines.
Roads like the Eureka and Palisade, the Nevada Central, the Nevada and
California, and the Virginia and Truckee railroads, which were at one
time lucrative feeders to the Central Pacific main line, all showed a
considerable decline in earnings and business between 1875 and 1885
because of the failure of the mines. The freight received at Palisade,
the terminus of the Eureka and Palisade Railroad, declined 74 per
cent between 1875 and 1888. The freight received at Battle Mountain,
the terminus of the Nevada Central, fell off 78 per cent, while that
arriving at Virginia City over the Virginia and Truckee Railroad
dropped 86 per cent.

It was estimated that the shrinkage of traffic between 1876 and 1885
was not less than $2,000,000 per annum as compared with the period
of highest prosperity of the Nevada country. The decrease was due in
the first instance to the working out of the ore deposits, not only
of the Comstock lode but of nearly all other camps within the states
of Nevada and Utah west of Ogden which were tributary to the Central
Pacific line. Following this, there was a large falling off in traffic,
consisting of mining machinery and all kinds of supplies previously
required by the miners at the mining camps, and also a large falling
off in passenger travel as compared with the first and prosperous years
of operation.[512]

Besides the loss of the Nevada mining traffic in the late seventies and
early eighties, the Central Pacific also had to reckon with a certain
loss of business by reason of the opening of transcontinental competing
routes such as the Santa Fé in 1881 and the Northern Pacific in 1883.
In the early part of the period the decline in business seems to have
been due mainly to local conditions; in 1884, however, as was to be
expected, a serious decrease in the earnings from through business
occurred.


Later Earnings

As a contrast to the unsatisfactory character of the returns for the
years 1883, 1884, and 1885, the reports of the companies show that,
taking the Central Pacific-Southern Pacific system as a whole, the
total earnings from 1885 to 1891 steadily increased, both in the
aggregate and per mile of line. If we compare the condition of the
system in 1891 with its condition in 1885, we find a progress which may
be summarized as follows:

COMPARATIVE STATEMENT OF MILEAGE, CAPITALIZATION, EARNINGS, AND
EXPENSES OF THE SOUTHERN PACIFIC SYSTEM, 1885,(*) 1886, and 1891

           Item              1885          1886          1891

  Mileage operated          4,698         4,847         6,376
  Capital stock         $171,036,160  $198,668,170  $264,375,066
  Funded debt            158,970,716   181,041,680   205,621,373
  Gross earnings          25,006,106    31,797,882    50,449,816
  Operating expenses      12,149,824    18,514,656    31,163,612
  Net earnings            12,856,282    13,283,226    19,286,214

  (*) The figures of earnings for 1885 represent the results of from
      nine to ten months’ operation only.

This was a satisfactory showing. The total mileage operated by the
Southern Pacific Company and by the Southern Pacific Railroad, Northern
Division, increased between 1885 and 1891 from 4,698 miles to 6,376
miles, not including the mileage of the steamship routes between New
Orleans and Galveston and New York. The principal elements of new
mileage added were certain lines in Oregon, including the property
of the Oregon and California Railroad from Portland to the California
state line (650 miles); a second road down the San Joaquin Valley on
the west bank of the river (190 miles); and additional construction on
the Coast Division (150 miles). Comparatively little was added during
these years to the Central Pacific main line, or to the properties east
of El Paso.

While the mileage operated thus increased by 1,678 miles, or 36 per
cent, gross earnings became greater by the sum of $25,000,000, or
approximately 100 per cent, and net earnings by $6,429,921, or about 50
per cent. This was accomplished with an increase in bonded indebtedness
of only 30 per cent. The increase in stock outstanding was greater, it
is true, than the increase in the funded debt, but the new stock issue
did not increase the fixed charges of the road, and therefore in no way
imperiled its solvency. In none of the figures cited are the so-called
subsidy bonds issued by the United States government or the accrued
interest upon the same included.


Decline Following 1893

Unfortunately, the progress of the Southern Pacific toward prosperity,
which was so considerable between 1885 and 1891, was interrupted by the
difficult commercial and industrial years between 1891 and 1897. The
effect of world-wide depression upon American railroads is apparent
when we observe that in the eastern part of the United States the gross
earnings of companies like the New York Central fell off during this
period from $21,000 per mile in 1892 to $18,000 per mile in 1897. The
Pennsylvania lines west of Pittsburgh earned $44,210,000 in 1891 on
a mileage of 3,502 miles. Six years later they hardly equaled this
record on a mileage 500 miles greater. Even the protected system of the
New York, New Haven and Hartford saw its gross earnings decline from
$22,000 per mile in 1891 to $20,000 per mile in 1897.

It was scarcely to be expected that the relatively new system of the
Southern Pacific would not suffer with the rest. The figures seem
to show, however, that the Huntington lines suffered more than most
eastern railroads from the depression in business following the panic
of 1893. While it is true that the portion of the roads operated by
the Southern Pacific Company which was known as the Atlantic system,
comprising the lines east of El Paso, escaped with a decline of
earnings from $7,700 per mile to $7,400, or only 43 per cent, the
Pacific system, including the Central Pacific and the Southern Pacific
Railroad of California, witnessed a decline in its returns from $8,000
per mile in 1891 to $6,400 per mile in 1897, or a loss of from five to
six times as much in gross, and a still greater relative decline in
net, receipts.

The following table shows the earnings and expenses of the Central
Pacific Railroad per mile of road from 1885 to the reorganization of
the company in 1898:

OPERATING RECEIPTS AND EXPENSES OF THE CENTRAL PACIFIC RAILROAD OF
CALIFORNIA, 1885-98 PER MILE OF ROAD

  Year    Gross Earnings    Operating Expenses    Net Earnings

  1885      $ 8,383.26          $3,712.93           $4,670.33
  1886        9,135.18           4,445.62            4,689.56
  1887       10,092.27           5,394.48            4,697.79
  1888       11,641.24           7,079.38            4,561.86
  1889       11,416.92           7,178.13            4,238.79
  1890       11,715.97           7,259.55            4,456.42
  1891       12,224.76           6,771.95            5,452.81
  1892       10,745.16           6,548.29            4,196.87
  1893       10,488.89           6,267.71            4,221.18
  1894        9,578.18           6,008.06            3,570.12
  1895        9,534.31           5,990.94            3,543.37
  1896        9,159.68           5,706.59            3,453.09
  1897        4,270.75(*)        2,715.62(*)         1,555.13(*)
  1898       11,595.87           6,769.00            4,826.87

  (*) Six months only.

These figures show very clearly that the gross receipts of the Ogden
route increased on the average per mile of road from 1885 to 1891, but
that they fell off largely and persistently from 1891 to 1897. Indeed,
the net earnings per mile each year from 1894 to 1897 inclusive, were
less than those for any of the nine preceding years.


Suspension of Central Pacific Dividends

It seems very likely that this unusual falling off in the receipts
of the Central Pacific Railroad Company is to be associated with the
exceptionally disturbed traffic conditions on the Pacific Coast during
the four or five years beginning in the latter part of 1891. These were
the years when the Traffic Association of California was conducting
its violent attack upon the Huntington interests. The period was
also marked by the dissolution of the Transcontinental Association,
and by the construction of the San Francisco and San Joaquin Valley
Railroad. It was not to be expected that a campaign such as has been
described in previous chapters would fail to have an influence upon
the receipts of a company interested in business in, to, and from the
state of California, so that a disproportionate decrease in Central
Pacific earnings was not surprising. However this may be, the effect of
the decline in earnings was to force the Central Pacific to stop the
payment of dividends; and the cessation of dividends, together with
other elements of uncertainty in the situation to which reference will
be made, eventually caused the price of Central Pacific and of Southern
Pacific stock to decline.[513]


Dividend Policy

In respect to dividends a word should be said here, enough at least to
make clear that the whole dividend policy of the Central Pacific was a
matter which provoked criticism, and that this criticism grew acute at
the close of the period we are discussing. As a general matter it was
charged that the Central Pacific had no business to pay any dividends
at all while its indebtedness to the United States government remained
uncanceled. It was further alleged, with more show of reason, that
the dividends of the eighties were declared in order to assist the
associates in disposing of Central Pacific stock in Europe, and not
because there existed any surplus to which they could be properly and
wisely charged. Finally, enemies of the company asserted, and showed
ground for believing, that the dividends set forth in the annual
reports of the Central Pacific to its stockholders did not represent
all dividends actually declared; they asserted that, in addition, by
special arrangement, considerable sums were paid out in unreported
dividends, which may or may not have reached all holders of the stock.

It appeared in this connection that a gentleman named Sir Rivers
Wilson had come to the United States in 1894 as a representative of
English shareholders.[514] Sir Rivers interviewed officers of the
Central Pacific, inspected the property, and it was reported in the
newspapers after his return to the East that he had arrived at a
compromise with Mr. Huntington. The terms of the compromise were at
first only vaguely understood, but the _London Economist_, in its
issue of March 23, 1895, declared specifically that Mr. Huntington had
undertaken to pay 1 per cent per annum in the shape of dividends until
satisfactory legislation had been obtained for the adjustment of the
Central Pacific’s debt to the government, and that he had also agreed
to pay 2 per cent per annum for two years after the debt question had
been settled, during which time the shareholders would have opportunity
to review their position and to consider effecting an arrangement of a
more permanent character.

Mr. Huntington’s attention was called to this statement of the
_Economist_, but he made no denial of the facts stated. Three years
later Mr. Huntington went further, and admitted that he had agreed with
Sir Rivers Wilson to pay shareholders—all shareholders—an annual
dividend of 1 per cent upon their stock.[515] It was understood that
the money for the secret Central Pacific dividends was loaned to the
Central Pacific by the Southern Pacific, although this detail was not
authoritatively established.


Market Prices of Stock Shares

Neither the Central Pacific nor the Southern Pacific were ever
investment properties under the Huntington régime, in the sense that a
stable return could be expected by holders of their stock, or even in
the sense that the selling price of their shares remained reasonably
uniform or ever reached a quotation in the neighborhood of par. Central
Pacific stock sold at 34 in January, 1885. It rose to 51 in 1886,
fluctuated principally between 26½ and 42 during the years from 1887
to 1892, and then proceeded to fall in value until in the spring of
1897 it was quoted on the New York Stock Exchange at the nominal figure
of 7⅛ per share. The stock was ordinarily not traded in to any extent
probably because so much of it was held abroad.

Southern Pacific stock was listed on the New York market in 1885, but
as has been explained in a previous chapter, quotations on the shares
were for several years artificial. In 1890 the stock sold mostly
between 25 and 35. It declined slightly during the latter part of
1890 and the early part of 1891, but from September, 1891, to August,
1892, most of the sales were between 35 and 40. Beginning in 1893 the
price of Southern Pacific stock began to decline. In 1894 it reached
17½, in 1895, 16¾; and in 1897 it touched the low point of 13½. After
1898 Central Pacific stock left the market, but Southern Pacific stock
recovered to about 50 in the middle of 1901, at which approximate price
46 per cent of it was purchased by the Oregon Short Line.

It is not without interest that the fluctuations in the quotations
of the stock of the Central Pacific were quite as extreme between
1885 and 1890 as were those of the Southern Pacific shares, although
one stock was occasionally a dividend payer and the other was not,
and that the Central Pacific stock was quoted at a distinctly lower
figure between 1894 and 1898 than was the stock of its apparently more
speculative associate. The reason is not to be found in the different
natures of the properties represented by the two stocks, nor in any
difference in operating conditions. It was plainly due to the gradually
approaching maturity of the debt which the Central Pacific owed to the
United States government, and to the complete uncertainty as to the
effect which government action might have upon the solvency of the
Central Pacific Railroad. So long as there seemed a possibility that
the Central Pacific would be called upon to make good, in cash, an
advance which by 1898 would amount to nearly $60,000,000—a sum which
few persons believed that the Central Pacific would be able to pay—the
stock certificates of this company could have only a speculative value.

The question of the best way to meet the huge obligation which had
grown out of the assistance tendered to the Central Pacific Railroad
by the federal government under the Pacific Railroad Acts of 1862 and
1864, was indeed the most important financial problem which the company
had to solve after Mr. Stanford’s death. The two following chapters
will be devoted to an exposition of the points involved in this
transaction, and to a description of the solution finally reached in
the year 1898.




CHAPTER XX

THE THURMAN ACT


A Loan, Not a Subsidy

The original loan of the United States government to the Central and
Western Pacific railroads amounted to $27,855,680. The bonds which
were issued to the companies were United States currency bonds,
bearing 6 per cent interest, payable semiannually and maturing at the
end of thirty years. They fell due therefore between 1895 and 1899.
Some question has been raised as to whether these bonds were to be
regarded as a loan or as a donation to the corporations which received
them. Setting aside the fact that a loan at a critical moment may be
almost as serviceable to the recipient as a gift, the evidence shows
that the unquestionable purpose of Congress in 1862 and 1864 was that
principal and interest of the bonds should be met by the railroads for
the benefit of which they were issued. It follows that this bond issue
constituted an advance to the Central and Western Pacific railroads,
not a gift; a loan, not a donation. It was the contention of Mr.
Huntington, indeed, that the very name “subsidy” was a misnomer. He
said:

 The Central Pacific never got a subsidy; they got the loan of a small
 subsidy. The government loaned money at six per cent and they expected
 and did receive direct benefits from the time the road was built. It
 was not a subsidy in any way.... A subsidy as I believe is where you
 give ... For instance if you will build a railroad I will give you
 $10,000 as a subsidy; as to being a loan of money it is no such thing.
 It is only a business negotiation.[516]

We must therefore recognize that the government advances to the
Central Pacific did not constitute a subsidy in the ordinary meaning
of that term. At the same time it should be observed that the Pacific
railroads occupied a peculiarly advantageous position in respect to
the loans which the government made to them. As will presently appear,
although interest on this loan was charged, the companies were not
obliged to pay a cent of this interest until the maturity of the
bonds. This unusual concession was declared by the Supreme Court to be
the necessary result of the absence of a precise stipulation to the
contrary in the Acts of 1862 and 1864. The court said:

 It is one thing to be required to pay principal and interest when
 the bonds have reached maturity, and a wholly different thing to be
 required to pay the interest every six months, and the principal at
 the end of thirty years. The obligations are so different, that they
 cannot both grow out of the words employed, and it is necessary to
 superadd other words in order to include the payment of semiannual
 interest as it falls due.[517]


Payment of Simple Interest at Maturity

A second concession to the Pacific railroads was made when no interest
on deferred interest payments was exacted. Ordinarily in such cases
interest is compounded at intervals of six months. On a thirty-year
loan of $27,855,680, issued under the conditions which characterized
the subsidies to the Central and Western Pacific railroads, the
difference between simple interest and interest compounded semiannually
would be $113,974,300. That is to say, simple interest would amount
to $50,140,224 at the end of thirty years, while compound interest
would equal the materially greater sum of $164,114,524. Put another
way, the value in January, 1865, of the right to receive the principal
of the government loan increased by simple interest according to the
terms and at the dates contemplated by the Acts of 1862 and 1864, was
only $13,000,000. This was the value of the monetary consideration
which the federal government accepted from the Central and Western
Pacific railroads. On the other hand, the value of the advance made
by the government to the same railroads as of the same date was
$23,000,000, or a difference of $10,000,000. This computation assumes
that government bonds were sold at par, and that the current rate of
interest was 6 per cent. The difference indicated would be reduced if
government bonds were assumed to have sold for less than par, and it
would be increased were a higher rate of interest than 6 per cent used
in the calculation. Discussions of the Acts of 1862 and 1864 usually
fail to make clear that the government demanded simple interest only on
its loan, but as a matter of fact this was a feature of the contract
which was of substantial value to the beneficiary.


Claims for Indemnity

It was of course expected by Congress that the Pacific railroads would
make adequate provisions during the life of the bonds to meet the
interest and principal due at their maturity. Before discussing the
disputes concerning the size and nature of the sinking funds which
should have been erected, a few words may be said regarding certain
equities to which the Stanford-Huntington group repeatedly alluded as
constituting reasons for not paying the bonds at all. These equities
may be briefly enumerated as follows:

The first equity was said to have arisen out of the loss which it was
claimed the Central Pacific had sustained through failure to sell
the bonds received by it from the government at par. This loss was
estimated at $7,120,074, a sum which was raised by accrued interest
up to the time of the maturity of the bonds to the very considerable
figure of $19,936,206. According to Stanford, the government loan
netted the company only 65 cents on the dollar. He said:

 Indeed, if the company had taken advantage of the time allowed by
 Congress for the completion of the road, they could not only have sold
 the government bonds at par, but could also have disposed of their own
 first mortgage bonds at their face value, which would have been a net
 gain, over and above what was actually received, of $7,120,074, the
 interest on which for thirty years would have been $12,816,132, which
 would make an aggregate saving on the government bonds and the bonds
 issued by the company, principal and interest in round numbers, of
 about $40,000,000.[518]

In the second place the Central Pacific insisted that there should be
credited to it a portion of the amount which the government saved in
the transportation of government employees and freight as a result of
the rapid construction of its railroad. Under the terms of the Acts
of 1862 and 1864, the Central Pacific and Union Pacific might have
delayed completion of their road until July, 1876. As a matter of fact
the through line from Sacramento to Ogden was opened in May, 1869. The
consequent saving to the government was estimated at $47,763,178, of
which the Central Pacific proportion was set at $21,971,062. A similar
calculation laid before the United States Pacific Railway Commission in
1886 reached the conclusion that the total saving to the government up
to January 1 of that year had reached the sum of $139,347,741 on the
Union and Central Pacific combined. The basis for these estimates was
found in a comparison of the rates which the government had paid for
rail movement and the rates which it would have had to pay for ox team
and mule team transportation.

Still a third claim was based upon an alleged loss of business
consequent upon government subsidies to other transcontinental roads.
The loss of earnings to the two roads from this cause was set at
$37,000,000, of which the Central Pacific share was put at 46 per cent,
or $17,000,000. Stanford did not deny that the government had a right
in its discretion to aid other lines of railroad, but he took the
position that if Congress found it in the interest of the country to do
something which deprived the Central Pacific of the means of paying
its debts, then it should compensate the Central Pacific for this
action.[519]


No Basis for Claims

These three principal claims for indemnity were set up by officials of
the Southern Pacific at one time or another as complete offsets to the
obligations laid upon the company by the Acts of 1862 and 1864. Among
minor equities should be mentioned also an alleged loss to the Southern
Pacific by reason of the government’s slowness in issuing patents to
land. Another claim was based on a loss in respect to sinking fund
investments of the company; and still another on the shipment of United
States mails by other than bond-aided lines when the use of the latter
was possible.

There was no real reason, however, why the government should have
reduced its claims against the Pacific companies because of any of the
equities mentioned. The administration certainly gave no guaranty in
1864 that the subsidy bonds would sell at par. The government offered
the bonds for what they were worth, and the companies accepted them
on that basis. Nor did the government at any time agree to preserve a
monopoly of transcontinental business for the Central route, or to send
its own freight over the Central and Union Pacific railroads to any
greater extent than might prove convenient. On these points the facts
are perfectly clear. It would seem clear, also, that the government was
under no obligation to share with the companies any saving which it
had made by reason of the early construction of the transcontinental
line. The companies had built more rapidly than had been expected, it
is true, but the construction was pushed in their own interest, not in
that of the government, and gave rise to no proper claim against the
latter. The other points in the companies’ contentions do not deserve
special mention.


Sinking Fund Provisions

We may now return to the question of the government debt and its
repayment. The Laws of 1862 and 1864 contained two provisions intended
to enforce the original stipulation that principal and interest of
the subsidy bonds should be paid by the beneficiaries. These laws
required that 5 per cent of the net earnings of the Central Pacific
after the completion of the road,[520] and second, that one-half of the
compensation for services rendered to the government should be annually
applied to the payment of interest and principal of the subsidy bonds
until the whole amount was fully paid. It was then expected that these
two sources of income would provide a fund sufficient to meet both
principal and interest in full.[521]

This expectation was not, however, fulfilled. On the contrary, it was
already apparent in the seventies that the amount which the companies
would be called upon to repay was mounting up much more rapidly than
the credits designed to meet it. Six per cent interest upon $27,855,680
of bonds called for an annual interest of $1,671,340.80. From 1867 to
October 31, 1877, the one-half of transportation account for carrying
mails, troops, supplies, etc., withheld by the government and credited
to the Central Pacific sinking fund was only $1,423,555.74, or less
than $200,000 a year.[522] The 5 per cent of net earnings account
averaged $331,481 from 1872 to 1876.[523] The total annual payment
by the Central and Western Pacific railroad companies, therefore,
approximated $530,000, leaving a deficit of over $1,100,000 a year. At
this rate it was not unreasonable to suppose that the Central Pacific
would be much more heavily in debt to the government at the maturity of
the bonds than it was at the time of their original issue.


Right of “Set-Off”

Alarmed at the probable failure of the sinking fund provisions, the
Secretary of the Treasury, on advice of the Attorney-General, withheld
from the Central Pacific Railroad _all_ the compensation due it for
services rendered to the government. The same action was taken with
respect to the other bond-aided lines. This was clearly illegal, and
Congress accordingly passed the Act of March 3, 1871, directing payment
of the sums withheld.[524] On passage of the Act of 1871, the Secretary
of the Treasury began to pay to the Central Pacific and to the other
bond-aided companies, the 50 per cent of compensation for services
rendered to the government which the statutes required. Since, however,
there seemed to be a legitimate difference of opinion as to whether the
government should continue to pay money to companies already heavily in
debt to it, Congress proceeded two years later to pass the Act of March
3, 1873, which, in effect, remitted the whole controversy to the court.

The terms of the Act of 1873 were as follows:

 That the Secretary of the Treasury is directed to withhold all
 payments to any railroad company and its assigns, on account of
 freights or transportation, over their respective roads, of any kind,
 to the amount of payments made by the United States for interest upon
 bonds of the United States issued to any such company, and which
 shall not have been reimbursed together with the five per cent. of
 net earnings due and unapplied as provided by law; and any such
 company may bring suit in the court of claims to recover the price of
 such freight and transportation; and in such suit the right of such
 company to recover the same upon the law and the facts of the case
 shall be determined and also the rights of the United States upon the
 merits of all the points presented by it in answer thereto by them and
 either party to such suit may appeal to the Supreme Court; and both
 said courts shall give such cause or causes precedence of all other
 business.[525]

The intent of Congress in 1873 was that, in order to make a case, the
Secretary of the Treasury should withhold the sums demanded by the
bond-aided railroads including the Central Pacific, that the companies
should sue, and that the court should then decide. In pursuance of this
idea, the Union Pacific promptly brought suit against the government
in the Court of Claims to recover the amount due from the United
States for transportation of government passengers and property after
deducting one-half of the amount as required by law. A decision being
rendered in favor of the company, the United States appealed to the
Supreme Court, where the judgment was affirmed.

The foundation of the government position was that the United States
could legitimately offset the interest on subsidy bonds which it was
paying currently against the sums due the bond-aided railroads for
government transportation. The reply of the court was, first, that the
general principles of “set-off” did not apply in the case at bar; and
second, that the United States had no claim in any event because the
law did not require the Union Pacific (and the same principles applied
to other bond-aided railroads) to meet the interest charges on the
government advances until the maturity of the bond.[526] A later case
added the ruling that the United States had in the matter only the
right of a creditor growing out of contract, and could not fall back
upon its sovereign rights in order to protect its financial claim.[527]

Not only did the Supreme Court decide completely in favor of the
companies in the important matter of “set-off,” and in that relating to
the date upon which the Pacific railroads became liable for the payment
of accruing interest on the subsidy bonds, but it diminished also the
sinking fund payments of the companies by holding that under existing
legislation it was proper for the companies, in calculating net
earnings, to deduct from gross earnings expenses incurred for enlarging
and improving their property. The particular account involved was
that of expenditure for station buildings, shops, and fixtures. Such
expenditures are not ordinarily charged to operating expenses, and the
court admitted that “theoretically” they should not be so charged. The
practice was nevertheless justified on the ground of general policy, as
likely to encourage a liberal application of earnings to improvements.
The same decision also authorized the Central and the Union Pacific to
deduct interest on first mortgage bonds from earnings before computing
the 5 per cent of net earnings which was to be credited to the sinking
fund. This ruling was defended as a legitimate consequence of the
concession of priority to the first mortgage bonds.[528]


Need of Governmental Action

While Congress was considering ways and means for enforcing some
adequate provision for the eventual repayment of the government’s
advance to the Pacific railroads, the Central Pacific declared
dividends which amounted to no less than $18,453,670 in the five years
from September 13, 1873, to October 1, 1877. In 1873, 3 per cent was
declared; in 1874, 5 per cent; in 1875, 10 per cent; and in 1876 and
1877, 8 per cent. To see earnings divided among a group of financiers
who were believed to be already overpaid, while the unpaid interest on
the government subsidy bonds piled up, was all the more exasperating
because of the apparent helplessness of Congress. Some action, however,
was presently to be taken. In 1874 a bill was introduced in the Senate
to alter and amend the Acts of 1862 and 1864 so as to safeguard the
government equity. In 1876 Mr. Thurman, of Ohio, presented another
bill, which was reintroduced in 1877, referred to the Committee on
Judiciary, and ultimately reached the Senate in March, 1878. This bill
ultimately became the Thurman Act of 1878.[529]

The situation as it appeared in 1878 was succinctly presented by Mr.
Thurman on the floor of the Senate. The government’s loan to the
Central and Western Pacific amounted to $27,855,680. The interest
upon that sum for thirty years would be $50,140,224, making a total
of $77,995,904. The probable reimbursement from the 5 per cent of net
earnings and the half of the transportation accounts would be about
$15,000,000, leaving probably due at the maturity of the government
loan, should the laws remain unchanged, the sum of $62,995,904, which,
added to the amount that would probably be due from the Union Pacific,
made an aggregate of $119,248,979.[530] To this amount there was also
to be added in estimating the payments which the Central Pacific,
Western Pacific, and Union Pacific would be called upon to make in the
late nineties, the amount of the first mortgage bonds of the three
companies, the lien of which was prior to the lien of the subsidy bonds.

It seemed manifest to Mr. Thurman in March, 1878, that the bare
statement of the amount for which the government would be the creditor
of the Pacific railroad companies ought to satisfy anyone that some
step should be taken by Congress to secure the government from loss.
This point of view was not seriously contested. Objection to any
action there was, indeed, but not based on any denial of the assertion
that the security of the government was becoming impaired.


Thurman Bill

On the basis of the admitted need, Mr. Thurman, in behalf of the
Committee on the Judiciary of the United States Senate, made a series
of concrete proposals. The essence of the Thurman plan was that the
annual payments of the Pacific railroads for the eventual retirement of
the government debt should be largely increased. It was contemplated
that 5 per cent of the net earnings of these railroads, together with
half of the sums due to the companies for government transportation,
should continue to be applied to the retirement of the subsidy bonds.
This annual appropriation Mr. Thurman estimated at $531,000. But it was
now intended that in addition to this sum there should be retained by
the government and credited to a sinking fund, the other half of the
sums due to the companies for government transportation; proceeding
still further, the Thurman bill provided that in case the whole of the
government transportation accounts, added to the 5 per cent of net
earnings, did not make a sum equal to 25 per cent of net earnings, then
the Pacific railroads should pay into the sinking fund such sums not
exceeding $1,200,000 for the Central Pacific and $850,000 for the Union
Pacific, as would bring the companies’ payment up to 25 per cent.

Textually, the section of the Thurman bill relating to the Central
Pacific sinking fund read as follows:

 Sec. 4. That there shall be carried to the credit of the said
 fund, on the first day of February in each year, the one-half of
 the compensation for service hereinbefore named, rendered for the
 Government by said Central Pacific Railroad Company, not applied in
 liquidation of interest; and, in addition thereto, the said company
 shall, on said day in each year, pay into the Treasury, to the credit
 of said sinking fund the sum of one million, two hundred thousand
 dollars, or so much thereof as shall be necessary to make the five
 per centum of the net earnings of its said road payable to the United
 States under said act of eighteen hundred and sixty-two, and the
 whole sum earned by it as compensation for service rendered for the
 United States, together with the sum by this section required to be
 paid, amount in the aggregate to twenty-five per cent of the whole
 net earnings of said railroad company, ascertained and defined as
 hereinbefore provided, for the year ending on the thirty-first day of
 December next preceding.[531]

Mr. Thurman estimated the total payments which the Central Pacific
would have to make under his bill at $1,900,000 annually, or
substantially more than the accruing 6 per cent on the subsidy
loans.[532] In case earnings should be insufficient to meet interest
charges on underlying first mortgage bonds after the deduction of 25
per cent, the Secretary of the Treasury was authorized to remit as much
of the 25 per cent as might be necessary to avoid default.


Disappointing Results

From the point of view of the government, the clauses of the Thurman
bill relating to the annual payments of the companies were of the first
importance, because upon them depended the adequacy of the provision
for the eventual cancellation of the government debt. As a matter of
fact, the payments were less than Senator Thurman anticipated, because
the earnings of the Pacific railroads proved disappointing. Instead
of $1,900,000 annually, the average contribution up to 1897 was only
$629,690. In particular, the clauses requiring the companies to add to
the sums earned from government transportation and that measured by 5
per cent of net earnings sufficient to bring the total up to 25 per
cent of net earnings, were ineffective. In but one year after 1883 was
anything paid on this last account. Indeed, the earnings of the Central
Pacific fell so low that the government transportation and 5 per cent
accounts at times amounted to 50 per cent of net earnings without any
addition from other sources.

It was assumed by some speakers on the Thurman bill in the Senate, that
under the proposed plan the total contribution of the Pacific railroads
toward the reduction of the government debt was to be paid into a
sinking fund. This was not, however, the case, as a careful reading of
the statement already made will make clear. Instead, the payments which
these railroads had been making under the Acts of 1862 and 1864 were
to be continued, and were to be credited directly to the railroad debt
as before. The money was to be held in the United States Treasury, and
no interest was to be allowed upon it.[533] It was only the balance,
comprising the half of the payment due the companies for government
transportation which they had received under the Act of 1864, and such
additional payment, not exceeding $1,200,000 or $850,000 respectively,
as would be necessary to bring the whole contribution of the companies
under the proposed law up to 25 per cent of net earnings, which was
credited to the sinking fund. The distinction is important, because
the sums paid into the sinking fund earned compound interest, whereas
the sums credited to bond and interest account earned no interest at
all. That is to say, the contributions to the sinking fund were to be
invested in government bonds, and the interest on these bonds was to be
reinvested semiannually in the same security, but other payments merely
gave rise to credits on the government books.


Sinking Fund Investments

The mention of the sinking fund leads naturally, however, to a
reference to the provisions of the Thurman bill relating to sinking
fund investments. Mr. Thurman proposed in 1878 that the sums credited
to the Pacific railroads’ sinking funds be used to purchase United
States bonds, preferably 5 per cent bonds because other outstanding
issues were either insufficient in amount or had only a short time to
run. Up to June 30, 1897, about $6,000,000 were available for such
purchases. But this limitation of the field of investment seriously
crippled the earning power of the fund by requiring the purchase of
securities of classes which either bore low rates of interest or which
commanded considerable premiums in the market. The average premium paid
by the Central Pacific up to 1883 was approximately 13 per cent.[534]
In 1891 the Commissioner of Railroads reported that between the date of
the creation of the sinking fund in 1878 and the date of his report,
on June 30, 1891, the government had bought bonds with a par value of
$6,138,800 for the Central Pacific, for which it had paid a premium
of $1,110,409.62, or an average of 18 per cent. At times the premium
paid had gone as high as 35 per cent,[535] and in the earlier years the
payments on account of premiums materially exceeded the earnings of
the sinking fund in the way of interest. This excess disappeared, of
course, as the fund grew larger, but the absolute amount of the premium
continued to grow.

The principal bonds in which the sinking funds were invested up to
1882 were the United States currency sixes, the 5 per cent funded loan
of 1881, and the 4 per cent funded loan of 1907. In 1881 the funded
fives matured and were continued at 3½ per cent. In 1882 the Treasurer
of the United States exchanged these bonds for a new 3 per cent
issue. Inasmuch as the bonds which bore the higher interest rates all
commanded a premium, the actual yield of the fund up to 1886 was only
from 2½ to 3 per cent. This condition was recognized as disadvantageous
by all concerned. The Commissioner of Railroads declared in 1883 that
it would require a century or more at the rate provided in the Thurman
Act to accumulate a fund sufficient to discharge the railroad debt,
with a strong probability that even then it could not be done.[536] The
Auditor of Railroads in 1879, the Secretary of the Treasury in 1881,
and the Commissioner of Railroads, in various reports, all urged that
the field for investment of the sinking funds be widened, at least
to include the first mortgage bonds of the Pacific railroads. Since
the lien of these bonds was prior to that of the sinking fund itself,
it seemed appropriate to allow the Secretary of the Treasury to buy
them with sinking fund money. The suggestion was adopted by Congress
in 1887,[537] with the result that interest on the funds placed in
this new investment amounted to 4.15 per cent. This was a substantial
increase from the 2½ or 3 per cent realized from government bonds,
though still less than the 6 per cent carried by the subsidy bonds
themselves.[538]


Passage of Bill

The Thurman bill was carefully considered by the Senate before its
enactment, and may fairly be said to embody the best judgment of
Congress at the time of its enactment. The final vote in the Senate was
taken on April 9, 1879. Forty Senators voted for the bill, and twenty
against it.[539] If paired votes for and against the act be included,
the vote was forty-four to twenty-six. Twenty-seven Democrats voted for
the bill, and six against it. Yet in spite of this strong Democratic
party support and the opposition of Senators Blaine and Conkling,
nearly as many Republicans went on record for the bill as voted or were
paired against it. In the House there were but two votes against the
bill compared with 243 in favor of it.[540]

In neither house was there marked party or sectional division.
Doubtless the passage of the act was made easier by the general
unpopularity of railroad enterprise in 1878, although adequate reasons
for additional legislation undoubtedly existed. It was the period of
the aftermath of the panic of 1873—the epoch of Granger legislation
and railroad control bills, of revelations regarding rebates and
construction frauds. Sentiment ran strongly against great railroad
corporations. Railroads still had stalwart supporters, but it is
putting it mildly to say that the presumption in doubtful cases was
against them.


