Full text of "Chapters on the history of the Southern Pacific"

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CHAPTERS ON THE HISTORY

OF THE

Southern Pacific

STUART DAGGETT, Ph.D.

Professor of Railway Economics and Dean of the

College of Commerce, University of Califomia;

Author of " Railroad Reorganization "

NEW YORK

THE RONALD PRESS COMPANY
1922

ST2.

PREFACE

So far as the author knows there is no published study
which discusses in detail the important business problems con-
nected 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 com-
pany 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;

IV PREFACE

and that of the State Library at Sacramento. Use has also
been made of data in the office of the Secretary of State of
CaHfornia 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 par-
ticular portions of the book.

Stuart Daggett
Berkeley, California,
February i, 1922.

CONTENTS

Chapter Page

I Inception of the Project 3

II Resources for Construction — State and Local Aid . 21 N

III Federal Land Grants and Subsidies 45 ^

IV Progress of Construction — Construction Com-

panies 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 Indebted-
ness TO the Government 39S

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 i860 " 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 Jose

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 2g5

Diagram showing adjustment of freight rates between San Francisco,

Santa Rosa, and Sebastopol, 1916 agg

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 Fe, 18^8 ^25

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 com-
panies 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
i860 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

4 HISTORY OP THE SOUTHERN PACIFIC

policies of railroad corporations, is mainly derived from con-
tact with the Southern Pacific Railroad and its auxiliary com-
panies.

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 Fran-
cisco, 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.^ It is therefore to the cir-
cumstances 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

" The statement in the text is sufBciently aocarate 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.

INCEPTION OP THE PROJECT 5

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 obsta-
cles and resulted in the formulation of definite and successful
plans for a transcontinental line.*

Judah began work in California as engineer of the Sacra-
mento Valley Railroad. He left the service of the company,
however, before the road was finished to Folsom. Subse-
quently 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 trus-
tee 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 i860 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 ^^ 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 transconti-
nental railroad. When the convention adjourned he was sent
to Washington at his own expense to urge the passage of a

" 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 Rail-
roads of the First Nevada Legislature" (Carson City, 1865). This document contains
several valuable reports and some interesting testimony.

6 HISTORY OF THE SOUTHERN PACIFIC

bill such as the convention favored. He returned in i860
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.^

Discovery of Transcontinental Route

It was after Judah's return from Washington in i860 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 try-
ing 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.*

Such is Strong's testimony given years afterwards, when
the Central Pacific had proved a success, and it was a distinc-
tion to have been connected with it. It is possible that Strong
overestimated his contribution to the work. Yet the essential .

3 Judah's report of his mission to Washington as a delegate of the Pacific Railroad
Convention is printed m full in the Sacramento Union for July 25, 1S60. ivaiiToau

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 tSBTT„:i.3
States, and other purposes." (soth Congress, ist Session, Senate Executive Dori,^»„?M„
SI, pp. 2838-39. testimony D. V. Strong.) Hereafter referred to as United Stet^pL;*?;
Railway Commission. "t-ates racmc

Theodore Dehone Judah

INCEPTION OF THE PROJECT 7

fact is that Judah was in the mountains in August, i860, 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 instru-
ments." 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." ®

Appeal for Funds

Judah drew up articles of association for a company late
in i860, 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.''

By October or November, i860, 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

s The expenses of this preliminary investigation were provided by small subscribers
around Dutch Plat. A paper dated at Dutch Flat, June 26, i860, contains 47 names, in-
cluding 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.)

* Judah manuscript, letter of Mrs. Anne Judah.

7 Evidence concerning projected railways across the Sierra Nevada Mountains, sup
tit., testimony L, L. Robinson.

8 HISTORY OF THE SOUTHERN PACIFIC

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 endeavor-
ing to give wide circulation to the results of his discoveries.

Under date of November i, i860, 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 Sacra-
mento 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.*

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

StronJ^""*'^ ^*'"°^ ^^"^^ ^"''^*y Commission, pp. J960-61, testimony D. W.

INCEPTION OF THE PROJECT 9

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 ofif 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 Beck-
wourth 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 pubHcation of the news of his discoveries in the
nevifspapers, Judah went to San Francisco. He managed to get
in touch with some capitaHsts, 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.*

Sacramento Meetings

When he failed to secure support in San Francisco, Judah
went to Sacramento. The city of the plains, as it was then

9 Sacramento Union, January 9 and io» i86z.

. lO HISTORY OF THE SOUTHERN PACIFIC

afJectionately 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 enthusi-
asm 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 baro-
metrical 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. Hunt-
ington 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 ^^ on the 115 miles of line contemplated,
and small miscellaneous offerings were not likely to carry the
promoter very far.

CoUis P. Huntington

It is at this juncture that we first hear the names of CoUis
P. Huntington, Leland Stanford, Charles Crocker, and Mark
Hopkins, all prosperous business men in Sacramento. Hunt-

^° Sacramento Union, January 4, 186,1.

•T3

as
O

a)
Pi

INCEPTION OP THE PROJECT II

ington 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 busi-
ness 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. Enter-
prise 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 inaagination which were not
absent from his business plans.

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.

12 HISTORY OP THE SOUTHERN PACIFIC

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 circum-
stances. 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

INCEPTION OP THE PROJECT 1 3

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.^^

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.^^

" 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.

^^ Crocker said of his own personal appearance during the sixties: ''While I was build-
ing the road, I weighed nearly all the time 264-s 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
66 ^ 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 10 J^ inches
tall." (Crocker manuscript, p. 63.)

14 HISTORY OF THE SOUTHERN PACIFIC

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.^* 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 i860. 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 pro-
moter 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 meet-
ing, and that Judah came to his house the following evening.

'3 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 verv full and in
formmg. They will be referred to in the present volume as " Huntington rnam,rrrint "
"Crocker manuscript," etc. See also Redding. "Sketch of the Life of MaS- ?T^S;^«"
(San Francisco, 1881). "laric iiopkms

INCEPTION OF THE PROJECT 15

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.^* 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 considera-
ble risk."

Likelihood of Government Aid

Although we have no direct evidence to Jhis 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

'< Huntington manuscript, pp. 9-10.

'S Crocker manuscript, pp. 28-29. See also Hittell, "History of California," Vol. 4.

l6 HISTORY OP THE SOUTHERN PACIFIC

from the first, it was fortunate for Mr. Judah that/owing to
his famiHarity with conditions both at Washington and in
CaHfornia, he was in a position to inform his prospective
cHents of the Hkehhood 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, i860, 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.^* Only one year later, when the, first instru-
mental 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

"> Report of a committee of the board of directors, Sacramento Vallev Railrna^i rnm.
pany, August 7, 1855. ' 's.Miioa.a \^om

-2>S^2-**--^fl/'

INCEPTION OF THE PROJECT 17

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 in-
creased 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,^^ of the Stockton and Copperopolis in 1862,^* of the
Placerville and Sacramento Valley Railroad in 1863,^* and of
the North Pacific Coast in 1873.^" Judah had no greater
facilities than other engineers of the time, and in his own
estimates followed the prevailing custom.^^

Estimates of this nature were not accurate, and it was
unreasonable to suppose that they should be accurate. Judah

^7 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,
I8S3-

^* Engineer's report of a preliminary survey of the Stockton and Copperopolis Railroad
with estimates of cost and traf&c, October, 1862.

^ 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.

" Report of President Moore to stockholders, 1873.

^' Report of the chief engineer on the preliminary survey, cost of construction, and es-
timated 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.

1 8 HISTORY OF THE SOUTHERN PACIFIC

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 ex-
traordinary 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 Cali-
fornia. 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

INCEPTION OP THE PROJECT 1 9

miles. Huntington, Hopkins, Stanford, and Crocker sub-
scribed 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 Stan-
ford, 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.^^

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, i860, 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: (i) 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

" Report of the chief engineer on the preliminary survey, cost of construction, etc.,
October 22, 1862 (October i, 1861), sui>. cit.

20 HISTORY OF THE SOUTHERN PACIFIC

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 com-
mittee chosen by Congress the following memorandum show-
ing 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 i, 1870 1,610,000

Total $46,062,000

Company owed Contract and Finance Company 1,827,000

Grand total $47,889,000

22 HISTORY OP THE SOUTHERN PACIFIC

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 con-
siderable, 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 Hunt-
ington and Hopkins, amounted to something like $1,000,000
when the construction of the Central Pacific was begun.'
Other estimates put the figure at $160,000,^ or even as low as
$109,000.^ 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 Rail-
road during construction were more important than the con-
tributions of the partners. Between 1863 and 1869, according
to the calculations of the United States Pacific Railway Com-
mission, the gross earnings of the Central Pacific amounted to

' United States Pacific Railway Commission, p. 3774, testimony C. P. Huntington.
'ComplaintotSamuelBrannan, Juneai, 1870. Filedin the case of Brannan v Central
Pacific Railroad, m the District Court of the Fifteenth Judicial District of thJ'sute of

3_Bancroft. ■'History of California," Vol. 7. p. S4S, note. The assessed value of the
associates' property in Sacramento County in 1861 was $118,035. vaiue 01 inc

STATE AND LOCAL AID 23

$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 deduc-
tion of interest and taxes for this period amounted to
$2,427,533.80.* Most of these earnings came from local
business, although an attempt was made to provide facilities
for through travel before 1869, by arranging stage accommoda-
tion 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
i86g. 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 sub-
stantially 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.^

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

4 United States Pacific Railway Commission Report, p. 87-

s United States Pacific Railway Commission, p. 34^1, testimony M. D. Boruck.

24 HISTORY OP THE SOUTHERN PACIFIC

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.*

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,'^ and it appears that Charles and
A. B. Crocker transferred their stock to Huntington, Hop-
kins, and Stanford in 1873, for $13 a share.* No attempt to
sell Central Pacific stock generally was made until 1873, and
it was not listed on the Stock Exchange until 1874.^

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 occa-
sion that there was the greatest difficulty in securing loans on
the bonds the Central Pacific had to ofifer — including govern-
ment, county, convertible, state aid, and first mortgage bonds —
to as much as 75 per cent of the face value of the issues.^"
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.^^

6 Crocker manuscript, p. 32.

7 United States Pacific Railway Commission, pp. 2630-3 1, testimony Leland Stanford.
* 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.

9 Ellen M. Colton v. Leland Stanford et al., in the Superior Court of the State of Cali-
fornia 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.

'" United States Pacific Railway Commission, p. 3493, testimony D. 0. Mills

^' Crocker manuscript, pp. 29-30.

STATE AND LOCAL AID 25

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.^'' Yet
at the time when the construction of the Central Pacific Rail-
road 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.^^

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 govern-
ment 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 :

" United States Pacific Railway Commission, p. 2731. testimony Leland Stanford.
" Ibid., p. 2399. testimony A. Cohen; p. 2767. testimony Leland Stanford.

26 HISTORY OP THE SOUTHERN PACIFIC

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 350,000 160,000

San Joaquin County, subscription to Western

Pacific 250,000 135,000

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

STATE AND LOCAL AID 2^

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 passen-
ger for the round trip $50 in cash and three days in time — ex-
cess 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 busi-
ness 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 sit-
uation 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 com-
petition 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 Calif orriia town against another.

28 HISTORY OP THE SOUTHERN PACIFIC

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.** 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,*^ and it is notorious that the fears of San
Francisco were played upon in order to obtain terminal facili-
ties 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 Conven-
tion 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 in-
stance 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.

'4 Colton case, pp. 948-49, Huntington to Colton. October 8, 1874.

»s Tinkham, "History of Stockton," p. 3S6; San Francisco Chronicle, June 13, 1874.

STATE AND LOCAL AID 29

County Stock Subscriptions

Perhaps the eariiest California statute in aid of railway
construction was the act approved May i, 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.^* 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 Marys-
ville and Benicia.^^ And during the following two years the
San Francisco and Marysville Railroad not only received a
land grant/* 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,^® and the duty of the supervisors of Solano and
Yolo counties to call elections in those counties with similar
intent.^" 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.^^ 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

•« Laws of California, 1852, Ch. 77- '' Ibid., 1857. Ch. 343.

'8 Ibid., 18S8, Ch. 300. '9 Ibid., 1859, Ch. 241. "° Ibid., i8S9, Ch. 263, 264.

"Ibid., 1859. Ch. 262.

30 HISTORY OP THE SOUTHERN PACIFIC

subscribing $250,000 to the capital stock of the Western
Pacific.22 In April, Placer County was authorized to consider
a subscription of equal amount to the stock of the Central
Pacific.^* Next, Santa Clara County was authorized to hold
an election and to subscribe $150,000 to the Western Pacific,
if it so desired.^* Sacramento received the same privilege in
April, to the extent of being permitted to take 3,000 shares of
the Central Pacific,^® and was in addition allowed to give away
rights-of-way and certain rights of construction of consider-
able though indefinite value ; ^® 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.^'^

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 stock-
holders 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

" Laws of California, 1863, Ch. 77 '3 Ihid., 1863, Oh. 125.

24 Ibid.. 1863. Ch. 207. =5 Ihid., 1863, Ch. 310.

=' Ibid.. 1863, Ch. 209. The value of these privileges has been estimated at S200 000.

»7 Ibid., 1863, Ch. 291.

STATE AND LOCAL AID 31

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.*^

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.^®

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 corpora-
tion.'" 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.'^

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

« Ibid.. 1863, Ch. 314-

^ Ibid., 1864, Ch. 320. Twenty years later the quarries were still undelivered.

" Constitution of the State of California, Arts. VIII, XI, Sec. lo.

31 People V. Pacheco, 27 Cal., 176 (186s).

32 HISTORY OP THE SOUTHERN PACIFIC

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 Place'' Herald and
the Advocate. The proposal for a bond issue \ carried, but
only by a majority of 409 in a total vote of 3,810.^^

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.^*

These affidavits were later supported by the assertion of
Hon. William A. Piper, on the floor of the House of Repre-

3^ Angel, "History of Placer County," 1882, p. 280.

33 "The Great Dutch Flat Swindlel — An address to the Board of Supervisors Officers
and People of San Francisco," 1864.

1 ',

Henry P. Coon

STATE AND LOCAL AID 33

sentatives 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.

Resort to Court

Whether or not the election of 1863 was tainted with
corruption, as s.oon 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 irregu-
larities 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 com-
panies for the construction and equipment of their roads.
According to counsel, this was an attempt to create an exemp-
tion from the proportionate liability imposed on all stock-
holders 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.

34 HISTORY OP THE SOUTHERN PACIFIC

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 con-
cern 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.^*

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 Rail-
road 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 com-
pelled by final judgment of the Supreme Court to execute and
deliver the bonds specified in the act.^'^

Pursuant to this act of April 14, 1864, the Board of

34 French v. Teschemaker, 24 Cal. S18 (1864).

35 Laws of California, 1864, Ch. 344.

STATE AND LOCAL AID 35

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 j.^^ 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 2y 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 :

I. 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.

3« California Supreme Court Records, Vol. 38, case of People v. Coon.

36 HISTORY OF THE SOUTHERN PACIFIC

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

3. It was also declared by defendants that the Act of 186^
had been misconstrued — that it did not relieve San Franciscc
from her subscription, but simply authorized the city to liqui-
date that subscription "in cash or other security" instead of ir
bonds. "We claim," said counsel, "that the act authorized nc
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 subscrip-
tion for any amount less than $600,000, payable in cash ir
place of bonds." ^''

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 rail-
road had at this time either called in from other subscribers
the whole amount of their respective subscriptions, or hac
expended on the road from other sources a sum equal to the
amount of the bonds. The Supreme Court, however, did no1
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 Centra
Pacific Railroad of California, the 400 bonds of the city anc

37 California Supreme Court Records, Vol. 38, p. 98, sup. cit.

STATE AND LOCAL AID 37

county of San Francisco, described in the ordinance before
referred to.^*

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 com-
mittee, to deliver the bonds to the Central Pacific. It was
obviously hoped to tie things down so that no further delay
would be possible.

38 People V. Coon, as Cal. 63s (1864).

38 HISTORY OP THE SOUTHERN PACIFIC

There seems to have been a split in the Board of Super-
visors 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 them-
selves 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."

STATE AND LOCAL AID 39

It was pointed out that the Central Pacific was a work of
general interest to the Pacific Coast. It did not come within
ICO 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 oh 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 be-
cause, 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 com-
pelled to support the entire expenses of the former, or that any
other city should be compelled to contribute towards the ex-
penses 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 con-
sideration, 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.^®

39 People V. Supervisors, 37 Cal. 6ss (i86s).

40 HISTORY OF THE SOUTHERN PACIFIC

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,*'' 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 wer^
sold at $751.60 each, amounting to $236,754, while 85 were
paid out at par for rolling stock.*^

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 Cali-
fornia, 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 assess-

4° United States Pacific Railway Commission, pp. 3610-11, testimony Leland Stanford.
*^ Ibid., p. 3464. testimony E. H. Miller.

STATE AND LOCAL AID 4I

ment 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.*^ 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.** 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. IrT]
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 1
a clear excess of $11,500, to the county without considering |
the effect of the railroad in increasing the valuation of real I
estate.

These were the results which voters were led to expect, v

<' Angel, "History of Placer County," pp. 158-65.

*3 Fankhauser, "Financial History of California," p. 299 #■

42 HISTORY OF THE SOUTHERN PACIFIC

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 $1.73 >4. 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 em-
barrassment 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 senti-
ment 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 trans-
portation 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

STATE AND LOCAL AID 43

Steamship Company. In the aggregate their influence was
considerable, and it was constantly thrown against the grant-
ing of aid to the Central Pacific.

It is a curious commentary upon the effect of government
subsidies, tRat 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 govern-
ment from Sacramento to Auburn than to buy a railroad al-
ready in active operation for most of the distance between these
points. In cold figures, it would have cost $400,000 to buila'\
a new line out of Sacramento, and $285,000, according to ,
Central Pacific engineers, to put the Sacramento Valley Rail- I
road in thoroughly good physical condition. But under federal j
legislation, to be described in a later chapter, only $250,000 j
out of the $400,000 would have to be paid by the Central i
Pacific in cash, leaving a clear gain of $35,000 if the policy J
of construction were pursued.**

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

End of Local Subsidies

In the year 1868, a resolution was introduced into the Cali-
fornia 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 reso-
lution 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,

44 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 i, 1863.

45 Letter of L. L. Robinson, chief engineer, to Chas. A. Sumner and Henry Epstein,
Chairmen Committees on Railroads, Legislature of Nevada, Sacrairento, February 3, i86s.
Printed in a pamphlet entitled "Evidence concerning projected railways across the Sierra
Nevada Mountains," sup. cit.

44 HISTORY OF THE SOUTHERN PACIFIC

the Sacramento Union, while in favor of a grant to the Stock-
ton and Tulare Railroad, urged the counties to go slow and
to secure an amendment to the general railway law, reducing
maximum transportation charges to lo 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 rail-
roads, but this could not prevent the passage of the so-called
"Five Per Cent Act" of 1870, authorizing counties to sub-
scribe to railroad stock up to 5 per cent of their assessed valua-
tion; 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,** and the other providing for the construction of a rail-
road 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 sub-
sidies were not only unwise, but that they were unconstitu-
tional for the reason that a donation to a private corporation
was not a use of funds for a proper purpose.*'' 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 follow-
ing year, however, the Five Per Cent Act was repealed, and
the period of local subsidies in California came to an end.

•i' Stanislaus, Merced, Fresno, Tulare, and Kern counties. In Kern County the bond
issue was limited to $480,000 and in Stanislaus to Si8o,ooo.

. . ^' Letters of Governor Haight, on the constitutional power of the legislature to authoriie
cities and counties to donate bonds to railroad corporations, Sacramento, 1870.

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.^ It was perfectly well under-
stood on the Pacific Coast that no transcontinental railroad
could be built without the assistance of the national govern-
ment. 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 con-
struction of a railway from the Missouri or Mississippi River
to the Pacific Ocean, the cost of which should be borne by the
general government.* 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 dis-

'^ 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."

'Laws of California, 1852, p. 276. See also resolutions passed May 17, 1853 (Laws of
i8S3,p.3is); May 13, 1854 (Laws of 1854, p. 224); February 25, 1854 (Laws of 1854, p. 227);
March 19, l8S7 (Laws of 1854, p. 370); April l, 1859 (Laws of 1859, p. 390); April 15, 1859
(Laws of l8s9,p. 394). In 1859 the legislature adopted a memorial to the same general effect
(Laws of 1859, p. 395).

3 The proceedings of the Pacific Railroad Convention of 1859 were publisheii 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 Sis, 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 $s, 000, 000 by the state of Oregon. In Febru-
axy, i860, an adjourned meeting of the same convention was held at Sacramento. Con-
siderable opposition developed at this meeting to the proposal to bond the state for

46 HISTORY OF THE SOUTHERN PACIFIC

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 j
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 Htintington-Stanford group was based. V

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 i, 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 CaHfornia,
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 Cali-
fornia, chairman of the Senate Pacific Railroad Committee, he
proceeded to Washington.

From the time of his arrival there to the following July,
Judah vyas 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

$15,000,000. 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 laore
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, i860.)

FEDERAL LAND GRANTS AND SUBSIDIES 47

number of Congressmen. He was aided, also, by the fact that '
Sargent, at the opening of the session, was assigned to the Paci-
fic Railroad Committee of the House, and by the further cir-
cumstance that, with questionable propriety, he, Judah — inter-
ested in the outcome of the pending legislation as he was — was
made clerk of a subcommittee of the House Committee on Paci-
fic Railroads and secretary of the Senate Pacific Railroad Com-
mittee, 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 looth meridian instead
of at the I02d 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 pay-
ments were made for the road across the Sierras and not for
the section east of the California state line, where the diffi-
culties 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.*

4 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 Hunt-
ington 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 1864J, C. P. Huntington spent much of his time in Wash-
ington. 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 fellow-
ship, besides ... I had been associated with him and others in the organization of the
Central Pacific Railroad Company . . ." (Cornelius Cole, Memoirs, pp. 179-80.)

48 HISTORY OF THE SOUTHERN PACIFIC

* 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 Jose 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 Sargentl
would hardly have been naive 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 l
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 i, 1862,^ and accepted by the company by letter
dated November i.® 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 oflFered. However this
may be, Judah arranged for the purchase of locomotives, cars,

5 12 United States Statutes 489 (1862).

6 United States v. Southern Pacific Co., Record, pp. 1654-57.

FEDERAL LAND GRANTS AND SUBSIDIES 49

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.'^

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.* 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.*

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 near-
by. The Act of 1862 had contained no limitation on construc-
tion eastward beyond the reference to a Union Pacific
connection. Huntington said later that the restriction of 150

7 Report of chief engineer, Central Pacific Railroad of California, on his operations in
the Atlantic states, 1862.

8 13 United States Statutes 3S6 (1864).

9 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. (4Sth Con-
gress, 2d Session, Congressional Record, Vol. 7, p. 2024.)

50 HISTORY OP THE SOUTHERN PACIFIC

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 Washing-
ton ... 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.^"

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.^^

In addition to the authority to build, the Central Pacific\
was given a free right-of-way 400 feet wide across all govern-
ment 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

"> Huntington manuscript, pp. 78-79. The act referred to appears in 14 United States
Statutes 78-79.

" Report of the chief engineer on the preliminary survey of the Central Pacific Rail-
road, etc., October 22, 1862.

FEDERAL LAND GRANTS AND SUBSIDIES 51

by the United States, or lands to which a pre-emption, home-
stead, 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 i, 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 por-
tion of the road. East of this section of line the Central
Pacific bond subsidy was to be $32,000 per mile, but west of

52 HISTORY OF THE SOUTHERN PACIFIC

it, it was to be only $16,000 per mile. It was the understand-
ing 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 govern-
ment. This last point was later the subject of litigation in
which the company's contention was sustained.^^ The subsidy
offered by the government inured to the company on the com-
pletion 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 engi-
neer 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 de- i
mands made upon the Central Pacific do not seem to have beeh
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 i
curves were not to exceed the maximum grades and curves I
of the Baltimore and Ohio Railroad, and the whole line of
railroad and branches. Union Pacific and Central Pacific in-
cluded, was to be operated and used for all purposes of com-
munication, travel, and transportation, so far as the public
and the government were concerned, as one connected, con-:
tinuous line.

In the second place, demand was made that the company
should pay the principal of the government bonds at maturity,

^^ United States v. Union Pacific, 91 U. S. 72 (i87S)-

FEDERAL LAND GRANTS AND SUBSIDIES 53

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
pre'ference in the use of the same for all the purposes afore-
said (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.'^^

In 1864 this section was changed by requiring only one-
half of the compensation for services rendered to the govern-
ment 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

" 12 United States Statutes 489 (1862), Sec. 6.

54 HISTORY OF THE SOUTHERN PACIFIC

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, ex-
clusive 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 in-
deed. Under the provisions of the Acts of 1862 and 1864,
the Central Pacific and Western Pacific railroads received I
$27,855,680 in government bonds, and 10,081,945.18 acres inS
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 re-
ceived 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

FEDERAL LAND GRANTS AND SUBSIDIES 55

$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 granti
referred to in the Pacific Railroad legislation was mucb^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 dif-
ferences between the actual mileage of the railroad and the
mileage upon which land was awarded, reduced the area pas-
sing 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

56 HISTORY OF THE SOUTHERN PACIFIC

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, how-
ever, 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 consecu-
tive 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 re-
ceivers, and when declared cleared, the railroad company paid
for the surveying, selecting, and conveying. Upon the pay-
ment 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 examina-
tion.

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

FEDERAL LAND GRANTS AND SUBSIDIES 57

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 identi-
fying any particular sixteenth section of a tract. There were
delays also in determining the title to lands claimed by home-
steaders 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 pa3Tnent of taxes. This the company denied, pointing to
the fact that the lands listed to June i, 1887, exceeded the
lands patented by 622,612.54 acres, and that the cash de-
posited with the United States Land Department to cover the
cost of surveys exceeds the amount charged against the com-
pany up to January 15, 1886, by $28,771.92.^* 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 stafif in the General Land Office at Washing-
ton and not to the policies of the railroad itself. This is shown
by the wide disparity between listings and patents. The excess

'< United States Pacific Railway Commission, p. 3562. testimony W. H. Mills.

58 HISTORY OF THE SOUTHERN PACIFIC

of lands selected over lands patented averaged 57,000 acres dur-
ing 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 selec-
tions 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 contraction of the Central
Pacific was not aided to any material degree by the lands of-
fered 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,^^ 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 construc-
tion, but as a reward to promoters for having taken risks.
/^ While to some extent the land grant to the Central Pacific
I may have aided the sale of Central Pacific first mortgage
V bonds, in the main its effect was to give a grossly excessive and

•s The Western Pacific had received in addition two patents conveying 27 sos 03 acres,
but these lands were assigned by the Central Pacific to outside parties. '

FEDERAL LAND GRANTS AND SUBSIDIES 59

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 chap-
ter, so that the provisions designated to secure repayment of
the government loan need not be considered at this time. Men-
tion 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 Sacra-
mento 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

6o HISTORY OF THE SOUTHERN PACIFIC

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 extrem-
ities 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 recom-
mendations 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 be-
came plainly perceptible to the naked eye.^* Since this inter-
pretation 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 identi-
fied, however, the title attached to specific sections as of the
date of the grant, except in the case of sections which were

*fi United States Pacific Railway Commission, pp. 3569-70.

FEDERAL LAND GRANTS AND SUBSIDIES 6l

specifically reserved.^^ Whilejhe.^rant was a present grant,
itjconveyed 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 com-
petent authority for any purpose or in any manner, whether
or not the reservations were mentioned in the granting act.^^

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.^^ The same effect was produced by an uncan-
celed 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.^"

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

" United States v. Southern Pacific Railroad Co.. 146 TJ. S. 570, 593 (1892)-
'8 Newhall v. Sanger. 92 U. S. 761 (187s).
w Kansas Pacific v. Dunmeyer, 113 U. S. 629 (188s).

" Hastings and D. R. Co. v. Whitney, 132 U. S. 357 (1880); Whitney v. Taylor, 158
U. S. 8s, 92 (1895); Bardon v. Northern Pacific, 145 U. S. 535 (1892).

