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In Memory of 


'He Loved Cornell' 


DEC 19 






WC lA 

MAY ^ "^' 













Cornell University Library 
HE 2791.S72 1922 

3 1924 024 571 998 

Cornell University 

The original of tiiis book is in 
tine Cornell University Library. 

There are no known copyright restrictions in 
the United States on the use of the text. 



Southern Pacific 



Professor of Railway Economics and Dean of the 

College of Commerce, University of Califomia; 

Author of " Railroad Reorganization " 




Copyright, 1922, by 
The Ronald Press Company 


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; 


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 

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. 


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 




"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 




Southern Pacific 



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 

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



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

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 

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. 


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 

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. 


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 


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. 


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. 


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. 


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. 






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. 


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 


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.) 


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 


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. 


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 



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, 

^* 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, 

" 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. 


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 

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 


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. 


in the direction of Humbolt Sink, and entirely avoiding the 
second summit of the Sierras and the crossing of the Washoe 

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. 



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 


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 



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 


$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. 


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. 


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. 


Aid Derived by Central and Western Pacific Railroads 
FROM State and Local Governments in California 

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 


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. 


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. 


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. 


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 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). 


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 

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 


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 


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. 


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. 


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. 


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). 


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." 


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). 


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 

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. 


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 

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 #■ 


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 

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 


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. 


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. 



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 



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.) 


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.) 


* 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. 


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.) 


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. 


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 


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)- 


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. 


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 


$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 


the company to select additional lands within "indemnity" 

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- 

In all this procedure delays were frequent. The initiative 
in the process of conveyance of land lay with the railroad 
company and not with the government, so that failure to file 
lists with the local land office or failure to pay into the United 
States Treasury the cost of surveys of listed lands prevented 
progress in the distribution of the grant. On the other hand,\ 
the slowness of the government in making surveys hindered ' 
the railroad in its selections. Still another reason for delay 


was the fact that within the mineral belt the Commissioner of 
the General Land Office required the railroad to file affidavits 
defining the mineral or non-mineral character of lands by 
40-acre tracts. This requirement arrested the selection and 
patenting of lands, because the government survey did not 
subdivide tracts of 640 acres, and there was no way of 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. 


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. ' 


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 

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


the point in the Sacramento Valley where the ascent commenced 
would clear the most difficult and mountainous portion of the 
Sierra Nevadas and reach the valley on the eastern slope, then 
it seemed reasonable that the base of the Sierra Nevadas should 
be taken as beginning at that point. He recommended the 
place where the line of the Central Pacific crossed Arcade 
Creek as such a point. 

The same place was selected by the Surveyor-General of 
the state of California, on the principle that the two 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. 


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). 


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). 


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. 


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. 




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 


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- 

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. 



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, 

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. 


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 

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 

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. 


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. 


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 

Number of 



Rate of pay 

White Men 

Rate of pay 


Very few 


S30 a month 



S30 a month 


35 " 



35 " " 


35 " " 



35 " •' 









° 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.) 


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. 


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. 













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. 


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. 


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. 


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 

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. 


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. 


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. 


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. 


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. 





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

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

Besides the completion of the main line of the Central 
Pacific, the Contract and Finance Company built a portion of 
the California and Oregon Railroad, part of the Western 
Pacific, and the entire San Joaquin Valley branch of the 
Central Pacific from Lathrop to Goshen. The arrangements 
between the Contract and Finance Company and Central 
Pacific for this work varied, but substantial additional profits 
were secured. In 1874, the Contract and Finance Company 
was dissolved. There is some dispute as to whether its assets 


were divided into four or five parts, but both Stanford and 
Crocker have testified that their dividend consisted of 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. 



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 ;. 



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. 


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 


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 

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. 


limits of the town of Oakland between high tide and ship 

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-) 


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. 


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 


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 

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. 


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 

'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, 


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). 




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. 


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, 

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. 



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 


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. 


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 

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. 


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. 


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- 


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. 


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.) 


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. 



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 

Under conditions like these, Stanford, Huntington, Hop- 



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. 

