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The Government and the Pacific Railroad

THE GOVERNMENT AND THE PACIFIC RAILROAD 1. Description of the original system.

2. The system that was built.

3. The roads were built by construction companies.

4. The operations of the Credit Mobilier.

5. The amount of public subsidies.

6. The reimbursement to the government.

7. The Thurman act for creating a sinking fund.

8. Its operation.

9. Amount of indebtedness of the companies.

10. Plans proposed for paying it.

11. Sale of the roads.

1. For many years it was strongly urged that a railway ought to be built across the continent to the Pacific Ocean.' In 1862 a charter was finally granted to aid in the construction of a railroad and a telegraph line from the Missouri River to the Pacific Ocean, and to secure to the Government the use of the same for postal, military and other purposes. It was proposed to construct a main line from an initial point on the one hundredth meridian of west longitude between the south margin of the val ley of the Republican River and the north margin of the valley of the Platte River, in the Territory of Nebraska, to the Pacific Coast near San Francisco, or the naviga ble waters of the Sacramento River. From the initial point two branches were to extend to Omaha and to Kansas City ; a branch also has to extend to Sioux City from the initial point or from some point on the Omaha branch, while other branches were to be built at various places, but converging at no considerable distance to the main line, westward. On the first plan is shown clearly what Congress intended to have built, and on the second the extent to which its intention was regarded in con structing this great enterprise.

2. The main line from Omaha to Sacramento was built with only a few changes, but the eastern line, as will be seen from the maps, varied considerably from the in tention of Congress. The Kansas Pacific, instead of forming an eastern branch of the main line, was extended almost due west from Kansas City to Denver, and only in a technical way complied with the law by connecting with the Northern Pacific at Cheyenne. The Sioux City branch was built by the Sioux City & Pacific Railway Company, and joined the Union Pacific at Fremont. The Atchison branch extended far enough to get its subsidy for loo miles, and then stopped. The unsubsidized Leavenworth and Platte River branches were built as designed by Congress.

3. This great system of railway was built by construc tion companies. They were not a new thing in the his tory of railroad operations, and since that time have been often formed to build railroads. The main line was built by two construction companies, one building the Central Pacific, which extended from Ogden to San Francisco, the other from Omaha to Ogden.

4. The eastern construction company was known as the Credit Mobilier. The company consisted of a body of men who owned the stock of the enterprise and sold the bonds issued by the Government, and also the bonds forming a prior lien, as will be hereafter explained. From the proceeds of these they built the road and put the remainder in their pockets as their profits. The scheme proved to be enormously profitable, as the cost of building the road was nothing like the amount of money granted by the Government together with the money accruing from the sale of the first mortgage bonds. To keep Congress silent and prevent an investigation, Oakes Ames, president of the construction company, and an accomplished scoundrel, having faith in the magical properties of this stock, distributed some of it among members of Congress. Nor was he disappointed, for they kept silent until the road had been completed, the bonds had been sold and all the proceeds well squeezed out. Then, after the completion of the mischief, an investiga tion was made, the scandal was brought to light—by far the worst of any in our legislative history.

5. To aid the undertaking, the United States granted to several companies a right of way 40o feet wide, through the public land, the right to take material for construction purposes from adjacent public lands, and twenty sections of public land for each mile of railroad constructed, except coal and other mineral lands and lands already pre-empted or otherwise sold. Further more, as rapidly as the lines were completed in sections of twenty miles, bonds were to be issued to the compa nies by the United States, running thirty years, with interest at 6 per cent., to the extent of $16,000 for each mile east of the eastern base of the Rocky Mountains, and west of the western base of the Sierra Nevada Moun tains, and $48,000 for each mile of the 15o west of the western base of the Rocky Mountains, and of the same number east of the western base of the Sierra Nevada, and $32,000 for each mile intervening between the two mountain sections of 15o miles. The total issue of bonds for the main line was not to exceed $5o,000,000. No bonds were to be issued in aiding the construction of the Leavenworth or of the Platte River branch, while the Atchison branch was to be subsidized only to the extent of Ioo miles of its line. The Government also authorized the companies to issue bonds for a similar amount, which would be a first mortgage on the railways. It was to take a second mortgage or lien on them for its advances ; it was also provided that at least 5 per cent. of the net earnings of each bond-aided company should be annually applied to extinguishing its debt to the United States, and one-half the compensation for services rendered to the Government. The companies were required to trans mit dispatches, mail, troops, ammunitions and Govern ment supplies at a reasonable compensation, and the Gov ernment was to be at all times preferred to private per sons in the rendering of these services.