62 HISTORY OP THE SOUTHERN PACIFIC

at the time the Hne 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.^^ Indeed,
the Secretary of the Interior ruled that settlement and occupa-
tion exempted land from the grant even though the settler
failed formally to assert his claim.^^ After the lands embraced
in the grant were withdrawn from pre-emption, private entry]
and sale, a settler could not secure acreage by subsequent oc-
cupation, 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.^^

Following this act, many claims were presented. The
United States Supreme Court held that land within the boun-
daries 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

»i Menotti v. Dillon, 167 U. S. 703 (1897).
" Central Pacific Railroad case, 3 L. D. 264.
'3 9 United States Statutes 631 (1851).

FEDERAL LAND GRANTS AND SUBSIDIES 63

many sections of California knds which were isub 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 sufifered 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.^*
Sometimes, indeed, the company leased unpatented land to
cattlemen at low rates, in spite of its lack of title. Actual trans-
fers 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 acknowledg-
ment 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 Fran-
cisco, Sacramento, San Jose, 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 fur-
nished free transportation for California terminals to the sec-
tions bought. This last practice, at least, was in force on the \j
Southern Pacific in 1880, and presumably on the Central (
Pacific also.

All in all, the Central Pacific does not seem to have at-

'< United States Pacific Railway Commission, p. 2412. testimony W. H. Mills.

64 HISTORY OP THE SOUTHERN PACIFIC

tempted 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 pro-
prietor, 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 govern-
ment 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 CaH-
fornia 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 gath-
ered 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 every-
body, 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.^

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 sur-
mount. The highest point which the company had to reach
was Summit Station, 105 miles from Sacramento, at an alti-
tude of 7,042 feet. Since Sacramento lay only 56 feet above
sea level, to reach this point required an ascent of 6,986 feet

' 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."

s 65

66 HISTORY OF THE SOUTHERN PACIFIC

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 con-
tinuous ascending grade, the maximum grade, from the foot-
hills 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).^ Loca-
tion surveys reached Alta in 1863, the state line in 1866, and
Ogden in 1868.* 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,*
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 proceed-
ing, to the American River side. This change avoided some
20 miles of 1 16-foot grade, together with a great deal of curva-
ture.^

The final result of these various surveys was a line with
maximum grades of 116 feet to the mile. This does not com-
pare unfavorably with most of the transcontinental routes sub-
sequently built. It is interesting to observe, however, that the
Central Pacific summit is some 2,000 feet higher than the alti-
tude 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

_ ' Report of the chief engineer upon recent surveys of the Central Pacific Railroad of
California, July, 1863.

5 Ibid., December, 186s, and July, 1869. 4 /ftfj., October 8, 1864.

s Ihid., December, 1863.

c^-^

CONSTRUCTION COMPANIES 67

Judah nor his immediate successors, therefore, discovered the
best route across the Central Sierras.

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 Janu-
ary the trails become impassable, and the high levels are un-
visited 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 be-
yond the summit and put to work, at great expense, in the
cafions of the Truckee River. The first snow sheds were built
in the summer of 1867, and in the following years it was de-
cided 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.®

« United States Pacific Railway Commission, pp. 2581-82, testimony Arthur Browil.
superintendent of bridges and buildings.

68 HISTORY OF THE SOUTHERN PACIFIC

In addition to the difficulties caused by snow, it must be
remembered that the frozen earth, though uncovered, was
difficuh to work. Not only was it necessary to blast out mate-
rial 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.^

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 con-
struction, 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 Paci-
fic, 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 con-
struction of the Central Pacific lay in the difficulty of getting
supplies. Wood and stone could be procured in the moun-
tains, 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

7 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.

CONSTRUCTION COMPANIES 69

oats about 14 or 15 cents a pound. Stanford says he sold one
potato for $2.50.®

In the cases cited, high cost of transportation often played
an important part in determining the final prices, and in gen-
eral, 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 Sacra-
mento 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 Wah-
satch Mountains. He continues :

They had seven ties on that wagon. I asked where they
were hauled from, and they said from a certain canon. Thfey
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 with-
out having a fire to warm themselves.

Fortunately for the company, the cost of labor on the Cen-
tral 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 con-
struction was at its height. White men, of whom there were

8 United States Pacific Railway Commission, 0.2523, testimony Leland Stanford. On
the other hand, there were abundant supphes of timber along the hne, and the price of
machinery declined after the war.

70 HISTORY OF THE SOUTHERN PACIFIC

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 me-
chanics. Most of the track laborers, however, were Chinamen,
who were paid $35 a month, and boarded themselves.® 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.^"

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. Hunting-
ton 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 i8th and

9 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

Year

Chinamen

Rate of pay

White Men

Rate of pay

1864

Very few

1,200

S30 a month

186s

7,000

S30 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

S,ooo

1,500-1,600

° Huntmgton 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.)

CONSTRUCTION COMPANIES 71

30th sections." 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 quar-
reled with each other, and tried to "scoop" labor from each
other ;i2 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."

At any rate, after the completion of section 29, no more
contracts were let to anyone except Charles Crocker and Com-
pany. According to the associates, it was not so much a ques-
tion 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
I 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

" 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 influ-
ence which prevented Crocker from building sections 19 to 30. Judah wrote :" I have had a
bi^ 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 Stanf ord-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.

" United States Pacific Railway Commission, p. 3769, testimony CoUis P. Huntington.

^3 /ftjf^., pp. 2621-26, testimony Leland Stanford.

72 HISTORY OF THE SOUTHERN PACIFIC

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 passen-
ger traffic between Sacramento and Virginia City; and also in
order to comply with the acts of Congress and the state legisla-
ture, 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 afrangements
be continued with that firm, at rates specified in an accompany-
ing resolution.^* 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 rail-
road 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 modi-
fied 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

'■• 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. _ ilbid., pp. 3045-46.) This report made the point that the letting of contracts to a
responsible contractor would raise the credit of the railroad.

ci
O

a!
Pi

■a
fi

.c
"3

a
:3

CONSTRUCTION COMPANIES 73

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.

Paymetits 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.^®

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 in-
creased his chance for a speculative gain, to be realized after
construction should have been completed. Mr. Stanford has^i
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.^^ 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

'S United States Pacific Railway Commission, p. 3436.
" Ihid., p. 3157, testimony J. H. Strobridge.

74 HISTORY OP THE SOUTHERN PACIFIC

with the contractors, as the case might be." 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 : ^^

Total Amount Paid Charles Crocker and Company
ON His Contract and for Extra Work

Cash, or its equivalent, including material fur-
nished 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 1 1,947,530.00

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

*? 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.)

'8 United States Pacific Railway Commission, p. 3511, testimony Richard F. Stevens.

CONSTRUCTION COMPANIES 75

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 stock-
holders 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.^"

"Contract and Finance Company"

When the Central Pacific approached the state line of Cali-
fornia 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.^" 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 under-
take 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.*^
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. Milli-
ken, 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

" United States Pacific Railway Commission, p. 2636, testimony Leland Stanford.

'" Ibid., p. 3661, testimony Charles Crocker.

" Colton case, pp. z66-68, deposition of CoUis P. Huntington.

76 HISTORY OF THE SOUTHERN PACIFIC

Finance Company was formed for the purpose of engaging in
and carrying on the business of constructing, purchasing,
leasing, selHng, holding, maintaining, operating, and repairing
railroads, wagon and transit roads, steamboats, vessels, tele-
graph 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 purchas-
ing and using of iron and other materials for railroad and
telegraph lines ; the borrowing and loaning of money ; the con-
ducting 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 Con-
tract 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.^^ The result of the failure to secure outside
subscriptions to the Contract and Finance Company was that

" United States Pacific Railway Commission, p. 2640, testimony Leland Stanford.

CONSTRUCTION COMPANIES 77

the associates had to take up the stock of that company them-
selves. 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, Hunt- '
ington, and E. B. Crocker took equal shares with him — each
subscribing for 10,000 shares out of the 50,000 outstanding. ^^
Later a little stock was disposed of to outsiders, but when the
Contract and Finance Company got into the courts the associ-
ates 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 them-
selves 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 stock-
holders 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, some-
times 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.

'3 Ibid., p. 3661, testimony Charles Crocker; p. 2637, testimony Leiand Stanford.

78 HISTORY OP THE SOUTHERN PACIFIC

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 under-
taking. 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 be-
came 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 tele-
graph 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.^* 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

^4 United States Pacific Railway Commission, pp. 3436-37.

CONSTRUCTION COMPANIES 79

relative to the terms of the contract with the construction
company is made on the strength of the recollections of parties
interested,^® for the actual contract is one of the missing docu:^.
ments characteristic of Central Pacific history. Stanford des--^
cribes 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 con-
struction company as compared with those of construction by
the Central Pacific itself, were those connected with specializa-
tion of the work. A company which does nothing but con-
struction 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 dis-
charging 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 rail-
road ; and as for tools, the Contract and Finance Company had
no machine tools at all at the beginning, and had ^ 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

'5 United States Pacific Railway Commission, p. 2897. testimony W. E. Brown ; p. 3062,
testimony E. H. Miller; pp. 3SI1-20, testimony R. F. Stevens.

80 HISTORY OP THE SOUTHERN PACIFIC

been packed into boxes by the industrious Mark Hopkins inj
1873, and never again produced.*^ 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 dis-
appeared, if indeed they ever existed.^'' We do not know,
therefore, how much construction cost the Contract and Fi-
nance 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.^* If we addio
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 cashj_ $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 o§ purchasing from the Union Pacific 47)^ 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 pay-
ment for which is not included in the figures just given.^^

In a word, if the conclusions of the United States Pacific

'^ United States Railway Commission, pp. 2712-17, testimony D. Z. Yost.

"' Ibid., pp. 2875-92, testimony John Miller; pp. 3028-33, testimony N. Greene Curtis.

" 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.)

" United States Pacific Railway Commission Report, pp. 74-75.

CONSTRUCTION COMPANIES 8l

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

82 HISTORY OP THE SOUTHERN PACIFIC

were divided into four or five parts, but both Stanford and
Crocker have testified that their dividend consisted of approxi-
mately $13,000,000 in Central Pacific stock, at par.*" At the
same time the stockholders of the construction company
assumed its debts, amounting to perhaps $1,600,000.*^

3° United States Pacific Railway Commission, pp. 26SS-S6. testimony Leiand Stanford;
p. 3668, testimony Charles Crocker. Mr. Huntington said in 1873 that he thought his divi-
dend 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.)

'^ United States Pacific Railway Commission, pp. 2977-88, testimony W. E. Brown.

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 : ^

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

' 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 ;.

84 HISTORY OP THE SOUTHERN PACIFIC

Relations with Western Pacific

It has already been noted that the line from Sacramento j
via Stockton to San Jose was not part of the original plan,;
and that the rights, grants, and franchises of the Central Pacific I
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 Jose 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.^ 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 arrange-
ments between himself and the Western Pacific be canceled.^

This led the Western Pacific to enter into a contract with
the Contract and Finance Company, with the result that sub-
stantially 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 Jose 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 Jose was in working order. It would be an

' 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 Legisla-
ture 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 Jos6, 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."

3 United States Pacific Railway Commission, p. 2785, testimony Leland Stanford.

THE SEARCH FOR A TERMINAL 85

exaggeration to say that the Hne 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 insvifficient, 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 transconti-
nental 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 Bayr
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 unprofita-
ble 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 Jose. 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 Fe did later, or
to develop Benicia or Port Costa, or even' to build a terminus

86 HISTORY OF THE SOUTHERN PACIFIC

on an island in the bay. Yet as compared with these alterna-
tives, 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.'* 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.^

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

< Laws of California, 1852, Ch. 107.

s City of Oakland v. Oakland Water Front Company, transcript of testimony, p. 649,
deposition Horace W. Carpentier; p. 175s. testimony A. J. Moon.

THE SEARCH FOR A TERMINAL 87

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.® But the understanding,
if any existed, never could be enforced,^ 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.®

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

« 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.

7 Moon, one of the trustees who approved the grant, was afterwards taken into Carpen-
tier's employ. Adams, another trustee, secured the property now known as the "Adams
Wharf " to the east of the narrow-gauge bridge.

» City of Oakland v. Carpentier, 13 Cat 540 (1859); 21 Cal. 642 (1863). The Oakland
ordinances were ratified and confirmed by act of the California legislature passed May is,
1861. (Laws of California, 1861, Ch. 377-)

88 HISTORY OF THE SOUTHERN PACIFIC

should be done on approximately this basis.** 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." 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 Stan-
ford, 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 i share.

On March 31, Mr. Carpentier deeded to the new corpora-
tion all the water-front of the city of Oakland, that is to say,
all the lands, and the lands covered with water lying be-
tween 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. ^^

9 City of Oakland v. Oakland Water Front Company, transcript on appeal, pp. 652-54,
deposition Horace W. Carpentier.

'° Laws of California, 1868, Ch. 230.

" City of Oakland v. Oakland Water Front Company, transcript of testimony,
sup. cit. pp. 976-80.

THE SEARCH FOR A TERMINAL 89

Cession of Land by Water Front Company

On April i, 1868, two further agreements were signed.
One, styled an indenture, was between the Oakland Water
Front Company, the Western Pacific Railroad Company, Car-
pentier, 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 fol-
lows :

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 obstruc-
tions 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

90 HISTORY OF THE SOUTHERN PACIFIC

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 i, was an agreement
between the Western Pacific Railroad Company, Leland Stan-
ford, 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.^*

Attitude of City

Up to this point the city had not entered into any contracts.
On April i, 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

" City of Oakland v. Oakland Water Front Company, transcript of testimony, Bp.
6S7-64. deposition Horace W. Carpentier.

THE SEARCH FOR A TERMINAL 91

tide and ship channel. This ordinance further provided that
Carpentier should convey to the Oakland Water Front Com-
pany 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.^^

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 addi-
tion, 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.^*

'5 See the Ordinance of the Cityr of Oakland, No. 302 (April 2, 1868). An excellent ac-
count of these transactions is given in an unpublished manuscript in the University of Cali-
fornia 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 303
were passed. The compromise described was effected under authority of an act of the
California legislature dated March 21, 1868.

14 By ordinance passed August 31, 1867, the Oakland City Council voted to pay Mr,
Felton a fee equal to 15 per cent of aU the property recovered by the city in the water-front
litigation. (Transcript of testimony, sup. cit. p. 7S9.) Mr. Merritt was subsequently ac-
cused 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 i86g 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,)

92 HISTORY OF THE SOUTHERN PACIFIC

In subsequent years the relations between the city of
Oakland and the Oakland Water Front Company were re-
peatedly 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 con-
trary, in 1897 the Supreme Court of California definitely
pronounced the compromise of 1868 binding upon the munici-
pality, 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.^^

Water-Front Monopoly Broken

Ten years later the title of the Oakland Water Front Com-
pany 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 addi-
tional 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

'S City of Oakland v. Oakland Water Front Company, ii8 Gal. i6o (1897).

THE SEARCH FOR A TERMINAL

94 HISTORY OF THE SOUTHERN PACIFIC

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 north-
easterly from the mouth of the San Antonio estuary at Sand
Point as indicated in the map on page 93.^*

This at one stroke transformed the Southern Pacific's hold-
ing 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, how-
ever, 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 control-
ling interest in the San Francisco and San Jose Railroad ; pos-

"' Western Pacific Railway Company v. Southern Pacific Company, isi Fed. 376
([1907). The court also pointed out in the decision that although the low-tide line was pro-
jected across the mouth of the estuary for the purpose of determining the boundary of Oak-
land, this should not be done in ascertaining the limit of the railroad grant.

THE SEARCH FOR A TERMINAL 95

sibly 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 re-
ceived 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 Fran-
cisco, 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.^'' \

The total length from the foot of Channel Street to Point -
San Bruno was a little over 8 miles. The maximum breadth
was approximately 2^ 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 im-
portance 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

" 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
Alia of March 14, 1868.

HISTORY OP THE SOUTHERN PACIFIC

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.

Pc.Ansadcro or
Hurtter's Point

San Franc isco County Line

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 Jose rail-
roads, which were the proposed grantees, should pay the fair
market cash value of the submerged lands at the time of the

THE SEARCH FOR A TERMINAL 97

passage of the act, being not less than $ioo per acre for the
lands lying north of Point Avisadero. But it was also provided
that the surplus over $ioo 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 ad-
ditional amounts in improvements. The Senate committee de-
fended 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 com-
missioners. How a rival railroad in the future would get
access to the docks, it did not say.^*

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 there-
fore fortunate under the circumstances that the improvident

'^Appendix to journals of Senate and Assembly of the California Legislature, zyth
Session, Vol. 3, 1868.

98 HISTORY OP THE SOUTHERN PACIFIC

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.^°

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.20

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,^^ while it refrained from commenting
on the Bulletin's assertions that it was the intent of the rail-
roads 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

" San Francisco BuUelin, March 7, 1868.
"° Daily Alta California, March 10, 1868.
" San Francisco Times, March 13, 1868.

THE SEARCH FOR A TERMINAL 99

not dare to carry out its original plan.22 Instead, the Southern
Pacific and Western Pacific were offered each 150 acres, to be
located by the companies within specified limits south of Chan-
nel 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 nionths,
or the grant would revert to the state.^*

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 import-
ant, and, added to what had been secured in Oakland, provided
satisfactorily for the Central Pacific's transportation needs.

In 1 871 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

" See resolutions of a meeting o£ San Francisco business men in March, 1868, recom-
mending that the legislature grant iso acres each to the Central Pacific and Southern Pacific ;
and the admission of the Southern Pacific that it could get along with 250 acres.

" Laws of California, 1867-68, Ch. 543.

lOO HISTORY OF THE SOUTHERN PACIFIC

Pacific, in consideration of a subsidy of $3,000,000 and of al-
terations 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 excite-
ment 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 oc-
cupation 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 opera-
tion within four years a first-class rail and ferry communica-

THE SEARCH FOR A TERMINAL lOI

tion between the city of San Francisco, the premises conveyed
to it, Oakland and Vallejo.^*

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 require-
ment of a line to the town of Vallejo itself,^^ 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 Anti-
och 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 Fran-
cisco. It appeared that residents of San Francisco anticipated
the permanent loss of a large part of the transcontinental busi-
ness 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 estab-
lishments of a seaport of 500,000 inhabitants. It was stated

't Laws of California. 1867-68, Ch. 386. A lively account of the circumstances attend-
ing the passage of the Goat Island bill through the legislature was published by an old news-
paper man, Sam Leake by name, in the Son 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.

«Laws of California, 1869-70, Ch. 381.

102 HISTORY OF THE SOUTHERN PACIFIC

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 me-
morial 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 Cen-
tral Pacific in the hope of arriving at some general understand-
ing relative to terminal facilities, and eventually the whole
Goat Island project lapsed.^*

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 Sac-
ramento. 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 neces-
sary to enable its trains to reach San Francisco Bay at all. In
that month Stanford, Huntington, Hopkins, and Crocker

^' 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.)

THE SEARCH FOR A TERMINAL 103

bought a majority of the stock of the San Francisco and Oak-
land 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 be-
tween 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 pos-
sibilities of monopoly control of the railway business of Cali-
fornia 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 val-
leys 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 consum-
ing public had not been developed. People hated monopolies
because monopolies meant high prices; but the very per-
sons 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, Hop-

104

ACQUISITION OF CALIFORNIA PACIFIC 105

kins, 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,^ and this was probably the last of several offers
made to different parties.

The evidence seems to show, however, that by 1870 the
Htmtington group were inclined to remain in the railroad busi-
ness. Strategically, the associates then occupied a very strong
position. They possessed the only railroad line from Califor-
nia 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,^ and from Lathrop
south to Modesto, to be extended to Goshen by August i, 1872.^
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 Rail-
road 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

' United States Pacific Railway Commission, pp. 3496-3500, testimony D. O.
Mills.

' 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.

3 This branch was known as the San Joaquin Valley Railroad. The company bearing
this name wa§ incorporated in 1868. Stanford, Huntington, Hopkms, Charles, and E. B.
Croclcer were directors. In 1870 it was consolidated with the Central Pacific. Stanford
declared in 18B7 that the trunk lines up the San Joaquin and Sacramento valleys were the
most important factors in the Central Pacific's local business.

io6

HISTORY OF THE SOUTHERN PACIFIC

the fact that they did not control the short line between Sacra-
mento and San Francisco. We will, accordingly, consider the

OiiUnCft hoffl Sin FfUKiMe>'

• yuHa

Map of California Railroad, about 1870.

situation and the policy of the Huntington group in these re-
spects.

ACQUISITION OF CALIFORNIA PACIFIC 107

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. Con-
tracts 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 con-
nection 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 com-
petitor to the Central Pacific when the latter acquired its cir-
cuitous 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 I37>^ miles; the time via Vallejo was 3^ hours,
via Stockton 5 hours. It appears that transcontinental pas-
sengers on Central Pacific trains often changed cars at Sacra-
mento, sacrificing the balance of their through ticket and
paying extra fare in order to save time.* Of the local pas-
senger business between Sacramento and San Francisco, the
California Pacific claimed three-fourths. How large a share

4 United States Pacific Railway Commission, pp. 3628-29, testimony J. P. Jackson;
p. 3613, testimony Leland StanJprd.

I08 HISTORY OF THE SOUTHERN PACIFIC

of the freight went by the shorter Hne 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/ 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 com-
petition for local business, the California Pacific had ambitious
plans in other directions. We know, for example, that it pro-
posed an extension eastward via Beckwourth's Pass to a con-
nection with the Union Pacific, at or near Ogden. This line
was to be built by the California Pacific Railroad Eastern Ex-
tension Company, incorporated at Sacramento in March, 1871,
with a capital stock of $50,000,000." Other reports credited it
with an intention to enter the San Joaquin Valley ; '^ while its
influence in Sonoma, Marin and Napa counties was recog-
nized. 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 Paci-
fic 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

s United States Pacific Railway Commission, pp. 3366-67, testimony J. C. Stubbs.
* Ibid.y pp. 3628-29, testimony J. C. Jackson.
7 San Francisco Bulletin, November 29, 1869.

ACQUISITION OF CALIFORNIA PACIFIC 109

unballasted, and inadequately supplied with ties. Embank-
ments 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.^

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 1 87 1 the Central Pacific, taking advantage of the weak-
ness of its rival, proceeded to the attack by arranging to con-
struct 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.® The California Pacific was already
suffering from the competition of river boats, and the con-
struction 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 negotia-
tions with the Central Pacific, through Collis P. Huntington,

8 Main v. Central Pacific, argument of Harvey S. Brown, of counsel for the defendants,
1886.

9 San Francisco Chronicle, August i6, 1874. statement Milton S. Latham. This was
the bridge over which the California Pacific was entering Sacramento.

no HISTORY OF THE SOUTHERN PACIFIC

for an adjustment of difficulties. This was precisely the situa-
tion 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 will-
ing 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, Le-
land Stanford, and Mark Hopkins, Mr. Latham agreed to
deliver 76,101 shares of the California Pacific Railroad Com-
pany, to assign three-fourths of the capital stock of the Cali-
fornia 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 direc-
tors of the California Pacific at a formal meeting approved,
resolutions to the effect that the sum of $1,600,000 was neces-
sary for the purpose of constructing and completing an addi-
tional track, and for strengthening the California Pacific em-
bankments 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

ACQUISITION OF CALIFORNIA PACIFIC III

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 tim-
ber and ties and iron railroad thereon, so as to make an addi-
tional 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 com-
pleted 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 i,6oo second mortgage California
Pacific bonds.

On August 19, 1871, the Huntington group, now control-
ling 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 Califor-
nia 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 be-
ginning or ending their trips on the Central Pacific or connect-
ing roads, and to maintain its fare for other passengers at $4 be-
tween San Francisco and Sacramento. On September i, 1871,
the Central Pacific took full control of the California Pacific,
and moved its offices from San Francisco to Sacramento.^"

Motives Behind Transactions

Two explanations of these transactions are possible. Coun-
sel for the Central Pacific, in 1886, maintained that the con-

'° Main v. Central Pacific. Statement of facts. The closing argument of L. E. Chit-
tenden, of counsel for plaintiffs, 1886. See also San Francisco Chronicle, August 16, 1874,
itatement of Milton S. Latham.

112 HISTORY OF THE SOUTHERN PACIFIC

tracts fell into two distinct classes or groups. The California
Pacific, according to this point of view, arranged for an ad-
ditional 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 de-
fendants 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 anounced that he was ready to deliver the stock, it be-
came 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 agree-
ment 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.

ACQUISITION OF CALIFORNIA PACIFIC II3

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." 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 i, 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 agree-
ment. Instead, Mr. Montague, chief engineer of the Cali-
fornia 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 Con-
tract and Finance Company finished the job, however, in six
weeks after the work was actually commenced, and what in-
formation 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

^'Opponents of the Central Pacific described the transaction in 1886 as follows: "Hunt-
ington, 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 con-
tracted with their hereditary enemies to do it — all without the remotest reference to any
purchase of, or intended future control of the corporation!"

114 HISTORY OF THE SOUTHERN PACIFIC

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, contem-
poraneously with the main contract, of a supplementary agree-
ment, under which the Stanford group agreed to pay Latham
$250,000 in a six months' note, besides the other considera-
tion for California Pacific stock, if he would visit New York
at once, obtain the consent of the stockholders whom he repre-
sented, and personally assume all the obligations of the Cali-
fornia 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, Sulli-
van, 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 com-
pany, and whose interest would be to do that work in a work-
manlike manner." Certainly this was not a desirable point
of view for a representative of the California Pacific to
take.

ACQUISITION OP CALIFORNIA PACIFIC 115

Undisputed Control

The inevitable result of the various contracts and agree-
ments which have been described was to place the Huntington
group in undisputed control of the California Pacific. On
August lo, 1871, Mr. Stanford was elected president vice Jack-
son, 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 con-
nection 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 Fran-
cisco, 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

Il6 HISTORY OF THE SOUTHERN PACIFIC

arrangements between the Central Pacific and the California
Pacific went beyond what one might have expected. It ap-
pears, for instance, that soon after the Stanford group obtained
control of the last-named company, that portion of the con-
tract 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 inde-
pendent 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 Cali-
fornia 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, Hop-
kins, 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 ad-
vances previously made. Mr. Haggin had no interest in the
matter, merely allowing the use of his name.^^ The following
month, Vice-President Gray, of the California Pacific, made

" Colton case, pp. 3214-15.

ACQUISITION OP CALIFORNIA PACIFIC 1 1?

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 sen-
sational a reply.^^ 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 i, 1876, for 29 years, at a
rental of $550,000 per year, plus three-fourths of the net earn-
ings 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

'3 San Francisco Chronicle. August 16, 1874- According to A. A. Cohen, a San Fran-
cisco lawyer one time in the employ of the Central Pacific and mtimately acquainted with
its policies, Stanford told Latham that he, Stanford, was extremely sorry that the K.eese 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; .,.„,,, t, ^ _i- , , ..

Regret on your own account that you are so ill. Send Mr. Yost over particularly to re-
port, and carry this message. Michael Reese is willing to commence suit as stockholder.
Please transfer to him iso 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 Stan-
ford's own instance.

Il8 HISTORY OF THE SOUTHERN PACIFIC

payments over the $550,000 minimum in consideration of a
fixed additional payment of $50,000 a year.^*

By and large, the California Pacific proved a good invest-
ment 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 acquisi-
tion 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.

'* United States Pacific Railway Commission, pp. 3936-42, testimony L. E. Chit-
tenden.

CHAPTER VII

BUILDING OF THE SOUTHERN PACIFIC

San Francisco and San Jose Railroad

The Huntington interests had secured control of the Cali-
fornia 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 con-
struction 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 pro-
viding 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.'^

The small beginning of what later came to be known as the
Southern Pacific Railroad system is to be found in the San

' United States Pacific Railway Commission, p. 3614, testimony Leland Stanford.

119

120 HISTORY OF THE SOUTHERN PACIFIC

Francisco and San Jose Railroad, which ran from San Fran-
cisco down the peninsula in a southerly direction to the city
of San Jose. 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 i860 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 Jose 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 Jose 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 Jose 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
Jose 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 Jose 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
Jose, another company, the Southern Pacific Railroad Com-
pany, was incorporated ^ 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

'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.

BUILDING OP THE SOUTHERN PACIFIC

121

122 HISTORY OF THE SOUTHERN PACIFIC

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 Rail-
road, besides a right-of-way, ten alternate sections of unre-
served 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 sub-
sidy was given.^ By Act of July 25, 1868, Congress extended
the time for the construction of the Southern Pacific line, re-
quiring the completion of the first 30 rqiles by July I, 1870,
and subsequent construction of 20 miles annually.* This was
plainly an enterprise of first-class magnitude.

