THE CASE OF DAVID D. COLTON
Meeting the Associates
During the seventies the associates took a new partner. This was David D. Colton, one-time sheriff of Siskiyou County, brigadier-general of militia, second to Broderick in the famous Terry-Broderick duel, and still later colonel of United States Volunteers. In spite of these various military titles, Colton seems never to have seen service. But he had been active in California politics as a delegate of the Union Democratic party in 1861, and as chairman of the state central committee of that organization, and was widely known throughout the state. He was a man of fine physique, and endowed with a quick if not a profound intelligence.
Colton first made the acquaintance of Charles Crocker in 1867, when the latter was on his way to inspect the work of construction of the Central Pacific beyond Elko. Three years later Crocker invited Colton to accompany him to Evanston, California, where he intended to look over, and perhaps to purchase, certain coal mining properties. According to Crocker, Colton said that he also would like to have an interest in the mines in question. Crocker, who had in the meantime completed negotiations for the purchase, replied with an offer to make Colton president and manager of the coal company if he would buy a thousand shares of its stock, which Colton immediately did.[217]
The relations thus begun rapidly became more intimate. As early as 1868, Mr. and Mrs. Colton had invitations from Mr. Crocker and passes to travel on the Central Pacific. In 1869 or 1870 the two families visited the Yosemite together, and in 1871-72, when the Crockers went to Europe and the two Crocker boys were left behind at a military academy in Oakland, the Coltons looked after the children generally, and had them at the Colton house for week-ends.[218]
It was through his acquaintance with the Crockers that Mr. Colton met the other members of the Stanford group. Mr. Huntington was favorably impressed with him; Stanford and Hopkins less so. Huntington was becoming dissatisfied about this time with the amount of work done by his associates, and the suggestion soon made that Colton join the other members of the group and share the burden of managing the Central Pacific enterprise with them, met his approval. “I was worked,” he said later, “up to my full capacity, whatever that might be. Mr. Crocker was in the habit of going to Europe and having a good time and the Governor owned ranches, and his horses took a great deal of his time; in fact, the Governor never could confine himself right to the office; that is, I don’t consider that he could, to close, hard work, and we wanted somebody there to do that work; and Mr. Colton convinced me that he, of all men, was just the man that we wanted.” And again, speaking of his partners and of Colton, Huntington said: “He knew I was not satisfied with some things that my associate co-directors were doing there. The way they used to go to Europe and go away from business, while I was working every day in the year almost, and about fourteen hours a day; he knew I was not quite satisfied with the hours they put in.”[219] The fact that Mr. Hopkins’ health was not strong was an additional reason for taking in a new partner.
Agreement Signed
The result of these preliminary discussions was the conclusion of an agreement, dated October 5, 1874, whereby Colton received 20,000 shares of Central Pacific Railroad stock and 20,000 shares of Southern Pacific stock in return for his promissory note for $1,000,000, maturing in five years.[220] At the same time it was mutually understood that Colton should share in all the responsibilities and liabilities of the associates for five years in proportion to his stockholdings, and should stand in their shoes, as it were, holding the same positions and relations which they had to the Central Pacific Railroad, and to the Contract and Finance Company. The contract called for no cash payment, for obvious reasons.
Mr. Huntington says he felt in 1874 that Colton was receiving something very handsome, and the opinion was not without some justification. Certainly, in the long run the opportunity to share in the profits of the associates was valuable. Colton was not a man of large means to begin with, yet after two years and three months with the Central Pacific, he inventoried his assets at $961,506.18,[221] and at the time of his death his rent roll alone amounted to $2,500 to $3,000 a month.[222]
This was a very substantial compensation, even for very valuable service. But on the other hand, it is evident that Mr. Colton put himself entirely in the hands of the associates when he signed the agreement and the promissory note which have been described. He not only pledged his services for five years, but he assumed an unconditional liability to pay $1,000,000 at the end of this period, in return for which he obtained only 40,000 shares of unsalable securities and a right to participate in the management of the associates’ property which was revocable at the pleasure of Huntington and his friends at any time within two years. This was a dangerously exposed position. It was not a wise thing even for the Huntington-Stanford group to put Colton in such a predicament, and much subsequent difficulty resulted therefrom.