Feeling of Railroad Men

There is plenty of evidence, nevertheless, that railroad men felt very
bitter that the Thurman bill should ever have been passed. Stanford
declared that no act so destructive to private right had ever before
been attempted in this country, and that only two examples of such
atrocity could be found in English history; one being the suppression
of the order of Templars in the time of Edward the Second, and the
other, the suppression of the religious houses in the time of Henry
the Eighth. Undoubtedly, also, the railroads were active in Congress
in the attempt to prevent the passage of the Thurman Act. The
reader’s attention has already been directed in a previous chapter
to correspondence relating to the Thurman bill which passed between
Huntington and Colton in 1877 and 1878. It will be recalled that in
January, 1878, Huntington wrote that matters did not look well at
Washington. He thought, however, that the railroad would not be much
hurt, although “the boys are very hungry, and it will cost considerably
to be saved.” Some time before this, in May, 1877, Huntington wrote:

 We must have friends in Congress from the West Coast, as it is very
 important. I think that we can kill the open highway, and get a fair
 sinking fund bill by which we can get time beyond the maturity of the
 bonds that the Government loaned us, to pay the indebtedness.[541]

Again, in November, Huntington said:

 Some parties are making great efforts to pass a bill through Congress
 that will compel the Union Pacific and Central Pacific to pay large
 sums into a sinking fund, and I have some fears that such a bill will
 pass.... The temper of Congress is not good and I fear we may be
 hurt.[542]

A letter from Colton dated March 5, 1878, reads:

 By the telegraph this morning in the papers I see outline of Thurman’s
 Sinking Fund Bill, etc. It does seem as though the whole world, Courts
 and all, were determined to rob us.

       *       *       *       *       *

 I know you are having a terrible struggle on that side, and think of
 you very often, but, Huntington, I see no way but to fight it out on
 these lines, and fight them inch by inch while we last; let’s look to
 paying our debts, incurring no more, and stand by the wreck to the
 last. We can at least die game.[543]

When the Thurman bill passed the Senate, the correspondence took a
still more gloomy turn. Huntington wrote Colton on April 19, 1878,
that in his judgment the House would follow the Senate’s lead. He
had made some mistakes, of which the greatest was Gould’s going to
Washington. Colton replied, on April 29:

 We all agree with you that this Congress is simply a band of robbers.
 They were such a set of cowards they dare not go onto the highway and
 give the man they rob an even show with them, but went to Congress and
 did it through that channel. But Huntington, we will live to see many
 of these fellows come to grief. I trust the day will soon come that
 we can get in a shape that you can avoid going to Washington during a
 session of Congress. A few sessions like the present one and the last
 will wear you out....

       *       *       *       *       *

 I think you will remember I wrote you once or twice that in my opinion
 Jay Gould would be a heavy load for us to carry in Washington or
 elsewhere, whenever we had connections with him that would affect our
 interests, on account of the general feeling against him. So I am not
 surprised to read what you say of him and the Funding bill, but it was
 a thing we could not help, as I understand it....

       *       *       *       *       *

 I hope Congress will adjourn soon, and that you will be able to get
 out here as early as possible, for I want very much to see you again.
 There is much for us all to talk over and look after. I do not think
 you will find anyone to buy you out, nor do I want you to. I think we
 must stick to the wreck.[544]

Letters such as those quoted display the state of mind of the Central
Pacific associates during the months when the Thurman bill was under
discussion. It was perhaps natural that they should have opposed
sinking fund legislation, for this cut into the surplus which the
Central Pacific would otherwise have had for dividends, and depressed
the price of the railroad’s securities. Nor, indeed, was it perfectly
clear that the new legislation did not constitute a breach of the
contract between the Pacific railroad companies and the government
which could be deduced from the Acts of 1862 and 1864. The legislation
in these acts had, it is true, reserved to subsequent Congresses the
right of amendment and repeal, but it was uncertain, nevertheless,
to what extent this right could properly be exercised. On this point
a decision of the Supreme Court was had in 1878, upholding the
constitutionality of the Thurman Law on broad grounds, but by a divided
court.[545]


Charge Against Railroad

The unfortunate fact about the Thurman Act, however, was not that it
excited the anger of representatives of the railroad companies to which
it applied, but that it proved a failure in its primary purpose of
providing for the eventual retirement of the subsidy bonds. But before
summarizing the workings of the law in this respect, a word may be
said regarding certain disputes which occurred in the course of its
administration.

In February, 1881, Thomas French, Auditor of Railroads, made the charge
that the Central Pacific was diverting business from the subsidized
portions of its line to its leased properties in order to lessen the
payments required under the Thurman law. The basis for this charge, so
far as reported, appeared to lie in the fact that the net earnings of
the Central Pacific were decreasing, while those of the Union Pacific
were going up. Mr. French suggested that the Pacific railroads be
required to contribute up to 50 per cent of net earnings for retirement
of the government debt, instead of up to 25 per cent as then required
by the law.[546]

Mr. French’s suggestion was not adopted, but the government
subsequently advanced the claim that it had the right to retain
all the compensation for service rendered to the government by the
bond-aided companies without regard to the conditions of construction
of particular sections of the road. The company took a different view
of the matter, but in deference to an opinion of the Attorney-General
on this point, the Secretary of the Treasury in 1884 withheld
compensation on the entire mileage of the Pacific railroads pending an
authoritative decision. The Supreme Court, however, ruled in favor of
the companies,[547] and the sums withheld had to be paid over.

In subsequent years the earnings of the portions of the Central and
Union Pacific which had received no bond subsidies were credited, in so
far as they arose from government business, as a part of the 5 per cent
of net earnings which these companies were required to apply to the
eventual retirement of the government debt. This meant a considerable
amount of bookkeeping, which was increased by other claims of the
companies of which no detailed mention is here made. Indeed, when the
final settlement was concluded between the Central Pacific and the
government, credits to this one company were allowed by the United
States to the amount of no less than $1,162,939.48.[548]


Definition of Net Earnings

In addition to the controversy over earnings on government
transportation over non-bond-aided lines, there developed a second
difference of opinion over the calculation of the net earnings of the
Pacific railroads. It has already been observed that the Law of 1862,
as interpreted by the Supreme Court, allowed the Pacific railroad
companies to charge expenditures for additions and improvements to
operating expenses, and thus to reduce their net earnings, upon the
size of which the rate of provision for repayment of the government
debt depended. The Central Pacific insisted that the same practice was
legitimate under the Thurman law. But in this last-named legislation
the wording of the clause relating to net earnings had been changed.
In 1862 no definition of net earnings had been given. In 1878 it was
provided that net earnings should be calculated “by deducting from the
gross amount of their [the Pacific railroads’] earnings, respectively,
the necessary expenses actually paid within the year in operating the
same and keeping the same in a state of repair, and also the sums
paid by them respectively within the year in discharge of interest
on their first mortgage bonds.” This was deliberately intended as an
amendment of the Act of 1862. As Mr. Thurman told the Senate, it was
his intention to leave the question of the nature of the net earnings,
so far as the past was concerned, for the decision of the Supreme Court
without any retroactive legislation at all, but to define net earnings
for the future.

In spite of the apparently clear wording of the law, and the definite
expression of the views of the Senate Committee on the Judiciary at
the time the act was passed, the Central Pacific still maintained
that it possessed the right to deduct expenditures for improvements
and betterments from gross earnings, in the process of arriving at
the figure of net earnings upon which its contributions toward the
retirement of government indebtedness were in part based. A decision
of the Court of Claims and another by the Supreme Court of the United
States were necessary before this position was abandoned.[549]

Still other controversies arose between the Union Pacific and the
United States government over earnings from the operation of the bridge
across the Missouri River between Council Bluffs and Omaha, over
receipts from the operation of Pullman cars, and over the payments by
the Union and Central Pacific railroads to the Pacific Mail Steamship
Company according to the terms of contracts described in a preceding
chapter.[550]


Inadequacy of Law

The persistent disputes between the government and the railroad
companies over the proper interpretation of the Thurman law made the
administration of the statute difficult. The primary defect of the act,
however, lay in the fact that the contributions which it compelled the
companies to make were too small to provide for the retirement of the
subsidy bonds with interest at their maturity. How far the ultimate
provision under the law fell short of a proper accumulation may be seen
from the table given in the next paragraph, in which the debits and
credits on account of the government loan to the Central and Western
Pacific railroads are given as of June 30, 1897, six months before the
greater part of the subsidy bonds fell due.

According to the Commissioner of Railroads, the account between the
United States and the Central Pacific Railroad stood on the 30th of
June, 1897, as follows:[551]


STATEMENT ON THE GOVERNMENT LOAN TO THE CENTRAL AND WESTERN PACIFIC
RAILROADS, AS OF JUNE 30, 1897

  _Debits_:
    Principal of subsidy bonds issued        $27,855,680.00
    Interest paid by the United States        47,954,139.78
                                             ——————————————
            Total debits                     $75,809,819.78
                                             ══════════════
  _Credits_:
    Applied to bond and interest account:
      Transportation                          $7,977,535.66
      Cash                                       658,283.26
    Applied to sinking fund account:
      Transportation                           5,027,848.71
      Cash                                       633,992.48
      Proceeds of sinking fund investments     1,683,127.38
                                             ——————————————
            Total credits                    $15,980,787.49
                                             ══════════════
  Balance of debt, June 30, 1897             $59,829,032.29
  Excess of interest paid by the
    United States over all credits           $31,973,352.29

The reasons for the inadequacy of the Thurman law were, first, the
failure of the net earnings of the Pacific railroads to increase as
rapidly as had been expected, and second, the meager results of the
sinking fund accumulations. Net earnings were disappointing because
of general business conditions, especially after 1893, and because of
competition from other transcontinental railroads. The accumulation of
the Central Pacific sinking funds proceeded at a slower rate than had
been anticipated, for reasons already given. Up to June 30, 1897, the
table shows that the total proceeds of sinking fund investments by the
Central Pacific Railroad had amounted to only $1,683,127.28. When it is
understood that this was less than a third of the sum which the moneys
paid into the sinking fund would have earned if invested promptly and
continuously at 6 per cent, the loss which resulted from the purchase
of government bonds becomes evident.

After thirty years of contention and nineteen years of operation under
the Thurman law, the accumulated reserve for the retirement of the
subsidy bonds was less than $16,000,000, of which only $7,300,000 was
the result of the Thurman sinking fund. On June 30, 1897, the United
States had actually paid out in interest on its bonds issued in aid of
the Central Pacific Railroad, $31,000,000 more than had been provided
against both the interest and the principal of the debt. Except to the
extent of $7,300,000, the problem remained substantially as it had been
presented in 1878.




CHAPTER XXI

FINAL SETTLEMENT OF THE CENTRAL PACIFIC INDEBTEDNESS TO THE GOVERNMENT


Refunding Proposals

It is the purpose of the present chapter to describe proposals for
the settlement of the government’s claims against the Central Pacific
Railroad which were made between 1878 and the date of maturity of the
subsidy bonds, and to explain in some detail the adjustment finally
arrived at in 1899.

Soon after it became apparent that the Thurman law would not provide
adequately for the retirement of the federal subsidy bonds at their
maturity, agitation began for other and more stringent arrangements.
As early as 1882, the Commissioner of Railroads suggested that the
indebtedness of the Pacific railroads be changed from a running
book account and that there be a settlement and actual delivery
of interest-bearing bonds for the amount found to be due upon a
convenient day, say July 1, 1883. On this day he proposed that the
companies should deliver to the government 100 redemption bonds, each
representing a hundredth part of the indebtedness. One bond was to fall
due thereafter every six months, and interest was to accrue as before
upon the unpaid bonds outstanding.[552]

Five years later the United States Pacific Railway Commission, in
an important report, recommended also that the net indebtedness of
the Central Pacific Railroad Company be ascertained as of a certain
date—this time as of July 1, 1888—and that arrangements be made to
fund the amount so determined into new railroad fifty-year 3 per cent
bonds, which should be made a lien upon all the property which the
Central Pacific owned or in which it had an interest.[553] Congress
was not ready, however, to refund the Pacific railroad debts upon the
terms proposed either by the Commissioner of Railroads or by this
special body of experts.

The next official report was that issued by a select committee to which
the United States Pacific Railway Commission report was referred. This
committee report was known as the Frye-Davis report, from the names of
the Senators who transmitted the sections dealing with the Union and
Central Pacific railroads, respectively. The committee was instructed
to, and did, personally examine the roads of the Union, Kansas,
Central, and Western Pacific Railroad companies, together with that
of the Central Branch Union Pacific. It further prepared a plan for
refunding the Pacific railroad debt.

So far as the Central Pacific was concerned, the committee proposed
that the company should pay its debt in seventy-five years from date,
with interest at 2 per cent. In view of the serious financial condition
of the company, and the alleged necessity of building several bridges
and some additional mileage in California, 1 per cent of the 2 per
cent was to be capitalized for ten years. During the first ten years
the company’s annual payment was thus to be from $600,000 to $650,000
per year; after that time it was to be about $1,400,000 annually.
The Frye-Davis committee therefore required a smaller payment and
contemplated a longer extension of time than did the United States
Pacific Railway Commission. Like its predecessor, it demanded from the
Central Pacific, as security, a mortgage on all the roads and property
of every name and description which the Central Pacific possessed,
including a mortgage on the whole road from four miles west of Ogden to
San José. This mortgage was to include the lease of the Central Pacific
to the Southern Pacific, and there was now inserted a provision that
the rental paid by the latter should never be less than the sums that
the bill called for from the Central Pacific, thus making the Southern
Pacific in effect a guarantor of the arrangement.[554]


Further Reports

In 1894 still another report was rendered, this time by James Reilly,
of Pennsylvania, from the House Committee on Pacific Railroads. The
report reviewed briefly the history of the relations between the
Pacific railroads and the government. It was opposed to foreclosure.
Instead, it suggested that the debt due to the United States be
calculated as of January 1, 1895, and be funded into railroad 3 per
cent bonds. The companies were then to begin paying on the debt at the
rate of one-half of 1 per cent semiannually, for a period of ten years,
commencing on the 1st of July, 1895. For the next period of ten years,
three-quarters of 1 per cent was to be paid; for the next period 1 per
cent; and so continuing that the railroad bonds, and therefore the
principal of the debt, should be wiped out in fifty years. Meanwhile
the railroads were to pay off their first mortgage bonds, leaving the
new funding bonds a prior lien upon the property of the companies,
including both the aided and the non-aided portions. Nothing was done
with this report except to submit it.[555]

As the period when the greater part of the subsidy bonds were to
mature approached, committee reports upon the Pacific railway debts
multiplied. On the 28th of January, the Committee on Pacific Railroads
submitted a long discussion through Senator Brice, of Ohio. The
committee was opposed to government operation and pessimistic about
the results of a foreclosure sale. It recommended that the subsidy
bonds be refunded for such a period and at such a rate of interest as
should enable the companies, under ordinary circumstances and business
conditions, to meet the current interest and a portion of the principal
of the debt each year.


Powers Bill

On April 25, 1896, Mr. Powers, of Vermont, in behalf of the House
Committee on Pacific Railroads, presented a bill and a report to
accompany it. The House committee now definitely proposed that the
Pacific railroad companies issue, and that the government accept,
bonds equal in amount to the whole balance due the United States, and
bearing interest at 2 per cent, payable semiannually. These bonds
were to be secured by second mortgages, which were to embrace not
only the subsidized parts of the Pacific railroads, but also all the
other railroads, terminals, lands, and equipments belonging to the
companies, to which the lien of the government did not then extend. It
was provided that the companies should make annual payments on account
of the principal of the bonds—smaller payments during the earlier, and
larger payments during the later years—in such fashion that the debt
would be repaid in about eighty-five years.

In addition to providing the government with the additional security
which came from extending the lien of its second mortgage bonds, the
Powers bill required, as one of the terms of the settlement, that the
lease of the Central Pacific Railroad to the Southern Pacific Company
should be so modified as to require, first, that the Southern Pacific
Company guarantee the full payment of the obligations imposed upon the
Central Pacific by the new legislation so long as it should remain
lessee of the property; and second, that if the Southern Pacific
Company should consent to the termination of the lease before the
maturity of all instalments payable under the act, it should in that
event guarantee the payment by the Central Pacific of all required
payments. In case of any abrogation or termination of the lease, the
principal of all bonds issued under the act was, at the option of the
President of the United States, immediately to mature.[556]

The Powers bill was debated in the House of Representatives from
January 7 to January 11, 1897. It was supported by the friends of the
railroad companies, doubtless because of the long period over which the
railroad debt was to be extended and the low rates of interest on the
refunding bonds. It was opposed by anti-railroad men, and by those who
thought the bargain a bad one for the government from a business point
of view, and it was finally defeated because Congress was unwilling to
extend the government loan at 2 per cent for eighty-five years until
more convinced of the necessity of compromise.[557]


Additional Schemes

Four days after the submission of the Powers report and its
accompanying bill, a report was presented to the Senate by Mr. Gear,
of Iowa, which recommended the passage of a substantially identical
statute.[558] Nothing was done with this report, nor with a suggestion
which Mr. Gear made in January that the whole matter be referred to a
commission to be appointed for the purpose.

The submission of the Gear report brings the account of the
negotiations for the settlement of the Pacific railroads’ indebtedness
down to the spring of 1897. Four Congressional committees had reported
up to this time. Of these, two had recommended that the subsidy bonds
be refunded at the rate of 3 per cent for fifty years, and two that
they be refunded at the rate of 2 per cent for seventy-five years or
more. All four had proposed an improvement of the government’s security
by extending the government lien to cover the non-aided portions of the
Pacific railroads, and in addition to this the Reilly bill had provided
that the government should secure a first lien upon the railroad
property in question by paying off the underlying bonds.

It would be possible to lengthen the list of suggestions for the
repayment of the subsidy bonds which were made during the eighties
and the nineties, by including schemes elaborated by other persons
than members of Congress and presented in other ways than through
formal reports of Congressional committees to the legislature. This
will not be done to any great extent because of limitations of time
and space. While, however, the greater part of outside comment upon
various pending refunding bills must be omitted, it is important to
remember that the discussion outside of Congress, especially during the
nineties, was quite as active as that within, and that it was conducted
with great bitterness of feeling and freedom of expression. Indeed, the
extreme contentions on either side are quite inadequately set forth in
the Congressional debates.


Railroad Proposals

The general railroad position with respect to the repayment of the
subsidy bonds was that the entire debt to the government should
be remitted.[559] Failing this, the companies contended that the
government should satisfy its claim by taking back a portion of the
railroad land grant. If the United States should be indisposed to
resume the land grant, then Mr. Stanford suggested that the government
should take up all the liens on the Central Pacific Railroad prior to
the subsidy bonds, and in lieu of them issue government bonds bearing
interest at the rate of 2 per cent. The saving to the company, due
to the reduction in the interest rate on first mortgage bonds from
6 to 2 per cent, would enable it to pay off its indebtedness to the
government, sufficient time being given and a moderate rate of interest
allowed.[560] In case even this settlement were rejected, it was
proposed that the government refund the subsidy bonds by a new issue,
running 100 or 125 years, and bearing interest at the rate of 2 per
cent.[561]

In opposition to the railroad proposals, western shippers, who
represented the extreme anti-railroad sentiment, violently objected to
a refunding bill of any description. It was the belief of California
men that a refunding bill would simply saddle the railroad debt upon
the shipping public. For the railroad would make the necessary annual
payments for interest and sinking fund from the proceeds of rates,
which would necessarily be paid by the shipper. As able a man as John
T. Doyle, of San Francisco, maintained, moreover, that refunding was
unnecessary, because it would be found that the assets of the Central
Pacific would be adequate on foreclosure sale to meet both its first
and its second mortgage obligations. In saying this, Mr. Doyle relied
upon the ability of the government to hold directors of the Central
Pacific personally liable for misappropriation of funds, as well as
upon alleged illegalities in the issue of first mortgage bonds, and
upon the chance that the courts would consider the San Francisco
terminals of the Western Pacific, together with other miscellaneous
property, subject to the lien of the government mortgage, although the
property was not “bond-aided” in a narrow sense.[562]


Pacific Coast Agitation

As an example of the feeling in the West concerning the policy of
refunding, particular reference may be made to expressions of opinion
in the city of San Francisco. In May, 1894, a mass meeting of citizens
of San Francisco elected a committee of three to proceed to Washington
and to oppose the funding of the debt of the Central Pacific Railroad
to the United States. In a memorial addressed to the Senate and House
of Representatives, and designed to oppose the Huntington scheme of a
long-time extension of the subsidy bonds at a low rate of interest,
this committee said:

 In the name of the people of San Francisco, of California, and of the
 whole Pacific Coast, we protest against the acceptance by Congress of
 a plan which will keep more than $77,000,000 of the public’s money
 from being paid to the United States Treasury, and which will secure
 in their present wrongful possession of that sum, besides promoting
 their other selfish and unpatriotic schemes, men who have for thirty
 years been wrecking a railroad, defrauding the Government, corrupting
 public morals, plundering and oppressing the people, and violating
 every principle of business probity, of law, right, justice, and
 public policy.

Another meeting, held in the Metropolitan Temple, in San Francisco,
on June 19, 1894, called on the state conventions of both parties to
introduce into their platform resolutions against the funding of the
debt of the Central Pacific Railroad Company to the United States at
the rate of 2 per cent per annum for one hundred years, at a rate of
4 per cent per annum for fifty years, or at any other percentage, or
during any other period. Under the leadership of the eccentric Adolph
Sutro, this meeting adopted an arraignment of the Southern Pacific
which was almost inarticulate in its denunciation. It was charged that:

 This monopoly has spread a black cloud over the surface of the
 State. It has manœuvred through a large number of corporations, of
 which the Southern Pacific Company of Kentucky is now the center.
 It has seduced and drawn into its service many prominent men, whose
 Americanism and integrity were not equal to their brains. It has
 antagonized the people, minimized immigration, choked enterprise, and,
 in this unrelenting attack, has used the supposed representatives of
 the people in each department of the government, Municipal, State,
 and National. It has controlled legislation, executive action and the
 administration of justice. It has discriminated in freights and fares
 and, at every station on its many thousands of miles of railroad,
 maintained a Custom House of its own.

This was followed on June 29 by a telegram, signed by Sutro and
addressed to Grover Cleveland, advising the President that history
would record him as the greatest benefactor of the American people if
he would recommend the foreclosure of the mortgages on the Pacific
railroads and the purchase of these railroads by the government at
foreclosure sale. It was Sutro’s idea that the government should hold
the transcontinental lines as a great national highway, and permit all
American railroads to run their locomotives and cars over it under
payment of tolls to be regulated by the Treasury Department.

During the summer of 1894 the _San Francisco Examiner_ circulated a
petition against the Reilly funding bill, to which, by September 20, it
was said that 194,663 names had been attached.[563] In January, 1895,
both the Colorado and the California legislatures adopted resolutions
opposing the refunding. In California there was not a dissenting vote.
The same month another mass meeting was held in San Francisco, and
in December, 1895, still another one followed, with the result that
a committee of fifty was appointed, and a recommendation sent to the
national government.

The San Francisco agitation in 1894 and 1895 was addressed to the
comparatively moderate provisions of the Reilly bill, proposing the
refunding of the government debt for fifty years at 3 per cent. In
1896, when the more liberal Powers bill was under discussion, the
agitation revived. At this time Mayor Sutro, of San Francisco, made
an unsuccessful attempt to persuade the people of Kentucky to repeal
the charter of the Southern Pacific Company. Although this particular
move met with no success, a state anti-funding convention was held at
the Metropolitan Temple in San Francisco on January 18, 1896, a new
committee was appointed, and a new memorial was framed.

This memorial reiterated and reinforced most of the arguments presented
in the memorial of the committee of fifty. It dwelt on the alleged
frauds of the Central Pacific and Southern Pacific companies, the
uncertainty as to the extent of the property of these corporations, and
as to the validity of certain liens against them. The whole matter,
the memorial urged, was distinctly one for judicial investigation.
It urged that the government let foreclosure take its course. The
Central Pacific should not be allowed to confirm possession of money it
might have stolen. It was sound policy, the memorial agreed, to make
sure that the company really had not enough to pay its debts, and to
this end to see that transferred, withdrawn, and stolen assets were
restored. Agitation along these same lines continued through 1896, and
in January of the following year the legislature adopted a resolution
opposing refunding and calling for foreclosure if necessary.[564]


Different Points of View

The fundamental difference between the sentiment in Congress in 1897
and that on the Pacific Coast was that the legislature at Washington
addressed itself to Pacific railroad legislation with the object
of recovering as much of the government’s advances to the Pacific
railroads as was possible under the circumstances. The gains sought
were primarily financial. In California, on the other hand, public
sentiment was more concerned with railroad service and railroad rates
than with finance. And this was a principal reason for the insistence
upon foreclosure and the equanimity with which government operation was
regarded. That the difference between the two points of view was not
more fully appreciated was doubtless because the necessity of shaping
its arguments so as to influence Congress led the Pacific Coast to
talk in terms of finance, even when they thought in terms of monopoly.
So much must be understood in order that the animus behind the San
Francisco agitation may be clear.

From the point of view of Congress, the weakness of the government’s
position in 1897 lay in the fact that its debt was secured by a second
mortgage, and a mortgage which covered, at that, only a portion of the
road. There seems to have been substantial unanimity of opinion among
official representatives of the government after 1882 and 1883, that
the bond-aided parts of the Pacific railroads would not bring at a
forced sale a sufficient price to cover both the first and the second
mortgage liens upon them. In fact, it was believed that if the Pacific
railroad property should be put up at foreclosure sale, no bidder would
appear except the Huntington-Stanford interest, and perhaps the Union
Pacific Railway. Under these circumstances the price obtained was sure
to be low, and it was not unlikely that the result of the sale would
be to leave the railroad in the hands of its original owners free from
all obligations to the government. “These very men whom you are now
scolding about,” said Mr. Powers, of Vermont, in 1897, “the very men
who own the terminals and own these connecting lines are the only ones
who can safely bid on the property, and probably they will be the only
bidders. They would get the property at their own figures.”[565]


Stockholders’ Liability

It is true that there were two possibilities that improved the
government’s position slightly. The first was found in the suggestion
that directors or stockholders of the Central Pacific might in some way
be held individually responsible for the debts of the company. If this
could be done, the great wealth of the Stanford-Huntington group made
the resource a substantial asset. It was pointed out by anti-railroad
men that the Central Pacific was a California corporation, and that
under California law each stockholder of a railroad corporation was
liable, in proportion to the stock owned and held by him, for all its
debts and liabilities. Moreover, the directors of the Central Pacific
were said to be liable as directors because of the diversion of Central
Pacific funds to the payment of dividends at a time when the company
owed the government and its first mortgage bondholders large sums
which it was unable to pay. In addition the directors were charged
with illegal use of Central Pacific money in the construction of the
Southern Pacific Railroad.

Unfortunately for the government, the United States Supreme Court
squarely refused to entertain the notion that Central Pacific
stockholders were individually liable for repayment of advances which
the United States had made to that company. Individual liability
depends upon express statutory prescription, and no word upon this
point was to be found in the federal laws of 1862 and of 1864. While
California railroad stockholders were undoubtedly personally liable to
some degree for the debts of California corporations, yet the state
law which established this liability was held not to apply to the debt
due to the United States. The terms of liability as regards this debt
were to be sought, according to the Supreme Court, in the Congressional
enactment, and there only. It was said that any other ruling would not
only lack solid legal foundation, but would have the unfortunate effect
of imposing a heavier burden upon stockholders of the Central Pacific
than upon those of the Union Pacific.[566]


Lien of Subsidy Bonds

A second possibility which might have strengthened the government’s
claim that the lien of the subsidy bonds might be held to extend to
the non-bond-aided portions of the Central Pacific as well as to
those portions for the construction of which the government had given
aid. This was also the contention of Mr. Doyle, of San Francisco.
The point was of the highest importance, because if it were denied,
the government possessed a mortgage upon only the trunk lines of the
Pacific railroads. It had no interest in, and could by foreclosure
secure no control over any branches, or over the principal terminals.
On the Central Pacific it could acquire by judicial sale only 860 miles
from a total of 1,360, and on the Union Pacific 1,532 miles from a
total of 7,944. The bond-aided portions of the Central Pacific reached
neither Oakland nor San Francisco.[567]

In order to understand the relation of the subsidy bonds to the
non-aided portions of the Central Pacific, it is necessary to refer for
a moment to the terms of the Pacific railroad legislation. The clauses
of the Act of 1862 which relate to the lien of the subsidy bonds of
the Central Pacific were to be found in Section 5 of that law. They
provided as follows, namely, that:

 ... the issue of said bonds and delivery to the company shall ipso
 facto constitute a first mortgage on the whole line of the railroad
 and telegraph, together with the rolling stock, fixtures and property
 of every kind and description, and in consideration of which said
 bonds may be issued; and on the refusal or failure of said company
 to redeem said bonds, or any part of them, when required so to do by
 the Secretary of the Treasury, in accordance with the provisions of
 the act, the said road, with all the rights, functions, immunities,
 and appurtenances thereunto belonging, and also all lands granted to
 the said company by the United States, which, at the time of said
 default, shall remain in the ownership of the said company, may be
 taken possession of by the Secretary of the Treasury, for the use and
 benefit of the United States.[568]

By the Act of July 2, 1864, the lien of the subsidy bonds was
subordinated to that of first mortgage bonds which the company was then
authorized to issue, but no other change in the underlying security was
made.[569]

The meaning of Section 5 of the Act of 1862, as amended, was considered
by the United States Supreme Court in 1878 in a case brought against
the Kansas Pacific Railway to recover 5 per cent of the net earnings
of the Kansas Pacific, payment of which was required by Section 6 of
the same act. In these matters the Kansas Pacific and the Central
Pacific were subject to the same requirements. It appeared that the
Kansas Pacific had received subsidy bonds for 393-15/16 miles of line,
from the Missouri River to the hundredth meridian, but had actually
constructed 637 miles, reaching as far west as Denver. The question
arose as to whether the company was responsible to the government for
5 per cent of its net earnings on the whole mileage, or only for 5
per cent on 393-15/16 miles. Upon this point the Supreme Court ruled
that “the subsidy bonds granted to the company, being granted only in
respect to the original road, terminating at the hundredth meridian,
are a lien on that portion only; and that the five per cent of the net
earnings is only demandable on the net earnings of said portion.”[570]


Provision in Thurman Law

The decision in the Kansas case clearly meant that the lien of the
subsidy bonds authorized by the Act of 1862 did not extend to the
non-bond-aided portions of the Central Pacific or to similar sections
of any of the other Pacific railroads. This appears to be a conclusive
answer to the later government argument, so far as the Act of 1862 is
concerned. The legislation of 1862 was, however, amended in 1878, as we
have seen in the previous chapter. Section 9 of the Thurman law read as
follows:

 That all sums due to the United States from any of said companies
 respectively, whether payable presently or not, and all sums required
 to be paid to the United States or into the Treasury, or into said
 sinking fund under this act, or under the acts hereinbefore referred
 to, or otherwise, are hereby declared to be a lien upon all the
 property, estate, rights, and franchises of every description granted
 or conveyed by the United States to any of said companies respectively
 or jointly, and also upon all the estate and property, real, personal,
 and mixed, from whatever source derived, subject to any lawfully prior
 or paramount mortgage lien, or claim thereon.[571]

A comparison of the Thurman law with the Act of 1862 shows that the
later law expressly extended the lien of the subsidy bonds to all
Pacific railroad property “from whatever source derived,” instead of
limiting the lien to property “in consideration of which said bonds
may be issued.” It does not appear that this change was particularly
considered in the debates on the Thurman bill. Mr. Thurman himself did
not mention Section 9 in his opening address, and while members of
the Senate discussed at length the power of Congress to alter, amend,
or repeal the Act of 1862, they usually had in mind the sinking fund
provisions of the Thurman law and not those relating to the lien of
the subsidy bonds. The exception to this statement is to be found in
a colloquy between Mr. Dawes, of Massachusetts, and Mr. Edmunds, of
Vermont. Mr. Dawes called attention on April 3 to the sweeping nature
of the amendment contained in Section 9. He was of the opinion that in
1862 Congress never undertook to put a mortgage on anything except that
which they granted to the railroad. Under the Thurman Act, however,
he understood that all subsequently acquired property was also to be
pledged, with the effect, Mr. Dawes added, that, among other results,
all payment of dividends would become illegal.

To this criticism Senator Edmunds replied that the Act of 1862 already
subjected all the property of the Pacific railroads to the lien of the
subsidy bonds. It was the view of the Senator from Vermont that the
words “in consideration of which said bonds may be issued” did not
have the limiting effect in the Act of 1862 which Mr. Dawes ascribed
to them, but rather that they conveyed the idea, with other words in
the same clause, that the Secretary of the Treasury might from time to
time issue bonds of the United States in consideration of the fact,
which the law declared, that every particle of the property of the
Pacific companies, real and personal, franchises, tolls, and everything
else, were the security upon which the bonds were to be a lien.[572]
Subsequent discussion did not serve to clear up the differences in
interpretation brought out in the Congressional debate, but the later
decision of the Supreme Court showed that, in the principal matter at
issue, Mr. Dawes was right.