' 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 

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. 



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- 


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. 


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 

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. 


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 

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 

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, 

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


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 


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. 


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. 


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!" 



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 

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 


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 


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. 


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, 


The inference from this letter is, of course, that the Reese suit was brought at Stan- 
ford's own instance. 


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- 



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. 



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, 




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). 


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 


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. * 



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. 


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). 


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. 


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. 


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 


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. 


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 


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. 


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. 


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. 


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, 

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. 


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 

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


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- 

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. 


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. 


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. 


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. 


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 



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) 


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. 


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. 


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. 


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. 


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- 

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. 


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. 


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. 


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. 


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. 


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- 

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. 


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). 


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. 



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. 



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. 


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. 


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 


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. 


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 

^' 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. 


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. 



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 

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. 


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 


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. 


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. 


$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. 


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. 


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 


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. 



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 





$ 1,024,680 

$ 777,348 

$ 247,332 

























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



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


Gross Earnings 

Operating Expenses 

Net Earnings 

(Calendar years) 


$ 16,994,216 

$ 10,970,599 

$ 6,023,617 






















$ 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. 


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 


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. 


$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. 


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 

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. 


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. 


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. 



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. 


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. 


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. 


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. 



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 


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 


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. 


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. 


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 


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- 

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 


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 


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. 


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 

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." 


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 

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 

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). 


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. 


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. 






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




»^«|^SJ\^.^8P^ A 

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



George Stoneman 


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 


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 

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 

'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.) 


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 

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. 


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- 

Of the Gerke transaction, Cone testified : 

I would say that the ranch was held under a deed of trust, 
and parties were foreclosing it, and at the time I bought it it 


would have been sold under a deed of trust in fourteen days, 
and the party came to me and asked what I would pay for it 
and I didn't dream they intended to sell it because I didn't 
know the condition the land was in, and they insisted on my 
making an offer that day for it. I made an offer and it was 

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. 


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. 



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 



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.*' 


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. 


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. 


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- 

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- 


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. 


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, 

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. 


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. 


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. 


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- 

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. 


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- 


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. 


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. 


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. 


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. 


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- 


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

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. 


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. 


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- 


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. 


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. 


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 

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- 


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. 



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 


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. 


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. 


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. 



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. 


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. 


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 

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. 


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 

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. 


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. 


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. 

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


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 




































































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. 


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.) 


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- 


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 

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. 


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. 



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. 



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 


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. 


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. 


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 

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.) 



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. 


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). 


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 

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


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, 


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. 


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 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. 


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. 


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. 


"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. 


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. 


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). 


same. We would average the rate while he was using the three 

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, 

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


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 


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. 

" 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.) 


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 

























































^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. 



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 


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- 


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. 



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 

The first chart depicts the rates on second-class freight 



and those on grain in January, 1876, between Sacramento and 
points in the Sacramento Valley north of that city. Second- 
class freight at this time on the Southern Pacific included 

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 


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 


introduced by the company at the commencement of its 

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 


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.) 


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 

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 



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- 




(%m Francisco 


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. 


Angeles over the coast and San Joaquin Valley routes, 

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 

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 



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 


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 



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- 




~ ^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 


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 , 

Without going further into the matter at this point, we 
will content ourselves with adding to our description of local 


rates in California some observations upon the attitude of 
California shippers with respect to railroad charges 

Conflicting Claims of Cities 

The rates of the Southern Pacific and of the Central Pacific 
railroads were unpopular in California because they were 
believed to be too high. Beyond this, and when it came to 
questions of relative adjustments, each community looked at 
the relations of rates which interested it from the narrow 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 

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). 


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 

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. 


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). 



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}- 



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 

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; 



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].) 


Francisco and Los Angeles than between San Francisco and 

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. 


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" 

These three features of the transcontinental rate structure, 
namely, that rates between the Atlantic and the Pacific sea- 


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 


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 

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. 


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. 


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 


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. 



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.' " " 


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. 


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). 


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. 


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 


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. 


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. 


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 



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 

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

'' 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). 