The evidence suggests that the San Francisco and San Jose
and the Southern Pacific Railroad companies fell under the
control of Stanford, Huntitigton, Hopkins, and CMcker some/
time in 1868. Mr. Stanford published a statement on March .
6, 1868, to the effect that any rumor that the CeWral 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 Jose or any property or franchises con-

3 14 United States Statutes 292 (i-866). An act granting lands to aid in the construc-
tion 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.

•• IS United States Statutes 187 (1868).

BUILDING OP THE SOUTHERN PACIFIC 123

nected therewith, or that any negotiations had been made tend-
ing to that result, was utterly without foundation.^ On the
other hand, it. was CoUis 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 asso-
ciates tdbk charge. In any case their influence was presently to
appear.®

Consolidation

On October 12, 1870, the San Francisco and San Jose
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 staj^d
to be to construct and operate a railroad from San Francisco
to 'the Colorado ftiver, throilgh the counties of San Mateo,
Santa Clara, Monterey, Fr^no, 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 incorporatio;i, as an examination of the accompany-
ing 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 Wash-

s San Francisco Bulletin, March 14, 1868.

« 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 consohdatmg
companies. This may merely mean, however, that the stock of these companies was placed
linder other names for purposes of convenience. *

124

HISTORY OP THE SOUTHERN PACIFIC

c^jt^ ^

-*^ 'X

^1 \ /

^~l' V

-1 ,J v

SSnla \^^-' \
vCIjra S Merced \

\>-^-^-( ,^-^

' \ '-,' Presno

f' —

1 Monterey ?• — . '' "i Inyo

'V' \ Tulare (

\%m Luis\ \ •

, OWspo \ I

' \ \ Kern ^^ i

lanta Barbara

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

BUILDING OP THE SOUTHERN PACIFIC 125

ington, and it had the advantage of reaching the eastern boun-
dary of California with less mileage and f^wer grades than the
line originally laid out.''

In 1 87 1, an additional route from Los Angeles to Yuma
was designated under the authority of the twenty-third sec-
tion 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 pro-
vided in the Atlantic and Pacific Act of 1866.^

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 con-
struction, was that from San Jose 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 Val-

7 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 ujjon and improved tracts
near Hanf ord_ before the railroad applied for ipatent 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 $r I to $3S an acre, instead of the customary
$2.50 to $s an acre. The settlers understood from this that the company was tryingto
make them pay for improvements which they themselves had made, and resorted to active
oppositipn. 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. I*

In 1881 the railroad atteibpted to take forcible ]possession of two pieces of the disputed
land. There was resistance^ arid in the shooting which followed, eight men were killed, in-
cluding 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.

' i5 United States Statutes S73 (1871).

126 HISTORY OF THE SOUTHERN PACIFIC

ley, in which Tres Pinos is located, relatively poor in traffic,
and difficult to build in. Stanford visited the country person-
ally, 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 con-
sideration 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 pro-
vision 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.®

9 See on this matter Colton case, p. 1621, Crocker to Colton, February 12, 1875.

BUILDING OF THE SOUTHERN PACIFIC 127

At the time when the Southern Pacific Railroad entered
upon its ambitious project for southern construction, the terri-
tory 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.^'* San Diego had a population
of 2,300, and Santa Ana 1,445. These were the largest con-
centrations of people to be found, and they amounted to
nothing more than little country towns.^^ Nor were the sta-
tistics 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 men-
tion 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 addi-
tional 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 Wilming-
ton.^^ General Banning is said to have entered the California

'" Guinn, "A History of California," pp. 2S4. 276.
" Ninth Census of the United States, 1870.

" 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.

128 HISTORY OP THE SOUTHERN PACIFIC

legislature in order to advance his project and to have success-
fully 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.^^

In addition to the Los Angeles and San Pedro, reference
should be made to the Los Angeles and Independence, a rail-
road 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 prop-
erty 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 Rail-
road, 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 out-
let 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 South-
ern Pacific. In May, 1872, two citizens of Los Angeles wrote
Mr. Stanford stating that they expected to call a meeting of

'3 Ranchers near Los Angeles feared lest the construction of the railroad would do away
with horses and the demand for barley

View south from over the San Fernando tunnel — Southern Pacific Railroad

BUILDING OP THE SOUTHERN PACIFIC 129

tax-paying citizens of the county in a few days, for the pur-
pose 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.^*

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 pro-
posed 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 arrange-
ment was submitted to popular vote on November 5, 1872,
and was then approved.

'4 "Illustrated History of Los Angeles County" (Chicago, 1889), p. 136.

I30 HISTORY OP THE SOUTHERN PACIFIC

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 Hne 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 be-
set 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, passen-
gers took the stage at San Fernando and bounced over the ■
mountains to Bakersfield, the point farthest south on the rail-
road 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 con-
nected at Soledad with the Southern Pacific Railroad bound
for San Francisco by way of Salinas City, Gilroy, and San
Jose, and his line made a specialty of daylight travel, thus

BUILDING OP THE SOUTHERN PACIFIC I3I

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.^^

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

'S Newmark, "Sixty Years in Southern California," pp. 496-97.

132 HISTORY OP THE SOUTHERN PACIFIC

of the Central Pacific. That is to say, they organized con^
struction companies, controlled by themselves, caused these
companies to contract with the Southern Pacific for the con-
struction 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 Jose 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 Com-
pany 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 improve-
ments. 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.^®

Under date of February 2, 1875, the Western Development

Articles of incorporation are printed in Colton case.pp. 5475-77, testimony F. S.
Uouty. 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.

BUILDING OP THE SOUTHERN PACIFIC 1 33

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 Groshen 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. ^'^

In addition to its contract with the Southern Pacific, the
Western Development Company undertook certain miscel-
laneous construction, including work on the Northern Railway,
and the San Pablo and Tulare Railroad, the building of steam-
ers 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, be-
sides 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 afifairs 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

^7 Colton case, pp. 362-65, 7806-22, testimony F. S. Douty. The actual payments
were, as the result of certain adjustments, slightly less.

134 HISTORY OP THE SOUTHERN PACIFIC

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.^*

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 es-
tate. 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 re-
mained 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 con-
siderable amount of real estate, including much unimproved
property in the Potrero district of San Francisco, land in the
Monterey peninsula, and other propei ty in Buffalo, New York.
It has, besides, the stock and bonds of certain railroad com-
panies, stock of the Carbondale Coal Company of Washington,
and of the Oakland Water Front Company of Oakland, Cali-
fornia, and what is still more important, it holds a large num-
ber of bills receivable covering property of all sorts which it

^^ United States Railway Commission, p. 2701, testimony F. S. Douty.

BUILDING OF THE SOUTHERN PACIFIC 1 35

has sold in recent years but which has not been entirely paid
for. The Pacific Improvement Company's construction out-
fit was sold to the Central Pacific in 1883.

The last of the construction companies, the Southern De-
velopment Company, became responsible for construction east
of the Arizona state line when the Pacific Improvement Com-
pany left the field. It was of minor importance and may be dis-
missed with a word. In respect to ownership and operation it
resembled the Contract and Finance Company, the Western De-
velopment 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, Huntington, 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 stock-
holders 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.^® The same
general shops furnished track materials.^" The same equip-
ment 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.

" United States v. Southern Pacific, pp. SS3-5S. testimony Redington.
'° Ibid., pp. 533-3S, testimony Luckett.

136 HISTORY OF THE SOUTHERN PACIFIC

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.^^

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 competi-
tion.

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 f o? ,
the Contract and Finance Company and its successors, the /
Western Development and the Pacific Improvement companies, y
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 de-

" Colton case, p. 7637, Colton to Huntington.

BUILDING OP THE SOUTHERN PACIFIC 137

posited funds in varying amounts which were credited to them
as loans. Interest was paid on these advances at rates vary-
ing from 6 to lo 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 $1 1,000,000. It remained
at this figure through 1878, and the major part of 1879. The
largest contributions were made by the estate of Mark Hop-
kins 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.^^

Similar advances were probably made by the Central Pacific
to the Pacific Improvement Company,^^ and to the Contract
and Finance Company, sometimes without interest. Money
in the Central Pacific sinking fund was invested in this way,

==Colton case, pp. 231-32, testimony F. S. Douty; United States Pacific Railway
Commission, pp. 3626-27, testimony F. S. Douty.

"3 United States Pacific Railway Commission, p. 2832, testimony Leland Stanford.

138 HISTORY OP THE SOUTHERN PACIFIC

at interest.** 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.*® 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.*" How much all these transactions
amounted to, it is very difificult 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 Develop-
ment companies. We know they were great, because the asso-
ciates 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.^''
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

'^ United States Pacific Railway Commission, p. 2994, testimony C. F. Crocker.

"5 Colton case, pp. 7646-54, 1586.

'^ Ibid., pp. 9669-73, testimony Charles Crocker.

''' San Francisco Examiner, October 8, 1889.

BUILDING OF THE SOUTHERN PACIFIC 139

estate, neither of which were immediately salable. As a con-
struction 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 exploita-
tion of the possibilities of monopoly in California.^^

_^* 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 in-
terest, provided that Huntington would cut the Southern Pacific bonds outstanding from
540,000 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 JosS 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 Conipany.

May 14, 1888. Consolidation of the Southern Pacific Railroad Company, the San Jos6
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 Cojjperopolis Railroad Company, the Stockton and Tulare Railroad Com-
pany, 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, Whittierand Los Angeles County Railroad Company, the Long Beach Railroad Com-
pany, the Southern Pacific Railroad Extension Company, and the Ramona and San
Bemardina 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 Cali-
fornia), the Southern Pacific Railroad Company (of Arizona), and the Southern Pacific
Railroad Company of New Mexico.

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 Cali-
fornia, 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 ex-
tent 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 Joa-
quin 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 Jose via Stockton, the
San Francisco, Oakland and Alameda Railroad, which con-
nected 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

140

CENTRAL AND SOUTHERN PACIFIC SYSTEM 141

of the Central Pacific near Roseville, and ran in a northwesterly
direction to Redding toward the Oregon boimdary. 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 Cali-
fornia Pacific, to Tehama, of which 82.20 miles were com-
pleted in 1875. In 1878 the company built from Oakland to
Martinez, and from Benicia to Suisun, and still later it con-
structed 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 Jose to Soledad and Tres Pinos.
The Tres Pinos line has been referred to in the previous chap-
ter. 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)

142 HISTORY OF THE SOUTHERN PACIFIC '

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 com-
pany which has been mentioned. Usually this stock had come
to them in their capacity as shareholders in the various con-^
struction companies which had built the roads. In some cases,
however, as with the California Pacific and the Northern Divi-
sion 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 ad-
vantage of simplifying the conditions under which the com-
panies 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 de-
parted 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.* Mr. Stanford thought that this
was based on an estimated cost of construction.^ In 1879 the
same property was leased to the Central Pacific for a payment

^ Colton case, pp. 1522-24, 1529.

' United States Pacific Railway Commission, pp. 2791-92, testimony Leland Stanford.

CENTRAL AND SOUTHERN PACIFIC SYSTEM I43

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 passen-
ger car, and 8 cents for each freight or caboose car.' This
proved to be a very expensive rental, and was changed to a
monthly payment of $47,500.*

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.^ The Central Pacific leased
the Amador branch between Gait and lone for $3,500 per
month. In the case of the Stockton and Copperopolis, how-
ever, 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." 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 differ-
ent 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

3 Colton case, pp. 1524-29.
^ Ibid., pp. 1510-13.

s United States Pacific Railway Commission, p. 344s, testimony E. H. Miller, Jr.
' For terms of leases see especially United States Pacific Railway Commission, pp.
3443-53. testimony of E. H. Miller, Jr.

144 HISTORY OP THE SOUTHERN PACIFIC

officials reached east to New Orleans, though the general super-
intendent, Mr. Towne, seems never to have had jurisdiction
beyond Vermillionville, 144 miles from New Orleans.'^ The ad-
vantages 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 operat-
ing 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.* 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 pur-
chase 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 en-
trance to the important city of San Francisco, and should

7 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 Utall
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.

8 Colton case, pp. 814-26.

CENTRAL AND SOUTHERN PACIFIC SYSTEM 145

have been operated in close harmony with its connections at
San Jose.

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 unfor-'
tunate," 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." ® "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." ^° 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 Tirftothy 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, Hunting-
ton, 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

» Colton case, pp. 1643-44, Huntington to Colton, May 28, 1875.
'° Ibid., pp. 161S-16, Huntington to Colton, December 10, 1874.

146 HISTORY OP THE SOUTHERN PACIFIC

organization of a new company for the purpose of holding and
operating the railroad companies that were owned by the asso-
ciates and controlled by them, both those under the man-
agement of the Central Pacific and those east of El Paso
in Texas and Louisiana.^^ The meeting was recognized
as important and minutes were kept, which have been pre-
served.

There were several circumstances which made a reorgani-
zation 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 conclu-
sive, 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 Cali-

" United States v. Southern Pacific, p. 655, testimony Timothy Hopkins.

CENTRAL AND SOUTHERN PACIFIC SYSTEM 147

fornia 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 pay-
ing 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 be-
tween 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,^^ 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.^^ 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." 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 oCtt-
of a total outstanding of 592,755 shares at this date.^® Timothy
Hopkins later suggested that Brown's figures might have in-
cluded 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,^® while Stanford told the

" United States v. Southern Pacific, pp. 1191-96, testimony James Speyer.

'3 Ibid., pp. 613-18, testimony George T. Klink.

'■* Ibid., p. 64s, testimony George R. Jackson.

'S Ibid., p. 169s, Defendant's Exhibit No. 21.

'' Ibid., p. 871, inventory of Charles Crocker estate, filed July 12, 1889.

148 HISTORY OF THE SOUTHERN PACIFIC

United States Pacific Railway Commission in 1887 that he
owned 32,000 shares.^''

The conclusion to which this evidence leads is that Hunt-
ington 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 Cen-
tral 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.^* 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. Hav-

'7 United States Pacific Railway Commission, p. 2657, testimony Leland Stanford.
'' United States v. Southern Pacific, pp. 615, 645, testimony George T. Klink.

CENTRAL AND SOUTHERN PACIFIC SYSTEM 149

ing 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 domi-
nant partner in the Central Pacific-Southern Pacific combina-
tion. 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 asso-
ciates 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 Septem-
ber II the question of the reorganization of the Southern
Pacific system was taken up, and the following order of busi-
ness was agreed upon : ( i ) 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.^^

On September 25, the associates came together again, and
from that time until November 7, meetings were held almost

" United States v. Southern Pacific, p. 666, testimony Timothy Hopkins.

I50 HISTORY OP THE SOUTHERN PACIFIC

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 por-
tion of the railroad between Goshen and Mojave. Then a run-
ning 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 Cali-
fornia points.^**

This plan was not finally adopted. On October i, 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 dis-
cussion 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 leas-
ing 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 sys-
tem 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

'" United States v. Southern Pacific, pp. 1688-1702, Defendant's Exhibit No. 31.

CENTRAL AND SOUTHERN PACIFIC SYSTEM 151

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 com-
pleting the through line to New Orleans.^^

Secondly, the Southern Pacific Company leased the South-
em Pacific Railroad and these same subsidiaries for ninety-
nine years from the loth of February, 1885, undertaking
to keep the properties in repair, and to pay over 93 J^
per cent of the net profits to the lessors in specified pro-
portions.

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 asso-
ciates. The Southern Pacific assumed all Central Pacific obli-
gations 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 neces-
sary to describe.^^

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.^* The

" United States v. Southern Pacific, pp. 621-22, testimony George T. Klmk. 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 m the
federal and not in the state courts.

=^ 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 Paci-
fic 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.

'3 United States Pacific Railway Commission, pp. 2812-13, testimony Leland Stanford.

152 HISTORY OF THE SOUTHERN PACIFIC

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 exten-
sion of the Central Pacific from Delta, California, to a connec-
tion 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.**

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 following table shows the result of operation under the lease for each year from
188s 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, 188s $1,483,033 $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 2,144,42s 2,144,42s

1892 861,874 1,360,000 498,127

1893 784,717 1,360,000 573.283

Totals $10,682,251 $12,951,456 $2,269,206

Brice Report, S3d Congress, 3d Session, January 28, 189s (Senate Report, No. 830,
Serial No. 3288).

CENTRAL AND SOUTHERN PACIFIC SYSTEM 153

the operation of the agreement, either party was being bene-
fited at the expense of the other, the agreement should be
revised and changed. On the whole the earnings of the Cen-
tral Pacific were less than were expected under the lease, par-
ticularly 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 adjust-
able, 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 ac-
tive in California politics as a delegate of the Union Demo-
cratic party in 1861, and as chairman of the state central com-
mittee 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 pur-
chase, 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 com-
pleted 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 im-
mediately did.^

^ Colton case, pp. 8839-42, testimony Charles Crocker. A discussion of the relations
between Colton and theHuntington group which differs from that given in the text is pre-
sented in Russell, "Stories of the Great Railroads," 19x4.

154

THE CASE OF DAVID D. COLTON 155

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 tv(?o families visited the Yosemite together,
and in 1871-72, wrhen 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.^

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 mem-
bers of the group and share the burden of managing the Cen-
tral 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 asso-
ciate 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." ^
The fact that Mr. Hopkins' health was not strong was an addi-
tional reason for taking in a new partner.

' Colton case, pp. 2446-50, testimony Mrs. Colton.
^ Ibid., pp. 172-73, deposition C. P. Huntington.

156 HISTORY OF THE SOUTHERN PACIFIC

Agreement Signed

The result of these prehminary discussions was the con-
clusion of an agreement, dated October 5, 1874, whereby Coin
ton 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.*. 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 re-
ceiving something very handsome, and the opinion was not
without some justification. Certainly, in the long run the op-
portunity 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 inven-
toried his assets at $961,506.18,^ and at the time of his death
his rent roll alone amounted to $2,500 to $3,000 a month.'

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 re-

4 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.

5 Colton case, pp. 7018-19.

' Ibid., p. 6529, testimony H. K. White.

THE CASE OP DAVID D. COLTON 157

vocable at the pleasure of Huntington and his friends at any
time within two years. This was a dangerously exposed posi-
tion. It was not a wise thing even for the Huntington-Stan-
ford group to put Colton in such a predicament, and much
subsequent difficulty resulted therefrom.

In 1876 the associates served notice on Mr. Colton, dis-
severing 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.'
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 Hunt-
ington 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. Hunt-
ington and perhaps to Mr. Crocker, more than to Mr. Hopkins,
but exercised a good deal of independent initiative.^ With the
operation of neither the Central Pacific nor the Southern
Pacific had he an)^hing to do. On the other hand, it was
either Colton in San Francisco, or Huntington in New York,

7 Colton case, p. 8869, testimony Charles Crocker.

^ Ibid.t pp. 1058, 1064-66, testimony E. H. Miller, Jr.; p. 8957, testimony Charles
Crocker.

158 HISTORY OP THE SOUTHERN PACIFIC

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 ; " it was Colton who was responsible head of the
Rocky Mountain Coal and Iron Company's mine at lone; and
it was Colton who took particular interest in finding a market
for the output of this corporation.^**

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." ^^

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 con-
stantly, and gave him great coiacern. No other reason can be

9 Colton case. pp. 2711-12, 478-81, testimony F. S. Douty.

'" 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-so, testimony Newell Beeman.)

" Colton case, pp. 7612-13, Colton to Huntington, January 31, 1878.

THE CASE OP DAVID D. COLTON 159

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 de-
pendent 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 situa-
tion, 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.^^

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.^*

^' Colton case, p. 8915, testimony Charles Crocker.

»3 United States Pacific Railway Commission, p. 32SS. testimony F. S. Douty ; Coltc
case, pp. 423-24, testimony F. S. Douty.

l6o HISTORY OP THE SOUTHERN PACIFIC

Ostensibly the Western Development Company's dividend
was a distribution of surplus profits. In reality it was a divi-
sion 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 un-
certain, 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.

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.^* 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. Hunt-
ington 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

" Colton case, pp. 8883, 8887, testimony Charles Crocker.

x^W^^^t:?:;^^^^^^^^^^^^^

THE CASE OF DAVID D. COLTON l6l

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.^"*

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 opera-
tions — 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 transac-
tions. Qiarges of embezzlement were even later made and not
disproved. Three of four illustrations of such incidents may
be given.

I. 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 Moim-
tain 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

'S Colton case, pp. 8881-82, teitimony Charles Crocker; pp. 36-37. deposition C. P.
Huntington.

l62 HISTORY OF THE SOUTHERN PACIFIC

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 ac-
countants 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 associ-
ates intended he should have.^®

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 $1 1,622 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 pay-
ment, and apparently pocketed the $1 1,622.

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,

^^ Colton case, pp. 2335-46, testimony Gunn; pp. 3127-29, 3227, testimony W. G
FuUerton.

THE CASE OF DAVID D. COLTON 163

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." 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 enumer-
ated, 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. Doubt-
less 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 Hunt-

»7 Colton case, pp. 7187-92. testimony Madden; pp. 7217-24. testimony N. T. Smith.

l64 HISTORY OF THE SOUTHERN PACIFIC

ington'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,^* 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.^® 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 offici-
ally that they were willing to have Mrs. Colton pay her obliga-
tions 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

'8 Colton case, pp. 2436-39, Huntington to Mrs. Colton, November is, 1878, and
November 21, 1878.

•9 Ibid., pp. 2485-92, testimony Mrs. Colton; pp. 8892-99; testimony Charles Crocker.

THE CASE OP DAVID D. COLTON 165

$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 vi^as 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.^"

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 some-
times 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 securi-
ties 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 our-
selves, of course, and she should receive the full benefit of our
knowledge and experience in handling these securities, and we

'" Colton case, pp. 16-32, deposition S. N. Wilson.

l66 HISTORY OP THE SOUTHERN PACIFIC

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." ^^

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 associ-
ates, 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 Com-

" Colton case, pp. 8931-32, testimony Charles Crocker.

THE CASE OP DAVID D. COLTON 1 67

pany 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 them-
selves, the Western Development Company, the Central Pacific,
and its allied companies.^^

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,^^ 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 transac-
tion, 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 liabili-
ties, 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

" In the case of the Central Pacific claims, the qualification "so far as known at the
time " was introduced,

*3 Colton case, pp. 2815-16, testimony Mrs. Colton; pp. 8943-44, testimony Charles
Crocker.

1 68 HISTORY OP THE SOUTHERN PACIFIC

state, where Mrs. Colton was finally defeated. A careful read-
ing 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 dis-
proportionate 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

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

187s

15,665,082

9,937,465

5,727,617

' Report compiled by the Commissioner of Railroads, 47th Congress, ist Session House,
Executive Documents No. 123. 1882, Serial No. 2030.

169

I70 HISTORY OF THE SOUTHERN PACIFIC

Earnings and Expenses of the Central Pacific
Railroad, 1874-81 — Continued

Period

Gross Earnings

Operating Expenses

Net Earnings

(Calendar years)

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
$119,823,379

9,547,102

$184,381,097

$ 64,557,718

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. /TlaJbusi-
ness 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.^

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

* Crocker manuscript, pp. 40-41.

FINANCIAL DIFFICULTIES 171

work for fear that the federal government might be persuaded
to subsidize another transcontinental road, and so deprive it
of the monopoly virhich 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 securi-
ties 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.^

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 ulti-
mately 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.

' Colton case, p. 248, testimony Douty; United States Pacific Railway Commission,
104. testimony D. O. Mills.

P- 3494. testimony

172 HISTORY OF THE SOUTHERN PACIFIC

Naturally Southern Pacific securities of any type were still
more difficult to sell than Central Pacific stock. Mr. Hunting-
ton found that the Southern Pacific Railroad was not known
in the East, even by parties who had spent some considerable
time in California.* 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 news-
papers, 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.^ 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. U

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." ® 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

4 Colton case, p. 1662, Huntington to Colton, May i, 1875.

s Ibid., pp. 1729-31, Huntington to Colton, June 24, 187s; pp. 1743-4S, Huntington to
Colton, December 4, 1875.

fi Ibid., miscellaneous depositions, p. 41, depositions S. H. Thayer.

FINANCIAL DIFFICULTIES 1 73

$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.'' 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.^

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 i860 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 : ( i ) speculation in
real estate around San Francisco Bay had so discounted the
completion of the line that the actual opening of communica-
tion caused a reaction rather than an advance; (2) the com-
bination 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

7 Colton case, p. 33, deposition D. O. Mills.
' Ihid., p. 45, deposition S. H. Thayer.

174 HISTORY OP THE SOUTHERN PACIFIC

given rise to acute suffering and discontent. These things in
turn had reacted on poHtical 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. Mean-
while 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." Every element affecting their credtt
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.^" 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

9 Colton case, pp. 1684-85. Huntington to Colton, November 13, 1875.
" Ibid., pp. 1747-48, Huntington to Colton, December 20, 1876.

FINANCIAL DIFFICULTIES 175

seen, I am disposed to think such fights would be few." "
In May, 1877, Huntington let his partners know that reports
from CaHfornia to the effect that the railroad magnates there
were spending their money for personal expenses with
unexampled recklessness had hurt the Central Pacific credit.^^
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.^*

All through 1877 the letters exchanged between Hunting-
ton 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 exten-
sive 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." ^* 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." ^^ 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

" Colton case, pp. 1746-47, Huntington to Colton, December 8, 1870.
^' Ibid., pp. 1768-70, Huntington to Colton, May 6, 1877.
'3 Ibid., pp. 1772-73, Huntington to Colton, May 9, 1S77.
"■< Ibid., pp. 7517-18, Colton to Huntington, August 24, 1877.
^^Ibid,, p. 7523, Colton to Huntington, September 28, 1877.

176 HISTORY OF THE SOUTHERN PACIFIC

overdrawn from $150,000 to $350,000 each, and Colton was
picking up every dollar outside which he could secure without
showing his hand.^®

Indorsement of Notes

As a general practice the associates seem to have refused to
put their personal indorsement on the notes which they dis-
counted. 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 aE
live up to that, he would sign 20 of the blank notes, which he
did, 10 of each.^''

Conditions in California grew worse rather than better
after the notes were sent, but those in the East improved, and

'6 Colton case, pp. 7625-26, Colton to Huntington, March 13, 1878.

It is extraordinary that a man in Colton's position \iith 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 bis personal necessities may have been.
This was, however, done. In reply to a letter from Huntington criticizing this action, Col-
ton 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 meet-
ing 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 sur-
plus 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.)

'7 Colton case, pp. 7608-14, Colton to Huntington, January 31, 1878.

^/HyiA^^ihl

FINANCIAL DIFFICULTIES 1 77

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.^^

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 Rail-
road 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 "jj. 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.^^

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

^* In i88s 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 embar-
rassed 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 obliga-
tions. 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.

19 Colton case. pp. 704-705.

178 HISTORY OF THE SOUTHERN PACIFIC

said that the general market had become so strong in the latter
part of 1879 that it was a good time to sell anything.^" 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.^^ 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 agreemept 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 ( i ) a provision that the lease should

'" Colton case, p. 112, deposition J. D. Probst.
^^ Ibid.f pp. 146-47, deposition A. L. Thompson.

FINANCIAL DIFFICULTIES 179

continue five years from the ist of May, 1879; (2) a provi-
sion 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 agreemeents relating to the lease of
the Southern Pacific to the Central Pacific, and those anticipat-
ing 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.

l8o HISTORY OF THE SOUTHERN PACIFIC

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 ex-
tension 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 Hunt-
ington 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 be-
fore they became railroad men, and the state and local aid
which the railroad secured at the very beginning of its con-
struction but confirmed an attitude favorable to continued re-
lations 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 cor-
poration 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 op-
erations of a railroad business except perhaps that the propor-
tionate liability established by the law to some extent dis-
couraged 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

1 82 HISTORY OP THE SOUTHERN PACIFIC

corporation led to important additions to the law. This re-
sentment had been growing for several years. The Sacra-
mento 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, appar-
ently 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 discrimi-
nated 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 ex-
tremely 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 popu-
larity 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.

RAILROAD COMMISSION OP 1880-1883 1 83

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 legisla-
tion, 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 ex-
tortion 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 super-
vising all such railroads with reference to the security and
accommodation of the public.^

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.^ 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.*
Mr. Tuttle, the new commissioner, accumulated certain statis-
tics during his two-year term of office, but otherwise did little
to which the railroads could object.