We may say with some confidence that the nature of the lien of the
second mortgage subsidy bonds of the United States depended, under the
Thurman Act, upon the power of Congress to alter, amend, and repeal the
terms of the Acts of 1862 and 1864 in respect to the security provided
for the government loan.


Court Decisions

Now on the question of the meaning of the “saving clause” in the Act of
1864, the courts had not in 1897, and still have not, satisfactorily
passed. That the clause did not authorize unlimited changes in the
provisions of existing legislation was evident. The majority of the
Supreme Court expressed the view in the sinking fund cases that the
reserved power could not be used to undo what had already been done
or to unmake contracts which had already been made, but that Congress
could provide for what should be done in the future, and might even
direct what preparation should be made for the due performance of
contracts already entered into.[573] Under this interpretation the
Supreme Court upheld the clauses in the Thurman law which required the
Pacific railroads to pay certain moneys into a sinking fund.

The same court in 1895 decided that a federal act which required
bond-aided railroads to operate their own telegraph lines was a
legitimate amendment of the clause of the Act of 1862 which authorized
these companies to enter into agreements with specified private
corporations for the rendering of telegraph service.[574]

Again, in Menotti v. Dillon (1897), the court approved an amendment
to the land-grant provisions of the Act of 1862 designed to quiet
litigation in land cases in California;[575] and in Union Pacific v.
Mason City and Fort Dodge, it sustained a law of 1871 which authorized
the Union Pacific to issue bonds for the construction of a bridge
across the Missouri River at Omaha, but required the company to permit
the trains of all railroads terminating at the Missouri River at Omaha
to use the new bridge up to a fair limit of its capacity and on payment
of a reasonable compensation.[576]

None of these cases, however, can fairly be taken as precedents for so
radical an alteration in a bargain made as would have been produced
by an extension of the lien of the subsidy bonds to non-aided portions
of the Pacific railroads. On this precise point the nearest approach
to a decision is found in a dictum growing out of litigation under
the Thurman law with respect to the proper handling of compensation
for government services. As explained in the previous chapter, the
government contended at one time that all compensation for services
rendered to the government by the Central Pacific Railroad should be
paid into a sinking fund for the eventual retirement of the subsidy
bonds or should be applied in liquidation of interest on these bonds,
whether these services were rendered on bond-aided or on non-bond-aided
portions of the company’s lines. When this contention reached the
Supreme Court it was rejected, on the ground that the Thurman Act,
properly interpreted, applied only to the bond-aided lines.

The court went on to remark, moreover, that the construction which the
government here sought to place upon the law would not only render the
second section of the Thurman Act a breach of faith on the part of the
United States, but would make it an invasion of the constitutional
rights of the railroad company.[577] This indicates that the court
would not have approved a law which clearly compelled the Central
Pacific to turn over to the government the compensation for the
transportation of government troops and supplies earned over sections
of its lines which had not received a subsidy in government bonds. If
this really represented the attitude of the court, then it seems still
more unlikely that an attempt to extend the lien of subsidy bonds to
these same non-bond-aided sections would have been sustained.


Critical Situation

It is reasonable to suppose that the repeated discussion of refunding
plans in Washington was due to the fact that Congress was of the
opinion that a rigid insistence by the government upon its legal
rights would result in a minimum rather than a maximum recovery from
the Pacific railroads. At the same time, the shrewder heads in the
legislature were perhaps hopeful that results might be obtained by
negotiation which could not be secured by legal proceedings. Hence the
refusal to approve of any specific plan for the settlement of the debt.

In the year 1897 the pending maturity of the United States subsidy
bonds made the situation too critical for action to be much further
delayed. On March 4, 1897, the 54th Congress and the second
administration of President Cleveland came to an end, and the
administration of President McKinley began. A special session of
Congress, called by the new President, convened on March 15. During
this session Mr. Gear introduced a bill for the appointment of a
commission to settle the debt of the Central Pacific and Western
Pacific railroads to the government.[578] This bill failed to pass.
In December, 1897, the first regular session of the 55th Congress
convened. By this time the maturity of a large portion of the subsidy
bonds was distant only a few weeks. That is to say, the bonds issued to
the Central and Western Pacific railroads matured as follows:

  January 16, 1895      $ 2,362,000
      ”    1, 1896        1,600,000
      ”    1, 1897        2,432,000
      ”    1, 1898       10,614,120
      ”    1, 1899       10,847,560

About $2,000,000 of these bonds were held in the sinking fund
established by the Thurman Act. These had naturally been canceled as
they fell due. On December 21, 1896, moreover, most of the remaining
bonds held by the government in the Central Pacific sinking fund had
been sold and the proceeds applied to maturing indebtedness.[579]

These resources, together with the credits in the Central Pacific bond
and interest account, had covered the demands upon the company up to
January 1, 1898. Meanwhile coupons on the first mortgage bonds had been
regularly paid, and arrangements had been made with first mortgage
bondholders to extend the maturity of each instalment until January
1, 1898, at which date first mortgage bonds of the Central Pacific
Railroad Company to the amount of $25,883,000 were to mature. First
mortgage bonds of the Western Pacific Railroad, aggregating $1,970,000,
matured on July 1, 1899. It was evident that all available Central
Pacific resources would be exhausted by the 1st of January, 1898.


Negotiations Initiated

In the face of what amounted to a real crisis, involving not only
the possibility of loss to the government, but also that of serious
financial injury to private interests connected with the Pacific
railroads, the initiative in seeking a compromise was now taken by the
banking firm of James Speyer and Company, of New York, through which
a large amount of Central Pacific securities had been marketed. Mr.
Speyer felt responsibility in the matter because so many of his clients
were involved. He later testified:

 I think it naturally suggested itself to us as bankers, having sold
 such a large amount of securities and the company being threatened
 with bankruptcy, we naturally sat up nights thinking how we could
 save it, because these bonds were all out, all over Europe, and stock
 too; and we tried to find some means to work it out so that these
 people would not lose their money. So that I think that originally
 when this debt came nearer and nearer, when it got so that it
 became a threatening thing to the Central Pacific security holders,
 we naturally began to look around to see how we could stave off
 receivership and bankruptcy.[580]

There were also certain strategic considerations which had weight
at this time. These affected the dominant interests in the Southern
Pacific particularly. In spite of the apparently indifferent attitude
of the Stanford-Huntington group, these gentlemen could not have been,
and were not, blind to the fact that a receivership for the Central
Pacific opened possibilities of disaster, not only for the Central
Pacific itself, but also for the Southern Pacific, in which their main
interest then lay. Such a receivership, if followed by a foreclosure
sale, would have wiped out the last vestiges of the Stanford-Huntington
stock holdings in the Central Pacific Railroad and would in all
probability have eliminated also the lease of the Central Pacific
to the Southern Pacific. This suggested the possibility of a severe
competition for Pacific Coast business, from which the Southern Pacific
could scarcely have escaped unscathed. The whole future control of the
railroad systems of the South West was clearly at stake.

It appears that Mr. Speyer took the matter up with Mr. Huntington,[581]
probably early in 1898. Mr. Huntington was receptive and the subject
was then discussed with representatives of the government. At an
early stage in the negotiations President McKinley was consulted. The
matter was one deemed of great importance to the government; in fact,
in January, 1898, the President directed the Attorney-General to give
immediate attention to the Pacific railroad debts, to take every means
necessary, and to spend as much money as should be needed in order to
enforce the government’s lien.[582] In later proceedings Mr. Griggs,
the Attorney-General, and Mr. Gage, Secretary of the Treasury, took an
active part. Mr. McKinley continued to follow the negotiations, and
was about as well informed as any of the others as to how matters were
getting on. Elihu Root was employed by the Attorney-General as special
counsel.[583] In short, the administration responded cordially to the
initiative of the railroad and banking group.


Government Commission

While negotiations were going on, Congress passed the Act of July 7,
1897. This act appointed the Secretary of the Treasury, the Secretary
of the Interior, and the Attorney-General a commission with full power
to settle the indebtedness to the government growing out of the issue
of bonds in aid of the Central Pacific and Western Pacific bond-aided
railroads. The commission was required to submit any settlement made
to the President for his approval, and it was forbidden to accept a
less sum in settlement of the debt due the United States than the full
amount of the principal and interest of the subsidy bonds. It was
empowered to grant an extension of time for repayment not exceeding ten
years, at a rate of interest not less than 3 per cent, and to accept
such security as might seem expedient.[584] So far as the commission
was concerned, this was Mr. Gear’s proposal of the previous year.

It seems probable that negotiations had already reached an advanced
stage before the Act of July 7 was passed. Mr. Griggs was later of
the impression that the act was drawn and passed to fit a tentative
agreement which had already been made.[585] If such were the case
the willingness of Congress to entrust the matter to the executive
branch of the government, after having once refused to do so, may be
explained. Possibly, also, the fact that the Union Pacific had been
sold at foreclosure on November 1, 1897, for $58,448,223.75, a sum
sufficient to cover the full amount of both first and second mortgage
bonds, had weight.[586]

The indebtedness of the Central and Western Pacific railroads to the
United States government as of February 1, 1899, was $58,812,715.48.
These figures were reached by adding thirty years’ interest at 6 per
cent to the original loan of $27,855,680, and by deducting accumulated
credits resulting either from the deposits in the sinking fund
established by the Thurman law, or from the operation of the bond and
interest account originating in the Acts of 1862 and 1864. Comparison
of the figure of $58,812,715.48 with the slightly larger amount given
in the previous chapter as of June 30, 1897, will show that during the
intervening nineteen months the net amount of indebtedness had slightly
decreased.


Plan of Settlement

In view of the impending maturity of large quantities of subsidy bonds,
the first essential point in the negotiations between Mr. Speyer and
the government was necessarily that more time should be allowed the
Central Pacific for the payment of its debt. It was agreed that at
least certain portions might be extended for as long as ten years.
Mr. Speyer was of the opinion that, given this extension, the Central
Pacific could repay its debt in full—a striking contrast to the former
statements of Central Pacific Railroad men. By paying the debt in full
was meant paying with interest on all delayed balances.[587]

In order to cover the matters just referred to, Mr. Speyer agreed in
1898 that the indebtedness of the Central Pacific to the government
should be refunded into twenty notes of the railroad company, falling
due one every six months, beginning August 1, 1899, and ending February
1, 1909. The notes were to carry interest at 3 per cent per annum,
payable semiannually. Taken by itself, this offer was the most liberal
that the railroad company had ever made. Yet it represented up to this
point only a promise, without security. In order to provide security,
Mr. Speyer proposed an additional arrangement, in two parts.

By the first part of the additional agreement, Speyer and Company
undertook to purchase the four Central Pacific notes earliest in point
of maturity, and to pay the face value thereof as soon as received
from the government. This obligation of a reputable banking house to
pay the substantial sum of $11,762,543.12 was a valuable thing in
itself, and materially increased the attractiveness of the whole plan
from the government’s point of view. In consideration for its advance,
Speyer and Company received new first mortgage bonds of the Central
Pacific Railroad, of an issue presently to be described. By the second
part of the same arrangement, each note remaining in the hands of the
government was to be secured by deposit of first refunding 4 per cent
gold bonds of the Central Pacific equal in amount to the face of the
note.[588]

It will, however, be asked how, in view of the outstanding
capitalization of the Central Pacific, it was possible to offer a
first mortgage security as collateral for the refunding notes. This
was provided for by the further reorganization of the Central Pacific,
and by the issue in particular of two new classes of bonds, of which
the first was to be a 4 per cent, and the second a 3½ per cent issue,
having a first and second mortgage lien, respectively, upon all
property of which the Central Pacific was possessed.


Reorganization Proposal

On February 1, 1899, the outstanding debt of the Central Pacific
Railroad consisted of the following issues:

  Central Pacific Railroad of California, first mortgage
    bonds                                         $25,881,000

  Western Pacific Railroad Company, first mortgage
    bonds                                           2,735,000

  Central Pacific Railroad Company (San Joaquin
    Valley branch), first mortgage bonds            6,080,000

  Central Pacific Railroad Company, land bonds      2,134,000

  Central Pacific Railroad Company, 50-year 6 per
    cent bonds                                         56,000

  Central Pacific Railroad Company, 50-year 5 per
    cent bonds                                     10,245,000

  California and Oregon Railroad Company, and
    Central Pacific Railroad Company, successor,
    first mortgage bonds                           10,340,000

                                                  ———————————
  Total                                           $57,471,000

Under the proposed reorganization plan, the aggregate of $57,471,000
of securities listed was to be retired in exchange for $51,253,500
in new 4 per cent bonds, $13,695,000 in new 3½ per cent bonds, and
$1,987,383.70 in cash. Generally speaking, the outstanding first
mortgage bonds were offered par in new fours, with a slight bonus in
new 3½ per cents. Junior mortgages received 50 per cent in new fours,
and from 70 to 90 per cent in new 3½ per cent securities. After the
retirement of outstanding first mortgages, the 4 per cent bond issue
was then to be increased further by the amount necessary to provide
the government with the collateral stipulated for in the negotiations.
Thus the government was set on a par with outstanding first mortgage
bondholders.

Here, however, was a real difficulty. It was plain that while the old
first mortgage bondholders might consent to the retirement of the
issues which they held by exchange for new bonds, on the terms stated,
they would yet hesitate to allow the inflation of the first mortgage
issue by putting out $58,000,000 first mortgage bonds over and above
the amount of their holdings in order to satisfy a government claim
hitherto secured only by a second mortgage lien. It must be remembered
that the reorganization was a voluntary one, requiring for its success
the free consent of all parties. Some additional considertion had
to be offered at this point in order to satisfy first mortgage
bondholders. It was at this juncture that the Southern Pacific Company
stepped in, with a guaranty on both the new 4 per cent and the new 3½
per cent issues. The additional security provided by this guaranty
was without doubt an element contributing strongly to the successful
carrying out of the proposed exchanges. At the same time the guaranty
was received with favor by the government, because it increased the
government’s security as well as that possessed by former bondholders.

In subsequent years there was dispute as to how far the government
relied on the Southern Pacific guaranty as an essential element in the
security provided for the ultimate repayment of the government loan.
Curiously enough, the fact of the guaranty was not mentioned in the
original agreement of February 1, 1899, between the Central Pacific and
the government, nor was it referred to in the report dated February
15, 1899, which the commissioners appointed to settle the Central
Pacific indebtedness made to Congress, nor in the clauses of the
refunding mortgage itself. But the testimony of all concerned is that
the guaranty was understood to be a vital part of the agreement, and
Attorney-General Griggs later went so far as to say that the Central
Pacific bonds without the guaranty would not have been acceptable.[589]
When the bonds to which the government was entitled were delivered to
the United States Treasury Department, they had indorsed on them in
proper form the guaranty of the Southern Pacific Company.


Treatment of Stockholders

In addition to the promises for settlement of the government debt,
mention should be made of the allowance made to Central Pacific
stockholders in the reorganization plan, and of the provision for cash
requirements.

Some provision for cash requirements is a necessary part of any
reorganization plan. In the case of the Central Pacific and Western
Pacific, the cash requirements consisted of $11,762,543.12, which were
needed to take up the first four notes issued to the government, and
of $9,657,556.88 for new equipment, improvements, and other purposes
of the new company, including expenses, commissions, compensation,
and similar items incident to the reorganization. Speyer and Company,
it will be recalled, had agreed to purchase the first four maturing
notes issued to the government. The inclusion of the amount paid for
these notes as a cash requirement of the Central Pacific was due to the
fact that the money paid by the bankers for this purpose was regarded
merely as a loan by the bankers to the railroad company. In all, the
sum which it was necessary to raise amounted to $21,420,100. This money
was raised by the sale to Speyer and Company, on behalf of a syndicate,
of portions of the new 4 per cent and 3½ per cent issues aggregating
$12,995,500, and by the issue of $12,000,000 of new preferred stock to
the Southern Pacific in exchange for a like amount of that company’s
4 per cent bonds. In addition, the Southern Pacific agreed to take
up $8,000,000 additional preferred stock of the Central Pacific, as
issued, upon the same terms.

As for the common stock of the Central Pacific Railroad, this was
exchanged, dollar for dollar, for stock of the Central Pacific
Railway Company (new corporation). Such an exchange was the best that
stockholders could hope for. At the same time the Southern Pacific,
here too, became a factor in the operation, by offering to issue its
own stock, dollar for dollar, in exchange for the new stock of the
Central Pacific Railway and to add thereto a bonus in the shape of
Southern Pacific 4 per cent bonds to the extent of 25 per cent of the
new stock issue.

Examination of the elaborate arrangements between the Central Pacific,
the government, and the Southern Pacific in 1899 shows that the
last-named company participated in the reorganization plan which has
been described to the following extent:

  It became guarantor in respect of a bond issue
    (new 4 per cent first mortgage) of          $100,000,000

  It became guarantor in respect of a bond issue
    (new 3½ per cent second mortgage) of          25,000,000

  It issued its own bonds for the purchase of
    $12,000,000 of the preferred stock of the new
    company, in the amount of                     12,000,000

  It agreed as and when required to purchase the
    remaining $8,000,000 of the preferred stock
    of the new company with bonds in the
    amount of                                      8,000,000

  It agreed to issue its bonds as part payment in
    the purchase of $67,275,500 of the common
    stock of the new Central Pacific Railway in
    the amount of                                 16,819,000

  It issued its own stock in partial payment for
    $67,275,500 of the common stock of the new
    Central Pacific Railway Company in the
    amount of                                     67,275,500
                                                ————————————
  Making a total of assumed liabilities of      $229,094,500

This was a very substantial contribution for any third party to
make to the success of a Central Pacific reorganization plan. True,
the Southern Pacific received Central Pacific stock for its cash
advance, but the value of this stock at the time was slight. The real
consideration which counted with the Southern Pacific was the control
of the Central Pacific system.


Execution of Agreement

In carrying out the proposed plan the commission named in the Act of
July 7, 1897, reported to Congress under date of February 15, 1899,
that an agreement had been reached, and that the subsidy bonds were
to be refunded into twenty notes of $2,940,635.78 each. On March 3,
1899, Congress authorized the Secretary of the Treasury to sell the
first four notes in order that the agreement with Speyer and Company
might be carried out.[590] These notes were already in the Secretary’s
hands. They were duly purchased by the bankers named on March 10 of
the same year. During the summer of 1899, the Central Pacific Railway
was incorporated to succeed the former railroad company, and the
various issues called for by the reorganization plan were put forth. On
February 1, 1909, the last of the refunding notes matured and was duly
paid. The divorce of the Central and Western Pacific companies from the
government was complete.

To anyone who has followed the long drawn-out discussions between the
Central Pacific and the government, the speed with which the final
settlement was made and the favorable terms which the government
secured come as a distinct surprise. Not once during the twenty years
following the passage of the Thurman Act had it been suggested that the
Central Pacific could meet principal and interest of the government
loan on condition only that it be granted an average extension of
five years on its indebtedness with interest at 3 per cent on delayed
payments. The result was properly regarded as a triumph for the
administration.

In a measure, also, the settlement justifies in a general way the
entire policy of the administration with respect to the issue of
subsidy bonds to the Central and Western Pacific Railroad companies.
These subsidy bonds were issued originally for a well-considered
purpose. The purpose was accomplished, and repayment of the loan was
secured without important delay. From a business point of view the
operation was therefore a distinct success. Doubtless there were
disadvantages connected with the policy. Such were the many disputes
between railroad and government, which hampered the railroad in its
later development, and occupied the time and energy of public men.
Such, also, was the apparent consent which the government yielded
to the permanent consolidation of the Central and Southern Pacific
companies by its acceptance of the reorganization of 1899. The final
price paid by the public was larger than is sometimes appreciated. But
the final gain was also very large.




CHAPTER XXII

THE SOUTHERN PACIFIC MERGER CASES


New Era

There is no question that the final separation of the finances of
the Central Pacific from those of the United States government was a
matter of very great importance to both parties. The direct result was
to place the federal government outside the Central Pacific instead
of inside it. Instead of holding the dual relation of creditor and
regulating body, Congress now stood as regards the Central Pacific in
the same position as with respect to every other railroad in the United
States—without interest in the company’s internal finance, but free to
act in the interests of the consuming, shipping, and investing public.
This was an immense advantage, both from the point of view of the
government and from that of the railroad itself.

The Central Pacific reorganization of 1899, moreover, not only
accomplished a desirable change in the external relations of the
Huntington lines, but it also brought about a change in the relations
between the Central Pacific Railroad and the Southern Pacific Company
which was of considerable significance. It will be recalled that
from 1885 to the time of the reorganization of the Central Pacific
in 1899, these relations had rested upon a leasehold interest only.
The insecurity of such a connection had been brought forcibly to the
attention of the Southern Pacific management during the course of the
reorganization proceedings. But as a result of the participation of
the Southern Pacific in the reorganization which made possible the
repayment of the government debt, that company became possessed of
the ownership of the entire outstanding Central Pacific common and
preferred stock. While such ownership still lacked the completeness
which would have followed the assumption of direct title to the Central
Pacific road-bed and rolling stock, it was considered satisfactory, and
certainly was an improvement from the Southern Pacific’s point of view
over anything which had gone before.

Separated from all financial connection with the government and with
its parts joined together by the double tie of leasehold and stock
control, the Central Pacific-Southern Pacific system, on the conclusion
of the Central Pacific reorganization of 1899, entered upon a new era
which contained possibilities of new policies, and of a sounder and
more profitable development than it had yet known. There was, too, one
additional circumstance which made it easy for the stockholders of
the Southern Pacific in 1900 to embark upon new policies—namely, the
death of Mr. Huntington. Of the original associates, Huntington was
the last survivor. Mark Hopkins had died in 1878, Charles Crocker in
1888, and Stanford in 1893. For ten years, at least, Huntington had
been the active manager of the Southern Pacific properties. Personally,
he never owned so much as 50 per cent of the Southern Pacific stock
outstanding,[591] but by virtue of the support of the Crocker and the
Hopkins interests, he exercised almost undisputed control. Huntington
had reached the ripe age of seventy-nine years in 1900, and his death
was not unexpected. The effect was none the less great, however, for
the passing of Mr. Huntington meant the removal of the last of the men
to whom the integrity and independence of the Central and Southern
Pacific companies were matters of personal pride.


Purchase of Control by Union Pacific

It was the death of Mr. Huntington, to repeat, which now made possible
a very important change in the relations which the Central Pacific
and the Union Pacific railroads bore to each other. While the Union
and the Central Pacific roads both owed their existence to the same
federal legislation, and while they had been close business associates
for over thirty years by virtue of geographical necessity, both had
uncompromisingly maintained their independence. Neither Jay Gould,
who was long influential in Union Pacific affairs, nor Huntington
himself, were men who cared to form part of organizations which they
could not control. Moreover, Huntington distrusted Gould. He once
wrote Colton that Gould had scared the Kansas Pacific people so that
they had let him, Gould, get into bed with them. For his part, he did
not intend to follow the Kansas Pacific example. Gould might frighten
him so that he would leave the bed, but never so that he would share
it. After Gould’s death in 1890, the same disinclination to combine
persisted. The Huntington group was now powerful, and still unwilling
to enter a combination which it could not control. The record shows
that proposals were made. The Union Pacific, dependent upon the Central
Pacific for direct connection with San Francisco, and fearful lest at
Mr. Huntington’s death his Southern Pacific stock should fall into
unfriendly hands, offered to purchase his shares, or, failing in this,
to conclude a permanent alliance. To this offer Mr. Huntington remained
indifferent.

Huntington died, however, in August, 1900, leaving his Southern Pacific
stock to his widow and nephew in the proportion of two-thirds and
one-third, respectively; and both, as had been anticipated, proved
willing to dispose of their holdings. Negotiations were carried to
completion in February, 1901. Four hundred and seventy-five thousand
shares were purchased from the Huntingtons and from Edwin Hawley, the
late financier’s most intimate business associate, while enough was
secured from other parties through Kuhn, Loeb and Company to make an
aggregate of 677,700 shares, at an average price of 50.6146. Market
quotations were then in the neighborhood of 45. On February 4, Kuhn,
Loeb and Company engaged to deliver to the Union Pacific one month
later 72,300 additional shares at the same price, plus 4 per cent
interest from February 11, bringing the company’s holdings up to
750,000 shares.

This, in Mr. Harriman’s opinion, was sufficient for control. A year or
two later an attempt to force the Southern Pacific to pay in dividends
earnings which its managers thought should be expended in improvements
led the Union Pacific to acquire 150,000 additional shares. In January,
1910, purchases were renewed for the last time, in view of pending
legislation in Congress which promised to make the possession of an
absolute majority of Southern Pacific stock desirable; but these
purchases ceased after 74,000 shares had been obtained, and 50,000 of
these shares were subsequently sold. This concluded the episode. On
June 30, 1911, the Union Pacific through the Oregon Short Line owned
1,266,500 shares of Southern Pacific common, or 46 per cent of all
outstanding stock—sufficient to give undisputed control.


Harriman System

This purchase by the Union Pacific of a controlling interest in the
stock of the Southern Pacific, made the latter a partner in a railroad
system of about 18,500 miles, stretching from Omaha, Kansas City, and
New Orleans on the east, to Los Angeles, San Francisco, and Portland
on the west, and, by means of the Morgan Steamship Line, reaching
New York. In addition, the Union Pacific owned a majority of stock
in the Pacific Mail Steamship Company, which carried freight and
passengers from the Pacific Coast to the Orient and to Panama. Of the
total mileage west of the Mississippi-Missouri River and south of the
Northern Pacific Railroad, the Harriman management controlled 19 per
cent. Finally, through stock ownership in the Illinois Central, the
Chicago and Alton, and other lines, and by contract with the San Pedro,
Los Angeles, and Salt Lake, it possessed in varying degree influence
over connecting and competing roads.

Undoubtedly its association with the Union Pacific increased the
prestige of the Southern Pacific Company at the time when the merger
took place. The association involved, however, serious dangers, for
it placed the credit and the earning power of the Southern Pacific
at the disposal of Mr. Harriman for speculative projects in eastern
fields, and also it ran counter to a national policy opposed to great
accumulations of capital under single control which was presently to
become clearly defined. It is true that public hostility toward big
business seemed unimportant in 1901 when the Union Pacific and the
Southern Pacific first combined, yet the attitude of the courts toward
monopoly became a matter for serious consideration by the latter
in 1911, ten years after the original merger had taken place, when
the federal government attacked the Union Pacific-Southern Pacific
consolidation as a combination in restraint of trade under the terms of
the Sherman Anti-Trust Act of 1890. A brief discussion of the issues of
this extremely important lawsuit is therefore necessary.

There was perhaps some ground for conflicting views with respect to the
motive which had induced the Harriman interests to seek control of the
Southern Pacific. The obvious explanation of the operation was that the
Union Pacific desired to increase its power in the South West. It was
stoutly maintained by Mr. Kahn, of Kuhn, Loeb and Company, however,
that the desire to control the Southern Pacific line from San Francisco
to El Paso was not a motive in the transaction. The necessity of buying
the Sunset route, he said, was considered an obstacle and a deterring
feature. If a way could have been found to secure the Central Pacific
alone, it would have been preferred at the time. The possible reduction
of competition was not even considered at any of the meetings of the
executive committee at which the subject was brought up. Speaking of
the Southern Pacific, Mr. Kahn declared:

 We knew it would require a great deal of money to be spent on it, we
 knew it added thousands of miles to the burden of administration and
 management. We were very anxious that the Union Pacific should receive
 as much of the administrative ability and of the railroad genius of
 Mr. Harriman as it was possible for him to give it, and we were rather
 disinclined to put upon him any more burden than was necessary to the
 best development of the Union Pacific; and therefore we, individually,
 felt that if the Southern Pacific could be separated, keeping only
 the Central Pacific and the north and south lines in California, and
 getting rid of the southern part of the Southern Pacific, we would be
 getting rid of a nuisance.[592]


Arguments of Railroad Counsel

The contention of the Union Pacific Railroad in 1911 was that the
consolidation of the Union Pacific and Southern Pacific properties
was legal under the Sherman law irrespective of motive, because the
two systems were not competing, and that the government was unable to
interfere in any case because the consolidation took place through
the means of a purchase of stock instead of by contract or agreement
between the railroad corporations concerned. On this last point the
railroad also argued that, as a matter of law, ownership by one
railroad of another’s stock did not constitute control unless a clear
majority was held. Control, said counsel, is a matter of power. A
minority may direct the operation of a railroad because the majority
has confidence in it, but this is lawful. The argument applied to the
Southern Pacific case because it was known that the Union Pacific
possessed only a minority interest in the first-named company.

Apart from this, counsel contended that a purchase of stock was a thing
which the federal government could not control, for the reason that the
acquisition or disposition of property was not commercial intercourse.
“If any citizen should step into a broker’s office on Broadway, New
York, buy some stock in the Pennsylvania Railroad, pay for it, put the
certificates in his pocket, and walk out, would he, or the broker, or
the broker’s principal, be engaged in commercial intercourse between
nations and parts of nations?... Would a state corporation buying
those certificates be in any different situation from an individual
purchaser, if the State of its domicile had endowed it with corporate
power to buy stock?”

Moreover, to continue the argument, though purchases of stock were
subject to federal law, they would violate no provisions of the Sherman
Act. A purchase or sale is not a contract in restraint of trade, for
a contract is executory, implying something yet to be done; while a
sale is executed, completed when made and because it is made. Nor
is a contract in restraint of trade necessarily unlawful. It must
be undue, that is, not entered into with the legitimate purpose of
reasonably forwarding personal interest and developing trade. The same
may be said of an attempt to monopolize. Every act of competition
tends to drive competitors out of business, but competition is legal,
in the absence of fraud or duress. It follows that an individual may
buy out a competitor, and then another competitor, and so on, and a
corporation may do the same thing. “It is evident,” said Mr. Dunne’s
brief, “fraudulent, intimidating, coercive, and other like wrongful and
unlawful methods apart—that here we touch a fundamental principle of
the freedom to buy and sell, of the legal right of the individual in
respect to his own property.”


Government’s Contention of Previous Competition

The arguments of railroad counsel in defense of the Union
Pacific-Southern Pacific merger rested predominantly, although not
wholly, upon points of law such as have been mentioned. Fundamental
as some of these were, the main interest in the case for the ordinary
student will be found in the elaborate analysis of the competitive
relations between the Southern Pacific and the Union Pacific which
the government developed in the course of its argument. So far as
the writer is aware, no record has ever been presented to any court
in which the nature and extent of the competition between two great
railroad systems has been so thoroughly discussed.

In establishing the fact that competition had been active between
the Southern Pacific and the Union Pacific before the merger of the
two companies in 1901, the government insisted upon the fact that
the Central and Southern Pacific managers had continuously diverted
all the traffic which they could control to the Sunset route so
long as they remained independent of Union Pacific dictation.[593]
The government examined no less than seventy witnesses—shippers,
Southern Pacific employees and ex-employees, and representatives of
independent railroad lines. Among those who testified were Mr. Hawley,
for nineteen years eastern agent of the Southern Pacific and afterwards
a financier of prominence; Messrs. Stubbs, Spence, and Munroe, of the
traffic department of the Southern Pacific; Paul Morton, one-time
vice-president of the Equitable Life Assurance Company; Mr. Jeffery,
president of the Denver and Rio Grande; and Mr. Hannaford, in charge of
traffic on the Northern Pacific.

Substantially all these witnesses testified that traffic from the
Atlantic seaboard could move to the Pacific Coast either via the Morgan
Steamship Line to New Orleans and thence over the Sunset route of the
Southern Pacific to San Francisco, or via the trunk lines and their
connections to Omaha, thence over the Union Pacific to Ogden and over
the Central Pacific to the coast. Although the Southern Pacific was
interested in both of these routes, it secured all the revenues from
freight moving via the Sunset route, and only 30.1 per cent of the
total revenue from freight delivered to it by the Union Pacific at
Ogden. In consequence, it used its best efforts to influence freight to
travel by the southern line.

[Illustration: Map showing mileage owned in 1913 by the Central Pacific
Railway and the Southern Pacific Railroad.]

The government showed by the evidence of shippers that freight was
actually solicited in competition between the two Pacific companies.
The Southern Pacific, it appeared, took traffic at New York rates from
as far west as Buffalo and Pittsburgh, not including those cities, and
from as far south as Norfolk. Not only this, but the Union Pacific was
not altogether restricted to the route via Ogden. By diverting freight
at Granger and sending it north to Portland over the Oregon Short
Line and the Oregon Railroad and Navigation Company, it could affect
the transcontinental rate in two ways. In the first place, it was
physically possible for traffic to move from Portland to San Francisco
by boat; and in the second place, a slight reduction in the rate to
Portland compelled a cut to every Pacific terminal point in order to
maintain these different cities in the same relative position for the
distribution of eastern goods. As Mr. Stubbs expressed it, “Let the
rate be cut on the Great Northern, and it goes down to the Gulf of
California.”

Mention may also be made of the route via the Isthmus of Panama, in
which the Southern Pacific had an interest by virtue of its control of
a steamship line from San Francisco to Panama. The business was not
large, but in so far as any moved this way it was in competition with
the rail lines via Ogden.


Competition between Other Points

In addition to competition between the Southern Pacific and the Union
Pacific on business between the Pacific Coast and points east of the
Missouri River, the government succeeded in showing the existence of
competition between the Atlantic seaboard and Colorado and Utah common
points. A good many sheep wintered in the desert west of Salt Lake,
and in the spring moved to the summer ranges in Idaho where they were
sheared. The railroad near which the shearing took place secured the
outbound wool, and for this reason the Union Pacific, Southern Pacific,
and Rio Grande Western offered every attraction possible in order to
influence the movement of the flocks. The Union Pacific for instance,
at one time paid a head tax which Wyoming levied on all sheep brought
into that state. The Oregon Short Line purchased salt on behalf of the
sheep owners, carried it to Idaho, and collected the purchase price
only when the salt was delivered. In the same way there was competition
in respect to cattle and horses which wintered in southern Idaho and
northern Nevada and moved east in the spring.