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 

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


alternative distributions, was the one which rendered its hold 
upon the business of its territory the least secure. 

In spite of these defects, it is the writer's judgment that 
some basing rate system, in its broad outlines similar to the 
transcontinental system actually applied, was necessary and 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. 




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 

' 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). 



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. 


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). 


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.® 


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. 


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 


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, 

^San Francisco Chronicle, October 24, 1891. 


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. •" 



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.) 


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. 


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. 


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.^^ 


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. 


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 


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. 


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. 


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. 


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. 


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 : 


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. 


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. 


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 

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- 


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. 


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 

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. 


Reductions in Transcontinental Rail Rates to 
January, 1894 

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

Beans $ $ .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 .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 

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. 


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- 


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). 



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, 



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. 


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 

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 


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, 


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 

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- 



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 

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.) 


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 

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- 


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. 



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 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, 


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. 


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. 


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. 


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 


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 

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


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 


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. 


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 


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 

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. 


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 

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. 


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. 


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. 


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- 


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. 


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." 


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. 


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 


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. 



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 


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. 


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. 



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 

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 



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 


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 

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 


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. 


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 

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. 


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 


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- 


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. 


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 

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. 


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 

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. 


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. 


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. 


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 

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. 


during these years, nor did they occur at exactly the same times, 
but the figures seem to offer no support to the charge that the 
prosperity of either company was being sacrificed. 

It may also be observed that the policy of freight diversion 
was not confined to the period when the Central Pacific was 
negotiating with the government for the payment of its debt 
and with the English stockholders for the adjustment of their 
claims, nor to the years when the management of the Southern 
Pacific Company owned Southern Pacific shares and did not 
own a corresponding amount of the shares of the Central 
Pacific. In fact, as has been said, the policy of seeking to 
obtain the benefits of the long haul is still followed by the 
Southern Pacific Company, and its agents still take credit for 
sending freight all the way to New York by company lines, 
although the financial control of both the Southern and the 
Central Pacific has long been in one set of hands. 

Traffic in Early Eighties 

Like other systems in the United States, the earnings of the 
Southern and Central Pacific railroads fluctuated considerably 
from year to year. It has been pointed out in a previous', 
chapter that during the period from 1870 to 1879 the rapid 
extension of the Southern Pacific in the South West, and the 
temporarily unproductive character of the new mileage built, 
well-nigh caused the bankruptcy of the entire concern. The 
associates were then saved by the completion of the Southern 
Pacific main line to The Needles, and by an improvement in 
general stock market conditions which enabled them to sell 
securities in New York. In 1885 the Central Pacific retired the 
greater part of a floating debt of $12,873,946 by an issue of 
bonds, and for the first time in many years was freed from 
what had always been a pressing danger. 

In spite of this important relief, the years 1882, 1883, 1884, • 
and 1885 were still years of considerable difficulty. Although 


the mileage of the system now increased but slowly, the revenue 
per mile declined. Thus the Central Pacific earned $9,449 per 
mile of line in 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). 


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- 


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. 


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. 


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: 



Per Cent 



























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, 

It appeared in this connection that a gentleman named 



Per Cent 










































































There were no dividends declared between September, 1893, and the reorganization ot 
the Central Pacific in 1899. 


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 

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. 


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 


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 



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. 



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). 


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 : 



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 



Date Issued 

of Bonds 



May 12, 

186s Jan. 16 





S 1,258,000 

Aug. 14, 


' 16 






Oct. 16, 


• 16 






Dec. II, 


• 16 






Mar. 6, 







July 10, 







Oct. 31, 







Jan. IS, 







Oct. 25, 






Dec. 12, 







June 10, 







July II, 





Aug. s. 








" * 





Sept. 12, 





" 21, 

• • t 





Oct. 13, 

• « • 






" 28, 

• • i 





Nov. s. 