'Laws of Calif omia, 187S-76, Ch. 515. Porareadableaccountofthehistory of the Cali-
fornia Railroad Commission up to 189S, see Mo£Eet, " The Railroad Commission of California
— A Study in Irresponsible Government," (Annals of the American Academy of Political
and Social Science, March, 189s).

" Report of the Board of Commissioners of Transportation to the Legislature of the
State of California, December, 1877.

3 Laws of California, 1877-78, Ch. 641.

1 84 HISTORY OP THE SOUTHERN PACIFLC

The development of railroad regulation was thus tempor-
arily arrested. Yet for several reasons the check to the prog-
ress 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 disturb-
ance 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 Working-
man'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 legis-
lature which passed the railroad control bill of 1878.* Mr.
Colton thought the call most unfortunate,® but there is no
reason to suppose that the legislature had anything particularly
radical in mind.

When the convention began its sessions, however, its mem-
bership was found to include a majority of persons determined

* Laws of California, 1877-78, Ch. 490.

5 Colton case, p. 7646, Colton to Huntington, May 23, 1878.

RAILROAD COMMISSION OP 1880-1883 1 85

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 ID 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 o£ views, and resulted in construc-
tive conclusions of importanoe. More could scarcely be asked
of a deliberative assembly. fThe 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 en-
trusted 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 pen-
alties, 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

1 86 HISTORY OP THE SOUTHERN PACIFIC

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 errone-
ous 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 legis-
lature was inexpert, slow to act, and subject to corrupt in-
fluences.

Other Constitutional Provisions

The second decision of the convention was that a general
prohibition of discrimination should be placed in the fundamen-
tal law. The clauses finally adopted provided that no discrimi-
nation 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 prop-
erty transported over any railroad, or by any other transporta-
tion company or individual, should be delivered at any station

RAILROAD COMMISSION OF 1880-1883 1 87

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 con-
vention that the proposals should not be approved.

*, Besides the fundamental clauses relating to a commission
an,'d those prohibiting and defining discrimination, the Consti-
tutional 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 cer-
tain 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 rail-
road or canal company should be interested in the furnishing
of material or supplies to such company. One apparently im-
portant 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 with-
out 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 con-
sulted. This act defined certain terms used in the law. It also

1 88 HISTORY OP THE SOUTHERN PACIFIC

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 commis-
sion 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.*

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 unpardon-
able ignorance, adopted in frenzied madness, and was valuable
only as a beacon to other states and peoples to avoid its
principles and results.''

The document certainly compelled the associates to con-
sider 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

' Laws of California, r88o, 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 sell -executing. This
was not the case in 1879. (McMurray, "Some Tendencies in Constitution Makmg," in
California Law Review, March, 1914.)

7 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.

RAILROAD COMMISSION OF 1880-1883 1 89

J. S. Cone, C. J. Beerstecher, and George B. Stoneman were
returned. Cone was a ranch owner, business man, and capita-
list 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 repre-
sented 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.*

The third member of the commission was C. J. Beerstecher,
a San Francisco lawyer with a miscellaneous practice amount-
ing 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 $1 5 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 com-
mission 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 under-
stood that he represented the popular interests ; another gentle-

8 The Visalia Delta said of Stoneman, with unconscious humor: "France has her
Napoleon-, Italy her Garibaldi; America her Washington; Ireland her O'Connellj and the
state of California her Stoneman."

190 HISTORY OF THE SOUTHERN PACIFIC

man ( J. S. Cone) was elected because it was understood that he
represented the feeHng of the corporations, and a third (Beer-
stecher) 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.^ Cone also con-
sidered 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, how-
ever, the activities of the new commission may be briefly
described.

Indifference of Commissioners

The evidence shows that from the very first the three mem-
bers 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 resi-
dent 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
109.1"

It seems beyond belief that a new commission, established to"^
initiate public control of a great industry, should have ap-
proached the problem in this indifferent way. The undertaking
called for the fullest exercise of the powers of all the com- -

9 Arguments and statements before the Committee on Commerce, House of Represen-
tatives, 47th Congress, 1st Session, 1882, House Misc. Doc. 55, p. 262, Serirl No. 2047.

'° Report of the Committee on Corporations, 1883, testimony W. R. Andros, secre-
tary to the commission (in appendix to journals of the Senate and Assembly of the Legisla-
ture of California, 25th Session, 1883).

RAILROAD COMMISSION OF 1880-1883 191

mission'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 commis-
sioners failed to make effective the most primary requirements
of the law. Instead of preparing new rates except as herein-
after 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.^^

Some slight attention was paid to the posting of rates, but
the only inspection seems to have been by the bailiff of the com-
mission. 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 neces-
sity, 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 commis-
sioners traveled through the state taking testimony and hearing
complaints. In the winter and spring of 1880-81, they at-
tempted to formulate results. It appears that in May, 1880,
Stoneman introduced a resolution to the effect that maximum

" Report of the Committee on Corporations, 1883, p. 48. testimony C. J. Beerstecher.

192 HISTORY OF THE SOUTHERN PACIFIC

rates in California should not exceed five cents per ton per mile
for distances lOO miles and over, and six cents per ton per mile
for distances under lOO 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. Noth-
ing 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.^^

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 origi-
nating 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 south-
ern California was being discriminated against.^* 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 litiga-
tion and to get quick action.^* Moreover, Stanford wished to
get away and go to Europe, and Cone did not like to keep him.

'^ This schedule was prepared under the direction of Stoneman and was approved by
Beerstecher on the understarding 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.)

^3 jbid., p. II, testimony G. B. Stoneman. Mr. Cone says that the freight schedule
was not fully prepared till March, 188 1.

^*Ibid., testimony J. S. Cone.

-,^^^

^^J

^^ <^Hi^K:~~ wuifeJ*^ffl[|^M

*ii^s^wp

»^«|^SJ\^.^8P^ A

^jjM^^H^^U^kjb . '-^I^^^H^^I

^^^

George Stoneman

RAILROAD COMMISSION OF 1880-1883 1 93

As Cone said in another connection, Stanford was pretty win-
ning 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,
1 88 1. 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 sup-
port him in action favorable to the railroad and Stoneman in
action of contrary tenor.

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, Stone-
man 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 com-
mission formulated no principles and worked out no effective
13

194 HISTORY OF THE SOUTHERN PACIFIC

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 com-
mission 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 im-
partial 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 Fran-
cisco, before which Beerstecher practiced, show that this was
highly unlikely,^^ and the testimony of the baliff to the com-
mission is directly to the contrary. $12,000 may be
regarded as adequate compensation for a man of Beerstecher's
type.i®

'5 Report of the Committee on Corporations, 1883, testimony C. J. Beerstecher.

16 When Beerstecher came up for re-election in 1882, the opposition press asserted
that a railroad official banded every employee of the railroad in Beerstecher's district a
Republican ticket with Beerstecher's name printed on it, with orders to vote it. (Mussd
Slough Delta, May 12, 1882.)

RAILROAD COMMISSION OP 1880-1883 I95

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 char-
acter that Cone was given unusual consideration by the rail-
road 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.^''

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 indi-
viduals 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, Wil-
son applied to purchase, although he believed that the applica-
tion 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 nego-
tiated 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

'7 Report of the Committee on Corporations. 1883. testimony J. S. Cone.

196 HISTORY OF THE SOUTHERN PACIFIC

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, exhibit-
ing 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 appHcation 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 Constitu-
tion 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 afiford to add to a quarrel which by any possi-
bility 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 under-
stood it. This offer was naturally refused, and Cone subse-
quently 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 com-
missioner.

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

RAILROAD COMMISSION OP 1880-1883 197

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 com-
missioner's duties. On the whole subject a committee of the
California legislature reported as follows :

As to the second subject of inquiry, whether the Commis-
sioners, or either of them, during their term of office, may have
made any extraordinary acquisition of property . . . your com-
mittee 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 Com-
missioner, and your committee believe that such acquisition of
wealth was largely due to extraordinary and unusual facili-
ties 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 pur-
chaser, 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.

198 HISTORY OP THE SOUTHERN PACIFIC

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 per-
mitted 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 con-
duct in permitting and upholding the same. Commissioner
Stoneman was unable to accomplish a redress of such discrim-
inations while Commissioner. Further, under this fourth sub-
ject 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 re-
ceived 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 corpora-
tions rather than of the people.

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

CHAPTER XII

THE SOUTHERN PACIFIC AND POLITICS

Appeals to Public

We may now consider in a more general fashion the politi-
cal 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 ad-
vantage 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 can-
not be bought, though individuals may be, and it would do in-
justice 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 de-
mand 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, communica-
tions to the newspapers, letters to private organizations which
interested themselves in the government control of corpora-
tions, 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

199

200 HISTORY OF THE SOUTHERN PACfflC

stood ready to correct any that were shown to exist. ^ Rail-
road fares and freights were cheaper in Cahfornia than any-
where else in the world, all things considered.^ 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.^ 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 viola-
tion 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. Anj^hing else was con-
fiscation. 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, Ameri-
can 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.*

^ Letter to Senate Committee on Corporations, California Legislature, January 22,
1874; San Francisco Chronicle, January 23, 1874.

* 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.

3 Letter to Committee of the New York Chamber of Commerce, January 20, 1881.

■1 The following interview with Charles Crocker, reported in the Placerville Democrat
for March 3, 1883, suggests how tt-e 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 v, ould 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 re-
ported 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 com-
pany was anxious to and would immediately extend the road to this place.*'

SOUTHERN PACIFIC AND POLITICS 201

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. In-
terviews 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 shap-
ing 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." ^ "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.^ Again,
"Yours of November 28 with Northern Pacific clips is re-
ceived. 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 back-
ground as much as possible." ''

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-sub-
sidy 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.*

s Colton case, pp. 1717-19, Huntington to Colton, April 27. 1876.

' Ibid., p. 1754, Huntington to Colton, January 22, 1877-

7 Ibid., p. 1814, Huntington to Colton, December 7, 1875-

> Ibid., pp. 1684-85, Huntington to Colton, November 13, 187S.

202 HISTORY OF THE SOUTHERN PACIFIC

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 be-
lieved 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.® 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.^" 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.^^

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 ^* or

9 Colton case, pp. 1642-43, Huntington to Colton, April 26, 1875.
^° Ibid., pp. 1676-77, Huntington to Colton, October 19, 1875.
" Ibid., pp. 1624-25, Crocker to Colton, February 8, 1875.

" Tom Scott was president of the Pennsylvania Railroad at one time and an active
opponent of Huntington before Congress.

SOUTHERN PACIFIC AND POLITICS 203

somebody else understands it," but he was willing to pay the
expenses of the trip for such men.^^ 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.^* "I aoticed you are looking after the State Railroad
Commission," Huntington adds in another letter to the same
address, "I think it is time." ^^ 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 Rail-
road Commissioners over the roads. I am glad to notice that
you are looking after the Commissioners. I think it very im-
portant.'®

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 vsray, he would lik^/o get some position with us
in California. Mr. Kasson has always been our friend in Con-
gress, 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.^'

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

'3 Colton case, p. 173S, Huntington to Colton, July 26, 1876.
"" Ibid., pp. 1736-37, Huntington to Colton, August 7, 1876.
^^Ibid., pp. 1756-58, Huntington to Colton, March 7. i877-
i<i Ibid., pp. 1763-65, Huntington to Colton, March 31, 1877.
" Ibid., pp. 1776-77, Huntington to Colton, May is, 1877-

204 HISTORY OF THE SOUTHERN PACIFIC

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 Washing-
ton. He had offices in New York and Boston also, and divided
his time between the three places while Congress was in ses-'
sion— four days in Washington, two in New York, and one
in Boston.^^ 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 Stan-
ford, 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 ex-
pense account. Much criticism has been directed at the activityi
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.^*

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

'^ Huntington manuscript, p. 17.

'9 Colton case, pp. 1622-23, Huntington to Colton, March 3, 1875.

SOUTHERN PACIFIC AND POLITICS 205

There is a terrible fight kept up on us in Washington. But
while they may bite us, they will not eat us up. Sherrell tele-
graphed me to come to Washington in great haste, as Lawrence
was to pass his bill at once; so I went over and got the com-
mittee 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.^"

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.21

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 an-
other Senator yesterday that he would pass his Pacific Rail-
road 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.^^

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

" Colton case, p. 1728, Huntington to Colton, June 21, 1876.
" Ibid., pp. 1731-32, Huntington to Colton, July 16, 1876.
"Ibid., p. 7669, Huntington to Colton, August i, 1876.

206 HISTORY OF THE SOUTHERN PACIFIC

for the same thing, but I beat him for once certain, as the com-
mittee 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.^^

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

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.^^

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 mat-
ters 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.^^

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.^^

"'Colton case, p. 17 56, Huntington to Colton, March, 7, 1877.

'* Ibid., p. 1758. Huntington to Colton, March 14, 1877; pp. 1812-13, Huntington to
Colton, December s, 1877.

"S Ibid., pp. 7776-77t Huntington to Colton, January 11, 1878.
'^ Ibid., pp. 1847-48, Huntington to Colton, February 9, 1878
" Ibid., p, 1833, Huntington to Colton, New York, June is. 1878.

SOUTHERN PACIFIC AND POLITICS 207

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.^^

Friend Colton: I returned from Washington this morning
and found on my desk yours of the loth inst., No. 74. Thur-
man'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.^^

... 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 Washing-
ton business much longer.^"

'' Colton case, pp. 833-34, Huntington to Colton, New York, June 20, 1878.

" Ibid., p. 1822, Huntington to Colton, New York, April 19, 1878.

3° Ibid., pp., 1823-24, Huntington to Colton, New York, April 23, 1878.

208 HISTORY OP THE SOUTHERN PACIFIC

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.^^

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 connec-
tion.

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.
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 dis-
inclined to talk to him concerning Southern Pacific matters.
In such cases he had recourse to third parties — perhaps a con-
stituent 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 asse-
s' Colton case, pp. 1828-29, Huntington to Colton, New York, May 24, 1878.

SOUTHERN PACIFIC AND POLITICS 209

ciates stood at the front while the franchises were being ob-
tained, but that after the charters were obtained it should be
known that they were controlled by the Southern Pacific.^^
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 Con-
gress or the State when it became one.^^

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 legis-
lation favorable to the company.'* 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 de-
pends. That passes were issued to members of the legisla-
ture, 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 state-
ment, at least, that no more than this took place in Nevada.
He told the United States Pacific Railway Commission of

'' Colton case, pp. 1673-74, Huntington to Colton, October 9, i87S-
33 Ibid., pp. 1679-81, Huntington to Colton, October 29, i87S-
31 Ibid., pp. 1669-70, Huntington to Colton, September 27, 1875-

210 HISTORY OP THE SOUTHERN PACIFIC

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 misapprehen-
sions that existed among the good people of Nevada, as indi-
cated by their press, concerning my relations with the legisla-
ture 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 ex-
penses 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."^'

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.^® 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.*''

On the whole, there is a good deal of evidence that the
owners of the Central Pacific went further in influencing

5S United States Pacific Railway Commission, p. 3276, testimony S. T. Ga?e.
3<i Hid., pp. 3287-88, testimony S. T. Gage.
"Ibid., pp. 4174-75, testimony Leland Stanford.

SOUTHERN PACIFIC AND POLITICS 211

legislation than any strict system of ethics would allow. Hunt-
ington 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.^'^

Further Evidence

More important than the record of such general expres-
sions of opinion are the affidavits filed in the San Francisco
subsidy litigation described in an earlier chapter. Nor is any-
one likely to read the letters of Mr. Huntington to Mr. Colton
in the late seventies without becoming convinced that the possi-
bility of purchasing votes was constantly before Huntington's
mind. Huntington wrote Colton at one time that the (South-
ern Pacific) company could not get legislation unless it paid
more than it was worth.^^ In another communication he said :
"H we pass the Sinking Fund Bill and beat Scott and the Union
Pacific, it will hurt us not less than half flora"; *" 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." *^

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

^' Huntington manuscript, p. 80.

3' Colton Case, pp. 1802-3, Huntington to Colton, November 9, 1877.

4° Ibid., pp. 1843-4S, 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.

41 Ibid., p. 1840, Huntington to Colton, January 12, 1878.

212 HISTORY OF THE SOUTHERN PACIFIC

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 ist, 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 expen-
sive ; 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.*^

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 proposi-
tion in writing, however, that he would control his friends for
a fixed sum.*^ When asked about the meaning of his cor-
respondence, Huntington denied that these expressions had
any vicious significance. He said he kept on high ground,**
and even objected to the free use of liquor and cigars.*^ Spe-
cifically, 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 re-
ceived 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

4' Colton case, p. 1803, Huntington to Colton, November is, 1877.

43 Ibid,, pp. 1700-1, Huntington to Colton, January 14, 1876.

^^ Ibid., pp. 1712-13, Huntington to Colton, March 23, 1876.

4s United States Pacific Railway Commission, p. 3738, testimony C. P. Huntington.

SOUTHERN PACIFIC AND POLITICS 213

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.*^ 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.*'' Vouchers covering such
items were made out simply to "Expense," or to "Legal
expense." *® In many cases expenditures authorized by Stan-
ford, Crocker, or Huntington were represented by no vouchers
at all,*® 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 state-
ment already quoted that vouchers to which there were objec-
tions would not be included in any settlement with the United
States, but that the moneys would be treated as still in the
treasury.'" 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

<6 United States Pacific Railway Commission, pp. 35-36, testimony C. P. Huntington.

47 Ibid., p. 3869, testimony I. E. Gates.

<8 Ibid,, p. 3697, testimony C. P. Huntington.

49 Ibid., pp. 2995-99, testimony C. F. Crocker; p. 3200, testimony Leiand Stanford.

5° Ibid., pp. 4174-75, testimony Leiand Stanford.

214 HISTORY OF THE SOUTHERN PACIFIC

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 appli-
ances. 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 con-
tend 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 in-
tervals, 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 mis-
management which, he asserted, had taken place under Hunt-

SOUTHERN PACIFIC AND POLITICS 215

ington's control. With respect to the interference of the
Southern Pacific in poHtics, Bassett wrote to Huntington in
1895:

What chief executive of the State, before the present in-
cumbent, has there been who did not owe his nomination and
election to the Southern Pacific Company and in acknowledg-
ment 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 Com-
missions 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 difhculty 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? . . ."^

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

5' Most of the so-called " Dear Pard letters " from which the above is taken, appeared
mfhe San Francisco Daily Report after November, 1892. Inthemajority of cases the letters
were printed in the Saturday edition. The correspondence continued with varying fre-
quency until Bassett's death in 1903. It was credited with a considerable share in prevent-
ing 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.

2l6 HISTORY OP THE SOUTHERN PACIFIC

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 state-
ments 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 i, 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."^

s* Colton case, p. 1661, Huntington to Colton, May i, 1875.

SOUTHERN PACIFIC AND POLITICS 21 7

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.®*
A letter in June, 1876, reads as follows :

I hope . . . will be sent back to Congress. I think it would
be a misfortUHe 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 Con-
gress once. . . .^*

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. . . .^^

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

Controversy between Associates

The correspondence which has just been cited is not offered
in order to discredit Mr. Huntington, or for any reason ex-
cept to show that it was Huntington's belief in the years 1875,
1876, and 1877 that the influence of the Central Pacific should

53 United States Pacific Railway Commission, p. 3721, testimony C. P. Huntington.

54 Colton case, pp. 1726-27, Huntington to Colton, June 7. 1876.
ss Ibid., pp. 1740-41, Huntington to Colton, November 11, 1876.
^^ Ibid; pp. 1765-66, Huntington to Colton, April 3, 1877-

21 8 HISTORY OF THE SOUTHERN PACIFIC

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.®^

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 ambi-
tion 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.^*

S7 It has also been asserted that the failure of Mr. and Mrs. Stanford to attend one of
the Huntin^on 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 in-
dividual of shady characteristics, and was not inclined to trust him further tlian he could
throw Trinity Church up the side of Mt. Shasta. For his part, Huntington spoke of Stan-
ford as a "blanked old fool." {San Francisco Daily Report, July 21, 1894.)

s*5an Francisco Examiner, April 10, 1890.

SOUTHERN PACIFIC AND POLITICS 219

This Statement attracted attention, and Huntington 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.^^

Such statements naturally led to an open breach between
Huntington and Stanford.®"

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

^^ San Francisco Examiner, April lO, 1890. «o /did., April 13, 1890; April 18, 1890.

220 HISTORY OP THE SOUTHERN PACIFIC

had little interest in general politics, thought they should not.
It is probable enough that Stanford or some of his subordi-
nates 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 judg-
ment was right. They fell out among themselves, not be-
cause 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 am-
bitions 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 diiificult 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 pend-

SOUTHERN PACIFIC AND POLITICS 221

ing. Huntington maintained that this was legitimate,®^ and
Gage once admitted that the company had to employ everybody
who could pull a pound. The practice was more easily defensi-
ble 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 construc-
tion 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,*^ 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.

'' United States Pacific Railway Commission, pp. 3697-98, testimony C. P. Huntington.
'" Colton case, p. 1729, Huntington to Colton, June 24, 1876.

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 pro-
foundly 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 signifi-
cance 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 discus-
sion 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

WATER COMPETITION 223

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, carry-
ing 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 im-
portance as early as 1847. In that year a small side- wheel
steamer seems to have plied between San Francisco and Sacra-
mento. In 1849 ^*^d 1^50 larger boats were put on, the Sacra-
mento 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 1 1 p.m. Often as many as four
boats left San Francisco loaded in one day.^

The total tonnage of steam vessels plying on California
rivers and bays was estimated by the State Transportation

' Report of the chief engineer upon the preliminary survey, revenue, and cost of con-
struction of the San Francisco and Sacramento Railroad, 1856.

224 HISTORY OP THE SOUTHERN PACIFIC

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 1
Landing, Colusa, Chico, Red Blufif, Antioch, and Pacheco were 1
among those able to take advantage of the water service.^

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,^ 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 draw-
backs 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,
i860, 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.*

Ocean Commerce

The first regular water connection between the eastern and
western coasts of the United States was provided by the clipper

' Biennial Report of the Commissioner of Transportation of the State of California for
the years ending December 31, 1877 and 1878.

3 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.

^Sacramento Union, December 19, i860.

WATER COMPETITION 225

ships on the route around Cape Horn. These swift sailing
vessels supplied the gold miners with the tools and manu-
factured 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.®

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 pos-
sible 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 185 1 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,* 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

s 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, l8th session, California Legislature, Vol 2);

Products Annual Receipts Annual Exports

Wheat 2 25,000 tons 200,000 tons

Barley 30,000 " 10,000 "

Oats 15,000 " 2, SOD "

Com 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 " SCO "

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

'Hittell, "Commerce and Industries on the Pacific Coast," Ch. 11.

226 HISTORY OF THE SOUTHERN PACIFIC

the Pacific to China and Austraha. Among its competitors
by sea at one time or another, besides the cHpper 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 trans-
portation 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 situa-
tion 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 des-
tined 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 Steam-
ship Company, resulting in earnings of $3,264,456.44.'' On

7 United States Pacific Railway Commission, p. 3576, testimony Richard Gray, general
freight agent. Central Pacific Railroad.

WATER COMPETITION 227

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 steam-
ships 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.*

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.®

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 :

8 United States Pacific Railway Commission, p. 2924. testimony Leland Stanford.

9 Colton case, pp. 981-83.

228 HISTORY OP THE SOUTHERN PACIFIC

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 men-
tioned, of course they would not expect any of the China busi-
ness 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 con-
trolled by those that are always short or long of stock and en-
deavor 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.^°

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 manage- '
ment of the enterprise.^^ 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

^° Colton case, pp. 981-83, Huntington to Colton, November 9, 1874.
'^ Ibid*, pp. 466, 495-96, testimony F, S. Douty.

WATER COMPETITION 229

3,800 tons; the other ships were of 2,600 tons each.^^ T^e
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.^^

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 i,
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 descrip-
tion, 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

— _ I

" Hittell, " Commerce and Industries of the Pacific Coast," Ch. ii.

'3 United States Pacific Railway Commission, p. 2924, testimony Leiand Stanford.

230 HISTORY OF THE SOUTHERN PACIFIC

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 steam-
ship 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 earn-
ings over $50 were to go to the railroad.^*

The essential facts in this agreement were that the steam-
ship 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 subse-
quent 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 rail-
road freight shipped were not to be less than $48,000 monthly
westbound, and $35,000 monthly eastbound. In case the earn-
ings 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

'< United States v. Union Pacific Railroad, pp. 3316-20.

WATER COMPETITION 23 1

\
in excess of 600 tons for each vessel were to be equally divided ,

between the railroad and the steamship company.^^ An addi-
tional 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 V
Sacramento, and vice versa.

An agreement dated June i, 1885, between the Transconti-
nental Association and the Pacific Mail does not differ strik-
ingly 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.^*

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,-
1 13.06, 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,

IS 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, ist Session, House Exec. Doc. No. 60, Serial No.
2398.

" United States v. Union Pacific, pp. 3321-25.

232 HISTORY OP THE SOUTHERN PACIFIC

1886, the Union Pacific paid $34,652.94, the Central Pacific
$31,927.57, the Southern Pacific $30,172.79, the Santa Fe '
$15,086.11, the Galveston, Harrisburg and San Antonio
$11,536.82, and seven other companies smaller sums.^^ V

Change in Ocean Traffic

The change which took place in the volume of vvrater-borne
commerce in and out of San Francisco coincident vi^ith the
arrangements between the railroads and the Pacific Mail which
have been described, is clearly indicated in the following
table : ^^

Value of Qjmmodities 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

Shipped from San

Year ended

York to San Fran-

Francisco to New

June 30

cisco

York

Total

1869

$50,015,994

$20,i86,03S

$70,202,029

1870

15,334,945

3,259,310

18,594,255

1871

9,391,607

2,161,106

11,552,713

1873

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

187s

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

2,781,06s

2,166,690

4,947,755

1880

2,963,06s

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

^' United States Pacific Railway Commission, pp. 4276-77.

^* 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.

WATER COMPETITION 233

competition — with the year 1884, it appears that the value of
commodities shipped in and out of San Francisco via Panama
during these years decHned from about seventy to about two
milHon 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 com-
fortable 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 with-
drawn. The peculiar strength of the Pacific Mail in negotiat-
ing 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 haul- \
ing freight across the Isthmus." 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

'9 Exception should be made of the period between December i6, 1900, and June 11,
1902, when there was no agreement between the Pacific Mail and the Panama Railroad.
(United States v. Union Pacific, p. spii, testimony Conner.)

234 HISTORY OF THE SOUTHERN PACIFIC

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 elabo-
rate 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 be-
tween 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 can-
cellation of its contract with the Pacific Mail, the organization
of a company known as the Pacific Transit Company, the pur-
chase of three old refitted warships, and the threat to engage
in active competition. Mr. Park was asked if he would de-
sist from his attack on the Pacific Mail if a neutral board of
directors were elected. He consented to this, and was satis-

WATER COMPETITION 235

fied 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.^**

Railroads' Main Relicince

It thus appears that during rhe 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 transconti-
nental 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 Rail-
road. When the Pacific Mail subsidy was reduced to $65,000
in 1887, the payment to the Isthmian railroad likewise fell to
$55,000. In 1 88 1 the Panama Canal Company, a French cor-

'° Bancroft, "ChronicleB of the Builders," Vol. s, Ch. 6; San Francisco Chronicle,
November lo, 1878.

236 HISTORY OF THE SOUTHERN PACIFIC

poration 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 re-
lative 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 characteristi(?ally 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 manufac-
turing 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 manu-
factures 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.

237

238 HISTORY OF THE SOUTHERN PACIFIC

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 sup-
port. Originally the chief profit of the northern towns came
from supplying the mining population of the Sierras with sup-
plies 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,^nd 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, how-
ever, changed and they remain as before — ^trading and con-
suming 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 individ-
ual cities, and also between the city communities as a whole
and the farming and manufacturing interests of the state.
These difTerences have received free expression in the discus-
sion 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 whole-
sale 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

RATE SYSTEM OF CENTRAL PACIFIC 239

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 discrimina-
tion 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.

240 HISTORY OF THE SOUTHERN PACIFIC

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." ^ "The Southern Pacific," said Mr. William B. Curtis,
of that company, in 1894, in the same strain, "sells transporta-
tion 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." *

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. 1
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 I
the details of this interesting system will now be presented. /

Separate Rate ClassiBcatiohs

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);

' California Mail Bag, August, 1874.