In return for the wool, cattle, hides, etc., shipped east, there
were brought in shipments of miscellaneous merchandise, dry goods,
machinery, and the like. When the Union Pacific handled the business,
the freight moved from New York to Norfolk or Newport News, thence by
rail to Omaha and over the Union Pacific lines to destination. When the
Southern Pacific took it, the freight went by Southern Pacific steamers
to New Orleans or Galveston, and thence over railroads controlled by
the company to Fort Worth, Texas, where it was given to connecting
lines for delivery at destination. The rate was the same either way,
but the rivalry between soliciting agencies was intense.

Still again, there was competition between Portland and Utah and
Colorado common points, including certain points in Nevada. Portland
enjoys a fairly direct route over the Oregon Railroad and Navigation
Company’s tracks to Huntington, and from there over the Oregon Short
Line to Granger, a few miles east of Ogden. The Southern Pacific
runs south from Portland to Roseville, near Sacramento, and thence
east through California, Nevada, and Utah to Ogden. The distance over
the one route is 945.3 miles, and over the other 1,487.3 miles. The
Roseville route has nearly twice the rise and fall of the route via
Huntington, while the curvature also is greater. In a calculation
made by Mr. Kruttschnitt, he estimated that the direct line haul
was equivalent to 3,498 miles of straight level track, but that the
haul via Roseville was equivalent to 6,164 such miles. The evidence
nevertheless showed that some business, especially lumber, had moved
the long way round before 1901. Traffic had also moved via the Oregon
Short Line and Central Pacific to points as far west of Ogden as Wells,
Nevada. How much all this amounted to was not clearly shown—at best
it was probably not a great deal. After the consolidation of the Union
Pacific and Southern Pacific in 1902, through rates with the Oregon
Railroad and Navigation Company via the Shasta route were discontinued
and competition ceased.

Other kinds of competition included competition for traffic between San
Francisco and Portland, between San Francisco and points in Montana
and Idaho, and competition for Oriental traffic destined to points in
the United States east of the Missouri River. In short, the voluminous
evidence thus summarized showed that active competition had existed of
almost every conceivable kind. There had been competition of parallel
routes between the same termini, of parallel or roundabout routes
between different termini, of roundabout routes entirely controlled
by the competing lines, of the routes in which the Union Pacific
and Southern Pacific were links only in chains of connecting and
independent roads, and finally there had been competition in cases
where one competitor had to rely upon the other for a greater or less
proportion of the haul.


Dissolution of Merger

This demonstration that the Union Pacific and the Southern Pacific had
competed with each other before the merger of 1901, followed by easily
secured evidence that the competition had ceased after the merger,
was sufficient to persuade the Supreme Court to grant the government
a decree, in spite of the protests of the defendant railroads.[594]
The effect upon the Southern Pacific was of course important. A
drastic reorganization of the affairs of the company was called for
in order to take the Southern Pacific out of the control of the Union
Pacific and to re-establish the conditions of the Huntington régime.
Such a reorganization presently occurred. While the details of this
transaction are not of present significance, it may be said, in brief,
that after several abortive attempts the Union Pacific disposed of all
its Southern Pacific stock under a reorganization plan dated May, 1913,
delivering some of this stock to the Pennsylvania Railroad in exchange
for stocks of the Baltimore and Ohio Railroad, and selling the rest
to the general public.[595] Henceforth the rail lines of the Southern
Pacific were not to reach east of New Orleans and of Ogden.


Attack on Control of Central Pacific

When the United States Supreme Court declared that the Union and
Southern Pacific systems must be separated, it merely restored the
latter to a condition of independence. The United States Department
of Justice was of opinion, however, that the logic of the decision
went further than this, and, encouraged by its preliminary success, it
took the dramatic step of attempting to separate the Southern Pacific
and the Central Pacific companies by the application of the same
principles which had torn the Southern Pacific and the Union Pacific
apart. The new suit was known as the United States v. Southern Pacific
Company, and, like the old, was brought under the Sherman law.[596]

The principal points in the case of the United States v. the Southern
Pacific Company were as follows. A glance at the accompanying map will
show that the Central Pacific Railroad, from Ogden to Sacramento, and
the Western Pacific, from Sacramento to Oakland, were in practical
effect but the western end of a route of which the Union Pacific formed
the eastern part. So far as competition was concerned, all parts of the
route were on a parity. If the Union Pacific competed with the Southern
Pacific when it hauled eastern freight from Omaha to Ogden, the Central
Pacific did likewise when it hauled the same freight from Ogden to
Sacramento. If it would promote competition to place the Southern
Pacific and the Union Pacific in separate hands, the same could be said
of the Central Pacific and its southern neighbor. So much is reasonably
clear even from a cursory examination of the facts.

In at least two important respects, however, the relations between
the Southern Pacific and the Central Pacific differed from those
between the Southern Pacific and the Union Pacific. These points were
emphasized in the briefs of counsel, and formed the basis of the
companies’ defense. Unlike the Union Pacific, the Southern Pacific
had obtained control of the stock of the Central Pacific at a time
when and under circumstances in which the federal government was an
interested party. If the details of the reorganization of 1898 are
recalled, it will be remembered that the government then accepted
notes in satisfaction of its claims against the Central Pacific which
were secured by mortgage bonds carrying a Southern Pacific guaranty.
This guaranty, in turn, was offered by the guaranteeing company as one
element in a series of transactions which included the acquisition
of Central Pacific stock by the Southern Pacific in exchange for the
latter’s own stock certificates. The implications of this episode were
mentioned when the transaction was described. While it certainly gave
no permission to the Southern Pacific to violate the Sherman or any
other law as a consideration for assisting the Central Pacific to pay
its debts, the government did lay itself open to the charge of having
at one time approved and enjoyed the fruits of a transaction of which
it later complained.

The more important distinction between the later and the earlier
merger cases in which the Southern Pacific was involved, lay in the
circumstances that the combination of the Union Pacific and the
Southern Pacific had been a recent matter, while the relations between
the Central Pacific and the Southern Pacific had begun almost as
soon as the latter corporation had been organized. In discussing the
construction of the Southern Pacific, the remark has been made that the
two enterprises were originally but different manifestations of the
activities of a single group of men. The first statement in the brief
of Mr. Herrin, chief counsel for the defense in the Central Pacific
case, was similarly that: “This case does not involve any combination
of competitive units, or any combination at all, for the Southern
Pacific and Central Pacific lines were projected and built and have
been operated since their organization as one property.”[597] These two
characterizations indicate a difference of considerable significance
between the Union Pacific and the Central Pacific cases.


Final Decision Doubtful

It must be pointed out, nevertheless, that in spite of the long
and close association between the Central and the Southern Pacific
railroads, there were certain features in this controversy which made
it difficult to forecast the final decision of the Supreme Court of the
United States. Counsel for the railroad company in the Union Pacific
case dwelt much upon legal technicalities. But in the Southern Pacific
case the forms were all opposed to the company’s contentions. For
one reason or another, doubtless largely for political effect, the
associates had always scrupulously insisted upon the separate identity
of the two companies concerned. The corporations had been made to
appear to deal with each other at arm’s length, and there had even been
much discussion of the relative profitableness to each of the contracts
concluded between them.

Nor was the matter one of form alone, as we have seen in earlier
chapters of this study. While the construction of both roads was
financed by the same parties, after 1880 the associates disposed of the
greater part of their Central Pacific holdings. The Southern Pacific
and the Central Pacific were still held together by lease relations, it
is true, but they then became separate, not merely in organization but
also in ownership. The separate ownership continued until 1899, when
the new arrangements were made to undo which the government brought
suit. It followed that counsel for the defendant railroads were in the
position of defending a combination of legally distinct corporations,
owned by different parties, with no connection between them save
through the minority holdings of individual stockholders and through
the very arrangements of which complaint was made. As an answer to this
indictment, the circumstance that the same parties had found their
profit in building each of the defendant lines could hardly be given
weight, nor was the fact that the original consolidation antedated the
Sherman law important.

The suit of the United States v. Southern Pacific Company was argued
before the circuit judges of the Eighth Circuit sitting at St. Louis
in December, 1915. The decision of a majority of this court was
rendered in March, 1917, and was unfavorable to the government’s
contention.[598] The grounds of this opinion were not brought out with
complete distinctness, but two judges held that there had never been a
“natural and existing competition” in interstate commerce between the
Southern Pacific and the Central Pacific. Nearly half of the text of
the decision, moreover, was devoted to a description of the financial
settlement of 1899, in which Congress appeared to have treated the
control of the Central Pacific by the Southern Pacific as consistent
with the statutes of the United States. Judge Carland dissented from
the conclusions of his colleagues in a carefully prepared opinion.
The case was appealed, and after full oral argument, was submitted to
the Supreme Court on April 19, 1921. An early decision is expected.
Meanwhile, the continued close relations between the Central Pacific
and the Southern Pacific are approved by public sentiment upon the
Pacific Coast, while the continuance for the present of common control
of the two companies certainly avoids many practical difficulties.




CHAPTER XXIII

OIL AND TIMBER LAND LITIGATION


Oil Land Ownership

The discussion in the previous chapter dealt with litigation under the
Sherman law which checked the absorption of the Southern Pacific by
the Union Pacific system and profoundly altered the relations of these
two companies to each other. Our narrative will close with the mention
of two other suits or groups of suits which concerned, the one, the
possession of certain oil properties in southern California, and the
other, the administration of lands—mainly timber lands—granted to the
Oregon and California Railroad in the North by federal legislation of
1866 and 1869. The Southern Pacific Company took part in both of these
controversies as a principal interested party.

The oil lands which until recently belonged to the Southern Pacific
Railroad lay principally in the West San Joaquin fields in southern
California. They covered an area of between 160,000 and 170,000 acres.
In 1917, a committee of the California State Council of Defense
estimated that the Southern Pacific and its subsidiary companies
controlled 26.4 per cent of the total output of the state, although
much of the oil so controlled was not produced upon the company’s own
land. The actual production of oil by the Southern Pacific Company
in June, 1918,[599] was 49,679 barrels out of 282,672 barrels of
production by all companies in the state, or a little less than 18 per
cent.[600] No later statistics of production by companies have been
made public. In June, 1920, however, the Southern Pacific Land Company
owned 19.38 per cent of all the proven oil land in California, and in
addition the Southern Pacific Company held a controlling interest in
the Associated Oil Company, also a large producer.

Unquestionably the Southern Pacific oil lands are valuable. A witness
in one of the recent cases testified that he had told Mr. Huntington
in 1893 that the railroad oil lands were worth more than the entire
Southern Pacific Railroad, while it is common report that the value of
the properties may run into the hundreds of millions of dollars. All
this is, moreover, recent. The discovery of oil in large quantities
was first made in southern California in the Kern River field, near
Bakersfield, in the spring of 1899. This was followed by discoveries
in the so-called McKittrick and Sunset fields, and by an oil boom of
extraordinary proportions. In so far as the railroad owns oil lands, it
has therefore recently secured an unearned increment which is not only
of great size, but of a character entirely unanticipated by legislators
of earlier days. This has given rise to controversy, in which the
government has questioned the railroad title.

The peculiarity of the oil land litigation, and the reason why the
federal government is involved, is found in the fact that the railroad
land is mostly land-grant land, lying within the limits laid down by
the Act of 1866 from which the Southern Pacific Railroad took its life.
It follows from this that the railroad title was affected by certain
reservations in the land-grant legislation, such as that of exempting
mineral lands from the operation of the grants. The government offered
to convey certain land to the railroad free of charge when it undertook
to stimulate railroad building in California, but it did not include
mineral land in this offer, except coal land and iron land. Not only
this, but the exception of mineral lands was repeated in the patents
later issued by the Department of the Interior, and in such patents the
words, “excluding and excepting all mineral lands should any such be
found in the tracts aforesaid,” were used, making the exemption apply
to future discoveries as well as to discoveries occurring before the
patents were issued. Evidently the legislature and the land office
intended to limit the donations to the Southern Pacific by excluding
unknown and immeasurable increments of value in so far as this might be
done. Coal and iron were left, for the reason that these minerals were
intimately connected with the construction and operation of the road.


Test Case

In 1910, one Edmund Burke filed a bill in equity in the Circuit Court
of the United States for the Southern District of California, in
which he challenged the title of the railroad to oil lands in an area
covering five sections in Fresno County, California. This was a test
case. Disregarding minor points, the larger questions at issue were the
following:

The first question was as to whether or not oil was a mineral. The
plaintiff said that it was a mineral, the defendant said that it was
not. If oil was a mineral, then the railroad could not obtain title
under the land-grant laws to land which was known to contain oil at the
time the patent was applied for. If oil was not a mineral, there was no
limitation. Now matters of definition always cause trouble. The word
“mineral” is sometimes associated with metallic ores, a notion which
would not include a resultant from the decomposition of organic matter
such as California petroleum. Indeed, the Secretary of the Interior
once held that the word “mineral” embraced only the more precious
metals, such as gold, silver, cinnabar, etc., although on rehearing
this view was rejected. Common usage includes more than the metallic
ores, and the courts have considered as mineral such articles as clay,
coal, and marble, and even deposits such as guano.[601] When the matter
was presented to it, the United States Supreme Court followed common
usage and held that petroleum was a mineral.[602]

The second point had to do with the effect of a patent. It was shown
that the Southern Pacific had received patents as early as 1892 to
lands which ultimately proved to contain petroleum, and there was
dispute as to whether this subsequent discovery invalidated title to
property once patented. On this point, fortunately, the law was clear.
Quoting the Supreme Court:

 The settled course of decision ... has been that the character of land
 is a question for the Land Department, the same as the qualifications
 of the applicant and his performance of the acts upon which the
 right to receive the title depends, and ... [that] when a patent
 issues it is to be taken upon a collateral attack, as affording
 conclusive evidence of the non-mineral character of the land and of
 the regularity of the acts and proceedings resulting in its issue, and
 upon a direct attack, as affording such presumptive evidence as to
 require plain and convincing proof to overcome it.

The Supreme Court therefore held that the Southern Pacific was secure
in its possession of lands to which it held patent, unless fraud could
be shown, and this irrespective of any saving clause in the patent
itself, and without regard to the nature of the investigation by which
the Land Office had originally satisfied itself as to the character of
the land.[603]


Elk Hills Suit

The effect of the rulings of the Supreme Court in the test case of
Burke v. Southern Pacific was not only to cause the dismissal of the
pending suit, but to make it evident that the government must show
fraud on the part of the railroad company before the company’s title
could be disturbed. The holding of the court that oil lands were
mineral lands was, however, an important victory for the government. It
was under these circumstances that the federal government instituted a
fresh series of suits. Of these, one suit called in question the title
of the Southern Pacific to some 6,109 acres of land in the Elk Hills
region of southern California, held under a patent issued December
12, 1904. The other suits attacked the legality of the railroad’s
possession of substantially all its remaining oil lands, obtained at
various dates from 1892 to 1902. The value of the lands involved in
the second proceedings was estimated by the government as in excess
of $421,000,000. Counsel alleged that the company’s land agents,
Messrs. Eberlein and Madden, had accompanied the lists, which they had
submitted to the government for patenting, with affidavits stating that
the lands were not mineral lands, although both agents knew at the
time the patents were applied for that the lands in question contained
oil. This charge, if substantiated, amounted to a showing of fraud. In
both cases the government sought to show that the presence of oil upon
the lands sought was a matter of common knowledge, and that there was
reason to believe that the company was fully cognizant of the facts.

Most of the sensational testimony taken in the oil land cases appeared
in the so-called Elk Hills case. Mr. Eberlein here figured as the
land agent for the Southern Pacific. Omitting again all relatively
unimportant detail, it appeared that Mr. Eberlein had filed an
affidavit with the Land Office in November, 1903, in which he swore to
two pertinent facts: first, that he had caused the lands for which the
railroad applied to be carefully examined by the agents and employees
of the company as to their mineral or agricultural character; and
second, that to the best of his knowledge and belief, none of the lands
returned in the list were mineral lands. These statements had been
repeated in September, 1904, when a substitute list was filed.

In the face of these sworn assertions, the United States Supreme Court
later found that Mr. Eberlein had not examined the lands in question,
nor had he caused them to be examined by others. Indeed, Eberlein
had even objected to the examination of the lands. He had protested
verbally to Judge Cornish, vice-president of the Southern Pacific
Company against examination, and to Mr. Markham, its general manager,
and in 1908 he had summed up his repeated objections by writing to the
assistant land agent of the company as follows:

 The examination of our S. P. lands not yet patented by our oil experts
 must be stopped as information that they may obtain or give as to
 mineral character prior to patent will forever prevent our getting
 title.... Mr. Dumble (the company’s geologist) and his men should not
 be furnished by us with any data whatever except as to _patented_
 lands. For reasons above given such information will be embarrassing
 to them and us and may make them witnesses against this company in
 mineral contests hereafter.[604]

The most that can be said for such an epistle is that it indicated an
anxiety to keep within the letter of the law.


Government Victory and Defeat

Besides falsely swearing that he had made an examination of the
lands involved in the Elk Hills case, Mr. Eberlein made the positive
statement in his affidavit that none of the lands covered by his
application were mineral lands, in so far as he was informed. Now in
this matter it is clear that the evidence before Mr. Eberlein, such as
it was, pointed to a mineral and not to a non-mineral content of the
land in question. This evidence consisted primarily in the results of
work of Southern Pacific geologists in the general region of which the
Elk Hills were a part, and in the presence there of a certain number
of producing wells. It is on record that in 1902 the Southern Pacific
withdrew from sale many of its patented lands which surrounded or were
adjacent to the land in controversy “because they were in or near oil
territory.” The following year the company decided to lease such of
its lands as were considered valuable for oil purposes to a subsidiary
company—the Kern Trading and Oil Company. The proposed lease was laid
before Eberlein in August, 1904. He at once objected. In a letter to C.
H. Markham, general manager of the Southern Pacific Company and second
vice-president of the Southern Pacific Railroad Company, Eberlein set
forth (September 10, 1904) the reasons for his opposition in these
words:

 In addition to this there is a very urgent reason for delaying the
 execution of these papers. We have selected a large body of lands
 interspersed with the lands sought to be conveyed by this lease and
 which we have represented as non-mineral in character. Should the
 existence of this lease become known, it would go a long way toward
 establishing the mineral character of the lands referred to and which
 are still unpatented.[605]

A similar letter addressed the week before to Judge Cornish in New York
contained arguments of a similar nature. The protests were heeded, and
the leases of lands in the McKittrick and Coalinga districts were held
up. It was recognized, moreover, that the matter was a delicate one,
and the papers relating to the proposed leases were placed in a special
and private file separate from the general file of the land department
of the railroad company. Summing up the evidence in the case, the
United States Supreme Court later observed that the natural, if not the
only, conclusion from the facts was that in pressing the selection the
officers of the railroad company were not acting in good faith, but
were attempting to obtain the patent by representing that the lands
(covered by the Elk Hills litigation) were not mineral when they
believed the fact was otherwise.[606] The decree of the United States
Supreme Court requiring the cancellation of the railroad patents to the
6,000 acres of land in the Elk Hills district was given on November 17,
1919.

Three months before this Supreme Court decision, Judge Bledsoe, in
the District Court for the Southern District of California, dismissed
a suit challenging title to some 165,000 acres of land in the oil
territory on the west side of the San Joaquin Valley.[607] This suit
represented a consolidation of the oil land suits other than those
included in the Elk Hills case. Perhaps 156,000 of the acres under
litigation were claimed by the railroad. Cases are seldom alike, and
the Bledsoe case differed from the Elk Hills controversy in several
important details. In this case, for example, it appeared that the
railroad had sold lands in the disputed territory at agricultural
prices—a policy which it presumably would not have followed had it
believed that these lands had mineral value. There was also lacking
much of the direct evidence which had helped to demonstrate the fact
that Mr. Eberlein had distorted the truth in his representations to the
government. On the other hand, the refusal of Judge Bledsoe to believe
that men like the general manager of the Southern Pacific, its land
agent, and its vice-president would lend themselves to fraud, is less
impressive after a perusal of the Elk Hills material. The government
has announced that it will not appeal from Judge Bledsoe’s ruling—a
decision which, on the face of things, appears to be a mistake.


Sale of Oil Lands

The most recent development in connection with the Southern Pacific
oil lands is associated with the organization of the Pacific Oil
Company. The formation of this company was announced in March, 1921.
It purchased from the Southern Pacific Land Company, for the sum of
$43,750,000, about 259,000 acres of lands in California, most of which
were proven oil lands, and 200,690 shares (50.48 per cent) of the
capital stock of the Associated Oil Company. This was the whole of
the Southern Pacific interest in the oil fields. The Southern Pacific
Company provided the funds for the purchase by subscribing to 3,500,000
shares of the Pacific Oil Company at $15 per share, but the railroad
disposed of its newly acquired shares by extending to holders of its
own stock the right to purchase Pacific Oil stock at $15 per share,
one share of stock of the new company for each share of the Southern
Pacific Company stock so held. This transaction will transfer the
ownership of the railroad oil lands from the Southern Pacific Company
to the stockholders of that company as fast as the subscription rights
are taken up. Commenting on the plan for the separation of the oil
and railroad properties, President Sproule observed that the plan was
simply responsive to the spirit of the times. It seems likely, however,
that it will have the additional result of preventing further action
tending to disturb the railroad title. The president of the Pacific
Oil Company is Mr. Shoup and its directors are men of influence in the
East.[608]


Timber Land Grant

This summary discussion of the oil land litigation in California brings
us to the last of the great cases with which the Southern Pacific
has, in recent years, been concerned, namely, to the dispute between
the federal government and the Oregon and California Railroad over
the administration of timber lands in Oregon. By the Act of July 25,
1866,[609] Congress authorized the California and Oregon Railroad to
build a railroad and telegraph line in the state of California from a
point on the Central Pacific in the Sacramento Valley to the northern
boundry of the state. The same act empowered “such company, organized
under the laws of Oregon, as that state should designate,” to construct
a railroad from Portland, Oregon, to a junction with the California
and Oregon upon the Oregon-California boundary line. The legislature
granted to the company mentioned a right-of-way, and in addition ten
alternate sections of public land on each side of its track.

At the time Congress acted, there was no company in Oregon in condition
to become the beneficiary of the grant. In 1867, however, the Oregon
Central Railroad Company of Salem was incorporated, and the following
year this railroad received the needed legislative designation. It
appears that there was some dispute between the Oregon Central of Salem
and another organization known simply as the Oregon Central Railroad
Company, and that the doubt as to which of these two was entitled to
receive the granted lands in Oregon delayed the filing of the necessary
formal assent to the terms of the Congressional Act of 1866. In 1869,
therefore, Congress extended the time for the filing of the required
assent.[610]

At the time this privilege was accorded, however, Congress introduced
an important limitation to its previous action, by providing that the
lands granted by the Act of 1866 should be sold to actual settlers
only, in quantities not greater than 160 acres to one purchaser, and
for a price not exceeding $2.50 per acre. So amended, the Act of 1866
was accepted by the Oregon Central, and on March 16, 1870, the rights
acquired were assigned to the Oregon and California Railroad. In 1887,
the Oregon and California was absorbed by the Southern Pacific.

As a result of the legislation described, the Oregon and California
Railroad Company received a total grant estimated at 3,821,902 acres,
which it held subject to the requirement that it should dispose of the
property to actual settlers, in small lots, at prices not exceeding
$2.50 per acre. Now the simple facts with regard to the company’s
administration of this estate are that it did not limit the price
which it charged to $2.50 per acre, that it took no pains to ascertain
whether or not, purchasers of its lands were actual settlers, and that
it sold in whatever quantities were convenient from the point of view
of revenue. Between 1894 and 1903, to take the period when the company
neglected its obligations most grossly, there were sales at prices
ranging from $5 to $40 an acre, and in amounts which in one instance
reached the figure of 45,000 acres to a single purchaser. Out of
820,000 acres sold during this period, approximately 370,000 were sold
to 38 purchasers in quantities exceeding 2,000 acres to each purchaser,
and at prices higher than $2.50. These sales, according to the Supreme
Court, were to persons other than actual settlers, and for other
purposes than settlement. On January 1, 1903, the company reached the
climax of its disobedience to law by withdrawing all of its lands from
sale and refusing to accept offers for any of them, asserting that they
were timber lands and unsuitable for settlement. In 1911 there were
2,360,492.81 acres unsold, of which 2,075,616.45 had been patented.
Only a comparatively small part of the grant, that is to say, had been
disposed of.


Land Rebought by Government

It is somewhat amazing that so clear a violation of the terms under
which the Oregon and California held its land grant should have passed
unchallenged. Nor can the obstinacy of the company’s defense fail
to excite surprise. When the Attorney-General of the United States
sought to have the Oregon and California grant declared forfeit[611]
because of the company’s disregard of the terms of the law, it proved
necessary to litigate for eight years, to take seventeen volumes of
testimony, to consider 2,500 pages of briefs, and to obtain three
court decisions and the enactment of a new law before the matter could
be finally set at rest. It is unnecessary to go into the elaborate
record, or the arguments by which counsel sought to demonstrate that
the restrictive provisions of the Act of 1869 were beyond the power
of Congress to enact, or to discuss the contentions that breaches of
the law had been condoned and that the covenants were not in any case
enforceable. The case was considered by the Circuit Court of the United
States for the District of Oregon in 1911,[612] and by the Supreme
Court of the United States in 1915.[613] Both courts pronounced the
restriction on the alienation of Oregon and California lands binding.

The controversy was at last settled by a new Act of June 9, 1916, in
which Congress resumed possession of the unsold lands appertaining to
the grant, while appropriating the sum of $2.50 an acre for these lands
as a payment to the railroad company.[614]

Under the terms of the act, the Secretary of the Interior was directed
to ascertain the exact number of acres of land patented to the railroad
company, and the number of acres of unpatented land which the company
was entitled to receive in the future according to the original grants.
The Secretary was then to calculate the value of all this land at $2.50
per acre, and to pay over the amount so ascertained to the railroad
company from time to time from the proceeds of future sales of the
lands or of the timber upon it, after deducting from the valuation the
amounts already received by the railroad and by its predecessors in
interest. The intent was clearly to allow to the railroad $2.50 per
acre of the original grant, no more and no less, taking full account of
the sums already received by the company. The constitutionality of the
law was later upheld by the Supreme Court.[615]




CHAPTER XXIV

FINAL REMARKS


Character of Associates

It is to be regretted that the oil, land, and timber litigation of
recent years has once more presented the Southern Pacific in the light
of a corporation more heedful of its own financial interests than of
the requirements of public policy or of a high ethical code. In all
fairness to the company, it should be said that this controversy does
not truly represent its attitude at the present time. Stanford and
Huntington are dead, and their properties are in other hands. The
great railroad system which they left, controlled by leaders who are
responsive to new policies, is in general no longer a profit-making
device in the hands of a small group of men, but instead is a powerful
machine for the promotion of industry and commerce on the Pacific Coast.

Our narrative will now close with a few words of summary and conclusion.

The purpose of the writer in presenting the story of the Southern
Pacific has been to throw light upon the problems encountered by the
most important railroad upon the Pacific Coast, and to characterize
and interpret the policies adopted by that railroad and by the men who
governed it.

The writer’s view with regard to the so-called Southern Pacific
associates, Stanford, Huntington, Mark Hopkins, and Crocker, is that
they were rough, vigorous, and grasping men, tenacious of rights
to property once acquired, kind-hearted within the circle of their
families and intimate friends, but narrow in vision, uneducated, and
inexpert in the details of railroad operation, and uninformed in all
that related to questions of public policy. Huntington alone, while
rough and selfish as the others, showed important constructive capacity
in the railroad field. The strength of the associates lay in their
courage and persistence, in their loyalty to each other in business
matters, in their readiness to attract and to support able men whose
views did not differ too greatly from their own, and in a native
shrewdness which, in Huntington at least, reached to a superlative
degree.


Achievements of Group

The reputation of the Huntington group rests upon the fact that
within fifty years they built up an organization operating 11,152
miles of lines and earning an operating revenue in a single year of
no less than $282,000,000. A statement like this is quickly made. The
significance of it comes home, however, only to those who understand
the difficulties of successful management of great corporations and
who appreciate the multitude of decisions as to policy which must have
been, on the whole, soundly made, at least from the point of view of
the corporation itself, in order to achieve such a success.

Doubtless most of the details of the Southern Pacific management were
necessarily handled by subordinates. It is unlikely, for instance,
that the associates had much to do with the construction of railroad
rates in the West, with the negotiation of special contracts with
California shippers, or with agreements with the Pacific Mail. The
contribution of the owners was here the appointment of competent men at
liberal salaries to attend to matters which they did not understand or
for other reasons were not able to handle themselves. The credit for
general direction and support of the policies adopted, however, belongs
to the associates even in these matters, when credit is due, just as
responsibility for errors properly falls upon them.


Principles of Operation

There are three principles relating to the operation of these railroad
properties which the author feels that he can attribute with some
confidence to Huntington and his friends. The first of these was that
the Southern Pacific enterprise should remain under the associates’
control and free from eastern entanglements. The second was that
railroad monopoly in California was essential to a satisfactory
railroad profit, and that the utmost possible profit should be
exacted when monopoly power had been attained; and the third was that
regulation by public bodies was in all respects objectionable, although
public grants were considered to be legitimate sources of revenue.

Looked at in a comprehensive way, the history of the Southern Pacific
may be said to have centered in the application of these principles to
the solution of a series of problems, of which the final disposition of
the Southern Pacific oil and timber lands was the last. These problems,
to name them consecutively, included the construction of the original
Central Pacific and Southern Pacific railroads; the establishment of
these companies as going concerns with opportunity for prosperity and
power; and the adoption by the associates of policies with respect
to government regulation, with respect to rates, and with respect to
relations with competing lines. They included also the negotiation
of a plan of settlement with the federal government under which the
financial assistance tendered to the companies in their younger days
was repaid, and the railroad stood forth free of unusual responsibility
and devoid of special privilege. At a later date the merger of the
Southern Pacific with the Union Pacific represented an additional
adventure, although one which was never part of Huntington’s plan; and
still another episode, the oil and timber litigation just described,
was concerned with a forced liquidation of interests of which
Huntington had known and approved.


Two Eras in Company’s History

Grouped in a somewhat different way, but with the same essential point
of view, the history of the Southern Pacific may be divided into two
parts, the one ending and the other beginning in or about the year
1883. Before 1883, the Huntington group was primarily interested in
construction from Sacramento to Ogden in order to obtain the benefit
of the federal subsidy, and in construction in southern California,
New Mexico, and Arizona, in order to prevent the building of an
independent competing line. In this period, also, steps were taken
to crush the competition of certain local enterprises in California.
After 1883, or more accurately, after 1879, the attention of the
associates was concentrated upon the establishment of their credit,
the resistance to the threatened regulation by the state of their
properties in California, and upon the competition of the newly created
transcontinental railroad lines and the water routes from the Pacific
to the Atlantic Coast. The second of these dangers led them into local
politics, and the third resulted not only in a variety of agreements
with competitors, but also caused the Southern Pacific to modify its
rate structures and to subsidize potential competitors upon the sea.
Still later came the necessity of repaying the loans which the Central
Pacific had received from the federal government at the time of the
construction of its road and the new relations with the Union Pacific
under the Harriman régime. The oil and timber litigation, though
falling within the second period, represented the closing up of grants
received in the first.

In solving all the problems presented in the course of the Southern
Pacific’s career, the associates followed consistently the three
fundamental principles laid down in a preceding paragraph whenever
the principles were applicable and the circumstances permitted
of a deliberate choice. The only striking variation from them
occurred when the Union Pacific was allowed to obtain a controlling
interest in Southern Pacific stock—a transaction which occurred
after Huntington’s death and one for which the associates were not
responsible.


The Charge against Associates

The weakness in the position of the Huntington group lay in the fact
that their insistence upon monopolistic control of railroads in the
state of California and their resistance to government regulation,
ran counter to public policies of a most fundamental kind. A further
ground for incisive criticism is properly found in the methods which
the associates adopted in their business and political campaigns. It is
not sufficient to declare that Huntington and Stanford merely imitated
practices which they found about them. There is reason to believe
that the Southern Pacific associates lowered the standard of business
ethics of their time. The reader who has examined the data submitted in
preceding pages will need no specification of this charge. In finance,
in politics, in questions of rates, and in their relations with public
bodies, the associates were indifferent to standards of private and
public conduct, which alone can bring trust and confidence into
business relations. The great material achievements of the Huntington
group were marred by the moral and spiritual defects of its members.


Public’s Present Favorable Attitude

This narrative closes without consideration of the part which the
Southern Pacific played in the war of 1914-1918, and without detailed
analysis of the present position of the company or of its prospects for
the future. As a matter of fact, the tendency today is for individual
systems to be assimilated into the national railroad net through
governmental regulation of rates, of wages, and of many details of
operation, so that elaborate discussion of the affairs of single
companies has lost much of the interest which it once possessed. The
future of the Southern Pacific will depend more on the outcome of
national policies with respect to the support and control of railroads
in all parts of the country, than it will on the success of the
strategy of any group of railroad men.

For good or bad the pioneer days are over. Public opinion in California
is now well disposed toward the Southern Pacific in marked contrast
to the attitude of earlier days. Probably the change is in part due
to the efficiency of the technical staff of the company and to the
excellence of its service as compared with other roads. Probably also
the recent enforced separation of the Union Pacific and the Southern
Pacific has on the whole strengthened the latter by relieving it of the
unpopularity which would have followed long-continued outside control,
while the completeness of public authority over rates through state and
federal commissions has removed still another cause of discontent. In
spite of past errors the Southern Pacific now looks forward to a long
and prosperous career and to a popularity properly the result of the
loyal and efficient service of a great body of official employees.




