BUILDING OF THE SOUTHERN PACIFIC
San Francisco and San José Railroad
The Huntington interests had secured control of the California Pacific. The next logical step was to strengthen the position of the Central Pacific south of San Francisco Bay. A start in this direction had already been made through the construction of a branch from Lathrop on the Central Pacific to Goshen in the San Joaquin Valley, finished in August, 1872. But this was not enough. Not only did the Central Pacific fail to reach the city of San Francisco, but the company was threatened in 1869 with the possibility that an independent Southern Railroad system might be created, no less ambitious than the California Pacific, and penetrating a richer if less developed territory. This projected system was that of the Southern Pacific Railroad, and in respect to it Mr. Stanford frankly said some years afterwards:
Well, the necessity of obtaining control of the Southern Pacific Railroad was based really upon the act of Congress providing for its construction. It became apparent that if that last was constructed entirely independent to those who were interested in the Central Pacific, it would become a dangerous rival not only for the through business from the Atlantic Ocean, but it would enter into active competition for the local business of California. It was of paramount importance that the road should be controlled by the friends of the Central Pacific; and all our anticipations consequent upon the control of that road have been realized.[165]
The small beginning of what later came to be known as the Southern Pacific Railroad system is to be found in the San Francisco and San José Railroad, which ran from San Francisco down the peninsula in a southerly direction to the city of San José. Originally this company was a local project only, and for some years an unsuccessful one. Several parties tried their hands at building it, but failed because they could not raise the necessary funds. In 1860 the project was taken up by a group of local capitalists of more than ordinary energy and resources, contracts were let, and four years later a line to San José was actually in running order. It was to these capitalists that the Central Pacific transferred its rights in the Western Pacific, and it seems to have been expected that the San Francisco and San José and the Western Pacific together would form the western end of the transcontinental line.
This expectation was disappointed, as was the hope that the San Francisco and San José would participate in the federal subsidies and land grants provided in the Pacific Railway Acts of 1862 and 1864. The city of San Francisco did, however, subscribe $300,000 in city bonds to San Francisco and San José Railroad stock, and the counties of Santa Clara and San Mateo, $200,000 and $100,000, respectively. At this time the Huntington group had no interests south of Sacramento. In 1869 the San Francisco and San José was extended to Gilroy by a company known as the Santa Clara and Pajaro Valley Railroad Company.
Southern Pacific Railroad Company
Shortly after the completion of the San Francisco and San José, another company, the Southern Pacific Railroad Company, was incorporated[166] by local parties in San Francisco to build a line of railroad in as direct a route as feasible from San Francisco to the town of San Diego, through the counties of Santa Clara, Monterey, San Luis Obispo, Tulare, Los Angeles, and San Diego; thence eastward through the county of San Diego to the eastern boundary of the state of California. It is quite possible that this new company was organized in anticipation of further legislation at Washington. At any rate in July, 1866, Congress granted to the Southern Pacific Railroad, besides a right-of-way, ten alternate sections of unreserved and unappropriated public lands on either side of the road, in the state of California, on condition that it construct a line, presumably from San Francisco, to a connection with a projected railroad known as the Atlantic and Pacific Railroad, which was authorized to extend from the state of Missouri to the Pacific Ocean. In case any portion of the twenty sections indicated should be found to be occupied or reserved, the Southern Pacific was to be given the privilege of selecting other lands within 20 miles of its road. The company was to begin work within two years, and to complete not less than 50 miles annually after the second year. No money or bond subsidy was given.[167] By Act of July 25, 1868, Congress extended the time for the construction of the Southern Pacific line, requiring the completion of the first 30 miles by July 1, 1870, and subsequent construction of 20 miles annually.[168] This was plainly an enterprise of first-class magnitude.
Map showing northern end of the San Francisco and San José Railroad in 1862.
The evidence suggests that the San Francisco and San José and the Southern Pacific Railroad companies fell under the control of Stanford, Huntington, Hopkins, and Crocker some time in 1868. Mr. Stanford published a statement on March 6, 1868, to the effect that any rumor that the Central Pacific or Western Pacific Railroad Company or any person connected with either of them had purchased the Southern Pacific or the San Francisco and San José or any property or franchises connected therewith, or that any negotiations had been made tending to that result, was utterly without foundation.[169] On the other hand, it was Collis P. Huntington who signed a letter dated September 25, 1868, addressed to the Secretary of the Interior, at Washington, transmitting the annual report of the Southern Pacific Railroad required by the act of Congress. If Stanford told the truth in March, these two circumstances would indicate with sufficient precision the time when the associates took charge. In any case their influence was presently to appear.[170]
Consolidation
On October 12, 1870, the San Francisco and San José Railroad, the Southern Pacific, the Santa Clara and Pajaro Valley Railroad, and a new company, the California Southern, organized on paper only, were consolidated into a corporation known as the Southern Pacific Railroad of California. The directors for the first year were Lloyd Tevis, Leland Stanford, Charles Crocker, C. P. Huntington, Mark Hopkins, Charles Mayne, and Peter Donahue. Plainly, Central Pacific interests were in control. The purpose of the new company was stated to be to construct and operate a railroad from San Francisco to the Colorado River, through the counties of San Mateo, Santa Clara, Monterey, Fresno, Tulare, Kern, San Bernardino, and San Diego, together with a line from Gilroy through the counties of Santa Clara, Santa Cruz, and Monterey, to a point at or near Salinas City. This was not the line proposed in the articles of incorporation, as an examination of the accompanying map will show. It was, however, in the main the route designated by the Southern Pacific in 1867, upon which land had been withdrawn from entry by the government at Washington, and it had the advantage of reaching the eastern boundary of California with less mileage and fewer grades than the line originally laid out.[171]
Proposed route of the Southern Pacific Railroad, according to map filed with the Commissioner of the General Land Office on January 3, 1867.