^San Francisco Examiner, May I, 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.

RATE SYSTEM OF CENTRAL PACIFIC 241

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.^

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.*

When the Santa Fe later built into southern California it
brought in the Western classification, tariffs, rules, and con-
ditions that governed its lines elsewhere, and applied the
Southern Pacific schedules of merchandise rates to this classifi-
cation. Since, however, the Southern Pacific had only one mer-
chandise class, the Santa Fe 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 classifica-
tion 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

^Report of California Commissioners of Transportation, 1877, table i, pp. 34-38.

4 Report of the Senate Committee on Constitutional Amendments, relative to constitu-
tional 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 CaUfomia,
30th Session, Vol. S, 1893.)

242 HISTORY OP THE SOUTHERN PACIFIC

Pacific itself substituted the Western classification for the one
which it had been using. ^

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,* the evidence is to the effect that this
maximum was generally applied on short-haul local business as
late as 1877 ^'^d 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 1 5 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 Stock-
ton, 92 miles, was $3.20 per ton, or 3^ cents per ton per mile;
that from San Francisco to Sacramento, 140 miles, was $3.60,
or 2^ 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.''

s San Francisco Examiner, October 27, 1893. Even in the case of through rates more
than one classifipation was used. It appeared in a case brought before the Interstate Com-
merce Commission in 1887 that while the Western classification governed shipments from
San Francisco to Denver, another classification, known as the Pacific Coast eastbound classi-
fication, was used in connection with freight moving from San Francisco to the Missouri
River. (Martin v. Southern Pacific Company, 2 I. C. R. i [1888].)

' United States Pacific Railway Commission, pp. 2536-37, testimony Leland Stanford.

' Report of California Commissioners of Transportation, 1877.

RATE SYSTEM OF CENTRAL PACIFIC 243

In later years the charges of the Southern Pacific natur-
ally declined. Yet the rate on brick from San Francisco to
Soledad in 1892 was sJ4 cents per ton per mile on a haul of
143 miles, and that to San Miguel, 64 miles farther on, was al-
most 5 cents per ton per mile.^ 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, ^^ 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. Rail-
road 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 pro-
ducing 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 discus-
sion of personal discrimination; in the next chapter the topic of
local discrimination will be considered.

8 Statement of J. S. Leeds, submitted to the State Railroad Commission (San Francisco
Bulletin, April 4, 1892).

244 HISTORY OP THE SOUTHERN PACIFIC

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 Cen-
tral Pacific and represented that they were offered transporta-
tion 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 state-
ment was true, we generally met the case by giving a pass !" '

Sudden Tariff Changes

In addition to granting passes, the Southern Pacific dis-N
criminated by changing open rates suddenly for the benefit of
persons fortunate enough to be advised in advance. Mr. Stan-
ford once explained that individual items in the company's tar-
iff were changed whenever by so doing the company could
encourage business in any direction.^" Indeed, a tariff would
scarcely be in force ten days before the necessity for changes
would be apparent. -^^

How this might work was shown in 1892, when complaint
was made of discrimination in favor of the Standard Oil Com-
pany. It was then alleged that the Central Pacific was lower-
ing oil rates from $1.25 per hundred pounds to 82 J^ 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.

9 United States Pacific Railway Commission, p. 3344, testimony J. C. Stubbs.
^^ Letter of Stanford to Committee of San Francisco Chamber of Commerce, December
1,1873.

^^ United States Pacific Railway Commission, pp. 3292-93, testimony J. C. Stubbs.

RATE SYSTEM OP CENTRAL PACIFIC 245

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.^''

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. Sfubbs 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 ist.
No doubt Mr. Stubbs was unaware that we were stocked up at the
present rate of 82 J4.

The Transcontinental Association adjourned at Chicago yester-
day, 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 ist I will have the same corrected by wire and the
$1.25 rate put in. As soon as Mr. Stubbs reaches home I will tele-
graph you whether it is intended that the 90-cent rate should be put
in effect January ist 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

"San Francisco Examiner, December 30, 1892, October 29, 1894; San Francisco
Bulletin, January 31, 1893.

246 HISTORY OF THE SOUTHERN PACIFIC

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 epi-
sode, the Union Pacific issued a circular applying a rate of
78^2 cents per hundred pounds on oil from Colorado points to
the Pacific Coast. This rate had been in effect some years i;
before, previous to the organization of the Western Traffic I
Association, under a rule which made Missouri River com- [
modity rates a maximum on business originating west of the
97th meridian. The rule in question had never been with-
drawn, 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
ofif this anticipated competition, the Standard Oil representa-
tive 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.^*

"San Francisco Examiner, October 30, 1894.

RATE SYSTEM OF CENTRAL PACIFIC 247

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 rail-
roads by which the rebate was paid. Mr. Stubbs once ex-
plained 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 be-
tween 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 transporta-
tion of them.^*

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 re-
duced 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 depart-

14 United States Pacific Railway Commission, pp. 3299. 3300, testimony J. C. Stubbs.

248 HISTORY OF THE SOUTHERN PACIFIC

ment of that company. Speaking before the Interstate Com-
merce 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 be-
fore 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 pub-
lished 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 to-
gether 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.'^^

Concrete Instances

The practice of quoting a lower rate to one person than to
another in order to secure a specific shipment, or in considera-

's Railroad Commission of Nevada v. Southern Pacific Company, 21, 1. C. C. R. 329.
349(1911).

RATE SYSTEM OP CENTRAL PACIFIC 249

tion of an agreement for exclusive patronage of the railroad
which granted the rebate, was clearly a case of personal dis-
crimination. 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 show-
ing that, in consideration of the rental of said wharf, Fried-
lander 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 Cali-
fornia," 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.

250 HISTORY OF THE SOUTHERN PACIFIC

"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 Com-
mission. 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, sljippers
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.^®

The system of special rates and exclusive contracts was
not at first applied to westbound freight, nor to general mer-
chandise, whether moving east or west. Late in July, 1878,
however, notice was given of advances in westbound merchan-
dise 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

" A copy of this contract is printed in the San Francisco Chronicle of May 7, 1879.

RATE SYSTEM OP CENTRAL PACIFIC 251

contracts with the railroad for exclusive handling of their
freight. The Central Pacific management placed the respon-
sibility for the rate advance upon the Union Pacific, and gave
publicity to a telegram of protest signed by Mr. Stanford.^''
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 Cen-
tral 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, Pitts-
burgh, Cincinnati, and Chicago, and other points taking the
same rates to the Pacific Coast. Rates on freight not specifi-
cally provided for were not to exceed those published in the
general tariff. In case rival railroads cut rates, or in case com-
petition 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 con-
tracting 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 competi-
tion 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 amotmts, 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.

'7 San Francisco Call, August i, 1878.

252 HISTORY OP THE SOUTHERN PACIFIC

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 agree-
ment 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." ^*

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. Con-
tracts 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, ex-
plaining 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

^ Report of the Committee on Corporations of the Assembly of California, 1883. sup.
ciU 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, 2Sth Session, Extra).

RATE SYSTEM OP CENTRAL PACIFIC 253

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.^^

Administration of Contracts

The railroad company .reserved from the beginning the
option of way-billing the goods and collecting freights accord-
ing 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 al-
ways 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 be-
came more stringent in the later years. J. T. Doyle, a well-in-
formed 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.^°

Probably there was some difference in the treatment of
different shippers in these matters. Mr. Hawley, a large im-
porter of hardware, told a committee of the California legisla-

'' Railroad Commission of Nevada v. Southern Pacific Company, 21 I. C. C. R. 329,
346(1911).

» Letter written by John T. Doyle and printed in the Nation, December 8, 1881.

254 HISTORY OF THE SOUTHERN PACIFIC

ture in 1884 that he was at hberty 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 ex-
change of a rebate by the railroad for an agreement for exclu-
sive 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 re-
quiring 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 trans-
continental rates. When special contracts were offered to
merchants in Stockton, Los Angeles, Marysville, and Sacra-
mento, 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

RATE SYSTEM OP CENTRAL PACIFIC 255

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,^^ 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. Prac-
tically, 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.^^

'^ United States Pacific Railway Commission, pp. 3333-34, 3358-59, testimony J. C.
Stubbs.

" 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 an>^ 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 Fran-
cisco, 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.)

256 HISTORY OF THE SOUTHERN PACIFIC

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.^* 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 be-
lieved 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 appre-
hension lest the contracts provoke antagonistic legislation at
Washington. Mr. Stubbs tried to argue the question, but with-
out success.**

^^ Business Men's League of St. Louis v. Atchison, Topeka and Santa F6 Railroad, g
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;

ended June 30

Number

Tonnage

1867

103

iio,7ii

1868

119

124,504

1869

139

153.784

1870

III

126,726

1871

66,289

1872

70,956

1873

104,586

1874

83.248

187s

110,071

1876

124,793

1877

124,746

1878

104.544

1879

92,683

1880

86.332

1881

89,097

1882

104,157

1883

118,494

1884

84,196

^4 Proceedings of the Transcontinental Association, i88s. 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 transporta-
tion 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 coatraryito sound public policy, whether applied
on land or sea.

CHAPTER XV

LOCAL RATES IN CALIFORNIA

Charging What the Traffic Will Bear

The general policy of the associates in dealing with prob-
lems 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 con-
cession be made from the highest rate which could be charged,
in order to promote the growth of business ?*

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 /

' 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 Sroo per ton and that the rail-
road 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
tothe smelter for one month an d 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 proposi-
tion I think this stands pre-eminent. Of course it was rejected, and I was given rates as
foUaws: Anderson, J71; Redding, $73 per car." (San Francisco Examiner, May 8, i8p3.)

17 257

258 HISTORY OF THE SOUTHERN PACIFIC

it was adopted, nor was it particularly repugnant to public opin-
ion 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 Encouragem.ent 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 in-
formation is on record.

One case of this sort, which shows the willingness of the
Southern Pacific management to respond to what they con-
sidered 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 com-
petition 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 Com-

LOCAL RATES IN CALIFORNIA 259

pany 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.^

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 3 1 next ensuing,
pending an anticipated agreement between the Transcontinental
Association and its eastern connections.^

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 substanti-
ally 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.

'United States Pacific Railway Commission, pp. 3319-20, testimony J. C. Stubbs.
^ Proceedings of the Transcontinental Railway Association, i88s, pp. 17-18.

26o

HISTORY OF THE SOUTHERN PACIFIC

the Southern and Central Pacific railroads, like other com-
panies in the United States and Europe, varied their local
charges with the distance between point of origin and point of

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

destination. To illustrate this point briefly, two charts are here
presented.

The first chart depicts the rates on second-class freight

LOCAL RATES IN CALIFORNIA

261

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

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

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

262 HISTORY OP THE SOUTHERN PACIFIC

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.

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 th6^
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 imple-
ments, 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 Cali-
fornia 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 con-
ditions under which the Central Pacific was constructed, to say
nothing of the extremely mountainous character of certain por-
tions of the Central Pacific lines, differences in the rates per
ton per mile between the valley and the mountain sections were

LOCAL RATES IN CALIFORNIA 263

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 accord-
ingly 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 ship-
pers, which have been alluded to in the preceding chapter in the
discussion of personal discrimination. The effect of com-
petition in distorting distance schedules in California will,
however, be dealt with at some lepgth.

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

264 HISTORY OP THE SOUTHERN PACIFIC

Diego, San Pedro, and San Francisco, and the long stretches
of navigable water on the Sacramento and San Joaquin rivers
have opened the possibihties of water shipment to a multitude
of inland towns. Indeed, in 1883 General Manager Towne, of
the Central Pacific, submitted to the State Railroad Commis-
sion 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 aiifected by proximity to
the competitive points previously mentioned.* 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.^ 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';

4 Letter to the State Railroad Commission, February 20, 1883.

s San Francisco Chronicle, August 25, 1879. It appears that the fare from San Fran-
cisco to Sacramento by steamer had been $s 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.)

LOCAL RATES IN CALIFORNIA. 265

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 Com-
missioners 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 tCK^r-
more distant points which enjoyed the advantage of nearness
to a water location. Since the ability to make use of a compet-
ing 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 numer-
ous complaints, and renders difficult the task of concise
description.

Rates to Intermediate Points

Official confirmation of the general correctness of the com-
plaint of discrimination which reached the public press from
time to time is found in a comprehensive investigation of rail-
road rates in California which the Railroad Commission of that
state undertook as late as the year 191 6. This inquiry was pro-
voked by an application by the Southern Pacific, Santa Fe, and
other railroads in California for relief from the clauses of the
amended state constitution and of the California Public Utili-
ties 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

266

HISTORY OP THE SOUTHERN PACIFIC

therefore the result of modern legislation, the facts brought out
were typical of conditions of long standing.®

Exhibit No. i in the case in question referred to class rates
in the San Joaquin Valley. It appeared that class rates between
San Francisco, San Jose, 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 con-

Waterway

~~"^^

(%m Francisco

Stockfoy

Diagram showing adjustment of freight rates between San Francisco
and Stockton, 191 6.

trolled by the class rate of the Pacific Coast Steamship Com-
pany, 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, how-
ever, water competition was not effective. The rate from San^
Francisco to Simi, 429 miles from San Francisco, was there- \
fore 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 J

p. 354

Opinions and Orders of the Railroad Commission of California, 1916, Vol. 10,
, ff.

LOCAL RATES IN CALIFORNIA 267

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
efifective; 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 competi-
tion 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 North-
western 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 North-
western 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. Ship-
ments to Sebastopol passed through these places, but because

268

HISTORY OF THE SOUTHERN PACHflC

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.

Santa Rosa

Petalama

San Francisco

Diagram showing adjustment of freight rates between San Francisco,
Santa Rosa, and Sebastopol, 191 6.

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 resuh 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

LOCAL RATES IN CALIFORNIA

269

from which the preceding illustrations have been drawn, by the
application of the Atchison, Topeka and Santa Fe Railway
to continue lower rates from Los Angeles to Mojave, Cali-

Lindsay

Mojave

Kramer

~ ^Barstow

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

fornia, 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.

In this case the rate to Mojave at the time application was

2^0 HISTORY OF THE SOUTHERN PACIFIC

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 Fe 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 condi-
tions 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 afifected 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

LOCAL RATES IN CALIFORNIA 27 1

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 view-
point 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 ex-
cessive 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 Jose, points more than 200 miles to the north.''

A few years earlier the rherchants 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

7 Declaration of Principles of the Anti-Monopoly Party of Tulare County (Mussell
Slough Delta, February 24. i88a).

272 HISTORY OF THE SOUTHERN PACIFIC

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.®

In addition to their contention that mileage rates on ship-
ments 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.*

Interstate Commerce Decision

Complaints similar to those voiced by Stockton were regis-
tered by the people of Los Angeles. In the eyes of inhabi-
tants 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 Ber-

* San Francisco Chronicle, August 27, 1879.
9 Stockton Independent, March 10, 1876.

LOCAL RATES IN CALIFORNIA 273

nardino was $1.27 per hundred pounds while to Los Angeles it
was $1.07. On stoves the rates were $1.19 and 99 cents, re-
spectively, and on school furniture $1.55 and $1.35. This
preference was alleged to be discriminative and illegaL^"

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 Fe 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 dis-
tributed. 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. ^^

Stockton, Los Angeles, and San Bernardino thus illustrate
in their conflicting claims the constant effort of cities in Cali-
fornia 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,^^ and the angry contentions
of Santa Clara, San Jose, Marysville, Santa Rosa, and Fresno

'° San Bernardino Board of Trade v. Atchison, Topeka and Santa F^ Railroad Com-
pany, 3 I. C. C. R. 138 (1890). The Circuit Court for the Southern District of California re-
fused to enforce the decree of the Interstate Commerce Commission in this case. (Inter-
state Commerce Commission v. Atchison, Topeka, and Santa F6 Railroad Company, so
Fed. 29s [1892].)

'' Harbor City Wholesale Company of San Pedro, California, v. Southern Pacific
Company, 19 I. C. C. R. 323 (ipio).

'"Commercial Club of Santa Barbara, California, v. Southern Pacific Company, 12
I. C. C. R. 495 (1907).

274 HISTORY OP THE SOUTHERN PACIFIC

in 1914 over the question of relative railroad rates from eastern
points.^^ The characteristics of the system of transcontinental
rates which were involved in these complaints will be discussed
in the following chapter.

'3 Santa Rosa Traffic Association v. Southern Pacific Company, 24 1. C. C. R. 46 (1912) ;
29 I. C. C. R. 6s (1914); Transcontinental Commodity Rate to San Jos6, Santa Clara and
Marysville. California, 32 I. C. C. R. 449 (1914}-

CHAPTER XVI

THE TRANSCONTINENTAL TARIFF

Market and Railroad Competition

The chief difference between the local situation in Cali-
fornia 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, com-
pleted in 1869; the Santa Fe, which reached the town of Dem-
ing 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;

275

276 HISTORY OF THE SOUTHERN PACIFIC

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 Fe, which obtained an
independent California connection in the late nineties. The
Santa Fe 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. ^ 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 trans-
continental railroad business from time to time, but none suffi-
cient 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 transconti-
mental 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 difiference 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

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 con-
ceded, 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. i [1888].)

THE TRANSCONTINENTAL TARIFF 277

Francisco and Los Angeles than between San Francisco and
Bakersfield.

The tendency in pubHc discussion is to regard the trans-
continental 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 descrip-
tion 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, be-
ing mostly located on the seaboard, or within easy reach of it.

278 HISTORY OP THE SOUTHERN PACIFIC

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, includ-
ing 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 ad-
vantage 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 east-
ern 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 sea-

THE TRANSCONTINENTAL TARIFF 279

boards 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 busi-
ness. 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

28o HISTORY OF THE SOUTHERN PACIFIC

the principle of graded charges was abandoned as a result of a
rate war which broke out in 1894.^

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 trans-
portation of higher grade articles, including cotton ducks and
denims, beans, canned goods, and a large number of kinds of

' Business Men's League of St. Louis v. Atchison, Topeka and Santa F6 Railway Com-
pany, 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 Cbmpany, 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 com-
pany 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 Com-
mission 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 jate and the local rate from terminal to intermedi-
ate 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.

THE TRANSCONTINENTAL TARIFF 281

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 Com-
mission has remarked that almost every article which moves
from the East to the Pacific Coast has been at times carried by
the ocean,^ 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.* 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 rail-
road 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 Jose, 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.'

3 Business Men's League of St. Louis v. Atchison, Topeka and Santa Fi Railway Com-
pany, 9 1. C. C.R. 318 (1902). SeealsoRateson Asphaltum, etc.,33 L C. C. R. 480 (1915).

^ 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.

5 Report of Senate Judiciary Committee on Assembly Bill No. 10, 1884, testimony
C. S. Stevens.

282 HISTORY OF THE SOUTHERN PACIFIC

Such a condition was highly unsatisfactory to California
towns other than San Francisco, yet by 1873 Sacramento,
Marysville, and San Jose had been given terminal rates,* and /
still later the list of terminal points was very greatly extended. I
In 1910 there were 152 terminal cities on the Pacific Coast, of/
which 97 were in California^ /•

Dissatisfaction with Rate System

Owing to the peculiar intensity of competition at their
doors. Pacific terminals therefore enjoyed exceptional ad-
vantages 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 con-
siderable 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 near-by
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
Fe, 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. Com-
petition by concerns of this magnitude was difficult for Cali-
fornia houses to meet, especially at times when the eastern

•i Letter of Stanford to a committee of the San Francisco Chamber of Commerce, 1873.
7 Railroad Commission of Nevada v. Southern Pacific Company, 19 I. C. C. R. 238
(1910).

THE TRANSCONTINENTAL TARIFF 283

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 in-
sisted that San Francisco was improperly shut out from Den-
ver, 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.* 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.^

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 enjoy-
ing 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

' San Francisco Bulletin, March 26, 1892. » Ibid., October 12, 1892.

{

284 HISTORY OP THE SOUTHERN PACIFIC

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, Hunt-
ington.' 'Well,' said I, 'I said you would grumble. Now,'
said I, 'you shut up.' " "

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 ex-
pression 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 atten-
tion of the House Committee on Interstate and Foreign Com-
merce in 1918 to the fact that the rate on iron and steel articles

'° Huntington manuscript, pp. 27-38.

THE TRANSCONTINENTAL TARIFF 285

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 consump-
tion 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 6s-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 out-
rageously imposed upon, which is what we are doing.^^

The second objection of the interior cities is that the system
of transcontinental rates limits the territory in which inter-
mediate 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 transconti-

" Hearings before the Committee on Interstate and Foreign Commerce of the House of
Representatives on H. R. 9928 (ssth Congress, 2d Session, March 26 to April 2, 1918, pp.
84-85, testimony W. S. McCarthy).

286 HISTORY OP THE SOUTHERN PACIFIC

nental 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 adjust-
ment 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 rail-
roads, 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 Paci-
fic, 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. -^^

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 com-
plaint arises out of the fact that the through rate to any point

V ^

^^ Hearings before House Committee on Interstate and Foreign Commerce, sup. ciU,
pp. 170-71, testimony, L. J. Spence.

THE TRANSCONTINENTAL TARIFF 287

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 im-
port 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 gener-
ally lower rates, carload against carload, and small consign-
ment 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

288 HISTORY OP THE SOUTHERN PACIFIC

their interior competitors. In some cases tiiis 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.^* 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 con-
sumer 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

"' Business Men's League of St. Louis v. Atohisoni Topeka and Santa F^, sup. cit.

THE TRANSCONTINENTAL TARIFF 289

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." 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 consider-
ing 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 commis-
sion 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. ^^ 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 transconti-
nental system primarily rests.

Not Responsive to Changed Conditions

Nor have the transcontinental carriers been quick to recog-
nize 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

'■t Kindel v. Atchison, Topeka and Santa Ti 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 191 1 ^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 mam line of
the Central Pacific might exceed the rates to Pacific Coast terminals. (Railroad Commis-
sion of Nevada v. Southern Pacific, 21 I. C. C. R. 329 (1911I.) Cf. Commodity Rates to
Pacific Coast Terminals, 32 I- C. C. R. 611 (t9is).

'5 Railroad Coaumssion of Nevada v. Southern Pacific Company, 19 I.C.C.R. 238
(1910).

290 HISTORY OP THE SOUTHERN PACIFIC

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 Com-
merce Commission, and received permission not only to con-
tinue the practice of quoting higher rates to interior towns
than were charged between eastern points and the Pacific
Coast,^^ but actually to increase the diiiference upon a selected
list of eastbound articles.^'' 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 transcon-
tinental rates were entitled under the new conditions. ^^

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 ques-
tion 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.

''Commodity Rates to Pacific Coast Terminals, 32 I. C. C. R. 611; 34 I. C. C. R. 13
(1915).

'' Daggett, "The Panama Canal and Transcontinental Rates," (in Journal of Political
Economy, December, 191s); Rates on Asphaltum, etc., sup. cit.

''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 37s (1919).

THE TRANSCONTINENTAL TARIFF 29 1

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 pre-
vail. 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 conces-
sions, 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 ren-
dered. And, finally, it has increased the amount of transporta-
tion 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 in-
terior 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

292 HISTORY OF THE SOUTHERN PACIFIC

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 de-
sirable for the development of the West. The principal advan-
tages of such an arrangement were that it gave to the Pacific
Coast the benefits of competing rail and water routes as no dis-
tance 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
afiforded 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 iSpiir^This
controversy arose as the result of an attempt by certain mer-
chants 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.^ 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 subse-
quently 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 busi-
ness depression of 1890 to 1897 to stir men to vigorous
action.

' 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 Joaouin Valley Railway" (San Francisco,
1896). See also Walker, "Pioneers of Prosperity" (San Francisco, i89S).

293

294 HISTORY OF THE SOUTHERN PACIFIC

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 efifect 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 Cali-'
fornia 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 sub-
jects, no penalty was incurred.^

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

' United States V. 250 Kegs of Nails, S2 Fed. 231 (1892); 61 Fed. 410 (1894). See also

Franctxr-O Tiullj^ttH TSJnvPTnVipr Tn TRriT

San Franctsco Bulletin, November 19, 1891.

TRAFFIC ASSOCIATION 295

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.* 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,* the words
"merchant" and "mercantile community" were left out, and
when the association was finally organized on October 30,
1 89 1, the constitution and by-laws provided merely for the ad-
mittance 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 protec-
tion, 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

3 27 United States Statutes 4SS (1893). This bill was introduced by Senator Frye.
■• Proceedings of the Merchants' Convention (San Francisco Butletin, October 19, 1891).

296 HISTORY OF THE SOUTHERN PACIFIC

first to last the overwhelming proportion of the association
funds came from San Francisco.

The government of the Traffic Association vi^as 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 re-
quire 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. More-
over, the constitution provided that any unusual work under-
taken 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 ac-
cordance with the benefits derived. No membership was to be
for a shorter period than two years.®

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 per-
form. 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 organi-
zation, merely to enable the shippers of California to deal
collectively with the railroads, instead of one by one as hereto-

^ The constitution of the Traffic Association is printed in full in the San Francisco
Bulletin, November 4, 1891.

TRAFFIC ASSOCIATION 297

fore, 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 com-
panies. Associations similar to the one we propose forming
here are in existence in all the eastern cities, and great bene-
fits have accrued from them, and will not fail to prove success-
ful 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 be-
lieve 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

298 HISTORY OF THE SOUTHERN PACIFIC

good will come from it and [it will] prove of lasting benefit to
the commercial community.*

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.'
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 organi-
zation 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, suggest-
ing that the Santa Fe 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.*

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 pro-
gress possible. From now on, matters moved rapidly. The
executive committee was appointed, and its membership was
made public on October 23 ; ® on October 30 a complete con-

^San Francisco Bulletin, October 17, 1891.

''San Francisco Examiner, October 8, 1891.

8S0H Francisco Bulletin, October 17. 19. 1891; San Francisco Chronicle. October 18,
1891.

^San Francisco Chronicle, October 24, 1891.

TRAFFIC ASSOCIATION 299

stitution and set of by-laws was adopted by the association, and
on November 2 a general call for members was issued.^"

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 rail-
roads. 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 Cali-
fornia" 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 Josci at which the advantages of the Traffic Association
idea were presented. •"

Dissension.

There appears, however, to have been some difference of
opinion within the Traffic Association itself with regard to

'"San Francisco Bulletin, November 4, 1891.

'^ 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 H would be exceedingly
bad policy for San Francisco to antagonize the interior by endeavoring to secure special ad-
vantages for itself. (Saw Francisco Chronicle, December 10, 1892.)

The Traffic Association was said to be, under its constitution and by-laws, a state in-
stitution, 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.t December 18, 1S92.)

300 HISTORY OF THE SOUTHERN PACIFIC

the best policy to be pursued toward the interior. The funda-
mental 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. ^^

Ideas the same as those expressed by Mr. Jacobs appeared
in a petition made public in December, 1892, and signed by
over 1 50 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.^^

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.^* 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

''Son Francisco Chronicle, November 3, 1892.

'^ Ibid., December 7, 1892. The reply of the executive committee of the Traffic Asso-
ciation to this address is printed in the San Francisco Examiner, December 18, 1892.
^^ Sacramento Union, April 4, 1892.

TRAFFIC ASSOCIATION 3OI

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.^^

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 distribut-
ing 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 Associa-
tion 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 move-
ment 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 ex-

^5 Ihid., 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.

302 HISTORY OF THE SOUTHERN PACIFIC

perience behind him. He had been telegraph operator, station^
agent, assistant general freight agent, general freight agent,
and trafific manager on various eastern railroad systems, and at
one time had held the position of chairman of the Transconti-
nental 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 pos-
sessed qualities of energy and aggressiveness which unfitted
him for a temporizing or conciliatory role. Under his leader-
ship 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.^^

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 Bulletin, November 23, 1891. Mr. Leeds was given a two-year
appointment, at a salary of $12,000 per annum.

TRAFFIC ASSOCIATION 303

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 ulti-
mately to the state legislature ; the second was the encourage-
ment 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 Fe 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 Associa-
tion opportunity to collect signatures to a petition, and gener-
ally 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 mem-
bers of the Traffic Association route their freight in every

304 HISTORY OP THE SOUTHERN PACIFIC

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.^'^

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 con-
ducted in the interests of the Southern Pacific. This was too
ambitious an undertaking for the Traffic Association to under-
write 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

■' Walker, " Pioneers of Prosperity," sup. cit., p. 46.