In 1876 the associates served notice on Mr. Colton, dissevering his connection with them. Mr. Crocker relates that Colton was very much affected. He said, according to Crocker, “It is generally known that I am here with you, and there is no one knows these relations are only temporary, and it will be next to ruin to me to have them dissevered now.” In fact, he wept. Crocker later testified that he liked the general very much, and was touched by his distress. Colton wished him to go and see the others, and Crocker did so. The result was that the notice was reconsidered and a second contract made.[223] After this, Colton bought one-ninth of the capital stock of the Western Development Company, and commenced to deposit money with that organization in the same manner as did the other members of the group.
“Financial Director”
During substantially the whole period from 1874 to 1878, Colton took active charge of the financial affairs of the Huntington group at the San Francisco end. His office and title beginning August 31, 1875, was that of “financial director.” Formally he acted under the direction of the treasurer of the company, Mr. Hopkins. Practically he reported to Mr. Huntington and perhaps to Mr. Crocker, more than to Mr. Hopkins, but exercised a good deal of independent initiative.[224] With the operation of neither the Central Pacific nor the Southern Pacific had he anything to do. On the other hand, it was either Colton in San Francisco, or Huntington in New York, as we shall presently see, who attended to the negotiation of short-time loans, often necessary to take care of interest on the railroad properties. It was also Colton who had particular charge of the many affairs of the Western Development Company;[225] it was Colton who was responsible head of the Rocky Mountain Coal and Iron Company’s mine at Ione; and it was Colton who took particular interest in finding a market for the output of this corporation.[226]
From the tone of Mr. Huntington’s letters to Colton, it seems as though the former was reasonably well satisfied with the way the business in the West was conducted after 1874. On his part, Colton cultivated the idea that the interests of the five associates, himself included, were inextricably bound together. “I have learned one thing,” he wrote in 1878, “we have got no true friends outside of us five.... People will profess friendship to one of us, just to either try to find out something, or when the time comes, lie about the rest of us. We cannot depend on a human soul outside of ourselves, and hence we must all be good-natured, stick together, and keep our own counsels.”[227]
Yet, in spite of his assumption of the permanency of his relations with the Huntington group, Mr. Colton certainly understood that his position had no legal security whatever. Of this the episode of 1876 must have been a disagreeable reminder. In particular, as has been observed, there was a reasonable likelihood that he would be called upon to pay his note for $1,000,000 in 1879, before the Central Pacific and Southern Pacific shares, which secured it, had become salable. It is evident that these matters were in Mr. Colton’s mind constantly, and gave him great concern. No other reason can be offered for his efforts to secure title to property with such feverish rapidity. How should he protect himself against the automatic presentation of a note which might require the sacrifice of all his accumulations to pay? How should he put himself in a position where his income was not wholly dependent on the forbearance of four men, with only one of whom he had ties of personal friendship? If Mr. Colton’s moral fiber weakened somewhat under the strain of the situation, the fact need occasion no great surprise.
Western Development Dividend
Some time after 1874 Colton suggested to Crocker that the salaries of the associates be raised. They were all drawing $10,000 a year, and were giving all their time for that salary. Colton said it was an insignificant sum. Men such as the associates ought to have $25,000 a year, at least. But Crocker replied prudently that a salary of $10,000 could always be justified, while one of $25,000 might not be. He preferred to let the matter stay as it was.[228]
Three years later, when the period of his contract was drawing to a close, Colton took more drastic action by causing the Western Development Company to distribute a substantial part of its assets in the form of a dividend. This provided him with property, upon which as security he might have borrowed considerable sums of money. A dividend was declared on September 4, 1877, which consisted of $13,500,000 in Central Pacific stock, $6,300,000 in Southern Pacific Railroad bonds, and $1,562,500 in other securities, amounting to between one-half and one-third of the holdings of the Western Development Company. Colton’s personal share was one-ninth.[229]
Ostensibly the Western Development Company’s dividend was a distribution of surplus profits. In reality it was a division of capital. Nobody knew, in 1877, how great the profits of the Western Development Company had been, nor even whether the assets of the company equaled its liabilities, for the reason that the value of these assets was speculative and uncertain, and if realized on all at once, would have amounted to scarcely anything at all. It was known, of course, that the creditors of the company were also its stockholders, so that the distribution was not quite so reckless as it otherwise might have appeared; but yet the various stockholders were not holders of stock in the same proportions as they were creditors, and the heavier creditors, such as Huntington, might well have felt that their interests were not being sufficiently protected.
