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Title: Chapters on the History of the Southern Pacific

Author: Stuart Daggett

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*** START OF THE PROJECT GUTENBERG EBOOK CHAPTERS ON
THE HISTORY OF THE SOUTHERN PACIFIC ***

“The Golden Gate”

CHAPTERS ON THE HISTORY
OF THE
Southern Pacific

By

STUART DAGGETT, Ph.D.
Professor of Railway Economics and Dean of the
College of Commerce, University of California;
Author of “Railroad Reorganization”

NEW YORK
THE RONALD PRESS COMPANY
1922

Copyright, 1922, by
The Ronald Press Company

PREFACE

So far as the author knows there is no published study which discusses
in detail the important business problems connected with the history of the
Southern Pacific Railroad lines. Most of the books which contain references
to the Southern Pacific or to the Central Pacific limit themselves to a few
chapters upon the romantic aspects of their construction. The few works
which treat of the later period confine themselves chiefly to particular
episodes in Southern Pacific history, often with the deliberate attempt to
discredit the railroad company. The truth is that most writers upon the
Southern Pacific have relied upon the reports of the United States Pacific
Railway Commission or on Bancroft’s “History of California,” and very
few have done original work from source material.
Yet the usable material dealing with the subject of Pacific railroads is
abundant. The Southern Pacific has left a broad trail in California. The
record of its doings is to be found in court reports; in state, city, and federal
records; in the public testimony, or still better, in the private letters of
owners or managers of company enterprises; in the reports of the company
itself and of its engineers or other representatives; in pamphlets without
number; in files of newspapers. It is true that much of the data is partisan
and unreliable as to details. Yet a partisan statement is serviceable if one
knows it to be partisan, and, if one has reliable information with which to
check the unreliable, the extent of partisan exaggeration in a given case
becomes itself a fact of no insignificant importance.
Most of the documents used in the following pages have been consulted
in one or another of three large collections: that of the Bancroft Library of
the University of California; that of the Hopkins’ Railway Library of
Stanford University; and that of the State Library at Sacramento. Use has
also been made of data in the office of the Secretary of State of California

and of the State Railroad Commission. In certain cases the manuscript has
been submitted to officials of the Southern Pacific Company for their
comment, or to shippers or business men who were believed to be well-
informed. The work has been more or less actively in progress over a period
of eight years so that there has been more than usual opportunity for
checking, comparison of views, and the testing of material. It is the author’s
hope that he has at least examined all the significant classes of information
on the particular subjects which he has discussed. With a subject so
extensive it is rarely, if ever, possible to reach all the fugitive literature, or
to consult all the living men from whom opinions or scraps of information
might be obtained. The most that can be said is that there has been a diligent
search, with good facilities, through a number of years.
The conclusions which the writer has himself reached with respect to
the political and business activities of the Southern Pacific in California, he
has explained in the book at length and will not now repeat. There is
claimed for them no more conclusiveness than the facts presented in each
particular case may justify, although the conclusions are free from
conscious bias, and the author’s own interests are engaged on neither side.
Acknowledgment is hereby made of the courtesies extended by the
libraries of Berkeley, Palo Alto, and Sacramento, and of the patient
attention which individuals have given to particular portions of the book.
Stuart Daggett
Berkeley, California,
February 1, 1922.

CONTENTS

Chapter Page
I Inception of the Project 3
II Resources for Construction—State and
Local Aid 21
III Federal Land Grants and Subsidies 45
IV Progress of Construction—Construction
Companies 65
V The Search for a Terminal 83
VI Acquisition of the California Pacific 104
VII Building of the Southern Pacific 119
VIII Organization of the Central Pacific-
Southern Pacific System From 1870 To
1893 140
IX The Case of David D. Colton 154
X Financial Difficulties from 1870 To 1879 169
XI The Railroad Commission of 1880 To 1883 181
XII The Southern Pacific and Politics 199
XIII Water Competition 222
XIV The Rate System of the Central Pacific 237
XV Local Rates in California 257
XVI The Transcontinental Tariff 275
XVII The Traffic Association of California 293