TRAFFIC ASSOCIATION 305

to supply at least two-thirds of the freight. According to
statements made at the time, Grace and Company were ex-
pected 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. ^*

Effect of Competition

Some hint of the attitude of the older transportation com-
panies 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.^^

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

'8 The Merchants' Shipping Association continued in active operation until January i,
1894, when Grace and Company agreed to carry on the business on their own account. The
first ijoat to arrive in San Francisco was the " Charles E. Moody," of 1,915 tons. The next
two were the "T. F. Cakes," of 1,897 tons, and the "Emily Reed," of 1,488 tons. Subse-
quently, still other vessels were added.

^^San Francisco Bulletin, June 24, 1892.

306 HISTORY OF THE SOUTHERN PACIFIC

former rates of the Sutton and Beebe and of the WilHam
Dimond and Company Hnes 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.^" -J

This reduction in rates, and tne lacility wnich 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 west-
bound 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.^^ /

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 Fran-
cisco, $1.25 per ton for insurance, and $2.50 per ton for in-
terest, the total became $12.75, or $10.25 per ton less than the
all-rail rate.^^

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

'° San Francisco Chronicle, August 6, 1892.
" San Francisco Bulletin, August 4, 1892.
'"San Francisco Examiner, August 18, 1892.

TRAFFIC ASSOCIATION 307

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.^^

So far as the quantity of freight moving by water was con-
cerned, 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.**

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 im-
press 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 sup-
ported, 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.25

" San Francisco Bultelin, January s. i893-

'■< Walker, "Pioneers of Prosperity," sup. cil., p. 173-

'S Sob Francisco Bulletin, August 31, 1892.

308 HISTORY OF THE SOUTHERN PACIFIC

It was doubtless a considerable satisfaction to Mr. Leeds
and to members of the Traffic Association that the water com-
petition so vigorously inaugurated by the Merchants' Ship-
ping 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 rail-
roads, 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 :

TRAFFIC ASSOCIATION 309

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 transcon-
tinental 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 man-
agement, and the two companies began to throw mud. The
trouble got into the courts, and finally it was called to the atten-
tion of Congress. The Panama road and the Pacific Mail con-
sequently found themselves to be bitter enemies, and it didn't
seem that they could agree. ^^

Independent Steamship Line

Now it appears that a San Francisco shipping firm, the
Johnson-Locke Mercantile Company, which was participat-
ing 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 announc-
ing 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 ovra 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 com-
pany here, if they would join this company in maintaining a
through line from San Francisco to New York.^''

At this time the Panama Railroad was under the control
of the official liquidator of the French Panama Canal Corn-
's San Francisco Examiner, January 9, 1894. Cf. statement by General John Newton,
president Panama Railroad Company, ihid., November 29. 1892.
'7 Wheeler, "The Valley Road," sut. cil.

310 HISTORY OF THE SOUTHERN PACIFIC

pany. 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 him-
self lacked capital — as his own statement admits. To raise the
necessary capital a new company — the North American Navi^
gation 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 ?" ^*
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 Fran-
cisco need fear no excessive prohibitory rates from the Trans-
continental 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 trans-
portation, freedom from excessive freights, and makes our city
again the distributing point, instead of an isolated terminus of a
long haul by rail.^^

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 pro-
viding that sum were subscribed. When $80,000 had been
promised, however, the promoters solicited the aid of the re-

" Wheeler, "The Valley Road," sui>. cit.
"'Son Francisco Examiner, January 21, 1893.

TRAFFIC ASSOCIATION 311

cently 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.***

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 responsi-
bilities 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.*^ The additional subscription made possible
the continuance of the service approximately till the ist of
May, 1894, or for a total period of a little over a year. There

'°SoM Francisco Examiner, February 28, March 5, 1893.

^^ Ibid., December 20, 28, 30, 31, 1893. and January 3. i894-

312 HISTORY OF THE SOUTHERN PACIFIC

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 Com-
pany 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.^^ 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 accommo-
date any large portion of the business of the Pacific Coast, nor
indeed was there much chance for them to earn any consider-
able 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 trans-
continental rates by rail and water by demonstrating that the
business men of San Francisco could establish an independent

^' San Francisco Examiner, April i, 1893.

TRAFFIC ASSOCIATION 313

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 news-
papers printed colums 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.** 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.**

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

3^ San Francisco Examiner, March 19, 1893.

J< Wheeler, "The Valley Road," sup. cil.. pp. 32-33.

3SSo« Francisco Examiner, January 10, 1894.

314 HISTORY OF THE SOUTHERN PACIFIC

Reductions in Transcontinental Rail Rates to
January, 1894

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

Beans $i.io $ .50 55

Canned goods i.oo .50 50

Barley .90 -30 66?^

Dried fruits, raisins, and

prunes (in boxes) 1.40 i.oo 28

Wine 1.50 -37 J^ 80

Mustard seed i.io .30 73

Wool, in grease 1.50 .75 50

Wool, scoured 3.50 .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 Naviga-
tion 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.^* 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.^^

Whether the shippers benefited by the general demoraliza-
tion 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 thg Mer-

3' San Francisco Examiner, September 21, 1893, statement by H. E. Huntington.
37 Ibid., April 25, 1893, statement by Agent Hinton of the Panama Railroad.

TRAFFIC ASSOCIATION 315

chants' Shipping Association. Moreover, they suffered from
the competition of eastern jobbers during the hostiHties, a com-
petition which the railroads encouraged by reducing the differ-
ences between carload and less than carload rates, by the ex-
tension 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 demonstra-
tion 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 iri substance that rates ought to be read-
justed 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 in-
timating 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 discus-
sion was had but no definite conclusion reached. The confer-

3l6 HISTORY OP THE SOUTHERN PACIFIC

ence 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.^'

3' Business Men's League of St. Louis v. Atchison, Topeka and Santa F6 Railroad
Company, 9 I.C.C.R. 318 (1902).

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 legis-
lature to undertake direct regulation of railroad rates in Cali-
fornia, and to insert a provision for certain maximum rates
in the constitution of the state which should affect a consider-
able reduction in the rates then charged. This attempt failed,

317

3l8 HISTORY OF THE SOUTHERN PACIFIC

for reasons into which it is not necessary to go. There re-
mained 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 Cali-
fornia 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 pre-
pared 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 Fe, 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.^

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

' San Francisco Examiner, February 4, 1892.

THE VALLEY ROAD 319

Francisco to Stockton, with an initial capital of $2,000,000.
This was the moment when the Traffic Association was vigor-
ously pushing its plans for the encouragement of water com-
petition, 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 Fran-
cisco and Great Salt Lake the benefit of his advice, and the
California League of Progress formally indorsed the
enterprise.^

The San Francisco and Great Salt Lake conducted exten-
sive 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 sufifered 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. Ship-
pers, 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.* 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,* 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.®

' San Francisco Bulletin, August 20, 23, 1892. The League of Progress was an organi-
zation composed of the younger business men in San Francisco in sympathy with the policies
of the Traffic Association.

'San Francisco Bulletin, October 12, 1892.

*San Francisco Examiner, December 23, 1892.

s Ibid., March 8, 1893. See also ibid., March 4, 1893. With respect to the whole pro-
ject Mr. Huntington said to a reporter:

"As to building a railroad to Salt Lake, I certainly have no objection to other people

320 HISTORY OP THE SOUTHERN PACIFIC

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 evi-
dent, 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.J
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 Kem
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 Stock-
ton up, to add thereto a fair quota. Construction was to begin

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.)

THE VALLEY ROAD 321

at Stockton instead of at San Francisco, in order to save
expense and in reliance upon the efifect 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 Bakers-
field 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 es-
sential 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 transconti-
nental roads for many years to neutralize this seaport by all
the means at their command, including the practice of main-
taining 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.®

Lack of Financial Support

Once the prospectus was out, the project for a local com-
peting railroad was pushed with all the energy characteristic
of Mr. Leeds and the Traffic Association. It received substan-
tial 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 excep-
tion 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.^ Not only did the moneyed men of San Francisco

' San Francisco Bulletin, Jvine 22, 1893. ' Ibid., ]vly 17. 1893-

322 HISTORY OP THE SOUTHERN PACIFIC

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.* Yet there is
some question about the warmth with which the original pro-
posal for a competing line was received. Certainly the mini-
mum 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 en-
thusiasm.* 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 Fran-
cisco, 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,

' San Francisco Bulletin, July i8, 1893.

9 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 consoli-
dation 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 s, 1894.)

THE VALLEY ROAD 323

and, as in the earlier project, a trust was devised to hold the
stock of the company and to preserve its status as an indepen-
dent carrier.^"

In October stock subscription books were thrown open to
the public and some thousands of dollars of subscriptions re-
ceived. 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 sub-
scriptions 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 enter-
prise 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 encourag-
ing water competition. It was as inadequate to the financing
of a large railroad to be conducted without government sup-
port 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 unreas-
onable figure under the circumstances. Thus a subscription to
a fund of $350,000 merely committed the subscriber to an en-

'° San Francisco Bulletin, September 27. 1894-

324 HISTORY OP THE SOUTHERN PACIFIC

terprise 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 con-
struction 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.^^

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 pro-
ceedings 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

" San Francisco Examiner, January i8, 189s.

THE VALLEY ROAD

325

Spreckel's motion, moreover, the chairman was authorized to
appoint a committee of twelve from among the property owners
of the city to soUcit subscriptions from holders of real estate.
After the adoption of this motion the meeting adjourned.

San
francisco

-San Francisco and SanJoaquIn Valley Railway

- Southern Pacific Railroad

•■Atcheson, Topeka.and Santa Fe Railway

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 F6, 1898.

The subscriptions in definite amounts received on Tuesday,
January 22, 1895, did not much exceed $20,000. The com-
mittee of twelve met, however, on January 24 and Claus
Spreckels was elected chairman. Soon after this, larger pledges
bpgan to appear. Spreckels himself now subscribed $500,000,

326 HISTORY OP THE SOUTHERN PACIFIC

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 Traf-
fic 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 ob-
tained 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.^^

It is very evident that the substantial wealth of the Spreck-
els 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 enter-
prise was the same as before, but the leadership was diflferent.
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.^^ 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 con-
struction 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-

^^ San Francisco Examiner, February 9, 189s.
'5 Ibid., January 30, 1895.

THE VALLEY ROAD 327

making enterprise, the ability of the new company to earn divi-
dends 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.^* 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
clientele. 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.^^ 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 re-
lations. 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

'•I Statement of J. S. Leeds in the San Francisco Bulletin, October i, 1894, and in the
San Francisco Examiner, January 27. 1895.

'^San Francisco Examiner, March 6, 1895.

328 HISTORY OF THE SOUTHERN PACIFIC

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.^*
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.^'' The following month the San Fran-
cisco 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 neigh-
bors 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 for-
mation 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
ejames. The winning team was to constitute a share club, and
was to choose a trustee from among its members.^^

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 patri-

^^ San Francisco Examiner, January 31, 1895. As a matter of fact, the bulk of the
subscriptions came from a very few sources.
^"^ San Francisco Bulletin, March I, 189S.
^8 San Francisco Examiner, April 27, 1895.

THE VALLEY ROAD 329

Otic 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. Participa-
tion 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 en-
tertained 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 Fran-
cisco 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," re-
plied Mr. Spreckels, "as it could only be answered by some
theorist. The question is. What will Oakland do for the new
road?" 19

'' The question, as to what the valley towns would do for the new enterprise was re-
peatedly 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 kinds, 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 Jos6. Stockton organized a committee to present her claims.
San Jos6 did the same. Mass meetings were held in both places, that in San Jos6 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 loo 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 sub-
scriptions to the capital stock of the company to the amount of $100,000. {San Francisco
Examiner, May 3, 1895.)

The San Josi 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

330 HISTORY OP THE SOUTHERN PACIFIC

In spite of occasional skepticism, and here and there active
opposition, the San Joaquin Valley received the nev^f enterprise
cordially. Among the Valley towns from which assurances of
support were received may be mentioned Stockton, San Jose,
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.**

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 construc-
tion which the railroad company had to meet.

Purchase of Road by Santa Fe

Articles of association of the San Francisco and San
Joaquin Valley Railway Company were filed at Sacramenta
in February, 1895, and construction was begun at Stockton

rights-of-way, 75 per cent of which would be free of cost to the company, and also terminal
facilities in San J_os6 would be provided. {Ibid,, March 27, 189s.)

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.

'° See address of Robert Watt at Bakersfield, San Francisco Examiner, April 29, 1895.

THE VALLEY ROAD 331

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 aver-
age 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 con-
siderably greater. These were the only years for which statis- ', ,
tics are available, for the company was purchased by the Santa ^
Fe in December, 1898.

The circumstance that the San Francisco and San Joaquin
Valley Railway was purchased by the Atchison, Topeka and
Santa Fe 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 en-
thusiasm had been aroused by the proposal to build an inde-
pendent railroad for the service of shippers in San Francisco
and in the San Joaquin Valley. The high hopes of San Fran-
cisco 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

332 HISTORY OF THE SOUTHERN PACIFIC

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,^^ 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 per-
sons of like character. Nor was the argument that the con-
struction of the San Francisco and San Joaquin Valley Rail-
way would prevent the diversion of eastern freight from San
Francisco to distributing centers of the South,^^ easily to be
reconciled with the sale of the railroad to a company which,
like the Santa Fe, had a terminus in Los Angeles.

Spreckels Interests

There were, on the other hand, indications from the be-
ginning that the Spreckels group did not intend to commit it-
self to the permanent management of a railroad system, but
that they regarded connection with, and perhaps amalgama-
tion between, the San Francisco and San Joaquin Valley and
the Atchison, Topeka and Santa Fe 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 origi-
nally 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 Fe.
Of course this is surmise, and perhaps is mainly plausible as a

" San Francisco Examiner, January 30, 189S.

"^Letter from the Spreckels' Committee to San Francisco Bankers, San Francisco
Examiner, February 3, 1895.

THE VALLEY ROAD 333

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 Fe 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 rail-
road 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 cor-
poration, 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 con-
templated 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 trus-
tees 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 require-
ments, and to pay a dividend not exceeding 6 per cent upon '
capital stock paid in. This clause was evidently intended to

334 HISTORY OP THE SOUTHERN PACIFIC

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 com-
panies owning or controlling any parallel line of road to the
detriment and injury of the corporation hereinbefore men-
tioned." 23

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 JoaquinV
Valley.^^*

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 Fe and with
that railroad only, for the reason that there was no other sys-
tem with which combination would have been significant. The
trust agreement was approved at a meeting of stockholders
held on April 5, 1895,^^ and by the middle of the following

'3 San Francisco Examiner, March 26, 1895. '< Ibid., April 6, 189S

^s San Francisco Bulletin, April 6, 1895.

THE VALLEY ROAD 335

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 Fran-
cisco and San Joaquin Railway and the Atchison, Topeka and
Santa Fe 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, be-
cause 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 privi-
leges. The piece of property which it desired, however, con-
sisted of certain mud flats at China Basin, control over which
had been specifically vested in the State Board of Harbor Com-
missioners by a law passed in 1878.^' 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

"« Laws of California, 1878, Ch. 219.

336 HISTORY OP THE SOUTHERN PACIFIC

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 nego-
tiations 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 de-
clared 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.^'' 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.^^

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 commis-
sioners in general terms with the power to lease water-front
property,^® or whether the board should be authorized only
to lease a described parcel to a specified group of persons.'"
The fear was expressed in the course of the debate lest the tract
desired by the San Francisco and San Joaquin Valley Rail-
way 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

'''San Francisco Examiner, March 9, 1895.
'^ Ibid., March 11, i89S-

'' This was the proposal of Mr. Powers, of San Francisco. See Journal of the Assembly.
31st Session, March 8, 1895, p. 904.

'° Reid amendment. Journal of the Assembly, 31st Session, March 11, pp. 961-62.

THE VALLEY ROAD 337

to specified parties might prove unconstitutional as an example
of special legislation.

In the end the "Cleaves" 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.^^

Terms of Lease

Armed with the legislative sanction, Mr. Spreckels under-
took 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 24^^ 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 con-
siderable 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

" Laws of California, 1895, Ch. 171.
22

338 HISTORY OP THE SOUTHERN PACIFIC

have in operation within ten years, not less than 50 miles in
continuous railroad in addition to the mileage already con-
structed 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 under-
taking of new construction were obviously the real considera-
tions 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. Like-
wise 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 pur-
pose of preventing or limiting competition in the business of
carrying freight or passengers. This wording permitted mer-
ger or agreement between the San Francisco and San Joaquin
Valley Railway and the Atchison, Topeka and Sant Fe Railway
Company, but not between the former company and the South-
ern 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.^*

^' Indenture dated July 8, 1895. The lease was to expire May i, 194s. 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 in-
denture was then signed by the parties under date of November 21, 1900. By this docu-
ment the state slightly increasedthe area leased to the railway company, and extended the
term to December I, 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 Atchi-

THE VALLEY ROAD 339

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 Fe and the San
Francisco and San Joaquin Valley Railway with what appears
to have been considerable frankness. This statement is valu-
able enough to be quoted at length :

I have said that the Santa Fe 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 discus-
sions arose among ourselves and the public as to a probable con-
nection 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 Fe road . . .

For a little time we clung to the belief that we could make
a traflfic arrangement with the Santa Fe 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 per-
sonal 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 Fe people we
found that some of our richest stockholders had sold their stock
at 50 cents on the dollar; and when we talked traffic arrange-
ment with the Santa Fe 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 con-
clusion 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

son, Topeka and Santa F6 Railway Company. The Santa F6 road, successor to the San
Francisco and San Joaquin Valley R.^ilway, 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 F6 Railroad, and also the San Francisco Examiner^ November 15, 1898.

340 HISTORY OF THE SOUTHERN PACIFIC

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.^^

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 con-
nect their enterprise with some larger system in order to be
permanently successful. At the same time the prominent men-
tion of the Santa Fe Railroad in the statement, a railroad sys-
tem 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

33 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
F6 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 F6. 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 obtainmg 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 F6,
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 F6
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 F6, by an extension to Bakersfield, could make it a
transcontinental road and offered to buy a controlling interest."

THE VALLEY ROAD 341

certificates to deposit these certificates with the Union Trust
Company of San Francisco, and to give an option for the pur-
chase of them at par, valid for a period of three months. The
prospective purchaser was not named, but the Santa Fe was
understood to be the party interested. Certificate holders re-
sponded 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 rail-
road competition in the San Joaquin Valley.^* 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 Fe that the Valley road would be continued as a com-
peting line.^^ In due course the option was taken up and the
expected transfer of control to the Santa Fe occurred. .

It may be observed, to conclude this part of the story, that
when the Santa Fe 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 (Na-
tional 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 Fe 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 com-
pleted, 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 con-

3^ See especially a letter written by John T. Doyle under date of September 29. 1898,
and published in the San Francisco Bulletin, October s. 1898. The whole matter was ex-
tensively discussed in the columns of the San Francisco press in October, 1898.

3S San Francisco Examiner, October 27, 1898.

342 HISTORY OF THE SOUTHERN PACIFIC

tinued by the Santa Fe, 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 Mo-
jave and Bakersfield. Eventually, however, an amicable ar-
rangement 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 Fe 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, re-
cover, 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 Sep-
tember 15, 1895, the Southern Pacific rate from Ripon, a town

THE VALLEY ROAD 343

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 re-
ductions in the rates to Stockton, the new company afforded
shippers a sensible relief by abolishing the switching charge
of 1 5 cents per ton which the Southern Pacific had been accus-
tomed to demand on grain handled at that point.^*

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.^''
By 1898 the line had reached Bakersfield, and grain rates were
put in from towns between Hanf ord and that city which were
from 10 to 15 cents per ton less than the rates which the
Southern Pacific was accustomed to exact.^® 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

3' Biennial Report of the Board of Railroad Commissioners of the State of California
for the years 1895 and 1896.

'^San Francisco Examiner, September 19, 1896. '* Hid: June 28, 1898.

>.,

344 HISTORY OF THE SOUTHERN PACIFIC

Commission on August 22, 1896. The new merchandise ratesi
were based upon the Western classification, and were behevedl
to represent reductions of from 10 to 50 per cent as compared'
with Southern Pacific rates before the competition of the Val-
ley 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.^' As in the case of the grain rates, the
publication of new merchandise schedules continued as the Val-
ley 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.*"

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. *^ 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,*^ and that to Bakersfield from \^
$9.10 to $6.90.**

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 posi-
tion 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

3' San Francisco Examiner, August 23, 1896. ^° Ibid., June 4, 1898.

■>' 76ji., July 18, 1896. '•^/Hd., September IS, 1897. « /jjd., June 4, 18

THE VALLEY ROAD 345

higher than the rates to Stockton. This in itself represented
a reduction of 50 cents under the Southern Pacific rates, inas-
much 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 South-
ern Pacific grain rate to San Francisco by the same amount.**

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.*^ Here again
the relative position of San Francisco was improved, not un-
naturally 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 ac-
complished 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 with-
out considerable financial sacrifice, it is hard to avoid the con-
clusion 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 inde-

*''* 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 be-
tween 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.)

■•s Ibid; August 23, 1896.

346 HISTORY OF THE SOUTHERN PACIFIC

pendence, 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 com-
petition 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 South-
ern Pacific Railroad of California, the Southern Pacific Rail-
road of New Mexico, the Southern Pacific Railroad of Arizona,
Morgan's Louisiana and Texas Railroad and Steamship Com-
pany, 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 Rail-
road, 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

347

348 HISTORY OP THE SOUTHERN PACIFIC

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.^

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 sys-
tem, 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

^ 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 Paci-
fic agreed to operate and to maintain the properties of the proprietary companies, to pay all
fixed and other charges, includinginterest on bonds and floating debt, and to divide the sur-
plus net profits between the parties to the agreement in stipulated proportions. In 1896
the percentages for division of profits were as follows: Southern Pacific Railroadof Cali-
fornia, 44 per cent ; Southern Pacific Railroad of Arizona, 10 per cent ; Southern Pacific Rail-
road 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.

OPERATING CHARACTERISTICS 349

to the great eastern corporations which operated in the nine-
ties. The railroad mileage of the Southern Pacific in 1896
exceeded that of the Union Pacific by 2,600 miles, that of the
Santa Fe 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 Cen-
tral 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 Fe, 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 earn-
ings 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 opera-
tion. 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 agri-
culture, 17 per cent was manufactures, 15 per cent was prod-
ucts 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 anthra-
cite and bituminous coal, and that nearly half of the freight

350 HISTORY OF THE SOUTKE»N PACIFI9

transported over the Chicago, Milwaukee and St. Paul Rail-
road consisted of products of agriculture and of the forest,
we can understand the unusual position in which the Southern
Pacific was placed.^

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 develop-
ment. 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 trans-
portation 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 propor-

' In later years the lumber business of the Southern Pacific developed, but the coal
business has always remained small.

OPERATING CHARACTERISTICS 351

tion 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 Fe received only 2.12 cents, the Union Pacific 2.27
cents, the Chicago and Northwestern 1.72 cents, the Penn-
sylvania .92 cents, and the Lake Shore and Michigan Southern
.73 cents.* 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 mate-
rially 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 transconti-
nental 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 con-
cerns, 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.

5 C/. Annual Report of United States Commissioner of Railroads, 1883-84.

352 HISTORY OF THE SOUTHERN PACIFIC

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 popula-
tion, 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 suffi-
ciently distinct in character from the typical products of the
East to give something of the stability of international divi-
sion of labor to the movements between the Pacific Coast and
the eastern states. Much the same can be said of the trans-
portation 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 Cali-
fornia were heavier and took up more space than the manu-
factured goods received in exchange for them, a very con-
siderable 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

OPERATING CHARACTERISTICS 353

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 east-
bound 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 Fe, 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 sys-

354 HISTORY OP THE SOUTHERN PACIFIC

tern, 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 Ari-
zona, with earnings ranging from $6,500 to $5,800; the North-
ern Railway with $5,177; and finally the Northern CaHfornia
and the Oregon and California Railroad companies, with earn-
ings 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 be-
tween 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 con-
tinue 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.^

< Report on the Internal Commerce of the United States (Treasury Department, 1884)1
sup. cil.

OPERATING CHARACTERISTICS 355

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.® 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 in-
stead of by way of Ogden.® 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

s United States v. Southern Pacific, p. ISS. testimony of Schumacher; p. 942, testimony
of Chambers; pp. 1028-29, testimony of Spence.
' San Francisco Examiner, October 24, 1895.

356 HISTORY OF THE SOUTHERN PACIFIC

Other hand, if freight came via Chicago and Ogden, all the
way from i8 to 28 days might be spent upon the journey,
while information as to the causes of delay was difficult to
obtain.''

Testimony of Em,ployees 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
1 90 1, 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.* 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.'

Mr. Spence, director of traffic of the Southern Pacific
Company, admitted that effort was made to send business to

' San Francisco Examiner, February 25, 1896.

8 United States v. Southern Pacific, pp. 328, 338, testimony of Connor.

' Ibid., p. 199, testimony of Sproule.

OPERATING CHARACTERISTICS 357

California via New Orleans when the point of origin was in
territory east of a line drawn from Toledo through Indi-
anapolis and Terre Haute to St. Louis.^° 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.^^
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,^^ 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.^^

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 discrimina-
tion 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 sepa-
rated from the Southern Pacific, Mr. Shelby qualified his state-

'° Ibid., p. 1034, testimony of Spence. " Ibid., p. 290, testimony of Lovett.

" Ibid., p. 30s, testimony of De Priest; p. 311, testimony of Johnson; p. 312, testimony
of Hall.

'3 Ibid., p. 219, testimony of Sproule; p. IS2, testimony of Schumacher; p. 827, testi-
mony of Kruttschnitt.

35^ HISTORY OP THE SOUTHERN PACIFIC

ment by saying that it was hard to answer the question. The
Southern Pacific gave the Central Pacifiic 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.^*

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 invest-
ments 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. Hunt-
ington, 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

'< United States Pacific Railway Commission, p. 2150, testimony of Shelby.

OPERATING CHARACTERISTICS 359

service on the Sunset route than over the Central Pacific be-
cause of the indifference of the lines east of Omaha. The Cen-
tral 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 un-
important 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 Hnes practically withdrew from the
transcontinental business, and to this withdrawal should be
attributed the large proportion of the traffic between San Fran-
cisco and New York which was handled by the Sunset route
during these years. ^^

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

''United States Pacific Railway Commission, pp. 3304-6. 3362. testimony of Stubbs;
PP- 357 2-73. testimony of Gray.

36o HISTORY OF THE SOUTHERN PACIFIC

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

OPERATING CHARACTERISTICS 361

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 188 1, $8,437 i" 1882, $8,253 ^^ 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.^®

Besides the loss of the Nevada mining traffic in the late
seventies and early eighties, the Central Pacific also had to

'« Prye-Davis Report (sist Congress, ist Session, February 17, 1890, Senate Report
No. 293, Serial No. 2703).

362 HISTORY OF THE SOUTHERN" PACIFIC

reckon with a certain loss of business by reason of the opening
of transcontinental competing routes such as the Santa Fe 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 ex-
pected, a serious decrease in the earnings from through busi- '
ness occurred.

Later Earnings

As a contrast to the unsatisfactory character of the re-
turns 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 sum-
marized 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 oper-
ated by the Southern Pacific Company and by the Southern
Pacific Railroad, Northern Division, increased between 1885
and 1 891 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 mile-

OPERATING CHARACTERISTICS 363

age 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 Cen-
tral 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 govern-
ment 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.

364 HISTORY OP THE SOUTHERN PACIFIC

It was scarcely to be expected that the relatively new sys-
tem 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 re-
turns 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,i3S-i8 4,445.62 4,689.56

1887 10,092.27 S>394.48 4,697.79

1888 11,641.24 7,07938 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 S,4S2.8i

1892 10,74516 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 4.270.7s* 2,715.62* I,S5S-I3*

1898 11,595-87 6,769.00 4,826.87
* Six months only.