Nothing was said about the Western Development dividend to any of the associates at the time it was declared. Charles Crocker was in San Francisco, but knew nothing of it.[230] The fact came out, however, in August of the following year, when Huntington was in the West. Stanford, Huntington, and Crocker were all together in one of the Southern Pacific offices when Colton came in, accompanied by a couple of subordinates with their hands full of bonds, and said, “Gentlemen, here are your dividends.” Both Huntington and Crocker became at once very angry, and hot words seem to have passed. Huntington said that there was no sense in the dividend—it was wrong, the company ought to pay its debts before it paid a dividend—the stocks and bonds were of no particular value, but their distribution would leave the Western Development Company shorn of its resources, and they must be returned. Crocker agreed with Huntington. Colton begged the others not to injure him in the eyes of the employees of the company by compelling a return of the securities, and pledged his honor that he would not part with his shares, and would return them if needed. Stanford thought the matter might be passed with this understanding, and it was so agreed, not, however, without a good deal of resentment on the part of Huntington and Crocker.[231]
Misappropriation of Funds
The Western Development dividend and Colton’s request for a higher salary were, in a measure at least, open and above board. The same cannot be said of a number of other operations—in general, it is true, of minor importance—which took place between 1874 and 1878, and which became known only after Colton’s death. How far Colton was guilty of positive dishonesty during these years has been a matter of bitter dispute. There is no question, however, that he drew or credited himself with considerable amounts of money without the knowledge of the other partners, and that no vouchers were ever made out which sufficiently explained these transactions. Charges of embezzlement were even later made and not disproved. Three of four illustrations of such incidents may be given.
1. Salary drawn from the Rocky Mountain Coal and Iron Company. Mr. Colton was made president of this company in 1871 at a salary of $100 a month. In 1874 the associates agreed that Colton should receive a salary of $10,000 a year, as partner. No separate mention was made of the Rocky Mountain Coal and Iron Company in 1874, but it is reasonable to suppose that the new salary of $10,000 covered Colton’s work in supervising the coal property, as well as his share in the general administration of the railroad, especially as the coal business took comparatively little of his time. As a matter of fact, however, Colton restricted himself to $100 a month only during 1871. In 1872 he drew $400 a month, except during the month of March, when he took $366.50. In 1873 he took $23,500, of which a considerable amount was for back salary. In 1874 Colton drew $12,000, and in 1875, 1876, and 1877, $6,000 annually. According to the testimony of expert accountants who later went over the company’s books, Colton took $54,966.50 in salary during the years 1871-77 in excess of what he should have taken according to his agreement with Mr. Crocker, and beyond the amounts which the other associates intended he should have.[232]
2. Interest on Rocky Mountain Company balances. It is admitted that Mr. Colton deposited the balances of the Rocky Mountain Coal and Iron Company, running all the way from $30,000 to $90,000, in his own private bank account, and used them in his own private transactions.
3. Receipts from sale of coal. It appears that the Rocky Mountain Coal and Iron Company sold coal to the Central Pacific. For some time this coal was paid for at the rate of $2 and $2.65 per ton. In July, 1874, the Central Pacific made an extra payment of $11,622 to Mr. Colton for the purpose of increasing the price paid during the months from January to May, 1874, to $2.85 per ton, and arranged to pay this increased amount thereafter. In his instructions to the superintendent of the mine, Mr. Colton made no mention of the retroactive payment, and apparently pocketed the $11,622.
4. Appropriation of interest coupons. In 1876 Mr. Tevis wished to exchange some Southern Pacific bonds which he held, for certain lands owned by the Railroad Company. Colton agreed to facilitate the transaction by taking the bonds and giving his individual check for $140,700. Tevis delivered the check and $10.13 in cash to the Southern Pacific land agent, and got his deed. Colton eventually redeemed his check by delivery of the bonds to the treasurer of the Southern Pacific, but when the bonds came in, two interest coupons were missing. A similar transaction between the same parties, but for a lesser amount, took place later the same year, and again interest coupons were clipped from the bonds before Colton turned them in.[233] In each case Mr. Smith, the treasurer of the Southern Pacific, was compelled to hold Colton’s check for a considerable period before it was redeemed, and during this time Colton had, of course, the use of the money.
In addition to matters such as those here partially enumerated, there were a multitude of instances in which Colton charged relatively small sums to various accounts without supplying any evidence that the charges were legitimate. Doubtless the other associates did the same, but Colton’s position in the group was peculiar, and he could not afford to allow himself equal freedom with Huntington and Stanford. It would serve no useful purpose to discuss these instances in detail.