XVIII The San Francisco and San Joaquin Valley
Railway 317
XIX Operating Characteristics of the Southern
Pacific Lines 347
XX The Thurman Act 370
XXI Final Settlement of the Central Pacific
Indebtedness to the Government 395
XXII The Southern Pacific Merger Cases 425
XXIII Oil and Timber Land Litigation 441
XXIV Final Remarks 454

ILLUSTRATIONS

Page
“The Golden Gate” (Frontispiece)
Theodore Dehone Judah (opposite) 6
Sketch of train on the Sacramento Valley
Railroad 1860 ” 10
Leland Stanford ” 16
Henry P. Coon ” 32
Chas. Crocker ” 66
Summit Valley, Emigrant Mountain and
Railroad Pass ” 72
Summit tunnel before completion—Sierra
Nevada Mountains ” 80
Map of Oakland and Brooklyn 93
Boundaries of Railroad Tide-Land Grant, as proposed
in 1868 96
Map of California Pacific Railroad 106
Map showing northern end of the San Francisco and
San José Railroad in 1862 121
Proposed route of the Southern Pacific Railroad,
January 3, 1867 124
View south from over the San Fernando
tunnel—Southern Pacific Railroad (opposite) 128
David D. Colton ” 160

Mark Hopkins ” 176
George Stoneman ” 192
C. P. Huntington ” 208
Chart showing rates on second-class freight and on
grain in the Sacramento Valley, 1876 260
Chart showing rates on miscellaneous commodities in
the San Joaquin Valley, 1892 261
Diagram showing adjustment of freight rates between
San Francisco and Stockton, 1916 266
Diagram showing adjustment of freight rates between
San Francisco, Santa Rosa, and Sebastopol, 1916 268
Diagram showing adjustment of freight rates between
Los Angeles and points north and east of Los
Angeles, 1916 269
Map showing the line of the San Francisco and San
Joaquin Valley Railway, together with portions of
the systems of the Southern Pacific and of the
Atchison, Topeka and Santa Fé, 1898 325
Map showing mileage owned in 1913 by
the Central Pacific Railway and the
Southern Pacific Railroad (opposite) 432

CHAPTERS ON THE HISTORY
OF THE
Southern Pacific

CHAPTER I

INCEPTION OF THE PROJECT

Significance of the History
The history of the Southern Pacific and the railroad companies
connected with it affords one of the many examples in American economic
life of a great industrial organization built up from small beginnings within
the lifetime of one group of men. It is a story full of the interest which
attaches to constructive achievement in any line. When we remember that
as late as 1870 there was no railroad west of the Mississippi-Missouri River
except the Northern, Union, Kansas, and Central Pacific railroads, which
possessed a mileage as great as 300 miles, and when we recall that in 1860
the total railroad mileage of the states in this same territory amounted to
only 6,000 miles, we are able to form some idea of the successful energy
which created a system of 861 miles of railroad in the course of six and
one-half years, across an unsettled country, in the face of obstacles due to
climate, altitude, and distance from centers of traffic and of finance.
The history of the Southern Pacific is significant, however, for still
other reasons than because it illustrates what men can do in spite of serious
difficulties. The company’s record is important to the student of
transportation problems because there is embodied in it much of the
experience of the Pacific Coast with respect to railroad construction,
railroad finance, railroad rate-making, and the relation of railroad
corporations to the public at large, as represented by local, state, and
national governments. What the Pacific Coast, and what in particular the
state of California know, first hand, of the habits and policies of railroad

corporations, is mainly derived from contact with the Southern Pacific
Railroad and its auxiliary companies.
The narrative that follows is offered as a contribution from the far
western portion of the United States which may help to explain the attitude
of that section toward transportation matters; as well as an account of some
phases of the earlier development of a railroad system which is now one of
the most powerful in all the country, whether we compare this system with
the railroads of the East or with those of the West.
The Southern Pacific system today embraces lines from Ogden and
New Orleans on the east, to Portland, San Francisco, and Los Angeles on
the west. The part of the system first built, however, and at all times the
most important part of it, is that section reaching from a few miles west of
Ogden, Utah, to the cities of Sacramento and San Francisco. This portion of
the larger system was built and is owned by the Central Pacific Railroad
Company.[1] It is therefore to the circumstances attending the construction
of this portion of the line that attention will first be directed.