6. The main line from Omaha to Sacramento had hardly been completed when the interest question arose. The interest on the Government bonds was payable semi annually, and the Government claimed that its pay ments of current interest ought to be reimbursed by the companies. The 5 per cent. of the net earnings and half compensation for Government services, reserved as above mentioned, proved to be much less than the current in terest, and, of course, unless this was paid by the com pany, the subsidy debt would increase. This question was finally decided by the Supreme Court of the United States. The companies were not required to pay the current interest, except to the extent of 5 per cent. of the net earnings and the half-compensation for Govern ment services. But what were the net earnings? The company urged that in determining them the interest on bonded indebtedness, expenses of the land grant, and for improvements, new equipment and the Government's half compensation should be deducted. The Supreme Court decided that the net earnings were to be determined by deducting from the gross earnings the ordinary expenses of organization and operation, expenditures made for bona-fide improvements and paid out of the earnings, but that no deduction should be made of interest on bonds or the half-compensation of the Government.

7. This decision was so disappointing that it gave rise to a law known as the Thurman act, passed in 1878. This provided that a sinking fund should be established into which should be paid the half-compensation for Gov ernment services formerly payable to the companies, be sides such an additional sum as added to the whole com pensation for Government services, and 5 per cent. of the net earnings, would make a sum equal to 25 per cent. of the net earnings. It was, however, further provided that the sum thus going into the sinking fund should not annually exceed $85o,000 for the Union Pacific and $1,2oo,00o for the Central Pacific. The half-com pensation originally reserved for the United States was still to be applied directly to the liquidation of the cur rent interest. The sinking fund was to be in charge of the Secretary of the Treasury, and invested in United States bonds, and the semi-annual interest on them was to be similarly invested. The sinking fund was to be held for the benefit of all creditors of the two companies. The net earnings were to be determined by deducting from the gross earnings the necessary expenditures of opera tion and repairs and interest on the first mortgage bonds, but not the interest on any other indebtedness. All sums due to the United States or paid into the sinking fund were to be a lien on the property of the companies, and no dividends were to be paid as long as they and the interest on the first mortgage bonds remained unpaid. This fund was declared constitutional by the Supreme Court of the United States.

8. The maximum payments into the sinking fund, however, were not attained in consequence of the low net earnings resulting from competition, commercial de pressions and other causes.

9. Again, some of the funds invested in bonds bore a high premium, while other portions were not invested. Second, the accumulation of unliquidated current interest steadily increased after 1878. The amount of the indebt edness of the two companies on June 3o, 1896, was 10. Three ways were proposed for dealing with the companies : First, the realization at once of as much of the debt as possible, and severing the relations between the Government and the railroads. In other words, to get as much as possible for the Government's indebted ness, either in cash or properly secured bonds, and retire immediately from all connection with these corporations. The second plan was to extend the time for paying the companies' debts, and maintain essentially the present relations, with the exception of realizing in the future a larger amount from its bonds. As a part of this plan it was proposed that new bonds should be issued bearing 2 and per cent. interest, which would reduce the burden to be borne by the companies. The third plan was for the United States to assume the burden and own and operate the railroads.

11. Each of these plans had friends and enemies. Happily, notwithstanding the enormously excessive cost of the roads, the Union Pacific was sold for its cost, in cluding interest, and likewise the Central Pacific. The purchasers of the Union Pacific paid in cash, the pur chasers of the other paid in bonds bearing 272 per cent. interest, one-tenth of the amount being redeemable an nually. But on the Denver branch, which was also sold to the purchasers of the Union Pacific, there was a loss. The people have much cause for rejoicing over their escape from a much greater loss, which, for many years, seemed inevitable. In this, as in so many other matters, the country has been aided by an unexpected turn in its favor.' For a more complete account, see article by J. P. Davis, S Annals of Am. Acad. 259, which contains references to the most important reports of Con gress. See also Ann. Rep. of Corn. of Railroads, and article by H. K. White, 2 Jour. of Polit. Econ., 424.

'See Ann. Rep. Secy. of Interior, 1896, 68. See this report for details of the indebtedness of the railroads, credits for services rendered, etc.

a brief account of the mode of settlement, see the re ports of the U. S. Attorney-General for 1898 and 1899.

bonds, companies, earnings, built and line