In 1871, an additional route from Los Angeles to Yuma was designated under the authority of the twenty-third section of the act to incorporate the Texas Pacific Railroad, which authorized the Southern Pacific Railroad Company to construct a line of railroad from a point at or near Techachapi Pass, by way of Los Angeles, to the Texas Pacific Railroad at or near the Colorado River, with the same rights and privileges, and subject to the same limitations and restrictions as were provided in the Atlantic and Pacific Act of 1866.[172]
Ambitious Construction Program
Because of the terms of the federal Act of 1866, it was necessary for the Southern Pacific to proceed steadily in its construction to the south. The first piece of road offered in satisfaction of the requirement for a minimum annual construction, was that from San José to Gilroy. Then came an extension to Tres Pinos, which ended, for the time being, building on the Northern Division. What happened was that the associates found the southern end of the San Benito Valley, in which Tres Pinos is located, relatively poor in traffic, and difficult to build in. Stanford visited the country personally, and found no business there, nor, in his opinion, any prospect of business. He accordingly shifted construction from the Tres Pinos line to the territory south of Goshen, and caused the Southern Pacific to build its next 20 miles in that section, expecting to connect with the San Joaquin Valley branch of the Central Pacific which ultimately came to Goshen in August, 1872. The Southern Pacific track reached Delano on July 14, 1873, Caliente on April 26, 1875, and Mojave on August 9, 1876. The stretch of 240 miles from Mojave to The Needles was not finished until June 22, 1883, but that to Fort Yuma was completed in 1877.
In later years there was discussion concerning the right of the Southern Pacific to refuse to build the stretch of road lying between Tres Pinos and Alcalde, connecting the San Benito and the San Joaquin valleys. It was insisted that the contract implied in the Congressional land grant of 1866 was an entire one, and that the amount of land given had been fixed in consideration of the difficulties of mountain construction between the valleys named. This contention is not, however, borne out by the terms of the Act of 1866, and there seems to be no good reason why Congress should have stipulated for the building of this particular bit of road, when satisfactory connection between the San Joaquin Valley and San Francisco could be secured in another way. On their part, the associates never intended to build across the Coast Range, at least not out of the San Benito Valley. In 1872 the articles of association of the Southern Pacific Branch Railroad Company contained provision for a line from a point at or near Salinas City in the county of Monterey southeasterly to a point in Kern County south of Tulare Lake, intersecting the San Joaquin Division of the Southern Pacific. Even this road never was built.[173]
At the time when the Southern Pacific Railroad entered upon its ambitious project for southern construction, the territory south and east of Goshen was very slightly developed. Los Angeles was a city of 5,728 persons in 1870, with an assessed valuation of $2,108,061, and an average of one saloon to every fifty-five inhabitants.[174] San Diego had a population of 2,300, and Santa Ana 1,445. These were the largest concentrations of people to be found, and they amounted to nothing more than little country towns.[175] Nor were the statistics of industry much more striking. Los Angeles and Kern counties produced respectable amounts of wool, and in the matter of wine the output from the former amounted to nearly one-third of that for the entire state and one-sixth of that reported for the United States as a whole. The number of cattle was also considerable. But in grain only a beginning had been made, the yield of the orchards was still small, and the volume of general agriculture, to say nothing of manufactures, was insignificant.
The railroad construction in the territory consisted of two local railroads connecting Los Angeles with the harbors of San Pedro and Santa Monica, to which should be added mention of the Texas Pacific project of Mr. Scott. The Los Angeles and San Pedro Railroad was organized in 1868 and was finished on October 26, 1869. The city of Los Angeles subscribed $75,000 in city bonds, and the county took an additional amount of $150,000, also paying in bonds. City and county bonds both bore 10 per cent. The construction of this railroad marked the fruition of efforts begun as early as 1861, but the credit for final accomplishment of the work was due to Phineas Banning, the principal business man of Wilmington.[176] General Banning is said to have entered the California legislature in order to advance his project and to have successfully overcome a great deal of opposition in his own district in order to put it through. The company was consolidated with the Southern Pacific in 1874.[177]
In addition to the Los Angeles and San Pedro, reference should be made to the Los Angeles and Independence, a railroad built in 1875 by Senator John P. Jones, of Nevada, partly to afford an outlet to certain mines in Inyo County from which the senator expected large results, and partly to develop property on Santa Monica Bay. This road was also acquired by the Southern Pacific interests, but at a later date, and at the instance of Mr. Huntington against the judgment of at least one of his associates.