The aggregate of all the sums which Colton thus gathered into his control was considerable. The Western Development dividend alone supplied him with 700 Southern Pacific bonds that might have been used as collateral security for a loan, as well as with other securities, mostly of still uncertain value. Items of excess salary, interest on balances, and miscellaneous unaccounted-for expenses totaled $130,831.13. Had Colton succeeded in increasing his salary as financial director to $25,000, he would have added from $75,000 to $100,000 to his resources. Substantial progress was evidently being made toward meeting the million dollar note.
Colton’s Death and Mrs. Colton
Upon all the activities which have been described, Colton’s death in October, 1878, in the prime of life, fell with crushing force. In the first place, Colton’s manipulations were such as to be unforgivable by his business friends. Devious as Huntington’s ethical code was at times, he had no hesitation in pronouncing Mr. Colton guilty of robbery; that he himself was partly responsible was not likely to occur to him. In the second place, Colton’s assets at the time of his death were such as to render immediate liquidation impossible, and yet this was precisely the thing most likely to be demanded. Mrs. Colton, the sole heir, was a woman of unusual ability, clear-headed, definite in speech, and, although inexperienced in business, apparently quickly able to understand business problems. She had, moreover, a good adviser in the person of a San Francisco lawyer named S. M. Wilson. Her position was, nevertheless, one of disadvantage, which was intensified by her wish to shield her husband’s reputation.
It does not appear that the associates were aware of the true state of affairs during the weeks immediately following Mr. Colton’s death. Mr. Huntington wrote cordial though not altogether sincere letters to Mrs. Colton, expressing willingness to serve her in those matters in which General Colton was interested with the associates,[234] and Crocker called at Mrs. Colton’s house and wept there while speaking of the death of Mr. Colton. This attitude soon changed, however, and Mr. Crocker became less friendly in his intercourse with Mrs. Colton, and at last ceased to visit her altogether.[235] In fact, all pretense of sympathy with Mrs. Colton was presently abandoned, and negotiations between her and the associates were continued upon a cold business basis.
The attitude of the Stanford-Huntington crowd was officially that they were willing to have Mrs. Colton pay her obligations and continue with them. This meant a settlement of claims arising out of the improper withdrawal of moneys by Mr. Colton, but also more particularly the payment of the $1,000,000 note. It involved, also, for the future continued investment of funds in the Western Development Company, and the payment of assessments which might be levied upon Southern Pacific stock. It was insisted, however, that the matter be settled quickly, partly because Mr. Huntington was about to leave the city, and partly because the period for filing claims against the Colton estate would soon expire.[236]
In the event that Mrs. Colton should not desire to continue with them, the associates demanded an accounting in which the liabilities of Mr. Colton on account of the $1,000,000 note, his share of the net indebtedness of the Western Development Company, and the sum of the alleged embezzlements, should be set against the estimated value of the stock and bonds of which Colton died possessed. In estimating the value of Mr. Colton’s securities, moreover, the associates declared that the question was not as to the amount which could be realized eventually and after the underlying property had had a chance to prove itself, but the market value at the time of negotiations.
Mr. Crocker’s testimony on this point expresses very fully the attitude of the associates. He said:
Mr. Wilson and I had frequent conversations, and he sometimes asserted we could do so and so with these bonds, that we could realize 80 or 90 cents on them. I said in reply, “Possibly we can; I don’t know; it is a matter of speculation; it depends on the future of the roads.” Sometimes he would claim they would bring 80 or 85 cents; and then I would say, “Very likely they may,” but it would require time to do it, and a great deal of management necessarily to bring that out, and if Mrs. Colton desired to realize the full value of these securities after this lengthy handling of them, all she had to do was to pay the amount of the note and continue in the company and we would manage them for her, as well as we would for ourselves, of course, and she should receive the full benefit of our knowledge and experience in handling these securities, and we would get every dollar out of them we could, and she should have her share to the last cent. Then he would reply: “Well, that can’t be. We are determined to go out of this.” “Well,” I says, “then it is a matter of speculation.”[237]
Unquestionably these were hard terms, for it was out of the question for Mrs. Colton to continue with the associates in 1879, a fact of which these gentlemen must have been well aware. She did not have the necessary money, she could not afford in any case to risk her livelihood in so speculative an undertaking as building railroads in southern California, and the relations between her and the Huntington group did not savor of trust and confidence. The expressions of willingness to continue to treat Mrs. Colton as one of themselves cost the associates nothing, and were worth as much. Nor was the standard of valuation of the Colton assets offered by the associates, easily to be defended on ethical grounds. Mr. Colton had not played fair, it is true, but on his part he had been led into an improvement agreement and caused to sign a $1,000,000 note, in at least partial reliance upon the value of the stock of railroads under the associates’ control, which was given him in exchange. It was hardly appropriate for the Huntington group now to insist that the collateral security had no value.