INDEX


  A

  Adams, Edson, 86

  Agricultural products, 349

  Alcade, 141

  Amador branch, 143

  Antioch, 224

  Associated Oil Company, 449

  Atchison, Topeka and Santa Fé Railroad, 241, 275;
    acquires San Francisco and San Joaquin Valley Railroad, 331, 339-342

  Atlantic and Pacific Company, 226

  Atlantic and Pacific Railroad, 122, 125

  Atlantic and Pacific Steamship Company, 305


  B

  Baker, Col., of Tulare, 28

  Bakersfield, oil fields, 442

  Balfour, Guthrie and Company, 305

  Bankruptcy, threat of, 415

  Banning, Phineas, 127

  Bassett, J. M., 214

  Battle Mountain, 361

  Bear River, 8

  Beerstecher, Mr., member, State Railroad Board, 1880-1883, 189-198

  Benicia, 107, 141, 224

  Board of Land Commissioners in California, 62

  Bonds, California Pacific Railroad Company, 110-118;
    Central Pacific Railroad, 418;
    United States subsidy, 51-56;
    lien on, 407-410;
    payment and refunding of, 371-424;
    payment of interest at maturity, 371;
    settlement of indebtedness, 416-424;
    sinking fund provision, 376, 383

  Booth, L. A., 15, 19

  Brice, Senator, 397

  Brown, Mr., 147

  Brown, Harvey S., 188

  Brown, W. E., 75

  Burch, John C., Congressman from California, 8

  Burke v. Southern Pacific, 443

  Business depression of 1891-1897, 363

  Business Men’s League v. Atchison, Topeka and Santa Fé, 281, 282


  C

  California, aids Central Pacific Railroad, 25-44;
    “Five Per Cent Act,” of 1870, 44;
    industrial conditions, 237;
    Judah’s work in, 5;
    Spanish and Mexican grants, 62

  California and Oregon Railroad, 81, 140, 152, 363, 450

  California League of Progress, 319

  California Pacific Eastern Railroad Extension Company, 110

  California Pacific Railroad Company, acquired by Central Pacific,
       104-118;
    alleged mismanagement of, 116;
    bonds of, 111;
    competition of, 107;
    growth of, 1871-1877, 141;
    lease, 143;
    shares, 112

  California Southern Railroad, 123

  California State Board of Transportation Commissioners, 181-198, 242, 335

  California Steam Navigation Company, 224

  Calistoga, 141

  Canadian Pacific Railroad, 276, 308

  Cape Horn route to San Francisco, 225, 306

  Capital (See “Finance”)

  Carpentier, E. R., 88

  Carpentier, H. W., 86, 88, 89, 90

  Carr, William, 204

  Casserly, Eugene, 213

  Central Pacific Railroad Company, 4;
    Acts of 1862 and 1864, 49-64;
    acquires California Pacific Railroad, 104-118;
    acquires California Steam Navigation Company, 224;
    bond issues, 24, 51-56, 370-424;
    capital of, 22;
    consolidation with Western Pacific Railroad, 84;
    construction of, 1863-1869, 65-83;
    ceremonies attending inauguration of work, 65;
    contracts for, 70;
    cost estimated, 16;
    financing of, 75-82;
    gradients, 65;
    supplies for, 68;
    temperature of climate, 67;
    contract with California Pacific, 112;
    discriminations against charged, 357;
    dividends, 365, 374;
    earnings, 16, 22, 169, 361;
    expenses, legal and general, 213;
    finances, 1870-1879, 169-180;
    financing of California survey, 14;
    government aid by California, 25-44;
    government aid expected, 15;
    government debt, 370-424;
    in 1877, 140;
    incorporation, 1899, 421, 423;
    Judah’s second survey for, 19;
    Judah’s work for, 4-10;
    land grants, 50-64;
    leases, 142, 153;
    litigation with San Francisco, 31-40;
    monopoly control by, 104;
    Oakland water-front acquired, 85-94;
    organization, 1861, 18;
    rates, 237-256;
    receipts to December, 1869, 21;
    refuses to buy Sacramento Valley railroad, 43;
    reorganization plan, 1899, 418;
    San Francisco water-front acquired, 94-103;
    stockholders, 146-149;
    stock issues, 1863-1869, 23;
    county subscriptions, 29;
    subsidies demanded from towns, 28;
    surveys, 66;
    terminal facilities in 1869, 85;
    transcontinental line finished, 84

  Centralia, 19

  Chesapeake and Ohio Railroad, 149

  Chico, 224

  China Basin, 335-338

  Chinese labor, 70

  Cleveland, Grover, 403

  Clipper ships, 225, 303-316

  Cohen, A. A., 174

  Colon, Panama, 234

  Colorado River, 140

  Colton, David D., 28, 133, 154-168, 175, 184, 201, 202, 204-217, 387

  Colton, Mrs. David B., 164-168

  Colusa, 223, 224

  Commissioner of railroads (See “Railroad Commissions”)

  Competition, effect of, on rates, 263, 280;
    foreign ships, 294;
    proposal for competing railroad, 318;
    restraint of trade, accusations of, 356, 429-440;
    San Joaquin project, 320;
    transcontinental, 275;
    water, 222-236, 303-316

  Cone, J. S., member of State Railroad Board, 1880-1883, 189-198

  Congress (See “Legislation”)

  Connor, Mr., commercial agent, 356

  Consolidation, Union Pacific and Southern Pacific, 425-440

  Constitutional convention, California 1879, 184-187

  Contract and Finance Company, 75-82;
    builds railroad from Sacramento to Dansville, 113;
    construction of Southern Pacific, 132

  Contracts, construction of Central Pacific, 70-82;
    rates, 250-255

  Coon, Henry P., Mayor of San Francisco, 35

  Cornish, Judge, 446, 447

  County stock subscriptions, 28, 29

  Crocker, Charles, 13, 19, 22, 65, 70, 145, 170, 284;
    contracts for construction, 70-75;
    director, Southern Pacific Railroad, 123;
    President Contract and Finance Company, 77;
    relations with David D. Colton, 154-168;
    shares of, 146-149

  Crocker, E. B., Judge, 88

  Curtis, William B., 240


  D

  Dane, Timothy, 84

  Davisville, 112, 141

  Dawes, Mr., 409

  Debts (See “Government aid”)

  Dimond, William and Company, 304, 306

  Dividends, payment of, 171, 374;
    policy, 366;
    suspension of, 365

  Donahue, Peter, 123

  Doyle, John T., 216, 401, 407

  Dutch Flat, 6, 7, 8


  E

  Earnings, Central Pacific, 16, 22, 169, 361, 364;
    charges by Auditor of Railroads, 389;
    net earnings defined, 391;
    Southern Pacific, 347-369

  Eberlein, land agent, 445-448

  Edmonds, Senator, 409

  El Paso route, 354

  Election of 1863, 32, 33, 38

  Elk Hills title suit, 445

  Eureka and Palisade Railroad, 361


  F

  Fair, James G., 310

  Farming, 237

  Felton, John P., 87, 88, 89, 90

  Finance, construction work, Central Pacific, 71-82;
    Southern Pacific, 136-139;
    early years, 360;
    federal aid, 42-64;
    survey, 14;
    inability to get capital, 170;
    notes, 1878, 176;
    organization of company, 18;
    repayment of government debt, 370-424;
    San Francisco and San Joaquin Valley Railroad, 322;
    short-term borrowing, 174;
    state and local aid, 21-41

  “Five Per Cent Act,” of 1870, 44

  Flower, Roswell P., 177

  Folsom, 8, 10, 19

  Franchot, General, 204, 213

  Freight traffic, 353;
    rates, 191, 349

  Fremont’s route, 9

  French, Thomas, 89

  French v. Teschemaker, 33

  Friedlander and Reed, 249

  Frye-Davis report, 396


  G

  Gage, L. J., Secretary, U. S. Treasury, 415

  Gage, Stephen T., 204, 209, 210

  Galveston, Harrisburg and San Antonio Railway, 149

  Gates, I. E., 213

  Gear, Congressman, bill for refunding of debt, 399, 416

  General Land Office, 57-59

  Gerke, Mr., 195-197

  Gilroy, 141

  Gleaves Act, 338

  Goat Island, 100, 101

  Goodall and Perkins, 226

  Gordon, Senator from Georgia, 203

  Goshen, 119, 126, 127, 140

  Gould, Jay, 226, 234, 427

  Government aid, California, 25-44;
    California laws, 1864, 34;
    claim for indemnity, 374;
    county stock subscriptions, 29;
    federal, 45-64;
    Judah’s proposals, 15;
    opposition to in San Francisco, 31;
    Pacific Railroad bill, 1860, 8;
    repayment of debt, 370-424;
    state aid, direct, 30;
    United States bonds, 51-56, 371

  Government, U. S., withholds payments, 377

  Grace, J. W., and Company, 304

  Grading of railroad, 65

  Grain rates, 342

  Gray, R., 246

  Great Northern Railroad, 276

  Griggs, U. S. Attorney-General, 415, 416


  H

  Haight, H. H., 216

  Hale, Henry M., auditor of San Francisco, 35

  Hammond, President, California Pacific Railroad, 115;
    Vice-President, California Pacific Railroad, 114, 115

  Hannaford, Mr., 432

  Harriman, E. H., 428

  Harriman system, 428

  Hawley, Edwin, 253, 427, 432

  Hess, Mr., of Boca, 258

  Hibbard, Spencer, Bartlett and Company, 282

  Hood, engineer, 68

  Hopkins, Mark, 22;
    agreement with California Pacific Railroad 110;
    biography, 14;
    death of, 133;
    director, Southern Pacific Railroad, 123;
    finances Judah, 14;
    general agent, California Pacific Railroad, 115;
    report on construction, 72;
    shareholder of Central Pacific Railroad, 19;
    shares of, 147

  Hopkins, Moses, treasurer, California Pacific Railroad, 115

  Hopkins, Timothy, 145

  Houston, H. A., 84

  Howard, General, 216

  Huntington, Collis P., 22, 28, 69, 73, 144, 145, 279, 283, 327, 351,
        354, 357, 367, 370, 415;
    acquires control of California Pacific Railroad, 109-118;
    against state regulation, 200;
    biography, 10;
    death of, 426;
    director, Southern Pacific Railroad, 123;
    estate of, 427;
    finances T. D. Judah, 14;
    lobbying methods, 203-221;
    negotiates purchase of California Pacific Railroad, 109-118;
    organizes Contract and Finance Company, 75;
    organizes Occidental and Oriental Steamship Company, 227;
    policies, 426;
    President of Southern Pacific, 218;
    relations with Colton, 154-168;
    shareholder of Central Pacific Railroad, 19;
    shares of, 146-149;
    submits annual report of Southern Pacific, 123;
    Thurman bill, 387;
    valuation of oil land, 442

  Huron, 141, 179

  Hyde, Mr., 129


  I

  Illinois Town, 8

  Interest, on government bonds, 371


  J

  Jackson, Mr., 147

  Jacobs, Isidor, 300, 301

  Jeffery, President, Denver and Rio Grande Railroad, 432

  Johnson-Locke Mercantile Company, 309

  Jones, John P., Senator from Nevada, 128

  Judah, Theodore Dehone, 4-10;
    estimates construction cost of Central Pacific, 16;
    financed by Huntington and others, 14;
    organizes Central Pacific Railroad, 18;
    solicits federal aid, 46-48


  K

  Kahn, Otto H., 429, 430

  Kansas Pacific Railway, 408

  Kasson, Mr., 203

  Kearney, Dennis, 184

  Kern county, 127

  Kern Trading and Oil Company, 447

  Knight’s Landing, 224

  Kuhn, Loeb and Company, 428, 429


  L

  Labor, cost of, on construction of Central Pacific, 67

  Lake Pass on the Truckee River, 8

  Land, rebought by federal government, 451

  Land grants, 50-64;
    company policies toward settlers, 63;
    transfer of title, 56-59

  Lassen’s Meadows, 19

  Latham, Milton, General Manager, California Pacific Railroad Company,
      109, 110, 112, 114, 117

  Lathrop to Goshen route, 119, 140

  Lawler, Judge, 189

  Leases, 142, 153, 335-338

  Leeds, Joseph S., 283, 301, 302, 303, 307, 308, 313, 318-323

  Legislation, Act of March 3, 1873, 377;
    Act of 1880, 187;
    “Five Per Cent” Act of 1870, 44;
    Gleaves Act, 338;
    influencing of, 199-221;
    O’Connor bill, 183;
    Pacific Railroad bill, 8, 47-64;
    railroad control bill, 184-187;
    state constitutional provisions, 1879, 184-187;
    Thurman Act, 380-394

  Lien on subsidy bonds, 407-410

  Lincoln, Abraham, 8, 19

  Litigation, oil and timber lands, 441-453;
    U. S. v. Union Pacific and Southern Pacific, 425-440

  Loans, short-term, 174

  Lobbying, 203-221

  Loewy, William, clerk of the city of San Francisco, 37

  London Economist, 367

  Long hauls, 352

  Los Angeles, 140, 141;
    grants rights, 128;
    in 1870, 127

  Los Angeles and Independence Railroad, 128

  Los Angeles and San Pedro Railroad, 127

  Los Angeles to Yuma route, 125

  Lovett, Mr., 357

  Luce, G. W., 247


  M

  McDougal, Senator, 46, 48

  McFarland, Mr., 185

  McKinley, William, President, 415

  McLoughlin, Charles, 84

  Manufactures, 237

  Marier, Mr., of Oakland, 90

  Markham, C. H., 446, 447

  Marsh, Charles, finances Judah, 15;
    shareholder of Central Pacific Railroad, 19

  Martinez, 141, 319

  Marysville, 29, 141

  Mayne, Charles, 123

  Meeting of associates in New York, 149

  Merchants’ Shipping Association, 304

  Merger, Southern Pacific and Union Pacific, 425-440

  Merritt, Samuel, 87, 88, 91

  Mexican Coast Steamship Company, 226

  Mexican lands in California, 62

  Midgley, J. W., 259

  Mileage, 348

  Miller, John, secretary, Contract and Finance Company, 80

  Milliken, Theodore J., 75

  Mills, D. O., 105, 172

  Milton, 141

  Mojave, 140

  Montague, chief engineer, California Pacific Railroads, 113

  Moon, A. J., 86

  Morton, Paul, 432

  Moss, J. Mora, 5, 7

  Munroe, J. A., 246, 432


  N

  Napa, 224

  Napa Valley Railroad, 107

  Navigation lines, 222-236

  Needles, the, 140, 180, 360

  Nevada, influencing legislation in, 210

  Nevada and California Railroad, 361

  Nevada Central Railroad, 361

  New York Stock Exchange, Central Pacific stock listed, 171

  Newmark, Harris, 129, 130

  Nicaragua Canal Commission, 303

  North American Navigation Company, 308, 310-316

  North Fork, 8

  Northern Division of the Southern Pacific, 141, 144

  Northern Pacific Railroad, 275, 308

  Northern Railroad, 141;
    lease, 142


  O

  Oakdale, 141

  Oakland, 140, 141;
    terminal at, 85-94

  Oakland Water Front Company, 87-94

  Occidental and Oriental Steamship Company, 227-229

  O’Connor bill of 1876, 183

  Ogden, 4, 140, 354

  Oil land, litigation over, 441-453

  Oil rates, 246

  Operating, Southern Pacific, 347-369

  Oregon (See also “California and Oregon Railroad”); connection with,
      152, 276

  Oregon Central Railroad Company, 450

  Oregon Short Line, 276

  Orient, trade with, 227


  P

  Pacheco, 224

  Pacific Improvement Company, 133-135

  Pacific Mail Steamship Company, 225-308;
    agreement with, 229-232;
    arrangements with Panama Railroad, 233-236, 309

  Pacific Oil Company, 448

  Pacific Railroad bill, 8, 47, 48-64

  Pacific steamships, 225-236

  Palisade, 361

  Panama, 227-236

  Panama Canal, 289

  Panama, Isthmus of, 309-312

  Panama Railroad, 233-236, 309, 310

  Park, Trenor W., 226, 234

  Paxon, Joseph S., Treasurer of San Francisco, 35

  Peel, James, finances Judah, 15

  People v. Coon, 35

  Peters, 141

  Phelps, T. G., 28, 48

  Pierce, T. W., 149

  Piper, William A., 32, 216

  Placer county, subscriptions to stock, 41

  Placerville and Sacramento Valley Railroad, 17;
    Judah’s work for, 4-10;
    refusal of Central Pacific to buy, 43;
    Sacramento to Shingle Springs, 141

  Political methods, 199-221

  Population, southern California in 1876, 170

  Portland, Ore., 276

  Powers, Congressman, bill for refunding of debt, 398

  Prince, John D., 177

  Probst, Daniel, 177


  R

  Railroad Commission, United States Pacific, 80, 152, 209, 210;
    report of commissioner on repayment of government debts, 395;
    State Board of Transportation, 181-198, 242

  Rates, as affected by industrial conditions, 238;
    charging what the traffic will bear, 257;
    classifications, 240;
    competing railroad to cut, 318;
    competition of steamship lines, 303-316;
    contract system, 250-255;
    controversy with Traffic Association, 293-316;
    discrimination, 243;
    dissatisfaction with, 282;
    effect of water competition on, 263, 280;
    favoring of interests, 239;
    local, 242, 257-274;
    rebates, 247;
    San Francisco and San Joaquin Valley Railroad, 342;
    State Board adopts new schedule, 1880, 191-194;
    state regulation over local, 317;
    transcontinental, 275-292

  Reagan, Judge, 189

  Red Bluff, 224

  Redding, 141

  Reese, Michael, 117

  Reilly, James, report on refunding of debt, 397

  Reorganization plan, 418-424, 436

  Restraint of trade, government action, 1911, 429;
    testimony in regard, 356

  River traffic, 223

  Robinson, J. P., 5

  Rocky Mountain Coal and Iron Company, 158, 161, 162

  Root, Elihu, 415

  Roseville, 141

  Routes, Dutch Flat, 6;
    Judah’s second report, 1861, 19


  S

  Sacramento, Judah, T. D., in, 9;
    rates, 317;
    route to Benicia route, 5;
    route to San Francisco route, 107;
    route to San Francisco via Benicia, finished, 141;
    route to San José, 84, 140;
    route to Shingle Springs, 141;
    route to Ogden, 140;
    route to Washoe, 8

  Sacramento River bridge to Davisville, 111, 112

  Sacramento Union, 215

  Sacramento Valley Railroad (See “Placerville and Sacramento
      Valley Railroad”)

  Salinas Valley, 141

  Salt Lake, contemplated railroad to, 318

  San Benito Valley, 125

  San Diego, 127, 223

  San Fernando tunnel, 131

  San Francisco, 140, 223, 321;
    meeting at, to object to refunding bill, 402;
    opposes to government aid, 31-40;
    port of, 223;
    rates, 281, 317;
    terminal facilities in, in 1869, 85;
    water-front grants, 94-103

  San Francisco and Great Salt Lake Railroad Company, 318

  San Francisco and Marysville Railroad, 29

  San Francisco, Oakland and Alameda Railroad, purchased by Huntington
    and associates, 103, 140

  San Francisco and San Joaquin Valley Railroad, 44, 81, 140, 317-346;
    China Basin lease, 335-338

  San Francisco and San José Railroad, 48, 84, 120, 121, 123

  San Francisco to Great Salt Lake, 318;
    to Soledad, 141

  San Francisco Bulletin, 98, 101, 182, 306

  San Francisco Chronicle, 215, 219, 264

  San Francisco Examiner, 328, 403

  San Francisco Stock Exchange, Central Pacific stock listed, 171

  San Francisco Times, 98

  San Joaquin Valley, 119, 140

  San Joaquin Valley Railroad (See “San Francisco and San Joaquin Valley
    Railroad”)

  San José, 141

  San Pablo and Tulare Railroad, 141

  San Pedro, 223

  Santa Ana, in 1870, 127

  Santa Clara and Pajaro Valley Railroad, 123

  Santa Fé Railroad (See “Atchison, Topeka and Santa Fé Railroad”)

  Sargent, Congressman, 46, 47

  Scott, Tom, 202, 208

  Securities, advertised, 172;
    first sale of, 177;
    market for, 171

  Shelby, P. P., 357

  Shingle Springs, 141

  Shipping statistics, New York to San Francisco, 1869-1884, 232

  Ships, British vs. American, 294

  Sierra Nevada Mountains, surveys of, 5, 59

  Simmons Hardware Company, 282

  Sinking funds, bond provisions, 376, 383;
    court decisions, 410

  Smith, Mr., Treasurer of the Southern Pacific, 163

  Snow sheds, 67

  Soledad, 141, 179

  Southern Development Company, 135

  Southern Pacific Company of Kentucky, 150

  Southern Pacific Railroad acquires Los Angeles and San Pedro Railroad,
      128;
    bonds of, 370-424;
    construction of, companies organized to build, 132-136;
    early routes, 125-128;
    controlled by Stanford and associates, 122;
    earnings, 347-369;
    El Paso route, 354;
    in 1877, 140;
    incorporated, 120-123;
    grant by Los Angeles, 128;
    growth of, 1871-1878, 141;
    leases of, 143-153;
    northern division, 141, 144;
    operating characteristics, 347-369;
    reorganization plan, 1884, 149, 1913, 436;
    rivalry feared by Stanford, 119;
    route, 123;
    traffic diversion charged, 356;
    Union Pacific gains control of, 428

  Spanish lands in California, 62

  Spence, Mr., 286, 356, 432

  Speyer, James, and Company, contract to sell securities, 147, 177-180,
      414, 417

  Spreckels, Adolph, 326

  Spreckels, Claus, 324-328, 332, 336

  Spreckels, John D., 326, 329

  Sproule, Mr., 356

  Standard Oil Company, 245

  Stanford, Leland, 22, 64, 145, 284;
    acquires control California Pacific Railroad, 109-118;
    against state regulation, 199;
    agreement with California Pacific Railroad, 110;
    biography, 11;
    claim against federal government, 374;
    director, Southern Pacific Railroad, 123;
    finances T. D. Judah, 14;
    lobbying methods, 204-221;
    Oakland Water Front Company, 87, 89, 90, 91;
    objects to freight rates of 1880, 192;
    on rates, 239;
    organizes Contract and Finance Company, 75;
    resigns presidency of Southern Pacific, 218;
    senator from California, 218;
    shareholder of Central Pacific Railroad, 19;
    shares of, 146-149;
    statement regarding Southern Pacific, 122;
    Thurman bill, 385

  Stanford, Philip, 32

  State aid, 30

  State boards (see under names of states, California, Utah, etc.)

  State regulation, arguments against, 199;
    local control, 317;
    railroad commission, 1880-1883, 181-198

  Steinman, Mr., 189

  Stetson, J. B., President, Traffic Association, 295, 297, 318, 359

  Stock, Central Pacific Railroad, 1863-1869, 23;
    county subscriptions, 29;
    California Pacific Railroad Company, 109-118;
    prices of, 365-369

  Stock exchange listings, 171

  Stockholders, 142, 146-149;
    English, 367;
    liability of, 406;
    under reorganization plan, 420

  Stockton, 17, 107, 140, 141, 223, 224, 272, 317, 320

  Stockton and Copperopolis Railroad, 17, 141, 143

  Stockton and Tulare Railroad, 44

  Stockton and Visalia Railroad, 141

  Stockton Independent, 182

  Stoneman, George B., member, State Railroad Board, 1880-1883, 189-198

  Strobridge, engineer, 68

  Strong, Daniel W., 6, 284

  Stubbs, J. C., General Traffic Manager, 244, 249, 250, 252, 253, 255,
      256, 258, 292, 432

  Subsidies (See “Government aid”)

  Summit Station, 65

  Supplies, for construction of Central Pacific, 68

  Sutro, Adolph, 402

  Sutton and Beebe, 304, 306


  T

  Taylor, General, 203

  Tehama, 141

  Temperature, affecting construction, 67

  Terminal Central Pacific Railroad Company, 100

  Terminals, China Basin lease, 335-338;
    facilities in 1869, 85;
    Oakland, 85-94;
    rates, 281;
    San Francisco, 94-103

  Tevis, Lloyd, 88, 123, 162, 167

  Texas Pacific Railroad, 125, 275

  Thayer, S. H., 172, 173

  Thurman act, 380-394, 408

  Tilford, A. E., 245

  Tilford, W. H., 245

  Timber land, litigation over, 441-453

  Towne, Mr., general superintendent, 115, 144, 249, 264

  Tracy, 141

  Traffic, operating characteristics, 347-369;
    rates, 237-274;
    transcontinental, 275-292;
    Traffic Association of California, rate war, 293-316, 318-323, 365

  Traffic Bureau of Utah, 284

  Tres Pinos, 126, 141, 179

  Truckee River, 8, 9, 19

  Tulare, 141

  Tuttle, Mr., 194


  U

  Union Pacific Railroad Company, 49, 230, 275;
    gains control of Southern Pacific, 428;
    reorganization, 1913, 436

  United States v. Kansas Pacific Railway Company, 408

  United States v. Southern Pacific, 444-448

  United States Pacific Railway Commission, 80, 152, 209, 210


  V

  Vallejo, 107, 141, 224

  Vancouver, 276

  Vanderbilt, Cornelius, 226

  Van Sicklen, Mr., 323

  Virginia and Truckee Railroad, 361

  Virginia City, 361

  Visalia, 141

  Votes, purchasing of, 209


  W

  Washoe, 8, 9

  Water routes to California, 222-236, 263, 303-316

  Western Development Company, 132;
    Colton interests in, 157, 158, 159, 165;
    contract with Speyer, 178;
    dividends, 160

  Western Pacific Railroad, consolidation with Central Pacific Railroad,
        84, 140;
    constructed by Contract and Finance Company, 81;
    litigation with San Francisco, 31-40;
    receipts to December, 1869, 21

  Whittier, Fuller and Company, 246

  “Willamette,” steamer, 224

  Wilmington, 141

  Wilson, Mr., real estate transaction by, 195-197

  Wilson, Sir Rivers, 367

  Wilson, S. M., 164

  Woodland to Tehama route, 141


  Y

  Yuma, 140




FOOTNOTES:

[1] The statement in the text is sufficiently accurate as a preliminary
generalization. As will appear later, the road between Sacramento and
Oakland was not built by the Central Pacific, but by certain other
companies of which the Western Pacific and the California Pacific
were the most important. It may also be important for some purposes
to observe that the Southern Pacific system enters Ogden over Union
Pacific tracks, and New Orleans over the tracks of the Illinois Central
Railroad Company.

[2] On the early history of the Central Pacific, see a document printed
by order of the Nevada Senate, entitled “Evidence concerning projected
railways across the Sierra Nevada Mountains from Pacific tide-water in
California, etc., procured by the Committee on Railroads of the First
Nevada Legislature” (Carson City, 1865). This document contains several
valuable reports and some interesting testimony.

[3] Judah’s report of his mission to Washington as a delegate of the
Pacific Railroad Convention is printed in full in the _Sacramento
Union_ for July 25, 1860.

[4] Testimony taken by the United States Pacific Railway Commission,
appointed under an Act of Congress approved March 3, 1887, entitled,
“An act authorizing an investigation of the books, accounts, and
methods of railroads which have received aid from the United States,
and other purposes.” (50th Congress, 1st Session, Senate Executive
Document No. 51, pp. 2838-39, testimony D. W. Strong.) Hereafter
referred to as United States Pacific Railway Commission.

[5] The expenses of this preliminary investigation were provided by
small subscribers around Dutch Flat. A paper dated at Dutch Flat,
June 26, 1860, contains 47 names, including that of D. W. Strong. No
subscription was for over $15, and only nine were for as much as $10
apiece. (United States Pacific Railway Commission, p. 2959.)

[6] Judah manuscript, letter of Mrs. Anne Judah.

[7] Evidence concerning projected railways across the Sierra Nevada
Mountains, _sup cit._, testimony L. L. Robinson.

[8] United States Pacific Railway Commission, pp. 2960-61, testimony D.
W. Strong.

[9] _Sacramento Union_, January 9 and 10, 1861.

[10] _Sacramento Union_, January 4, 1861.

[11] Stanford’s election to the United States Senate was resented
by Huntington, and led eventually to an open breach between the two
men. It is not improbable, however, that Stanford’s friends, and not
Stanford himself, were responsible for the latter’s candidacy. It would
not have been difficult to persuade a man of Stanford’s temperament
that he was performing a public service in allowing his name to be used.

[12] Crocker said of his own personal appearance during the sixties:
“While I was building the road, I weighed nearly all the time 264-5
pounds; at one time, in China, I weighed about 274 pounds; the Chinaman
who weighed me called me a 4-_picul_ man--a ‘_picul_’ being 66⅔
pounds.... While I was building the road, I weighed the first year,
244, which increased to 265, and when I finished the work, was weighing
that. I am 5 feet 10¾ inches tall.” (Crocker manuscript, p. 63.)

[13] Huntington manuscript, p. 36. The Bancroft Library of the
University of California possesses notes of interviews with a number of
men prominent in California history collected by H. H. Bancroft or his
representatives. In some cases these notes are very full and informing.
They will be referred to in the present volume as “Huntington
manuscript,” “Crocker manuscript,” etc. See also Redding, “Sketch of
the Life of Mark Hopkins” (San Francisco, 1881).

[14] Huntington manuscript, pp. 9-10.

[15] Crocker manuscript, pp. 28-29. See also Hittell, “History of
California,” Vol. 4.

[16] Report of a committee of the board of directors, Sacramento Valley
Railroad Company, August 7, 1855.

[17] Articles of association and by-laws of the Sacramento Valley
Railroad Company, together with an estimate of the gross receipts of
the road when in operation, New York, 1853.

[18] Engineer’s report of a preliminary survey of the Stockton and
Copperopolis Railroad with estimates of cost and traffic, October, 1862.

[19] Report of the chief engineer on the survey, cost of construction,
and estimated revenue of the Placerville and Sacramento Valley Railroad
of California, San Francisco, 1863.

[20] Report of President Moore to stockholders, 1873.

[21] Report of the chief engineer on the preliminary survey, cost of
construction, and estimated revenue of the Central Pacific Railroad of
California, etc., October 22, 1862; report of Acting Chief Engineer
Montague, October 8, 1864. Reprinted in “Evidence concerning projected
railways across the Sierra Nevada Mountains,” _sup. cit._

[22] Report of the chief engineer on the preliminary survey, cost of
construction, etc., October 22, 1862 (October 1, 1861), _sup. cit._

[23] United States Pacific Railway Commission, p. 3774, testimony C. P.
Huntington.

[24] Complaint of Samuel Brannan, June 21, 1870. Filed in the case
of Brannan v. Central Pacific Railroad, in the District Court of the
Fifteenth Judicial District of the State of California.

[25] Bancroft, “History of California,” Vol. 7. p. 545, note. The
assessed value of the associates’ property in Sacramento County in 1861
was $118,035.

[26] United States Pacific Railway Commission Report, p. 87.

[27] United States Pacific Railway Commission, p. 3421, testimony M. D.
Boruck.

[28] Crocker manuscript, p. 32.

[29] United States Pacific Railway Commission, pp. 2630-31, testimony
Leland Stanford.

[30] _Ibid._, p. 2652. testimony Leland Stanford. Stanford and his
associates bought stock in 1871 for which they paid $400 or $500 a
share, but Stanford says that this was to quiet litigation which he
described as blackmail.

[31] Ellen M. Colton v. Leland Stanford _et al._, in the Superior Court
of the State of California in and for the County of Sonoma, 1883.
Hereafter referred to as “Colton case.” The record in this proceeding
contains much valuable information relative to the history of the
Southern Pacific and the activities of the Huntington-Stanford group.

[32] United States Pacific Railway Commission, p. 3493, testimony D. O.
Mills.

[33] Crocker manuscript, pp. 29-30.

[34] United States Pacific Railway Commission, p. 2731, testimony
Leland Stanford.

[35] _Ibid._, p. 2399, testimony A. Cohen; p. 2767, testimony Leland
Stanford.

[36] Colton case, pp. 948-49, Huntington to Colton, October 8, 1874.

[37] Tinkham, “History of Stockton,” p. 356; _San Francisco Chronicle_,
June 13, 1874.

[38] Laws of California, 1852, Ch. 77.

[39] _Ibid._, 1857, Ch. 243.

[40] _Ibid._, 1858, Ch. 300.

[41] _Ibid._, 1859, Ch. 241.

[42] _Ibid._, 1859, Ch. 263, 264.

[43] _Ibid._, 1859, Ch. 262.

[44] Laws of California, 1863, Ch. 77

[45] _Ibid._, 1863, Ch. 125.

[46] _Ibid._, 1863, Ch. 207.

[47] _Ibid._, 1863, Ch. 310.

[48] _Ibid._, 1863, Ch. 209. The value of these privileges has been
estimated at $200,000.

[49] _Ibid._, 1863, Ch. 291.

[50] _Ibid._, 1863, Ch. 314.

[51] _Ibid._, 1864, Ch. 320. Twenty years later the quarries were still
undelivered.

[52] Constitution of the State of California, Arts. VIII, XI, Sec. 10.

[53] People v. Pacheco, 27 Cal., 176 (1865).

[54] Angel. “History of Placer County,” 1882, p. 280.

[55] “The Great Dutch Flat Swindle!--An address to the Board of
Supervisors, Officers and People of San Francisco,” 1864.

[56] French v. Teschemaker, 24 Cal. 518 (1864).

[57] Laws of California, 1864, Ch. 344.