Grant by Los Angeles
By the acquisition of the Los Angeles and San Pedro Railroad, the Southern Pacific provided itself with a southern terminal, in advance even of the completion of its main line. At the same time it used the advantage which the location of its mileage in the San Joaquin Valley gave to it in order to persuade the people of Los Angeles to grant it aid in the measure they could afford. Speaking after the event, it is sufficiently obvious that sooner or later the Southern Pacific, or some other transcontinental road, was bound to seek an outlet on the Pacific Ocean either at San Diego or at San Pedro, and of these two San Pedro was the most likely to be chosen. But this fact, clear at the present time, was not obvious to the inhabitants of Los Angeles; on the contrary, the possibility that Los Angeles might be passed by caused them the liveliest concern. This feeling was known to the officials of the Southern Pacific. In May, 1872, two citizens of Los Angeles wrote Mr. Stanford stating that they expected to call a meeting of tax-paying citizens of the county in a few days, for the purpose of selecting from among them an executive committee which should have full power to meet the representatives of any railroad company who might visit Los Angeles, in order to agree upon some plan whereby a railroad to Los Angeles might be constructed.[178]
View south from over the San Fernando tunnel—Southern Pacific Railroad
The meeting was called, and the committee appointed. Harris Newmark, a prominent business man of Los Angeles, says that before the meeting he and ex-Governor Downey went to San Francisco and canvassed the whole situation with Mr. Huntington. A delegation from the citizens’ committee made a second visit and returned with a man named Hyde, who represented the railroad company. Between Mr. Hyde and the new committee terms were presently agreed upon. The Southern Pacific demanded a donation of 5 per cent of the assessed valuation of the county, which was the maximum authorized by state law. Since the county valuation in 1872 was set by the State Board of Equalization at $10,554,592, this meant a gift of $527,730. To cover this the county proposed to issue $377,000 in new 7 per cent bonds, and to turn over besides $150,000 in stock of the Los Angeles and San Pedro Railroad, which it held by virtue of its subscription to that company in 1868. The city added $75,000 in Los Angeles and San Pedro Railroad stocks, and 60 acres of depot ground. This made a clear gift in the aggregate of $602,000, besides whatever the depot ground might be worth, or $100 per capita for a population of 6,000 souls. On its side the Southern Pacific agreed to build 50 miles of its main trunk line in the county of Los Angeles, 25 miles to be built northward and 25 miles eastward from Los Angeles city. Later the company promised to add a branch to Anaheim. The whole arrangement was submitted to popular vote on November 5, 1872, and was then approved.
Inconveniences of Travel
Construction in accordance with the terms of the agreement of 1872 was promptly begun. San Fernando and San Pedro were reached in 1874, Anaheim in 1875, and the Southern Pacific main line in September, 1876. A vivid picture of the inconvenience of travel between Los Angeles and the East while the work was in progress, is given in the reminiscences of Harris Newmark, who has just been mentioned in connection with the negotiations between the railroad and the county of Los Angeles:
Before the completion of the San Fernando tunnel, a journey east from Los Angeles by way of Sacramento was beset with inconveniences. The traveler was lucky if he obtained passage to San Fernando on other than a construction train, and twenty to twenty-four hours, often at night, was required for a trip of the Telegraph Stage Lines’ creaking, swaying coach over the rough roads leading to Caliente—the northern terminal—where the longer stretch of the railroad north was reached. The stage lines and the Southern Pacific Railroad were operated quite independently, and it was therefore not possible to buy a through ticket. For a time previously, passengers took the stage at San Fernando and bounced over the mountains to Bakersfield, the point farthest south on the railroad line. When the Southern Pacific was subsequently built to Land’s Station, the stages stopped there; and for quite a while a stage started from each side of the mountain, the two conveyances meeting at the top and exchanging passengers. Once I made the journey north by stage to Tipton in Tulare County, and from Tipton by rail to San Francisco. The Coast line and the Telegraph line stage companies carried passengers part of the way. The Coast Line Stage Company coaches left Los Angeles every morning at five o’clock and proceeded via Pleasant Valley, San Buenaventura, Santa Barbara, Guadalupe, San Luis Obispo, and Paso de Robles Hot Springs, and connected at Soledad with the Southern Pacific Railroad bound for San Francisco by way of Salinas City, Gilroy, and San José, and his line made a specialty of daylight travel, thus offering unusual inducements to tourists. There was no limit as to time; and passengers were enabled to stop over at any point and to reserve seats in the stage coaches by giving some little notice in advance.
In 1876, I visited New York City for medical attention and for the purpose of meeting my son Maurice, upon his return from Paris. I left Los Angeles on the twenty-ninth of April by the Telegraph Stage Line, traveling to San Francisco and thence east by the Central Pacific railroad; and I arrived in New York on the eighth of May.[179]
The San Fernando tunnel to which Mr. Newmark refers is located 27 miles north of Los Angeles in the valley of the same name. It lies along the most direct and convenient route from Los Angeles into the San Joaquin Valley. Because of its length, nearly one and a quarter miles, and the unfamiliarity of the people of the coast with projects of this kind, there was much interest in the work and many doubts as to whether it could succeed. Governor Stevenson was credited with the statement that a tunnel could not be constructed. Other critics maintained that people could never be induced to travel through so long a tunnel, and that in any case the winter rains would cause it to cave in, to which Stanford replied that it was “too damned dry in Southern California for any such catastrophe.” So far as the records now show, however, there was no unusual obstacle encountered in the work, although the slowness with which the bore advanced and the large expense connected with construction caused considerable anxiety to the management of the Southern Pacific.
Western Development Company
In carrying out their plans for the occupation of Southern California, the Huntington group naturally followed the same general policy that had proved profitable to them in the case of the Central Pacific. That is to say, they organized construction companies, controlled by themselves, caused these companies to contract with the Southern Pacific for the construction of specified sections of line, and in their capacity as stockholders of the Southern Pacific required that company to issue and turn over large quantities of stocks and bonds in payment for work done. No further comment upon this method of procedure is necessary.