Settlement with Mrs. Colton
Hard as the terms were, Mrs. Colton finally acceded to them. By agreement dated August 27, 1879, she turned over 408 shares of the capital stock of the Rocky Mountain Coal and Iron Company, all of the shares which she held of the Occidental and Oriental Steamship Company, all claims to the 40,000 shares of Central Pacific Railroad and Southern Pacific Railroad stock, pledged as collateral for the $1,000,000 note, all of the capital stock of the Western Development Company standing to Colton’s credit, and some $587,500 in par value of bonds of the Central Pacific-Southern Pacific system, of which $500,000 was in first mortgage bonds of the Southern Pacific Railroad itself. In return for all this, the associates agreed to cancel Colton’s note for $1,000,000, and to release Mrs. Colton from any claims on the part of themselves, the Western Development Company, the Central Pacific, and its allied companies.[238]
This settlement left Mrs. Colton with property reasonably valued at half a million dollars, and with an income of perhaps $28,000 a year. That she withdrew with so much to her credit was due to the interposition of Mr. Tevis on her behalf at the last moment, in consideration of a contingent fee,[239] and to the fact that the associates were on the point of floating large amounts of Central and Southern Pacific securities in New York. Mrs. Colton felt, however, that she had been robbed, and in May, 1882, commenced suit to reopen the whole transaction, and to annul the compromise agreement. It has been estimated that this famous suit cost the parties $100,000 apiece. Mrs. Colton alleged fraud and the withholding of essential facts which the associates should have disclosed by reason of the trust relations which had existed between Colton and his partners. In particular she insisted that the statements given her in 1879 with reference to the affairs of the Western Development Company had been misleading and untrue. She now offered to pay Colton’s $1,000,000 note, and other liabilities, and asked for the return of the securities which she had previously surrendered.
The more important facts developed in this litigation have been dwelt upon in the preceding discussion, and need not be repeated here. The case went to the Supreme Court of the state, where Mrs. Colton was finally defeated. A careful reading of the evidence leads to the conviction that the court was right. Mrs. Colton had done the best she could under the circumstances and was properly held to an agreement she had made with her eyes open, some three years before. Yet the fault of the whole unsavory affair was not hers, nor altogether Mr. Colton’s, and the reputation of the associates thereby properly suffered in the public mind.
FINANCIAL DIFFICULTIES FROM 1870 TO 1879
Excessive Construction
We may now return to the more general considerations affecting Central Pacific finance which characterized the years from 1870 to 1879. There is a good deal of evidence that the years during which Mr. Colton was connected with the Central Pacific enterprise were years of financial difficulty for the associates, due in part to general depression, in part to a disproportionate amount of new construction, and in part to the continued inability of the Huntington-Stanford group for many years to interest eastern capital in western railroads.
During the years from 1869, when the Central Pacific was first opened to Ogden, to 1874, the earnings of the Central Pacific main line, both gross and net, steadily increased. The following table sets forth the facts relating to this progress, as well as figures for the succeeding years from 1875 to 1881.
Earnings and Expenses of the Central Pacific Railroad, 1874-81(*)
(*)Report compiled by the Commissioner of Railroads, 47th Congress, 1st Session House, Executive Documents No. 123, 1882, Serial No. 2030.