[58] California Supreme Court Records, Vol. 38, case of People v. Coon.

[59] California Supreme Court Records, Vol. 38, p. 98, _sup. cit._

[60] People v. Coon, 25 Cal. 635 (1864).

[61] People v. Supervisors, 27 Cal. 655 (1865).

[62] United States Pacific Railway Commission, pp. 3610-11, testimony
Leland Stanford.

[63] _Ibid._, p. 3464, testimony E. H. Miller.

[64] Angel, “History of Placer County,” pp. 158-65.

[65] Fankhauser, “Financial History of California,” p. 299 _ff._

[66] Report of the chief engineer upon recent surveys, progress of
construction, and an approximate estimate of cost of first division of
50 miles of the Central Pacific Railroad of California, July 1, 1863.

[67] Letter of L. L. Robinson, chief engineer, to Chas. A. Sumner and
Henry Epstein, Chairmen Committees on Railroads, Legislature of Nevada,
Sacramento, February 3, 1865. Printed in a pamphlet entitled “Evidence
concerning projected railways across the Sierra Nevada Mountains,”
_sup. cit._

[68] Stanislaus, Merced, Fresno, Tulare, and Kern counties. In Kern
County the bond issue was limited to $480,000 and in Stanislaus to
$180,000.

[69] Letters of Governor Haight, on the constitutional power of the
legislature to authorize cities and counties to donate bonds to
railroad corporations, Sacramento, 1870.

[70] Persons who desire details of the controversies in Congress prior
to the outbreak of the Civil War may consult Haney, “Congressional
History of Railways,” or Davis “History of the Union Pacific.”

[71] Laws of California, 1852, p. 276. See also resolutions passed May
17, 1853 (Laws of 1853, p. 315); May 13, 1854 (Laws of 1854, p. 224);
February 25, 1854 (Laws of 1854, p. 227); March 19, 1857 (Laws of 1854,
p. 370); April 1, 1859 (Laws of 1859, p. 390); April 15, 1859 (Laws of
1859, p. 394). In 1859 the legislature adopted a memorial to the same
general effect (Laws of 1859, p. 395).

[72] The proceedings of the Pacific Railroad Convention of 1859 were
published in the _San Francisco Alta_, September 21-26, 1859, and in a
special supplement of the same paper. See also _The Pacific_, October
6, 1859, and other California papers. The convention was attended by
delegates from Oregon and Washington. It thought that the Pacific
Railroad should run from the city of San Francisco through the counties
of San Mateo, Santa Clara, and Alameda, to the city of Stockton, thence
over the Sierras by a central route. It favored also a branch to Puget
Sound. Resolutions were adopted contemplating an issue of $15,000,000
in bonds by the state of California to cover the cost of railroads
within that state, and an issue of an unspecified amount, presumably
$5,000,000 by the state of Oregon. In February, 1860, an adjourned
meeting of the same convention was held at Sacramento. Considerable
opposition developed at this meeting to the proposal to bond the
state for The vote taken at San Francisco was reconsidered, and a
new resolution passed, recommending state aid to a transcontinental
railroad to the extent of not more than $15,000,000, but proposing
that security be taken for the advances made so that the sum should
not become a state charge. In other words, this idea of a loan was
substituted for that of a donation. (_Sacramento Union_, February 7-11,
1860.)

[73] Report of the chief engineer of the Central Pacific Railroad
Company of California, on his operations in the Atlantic states,
Sacramento, 1862. It should be added that Huntington himself was in
Washington while the Act of 1864 was being debated. Cornelius Cole,
one time senator from California, says of Huntington’s activity at
this time: “During the pendency of this legislation [Act of 1864],
C. P. Huntington spent much of his time in Washington. Many of the
amendments were suggested by him, and it gave me much satisfaction to
forward his views. In former years in Sacramento we had been in close
political fellowship, besides ... I had been associated with him and
others in the organization of the Central Pacific Railroad Company....”
(Cornelius Cole, Memoirs, pp. 179-80.)

[74] 12 United States Statutes 489 (1862).

[75] United States v. Southern Pacific Co., Record, pp. 1654-57.

[76] Report of chief engineer, Central Pacific Railroad of California,
on his operations in the Atlantic states, 1862.

[77] 13 United States Statutes 356 (1864).

[78] For a full digest of the Acts of 1862 and 1864, and for an account
of the Congressional history involved, the reader is referred to Haney,
“A Congressional History of Railways.” Senator A. A. Sargent asserted
in 1878 that he, Sargent, wrote the acts himself. (45th Congress, 2d
Session, Congressional Record, Vol. 7. p. 2024.)

[79] Huntington manuscript, pp. 78-79. The act referred to appears in
14 United States Statutes 78-79.

[80] Report of the chief engineer on the preliminary survey of the
Central Pacific Railroad, etc., October 22, 1862.

[81] United States v. Union Pacific, 91 U. S. 72 (1875).

[82] 12 United States Statutes 489 (1862), Sec. 6.

[83] United States Pacific Railway Commission, p. 2562, testimony W. H.
Mills.

[84] The Western Pacific had received in addition two patents conveying
27,505.93 acres, but these lands were assigned by the Central Pacific
to outside parties.

[85] United States Pacific Railway Commission, pp. 3569-70.

[86] United States v. Southern Pacific Railroad Co., 146 U. S. 570, 593
(1892).

[87] Newhall v. Sanger, 92 U. S. 761 (1875).

[88] Kansas Pacific v. Dunmeyer, 113 U. S. 629 (1885).

[89] Hastings and D. R. Co. v. Whitney, 132 U. S. 357 (1889); Whitney
v. Taylor, 158 U. S. 85, 92 (1895); Bardon v. Northern Pacific, 145 U.
S. 535 (1892).

[90] Menotti v. Dillon. 167 U. S. 703 (1897).

[91] Central Pacific Railroad case, 3 L. D. 264.

[92] 9 United States Statutes 631 (1851).

[93] United States Pacific Railway Commission, p. 2412, testimony W. H.
Mills.

[94] 1863 to 1913 “An Account of the Ceremonies Attending the
Inauguration of the Work of Construction of the Central Pacific.”
Interesting details of the course of construction of the Central and
Union Pacific railroads are given in Carter, “When Railroads Were New,”
and in Sabin, “Building the Pacific Railway.”

[95] Report of the chief engineer upon recent surveys of the Central
Pacific Railroad of California, July, 1863.

[96] _Ibid._, December, 1865, and July, 1869.

[97] _Ibid._, October 8, 1864.

[98] _Ibid._, December, 1863.

[99] United States Pacific Railway Commission, pp. 2581-82, testimony
Arthur Brown, superintendent of bridges and buildings.

[100] United States Pacific Railway Commission, p. 2579, statement
William Hood; pp. 2580-81, 3150, statement J. H. Strobridge; pp.
2576-77, statement L. M. Clement; p. 3055, testimony E. H. Miller; pp.
2581-82, statement Arthur Brown.

[101] United States Pacific Railway Commission, p. 2523, testimony
Leland Stanford. On the other hand, there were abundant supplies of
timber along the line, and the price of machinery declined after the
war.

[102] United States Pacific Railway Commission, pp. 3139-41, testimony
J. H. Strobridge. The following table is prepared from Mr. Strobridge’s
testimony:


NUMBER OF MEN EMPLOYED IN CENTRAL PACIFIC CONSTRUCTION, 1864-69, AND
RATE OF PAY

         Number of                    Number of
  Year   Chinamen       Rate of pay   White Men      Rate of pay

  1864   Very few                     1,200           $30 a month
  1865     7,000        $30 a month   2,500            35 ”   ”
  1866    11,000         35 ”  ”      2,500-3,000      35 ”   ”
  1867    11,000         35 ”  ”      2,500-3,000
  1868     5,000-6,000                2,000-3,000
  1869     5,000                      1,500-1,600


[103] Huntington was always openly in favor of unrestricted Chinese
immigration. He said that exclusion deprived the United States of
tractable and cheap labor, which was needed to build up the desert
places of the country. He believed the fanatical hostility to the
Chinese was limited to California, where, he asserted, the Irish
Catholics swung the balance of power. (_San Francisco Examiner_,
January 4, 1889.)

[104] United States Pacific Railway Commission, p. 3642, testimony
Charles Crocker. A letter from Mr. Judah to Dr. Strong, dated July 10,
1863, suggests that it was Judah’s influence which prevented Crocker
from building sections 19 to 30. Judah wrote: “I have had a big row
and fight on the contract question, and although I had to fight alone,
carried my point and prevented a certain gentleman from becoming
a further contractor on the Central Pacific Railroad at present.”
(_Ibid._, p. 2966, testimony Strong.) This was probably only one of a
number of differences of opinion between the Stanford-Huntington group
and the original promoters of the Central Pacific, led by Judah. It was
only after Judah’s death that the first-named interests were able to
dominate the situation completely.

[105] United States Pacific Railway Commission, p. 3769, testimony
Collis P. Huntington.

[106] _Ibid._, pp. 2621-26, testimony Leland Stanford.

[107] United States Pacific Railway Commission, p. 3048, testimony E.
H. Miller. For a general discussion of the relative advisability of
construction by contract as opposed to construction by the Central
Pacific itself, see an earlier report by Stanford, Hopkins, and Miller.
(_Ibid._, pp. 3045-46.) This report made the point that the letting of
contracts to a responsible contractor would raise the credit of the
railroad.

[108] United States Pacific Railway Commission, p. 3436.

[109] _Ibid._, p. 3157, testimony J. H. Strobridge.

[110] The actual cost of the whole work to the Central Pacific
depended upon Mr. Crocker’s reports upon the work which he did. There
is no evidence that the company exercised any supervision over these
reports, although it was to the advantage of the construction company
to describe as much of the work as possible as heavy; but on the other
hand, Mr. Crocker’s engineers testified that Crocker never attempted
to influence them in their estimates. (United States Pacific Railway
Commission, p. 3207, testimony L. Clement.)

[111] United States Pacific Railway Commission, p. 3511, testimony
Richard F. Stevens.

[112] United States Pacific Railway Commission, p. 2636, testimony
Leland Stanford.

[113] _Ibid._, p. 3661, testimony Charles Crocker.

[114] Colton case, pp. 266-68, deposition of Collis P. Huntington.

[115] United States Pacific Railway Commission, p. 2640, testimony
Leland Stanford.

[116] _Ibid._, p. 3661, testimony Charles Crocker; p. 2637, testimony
Leland Stanford.

[117] United States Pacific Railway Commission, pp. 3436-37.

[118] United States Pacific Railway Commission, p. 2897, testimony W.
E. Brown; p. 3062, testimony E. H. Miller; pp. 3511-20, testimony R. F.
Stevens.

[119] United States Railway Commission, pp. 2712-17, testimony D. Z.
Yost.

[120] _Ibid._, pp. 2875-92, testimony John Miller; pp. 3028-33,
testimony N. Greene Curtis.

[121] There is some evidence that $6,000,000 of this cash was not
strictly cash, but took the form of notes of the Central Pacific
Railroad which were ultimately settled in land-grant bonds at $86.50.
(United States Pacific Railway Commission Report, p. 75.) Mr. Crocker
says that the interest on a portion of these bonds paid his expenses on
a trip to Europe. (_Ibid._, p. 3668, testimony Charles Crocker.)

[122] United States Pacific Railway Commission Report, pp. 74-75.

[123] United States Pacific Railway Commission, pp. 2655-56, testimony
Leland Stanford; p. 3668, testimony Charles Crocker. Mr. Huntington
said in 1873 that he thought his dividend amounted to about $1,000,000,
but in 1887 he admitted that he had earlier mistaken the facts.
(_Ibid._, pp. 4026-28, testimony C. P. Huntington.)

[124] United States Pacific Railway Commission, pp. 2977-88, testimony
W. E. Brown.

[125] 1863-1913. An Account of the Ceremonies Attending the
Inauguration of the Work of Constructing the Central Pacific.
_Scribner’s Magazine_ for August, 1892, contains an article describing
the completion of the Central Pacific and also a reproduction of the
well-known painting, “The Joining of the Central and Union Pacific”
(“The Last Spike”).

[126] The indenture making this assignment, dated October 31, 1864,
is printed in full in the appendix to the journals of the Senate
and Assembly of the 20th Session of the Legislature of the State of
California, Vol. 6 (1874), No. 2. pp. 27-29. It covers not only the
right to build and operate a railroad between Sacramento and San José,
but also “all the rights, grants, donations, rights-of-way, loan of the
credit of the Government of the United States, or the bonds thereof.”

[127] United States Pacific Railway Commission, p. 2785, testimony
Leland Stanford.

[128] Laws of California, 1852, Ch. 107.

[129] City of Oakland v. Oakland Water Front Company, transcript of
testimony, p. 649, deposition Horace W. Carpentier; p. 1755, testimony
A. J. Moon.

[130] City of Oakland v. Oakland Water Front Company, transcript of
testimony, pp. 704-5, deposition Horace W. Carpentier; Wood, “History
of Alameda County”; _San Francisco Examiner_, June 26, 1892, July 3,
1892.

[131] Moon, one of the trustees who approved the grant, was afterwards
taken into Carpentier’s employ. Adams, another trustee, secured the
property now known as the “Adams Wharf” to the east of the narrow-gauge
bridge.

[132] City of Oakland v. Carpentier, 13 Cal. 540 (1859); 21 Cal. 642
(1863). The Oakland ordinances were ratified and confirmed by act of
the California legislature passed May 15, 1861. (Laws of California,
1861, Ch. 377.)

[133] City of Oakland v. Oakland Water Front Company, transcript on
appeal, pp. 652-54, deposition Horace W. Carpentier.

[134] Laws of California, 1868, Ch. 230.

[135] City of Oakland v. Oakland Water Front Company, transcript of
testimony, _sup. cit._ pp. 976-80.

[136] City of Oakland v. Oakland Water Front Company, transcript of
testimony, pp. 657-64, deposition Horace W. Carpentier.

[137] See the Ordinance of the City of Oakland, No. 302 (April 2,
1868). An excellent account of these transactions is given in an
unpublished manuscript in the University of California Library,
prepared by Stephen S. Barrows, one-time student in the University of
California. It is of some interest to observe that among the direct
beneficiaries of the agreements cited were Messrs. Carpentier, Felton,
and Merritt, all three at one time or other mayors of Oakland. Mr.
Merritt was mayor at the time ordinances Nos. 300, 301, and 302 were
passed. The compromise described was effected under authority of an act
of the California legislature dated March 21, 1868.

[138] By ordinance passed August 31, 1867, the Oakland City Council
voted to pay Mr. Felton a fee equal to 15 per cent of all the property
recovered by the city in the water-front litigation. (Transcript of
testimony, _sup. cit._ p. 759.) Mr. Merritt was subsequently accused
of having promoted the settlement between the city of Oakland and the
Oakland Water Front Company in order to derive a pecuniary profit for
himself. In 1869 the city council of Oakland authorized the appointment
of a committee of three to ascertain by what title Mr. Merritt held
certain water-front property near the foot of Broadway in Oakland. On
report of the committee the council exonerated Mr. Merritt. (_Ibid._,
pp. 1406-7, 1410-21.)

[139] City of Oakland v. Oakland Water Front Company, 118 Cal. 160
(1897).

[140] Western Pacific Railway Company v. Southern Pacific Company,
151 Fed. 376 (1907). The court also pointed out in the decision that
although the low-tide line was projected across the mouth of the
estuary for the purpose of determining the boundary of Oakland, this
should not be done in ascertaining the limit of the railroad grant.

[141] The boundaries are set forth in the _San Francisco Times_ of
March 7, 1868. As later amended and confined to the area north of Point
Avisadero, they are described in the _Daily Alta_ of March 14, 1868.

[142] Appendix to journals of Senate and Assembly of the California
Legislature, 17th Session, Vol. 3, 1868.

[143] _San Francisco Bulletin_, March 7, 1868.

[144] _Daily Alta California_, March 10, 1868.

[145] _San Francisco Times_, March 13, 1868.

[146] See resolutions of a meeting of San Francisco business men in
March, 1868, recommending that the legislature grant 150 acres each
to the Central Pacific and Southern Pacific; and the admission of the
Southern Pacific that it could get along with 250 acres.

[147] Laws of California, 1867-68, Ch. 543.

[148] Laws of California, 1867-68, Ch. 386. A lively account of the
circumstances attending the passage of the Goat Island bill through
the legislature was published by an old newspaper man, Sam Leake by
name, in the _San Francisco Bulletin_, March 17 and 19, 1917. There is,
however, no way of verifying this story, and it cannot be accepted on
Mr. Leake’s authority alone.

[149] Laws of California, 1869-70, Ch. 381.

[150] Mr. Stanford has asserted that the whole trouble was caused by
six gentlemen, three of whom had interests near Ravenswood, where it
was thought that the Central Pacific might cross, and three of whom had
interests in Sausalito. He says he was informed by a member of Congress
that he could have had necessary legislation in Congress for $10,000.
This refers to the campaign of 1875-76. (United States Pacific Railway
Commission, pp. 3170-71, testimony Leland Stanford.)

[151] United States Pacific Railway Commission, pp. 3496-3500,
testimony D. O. Mills.

[152] The California and Oregon Railroad Company was subsidized
by Congress by Act of July 25, 1866, to build from a point on the
Central Pacific Railroad to the Oregon boundary, where it was to meet
a railroad coming south from Portland. Tracks reached Chico, July 2,
1870. In 1870, the California and Oregon was consolidated with the
Central Pacific. In 1872 it reached Redding, and on October 5, 1887,
the state line. The federal legislation relating to the California and
Oregon Railroad is notable for the liberality of the land grant made.

[153] This branch was known as the San Joaquin Valley Railroad.
The company bearing this name was incorporated in 1868. Stanford,
Huntington, Hopkins, Charles, and E. B. Crocker were directors. In 1870
it was consolidated with the Central Pacific. Stanford declared in 1887
that the trunk lines up the San Joaquin and Sacramento valleys were the
most important factors in the Central Pacific’s local business.

[154] United States Pacific Railway Commission, pp. 3628-29, testimony
J. P. Jackson; p. 3613, testimony Leland Stanford.

[155] United States Pacific Railway Commission, pp. 3366-67, testimony
J. C. Stubbs.

[156] _Ibid._, pp. 3628-29, testimony J. C. Jackson.

[157] _San Francisco Bulletin_, November 29, 1869.

[158] Main v. Central Pacific, argument of Harvey S. Brown, of counsel
for the defendants, 1886.

[159] _San Francisco Chronicle_, August 16, 1874, statement Milton
S. Latham. This was the bridge over which the California Pacific was
entering Sacramento.

[160] Main v. Central Pacific. Statement of facts. The closing argument
of L. E. Chittenden, of counsel for plaintiffs, 1886. See also _San
Francisco Chronicle_, August 16, 1874, statement of Milton S. Latham.

[161] Opponents of the Central Pacific described the transaction in
1886 as follows: “Huntington, the incarnation of this hostility, whose
name was an inspiration of personal aversion, entered the state on the
24th of June; and the suggestion is, that the Court shall believe that
under these circumstances, the directors of the California Pacific
loaded their staggering trust with a new debt of $1,600,000, on which
interest should commence at once, to pay for a second track, not to
be finished until about two years, at the small end of their railroad
where there was no need of it, at a point where it was doubtful if one
track would stand—and contracted with their hereditary enemies to do
it—all without the remotest reference to any purchase of, or intended
future control of the corporation!”

[162] Colton case, pp. 3214-15.

[163] _San Francisco Chronicle_, August 16, 1874. According to A. A.
Cohen, a San Francisco lawyer one time in the employ of the Central
Pacific and intimately acquainted with its policies, Stanford told
Latham that he, Stanford, was extremely sorry that the Reese suit
had been commenced, and that it would not have been if he had known
anything at all about it. Cohen, however, made public the following
letter, written by Stanford the day before the suit was brought, which
puts an altogether different face upon the matter. Stanford wrote as
follows:

  “July 24th, 1874.

  DEAR COHEN:

 Regret on your own account that you are so ill. Send Mr. Yost over
 particularly to report, and carry this message. Michael Reese is
 willing to commence suit as stockholder. Please transfer to him 150
 shares of your stock in the California Pacific. Hoping to hear a more
 favorable account of your health, I remain,

  Yours truly,

  STANFORD.”

The inference from this letter is, of course, that the Reese suit was
brought at Stanford’s own instance.

[164] United States Pacific Railway Commission, pp. 3936-42, testimony
L. E. Chittenden.

[165] United States Pacific Railway Commission, p. 3614, testimony
Leland Stanford.

[166] On December 2, 1865. United States v. Southern Pacific,
transcript of testimony, p. 1284. Hereafter referred to as “United
States v. Southern Pacific.” This company was organized under the
general California statute relating to incorporations approved May 20,
1861.

[167] 14 United States Statutes 292 (1866). An act granting lands to
aid in the construction of railroad and telegraph line from the states
of Missouri and Arkansas to the Pacific Ocean. The provisions of this
act were promptly accepted by the Southern Pacific. See United States
v. Southern Pacific, pp. 1672-73.

[168] 15 United States Statutes 187 (1868).

[169] _San Francisco Bulletin_, March 14, 1868.

[170] United States v. Southern Pacific, Defendant’s Exhibit No. 23.
Neither Huntington nor Stanford signed the articles of association
of 1870 as holders of stock of the consolidating companies. This may
merely mean, however, that the stock of these companies was placed
under other names for purposes of convenience.

[171] The change of route was authorized by Congressional resolution,
dated June 28, 1870 (16 United States Statutes 382 [1870].) It should
be observed that the so-called Mussel Slough “massacre” resulted
from a dispute over the ownership of land south of Hanford, Tulare
County, which lay along the line of railroad as designated in 1867,
but not along that proposed in 1865. It appears that a number of
persons settled upon and improved tracts near Hanford before the
railroad applied for patent to land in this vicinity, but after the
Southern Pacific had filed the map showing its intended route with the
Commissioner of the General Land Office in 1867, and after lands along
this route had been withdrawn.

When the railroad secured title it offered to sell this occupied land
to the parties who had settled upon it, but at prices which were much
above those current for unimproved farm land. That is to say, the
railroad asked from $11 to $35 an acre, instead of the customary $2.50
to $5 an acre. The settlers understood from this that the company
was trying to make them pay for improvements which they themselves
had made, and resorted to active opposition. In 1876 the settlers
petitioned Congress to restore a portion of the land grant in question
to the public domain, on the ground that no railroad had ever been
constructed along it.

In 1881 the railroad attempted to take forcible possession of two
pieces of the disputed land. There was resistance, and in the shooting
which followed, eight men were killed, including six settlers. This was
the “massacre.” There seems to be no question but that the railroad
possessed legal title to the Tulare County property. The weakness of
its position lay in the fact that it was attempting to build a railroad
in one place and to secure a land grant in another—a procedure never
contemplated by Congress, and one not unlikely to lead to hostile
legislation. Eventually the railroad title was sustained, and the land
sold by the company, though at reduced prices.

[172] 16 United States Statutes 573 (1871).

[173] See on this matter Colton case, p. 1621, Crocker to Colton,
February 12, 1875.

[174] Guinn, “A History of California,” pp. 254, 276.

[175] Ninth Census of the United States, 1870.

[176] Newmark, “Sixty Years in Southern California.” The Los Angeles
and San Pedro was built to Wilmington only in 1869. It was not extended
to San Pedro until 1881.

[177] Ranchers near Los Angeles feared lest the construction of the
railroad would do away with horses and the demand for barley.

[178] “Illustrated History of Los Angeles County” (Chicago, 1889), p.
136.

[179] Newmark, “Sixty Years in Southern California,” pp. 496-97.

[180] Articles of incorporation are printed in Colton case, pp.
5475-77, testimony F. S. Douty. See also _ibid._, pp. 2993-95,
testimony Reynolds. The material and accounts for repairs possessed
by the Contract and Finance Company were turned over to the Western
Development Company at this time at a valuation of $431,530.53.

[181] Colton case, pp. 362-65, 7806-22, testimony F. S. Douty. The
actual payments were, as the result of certain adjustments, slightly
less.

[182] United Slates Railway Commission, p. 2701, testimony F. S. Douty.

[183] United States v. Southern Pacific, pp. 553-55, testimony
Redington.

[184] _Ibid._, pp. 533-35, testimony Luckett.

[185] Colton case, p. 7637, Colton to Huntington.

[186] Colton case, pp. 231-32, testimony F. S. Douty; United States
Pacific Railway Commission, pp. 3626–27, testimony F. S. Douty.

[187] United States Pacific Railway Commission, p. 2832, testimony
Leland Stanford.

[188] United States Pacific Railway Commission, p. 2994, testimony C.
F. Crocker.

[189] Colton case, pp. 7646-54, 1586.

[190] _Ibid._, pp. 9669-73, testimony Charles Crocker.

[191] _San Francisco Examiner_, October 8, 1889.

[192] Jay Gould once testified that Huntington had offered an interest
in the Southern Pacific to himself and his Union Pacific associates,
and that they had offered to take an interest, provided that Huntington
would cut the Southern Pacific bonds outstanding from $40,000 to
$25,000 per mile, and throw the stock in. Gould thought that $25,000
per mile was all that the road had cost. (Colton case, deposition Jay
Gould, pp. 8, 23-24.)

It should be observed that a great deal of the mileage now owned by the
Southern Pacific Railroad was not originally built by that company,
but by or for small separate companies, most of them organized by
the Huntington group, which were later consolidated with the parent
corporation. The complete list of these consolidations is as follows:

October 12, 1870. Consolidation of the Southern Pacific Railroad
Company, the San Francisco and San José Railroad Company, the Santa
Clara and Pajaro Valley Railroad Company, and the California Southern
Railroad Company.

August 19, 1873. Consolidation of the Southern Pacific Railroad Company
and the Southern Pacific Branch Railroad Company.

December 18, 1874. Consolidation of the Southern Pacific Railroad
Company and the Los Angeles and San Pedro Railroad Company.

May 14, 1888. Consolidation of the Southern Pacific Railroad Company,
the San José and Almaden Railroad Company, the Pajaro and Santa Cruz
Railroad Company, the Monterey Railroad Company, the Monterey Extension
Railroad Company, the Southern Pacific Branch Railway Company, the San
Pablo and Tulare Railroad Company, the San Pablo and Tulare Extension
Railroad Company, the San Ramon Valley Railroad Company, the Stockton
and Copperopolis Railroad Company, the Stockton and Tulare Railroad
Company, the San Joaquin Valley and Yosemite Railroad Company, the
Los Angeles and San Diego Railroad Company, the Los Angeles and
Independence Railroad Company, the Long Beach, Whittier and Los Angeles
County Railroad Company, the Long Beach Railroad Company, the Southern
Pacific Railroad Extension Company, and the Ramona and San Bernardino
Railroad Company.

April 13,1898. Consolidation of the Southern Pacific Railroad Company,
the Northern Railway Company, the Northern California Railway Company,
and the California Pacific Railroad Company.

March 7, 1902. Consolidation of the Southern Pacific Railroad Company
(of California), the Southern Pacific Railroad Company (of Arizona),
and the Southern Pacific Railroad Company of New Mexico.

[193] Colton case, pp. 1522-24, 1529.

[194] United States Pacific Railway Commission, pp. 2791-92, testimony
Leland Stanford.

[195] Colton case, pp. 1524-29.

[196] _Ibid._, pp. 1510-13.

[197] United States Pacific Railway Commission, p. 3445, testimony E.
H. Miller, Jr.

[198] For terms of leases see especially United States Pacific Railway
Commission, pp. 3443-53, testimony of E. H. Miller. Jr.

[199] United States v. Southern Pacific, p. 708, testimony Julius
Kruttschnitt. This was a case brought in 1915 before the District Court
of the United States for the District of Utah in order to compel the
separation of the Central Pacific from the Southern Pacific railroad.
The suit was brought under the Anti-Trust Law of 1890, and in the
course of the testimony the history of the Southern Pacific was very
fully brought out.

[200] Colton case, pp. 814-26.

[201] Colton case, pp. 1643-44, Huntington to Colton, May 28, 1875.

[202] _Ibid._, pp. 1615-16, Huntington to Colton, December 10, 1874.

[203] United States v. Southern Pacific, p. 655, testimony Timothy
Hopkins.

[204] United States v. Southern Pacific, pp. 1191-96, testimony James
Speyer.

[205] _Ibid._, pp. 613-18, testimony George T. Klink.

[206] _Ibid._, p. 645, testimony George R. Jackson.

[207] _Ibid._, p. 1695, Defendant’s Exhibit No. 21.

[208] _Ibid._, p. 871, inventory of Charles Crocker estate, filed July
12, 1889.

[209] United States Pacific Railway Commission, p. 2657, testimony
Leland Stanford.

[210] United States v. Southern Pacific, pp. 615, 645, testimony George
T. Klink.

[211] United States v. Southern Pacific, p. 666, testimony Timothy
Hopkins.

[212] United States v. Southern Pacific, pp. 1688-1702, Defendant’s
Exhibit No. 21.

[213] United States v. Southern Pacific, pp. 621-22, testimony George
T. Klink. It has been suggested that Huntington had the charter of the
Southern Pacific Company taken out in Kentucky, in order to enable the
company to conduct its suits in California in the federal and not in
the state courts.

[214] J. M. Bassett said of the action of Kentucky in granting a
charter to the Southern Pacific Company, that it amounted to granting
a letter of marque to that company on the condition that it make no
reprisals in Kentucky. He argued that the lease of the Central Pacific
was defective because its duration was to be greater than the life of
the Central Pacific under its articles of incorporation, because the
liability of Southern Pacific stockholders was not unlimited as in the
case of California corporations, and because the rule of comity under
which foreign corporations operated in California could not be expected
to apply to a corporation which was forbidden to do business in the
state of its nativity. None of these objections, however, proved to
have any practical importance.

[215] United States Pacific Railway Commission, pp. 2812-13, testimony
Leland Stanford.

[216] The following table shows the result of operation under the lease
for each year from 1885 to 1893:

NET PROFITS AND RENTALS CENTRAL PACIFIC RAILROAD, 1885-93

                               Net Profit      Rental Paid to    Excess of
                            Central Pacific   Central Pacific   Rental over
         Period             Railroad Company  Railroad Company   Net Profit
  April to December, 1885     $1,482,033          $1,482,033    ..........
          1886                 1,324,998           1,324,998    ..........
          1887                 1,086,733           1,200,000      $113,267
          1888                   962,830           1,360,000       397,170
          1889                 1,035,418           1,360,000       324,582
          1890                   999,223           1,360,000       360,777
          1891                 2,144,425           2,144,425    ..........
          1892                   861,874           1,360,000       498,127
          1893                   784,717           1,360,000       575,283
                              ——————————          ——————————     —————————
          Totals             $10,682,251         $12,951,456    $2,269,206
                              ══════════          ══════════     ═════════

Brice Report, 53d Congress, 3d Session, January 28, 1895 (Senate
Report, No. 830, Serial No. 3288).

[217] Colton case, pp. 8839-42, testimony Charles Crocker. A discussion
of the relations between Colton and the Huntington group which differs
from that given in the text is presented in Russell, “Stories of the
Great Railroads,” 1914.

[218] Colton case, pp. 2446-50, testimony Mrs. Colton.

[219] _Ibid._, pp. 172-73, deposition C. P. Huntington.

[220] Colton case, pp. 5872-74. See also Colton manuscript, pp. 36-40.
It was stipulated that either party might cancel the agreement at any
time within two years, upon which stock and promissory note were to be
mutually returned, and the parties placed in the same position relative
to each other as before the agreement was made.

[221] Colton case, pp. 7018-19.

[222] _Ibid._, p. 6529, testimony H. K. White.

[223] Colton case, p. 8869, testimony Charles Crocker.

[224] _Ibid_., pp. 1058, 1064-66, testimony E. H. Miller, Jr.; p. 8957,
testimony Charles Crocker.

[225] Colton case, pp. 2711-12, 478-81, testimony F. S. Douty.

[226] Newell Beeman, superintendent of the Rocky Mountain Coal and Iron
Company, says that Colton knew nothing about the practical working of
the mine. (Colton case, pp. 3849-50, testimony Newell Beeman.)

[227] Colton case, pp. 7612-13, Colton to Huntington, January 31, 1878.

[228] Colton case, p. 8915, testimony Charles Crocker.

[229] United States Pacific Railway Commission, p. 3255, testimony F.
S. Douty; Colton case, pp. 423-24, testimony F. S. Douty.

[230] Colton case, pp. 8883, 8887, testimony Charles Crocker.

[231] Colton case, pp. 8881-82, testimony Charles Crocker; pp. 36-37,
deposition C. P. Huntington.

[232] Colton case, pp. 2335-46, testimony Gunn; pp. 3127-29, 3227,
testimony W. G. Fullerton.

[233] Colton case, pp. 7187-92, testimony Madden; pp. 7217-24,
testimony N. T. Smith.

[234] Colton case, pp. 2436-39, Huntington to Mrs. Colton, November 15,
1878, and November 21, 1878.

[235] _Ibid._, pp. 2485-92, testimony Mrs. Colton; pp. 8892-99;
testimony Charles Crocker.

[236] Colton case, pp. 16-32, deposition S. N. Wilson.

[237] Colton case, pp. 8931-32, testimony Charles Crocker.

[238] In the case of the Central Pacific claims, the qualification “so
far as known at the time” was introduced.

[239] Colton case, pp. 2815-16, testimony Mrs. Colton; pp. 8943-44,
testimony Charles Crocker.

[240] Crocker manuscript, pp. 40-41.

[241] Colton case, p. 248, testimony Douty; United States Pacific
Railway Commission, p. 3494, testimony D. O. Mills.

[242] Colton case, p. 1662, Huntington to Colton, May 1, 1875.