The first construction company which did work for the Southern Pacific, under the plan outlined in the preceding paragraph, was the Contract and Finance Company. This was the same organization that had completed the Central Pacific. It appears that the Contract and Finance Company simply shifted men, teams and equipment from the Central Pacific to the Southern Pacific line between San José and Tres Pinos. Later it built the road from Goshen to Sumner, and that from San Fernando via Los Angeles to Spadra. In all, it built for the Southern Pacific 143.65 miles, including the stretch from Gilroy to Tres Pinos. In 1874 the Contract and Finance Company was dissolved and the Western Development Company took its place.
The Western Development Company was incorporated December 15, 1874, for the announced purpose, among other things, of carrying on construction, manufacturing, mining, mercantile, mechanical, banking, and commercial business in all their branches, and also for the purpose of constructing, leasing, and operating all kinds of public and private improvements. That is to say, its powers were made as extensive as could well be imagined. Stanford, Hopkins, Huntington, and Crocker each held one-fourth of the stock.[180]
Under date of February 2, 1875, the Western Development Company agreed to construct a railroad and a telegraph line on the routes selected by the Southern Pacific, between certain specified termini. The mileage actually built was that from Sumner to San Fernando, from Spadra to Fort Yuma, and from Goshen to Huron. Bills were rendered for this work on the basis of $72,000 per mile, or $29,153,520 for 404.91 miles, half in Southern Pacific first mortgage bonds and half in stock.[181]
In addition to its contract with the Southern Pacific, the Western Development Company undertook certain miscellaneous construction, including work on the Northern Railway, and the San Pablo and Tulare Railroad, the building of steamers for the Central Pacific, bridges and buildings for the Central Pacific and Southern Pacific, general repairs for the various companies controlled by the associates, and even finally private residences for Hopkins, Stanford, and Crocker. In short, during its existence the Western Development Company, besides completing the major part of the Southern Pacific, did incidental building of any sort which the associates desired to have done.
Pacific Improvement Company
The death of Mr. Hopkins in 1878, and the temporary unwillingness of Mrs. Hopkins to participate in the financing of new construction, together with the death of Mr. Colton in the same year, led Stanford, Huntington, and Crocker to close up the affairs of the Western Development Company, and to continue their more or less speculative building enterprises under a new organization. This new company, incorporated November 4, 1878, was known as the “Pacific Improvement Company.” Its relations to the Southern Pacific and to the associates were the same as those of the Western Development Company, except that Mr. Colton, who had taken one-ninth of the Western Development Company stock in 1875, was not a stockholder, and that Mrs. Hopkins at the beginning took no part. Even the capital stock was placed at the same amount, $5,000,000.
The main accomplishment of the Pacific Improvement Company was the construction of the Southern Pacific between Mojave and The Needles. Besides this, however, it extended the Southern Pacific from Soledad to San Miguel, built the Southern Pacific in Arizona and the Southern Pacific in New Mexico, completed the California and Oregon, and Oregon and California railroads, and continued the Northern Railroad from Willows to Tehama. The contracts made were similar to those executed by the Western Development Company, although the consideration varied.[182]
The Pacific Improvement Company is still in existence. After the construction work for which it was incorporated was completed, Mr. Huntington sold his stock to the Hopkins estate. This gave to the Hopkins interest, then represented by Mr. Searles, possession of 50 per cent of the stock of the Pacific Improvement Company. The other 50 per cent remained in the hands of the Stanford and Crocker interests. At a later date the Searles stock passed to the University of California. The Pacific Improvement Company is now in process of liquidation. It owns some thirty town sites, a considerable amount of real estate, including much unimproved property in the Potrero district of San Francisco, land in the Monterey peninsula, and other property in Buffalo, New York. It has, besides, the stock and bonds of certain railroad companies, stock of the Carbondale Coal Company of Washington, and of the Oakland Water Front Company of Oakland, California, and what is still more important, it holds a large number of bills receivable covering property of all sorts which it has sold in recent years but which has not been entirely paid for. The Pacific Improvement Company’s construction outfit was sold to the Central Pacific in 1883.
The last of the construction companies, the Southern Development Company, became responsible for construction east of the Arizona state line when the Pacific Improvement Company left the field. It was of minor importance and may be dismissed with a word. In respect to ownership and operation it resembled the Contract and Finance Company, the Western Development Company, and the Pacific Improvement Company.
Identical Control of Companies
There is a great deal of history about the operation of the various construction companies mentioned, that has not been, and perhaps never will be, written. The men out on the road seem to have known little about any of them. The contact of these men was with Stanford, Huntingdon, Hopkins, and Crocker. They neither knew nor cared whether they received orders from the associates in their capacities as directors of the Central Pacific or of the Southern Pacific, or as stockholders in one of the construction companies. Nor was it easy for them to keep informed. The same construction force moved from place to place. The same man in the same pay-car paid off employees of the Central Pacific, the Southern Pacific, and the construction companies indiscriminately.[183] The same general shops furnished track materials.[184] The same equipment was found on all the different lines, except perhaps on the northern division. There was small wonder that even the higher engineering officials were unable to locate accurately the stretches built for each of the principal companies which they served, nor that men under them should have been altogether confused.
As a matter of fact, the various corporations interested in the building of the Southern Pacific were, after 1870, only different manifestations of the activities of one group of men. It does not appear that any attempt was ever made to interest outside investors. On the contrary, Hopkins, Huntington, Colton, and perhaps the other partners as well, agreed that if anything happened to one of them, their stock in the Western Development Company should not go to outside parties until the existing stockholders had had a chance to take it.[185]
This was a distinct contrast to the attitude of the same men when the Contract and Finance Company was formed, and indicates that they anticipated no such difficulty in raising funds as they had experienced when they built the Central Pacific. Had this not been true, it is probable that they would have let the Southern Pacific alone, competition or no competition.