OPERATING CHARACTERISTICS 365

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 1 89 1 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 refer-
ence will be made, eventually caused the price of Central Pacific
and of Southern Pacific stock to decline.^''

'' The dividends declared by the Central Pacific Railroad Company from 1861 to 1898
were as follows:

Year
1873
1874
i87S
187s
1876
1876
1877
1877

Month

Per Cent

Amount

September

81,628.265

August

2,713,77s

April

2,171,020

October

3.256,530

April

2,171,020

October

2,171,020

April

2,171,020

October

2,171,020

366 HISTORY OF THE SOUTHERN PACIFIC

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 Cen-]
tral Pacific had no business to pay any dividends at all while
its indebtedness to the United States government remained i
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 i

Pacific to its stockholders did not represent all dividends
actually declared ; they asserted that, in addition, by special ar-
rangement, considerable sums were paid out in unreported divi-
dends, which may or may not have reached all holders of the ((((V,
stock.

It appeared in this connection that a gentleman named

Year

Month

Per Cent

Amount

1880

February

I.,628,26s

1880

August

1,778,26s

1881

February

1,778,26s

1881

August

1,778,26s

1882

February

1,778,26s

1882

August

1,778,26s

1883

February

1,778,26s

1883

August

1,778,26s

1884

January

1,778,26s

1888

February

672,755

1888

August

672,755

1889

February

672,755

1889

August

672,755

1890

February

672,755

1890

August

672,755

1891

February

672,755

1891

August

672,755

1892

February

672,755

1892

August

672,755

1893

February

672,755

1893

September

672,75s

There were no dividends declared between September, 1893, and the reorganization ot
the Central Pacific in 1899.

OPERATING CHARACTERISTICS 367

Sir Rivers Wilson had come to the United States in 1894 as
a representative of EngHsh shareholders.^^ Sir Rivers inter-
viewed 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. Hunting-
ton. 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 under-
taken to pay I per cent per annum in the shape of dividends un-
til satisfactory legislation had been obtained for the adjust-
ment 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 posi-
tion 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 i per cent upon their
stock.^' It was understood that the money for the secret Cen-
tral 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 regime, 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

'' Son Francisco Bulletin, November 20, i894- Sir Rivers Wilson was ex-controller of
the British National Debt Office.

''Testimony of Mr. Huntington before the California Railroad Commission, 5oi»
Francisco Examiner, May 14, 1898.

368 HISTORY OP THE SOUTHERN PACIFIC

shares remained reasonably uniform or ever reached a quota-
tion in the neighborhood of par. Central Pacific stock sold at
34 in January, 1885. It rose to 51 in 1886, fluctuated princi-
pally between 26j^ 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 75^ 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, quo-
tations 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 17^, in
1895, 16%; and in 1897 it touched the low point of 13^^.
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 quota-
tions 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 proper-
ties represented by the two stocks, nor in any difiference 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 eflfect which government action might

OPERATING CHARACTERISTICS 369

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 per-
sons believed that the Central Pacific would be able to pay —
the stock certificates of this company could have only a specula-
tive 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 impor-
tant financial problem which the company had to solve after
Mr. Stanford's death. The two following chapters will be de-
voted 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, pay-
able 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 1
... 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.^

'Huntington Manuscript, p. 91. On the general subject of the Thurman Act, see
Davis, "History of the Union Pacific Railway," Ch. 4.

370

THE THURMAN ACT 371

We must therefore recognize that the government advances
to the Central Pacific did not constitute a subsidy in the ordi-
nary meaning of that term. At the same time it should be ob-
served that the Pacific railroads occupied a peculiarly
advantageous position in respect to the loans which the govern-
ment 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 em-
ployed, and it is necessary to superadd other words in order to
include the payment of semiannual interest as it falls due.*

Payment of Simple Interest at Maturity

A second concession to the Pacific railroads was made when
no interest on deferred interest payments was exacted. Ordi-
narily 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 re-
ceive the principal of the government loan increased by simple
interest according to the terms and at the dates contemplated by

' United States v. Xjnion Pacific Railroad, 91 U. S. 72, 86 (187s).

372 HISTORY OP THE SOUTHERN PACIFIC

the Acts of 1862 and 1864, was only $13,000,000. This was
the value of the monetary consideration which the federal gov-
ernment accepted from the Central and Western Pacific rail-
roads. 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 computa-
tion assumes that government bonds were sold at par, and that
the current rate of interest was 6 per cent. The difference indi-
cated 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 rail-
roads 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; 1
raised by accrued interest up to the time of the maturity of the \ \ 1
bonds to the very considerable figure of $19,936,206. Accord- 1 i
ing to Stanford, the government loan netted the company only / / j I
65 cents on the dollar. He said :

THE THURMAN ACT

373

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 num-
bers, of about $40,000,000.^

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 em-

^ 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,

186s Jan. 16

189s

Jan.

16,

186s

S 1,258,000

Aug. 14,

' 16

Aug.

14.

384,000

Oct. 16,

• 16

Oct.

16,

256,000

Dec. II,

• 16

Nov.

29,

464,000

Mar. 6,

1866

1896

Mar.

1866

640,000

July 10,

•*

July

10,

640,000

Oct. 31,

Oct.

29,

320,000

Jan. IS,

1867

1897

Jan.

14.

1867

640,000

Oct. 25,

Oct.

25,

320,000

Dec. 12,

Dec.

11.

1,152,000

June 10,

I86S

189S

,'une
July

1868

946,000

July II,

10,

320,000

Aug. s.

Aug.

640,000

14,

" *

13,

1,184,000

Sept. 12,

Sept.

II,

1,280,000

" 21,

• • t

19,

*•

1,120,000

Oct. 13,

• « •

Oct.

12,

1,280,000

" 28,

• • i

26,

640,000

Nov. s.

" '

Nov.

640,000

12,

•* •

II,

640,000

Dec. s.

ft «

Dec.

640,000

" '

640,000

" 30,

41 t

29,

640,000

Jan. IS,

x86p

1899

Jan.

13.

1869

640,000

29.

•* '

28,

640,000

Feb. 17,

•1 t

Feb.

17,

640,000

Mar. 2,

" '

17,

1,066,000

■1 1

Mar.

1,333,000

May 28,

" •

May

27,

1,786.000

July IS,

•4 •

27,

1,314,000

" 16,

It 4

July

IS,

268,000

Dec. 7,

<4 «

16,

1,510,000

Jan. 2,

1872

1898

Nov.

28,

1868

4,120

Total

125,885,120

374 HISTORY OF THE SOUTHERN PACIFIC

ployees 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 com-
pletion 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 con-
clusion that the total saving to the government up to January;
I 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 i
it would have had to pay for ox team and mule team transpor-\>
tation.

Still a third claim was based upon an alleged loss of busi-
ness consequent upon government subsidies to other transcon-
tinental 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 $1 7,000,000. 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

United States Six Per Cent Currency Bonds
Western Pacific Railroad Company

Issued to

Date Issued

Maturity of
Bonds

Interest
Commenced

Amount

Tan. 24, 1867
Sept. I, 1869
Oct. 29, "
Jan. 27, 1870
8, 1872

Jan. I, 1897
" I, 1899
" I, "
" I, "
" I, "

Jan. 26, 1867
Sept. 3, 1869
Oct. 28, "
Jan. 22. 1870
22, 1872

$ 320,000

320,000

1,008,000

322,000

S6o

Total

11,970,560

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
(currencj?^ 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 io8 i/8.
(United States Pacific Railway Commission, pp. 4682-83.)

THE THURMAN ACT 375

deprived the Central Pacific of the means of paying its
debts, then it should compensate the Central Pacific for this
action.*

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

'United States Pacific Railway Commiasion, p. aTS. testimony Leland Stanford;
Report, pp. 91-95.

376 HISTORY OP THE SOUTHERN PACIFIC

against the latter. The other points in the companies' con-
tentions 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,^ and second, that one-half of the compensation for ser-
vices 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.® ^

This expectation was not, however, fulfilled. On the con-
trary, it was already apparent in the seventies that the amount
which the companies would be called upon to repay was mount-
ing 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.'' The 5 per cent of net earnings
account averaged $331,481 from 1872 to 1876.* The total
annual pajTnent by the Central and Western Pacific railroad

5 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 s per cent of their net earnings from this date. (99 U. S. 402, 449 (1878].)

* 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.

' Report of the Secretary of the Interior, 1877, p. xxviii.

* Report of Mr. Thurman from the Committee on the Judiciary (45th Congress, 2d
Session, March 4, 1878, Senate Report No. iii,p.8).

THE THURMAN ACT 377

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 vi^ould be much more heavily
in debt to the government at the maturity of the bonds than it V
was at the time of their original issue.

Right of "Set-Off"

Alarmed at the probable failure of the sinking fund pro-
visions, the Secretary of the Treasury, on advice of the Attor-
ney-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 with-
held.® 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 ser-
vices 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 pro-
ceeded 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 ac-
count 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 un-
applied 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 com-

' 16 United States Statutes 22s (1871).

378 HISTORY OF THE SOUTHERN PACIFIC

pany 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 ap-
peal to the Supreme Court; and both said courts shall give
such cause or causes precedence of all other business.^"

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 de-
cision 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.^^ 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. ^^

'° 17 United States Statutes 485, 508 (1873).

" United States v. Union Pacific Railroad Company, 91 U. S. 72 (1875).

"Ibid., 98 U. S. 569 (1878).

THE THURMAN ACT 379

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 be-
came 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 im-
proving their property. The particular account involved was
that of expenditure for station buildings, shops, and fixtures.
Such expenditures are not ordinarily charged to operating ex-
penses, 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 comput-
ing 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.^*

Need of Governmental Action

While Congress was considering ways and means for en-
forcing 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 i, 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

'3 Union Pacific Railroad Company v. United States, 99 U. S. 403 (1878).

380 HISTORY OF THE SOUTHERN PACIFIC

exasperating because of the apparent helplessness of Congress, i
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.^*

The situation as it appeared in 1878 was succinctly pre- V
sented by Mr. Thurman on the floor of the Senate. The gov-'
ernment'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 $1 5,000,-
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."
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

'4 The Congressional history of the Thurman bill is as follows: Introduced, October i6,
1877, and referred to the Senate Committee on Judiciary (45th Congress, ist Session,
Congressional Record, Vol. 6. p. S8); reported back from Committee March 4, 1878 (45tli
Congress, 2d Session, ibid., Vol. 7, p. 144s); debated in Senate March 12 to April g{ibid.,
pp. 1688-2384) ; passed by Senate April 9 (ibid., pp. 2779-90) ; approved by President, May
8 (ibid., p. 3257)-

'5 Speech of Senator Thurman of Ohio (4Sth Congress, 2d Session, March 12, 1878,
Congressional Record, Vol. 7, p. 1690).

THE THURMAN ACT 381

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 Thur-
man 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 con-
tinue 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 pro-
vided 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 rail-
roads should pay into the sinking fund such sums not exceed-
ing $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

382 HISTORY OF THE SOUTHERN PACIFIC

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 earn-
ings 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.is

Mr. Thurman estimated the total payments which the Cen-
tral 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.^^ 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 com-
panies 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,-1
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

"' 20 United States Statutes s6 (1878).

^^ Report of Mr. Thurman from the Senate Committee on the Judiciary (45th Congress,
2d Session, March 4, 1878, Senate Report No. ill. Serial No. 1789).

THE THURMAN ACT 383

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 govern-
ment 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 rail-
roads 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.^* It was
only the balance, comprising the half of the payment due the
companies for government transportation which they had re-
ceived 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

'' Annual Report of the Commissioner of Railroads, 1882, p. 440-

384 HISTORY OP THE SOUTHERN PACIFIC

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 earn-
ing power of the fund by requiring the purchase of securities
of classes which either bore low rates of interest or which com-
manded considerable premiums in the market. The average
premium paid by the Central Pacific up to 1883 was approxi-
mately 13 per cent.^® 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,^" 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 in-
vested 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 1 88 1 the funded fives matured and were continued
at 3>4 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 2^ to 3 per cent. This condition was recognized as dis-
advantageous by all concerned. The Commissioner of Rail-

'' Annual Report of the Commissioner of Railroads, 1883.

'" See also the Brice Report (S3d Congress, 3d Session, Senate Report No. 830, p. I7.
Serial No. 3288).

THE THURMAN ACT 385

roads 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 proba-
bility that even then it could not be done.^^ 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 sugges-
tion was adopted by Congress in 1887,^^ with the result that in-
terest on the funds placed in this new investment amounted to
4.15 per cent. This was a substantial increase from the 25^
or 3 per cent realized from 'government bonds, though still
less than the 6 per cent carried by the subsidy bonds them-
selves.^*

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

" Annual Report of the Commissioner of Railroads, 1883.

" 24 United States Statutes 488 (1887).

« 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 S S27.886.53

" 30,1883 844.652.13

" 30, 1884 1,089,159-75

" 30, 188s 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, withthe single ex-
ception of the year 1895, the uninvested portion of the sinking fund was negligible. (Annual
Reports of the Commissioner of Railroads, 1882-89.)

386 HISTORY OF THE SOUTHERN PACIFIC

voted for the bill, and twenty against it.^* 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.^°
In neither house was there marked party or sectional divi-
sion. Doubtless the passage of the act was made easier by
the general unpopularity of railroad enterprise in 1878, al-
though 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 suppres-
sion of the religious houses in the time of Henry the Eighth.
Undoubtedly, also, the railroads were active in Congress in the

'■I 20 United States Statutes s6 (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].)

^^45th Congress, 2d Session, Congressional Record, pp. 2384, 2790. The House vote
as given does not include pairs.

THE THURMAN ACT 387

attempt to prevent the passage of the Thurman Act. The
reader's attention has already been directed in a previous chap-
ter to correspondence relating to the Thurman bill which
passed between Huntington and Colton in 1877 ^^^ i8y8. It
will be recalled that in January, 1878, Huntington wrote that
matters did not look well at Washington. He thought, how-
ever, 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 high-
way, 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.^®

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.^'

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.^*

When the Thurman bill passed the Senate, the correspond-
ence took a still more gloomy turn. Huntington wrote Colton

'5 Colton case, p. 1770-71. " Ibid,, p. 1802, November 9, 1877.

" Ibid., argument of Hall McAllister, p. 248.

388 HISTORY OF THE SOUTHERN PACIFIC

on April 19, 1878, that in his judgment the House would fol-
low 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 chan-
nel. 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.29

^' Colton case, argument of Hall McAllister, p. 249. Huntington never forgave Con-
gress for having passed the Thurman bill. Years afterward he inserted the following com-
ments 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. Hunting-
ton, 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 Ran-
som , 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; the^j 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 pass-
ing 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 wasno
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 manuscriiit, p. 24-25, 76-77.)

It may throw some light upon the attitude of the Huntington group toward the Thur-

THE THURMAN ACT 389

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 rail-
road's securities. Nor, indeed, was it perfectly clear that the
new legislation did not constitute a breach of the contract be-
tween the Pacific railroad companies and the government which
could be deduced from the Acts of 1862 and 1864. The legis-
lation 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 Thur-
man Law on broad grounds, but by a divided court.*'*

Charge Against Railroad

The unfortunate fact about the Thurman Act, however,
was not that it excited the anger of representatives of the rail-
road companies to which it applied, but that it proved a failure
in its primary purpose of providing for the eventual retire-
ment of the subsidy bonds. But before summarizing the work-
ings of the law in this respect, a word may be said regarding
certain disputes which occurred in the course of its administra-
tion.

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

man Act to remember that the moneys in the sinking funds which the Central Pacific estab-
lished for the retirement of its own mortgage securities were, at least in part, loaned to the
Western Development Company, and used by this company m railroad building m southern
California. This was, of course, an ideal arrangement from the point of view of Huntington
and his friends.

3° Sinking Fund Cases, 99 U. S. 700 (1878).

390 HISTORY OP THE SOUTHERN PACIFIC

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.*^

Mr. French's suggestion was not adopted, but the govern-
ment subsequently advanced the claim that it had the right to
retain all the compensation for service rendered to the govern-
ment by the bond-aided companies without regard to the condi-
tions 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 Secre-
tary of the Treasury in 1884 withheld compensation on the
entire mileage of the Pacific railroads pending an authorita-
tive decision. The Supreme Court, however, ruled in favor
of the companies,*^ and the sums withheld had to be paid
over.

In subsequent years the earnings of the portions of the Cen-
tral and Union Pacific which had received no bond subsidies
were credited, in so far as they arose from government busi-
ness, as a part of the 5 per cent of net earnings which these com-
panies were required to apply to the eventual retirement of the
government debt. This meant a considerable amount of book-
keeping, 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
$1,162,9 39.48.^^

3' 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 ol
Commissioner of Railroads, 1894, p. 93,

3" United States v. Central Pacific Railroad Company, 118 U. S. 23s (1886).

" S6th Congress, 3d Session, Senate Document No. 227, Serial No. 4043.

THE THURMAN ACT 39 1

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 de-
pended. 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 earn-
ings 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 neces-
sary 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. Thur-
man told the Senate, it was his intention to leave the question
of the nature of the net earnings, so far as the past was con-
cerned, 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 expen-
ditures for improvements and betterments from gross earn-
ings, in the process of arriving at the figure of net earn-
ings upon which its contributions toward the retirement of

392 HISTORY OF THE SOUTHERN PACIFIC

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.**

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 Cen-
tral Pacific railroads to the Pacific Mail Steamship Company
according to the terms of contracts described in a preceding
chapter.*'

Inadequacy of Law

The persistent disputes between the government and the
railroad companies over the proper interpretation of the Thur-
man 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 provi-
sion 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 :*®

34 United States v. Central Pacific Railroad Company, 138 U. S. 84 (1891). See also
Annual Report of the Commissioner of Railroads, 1883, p. 428 #.

35S4th Congress, 2d Session, January 11, 1897, Senate Document No. 52, Serial No.
3469-

36 Annual Report of the Commissioner of Railroads, 1897.

THE THURMAN ACT 393

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 transconti-
nental railroads. The accumulation of the Central Pacific sink-
ing 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

394 HISTORY OF THE SOUTHERN PACIFIC

cent, the loss which resuUed 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 actu-
ally 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 Cen-
tral 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 sub-
sidy bonds at their maturity, agitation began for other and
more stringent arrangements. As early as 1882, the Commis-
sioner 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-bear-
ing bonds for the amount found to be due upon a convenient
day, say July i, 1883. On this day he proposed that the com-
panies 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.^

Five years later the United States Pacific Railway Com-
mission, 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 i, 1888 —
and that arrangements be made to fund the amount so de-
termined into new railroad fifty-year 3 per cent bonds, which
should be made a lien upon all the property which the Central

' Annual Report of the Conunissioner of Railroads, 1882, p. 440.

395

396 HISTORY OP THE SOUTHERN PACIFIC

Pacific owned or in which it had an interest.^ 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 com-
mittee 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 trans-
mitted 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, Cen-
tral, and Western Pacific Railroad companies, together with
that of the Central Branch Union Pacific. It further preparedy-^
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, i per cent of the 2 per cent was to be
capitalized for ten years. During the first ten years the com-
pany'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 se-
curity, 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 Jose. This mortgage was to include the lease of the
Central Pacific to the Southern Pacific, and there was now in- /

^ United States Pacific Railway Commission Report, December r, 1887 (50th Congress,
1st Session, Senate Executive Documents No. si, Serial No. 2505).

SETTLEMENT OF DEBT TO GOVERNMENT 397

serted 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.^

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 i,
1895, and be funded into railroad 3 per cent bonds. The com-
panies were then to begin paying on the debt at the rate of
one-half of i per cent semiannually, for a period of ten years,
commencing on the ist of July, 1895. For the next period of
ten years, three-quarters of i per cent was to be paid ; for the
next period i 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.*

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 Commit-
tee on Pacific Railroads submitted a long discussion through
Senator Brice, of Ohio. The committee was opposed to govern-
ment operation and pessimistic about the results of a fore-
closure sale. It recommended that the subsidy bonds be re-

3 Frye-Davis Report (sist Congress, ist Session, February 17, 1890, Senate Report
No. 293, Serial No. 2703). See also speech by Senator Frye, ibid.. Congressional Record,

p. 1377 if-

••Reilly Report (S3d Congress, 2d Session, July 21, 1894, House Report No. 1290,
Serial No. 3272).

398 HISTORY OP THE SOUTHERN PACIFIC

funded for such a period and at such a rate of interest as should
enable the companies, under ordinary circumstances and busi-
ness 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 j
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 sub- I
sidized 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 ex-
tend. 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

SETTLEMENT OF DEBT TO GOVERNMENT 399

all required payments. In case of any abrogation or termina-
tion 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.''

The Powers bill was debated in the House of Representa-
tives 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 com-
promise.®

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 sub-
stantially identical statute.' Nothing was done with this re-
port, nor with a suggestion which Mr. Gear made in January
that the whole matter be referred to a commission to be ap-
pointed for the purpose.

The submission of the Gear report brings the account of
the negotiations for the settlement of the Pacific railroads' in-
debtedness down to the spring of 1897. Four Congressional

'Powers Report (S4tli Congress, ist Session, April 2S, 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 52,409,818.20,
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.

'The Powers bill was finally defeated— yeas, 103; nays, 168; not voting, 84. (S4th
Congress, 2d Session, Congressional Record, p. 689.)

'Gear Report, 1896 (54th Congress, ist Session, May i, 'Se^. Senate Report No. 778.
Serial No. 3365; The House bill was numbered H. R. 8189; the Senate biU »■ 2894;.

400 HISTORY OP THE SOUTHERN PACIFIC

committees had reported up to this time. Of these, two hadj
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 under-
lying 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 com-
mittees to the legislature. This will not be done to any great ex-
tent 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 remem-
ber 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 ex-
pression. 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 govern-
ment should be remitted.^ Failing this, the companies con-
tended 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. Stan-
ford suggested that the government should take up all the liens

' United States Pacific Railway Commission, pp. 3589-90, letter from A. N. Towne.

SETTLEMENT OF DEBT TO GOVERNMENT 40I

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 re-
duction 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.^ 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.^"

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 inter-
est 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 refund-
ing 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 govern-
ment to hold directors of the Central Pacific personally liable
for misappropriation of funds, as well as upon alleged ille-
galities 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 miscel-
laneous property, subject to the lien of the government mort-
gage, although the property was not "bond-aided" in a narrow
sense.^^

» Frye-Davis Report (sist Congress, ist Session, February 17, 1890, Senate Report No.
293. p. 76, Serial No. 2703).

"■ Sob Francisco Examiner, February 18 and March is, 1890.

" Memorial of the committee of fifty appointed at the San Francisco mass meeting ol
December 7, 1895.

402 HISTORY OP THE SOUTHERN PACIFIC

Pacific Coast Agitation

As an example of the feeling in the West concerning the
policy of refunding, particular reference may be made to ex-
pressions 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 Hunting-
ton scheme of a long-time extension of the subsidy bonds at a
low rate of interest, this committee said :

In the hame of the people of San Francisco, of California,
and of the whole Pacific Coast, we protest against the accept-
ance 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 wrong-
ful 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 violat-
ing 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 Rail-
road 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 denuncia-
tion. It was charged that:

This monopoly has spread a black cloud over the surface
of the State. It has manoeuvred through a large number of

SETTLEMENT OF DEBT TO GOVERNMENT 403

corporations, of which the Southern Pacific Company of Ken-
tucky 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 unre-
lenting 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 Depart-
ment.

During the summer of 1894 the San Francisco Examiwer
circulated a petition against the Reilly funding bill, to which,
by September 20, it was said that 194,663 names had been
attached.^2 In January, 1895, both the Colorado and the
California legislatures adopted resolutions opposing the refund-
ing. 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

"Son Francisco Examiner, September 21, 1894.

404 HISTORY OF THE SOUTHERN PACIFIC

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 argu-
ments 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 con-
tinued through 1896, and in January of the following year the
legislature adopted a resolution opposing refunding and calling
for foreclosure if necessary.^^

Different Points of View

The fundamental difiference 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 govern-
ment's advances to the Pacific railroads as was possible under

'3 Laws of California, 1897, p. S8i. Joint Resolution, adopted January 8, 1897.

SETTLEMENT OP DEBT TO GOVERNMENT 405

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." ^*

'<S4th Congress, 2d Session, January 7, 1897, Congressional Record, p. 559.

406 HISTORY OP THE SOUTHERN PACIFIC

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 mort-
gage 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 Rail-
road.

Unfortunately for the government, the United States
Supreme Court squarely refused to entertain the notion that
Central Pacific stockholders were individually liable for repay-
ment 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 rail-
road 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 efifect of imposing a heavier

SETTLEMENT OF DEBT TO GOVERNMENT 407

burden upon stockholders of the Central Pacific than upon those
of the Union Pacific.^^

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 con-
tention of Mr. Doyle, of San Francisco. The point was of
the highest importance, because if it were denied, the govern-
ment possessed a mortgage upon only the trunk lines of the
Pacific railroads. It had no interest in, and could by fore-
closure 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.^*

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 legis-
lation. 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, fix-
tures and property of every kind and description, and in con-
sideration 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

'S United States v. Stanford, i6i U. S. 412 (1896). The United States sued the Stan-
ford estate in this case for $15,237,000.

"' See Annual Report of the Commissioner of Railroads, 1892, p- 141-

408 HISTORY OF THE SOUTHERN PACIFIC

the Treasury, in accordance with the provisions of the act, the
said road, with all the rights, functions, immunities, and appur-
tenances 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.^'

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.^®

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." ^®

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

'' 12 United States Statutes 489 (1862). '8 13 United States Statutes 356 (1864).

'9 United States v. Kansas Pacific Railway Company, 99 U. S. 455 (1878). See also
United States v. Denver Pacific Railway Company, 99 IJ. S. 460 (1878).

SETTLEMENT OF DEBT TO GOVERNMENT 409

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 argu-
ment, 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 para-
mount mortgage lien, or claim thereon.^"

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

'° 20 United States Statutes s6 (1878).

4IO HISTORY OF THE SOUTHERN PACIFIC

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.^^ 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 de-
pended, 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

" 4Sth Congress, 2d Session, April 3, 1878, Congressional Record, p. 2229.

SETTLEMENT OP DEBT TO GOVERNMENT 41 1

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 perform-
ance of contracts already entered into.^^ Under this interpreta-
tion 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 agree-
ments with specified private corporations for the rendering of
telegraph service.^^

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;^*
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 Mis-
souri 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.^^

None of these cases, however, can fairly be taken as pre-
cedents for so radical an alteration in a bargain made as would

"'Sinking Fund Cases, gg V. S. 700, 721-

'' United States v. Union Pacific Railway Company and Western Union Telegraph
Company, 160 U. S. i (189s).

''' Menotti V. Dillon, 167 U. S. 703 (1897)-

'S Union Pacific Railroad Company v. Mason City and Fort Dodge Railroad Company,
199 U. S. 160 (190s).

412 HISTORY OP THE SOUTHERN PACIFIC

have been produced by an extension of the Hen 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 Htigation 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 ren-
dered 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 re-
jected, on the ground that the Thurman Act, properly inter-
preted, applied only to the bond-aided lines.

The court went on to remark, moreover, that the construc-
tion 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.^® 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 trans-
portation of government troops and supplies earned over sec-
tions of its lines which had not received a subsidy in govern-
ment 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 Con-

'^ United States v. Central Pacific Railroad Company, ii8 U. S. 235 (1886).

SETTLEMENT OF DEBT TO GOVERNMENT 413

gress was of the opinion that a rigid insistence by the govern-
ment 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, con-
vened on March 15. During this session Mr. Gear introduced
a liill for the appointment of a commission to settle the debt of
the Central Pacific and Western Pacific railroads to the govern-
ment.^'^ 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

" I, 1896 1,600,000

" I, 1897 2,432,000

" 1,1898 10,614,120

I, 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, more-
over, 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.^®

"' Gear Report, 1 897, SSth Congress, ist Session, April 8, 1897 (Senate Report No. 20,
Serial No. 3569).

^ Commercial and Financial Chronicle, Vol. 63, p. 1114.

414 HISTORY OF THE SOUTHERN PACIFIC

These resources, together with the credits in the Central
Pacific bond and interest account, had covered the demands
upon the company up to January i, 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 i, 1898,
at which date first mortgage bonds of the Central Pacific Rail-
road Company to the amount of $25,883,000 were to mature.
First mortgage bonds of the Western Pacific Railroad, aggre-
gating $1,970,000, matured on July i, 1899. It was evident
that all available Central Pacific resources would be exhausted
by the ist 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 bank-
ruptcy.^^

^'United States v. Southern Pacific Company, pp. 1 200-1 201, testimony Tames
Speyer.