[243] _Ibid._, pp. 1720-31, Huntington to Colton, June 24, 1875; pp.
1743-45, Huntington to Colton, December 4, 1875.

[244] _Ibid._, miscellaneous depositions, p. 41, depositions S. H.
Thayer.

[245] Colton case, p. 33, deposition D. O. Mills.

[246] _Ibid._, p. 45, deposition S. H. Thayer.

[247] Colton case, pp. 1684-85, Huntington to Colton, November 13, 1875.

[248] _Ibid._, pp. 1747-48, Huntington to Colton, December 20, 1876.

[249] Colton case, pp. 1746-47, Huntington to Colton, December 8, 1870.

[250] _Ibid._, pp. 1768-70, Huntington to Colton, May 6, 1877.

[251] _Ibid._, pp. 1772-73, Huntington to Colton, May 9, 1877.

[252] _Ibid._, pp. 7517-18, Colton to Huntington, August 24, 1877.

[253] _Ibid._, p. 7523, Colton to Huntington, September 28, 1877.

[254] Colton case, pp. 7625-26, Colton to Huntington, March 13, 1878.

It is extraordinary that a man in Colton’s position with his intimate
knowledge of the precarious condition of Central Pacific finance should
have allowed that railroad to declare a 4 per cent dividend in October,
1877, great though his personal necessities may have been. This was,
however, done. In reply to a letter from Huntington criticizing this
action, Colton later wrote:

“I never had the least intimation of objecting to the dividend until
some time after it was declared. Governor Stanford informed me that
you had telegraphed him, advising relative to this October dividend.
We discussed it some time afterward in the Board meeting and found the
whole matter of dividend had been written up in the books, and had
gone so far before it had been brought before the Board that it was
considered best to let the matter stand as it was.... I did not give
the matter any attention outside of the Board meeting, for I felt it
was a matter that Governor Stanford was personally attending to.

“I do not, however, see the matter in just the light you do, and think
so few will know of it that it cannot hurt us in Washington, for if you
who are one of the largest stockholders, have not found it out, I do
not see much show for outsiders. That there were ample surplus earnings
to declare it there is no doubt. So it was a question of policy.... I
would think in a business way the Government would be glad to see us
doing well and prosperous, and evincing ability to pay dividends and
_all_ of our _debts_.” (Colton case, pp. 7533-34, Colton to Huntington,
November 24, 1877.)

[255] Colton case, pp. 7608-14, Colton to Huntington, January 31, 1878.

[256] In 1885 the Central Pacific directors authorized the issue of
$10,000,000 in bonds to pay off the floating debt. (United States
Pacific Railway Commission, p. 3019, testimony C. F. Crocker.) There is
some reason to suspect that Stanford was individually embarrassed in
1878, as a result of the financial stringency in California. Huntington
telegraphed Colton in September of that year to let him know Stanford’s
financial condition as near as he could ascertain it, and proposed to
have the Western Development Company assume Stanford’s indebtedness,
taking Southern Pacific bonds from Stanford in exchange, at 65. Colton
replied that the Western Development Company would have to take about
$3,000,000 in Southern Pacific bonds under such an arrangement to
cover Stanford’s obligations. The French bank in San Francisco had
just closed its doors, and he, Colton, was anxious about Stanford’s
collaterals. He thought that Stanford had $800,000 of United States
bonds in that institution. Michael Reese’s executors were calling for
money. It does not appear what conclusion was finally reached.

[257] Colton case, pp. 704-705.

[258] Colton case, p. 112, deposition J. D. Probst.

[259] _Ibid._, pp. 146-47, deposition A. L. Thompson.

[260] Laws of California, 1875-76, Ch. 515. For a readable account
of the history of the California Railroad Commission up to 1895,
see Moffet, “The Railroad Commission of California—A Study in
Irresponsible Government,” (Annals of the American Academy of Political
and Social Science, March, 1895).

[261] Report of the Board of Commissioners of Transportation to the
Legislature of the State of California, December, 1877.

[262] Laws of California, 1877-78, Ch. 641.

[263] Laws of California, 1877-78, Ch. 490.

[264] Colton case, p. 7646, Colton to Huntington, May 23, 1878.

[265] Laws of California, 1880, Ch. 59. Under the view that a clause
in the Constitution merely amounted to a mandate to the legislature,
an enactment such as that of 1880 was obviously necessary. It
should be said, however, that in later years this conception has
somewhat changed, and constitutional provisions have been held to
be self-executing. This was not the case in 1870. (McMurray, “Some
Tendencies in Constitution Making,” in _California Law Review_, March,
1914.)

[266] City and County of San Francisco v. L. Stanford, Charles Crocker,
_et al_, argument in the Circuit Court of the United States, 9th
Circuit, District of California.

[267] The _Visalia Delta_ said of Stoneman, with unconscious humor:
“France has her Napoleon; Italy her Garibaldi; America her Washington;
Ireland her O’Connell; and the state of California her Stoneman.”

[268] Arguments and statements before the Committee on Commerce, House
of Representatives, 47th Congress, 1st Session, 1882, House Misc. Doc.
55, p. 262, Serial No. 2047.

[269] Report of the Committee on Corporations, 1883, testimony W. R.
Andros, secretary to the commission (in appendix to journals of the
Senate and Assembly of the Legislature of California, 25th Session,
1883).

[270] Report of the Committee on Corporations, 1883, p. 48, testimony
C. J. Beerstecher.

[271] This schedule was prepared under the direction of Stoneman and
was approved by Beerstecher on the understanding that the railroad
companies were to be asked to show cause why it should not be adopted.
(Report of the Committee on Corporations, 1883, testimony C. J.
Beerstecher.)

[272] _Ibid._, p. 11, testimony G. B. Stoneman. Mr. Cone says that the
freight schedule was not fully prepared till March, 1881.

[273] _Ibid._, testimony J. S. Cone.

[274] Report of the Committee on Corporations, 1883, testimony C. J.
Beerstecher.

[275] When Beerstecher came up for re-election in 1882, the opposition
press asserted that a railroad official handed every employee of
the railroad in Beerstecher’s district a Republican ticket with
Beerstecher’s name printed on it, with orders to vote it. (_Mussel
Slough Delta_, May 12, 1882.)

[276] Report of the Committee on Corporations, 1883, testimony J. S.
Cone.

[277] Letter to Senate Committee on Corporations, California
Legislature, January 22, 1874; _San Francisco Chronicle_, January 23,
1874.

[278] Testimony before Senate Committee on Corporations, February 16,
1874 (in appendix to journals of Senate and Assembly, 20th Session
California Legislature, Vol. 4); _San Francisco Chronicle_, February
17, 1874.

[279] Letter to Committee of the New York Chamber of Commerce, January
20, 1881.

[280] The following interview with Charles Crocker, reported in the
_Placerville Democrat_ for March 3, 1883, suggests how the doctrine
described in the text was concretely applied:

“A gentleman of Placerville called upon Mr. Charles Crocker, of the
railroad company, in San Francisco last Saturday, to ascertain just
what we might calculate upon in reference to the extension of the
railroad from Shingle Springs to Placerville. He reports that Mr.
Crocker conversed freely on the subject, and with an appearance of
perfect candor. He said emphatically that his company would not build
or extend any branch roads under existing conditions as to uncertainty
of action by the Railroad Commission, and the apparent state of
public opinion as manifested in the Legislature and portions of the
public press. He says that if the Commission intends to make sweeping
reductions on the branch roads, such action would make these roads
valueless, and he is not disposed to build roads to be thus destroyed.
In answer to a direct question, with a full understanding that it was
to be reported to our people, he said that if the Robinson suit were
settled, and the position of the Commission ascertained as disposed to
non-interference with the branch roads, his company was anxious to and
would immediately extend the road to this place.”

[281] Colton case, pp. 1717-19, Huntington to Colton, April 27, 1876.

[282] _Ibid._, p. 1754, Huntington to Colton, January 22, 1877.

[283] _Ibid._, p. 1814, Huntington to Colton, December 7, 1875.

[284] _Ibid._, pp. 1684-85, Huntington to Colton, November 13, 1875.

[285] Cotton case, pp. 1642-43, Huntington to Colton, April 26, 1875.

[286] _Ibid._, pp. 1676-77, Huntington to Colton, October 19, 1875.

[287] _Ibid._, pp. 1624-25, Crocker to Colton, February 8, 1875.

[288] Tom Scott was president of the Pennsylvania Railroad at one time
and an active opponent of Huntington before Congress.

[289] Cotton case, p. 1735, Huntington to Colton, July 26, 1876.

[290] _Ibid._, pp. 1736-37, Huntington to Colton, August 7, 1876.

[291] _Ibid._, pp. 1756-58, Huntington to Colton, March 7, 1877.

[292] _Ibid._, pp. 1763-65, Huntington to Colton, March 31, 1877.

[293] _Ibid._, pp. 1776-77, Huntington to Colton, May 15, 1877.

[294] Huntington manuscript, p. 17.

[295] Colton case, pp. 1622-23, Huntington to Colton, March 3, 1875.

[296] Colton case, p. 1728, Huntington to Colton, June 21, 1876.

[297] _Ibid._, pp. 1731-32, Huntington to Colton, July 16, 1876.

[298] _Ibid._, p. 7669, Huntington to Colton, August 1, 1876.

[299] Colton case, p. 1756, Huntington to Colton, March 7, 1877.

[300] _Ibid._, p. 1758, Huntington to Colton, March 14, 1877; pp.
1812-13, Huntington to Colton, December 5, 1877.

[301] _Ibid._, pp. 7776-77, Huntington to Colton, January 11, 1878.

[302] _Ibid._, pp. 1847-48, Huntington to Colton, February 9, 1878.

[303] _Ibid._, p. 1833, Huntington to Colton, New York, June 15, 1878.

[304] Colton case, pp. 833-34, Huntington to Colton, New York, June 20,
1878.

[305] _Ibid._, p. 1822, Huntington to Colton, New York, April 19, 1878.

[306] _Ibid._, pp., 1823-24, Huntington to Colton, New York, April 23,
1878.

[307] Colton case, pp. 1828-29, Huntington to Colton, New York, May 24,
1878.

[308] Colton case, pp. 1673-74, Huntington to Colton, October 9, 1875.

[309] _Ibid._, pp. 1679-81, Huntington to Colton, October 29, 1875.

[310] _Ibid._, pp. 1669-70, Huntington to Colton, September 27, 1875.

[311] United States Pacific Railway Commission, p. 3276, testimony S.
T. Gage.

[312] _Ibid._, pp. 3287-88, testimony S. T. Gage.

[313] _Ibid._, pp. 4174-75, testimony Leland Stanford.

[314] Huntington manuscript, p. 80.

[315] Colton Case, pp. 1802-3, Huntington to Colton, November 9, 1877.

[316] _Ibid._, pp. 1843-45, Huntington to Colton, January 28, 1878.
J. M. Bassett declared that Huntington paid out $1,700,000 to prevent
Scott from securing a subsidy for the Atlantic and Pacific Railroad.

[317] _Ibid._, p. 1840, Huntington to Colton, January 12, 1878.

[318] Colton case, p. 1803, Huntington to Colton, November 15, 1877.

[319] _Ibid._, pp. 1700-1, Huntington to Colton, January 14, 1876.

[320] _Ibid._, pp. 1712-13, Huntington to Colton, March 23, 1876.

[321] United States Pacific Railway Commission, p. 3738, testimony C.
P. Huntington.

[322] United States Pacific Railway Commission, pp. 35-36, testimony C.
P. Huntington.

[323] _Ibid._, p. 3869, testimony I. E. Gates.

[324] _Ibid._, p. 3697, testimony C. P. Huntington.

[325] _Ibid._, pp. 2995-99, testimony C. F. Crocker; p. 3200, testimony
Leland Stanford.

[326] _Ibid._, pp. 4174-75, testimony Leland Stanford.

[327] Most of the so-called “Dear Pard letters” from which the above
is taken, appeared in the _San Francisco Daily Report_ after November,
1892. In the majority of cases the letters were printed in the Saturday
edition. The correspondence continued with varying frequency until
Bassett’s death in 1903. It was credited with a considerable share in
preventing the refunding of the Central Pacific indebtedness to the
United States government on terms favorable to the corporation, and
Bassett himself believed that his “exposures” had seriously injured
Southern Pacific credit in the financial markets.

[328] Colton case, p. 1661, Huntington to Colton, May 1, 1875.

[329] United States Pacific Railway Commission, p. 3721, testimony C.
P. Huntington.

[330] Colton case, pp. 1726-27, Huntington to Colton, June 7, 1876.

[331] _Ibid._, pp. 1740-41, Huntington to Colton, November 11, 1876.

[332] _Ibid._, pp. 1765-66, Huntington to Colton, April 3, 1877.

[333] It has also been asserted that the failure of Mr. and Mrs.
Stanford to attend one of the Huntington weddings was sharply
resented by Mr. Huntington. J. M. Bassett, at one time secretary to
Mr. Stanford, says that the latter came to regard Huntington as an
individual of shady characteristics, and was not inclined to trust him
further than he could throw Trinity Church up the side of Mt. Shasta.
For his part, Huntington spoke of Stanford as a “blanked old fool.”
(_San Francisco Daily Report_, July 21, 1894.)

[334] _San Francisco Examiner_, April 10, 1890.

[335] _San Francisco Examiner_, April 10, 1890.

[336] _Ibid._, April 13, 1890; April 18, 1890.

[337] United States Pacific Railway Commission, pp. 3697-98, testimony
C. P. Huntington.

[338] Colton case, p. 1729, Huntington to Colton, June 24, 1876.

[339] Report of the chief engineer upon the preliminary survey,
revenue, and cost of construction of the San Francisco and Sacramento
Railroad, 1856.

[340] Biennial Report of the Commissioner of Transportation of the
State of California for the years ending December 31, 1877 and 1878.

[341] Hittell, “The Commerce and Industries of the Pacific Coast of
North America,” 1882, Ch. XI; Sheppard. “F. F. Low, Ninth Governor of
California” (in University of California _Chronicle_, April, 1917);
_San Francisco Argonaut_, June 22, 1878.

[342] _Sacramento Union_, December 19, 1860.

[343] In 1869 a committee of the California legislature estimated the
volume of California products annually arriving at and exported from
the port of San Francisco as follows (in appendix to journal of Senate
and Assembly, 18th session, California Legislature, Vol 2):

             Products              Annual Receipts    Annual Exports

  Wheat                              225,000 tons       200,000 tons
  Barley                              30,000   ”         10,000   ”
  Oats                                15,000   ”          2,500   ”
  Corn                                 5,000   ”          1,000   ”
  Hay                                 40,000   ”          1,000   ”
  Potatoes                            37,500   ”         10,000   ”
  Beans                                3,600   ”          1,000   ”
  Hops and broom corn                  3,600   ”          1,000   ”
  Beets, carrots, tomatoes,
      parsnips, peas, cabbages,
      melons, squashes, etc.          40,000   ”            500   ”
  Butter and cheese                   10,000   ”            500   ”
  Brandy and wine                  6,000,000 gals.    4,000,000 gals.
  Fruits, dried and fresh             20,000 tons           500 tons
  Beef, mutton, and pork               6,000   ”      .........
  Poultry and eggs                    12,000   ”      .........
  Wool                                 7,500   ”          4,000   ”
  Hides                              168,000   ”       one-half


[344] Hittell, “Commerce and Industries on the Pacific Coast,” Ch. 11.

[345] United States Pacific Railway Commission, p. 3576, testimony
Richard Gray, general freight agent, Central Pacific Railroad.

[346] United States Pacific Railway Commission, p. 2924, testimony
Leland Stanford.

[347] Colton case, pp. 981-83.

[348] Colton case, pp. 981-83, Huntington to Colton, November 9, 1874.

[349] _Ibid._, pp. 466, 495-96, testimony F. S. Douty.

[350] Hittell, “Commerce and Industries of the Pacific Coast,” Ch. 11.

[351] United States Pacific Railway Commission, p. 2924, testimony
Leland Stanford.

[352] United States v. Union Pacific Railroad, pp. 3316-20.

[353] Message from the President of the United States to the House of
Representatives transmitting copies of contracts and leases entered
into by the Southern Pacific Company, etc., February 4, 1886. 49th
Congress, 1st Session, House Exec. Doc. No. 60, Serial No. 2398.

[354] United States v. Union Pacific, pp. 3321-25.

[355] United States Pacific Railway Commission, pp. 4276-77.

[356] Report on the internal commerce of the United States, by Joseph
Nimmo, Jr., Chief of the Bureau of Statistics, Treasury Department,
1884, Serial No. 2295.

[357] Exception should be made of the period between December 16, 1900,
and June 11, 1902, when there was no agreement between the Pacific Mail
and the Panama Railroad. (United States v. Union Pacific, p. 2911,
testimony Conner.)

[358] Bancroft, “Chronicles of the Builders,” Vol. 5. Ch. 6; _San
Francisco Chronicle_, November 10, 1878.

[359] _California Mail Bag_, August, 1874.

[360] _San Francisco Examiner_, May 1, 1894. Discrimination was easy
because rates were not published. Freight schedules were considered to
be for the information of employees and not for general publication.

[361] Report of California Commissioners of Transportation, 1877, table
1, pp. 34-38.

[362] Report of the Senate Committee on Constitutional Amendments,
relative to constitutional amendment No. 8, abrogating provisions of
constitution as to railroad commission (in appendix to journals of the
Senate and Assembly of the Legislature of the State of California, 30th
Session, Vol. 8, 1893.)

[363] _San Francisco Examiner_, October 27, 1893. Even in the case of
through rates more than one classification was used. It appeared in a
case brought before the Interstate Commerce Commission in 1887 that
while the Western classification governed shipments from San Francisco
to Denver, another classification, known as the Pacific Coast eastbound
classification, was used in connection with freight moving from San
Francisco to the Missouri River. (Martin v. Southern Pacific Company, 2
I. C. R. 1 [1888].)

[364] United States Pacific Railway Commission, pp. 2536-37, testimony
Leland Stanford.

[365] Report of California Commissioners of Transportation, 1877.

[366] Statement of J. S. Leeds, submitted to the State Railroad
Commission (_San Francisco Bulletin_, April 4, 1892).

[367] United States Pacific Railway Commission, p. 3344, testimony J.
C. Stubbs.

[368] Letter of Stanford to Committee of San Francisco Chamber of
Commerce, December 1, 1873.

[369] United States Pacific Railway Commission, pp. 3292-93, testimony
J. C. Stubbs.

[370] _San Francisco Examiner_, December 30, 1892, October 29, 1894;
_San Francisco Bulletin_, January 31, 1893.

[371] _San Francisco Examiner_, October 30, 1894.

[372] United States Pacific Railway Commission, pp. 3299, 3300,
testimony J. C. Stubbs.

[373] Railroad Commission of Nevada v. Southern Pacific Company, 21, I.
C. C. R. 329, 349 (1911).

[374] A copy of this contract is printed in the _San Francisco
Chronicle_ of May 7, 1879.

[375] _San Francisco Call_, August 1, 1878.

[376] Report of the Committee on Corporations of the Assembly of
California, 1883, _sup. cit._ See also testimony taken before
the Senate Judiciary Committee of the legislature of California
in considering Assembly Bill No. 10 concerning the Regulation of
Railroads, 1884 (in Appendix to the journals of the Senate and Assembly
of the Legislature of the State of California, 25th Session, Extra).

[377] Railroad Commission of Nevada v. Southern Pacific Company, 21 I.
C. C. R. 329, 346 (1911).

[378] Letter written by John T. Doyle and printed in the _Nation_,
December 8, 1881.

[379] United States Pacific Railway Commission, pp. 3333-34, 3358-59,
testimony J. C. Stubbs.

[380] The special contract system had the bad effect of repressing
complaints from shippers. Mr. Overheiser, member of the State Grange,
farmer, and resident of California since 1849, testified in 1884 before
a committee of the California Senate as follows:

“_Q._ Are you sufficiently acquainted with the commercial community of
Stockton to know whether they have any reluctance in making complaint
... before any Court of justice, or in going before the Railroad
Commissioners, or an investigating committee? _A._ All I know about it
is the impressions I have drawn from what I have heard.

“_Q._ To what effect? _A._ I would be very reluctant to come before
this body and state what firm I belong to, or represent, for fear that
the railroad might chastise me for it, or my firm.

“_Q._ Is that opinion generally shared among the merchants? _A._ As I
understand it, that is the general opinion.

“_Q._ What do you mean by the word ‘chastise’? _A._ They might take our
contracts away from us.”

This testimony was corroborated by at least one well-established
merchant in San Francisco, who declared before the same Senate
committee that business men in San Francisco were afraid to testify
against the railroad for fear that their contracts might be broken.
(Testimony before the Senate Judiciary Committee of the Legislature on
Assembly Bill No. 10, 1884.)

[381] Business Men’s League of St. Louis v. Atchison, Topeka and Santa
Fé Railroad, 9 I. C. C. R. 318 (1902). The number of vessels with their
tonnage which entered the port of San Francisco in the trade with the
Atlantic ports of the United States by way of Cape Horn from 1867 to
1884 was as follows:

  Year ended June 30      Number      Tonnage

       1867                103        110,721
       1868                119        124,504
       1869                139        153,784
       1870                111        126,726
       1871                 53         66,289
       1872                 63         70,956
       1873                 87        104,586
       1874                 62         83,248
       1875                 75        110,071
       1876                 88        124,793
       1877                 86        124,746
       1878                 68        104,544
       1879                 57         92,683
       1880                 53         86,332
       1881                 55         89,097
       1882                 67        104,157
       1883                 71        118,494
       1884                 48         84,196


[382] Proceedings of the Transcontinental Association, 1885. The
special contract system was strikingly similar to the system of
“deferred rebates,” until recently in good repute among ocean steamship
companies. The argument in defense of this last-named system shows
how slowly an understanding of the advantages of equality in matters
of transportation rates spreads in a community. It is the view of the
writer that both the special contract and the deferred rebate systems
were and are contrary, to sound public policy, whether applied on land
or sea.

[383] A miner in Shasta County wrote to the _San Francisco Examiner_ in
1893:

“I will state some facts about the attempt that was made to ship ores
from here. Up to 1887 little or no assorted gold ores had been shipped.
It was so new an enterprise that it was not classified in freight rates
of the railroad company. The company was asked to establish rates,
which it did—at $50 per car from Redding to San Francisco. This was
satisfactory to the miners. We commenced to ship, and in a few months
were sending down over 100 tons per month and had hopes of building
up a permanent business. All at once, without notice, the freight was
increased to $73 per car, and in a short time it was again raised,
this time to $95 per car, and lots of less than one car were raised
from 48 cents to 76 cents per 100 pounds. I went to San Francisco
to see why this was done, and after considerable trouble gained an
audience with an official at Fourth and Townsend streets. I spoke to
the official about the advance on ore freight rates. His reply was:
‘Why, you are sending down ore that would make a prince rich. We can’t
pull high-grade ore on low-grade rates.’ I reminded him that it was
billed at a valuation of $100 per ton and that the railroad company’s
responsibility ended there, and that we wished rates on all grades of
ore, as there were so many values we could not classify them.

“Then he made me the proposition that there be no regular rates
established, but to ship to the smelter for one month and then bring
my returns and he would take out what he might think a recompense for
pulling these values over the road. For cheek as a business proposition
I think this stands pre-eminent. Of course it was rejected, and I was
given rates as follows: Anderson, $71; Redding, $73 per car.” (_San
Francisco Examiner_, May 8, 1893.)

[384] United States Pacific Railway Commission, pp. 3319-20, testimony
J. C. Stubbs.

[385] Proceedings of the Transcontinental Railway Association, 1885,
pp. 17-18.

[386] Letter to the State Railroad Commission, February 20, 1883.

[387] _San Francisco Chronicle_, August 25, 1879. It appears that
the fare from San Francisco to Sacramento by steamer had been $5 in
pre-railroad days. When the California Pacific commenced operations in
1869, the fare fell to $4, and when the Western Pacific was opened,
a $3 rate was put in. As far back as the fifties, rates were still
higher. (A. A. Cohen, Letter to the State Railroad Commission, 1883.)

[388] Opinions and Orders of the Railroad Commission of California,
1916, Vol. 10, p. 354 ff.

[389] Declaration of Principles of the Anti-Monopoly Party of Tulare
County (_Mussell Slough Delta_, February 24, 1882).

[390] _San Francisco Chronicle_, August 27, 1879.

[391] _Stockton Independent_, March 10, 1876.

[392] San Bernardino Board of Trade v. Atchison, Topeka and Santa Fé
Railroad Company, 3 I. C. C. R. 138 (1890). The Circuit Court for the
Southern District of California refused to enforce the decree of the
Interstate Commerce Commission in this case. (Interstate Commerce
Commission v. Atchison, Topeka, and Santa Fé Railroad Company, 50 Fed.
295 [1892].)

[393] Harbor City Wholesale Company of San Pedro, California, v.
Southern Pacific Company, 19 I. C. C. R. 323 (1910).

[394] Commercial Club of Santa Barbara, California, v. Southern Pacific
Company, 12 I. C. C. R. 495 (1907).

[395] Santa Rosa Traffic Association v. Southern Pacific Company, 24
I. C. C. R. 46 (1912); 29 I. C. C. R. 65 (1914); Transcontinental
Commodity Rate to San José, Santa Clara and Marysville, California, 32
I. C. C. R. 449 (1914).

[396] In 1887 a steamer of the Pacific Coast Steamship Company left San
Francisco weekly for Vancouver, where its freight was loaded upon cars
of the Canadian Pacific Company and taken east across the mountains.
The Canadian Pacific demanded, and in 1888 was conceded, the privilege
of accepting freight from San Francisco to Chicago and points east at
rates less than those charged by the other transcontinental lines.
(Martin v. Southern Pacific Company, I. C. C. R. 1 [1888].)

[397] Business Men’s League of St. Louis v. Atchison, Topeka and Santa
Fé Railway Company, 9 I. C. C. R. 318 (1902).

When the Interstate Commerce Act was passed in 1887 the
transcontinental carriers agreed to grade eastbound rates back to the
Pacific Coast. Under tariffs issued April 5, 1887, Missouri River rates
were applied for about 350 miles west of the river, from which point
they gradually decreased to Denver. The Denver rates were applied from
Denver to a point near Green River, over 300 miles west from Cheyenne.
From Green River the rates again decreased gradually to the Pacific
Coast. The tariff of April 5 was published in order to comply with
Section 4 of the Interstate Commerce Law, and it was superseded by
other tariffs in April and May, 1887, by permission of the Interstate
Commerce Commission. (Martin v. Southern Pacific Company, 2 I. C. C. R.
I [1888].)

In later years transcontinental rates to interior points were not
uniformly built by combination upon the terminals. In many cases, even
in westbound rates, the terminal rates served as maxima beyond which
intermediate rates were higher than to terminal points, but not by the
full extent of the local back. Thus on the Central Pacific in 1902
the company named class rates to intermediate points which acted as
maxima to all points, which meant that when the specified intermediate
rate was less than the terminal plus the local back, the lower rate
prevailed. Nor must the influence of the Interstate Commerce Commission
in reducing intermediate rates be left out of account. Yet it was the
conclusion of this same commission as late as 1902, that the point
where the direct rate from the East was at least as high as the sum
of the terminal rate and the local rate from terminal to intermediate
destination, was on the average 300 miles east of the Pacific Coast,
and in some instances several times that distance, a fact which is
sufficient to characterize the system as a whole.

[398] Business Men’s League of St. Louis v. Atchison, Topeka and
Santa Fé Railway Company, 9 I. C. C. R. 318 (1902). See also Rates on
Asphaltum, etc., 33 I. C. C. R. 480 (1915).

[399] In so far as there is rail competition between transcontinental
carriers, this rivalry also is keenest upon the Pacific Coast, and
weakest in the intermediate territory.

[400] Report of Senate Judiciary Committee on Assembly Bill No. 10,
1884, testimony C. S. Stevens.

[401] Letter of Stanford to a committee of the San Francisco Chamber of
Commerce, 1873.

[402] Railroad Commission of Nevada v. Southern Pacific Company, 19
I.C.C.R. 238 (1910).

[403] _San Francisco Bulletin_, March 26, 1892.

[404] _Ibid._, October 12, 1892.

[405] Huntington manuscript, pp. 27-28.

[406] Hearings before the Committee on Interstate and Foreign Commerce
of the House of Representatives on H. R. 9928 (55th Congress, 2d
Session, March 26 to April 2, 1918, pp. 84-85, testimony W. S.
McCarthy).

[407] Hearings before House Committee on Interstate and Foreign
Commerce, _sup. cit._, pp. 170-71, testimony, L. J. Spence.

[408] Business Men’s League of St. Louis v. Atchison, Topeka and Santa
Fé, _sup. cit._

[409] Kindel v. Atchison, Topeka and Santa Fé Railway. 8 I. C. C.
R. 608 (1900). In its first exercise of authority under the amended
long-and short-haul clause, the Interstate Commerce Commission of 1911
prescribed the extent to which rates from eastern points of origin at
and west of the Atlantic seaboard to Reno and other points upon the
main line of the Central Pacific might exceed the rates to Pacific
Coast terminals. (Railroad Commission of Nevada v. Southern Pacific.
21 I. C. C. R. 329 [1911].) _Cf._ Commodity Rates to Pacific Coast
Terminals, 32 I. C. C. R. 611 (1915).

[410] Railroad Commission of Nevada v. Southern Pacific Company, 19
I.C.C.R. 238 (1910).

[411] Commodity Rates to Pacific Coast Terminals, 32 I. C. C. R. 611;
34 I. C. C. R. 13 (1915).

[412] Daggett, “The Panama Canal and Transcontinental Rates,” (in
_Journal of Political Economy_, December, 1915); Rates on Asphaltum,
etc., _sup. cit._

[413] Reopening Fourth Section Applications, 40 I. C. C. R. 35 (1916);
Transcontinental Rates, 46 I. C. C. R. 236 (1917). See also Skinner and
Eddy Corporation v. United States, 39 Supreme Court Report 375 (1919).

[414] Wheeler, “The Valley Road—A History of the Traffic Association
of California, the League of Progress, the North American Navigation
Company, the Merchants’ Shipping Association, and the San Francisco and
San Joaquin Valley Railway” (San Francisco, 1896). See also Walker,
“Pioneers of Prosperity” (San Francisco, 1895).

[415] United States v. 250 Kegs of Nails, 52 Fed. 231 (1892); 61 Fed.
410 (1894). See also _San Francisco Bulletin_, November 19, 1891.

[416] 27 United States Statutes 455 (1893). This bill was introduced by
Senator Frye.

[417] Proceedings of the Merchants’ Convention (_San Francisco
Bulletin_, October 19, 1891).

[418] The constitution of the Traffic Association is printed in full in
the _San Francisco Bulletin_, November 4, 1891.

[419] _San Francisco Bulletin_, October 17, 1891.

[420] _San Francisco Examiner_, October 8, 1891.

[421] _San Francisco Bulletin_, October 17, 19, 1891; _San Francisco
Chronicle_, October 18, 1891.

[422] _San Francisco Chronicle_, October 24, 1891.

[423] _San Francisco Bulletin_, November 4, 1891.

[424] It was the position of the executive committee of the Traffic
Association, and in this they were supported by the traffic expert
whom they employed, that it would be exceedingly bad policy for San
Francisco to antagonize the interior by endeavoring to secure special
advantages for itself. (_San Francisco Chronicle_, December 10, 1892.)

The Traffic Association was said to be, under its constitution and
by-laws, a state institution, organized to promote the welfare of the
whole state. The executive committee did not believe that San Francisco
should be made the sole terminal even were this possible. The city
would assume its proper and legitimate place not as the oppressor,
but as the protector of every industry in the state, provided free
competition and equally adjusted local rates could be secured.
(_Ibid._, December 18, 1892.)

[425] _San Francisco Chronicle_, November 3, 1892.

[426] _Ibid._, December 7, 1892. The reply of the executive committee
of the Traffic Association to this address is printed in the _San
Francisco Examiner_, December 18, 1892.

[427] _Sacramento Union_, April 4, 1892.

[428] _Ibid._, May 13, 1892. San Francisco merchants declared that it
was cheaper to send nails from San Francisco to Bakersfield via Los
Angeles, water and rail, than to move them direct by rail over the
floor of the San Joaquin Valley.

[429] _San Francisco Bulletin_, November 23, 1891. Mr. Leeds was given
a two-year appointment, at a salary of $12,000 per annum.

[430] Walker, “Pioneers of Prosperity,” _sup. cit._, p. 46.

[431] The Merchants’ Shipping Association continued in active operation
until January 1, 1894, when Grace and Company agreed to carry on
the business on their own account. The first boat to arrive in San
Francisco was the “Charles E. Moody,” of 1,915 tons. The next two were
the “T. F. Oakes,” of 1,897 tons, and the “Emily Reed,” of 1,488 tons.
Subsequently, still other vessels were added.

[432] _San Francisco Bulletin_, June 24, 1892.

[433] _San Francisco Chronicle_, August 6, 1892.

[434] _San Francisco Bulletin_, August 4, 1892.

[435] _San Francisco Examiner_, August 18, 1892.

[436] _San Francisco Bulletin_, January 5, 1893.

[437] Walker, “Pioneers of Prosperity,” _sup. cit._, p. 173.

[438] _San Francisco Bulletin_, August 31, 1892.

[439] _San Francisco Examiner_, January 9, 1894. _Cf._ statement by
General John Newton, president Panama Railroad Company, _ibid._,
November 29, 1892.

[440] Wheeler, “The Valley Road,” _sup. cit._

[441] Wheeler, “The Valley Road,” _sup. cit._

[442] _San Francisco Examiner_, January 21, 1893.