Construction Financing
Under the terms of their contracts with the Southern Pacific, the construction companies received substantially all of the stock and bonds which that company put out. The same parties were, therefore, directly or indirectly in control both of the railroad and of the companies which did work for the railroad. These securities had, however, no market for many years, at any price. County donations, of which there were a few, also yielded but little, and the federal land grant was not easily or early sold. The real source of financial supplies for the Contract and Finance Company and its successors, the Western Development and the Pacific Improvement companies, in their work upon the Southern Pacific, were the Central Pacific, as a corporation, and the associates as individuals.
As in the case of the Contract and Finance Company, the associates paid no money on their stock subscriptions, but deposited funds in varying amounts which were credited to them as loans. Interest was paid on these advances at rates varying from 6 to 10 per cent. It appears that the contributions by the associates to the Western Development Company began to be considerable in May, 1876. By January, 1877, they had reached the sum of $3,421,458.35. By March, 1878, the total advance was in the neighborhood of $11,000,000. It remained at this figure through 1878, and the major part of 1879. The largest contributions were made by the estate of Mark Hopkins and by Collis P. Huntington, though both Crocker and Stanford kept substantial balances. There is no record of the size of advances made to the Pacific Improvement Company, but we know that the same general practice was continued.
In addition to the advances made by the Huntington group, the construction companies benefited substantially by the assistance rendered them by the Central Pacific. This was a sort of help which the Central Pacific itself and the persons who built it had never known. It took a variety of forms. A very obvious service which the Central Pacific could and did offer was the operation of sections of the Southern Pacific as fast as completed in connection with the Central Pacific main line. Besides this, the Central Pacific acted as banker when the construction companies had spare funds. More important still, the Central Pacific on occasion lent considerable sums to the Western Development Company. This was later denied by representatives of the Central Pacific, but the evidence seems conclusive that the loans were made.[186]
Similar advances were probably made by the Central Pacific to the Pacific Improvement Company,[187] and to the Contract and Finance Company, sometimes without interest. Money in the Central Pacific sinking fund was invested in this way, at interest.[188] Like use was made of surplus funds belonging to the Occidental and Oriental Steamship Company, which the Central Pacific was holding, until the Union Pacific discovered the matter, and, being interested in the money, demanded that its share be handed over.[189] There is even evidence that the associates borrowed money from the Central Pacific between 1874 and 1878, and that the treasurer of the company entered the sums taken on so-called “cash-tags,” carrying them as cash in his accounts.[190] How much all these transactions amounted to, it is very difficult to say, but it is probable that the aggregate was large.
Profits of Associates
There is no way of estimating the profits which Stanford, Huntington, Hopkins, and Crocker drew out of the Western Development, Pacific Improvement, and Southern Development companies. We know they were great, because the associates died very rich men. Mark Hopkins engaged in no important enterprise outside of his hardware business, except in railroad construction and operation, and yet in 1878 he left an estate appraised at over $19,000,000. Eleven years later, Charles Crocker’s estate was appraised at $24,142,475.84.[191] Stanford’s estate was not appraised in 1893, or at least no figures of value were made public, and Huntington did not die until long afterwards. Inasmuch as the associates up to 1878 were all interested in the same business together, and since the most important of their investments were in railroad construction work, it is fair to assume that the profits of the construction companies were considerable. Whatever they were it must, however, be remembered that they consisted in the main of Southern Pacific securities and of California real estate, neither of which were immediately salable. As a construction enterprise, the whole Southern Pacific affair was speculative. It was from the point of view of the owners of the Central Pacific alone that the construction of the Southern Pacific presented itself as a necessary policy, both for the protection of an existing investment, and for the full exploitation of the possibilities of monopoly in California.[192]
ORGANIZATION OF THE CENTRAL PACIFIC-SOUTHERN PACIFIC SYSTEM, FROM 1870 TO 1893
Extent of System
By 1877 the Central Pacific-Southern Pacific combination was in control of over 85 per cent of all the railroads in California, including all the lines of importance around San Francisco Bay, except the San Francisco and North Pacific Railroad, and in the Sacramento and San Joaquin valleys. Not only had the associates established the monopoly which they desired, but the operations of their system had reached an extent which they themselves would have thought inconceivable a few years before. The operated mileage of the Central Pacific-Southern Pacific line on June 30, 1877, was 2,337.66 miles, the capitalization $224,952,580, and the gross earnings $22,247,030. There was a continuous stretch of road from Ogden to Sacramento, San Francisco, and Oakland, and from these cities to Los Angeles and Yuma, by way of the San Joaquin Valley; while a line from Mojave to the Colorado River and The Needles was in course of construction.
Legally and technically, this comprehensive system was divided into five parts. The original Central Pacific Railroad ran from 5 miles west of Ogden to Sacramento. In 1870 this company consolidated with the Western Pacific Railroad, operating between Sacramento and San José via Stockton, the San Francisco, Oakland and Alameda Railroad, which connected the Western Pacific with the city of Oakland, the San Joaquin Valley Railroad branch from Lathrop to Goshen, and the California and Oregon Railroad, which left the main line of the Central Pacific near Roseville, and ran in a northwesterly direction to Redding toward the Oregon boundary. All these lines were directly under one operating control.