The greatest continuous drain upon Mr. Huntington and his friends during the decade from 1870 to 1880 came from the necessity of raising funds to provide for construction in southern California as described in earlier chapters. Had business considerations alone controlled, there is little doubt that this construction would have ceased. It did not pay for itself, and could not be expected to be profitable until the country served had been developed. Indeed, Charles Crocker once declared that when the Southern Pacific was built through the southern San Joaquin Valley, the company could have started with a railroad train at Sumner at the south of the valley and come to Stockton, and with one engine and one train of cars, hauled every living soul that lived in the valley out at one haul. The settlers between Yuma and San Bernardino could have been carried in one carload. This was as late as 1876.[240]
Inability to Get Eastern Capital
It was largely owing to this construction, as well as to the general hard times, that the gross earnings per mile of the Central Pacific and leased lines fell from $12,068.63 in 1875, to $7,677.84 in 1879. The Central Pacific did not dare stop work for fear that the federal government might be persuaded to subsidize another transcontinental road, and so deprive it of the monopoly which it was so anxious to retain; but it built as slowly as it could, and endeavored to make up by retrenching in other directions. Had the associates been able to sell securities in New York, the slowness with which the earning power of their system developed would not have been so serious a handicap. The territory was after all a rich one, and given time was sure to yield substantial profits. But a market for their stock and bonds was impossible to secure for many years. We have seen the opinion expressed by the associates in the Colton settlement, with respect to the salability of Southern Pacific-Central Pacific securities. There is no reason to doubt that this judgment was correct. Before 1880 it does not appear that there was a market for any of the Huntington-Stanford issues except the Central Pacific first mortgage bonds, and the sale of these was very slow.[241]
There is evidence that the associates not only recognized this situation, but that they took what steps they could to meet it. Central Pacific stock was listed on the New York Stock Exchange in 1874, and on the San Francisco Stock Exchange in 1878, not so much with the idea of selling any large number of shares, as in order to make a beginning which might ultimately lead to an established market. Arrangements were made to have the stock called at San Francisco every day, and the associates stood always ready to buy it back at a slight decline. The payment of dividends was begun in 1873 and continued until by the end of 1877 the sum of $18,453,670 had been distributed. Yet all this had little result for many reasons, among which doubtless should be again mentioned the personal liability attaching under California law to holders of stock in California corporations.
Naturally Southern Pacific securities of any type were still more difficult to sell than Central Pacific stock. Mr. Huntington found that the Southern Pacific Railroad was not known in the East, even by parties who had spent some considerable time in California.[242] To overcome this he advertised Southern Pacific stock and bonds in a great variety of ways, sometimes by personal conference with eastern bankers, sometimes by the issue of pamphlets or by the insertion of items in the newspapers, sometimes by the manipulation of bond sales upon the Stock Exchange. Occasionally he bought a few outstanding Southern Pacific bonds in order to support the credit of the company.[243] But here again, in spite of his efforts practically no bonds were sold, and Southern Pacific stock could not be disposed of at any price.
Market for Securities
A good deal of specific testimony by New York brokers is available to show the estimation in which Central Pacific and Southern Pacific securities were held late as 1879. It is all cumulative, and to the effect that no market existed at that time for any of these issues except Central Pacific first mortgage bonds. Thus S. H. Thayer said of Central Pacific stock: “I don’t think it would have found any market; I do not think it would have been possible to have sold it at any price; the stock had no friends, nobody knew of it, nobody traded in it; that is, in a general market; I do not know what might have been done by private negotiation; but in the public market nothing could have been done with 20,000 shares towards selling it.”[244] Similar testimony was given by D. O. Mills, of San Francisco. Mr. Mills was asked what price could have been obtained in the San Francisco market in 1879 for $13,000,000 in Southern Pacific bonds, and replied that he did not think these bonds were salable then, that it would have been a matter of bargain and sale, and would not have depended upon any market value.[245] Mr. Thayer also testified that the Southern Pacific bonds were on the stock exchange list in New York, but were bonds no one dealt in, and about which few were informed.[246]
It would probably be a mistake, in spite of this testimony, to attribute the reluctance of eastern investors to buy Southern Pacific bonds solely to unfamiliarity with the security. Not only was the economic development of southern California slight and the probable earnings of the Southern Pacific for some years small, but the state as a whole was not in the seventies an attractive field for investment. During the decade from 1860 to 1870, California had grown rapidly in wealth and prosperity. Population had increased and manufactures had begun to develop. In agriculture, fruits, berries, and grapes had been added to the important quantities of grain and vegetables already produced. But the immediate effects of the completion of the transcontinental railroad had been harmful to California, rather than beneficial.