[443] _San Francisco Examiner_, February 28, March 5, 1893.

[444] _Ibid._, December 20, 28, 30, 31, 1893, and January 3, 1894.

[445] _San Francisco Examiner_, April 1, 1893.

[446] _San Francisco Examiner_, March 19, 1893.

[447] Wheeler, “The Valley Road,” _sup. cit._, pp. 32-33.

[448] _San Francisco Examiner_, January 10, 1894.

[449] _San Francisco Examiner_, September 21, 1893, statement by H. E.
Huntington.

[450] _Ibid._, April 25, 1893, statement by Agent Hinton of the Panama
Railroad.

[451] Business Men’s League of St. Louis v. Atchison, Topeka and Santa
Fé Railroad Company, 9 I.C.C.R. 318 (1902).

[452] _San Francisco Examiner_, February 4, 1892.

[453] _San Francisco Bulletin_, August 20, 23, 1892. The League of
Progress was an organization composed of the younger business men in
San Francisco in sympathy with the policies of the Traffic Association.

[454] _San Francisco Bulletin_, October 12, 1892.

[455] _San Francisco Examiner_, December 23, 1892.

[456] _Ibid._, March 8, 1893. See also _ibid._, March 4, 1893. With
respect to the whole project Mr. Huntington said to a reporter:

“As to building a railroad to Salt Lake, I certainly have no objection
to other people doing it. I should very much dislike to do it myself. I
do not believe it would be for the interest of San Francisco merchants
to build it; hence I do not think it will be built. A good railroad
from San Francisco to Salt Lake, with good terminals, as good a road as
the Central Pacific, would cost at least $50,000,000. Of course, a road
can be built for a much less sum, but such a road would not compete
with the present line, for certainly the present rates are not as much
as it would cost to haul the tonnage over a cheap line that could be
built for much, if any, less than the figure named. When the Central
Pacific Railroad was built I urged the moneyed men of San Francisco
to take an interest with us on exactly the same basis as I and my
associates hold our interests. But no one here would take an interest.
If they would not take an interest then when every man, woman, and
child in the State wanted a road so that they could go East and see the
old folks at home, they would hardly be likely to take it now, with
at least seven lines across the continent, charging rates of fare and
freight very, very much less than they were when the first road was
built, or than they expected these rates would be when the first road
was inaugurated.” (_Ibid._, September 20, 1892.)

[457] _San Francisco Bulletin_, June 22, 1893.

[458] _Ibid._, July 17, 1893.

[459] _San Francisco Bulletin_, July 18, 1893.

[460] _Ibid._, July 10, 1893. The stock was to be issued in the
name of nine trustees, and was to be voted by these gentlemen. The
trustees were to have the right to cause the consolidation of the
proposed corporation with another company. Possibly the railroad
project suffered somewhat from the fact that a plan existed for the
construction of a ship canal up the San Joaquin Valley to Bakersfield.
Fresno people were particularly interested in this scheme, which
contemplated the connection of Fresno with the navigable part of the
San Joaquin River at Crowe’s Landing, or some other convenient point.
(_San Francisco Examiner_, June 3, June 5, 1894.)

[461] _San Francisco Bulletin_, September 27, 1894.

[462] _San Francisco Examiner_, January 18, 1895.

[463] _San Francisco Examiner_, February 9, 1895.

[464] _Ibid._, January 30, 1895.

[465] Statement of J. S. Leeds in the _San Francisco Bulletin_, October
1, 1894, and in the _San Francisco Examiner_, January 27, 1895.

[466] _San Francisco Examiner_, March 6, 1895.

[467] _San Francisco Examiner_, January 31, 1895. As a matter of fact,
the bulk of the subscriptions came from a very few sources.

[468] _San Francisco Bulletin_, March 1, 1895.

[469] _San Francisco Examiner_, April 27, 1895.

[470] The question as to what the valley towns would do for the new
enterprise was repeatedly asked, and received a reasonably satisfactory
reply. Depot sites and rights-of-way were freely offered, and
subscriptions to stock were talked about, if not often pledged in any
binding way. The Spreckels group tried to encourage donations of all
lands, and to play one town against another where this was possible.
It refused to say, for example, whether the new road would begin at
Stockton, as once proposed, or even whether the new route would not
run through San José. Stockton organized a committee to present her
claims. San José did the same. Mass meetings were held in both places,
that in San José being marked by a procession, with transparencies
and a band. Stockton merchants agreed to give to the San Francisco
and San Joaquin Valley Railway rights-of-way 100 feet wide along the
adopted survey for the railroad from the city of Stockton through San
Joaquin County to the boundary line between San Joaquin and Stanislaus
counties. They further agreed to convey to the railway company certain
specified parcels of land in the city of Stockton, to aid the company
in obtaining franchises and rights-of-way in Stockton, and to obtain
subscriptions to the capital stock of the company to the amount of
$100,000. (_San Francisco Examiner_, May 3, 1895.)

The San José delegation which came to San Francisco in March said that
$148,000 had already been secured for the new road in their district,
that $200,000 was in sight, and that $300,000 in subscriptions could be
obtained with a guaranty of shipments by the new route from the large
fruit packers, business men, farmers, and horticulturists. They added
that rights-of-way, 75 per cent of which would be free of cost to the
company, and also terminal facilities in San José would be provided.
(_Ibid._, March 27, 1895.)

It is of some interest to recall that when the decision was made in
favor of Stockton, her representatives had difficulty in making their
promises good. It was remarked at one time that apparently one of the
things most needed to help on the era of progress in California was a
number of judiciously selected funerals—presumably of opponents to the
new developments.

[471] See address of Robert Watt at Bakersfield, _San Francisco
Examiner_, April 29, 1895.

[472] _San Francisco Examiner_, January 30, 1895.

[473] Letter from the Spreckels’ Committee to San Francisco Bankers,
_San Francisco Examiner_, February 3, 1895.

[474] _San Francisco Examiner_, March 26, 1895.

[475] _Ibid._, April 6, 1895.

[476] _San Francisco Bulletin_, April 6, 1895.

[477] Laws of California, 1878, Ch. 219.

[478] _San Francisco Examiner_, March 9, 1895.

[479] _Ibid._, March 11. 1895.

[480] This was the proposal of Mr. Powers, of San Francisco. See
Journal of the Assembly, 31st Session, March 8, 1895, p. 904.

[481] Reid amendment, Journal of the Assembly, 31st Session, March 11,
pp. 961-62.

[482] Laws of California, 1895, Ch. 171.

[483] Indenture dated July 8, 1895. The lease was to expire May 1,
1945. Five years after the lease was signed, however, the State Harbor
Commission declared it terminated because of the failure of the railway
company to make agreed improvements. A new indenture was then signed
by the parties under date of November 21, 1900. By this document the
state slightly increased the area leased to the railway company, and
extended the term to December 1, 1950. For its part, the railway
agreed to construct a definite length of sea-wall along the front of
the leased property, and to spend $50,000 annually for six years on
improvements. It is interesting to observe that while the new lease,
like the old, was non-assignable, the restriction in the indenture
of 1900 did not apply to any assignment or transfer that might occur
at the expiration of the Valley company’s corporate life through
foreclosure of its bonded indebtedness, nor to any sale, transfer, or
assignment to the Atchison, Topeka and Santa Fé Railway Company. The
Santa Fé road, successor to the San Francisco and San Joaquin Valley
Railway, purchased additional property adjacent to and south of China
Basin, but its terminals are still on the land leased from the state.
This includes the company’s freight ferry lands, its freight houses,
and most of its yard tracks in San Francisco. See on this matter the
annual reports of the Atchison, Topeka and Santa Fé Railroad, and also
the _San Francisco Examiner_, November 15, 1898.

[484] _San Francisco Examiner_, October 27, 1898. Another point of view
with respect to the consolidation of the San Francisco and San Joaquin
Valley Railway with the Santa Fé is presented by W. B. Storey, chief
engineer and general superintendent of the Valley line from 1895 to
1900 and now president of the Santa Fé. Mr. Storey writes:

“My views do not coincide with yours in regard to the reasons actuating
the promoters of the railroad. Popular opinion in California believed
that the domination of one railroad greatly retarded the progress of
the state and it was the feeling that the prosperity of the state
would be very greatly increased if competition could be provided. As
a possible means of obtaining such competition resort was made to
water competition and a steamship line was organized to handle freight
via the Isthmus. This line was maintained until the money raised had
been absorbed and it had been practically demonstrated that such a
line could not pay. The public was, therefore, eager for any other
competition that might present itself. It was the thought of the
projectors that a local line should be built which might ultimately,
if opportunity offered, become part of a transcontinental line. The
Santa Fé, however, was not in a position to do anything, as it was at
that time in a Receiver’s hands. It was, however, the nearest railroad
and it, therefore, seemed wise in projecting a new road branching from
San Francisco to so locate it that it could later become part of the
Santa Fé if that road desired an entrance to San Francisco. Most of the
people who subscribed did so with the idea of providing competition
and not with the idea of making money out of the investment.... By the
time the road reached Bakersfield it became evident to the Directors
that the road could not successfully compete with the Southern Pacific,
because while for the time the people in the valley were giving the
road all the freight that came from San Francisco, they were not able
to turn the freight coming from the east over the Valley Road, the
Southern Pacific refusing to make joint rates. The consequence was that
the Valley Road had to depend exclusively on local business, and it was
felt that in time even this would drop off materially by reason of the
competitive methods of the Southern Pacific. Mr. Spreckels expressed
the case in the following manner: It was not possible for the Valley
Road to exist unless it became a transcontinental road and California
could not raise money enough to make it such. The Santa Fé, by an
extension to Bakersfield, could make it a transcontinental road and
offered to buy a controlling interest.”

[485] See especially a letter written by John T. Doyle under date of
September 29, 1898, and published in the _San Francisco Bulletin_,
October 5, 1898. The whole matter was extensively discussed in the
columns of the San Francisco press in October, 1898.

[486] _San Francisco Examiner_, October 27, 1898.

[487] Biennial Report of the Board of Railroad Commissioners of the
State of California for the years 1895 and 1896.

[488] _San Francisco Examiner_, September 19, 1896.

[489] _Ibid._, June 28, 1898.

[490] _San Francisco Examiner_, August 23, 1896.

[491] _Ibid._, June 4, 1898.

[492] _Ibid._, July 18, 1896.

[493] _Ibid._, September 15, 1897.

[494] _Ibid._, June 4, 1898.

[495] In order to make possible its low San Francisco rate, the San
Francisco and San Joaquin Valley Railway concluded an arrangement with
the California Navigation and Improvement Company by which the latter
agreed to run two steamers a day each way between Stockton and San
Francisco, and to handle all wheat shipments to Port Costa, Benicia,
Vallejo, and San Francisco which were delivered to it by the Valley
road. The same rate was to be charged from Stockton to all the points
named. (_San Francisco Examiner_, July 9, 1896.)

[496] _Ibid._, August 23, 1896.

[497] The relations between the Southern Pacific Company and the
proprietary companies were governed by what was known as the “omnibus”
lease, under which the Southern Pacific agreed to operate and to
maintain the properties of the proprietary companies, to pay all fixed
and other charges, including interest on bonds and floating debt, and
to divide the surplus net profits between the parties to the agreement
in stipulated proportions. In 1896 the percentages for division of
profits were as follows: Southern Pacific Railroad of California, 44
per cent; Southern Pacific Railroad of Arizona, 10 per cent; Southern
Pacific Railroad of New Mexico, 6 per cent; Louisiana Western Railroad
Company, 7 per cent; Morgan’s Louisiana and Texas Railroad Company, 23
per cent; Southern Pacific Company, 10 per cent.

[498] In later years the lumber business of the Southern Pacific
developed, but the coal business has always remained small.

[499] _Cf._ Annual Report of United States Commissioner of Railroads,
1883-84.

[500] Report on the Internal Commerce of the United States (Treasury
Department, 1884), _sup. cit._

[501] United States v. Southern Pacific, p. 155, testimony of
Schumacher; p. 942, testimony of Chambers; pp. 1028-29. testimony of
Spence.

[502] _San Francisco Examiner_, October 24, 1895.

[503] _San Francisco Examiner_, February 25, 1896.

[504] United States v. Southern Pacific, pp. 328, 338, testimony of
Connor.

[505] _Ibid._, p. 199, testimony of Sproule.

[506] _Ibid._, p. 1034, testimony of Spence.

[507] _Ibid._, p. 290, testimony of Lovett.

[508] _Ibid._, p. 305, testimony of De Friest; p. 311, testimony of
Johnson; p. 312, testimony of Hall.

[509] _Ibid._, p. 219, testimony of Sproule; p. 152, testimony of
Schumacher; p. 827, testimony of Kruttschnitt.

[510] United States Pacific Railway Commission, p. 2150, testimony of
Shelby.

[511] United States Pacific Railway Commission, pp. 3304-6, 3362,
testimony of Stubbs; pp. 3572-73, testimony of Gray.

[512] Frye-Davis Report (51st Congress, 1st Session, February 17, 1890,
Senate Report No. 293, Serial No. 2703).

[513] The dividends declared by the Central Pacific Railroad Company
from 1861 to 1898 were as follows:

  Year        Month        Per Cent         Amount

  1873      September          3          $1,628,265
  1874      August             5           2,713,775
  1875      April              4           2,171,020
  1875      October            6           3,256,530
  1876      April              4           2,171,020
  1876      October            4           2,171,020
  1877      April              4           2,171,020
  1877      October            4           2,171,020

  1880      February           3           1,628,265
  1880      August             3           1,778,265
  1881      February           3           1,778,265
  1881      August             3           1,778,265
  1882      February           3           1,778,265
  1882      August             3           1,778,265
  1883      February           3           1,778,265
  1883      August             3           1,778,265
  1884      January            3           1,778,265

  1888      February           1             672,755
  1888      August             1             672,755
  1889      February           1             672,755
  1889      August             1             672,755
  1890      February           1             672,755
  1890      August             1             672,755
  1891      February           1             672,755
  1891      August             1             672,755
  1892      February           1             672,755
  1892      August             1             672,755
  1893      February           1             672,755
  1893      September          1             672,755

There were no dividends declared between September, 1893, and the
reorganization of the Central Pacific in 1899.

[514] _San Francisco Bulletin_, November 20, 1894. Sir Rivers Wilson
was ex-controller of the British National Debt Office.

[515] Testimony of Mr. Huntington before the California Railroad
Commission, _San Francisco Examiner_, May 14, 1898.

[516] Huntington Manuscript, p. 91. On the general subject of the
Thurman Act, see Davis, “History of the Union Pacific Railway,” Ch. 4.

[517] United States v. Union Pacific Railroad, 91 U. S. 72, 86 (1875).

[518] United States Pacific Railway Commission, p. 2529, testimony
Leland Stanford. In order that the reader may have full data concerning
the issue of the Government subsidy bonds, the following table of
amounts and dates of issue is presented:

UNITED STATES SIX PER CENT CURRENCY BONDS ISSUED TO CENTRAL PACIFIC
RAILROAD COMPANY

                       Maturity          Interest
   Date Issued         of Bonds          Commenced          Amount

  May  12, 1865      Jan. 16, 1895     Jan. 16, 1865      $1,258,000
  Aug. 14,  ”         ”   16,  ”       Aug. 14,  ”           384,000
  Oct. 16,  ”         ”   16,  ”       Oct. 16,  ”           256,000
  Dec. 11,  ”         ”   16,  ”       Nov. 29,  ”           464,000
  Mar.  6, 1866       ”    1, 1896     Mar.  6, 1866         640,000
  July 10,  ”         ”    1,  ”       July 10,  ”           640,000
  Oct. 31,  ”         ”    1,  ”       Oct. 29,  ”           320,000
  Jan. 15, 1867       ”    1, 1897     Jan. 14, 1867         640,000
  Oct. 25,  ”         ”    1,  ”       Oct. 25,  ”           320,000
  Dec. 12,  ”         ”    1,  ”       Dec. 11,  ”         1,152,000

  June 10, 1868       ”    1, 1898     June  9, 1868         946,000
  July 11,  ”         ”    1,  ”       July 10,  ”           320,000
  Aug.  5,  ”         ”    1,  ”       Aug.  4,  ”           640,000
   ”   14,  ”         ”    1,  ”        ”   13,  ”         1,184,000
  Sep. 12,  ”         ”    1,  ”       Sep. 11,  ”         1,280,000
   ”   21,  ”         ”    1,  ”        ”   19,  ”         1,120,000
  Oct. 13,  ”         ”    1,  ”       Oct. 12,  ”         1,280,000
   ”   28,  ”         ”    1,  ”        ”   26,  ”           640,000
  Nov.  5,  ”         ”    1,  ”       Nov.  3,  ”           640,000
   ”   12,  ”         ”    1,  ”        ”   11,  ”           640,000
  Dec.  5,  ”         ”    1,  ”       Dec.  5,  ”           640,000
   ”    7,  ”         ”    1,  ”        ”    7,  ”           640,000
   ”   30,  ”         ”    1,  ”        ”   29,  ”           640,000

  Jan. 15, 1869       ”    1, 1899     Jan. 13, 1869         640,000
   ”   29,  ”         ”    1,  ”        ”   28,  ”           640,000
  Feb. 17,  ”         ”    1,  ”       Feb. 17,  ”           640,000
  Mar.  2,  ”         ”    1,  ”        ”   17,  ”         1,066,000
   ”    3,  ”         ”    1,  ”       Mar.  2,  ”         1,333,000
  May  28,  ”         ”    1,  ”       May  27,  ”         1,786,000
  July 15,  ”         ”    1,  ”        ”   27,  ”         1,314,000
   ”   16,  ”         ”    1,  ”       July 15,  ”           268,000
  Dec.  7,  ”         ”    1,  ”        ”   16,  ”         1,510,000
  Jan.  2, 1872       ”    1, 1898     Nov. 28, 1868           4,120
                                                         ———————————
      Total                                              $25,885,120

  Jan. 24, 1867        Jan. 1, 1897     Jan. 26, 1867        320,000
  Sept. 1, 1869         ”   1, 1899     Sept. 3, 1869        320,000
  Oct. 29,   ”          ”   1,  ”       Oct. 28,  ”        1,008,000
  Jan. 27, 1870         ”   1,  ”       Jan. 22, 1870        322,000
   ”    8, 1872         ”   1,  ”        ”   22, 1872            560
                                                          ——————————
      Total                                               $1,970,560

Undoubtedly many of the bonds listed were disposed of at a considerable
discount. Subsidy bonds to the amount of $4,922,000 had been issued by
the government to the Central Pacific by October 25, 1866, and had been
sold for $3,546,478. The subsidy bonds (currency sixes) were listed on
the New York Stock Exchange, but there were few, if any, sales until
1868. Not a single transaction in these bonds was recorded for the
year 1867. In 1869, however, the bonds went above par, the average
sale price for the year being 108⅛. (United States Pacific Railway
Commission, pp. 4682-83.)

[519] United States Pacific Railway Commission, p. 275, testimony
Leland Stanford; Report, pp. 91-95.

[520] The Supreme Court later held that the Central Pacific and Union
Pacific railroads were completed on the 6th of November, 1869, in the
sense that the companies became liable to pay over 5 per cent of their
net earnings from this date. (99 U. S. 402, 449 [1878].)

[521] The Central Pacific Railroad Company in equitable account with
the United States. A review of the testimony and exhibits presented
before the Pacific Railway Commission, appointed according to the Act
of Congress, approved March 3, 1887, by Roscoe Conkling and William D.
Shipman of Counsel for the Central Pacific R. R. Co., New York, 1887.

[522] Report of the Secretary of the Interior, 1877, p. xxviii.

[523] Report of Mr. Thurman from the Committee on the Judiciary (45th
Congress, 2d Session, March 4, 1878, Senate Report No. 111, p. 8).

[524] 16 United States Statutes 225 (1871).

[525] 17 United States Statutes 485, 508 (1873).

[526] United States v. Union Pacific Railroad Company, 91 U. S. 72
(1875).

[527] _Ibid._, 98 U. S. 569 (1878).

[528] Union Pacific Railroad Company v. United States, 99 U. S. 402
(1878).

[529] The Congressional history of the Thurman bill is as follows:
Introduced, October 16, 1877, and referred to the Senate Committee on
Judiciary (45th Congress, 1st Session, Congressional Record, Vol. 6,
p. 58); reported back from Committee March 4, 1878 (45th Congress, 2d
Session, _ibid._, Vol. 7, p. 1445); debated in Senate March 12 to April
9 (_ibid._, pp. 1688-2384); passed by Senate April 9 (_ibid._, pp.
2779-90); approved by President, May 8 (_ibid._, p. 3257).

[530] Speech of Senator Thurman of Ohio (45th Congress, 2d Session,
March 12, 1878, Congressional Record, Vol. 7, p. 1690).

[531] 20 United States Statutes 56 (1878).

[532] Report of Mr. Thurman from the Senate Committee on the Judiciary
(45th Congress, 2d Session, March 4, 1878, Senate Report No. 111,
Serial No. 1789).

[533] Annual Report of the Commissioner of Railroads, 1882, p. 440.

[534] Annual Report of the Commissioner of Railroads, 1883.

[535] See also the Brice Report (53d Congress, 3d Session, Senate
Report No. 830, p. 17, Serial No. 3288).

[536] Annual Report of the Commissioner of Railroads, 1883.

[537] 24 United States Statutes 488 (1887).

[538] Annual Report of the Treasurer of the United States. 1887, p. 28.

Owing to the protests of the Pacific railroad companies at the low
rates of interest earned by the sinking funds, considerable amounts
remained uninvested between 1882 and 1886. The following table shows
the cash uninvested in the Treasury to the credit of the Central
Pacific Railroad Company for a series of years:

      Date               Amount

  June 30, 1882       $527,886.53
   ”   30, 1883        844,652.13
   ”   30, 1884      1,089,159.75
   ”   30, 1885      2,020,900.13
  Dec. 31, 1886      2,345,984.21
   ”   31, 1887         76,905.49
  June 30, 1889          2,766.14

No interest was earned on these uninvested balances. After 1886, with
the single exception of the year 1895, the uninvested portion of the
sinking fund was negligible. (Annual Reports of the Commissioner of
Railroads, 1882-89.)

[539] 20 United States Statutes 56 (1878). On June 19, 1878, another
act established the office of an “Auditor of Railroad Accounts” with
authority to prescribe reports from subsidized railroads west, north,
or south of the Missouri River, to examine books, and to furnish
information to various government departments as it might be required.
(20 United States Statutes 169, [1878].) Name changed to “Commissioner
of Railroads” in 1881. (21 United States Statutes 381, 409 [1881].)

[540] 45th Congress, 2d Session, Congressional Record, pp. 2384, 2790.
The House vote as given does not include pairs.

[541] Colton case, p. 1770-71.

[542] _Ibid._, p. 1802, November 9, 1877.

[543] _Ibid._, argument of Hall McAllister, p. 248.

[544] Colton case, argument of Hall McAllister, p. 249. Huntington
never forgave Congress for having passed the Thurman bill. Years
afterward he inserted the following comments in an autobiographical
statement which he gave to the California historian, H. H. Bancroft:

“Senator Ransom voted for the Thurman bill. He came out and said ‘Mr.
Huntington, I voted for that bill. I knew I was wrong.’ He said, ‘I
ought not to have done it.’ Said I, ‘Senator Ransom, I pity you.’ Said
he, ‘What do you say?’ Said I, ‘Senator Ransom, I said and I repeat
it for I do really pity you.’ I turned on my heel and left him. Now
there are a great many men in just that kind of a way; they don’t dare
to vote according to their convictions; they are afraid of what other
people think of their acts....”

       *       *       *       *       *

“I know old Thurman well. He expected to be President of the United
States by passing the Thurman Act, but he was not honored of course.
I don’t believe he was in earnest. I don’t believe he thought the Act
was proper. It was a false contract. There was no warrant in law or
equity. He turned demagogue for political purposes; ... I think Thurman
is a pretty good liar; lying was his best forte. He is an impressive
speaker; he always seems to be so in earnest.” (Huntington manuscript,
p. 24-25, 76-77.)

It may throw some light upon the attitude of the Huntington group
toward the Thurman Act to remember that the moneys in the sinking
funds which the Central Pacific established for the retirement of its
own mortgage securities were, at least in part, loaned to the Western
Development Company, and used by this company in railroad building in
southern California. This was, of course, an ideal arrangement from the
point of view of Huntington and his friends.

[545] Sinking Fund Cases, 99 U. S. 700 (1878).

[546] Report of the Auditor of Railroad Accounts, 1881 (46th
Congress, 3d Session, Exec. Doc. No. 87, Serial No. 1978). The same
recommendation is contained in the Report of Commissioner of Railroads,
1894, p. 93.

[547] United States v. Central Pacific Railroad Company, 118 U. S. 235
(1886).

[548] 56th Congress, 2d Session, Senate Document No. 227, Serial No.
4043.

[549] United States v. Central Pacific Railroad Company, 138 U. S. 84
(1891). See also Annual Report of the Commissioner of Railroads, 1883,
p. 428 _ff._

[550] 54th Congress, 2nd Session, January 11, 1897, Senate Document No.
52, Serial No. 3469.

[551] Annual Report of the Commissioner of Railroads, 1897.

[552] Annual Report of the Commissioner of Railroads, 1882, p. 440.

[553] United States Pacific Railway Commission Report, December 1, 1887
(50th Congress, 1st Session, Senate Executive Documents No. 51, Serial
No. 2505).

[554] Frye-Davis Report (51st Congress, 1st Session, February 17, 1890.
Senate Report No. 293, Serial No. 2703). See also speech by Senator
Frye, _ibid._, Congressional Record, p. 1377 _ff_.

[555] Reilly Report (53d Congress, 2d Session, July 21, 1894. House
Report No. 1290, Serial No. 3272).

[556] Powers Report (54th Congress, 1st Session, April 25, 1896. H. R.
Report No. 1497. Serial No. 3462). The Powers bill also required the
consent of the Southern Pacific to the appropriation for payment of
Central Pacific indebtedness, of the sum of $2,409,818.20, which stood
credited on the books of the United States Treasury to the Central
Pacific for services on non-aided lines. The consent of the Southern
Pacific was necessary for this appropriation because a considerable
portion of the amount in question had been adjudged by the Court of
Claims to be due to the Southern Pacific for the reason that the
services for which the sums mentioned were credited had been in large
part performed by that company.

[557] The Powers bill was finally defeated—yeas, 103; nays, 168; not
voting, 84. (54th Congress, 2d Session, Congressional Record, p. 689.)

[558] Gear Report, 1896 (54th Congress, 1st Session, May 1, 1896,
Senate Report No. 778, Serial No. 3365; The House bill was numbered H.
R. 8189; the Senate bill S. 2894).

[559] United States Pacific Railway Commission, pp. 3589-90, letter
from A. N. Towne.

[560] Frye-Davis Report (51st Congress, 1st Session, February 17, 1890,
Senate Report No. 293, p. 76, Serial No. 2703).

[561] _San Francisco Examiner_, February 18 and March 15, 1890.

[562] Memorial of the committee of fifty appointed at the San Francisco
mass meeting of December 7, 1895.

[563] _San Francisco Examiner_, September 21, 1894.

[564] Laws of California, 1897, p. 581. Joint Resolution, adopted
January 8, 1897.

[565] 54th Congress, 2d Session, January 7, 1897, Congressional Record,
p. 559.

[566] United States v. Stanford, 161 U. S. 412 (1896). The United
States sued the Stanford estate in this case for $15,237,000.

[567] See Annual Report of the Commissioner of Railroads, 1892, p. 141.

[568] 12 United States Statutes 489 (1862).

[569] 13 United States Statutes 356 (1864).

[570] United States v. Kansas Pacific Railway Company, 99 U. S. 455
(1878). See also United States v. Denver Pacific Railway Company, 99 U.
S. 460 (1878).

[571] 20 United States Statutes 56 (1878).

[572] 45th Congress, 2d Session, April 3, 1878, Congressional Record,
p. 2229.

[573] Sinking Fund Cases, 99 U. S. 700, 721.

[574] United States v. Union Pacific Railway Company and Western Union
Telegraph Company, 160 U. S. 1 (1895).

[575] Menotti v. Dillon, 167 U. S. 703 (1897).

[576] Union Pacific Railroad Company v. Mason City and Fort Dodge
Railroad Company, 199 U. S. 160 (1905).

[577] United States v. Central Pacific Railroad Company, 118 U. S. 235
(1886).

[578] Gear Report, 1897, 55th Congress, 1st Session. April 8, 1897
(Senate Report No. 20, Serial No. 3569).

[579] Commercial and Financial Chronicle, Vol. 63, p. 1114.

[580] United States v. Southern Pacific Company, pp. 1200-1201,
testimony James Speyer.

[581] United States v. Southern Pacific Company, p. 1201, testimony
James Speyer.

[582] _Ibid._, p. 993, testimony John W. Griggs.

[583] United States v. Southern Pacific Company, p. 998, testimony John
W. Griggs.

[584] 30 United States Statutes 652, 659 (1898).

[585] United States v. Southern Pacific Company, p. 994, testimony John
W. Griggs.

[586] See Report of Attorney-General, 1897, pp. vi-vii; 1898, p. xv.
The legislation described was inserted in the Deficiency Appropriation
bill on motion of Mr. Gear. The provision requiring full payment within
ten years was added on motion of Mr. White, of California. (55th
Congress, 2d Session, June 29, 1898, Congressional Record, pp. 6464-65.)

[587] United States v. Southern Pacific Company, p. 1199, testimony
James Speyer.

[588] The exact amount of 4 per cent bonds to be deposited as security
was $58,820,000.

[589] United States v. Southern Pacific Company, p. 1000, testimony
Griggs.

[590] 30 United States Statutes 1214, 1245 (1899).

[591] At his death in August, 1900, Huntington owned 37½ per cent of
the stock of the Southern Pacific Company.

[592] Full information with respect to the Union Pacific-Southern
Pacific merger case is to be found in the record and briefs submitted
to the Supreme Court. The testimony and exhibits in this case fill
thirteen volumes, and constitute an important addition to the source
material on railroad transportation. The case is discussed in detail
in Daggett, “The Decision on the Union Pacific Merger,” in _Quarterly
Journal of Economics_, February, 1913, and in another article by the
same author, entitled “Later Developments in the Union Pacific Merger
Case” (_ibid._, August, 1914).

[593] This question of the diversion of business from the central route
has been discussed in Chapter XX.

[594] United States v. Union Pacific Railroad Company, 226 U. S. 61,
470 (1912, 1913).

[595] Preferential subscription rights were given to Union Pacific and
Oregon Short Line Railroad Company stockholders, on condition that
these last-named individuals divest themselves of their ownership of
Union Pacific and Oregon Short Line shares before actually receiving
their Southern Pacific certificates. See Daggett, “Later Developments
in the Union Pacific Merger Case,” _sup. cit._

[596] This was the second suit of the same nature. In July, 1894,
Richard Olney, United States Attorney-General, filed a bill in the
United States District Court at Los Angeles to dissolve the Southern
Pacific combination. In 1894, as in 1915, it was charged that the
consolidation of the Southern Pacific and the Central Pacific companies
was illegal under the Sherman law. The Olney suit was later withdrawn.

[597] United States of America v. Southern Pacific Company. The record
and briefs in the case of the United States v. the Southern Pacific
are as extensive as those submitted in the Union Pacific merger case.
No attempt will be made to give detailed references to accompany the
summary account presented in the remainder of this chapter.

[598] United States v. Southern Pacific Company, 239 Fed. 998 (1917).

[599] Including the output of the Associated Oil Company.

[600] Third Annual Report of the State Oil and Gas Supervisor of
California, 1917-18.

[601] For a full discussion of this and kindred subjects, see Lindley
on Mines, ed. 3.

[602] Burke v. Southern Pacific, 234 U. S. 669 (1914).

[603] _Ibid._, pp. 691-92. See also Roberts v. Southern Pacific
Company, 186 Fed. 934 (1911).

[604] Southern Pacific v. United States, in the United States Circuit
Court of Appeals for the Ninth Circuit (Brief of United States,
Appellee, pp. 364-65).

[605] _Ibid._, p. 363.

[606] United States v. Southern Pacific Company, 251 U. S. 1 (1919).
The decision of the Circuit Court of Appeals, which was favorable to
the railroad, is reported in 249 Fed. 785 (1918).

[607] United States v. Southern Pacific, 260 Fed. 511 (1919). See also
_ibid._, 225 Fed. 197 (1915).

[608] The annual report of the Southern Pacific Company for the year
ending December 31, 1920, contained the statement that Southern Pacific
Company stockholders or their assigns had purchased an aggregate of
3,414,604 shares of Pacific Oil Company stock, thus leaving 85,395
shares still in possession of the company.

[609] 14 United States Statutes 239 (1866).

[610] 16 United States Statutes 47 (1869).

[611] See Joint Resolution No. 18, 35 United States Statutes 571
(1908), instructing the Attorney-General to institute certain suits.

[612] United States v. Oregon and California Railroad Company, 186 Fed.
861 (1911).

[613] Oregon and California Railroad Company v. United States, 238 U.
S. 393 (1915).

[614] 39 United States Statutes 218, Ch. 137 (1916).

[615] Oregon and California Railroad Company v. United States, 243
U. S. 549 (1917). Suit was brought by the United States in 1917, in
accordance with the law, seeking to offset against the compensation of
$2.50 per acre due the company for the unsold lands, moneys received
by the company, in excess of $2.50 per acre, by reason of past sales,
leases, and otherwise, as well as taxes levied since the forfeiture
decision and voluntarily paid by the federal government to the state of
Oregon. This case was ready for trial in 1921 and will probably be soon
heard and decided.




                          TRANSCRIBER’S NOTE:

—Obvious print and punctuation errors were corrected.