A second important part of the system was the California Pacific between Sacramento and Vallejo, with a branch from Davis north to Marysville, and another from Napa Junction to Calistoga. The ownership of the third portion was vested in the Northern Railway. This company had been chartered in 1871, and had projected a line from Woodland, on the California Pacific, to Tehama, of which 82.20 miles were completed in 1875. In 1878 the company built from Oakland to Martinez, and from Benicia to Suisun, and still later it constructed a line from Benicia to Fairfield. This last bit of road enabled Central Pacific trains to run from Sacramento to San Francisco via Benicia, instead of passing through Vallejo. The San Pablo and Tulare, completed about the same time as the road from Oakland to Martinez, connected the Northern Railway with Tracy on the main line of the Central Pacific.
The fourth part of the Huntington-Stanford system was the Northern Division of the Southern Pacific Railroad from San Francisco through San José to Soledad and Tres Pinos. The Tres Pinos line has been referred to in the previous chapter. The extension from Gilroy to Soledad up the Salinas Valley was in operation by 1877, and formed the first part of the route which later became the coast route to Los Angeles. The fifth and last part of the system was the Southern Division of the Southern Pacific Railroad from Goshen to Mojave, Los Angeles, and Yuma, with branches from Alcalde to Huron, and from Los Angeles to Wilmington. In addition to the main groups mentioned, there were certain minor extensions, such as the railroads from Sacramento to Shingle Springs (the Sacramento Valley and Placerville Railroad), from Stockton to Milton (the Stockton and Copperopolis Railroad), and from Peters to Oakdale (the Stockton and Visalia Railroad).
Lease and Stock Control
The various parts of the system were held together by a combination of leases and stock control. The associates in 1877 held all or a majority of the stock of each railroad company which has been mentioned. Usually this stock had come to them in their capacity as shareholders in the various construction companies which had built the roads. In some cases, however, as with the California Pacific and the Northern Division of the Southern Pacific, the greater part of it had been acquired by purchase. But the associates in most instances preferred to add to their control by stock ownership the further security of a lease—a procedure which had the additional advantage of simplifying the conditions under which the companies were operated, by concentrating operations under a single management. Only in the case of the Northern Division of the Southern Pacific do they seem to have temporarily departed from this procedure, and this exception can probably be explained by the special circumstances of the case.
So long as the same parties held all the securities of all the companies in the Central Pacific-Southern Pacific system, it made little difference how payments under the various leases were determined. Yet the possibility that the Central Pacific might sometime divest itself of some portion of its property, was kept in mind, and rentals were fixed so that in most cases they were materially less than the net earnings of the leased mileage. This was probably not true of the Southern Pacific in early years, but it had become so by 1880. In form, the leases showed surprising variety. The rental of the Northern Railway to the California Pacific in 1876 was at the rate of $1,500 per mile per year.[193] Mr. Stanford thought that this was based on an estimated cost of construction.[194] In 1879 the same property was leased to the Central Pacific for a payment of a given sum per mile for each piece of equipment passing over the road. That is to say, 25 cents per mile was paid for each passenger or freight locomotive, 20 cents for each passenger car, and 8 cents for each freight or caboose car.[195] This proved to be a very expensive rental, and was changed to a monthly payment of $47,500.[196]
The lease of the California Pacific to the Central Pacific in 1876 carried a rental of $550,000 per year, plus three-fourths of the net earnings of the California Pacific above that amount. The Central Pacific guaranteed principal and interest on $3,000,000 of bonds. This was changed to a flat payment of $600,000 per year in 1879.[197] The Central Pacific leased the Amador branch between Galt and Ione for $3,500 per month. In the case of the Stockton and Copperopolis, however, it undertook only to pay principal and interest on $500,000 of thirty-year bonds, at 5 per cent, with the provision, however, that the net earnings should apply on the Stockton and Copperopolis floating debt.[198] These variations, if they show nothing else, are persuasive that the associates had no standard method of procedure but suited their arrangements to the facts in each individual case.
Lease of Southern Pacific
Perhaps the most interesting relations between the different companies in the Huntington-Stanford system were those existing between the Central Pacific and the Southern Pacific—the Central Pacific’s most important extension. It has already been noted that during the early period of construction the Southern Pacific lines south of Goshen were turned over to the Central Pacific operating department as fast as they were completed. At one time the authority of some Central Pacific officials reached east to New Orleans, though the general superintendent, Mr. Towne, seems never to have had jurisdiction beyond Vermillionville, 144 miles from New Orleans.[199] The advantages of this arrangement were obvious. Under the lease, the Central Pacific paid the Southern Pacific $500 per mile per month rental, less $250 per mile per month to cover operating expenses, or a net sum of $250 per mile per month. As amended in 1879 and 1880, the leases made no mention of the $500 payment, but the Central Pacific engaged to keep the Southern Pacific in good repair, and to pay $250 per mile monthly.[200] In its first form the lease contained the implication that the operating ratio of the Southern Pacific was only 50 per cent, and it has been suspected that this was deliberately arranged in order to assist Mr. Huntington in disposing of Southern Pacific securities in New York. The lease was originally terminable on twelve months’ notice, but in 1880, on demand of New York bankers who contemplated the purchase of Southern Pacific bonds, it was changed to run for at least five years.
The fact has already been mentioned that the lease of the Southern Pacific system to the Central Pacific never included what was known as the Northern Division, running from San Francisco through Gilroy to Tres Pinos and from Carnadero to Soledad. Its officers reported directly to the executive officials of the Southern Pacific Company, and not to Mr. Towne. The difference in treatment of this part of the line was striking. The Northern Division lay west of the Coast Range, and was separated to some extent from the lines of the San Joaquin Valley; yet it gave the main system entrance to the important city of San Francisco, and should have been operated in close harmony with its connections at San José.