SETTLEMENT OP DEBT TO GOVERNMENT 415

There were also certain strategic considerations which had
weight at this time. These aiifected 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,^" probably early in 1898. Mr. Huntington was
receptive and the subject was then discussed with representa-
tives 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.^^ 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 in-
formed as any of the others as to how matters were getting on.
Elihu Root was employed by the Attorney-General as special

"■ United States v. Southern Pacific Company, p. I20i, testimony James Speyer.
3' Ibid., p. 993, testimony John W. Griggs.

4l6 HISTORY OP THE SOUTHERN PACIFIC

counsel.^^ In short, the administration responded cordially to
the initiative of the railroad and banking group.

Government Commission

While negotiations were going on, Congress passed thej
Act of July 7, 1897. This act appointed the Secretary of the
Treasury, the Secretary of the Interior, and the Attorney-Gen-
eral 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. Thci
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.^^ 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.^* 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. Possi-
bly, also, the fact that the Union Pacific had been sold at fore-
closure on November i, 1897, for $58,448,223.75, a sum
sufficient to cover the full amount of both first and second
mortgage bonds, had weight.^^

'^United States v. Southern Pacific Company, p. 998. testimony John W. Griggs.

33 30 United States Statutes 6S2, 659 (1898).

34 United States v. Southern Pacific Company, p. 994, testimony John W. Griggs.

35 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, (ssth Congress, 2d Session, June 29, 1898. Congressional Record, pp. 6464-65.)

SETTLEMENT OP DEBT TO GOVERNMENT 417

The indebtedness of the Central and Western Pacific rail-
roads to the United States government as of February i, 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 Thur-
man 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 goverimient was necessarily that
more time should be allowed the Central Pacific for the pay-
ment 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 state-
ments of Central Pacific Railroad men. By paying the debt
in full was meant paying with interest on all delayed balances.^"
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 I, 1899, and ending February i, 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 secur-
es United States v. Southern Pacific Company, p. Ii99, testimony James Speyer. /
27

41 8 HISTORY OF THE SOUTHERN PACIFIC

ity, 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.^''

It will, however, be asked how, in view of the outstanding
capitalization of the Central Pacific, it was possible to ofifer
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 3^ 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 i, 1899, the outstanding debt of the Central
Pacific Railroad consisted of the following issues :

Central Pacific Railroad of California, first mort-
gage bonds $25,881,000

Western Pacific Railroad Company, first mortgage
bonds 2,735,000

3' The exact amount of 4 per cent bonds to be deposited as security was $58,820,000.

SETTLEMENT OP DEBT TO GOVERNMENT 419

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, so-year 6 per
cent bonds 56,000

Central Pacific Railroad Company so-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 I

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
3j4 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 3^ per cents.
Junior mortgages received 50 per cent in new fours, and from
70 to 90 per cent in new 3J^ 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 thei
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 hold^
ings 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 suc-
cess the free consent of all parties. Some additional consider^

420 HISTORY OF THE SOUTHERN PACIFIC

tion 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 3^ per cent issues. The
additional security provided by this guaranty was without
doubt an element contributing strongly to the successful carry-
ing 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 agree-
ment of February i, 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.^^ 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 govern-
ment debt, mention should be made of the allowance made to
Central Pacific stockholders in the reorganization plan, and of
the provision for cash requirements.

'* United States v. Southern Pacific Company, p. looo, testimony Griggs.

SETTLEMENT OP DEBT TO GOVERNMENT 421

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 com-
pany, including expenses, commissions, compensation, and
similar items incident to the reorganization. Speyer and Com-
pany, it will be recalled, had agreed to purchase the first
four maturing notes issued to the government. The inclu-
sion of the amount paid for these notes as a cash require-
ment 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 n6w 4 per cent and
3J4 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 ex-
change 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

422 HISTORY OF THE SOUTHERN PACIFIC

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 3>4 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

SETTLEMENT OP DEBT TO GOVERNMENT 423

that the subsidy bonds were to be refunded into twenty notes of
$2,940,63578 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.^^ 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 rail-
road company, and the various issues called for by the re-
organization plan were put forth. On February i, 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 discus-
sions 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 con-
nected with the policy. Such were the many disputes between

3930 United States Statutes 12 14, 1245 (1899).

424 HISTORY OF THE SOUTHERN PACIFIC

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 govern-
ment yielded to the permanent consolidation of the Central and
Southern Pacific companies by its acceptance of the reorganiza-
tion 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 govern-
ment 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 signifi-
cance. 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 atttention of
the Southern Pacific management during the course of the
reorganization proceedings. But as a result of the participa-
tion 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

425

426 HISTORY OP THE SOUTHERN PACIFIC

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. v^

Separated from all financial connection with the govern-
ment 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 reor-
ganization of 1899, entered upon a new era which contained
possibilities of new policies, and of a sounder and more profit-
able 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 asso-
ciates, 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 outstand-
ing,^ 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 com-
panies 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

' At his death in August, igoo, Huntington owned 371/2 per cent of the stock of the
Southern Pacific Company.

SOUTHERN PACIFIC MERGER CASES 427

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 uncompromis-
ingly 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 dis-
trusted 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 con-
nection with San Francisco, and fearful lest at Mr. Hunting-
ton'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 pro-
portion 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 Com-
pany to make an aggregate of 677,700 shares, at an average

428 HISTORY OF THE SOUTHERN PACIFIC

price of 50.6146. Market quotations were then in the neigh-
borhood 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, 191 o, 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, 191 1, 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 manage-
ment controlled 19 per cent. Finally, through stock ownership

SOUTHERN PACIFIC MERGER CASES 429

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 in-
creased 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 earn-
ing 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 considera-
tion by the latter in 191 1, 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 ex-
planation of the operation was that the Union Pacific desired
to increase its power in the South West. It was stoutly main-
tained 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

430 HISTORY OP THE SOUTHERN PACIFIC

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 ad-
ministration 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.^

Arguments of Railroad Counsel

The contention of the Union Pacific Railroad in 191 1
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 rail-
road 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

^ 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 De-
cision 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).

SOUTHERN PACIFIC MERGER CASES 43 1

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 pro-
visions of the Sherman Act. A purchase or sale is not a con-
tract 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 re-
straint of trade necessarily unlawful. It must be undue, that is,
not entered into with the legitimate purpose of reasonably for-
warding 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 in-
dividual 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."

432 HISTORY OP THE SOUTHERN PACIFIC

Government's Contention of Previous Competition

The arguments of railroad counsel in defense of the Union
Pacific-Southern Pacific merger rested predominantly, al-
though 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 con-
trol to the Sunset route so long as they remained independent
of Union Pacific dictation.^ 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 Com-
pany ; Mr. JeflFery, 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

3 This question of the diversion of business from the central route has been discussed
in Chapter XX.

Central Pacific Rnilway Co,
Southern Pacific Railroad Co.

GUAVMAS

Map showing mileage owned in 1913 by the Central Pacific Railway
and the Southern Pacific Railroad.

SOUTHERN PACIFIC MERGER CASES 433

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.

The government shov^red 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 alto-
gether 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 Pan-
ama. The busiriess 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

434 HISTORY OP THE SOUTHERN PACIFIC

points east of the Missouri River, the government succeeded in
showing the existence of competition between the Atlantic sea-
board 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 pos-
sible 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

SOUTHERN PACIFIC MERGER CASES 435

east of Ogden. The Southern Pacific runs south from Port-
land 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 competi-
tion 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 Mis-
souri River. In short, the voluminous evidence thus sum-
marized 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 com-
petitor had to rely upon the other for a greater or less propor-
tion of the haul.

436 HISTORY OF THE SOUTHERN PACIFIC

Dissolution of Merger

This demonstration that the Union Pacific and the South-
ern Pacific had competed with each other before the merger of
1 901, 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.* The effect upon the
Southern Pacific was of course important. A drastic reor-
ganization 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
regime. 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 re-
organization 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.^ Henceforth the rail lines of the South-
ern 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

■I United States v. Union Pacific Railroad Company, 226 U. S. 61, 470 (1912, 1913).

s 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. ciU

SOUTHERN PACIFIC MERGER CASES 437

Central Pacific companies by the application of the same prin-
ciples 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.®

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 west-
ern 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 satis-

<i 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 con-
solidation of the Southern Pacific and the Central Pacific companies was illegal under the
Sherman law. The Olney suit was later withdrawn.

438 HISTORY OP THE SOUTHERN PACIFIC

faction of its claims against the Central Pacific which were
secured by mortgage bonds carrying a Southern Pacific guar-
anty. This guaranty, in turn, was offered by the guaranteeing
company as one element in a series of transactions which in-
cluded 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 trans-
action 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 hav-
ing 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 in-
volved, lay in the circumstances that the combination of the
Union Pacific and the Southern Pacific had been a recent mat-
ter, while the relations between the Central Pacific and the
Southern Pacific had begun almost as soon as the latter corpor-
ation had been organized. In discussing the construction of the
Southern Pacific, the remark has been made that the two enter-
prises were originally but different manifestations of the activi-
ties 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 pro-
jected and built and have been operated since their organization
as one property." '' These two characterizations indicate a
difference of considerable significance between the Union 1
Pacific and the Central Pacific cases. '

7 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 accom-
pany the summary account presented in the remainder of this chapter.

SOUTHERN PACIFIC MERGER CASES 439

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 J
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 becamp
separate, not merely in organization but also in ownership. The
separate ownership continued until 1899, when the new arrange-
ments 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 corpora-
tions, owned by different parties, with no connection between
them save through the minority holdings of individual stock-
holders 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.

440 HISTORY OP THE SOUTHERN PACIFIC

The suit of the United States v. Southern Pacific Company
was argued before the circuit judges of the Eighth Circuit sit-
ting at St. Louis in December, 1915. The decision of a ma-
jority of this court was rendered in March, 1917, and was
unfavorable to the government's contention.^ 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.

8 United States v. Southern Pacific Company. 239 Fed. 998 (1917).

CHAPTER XXIII

OIL AND TIMBER LAND LITIGATION

Oil Land Ownership

The discussion in the previous chapter dealt with Htigation
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 posses-
sion 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 191 7, 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,
1918,1 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.^
No later statistics of production by companies have been made
public. In June, 1920, however, the Southern Pacific Land

' Including the output of the Associated Oil Company.

^ Third Annual Report of the State Oil and Gas Supervisor of California, 1917-18.

441

442 HISTORY OF THE SOUTHERN PACIFIC

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 com-
mon 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 south-
ern 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 unan-
ticipated 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 South-
ern 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 ex-

OIL AND TIMBER LAND LITIGATION 443

cepting 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 in-
tended to limit the donations to the Southern Pacific by exclud-
ing 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 construc-
tion and operation of the road.

Test Case

In 1 910, 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,
Cahfornia. 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 min-
eral. 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 defini-
tion 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.* When the matter was presented to it, the

3 For a full discussion of this and kindred subjects, see Lindley on Mines, ed. 3-

444 HISTORY OP THE SOUTHERN PACIFIC

United States Supreme Court followed common usage and held
that petroleum was a mineral.*

The second point had to do with the efifect of a patent. It
was shown that the Southern Pacific had received patents as
early as 1892 to lands which ultimately proved to contain petro-
leum, and there was dispute as to whether this subsequent dis-
covery 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 charac-
ter 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 col-
lateral 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 at- -
tack, 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 satis-
fied itself as to the character of the land.^

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 com-
pany before the company's title could be disturbed. The hold-

'* Burke v. Southern Pacific, 234 U. S. 669 (1914).

^Ibid., pp. 691-92. See also Roberts v. Southern Pacific Company, 186 Fed Old
(1911). ' "^^

OIL AND TIMBER LAND LITIGATION 445

ing 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 $42 1 ,000,000. Counsel alleged
that the company's land agents, Messrs. Eberlein and Madden,
had accompanied the lists, which they had submitted to the gov-
ernment 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 com-
pany 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 Novem-
ber, 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 re-
turned in the list were mineral lands. These statements had
been repeated in September, 1904, when a substitute list was
filed.

446 HISTORY OF THE SOUTHERN PACIFIC

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 examina-
tion, 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 ob-
tain 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.®

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

fi 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).

OIL AND TIMBER LAND LITIGATION 447

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 "be-
cause they were in or near oil territory." The following year
the company decided to lease such of its lands as were consid-
ered 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 de-
laying 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 knowm,
it would go a long way toward establishing the mineral charac-
ter of the lands referred to and which are still unpatented.^

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, more-
over, 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 rep-
resenting that the lands (covered by the Elk Hills litigation)

^ ibid., p. 363.

448 HISTORY OP THE SOUTHERN PACIFIC

were not mineral when they believed the fact was otherwise.*
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.® 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 dif-
fered from the Elk Hills controversy in several important de-
tails. 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 be-
lieved that these lands had mineral value. There was also lack-
ing much of the direct evidence which had helped to demon-
strate the fact that Mr. Eberlein had distorted the truth in his
representations to the government. On the other hand, the re-
fusal of Judge Bledsoe to believe that men like the general man-
ager of the Southern Pacific, its land agent, and its vice-presi-
dent would lend themselves to fraud, is less impressive after a
perusal of the Elk Hills material. The government has an-
nounced 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 South-
ern Pacific oil lands is associated with the organization of the
Pacific Oil Company. The formation of this company was

* United States v. Southern Pacific Company, 251 U. S. i (1919). The decision of
;he Circuit Court of Appeals, which was favorable to the railroad, is reported in 240 Fed.
rSs (i9i8).1

' United States v. Southern Pacific, 260 Fed. s" (1919). See also ibii., 225 Fed. 197
[191s).

'//

OIL AND TIMBER LAND LITIGATION 449

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 Cahfornia, 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.^''

Timber Land Grant

This summary discussion of the oil land litigation in Cali-
fornia 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," Congress

" The annual report of the Southern Pacific Company for the year ending December
31, i92orcontained tie statement that Southern Pacffic Coinpany stockholders or the.r
assigns had purchased an aggregate of 3,414.604 shares of Pacific Oil Company stock, thus
leaving 8s,3PS shares still in possession of the company.

" 14 United States Statutes 239 (1866).

450 HISTORY OP THE SOUTHERN PACIFIC

authorized the CaHfornia and Oregon Railroad to build a rail-
road and telegraph line in the state of California from a point
on the Central Pacific in the Sacramento Valley to the north-
ern 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, Ore-
gon, 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 Con-
gressional Act of 1866. In 1869, therefore. Congress extended
the time for the filing of the required assent.^^

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 as-
signed 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
CaHfornia Railroad Company received a total grant estimated

" 16 United States Statutes 47 (1869).

OIL AND TIMBER LAND LITIGATION 45 1

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 quan-
tities were convenient from the point of view of revenue. Be-
tween 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 pur-
chaser. Out of 820,000 acres sold during this period, approxi-
mately 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 pur-
poses than settlement. On January i, 1903, the company
reached the climax of its disobedience to law by withdrawing all
of its lands from sale and refusing to accept ofifers for any of
them, asserting that they were timber lands and unsuitable for
settlement. In 191 1 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 ^^ because of the

"See Joint Resolution No. i8, 35 United States Statutes S7i (i908), instructing the
Attorney-General to institute certain suits.

452 HISTORY OF THE SOUTHERN PACIFIC

company's disregard of the terms of the law, it proved neces-
sary to htigate 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 mat-
ter 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,^* and by the Supreme Court of
the United States in 1915.^^ Both courts pronounced the re-
striction on the alienation of Oregon and California lands bind-
ing.

The controversy was at last settled by a new Act of June
9, 1 91 6, 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.^*

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 com-
pany from time to time from the proceeds of future sales of the
lands or of the timber upon it, after deducting from the valua-
tion the amounts already received by the railroad and by its
predecessors in interest. The intent was clearly to allow to

'4 United States v. Oregon and California Railroad Company, i86 Fed. 86i (191 1).
'S Oregon and California Railroad Company v. United States, 238 U. S. 393 (1915).
" 39 United States Statutes 218, Ch. 137 (1916).

OIL AND TIMBER LAND LITIGATION 453

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.^'^

^7 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, b^^ 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 ip2i
and will probably be soon heard and decided.

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 ques-

454

FINAL REMARKS 455

tions of public policy. Huntington alone, while rough and sel-
fish 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 busi-
ness 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 oper-
ating 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 appre-
ciate 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 man-
agement were necessarily handled by subordinates. It is un-
likely, 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 agree-
ments 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.

456 HISTORY OP THE SOUTHERN PACIFIC

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 entangle-
ments. 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 applica-
tion 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 con-
secutively, included the construction of the original Central
Pacific and Southern Pacific railroads; the establishment of
these companies as going concerns with opportunity for pros-
perity 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 in-
cluded also the negotiation of a plan of settlement with the
federal government under which the financial assistance ten-
dered to the companies in their younger days was repaid, and
the railroad stood forth free of unusual responsibility and de-
void 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 liquida-
tion of interests of which Huntington had known and ap-
proved.

FINAL REMARKS 457

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 begin-
ning in or about the year 1883. Before 1883, the Huntington
group was primarily interested in construction from Sacra-
mento 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 establish-
ment 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 govern-
ment at the time of the construction of its road and the new
relations with the Union Pacific under the Harriman regime.
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 para-
graph whenever the principles were applicable and the circum-
stances 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

458 HISTORY OP THE 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 busi-
ness 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 indif-
ferent 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 assimi-
lated into the national railroad net through governmental regu-
lation 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

FINAL REMARKS 459

national policies with respect to the support and control of rail-
roads 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 discon-
tent. 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

Adams, Edson, 86

Agricultural products, 349

Alcade, 141

Amador branch, 143

Antioch, 224

Associated Oil Company, 449

Atchison, Topeka and Santa F6
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 Com-
pany, 305

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, 1 880-1 883, 189-
198

Benicia, 107, 141, 224

Board of Land Commissioners in
California, 62

Bonds, California Pacific Railroad
Company, iio-ii8;' Central Pa-
cific Railroad, 418; United States
subsidy, 51-56; lien on, 407-410;
payment and refunding of, 371-
424; payment of interest at matur-

Bonds — Continued
ityi 371; settlement of indebted-
ness, 416-424; sinking fund pro-
vision, 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 F^, 281, 282

California, aids Central Pacific Rail-
road, 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, no

California Pacific Railroad Company,
acquired by Central Pacific, 104-
118; alleged mismanagement of,
116; bonds of. III ; competition of,
107; growth of, 1871-1877, 141;
lease, 143; shares, 112

California Southern Railroad, 123

California State Board of Transporta-
tion Commissioners, 181-198, 242,
335

461

462

INDEX

California Steam Navigation Com-
pany, 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; ac-
quires California Pacific Railroad,
104-1 18; acquires California Steam
Navigation Company, 224; bond
issues, 24, 51-56, 370-424; capital
of, 22; consolidation with Western
Pacific Railroad, 84; construction
of, 1 863-1 869, 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 Cali-
fornia 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; mo-
nopoly control by, 104; Oakland
waterfront acquired, 85-94; or-
ganization, 1 86 1, 18; rates, 237-
256; receipts to December, 1869,
21; refuses to buy Sacramento

Central Pacific Railroad Company —
Continued
Valley railroad, 43; reorganization
plan, 1899, 418; San Francisco
waterfront acquired, 94-103; stock-
holders, 146-149; stock issues,
1863-1869, 23; county subscrip-
tions, 29; subsidies demanded from
towns, 28; surveys, 66; terminal
facilities in 1869, 85; transconti-
nental 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 "Rail-
road 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")

Coimor, 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 Sacra-

INDEX

463

Contract and Finance Company —
Continiied
mento to Dansville, 113; construc-
tion of Southern Pacific, 132

Contracts, construction o£ Central
Pacific, 70-82; rates, 250-255

Coon, Henry P., Mayor of San Fran-
cisco, 35

Cornish, Judge, 446, 447

County stock subscriptions, 28, 29

Crocker, Charles, 13, 19, 22, 05, 70,
145, 170, 284; contracts for con-
struction, 70-75 ; director. Southern
Pacific Railroad, 123; President
Contract and Finance Company,
77; relations with David D. Col-
ton, 154-168; shares of, 146-149

Crocker, E. B., Judge, 88

Curtis, William B., 240

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

Earnings, Central Pacific, 16, 22, 169,
361, 364; charges by Auditor of
Railroads, 389; net earnings de-
fined, 391; Southern Pacific, 347-
369

Eberlein, land agent, 445-448

Edmonds, Senator, 409

EI Paso route, 354

Electionof 1863, 32, 33, 38

Elk Hills title suit, 445

Eureka and Palisade Railroad, 361

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, 889

French v. Teschemaker, 33

Friedlander and Reed, 249

Frye-Davis report, 396

Gage, L. J., Secretary, U. S. Treasury,

415

Gage, Stephen T., 204, 209, 210

Galveston, Harrisburg and San An-
tonio 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

464

INDEX

Goat Island, 100, loi

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 sub-
scriptions, 29; federal, 45-64;
Judah's proposals, 15; opposition
to in San Francisco, 31; Pacific
Railroad bill, i860, 8; repayment of
debt, 370-424; state aid, direct, 30;
United States bonds, 51-56, 371

Government, U. S., withholds pay-
ments, 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

Haight, H. H., 216

Hale, Henry M., auditor of San
Francisco, 35

Hammond, President, California
Pacific Railroad, 115; Vice-Presi-
dent, 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 Com-
pany, 282

Hood, engineer, 68

Hopkins, Mark, 22; agreement with
California Pacific Railroad no;
biography, 14; death of, 133; direc-
tor. Southern Pacific Railroad, 123;

Hopkins, Mark — Continued
finances Judah, 14; general agent,
California Pacific Railroad, 115;
report on construction, 72; sha/'e-
holder 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,
1 09-1 18; 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 Cali-
fornia Pacific Railroad, 109-118;
organizes Contract and Finance
Company, 75; organizes Occi-
dental and Oriental Steamship
Company, 227; policies, 426; Presi-
dent of Southern Pacific, 218; re-
lations 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

Illinois Town, 8

Interest, on government bonds, 371

Jackson, Mr., 147
Jacobs, Isidor, 300, 301

INDEX

465

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; es-
timates construction cost of Cen-
tral Pacific, 16; financed by Hun-
tington and others, 14; organizes
Central Pacific Railroad, 18; so-
licits federal aid, 46-48

Kahn, Otto H., 429, 430

Kansas Pacific Railway, 408

Kasson, Mr., 203

Kearney, Dennis, 184

Kern county, 127

Kem Trading and Oil Company, 447

Knight's Landing, 224

Kuhn, Loeb and Company, 428, 429

Labor, cost of, on construction of
Central Pacific, 67

Lake Pass on the Truckee River, 8

Land, rebought by federal govern-
ment, 451

Land grants, 50-64; company poli-
cies toward settlers, 63 ; transfer of
title, 56-59

Lassen's Meadows, 19

Latham, Milton, General Manager,
California Pacific Railroad Com-
pany, 109, no, 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,
30

Legislation — Continued

377; Act of 1880, 187; "Five Per
Cent" Act of 1870, 44; Gleaves
■A^ct, 338; influencing of, 199-221;
O'Connor bill, 183; Pacific Rail-
road bill, 8, 47-64; railroad control
bill, 184-187; state constitutional
provisions, 1879, 184-187; Thur-
man 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, WiEiam, 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 Rail-
road, 128

Los Angeles and San Pedro Railroad,
127

Los Angeles to Yuma route, 125

Lovett, Mr., 357

Luce, G. W., 247

McDougal, Senator, 46, 48

McFarland, Mr., 185

McKinley, William, President, 415

MoLoughlin, 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
MarysviUe, 29, 141

466

INDEX

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

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 Com-
pany, 308, 310-316

North Fork, 8

Northern Division of the Southern
Pacific, 141, 144

Northern Pacific Railroad, 275, 308

Northern Raih-oad, 141; lease, 142

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

Pacheco, 224

Pacific Improvement Company, 133-

135

Pacific Mail Steamship Company,
225-308; agreement with, 229-232;
arrangements with Panama Rail-
road, 233-236, 309

Pacific Oil Company, 448

Pacific Railroad biU, 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

INDEX

467

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
RaUroad, 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, biU for refund-
ing of debt, 398

Prince, John D., 177

Probst, Daniel, 177

Rates — Continued

194; state regulation over local,
317; transcontinental, 275-292

Reagan, Judge, 189

Red Bluff, 224

Redding, 141

Reese, Michael, 117

ReiUy, James, report on refunding of
debt, 397

Reorganization plan, 418-424, 436

Restraint of trade, government ac-
tion, 191 1, 429; testimony in re-
gard, 356 '

River traffic, 223

Robinson, J. P., 5

Rocky Mountain Coal and Iron Com-
pany, 158, 161, 162

Root, Elihu, 415

Roseville, 141

Routes, Dutch Plat, 6; Judah's
second report, 1861, 19

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 con-
ditions, 238; charging what the
traflSc 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; discrimina-
tion, 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
VaUey Railroad, 342 ; State Board
adopts new schedule, 1880, 191-

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, fin-
ished, 141; route to San ]os6, 84,
140; route to Shingle Springs, 141;
route to Ogden, 140; route to
Washoe, 8

Sacramento River bridge to Davis-
ville, III, 112

Sacramento Union, 215

Sacramento Valley Railroad (See
"Placerville and Sacramento Val-
ley Railroad")

Salinas Valley, 141

Salt Lake, contemplated railroad to,
318

San Benito Valley, 125

San Diego, 127, 223

San Fernando tunnel, 131

468

INDEX

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; ter-
minal facilities in, in 1 869, 85 ; water-
front grants, 94-103

San Francisco and Great Salt Lake
Railroad Company, 318

San Francisco and Marysville Rail-
road, 29

San Francisco, Oakland and Alameda
Railroad, purchased by Hunting-
ton 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 Jos6 Railroad,
48, 84, 120, 121, 123

San Francisco to Great Salt Lake,
318; to Soledad, 141

San Francisco Bulletin, 98, loi, 182,
306

San Francisco Chronicle, 215, 219,
264

San Francisco Examiner, 328, 403

San Francisco Stock Exchange, Cen-
tral Pacific stock listed, 171

San Francisco Times, 98

San Joaquin Valley, 1 19, 140

San Joaquin Valley Railroad (See
"San Francisco and San Joaquin
Valley Railroad")

San Jos6, 141

San Pablo and Tulare Railroad, 141

San Pedro, 223

Santa Ana, in 1870, 127

Santa Clara and Pajaro Valley Rail-
road, 123

Santa Fe Railroad (See "Atchison,
Topeka and Santa F6 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 Ken-
tucky, 150
Southern Pacific Railroad acquires
Los Angeles and San Pedro Rail-
road, 128; bonds of, 370-424; con-
struction 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; operat-
ing characteristics, 347-369; reor-
ganization 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, con-
tract to sell securities, 147, 177-
180, 414, 417
Spreckels, Adolph, 326
Spreckels, Claus, 324-328, 332, 336
Spreckels, John D., 326, 329

INDEX

469

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, no;
biography, 11; claim against fed-
eral 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 Paci-
fic, 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, TrafBc As-
sociation, 295, 297, 318, 359

Stock, Central Pacific Railroad, 1 863-
1869, 23; county subscriptions, 29;
California Pacific Railroad Com-
pany, 109-118; prices of, 365-369

Stock exchange listings, 171

Stockholders, 142, 146-149; English,
367; liability of, 406; under reor-
ganization 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 Man-
ager, 244, 249, 250, 252, 253, 255,
256, 258, 292, 432

Subsidies (See "Govenmient aid")

Summit Station, 65

Supplies, for construction of Central
Pacific, 68

Sutro, Adolph, 402

Sutton and Beebe, 304, 306

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; transcon-
tinental, 275-292, Traffic Associa-
tion of California, rate war, 293-
316, 318-323. 365

470

INDEX

Traffic Bureau of Utah, 284
Tres Pinos, 126, 141, 179
Truckee River, 8, 9, 19
Ttdare, 141
Tuttle, Mr., 194

Union Pacific Railroad Company,
49, 230, 275 ; gains control of South-
em Pacific, 428; reorganization,

1913, 436

United States v. Kansas Pacific
Railway Company, 408

United States v. Southern Pacific,
444-448

United States Pacific Railway Com-
mission, 80, 152, 209, 210

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

Washoe, 8, 9

Water routes to California, 222-236,
263, 303-316

Western Development Company,
132; Col ton interests in, 157, 158,
159. 165; contract with Speyer,
178; dividends, 160

Western Pacific Railroad, consolida-
tion with Central Pacific Railroad,
84, 140; constructed by Contract
and Finance Company, 81; lit-
igation 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

Yuma, 140