For this there were several reasons: (1) speculation in real estate around San Francisco Bay had so discounted the completion of the line that the actual opening of communication caused a reaction rather than an advance; (2) the combination of a stimulated immigration due to greater facilities for travel, with the sudden release of a considerable part of the labor used in railroad construction, had forced down wages, while, on their part, California merchants had become exposed to competition from eastern distributing houses; (3) droughts in the South, the decline in the production of the mines, and the collapse of speculation in Nevada silver properties, all had given rise to acute suffering and discontent. These things in turn had reacted on political conditions, and had produced, first, the so-called sand-lot excitement, and then the agitation that led in 1879 to a revision of the state constitution. Meanwhile the passage of the Thurman Act, and the various disputes between the Pacific railroads and the federal government had provided special reasons for distrusting the securities of the Southern Pacific and Central Pacific companies, quite apart from conditions peculiar to the section in which their mileage lay.
Short-Term Borrowing
To repeat, it was this failure to dispose of the railroad stock and bonds which they had to sell that threw the associates back upon the necessity of raising money by short-time loans at extravagant rates of interest, and which, in the late seventies, peculiarly exposed them to the dangers of stringency in the New York money market. The partners at times paid as high as 12 per cent for loans.[247] Every element affecting their credit had to be closely watched, lest lenders refuse to discount their paper, and interest on the company’s bonds go by default; for it was a customary practice for the associates to take care of interest, at least over short periods, by loans.
In December, 1876, Huntington wrote that the January interest would this time have to come out of earnings, as he had been away from New York so much that he had not been able to secure loans there.[248] The same month Huntington complained of certain pamphlets which one A. A. Cohen had been sending East. “If the parties that inaugurate such fights as we now have with Cohen,” he wrote, “and have with the Sacramento Union and Senator Booth ... had to raise money outside of California, where our property cannot be seen, I am disposed to think such fights would be few.”[249] In May, 1877, Huntington let his partners know that reports from California to the effect that the railroad magnates there were spending their money for personal expenses with unexampled recklessness had hurt the Central Pacific credit.[250] At another time he reported that the rumor was abroad that the Central Pacific had no power under its charter to give notes for money, and that this had been denied.[251]
All through 1877 the letters exchanged between Huntington and his partners in the West show the strain which the Central Pacific was under. Huntington was continually wiring for money in lots of $50,000 to $100,000. Colton was sending it, sometimes by telegraphic transfer, sometimes in coin. As early as in May, 1877, Colton was talking of dull business and of reducing expenses. On August 23 he said that he did not exactly like the present financial outlook. The following day he spoke of the need of keeping credit good. “We cannot afford to ever be called on for money,” he wrote, “and not be able instantly to respond. Our affairs are too extended and extensive for us to take any chances of suspicion. It would hurt us in many ways, and take a long time to restore confidence.... I will now commence to renew our loans for six or twelve months, and take in sail everywhere.”[252] In September he repeated, “I am going to send you, for the next three months, every dollar I can, and, for God’s sake, keep all you can for the January interest. That must be paid. We will not pay out a dollar here, I am not obliged to. I read every department a lecture on economy about once a week.”[253] Earlier in the year the accounts of the Huntington group with the London and San Francisco Bank and with the Bank of California had been overdrawn from $150,000 to $350,000 each, and Colton was picking up every dollar outside which he could secure without showing his hand.[254]
Indorsement of Notes
As a general practice the associates seem to have refused to put their personal indorsement on the notes which they discounted. Huntington was very insistent that no indorsements be given; yet in January, 1878, conditions had grown so bad that Huntington asked the associates to indorse 100 blank notes and send them to him, to be used as a last resort, and this was done in spite of the violent protest of Mark Hopkins. Colton wrote Huntington:
I told him [Hopkins] I felt the wise thing for us all to do, was to stand in and protect all interests against the debts now owing, but to all agree not to incur any more, not to build any more road, or to buy any steamship, or property, either jointly or individually, until we got out of debt, and had the money in bank to pay for what we bought. That proposition just met his views, and he said that if I would agree that we would all live up to that, he would sign 20 of the blank notes, which he did, 10 of each.[255]
Conditions in California grew worse rather than better after the notes were sent, but those in the East improved, and the indorsed notes do not seem to have been used. Yet, of course, the large accumulation of floating indebtedness of the Central Pacific could not be hidden altogether, and the credit of the company was correspondingly impaired.[256]
Sale of Securities
The first successful negotiations for the sale of Central Pacific and Southern Pacific securities were initiated in 1878 with the firm of Speyer and Company, of New York, and resulted in two agreements, dated the 27th and 28th of January, 1880, respectively. On the former date Huntington agreed to deliver, on or before January 31, 1880, as might be demanded, 50,000 shares of the capital stock of the Central Pacific Railroad at 72, ex-dividend, to Roswell P. Flower, John D. Prince, and Daniel Probst, representing a syndicate formed for the purpose. In case the parties took the stock just referred to, Huntington agreed further to deliver 50,000 more shares within six months from the date of the agreement, at 77. In any event, and provided that the syndicate took the first 50,000 shares mentioned in the agreement, Huntington undertook that no other Central Pacific stock beyond a stipulated amount of 40,000 shares should be sold to any other parties for a period of seven months from the date of the agreement.[257]
The syndicate which took Central Pacific stock at this time seems to have considered the enterprise a speculation justified by the resumption of dividends by the company, and by the improving stock market conditions of the time. Mr. Probst said that the general market had become so strong in the latter part of 1879 that it was a good time to sell anything.[258] On conclusion of the agreement a regular stock market campaign was opened with the usual accompaniment of matched sales to give an appearance of activity.[259] The stock nevertheless steadily declined, and the option held by the syndicate to take a second block of shares was not exercised.