One suspects that Mr. Huntington desired to separate the Central Pacific and the Southern Pacific in the public mind in order that he might more successfully oppose Mr. Scott’s Texas and Pacific plans at Washington. “I think it unfortunate,” he wrote in 1875, “that he [Stanford] should so closely connect the Central Pacific with the Southern Pacific, as that is the only weapon our enemies have to fight us with in Congress.”[201] “I think it important,” he said in another letter about the same time, “that the Southern Pacific should be disconnected from the Central as much as it well can be. And ... I think it should have a superintendent that does not connect with the Central Pacific, although I think it would be difficult to get a man as good as Towne.”[202] Opinions like these were likely to perpetuate distinctions between the Central Pacific and the Southern Pacific railroads which could not be explained on other grounds.
Arrangement Reversed
A second stage in the connection between the Central Pacific and the Southern Pacific companies began in 1885 when a lease of the Central Pacific to the Southern Pacific took the place of the earlier arrangement in which the Central Pacific was the lessee. It appears that Timothy Hopkins, treasurer of the Central Pacific and director of the Southern Pacific Railroad of California, received a telegram from Mr. Stanford in the summer of 1884, asking him to come to New York. When Hopkins arrived he found Stanford, Huntington, and Crocker, and it was explained to him that the meeting was desired in order to go over the affairs of the associates generally, and in particular to take up the question of the organization of a new company for the purpose of holding and operating the railroad companies that were owned by the associates and controlled by them, both those under the management of the Central Pacific and those east of El Paso in Texas and Louisiana.[203] The meeting was recognized as important and minutes were kept, which have been preserved.
There were several circumstances which made a reorganization at this time desirable. In the first place, the period of exceptional profits for the Central Pacific was passing away with the decline in the mining business in Nevada and the opening of other transcontinental lines. In the second place, the Southern Pacific was beginning to realize the earning power which it was to have as a completed road. It had now a through line to New Orleans; it reached San Francisco while the Central Pacific did not; it was handling 45 per cent of the transcontinental business in 1885; and while it could hardly yet be called a profitable enterprise, its prospects were bright. Southern Pacific bonds were first sold in New York in considerable quantities in 1880, when they brought between 86 and 90. Except on the supposition that the ownership of the Central Pacific and Southern Pacific was identical, there was beginning to be reason for the owners of the latter to feel dissatisfied with a lease like that of 1880, which compelled them to be contented with a fixed return.
Stock Holdings
On this last point the evidence, though not entirely conclusive, offers some interesting suggestions. Up to 1880 the number of stockholders in the Central Pacific remained small. Mr. Huntington had stock of the four associates for sale, and made efforts to place it in New York, but without success. In 1878 the report of the Central Pacific Railroad to the California Railroad Commission showed 82 stockholders, of whom 56, with a total holding of 432,563 shares, were residents of California. Mark Hopkins held 102,812 shares when he died in that same year, and Mr. Huntington, Mr. Stanford, and Mr. Crocker presumably possessed equal amounts. During the early eighties, however, while the Central Pacific was paying substantial dividends, large quantities of stock were sold in Europe. James Speyer has testified that when he came into the New York office of Speyer and Company, some time between 1883 and 1885, large blocks were held in England and Holland. The sales had been made before 1884, probably at a price above 50.
No record of the amount disposed of in these years is available,[204] but it is known that in 1884 the number of shares standing in the names of Huntington, Stanford, Crocker, and the Hopkins interests was considerably less than a majority of the stock outstanding.[205] Mr. Jackson, employee in the secretary’s office of the Central Pacific in 1885, estimated the amount at from 30,000 to 35,000 shares apiece.[206] According to Mr. Brown, who inventoried the stock of the associates in 1884, the combined holdings of Stanford, Huntington, Crocker, and Mrs. Hopkins, including stock in the name of the Pacific Improvement Company, were 157,535 shares out of a total outstanding of 592,755 shares at this date.[207] Timothy Hopkins later suggested that Brown’s figures might have included only stock free and available, and that the associates might have owned other stock pledged as collateral, but this was only a suggestion, without proof. As final bits of evidence, it is on record that Crocker possessed 34,049 shares of Central Pacific stock at his death in 1889,[208] while Stanford told the United States Pacific Railway Commission in 1887 that he owned 32,000 shares.[209]
The conclusion to which this evidence leads is that Huntington and his friends did not own as much as 30 per cent of the Central Pacific shares outstanding when they met together in New York in 1884. Their control of the company depended on the proxies which were sent them, and in particular upon the fact that the individual liability imposed on corporation stockholders under California law led new purchasers of Central Pacific stock to delay recording their ownership, or even to place their stock under the name of third persons in New York. Dividends were collected by presentation of coupons clipped from stock certificates.[210] Mr. Klink testified that the majority of the stock was voted by proxy in 1885, and that the bulk of it was in the name of people in the New York office of the company. On the other hand, during the period in which the ownership of the Central Pacific became scattered, the stock of the Southern Pacific continued to be closely held by the original associates: Stanford, Huntington, Crocker, and the estate of Mark Hopkins.