" ' 







•* • 






Dec. s. 

ft « 







" ' 






" 30, 

41 t 





Jan. IS, 








•* ' 



Feb. 17, 

•1 t 






Mar. 2, 

" ' 






■1 1 





May 28, 

" • 






July IS, 

•4 • 





" 16, 

It 4 






Dec. 7, 

<4 « 





Jan. 2, 










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-\> 

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 



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 







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.) 


deprived the Central Pacific of the means of paying its 
debts, then it should compensate the Central Pacific for this 

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. 


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). 


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). 


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 

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). 


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 

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). 


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). 


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 


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 

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). 


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- 


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). 


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- 

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.) 



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. 


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. 


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. 

"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- 


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- 

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). 


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 

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. 


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 

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 


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 

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 

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. 

36 Annual Report of the Commissioner of Railroads, 1897. 


Statement on the Government Loan to the Central 
AND Western Pacific Railroads, as of June 30, 1897 


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 


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. 



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. 



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). 


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). 


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 


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- 

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;. 


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. 


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 

» 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. 



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 


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- 

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. 


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. 


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. 


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- 

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 


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- 


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). 


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). 


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. 


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). 


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). 


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. 


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- 

^'United States v. Southern Pacific Company, pp. 1 200-1 201, testimony Tames 


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. 


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.) 


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. / 


ity, Mr. Speyer proposed an additional arrangement, in two 

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. 


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^ 


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. 


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 

Examination of the elaborate arrangements between the 



Central Pacific, the government, and the Southern Pacific in 
1899 shows that the last-named company participated in the 
reorganization plan which has been described to the following 
extent : 

It became guarantor in respect of a bond issue 

(new 4 per cent first mortgage) of $100,000,000 

It became guarantor in respect of a bond issue 

(new 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 


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). 


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 



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 



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. 


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 


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 

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 


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 


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). 


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 

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." 


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. 


Map showing mileage owned in 1913 by the Central Pacific Railway 
and the Southern Pacific Railroad. 


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 



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 

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 

Still again, there was competition between Portland and 
Utah and Colorado common points, including certain points in 
Nevada. Portland enjoys a fairly direct route over the Oregon 
Railroad and Navigation Company's tracks to Huntington, and 
from there over the Oregon Short Line to Granger, a few miles 


east of Ogden. The Southern Pacific runs south from 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. 


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 

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 


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 

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. 


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. 


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 


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 

8 United States v. Southern Pacific Company. 239 Fed. 998 (1917). 



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. 



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- 


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- 


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 

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). ' "^^ 


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 


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). 


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. 


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 



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). 


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). 


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. 


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- 

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 

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). 


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. 



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- 



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 

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 


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- 


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 


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 


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. 


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, 

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- 

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, 

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, 




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 — 
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- 



Contract and Finance Company — 
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- 

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, 


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 



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, 

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 



Jeffery, President, Denver and Rio 
Grande Railroad, 432 

Johnson-Locke Mercantile Company, 

Jones, John P., Senator from Nevada, 

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, 

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, 

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 



Mayne, Charles, 123 

Meeting of associates in New York, 

Merchants' Shipping Association, 304 
Merger, Southern Pacific and Union 

Pacific, 425-440 
Merritt, Samuel, 87, 88, 91 
Mexican Coast Steamship Company, 

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, 

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- 

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- 

Oregon (See also "California and 

Oregon Railroad"); connection 

with, 152, 276 
Oregon Central Railroad Company, 

Oregon Short Line, 276 
Orient, trade with, 227 

Pacheco, 224 

Pacific Improvement Company, 133- 


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 



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, 

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, 

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, 

San Benito Valley, 125 

San Diego, 127, 223 

San Fernando tunnel, 131 



San Francisco, 140, 223, 321; meeting 
at, to object to refunding bill, 402; 
opposes to government aid, 31-40; 
port of, 223; rates, 281, 317; 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, 

San Francisco Chronicle, 215, 219, 

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, 

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, 

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 



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- 

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, 

Terminal Central Pacific Railroad 
Company, 100 

Terminals, China Basin lease, 335- 
338; facilities in 1869, 85; Oakland, 
85-94; rates, 281; San Francisco, 

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 



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, 

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, 

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