The day after the arrangement for the purchase of the Central Pacific stock was concluded, and partly because of its conclusion, Speyer and Company entered into a written contract with the Western Development Company, containing a variety of provisions which together show the factors upon which the value of Southern Pacific securities then depended in the eyes of eastern bankers. Under an agreement dated January 28, the Western Development Company agreed to sell to Speyer and Company $1,000,000 in Southern Pacific bonds, within ten days, at 86. Within the year it undertook, in addition, to sell, if Speyer and Company should wish to buy, an additional $4,000,000 in bonds, at 87.51, and a still further amount of $5,000,000 at 90. On their part, the Western Development and Southern Pacific companies agreed not to sell any of the said bonds within a year to others than Speyer and Company, and the Central Pacific agreed not to issue bonds under the mortgage in question, to exceed $40,000 per mile.
Terms of Contract with Bankers
The more important features of the agreement with Speyer and Company in 1878 were, however, the following, relating to the lease arrangements between the Central Pacific and the Southern Pacific. Under these provisions the Southern Pacific agreed to secure a new lease from the Central Pacific within three months, containing (1) a provision that the lease should continue five years from the 1st of May, 1879; (2) a provision that the lease should be extended if the Southern Pacific was not connected with the eastern system of railroads, on the 32d parallel, within five years, until such connection should be made, provided that the extension of time should not exceed five years; and (3) a provision that the Central Pacific should pay a rental under the lease, sufficient to cover interest.
The Southern Pacific also agreed with Speyer and Company that if at any time before the expiration of nine years from the date of the lease contemplated, a railroad should be extended so as to connect the railroad of the party of the first part with the eastern system of roads, and the Central Pacific Railroad Company should refuse to prorate with the party of the first part, then the party of the first part would, before the expiration of one year from the date of such refusal, fill up or cause to be filled up one of the two gaps then unfinished between Tres Pinos and Huron, and between Soledad and near Lerdo, whichever it might choose to build.
The Southern Pacific finally undertook to furnish to the parties of the third part, within ninety days from the execution of the agreement, the written opinion and certificate of the chief engineer of the Southern Pacific, that the line of road either between Tres Pinos and Huron or between Soledad and near Lerdo could be completed and put in running order within twelve months of the commencement of work thereon, and could be constructed for the bonds reserved per mile.
The stipulation in the agreements relating to the lease of the Southern Pacific to the Central Pacific, and those anticipating further construction along the coast route, are of special interest. It is evident that the credit of the Central Pacific and not that of the Southern Pacific was the basis of the whole transaction. At the time the contract was signed, the option to take Southern Pacific bonds at 86 and 90, respectively, was considered valuable, but in fact this option was not exercised.
Later Improvement
After 1880 financial conditions generally improved. The earnings of the Central Pacific-Southern Pacific roads were still subject to fluctuations, but for several years substantial dividends were declared, and the sale of large quantities of Central Pacific stock in Europe enabled the associates to reduce their commitments. Moreover, by 1883 the long delayed extension to The Needles was completed and the necessary outlay for new construction was greatly lessened. The year 1883 may be taken as the close of the construction period of the Huntington system. Henceforth, in the absence of special disaster, and subject to successful settlement of its indebtedness to the government, the solvency of the Central Pacific and Southern Pacific railroads may be said to have been assured. We may therefore at this point turn away from the more personal and financial aspects of the enterprise, to the consideration of certain important political matters with which the associates were long concerned.