It is not difficult to understand why the associates should have gradually shifted their main interest from the Central Pacific to the Southern Pacific if we remember that their interests were widely extended as the result of their building enterprises in Southern California, and that Central Pacific securities were the only parts of their holdings on which they could realize in cash. Southern Pacific stock and bonds had no market in New York; Central Pacific stock and bonds had such a market. Doubtless, the associates could not have afforded to dispose of their Central Pacific holdings if this would have imperiled their control of the Ogden route, but such a result did not necessarily follow, as we shall see. Having sold Central Pacific securities in large quantities, however, it was natural for the Stanford-Huntington group to wish to make the company in which their main interest now lay a dominant partner in the Central Pacific-Southern Pacific combination. And this is probably the explanation of the transaction which we are about to describe.
New York Meetings
Let us return to the meeting of Huntington and his associates at New York in the summer and fall of 1884, at which the details of the reorganization were worked out. The first business there considered was the purchase of the interest of one T. W. Pierce in the Galveston, Harrisburg and San Antonio Railway and the making of certain adjustments of interests of the associates in connection therewith. The next was the taking of an inventory of securities on hand in New York and those used as collateral for the payment of liabilities of Stanford, Huntington, Hopkins, and Crocker. On September 11 the question of the reorganization of the Southern Pacific system was taken up, and the following order of business was agreed upon: (1) consolidation of all the lines of the Southern Pacific system in one company; (2) separation of Central Pacific business from Southern Pacific business; (3) leasing of the Central Pacific system to the Southern Pacific system (new organization); (4) general consolidation of lines from San Francisco to Newport News.
The fourth item referred to a proposal that Stanford, Crocker, and the Hopkins estate enter with Huntington into the ownership of the Chesapeake and Ohio Railroad, opening the way for a transcontinental rail line from coast to coast. This offer was declined; no further reference need be made to it.[211]
On September 25, the associates came together again, and from that time until November 7, meetings were held almost daily. From the meager reports of the proceedings kept by their secretary, we glean that more than one plan of adjustment was considered. It was agreed at one time that the Southern and Central Pacific companies might terminate their leases, and that the Central might lease from the Southern that portion of the railroad between Goshen and Mojave. Then a running arrangement was to be made between the Central Pacific and the Southern Pacific Company (new organization) to cover the line from Mojave to San Francisco and other California points.[212]
This plan was not finally adopted. On October 1, Leland Stanford was appointed a committee of one to formulate his proposed method of leasing the several roads which should form the through line of the Southern Pacific Company. It was agreed that the stock of the Southern Pacific Company, which had been organized the previous year, should be raised to $100,000,000. During the following three weeks the discussion turned largely about the details of the Southern Pacific organization and the best methods of liquidating the Southern Development Company. On November 5, the question of leasing the Central Pacific system to the Southern Pacific came up. It was agreed to lease the property, and temporarily to fix the rental at fixed charges and a guarantee of 2 per cent upon the capital stock, plus all the earnings of the Central Pacific system over and above that percentage until the amount should reach 6 per cent. All profits beyond 6 per cent were to go to the Southern Pacific Company. The last meeting was held on November 7.
Reorganization of System
The result of these exhaustive discussions was a threefold operation. In the first place, the Southern Pacific Company of Kentucky, organized in 1884 with a charter granting power to do most things in the world provided it did not operate in Kentucky, issued $100,000,000 in capital stock, and acquired in exchange for its certificates the stock of the Southern Pacific Railroad Company and that of the subsidiary companies completing the through line to New Orleans.[213]
Secondly, the Southern Pacific Company leased the Southern Pacific Railroad and these same subsidiaries for ninety-nine years from the 10th of February, 1885, undertaking to keep the properties in repair, and to pay over 93½ per cent of the net profits to the lessors in specified proportions.
In the third place, the Southern Pacific Company leased the Central Pacific Railroad for ninety-nine years from the first of April, 1885, for a rental which might vary from $1,200,000 to $3,600,000 a year, according as the earnings of the Central Pacific and leased lines north of Goshen might be small or large. This substantially corresponded to the 2 per cent and the 6 per cent on the capital stock mentioned in the minutes of the associates. The Southern Pacific assumed all Central Pacific obligations except the payment of the principal of indebtedness incurred or guaranteed by that company, and various minor adjustments and assignments were made which it is not necessary to describe.[214]
Mr. Stanford has testified that in fixing the rental of $1,200,000 the business of the previous years and the prospects of competition in the future were taken into account.[215] The United States Pacific Railway Commission approved the terms of the lease two years later.
In 1888 the minimum rental was changed to $1,360,000 and the maximum to $4,080,000, in consequence of the extension of the Central Pacific from Delta, California, to a connection with the Oregon and California Railroad at the Oregon boundary. In 1893 the Southern Pacific complained that it was suffering very considerable losses under the lease and the terms were once more revised. Instead of a rental with a fixed minimum, the Southern Pacific now agreed to pay $10,000 a year for the leased property, plus all net earnings up to 6 per cent on the capital stock of the Central Pacific Railroad and one-half the excess over 6 per cent.[216]
It was provided in the fourth article of the new lease that if the Southern Pacific should make any advances for payment on account of the Central Pacific, it should be entitled to receive interest on these advances at the rate of 6 per cent. On the 22d of March, 1894, this fourth article of the amended lease was again changed by inserting the words “lawful interest” instead of “interest at 6 per cent per annum” upon advances which might be made by the Southern Pacific Company. At the same time it was agreed between the Central Pacific and the Southern Pacific that if at any time it appeared that, by the operation of the agreement, either party was being benefited at the expense of the other, the agreement should be revised and changed. On the whole the earnings of the Central Pacific were less than were expected under the lease, particularly during the years 1888-93. Yet part of the difficulty arose from preferential solicitation of freight over the Sunset route, and for the rest the rental of the property was adjustable, as experience showed.