Early Activities of Theodore Dehone Judah
The promoter of the Central Pacific Railroad was a young engineer
named Theodore Dehone Judah. Judah was born in Bridgeport,
Connecticut. He obtained his first experience in railroad building on the
Troy and Schenectady Railroad in New York. Later he built a railroad down
the gorge of the Niagara River to Lewiston, served as resident engineer on
the Erie Canal, and in 1854 had charge of the Buffalo and New York
Railroad then building to connect with the Erie. This was a responsible
position for a man with so brief a period of training. When Judah came to
California in 1854 he was only twenty-eight years of age. He was soon to
make it evident, however, that he possessed more than respectable
engineering ability, while he also displayed a capacity for sustained
enthusiasm in connection with the project for a transcontinental railroad
which eventually overcame all obstacles and resulted in the formulation of
definite and successful plans for a transcontinental line.[2]
Judah began work in California as engineer of the Sacramento Valley
Railroad. He left the service of the company, however, before the road was
finished to Folsom. Subsequently he made a survey for a railroad from
Sacramento to Benicia, and also one for a short branch on the California

Central Railroad. Still later he was employed by the trustee of the
Sacramento Valley Railroad, J. Mora Moss, and the superintendent, J. P.
Robinson, to explore the Sierra Nevada Mountains for wagon road routes
north of the south fork of the American River, and at the same time to act as
agent for the Sacramento Valley Railroad in soliciting freight.
Details of Judah’s activities between 1854 and 1860 are difficult to
obtain. We know that he visited Washington in order to procure the passage
of a bill making grants of land to California for railroad purposes. In 1859
he was the delegate from Sacramento to the Pacific Railroad Convention,
where he urged the importance of a thorough survey before any decision
should be made regarding the route of a transcontinental railroad. When the
convention adjourned he was sent to Washington at his own expense to urge
the passage of a bill such as the convention favored. He returned in 1860
without having accomplished his purpose, but convinced that Congress was
in favor of granting federal aid to a railroad to California from the East, and
that it would act when more important matters had been disposed of.[3]

Discovery of Transcontinental Route
It was after Judah’s return from Washington in 1860 that he undertook
the explorations for the Sacramento Valley Railroad to which reference has
been made. Doubtless while engaged on this work he visited Dutch Flat,
and doubtless also his enthusiasm for a transcontinental railroad became
generally known. Judah was no mountaineer, but he could readily profit by
the knowledge of men acquainted with the country. Such a man he found in
Daniel W. Strong, a druggist at Dutch Flat, who accompanied him on his
explorations. We have Strong’s statement that he himself conceived the idea
that immigrant travel could be diverted through the Dutch Flat country by
the construction of a railroad, and that he hired assistants, made a
reconnaissance, and found a continuous divide over which he thought a
road could pass. Knowing that Mr. Judah was trying to find a pass over the
mountains, he wrote to him, and Judah came from Sacramento to Dutch
Flat. Strong says that he showed Judah the route he had discovered, and that
Judah thought well of it.[4]

Theodore Dehone Judah

Such is Strong’s testimony given years afterwards, when the Central
Pacific had proved a success, and it was a distinction to have been
connected with it. It is possible that Strong overestimated his contribution
to the work. Yet the essential fact is that Judah was in the mountains in
August, 1860, and that he or Strong, or both of them hit upon a route which
Judah pronounced practicable. One may hazard the guess that Strong
pointed out a pass and Judah tested it with instruments.[5] Mrs. Judah
repeats the story as she heard it:
It was in the drug store of Dr. Strong at Dutch Flat that the first profile was marked out
from notes taken by them (Judah and Strong). Judah could not sleep or rest after they got
into town and the store, till he had stretched his paper on the counter and made his figures

thereon. Then, turning to Dr. Strong, [he] said for the first time, “Doctor, I shall make my
survey over this, the Donner Pass, or Dutch Flat route, above every other.”[6]

Appeal for Funds
Judah drew up articles of association for a company late in 1860, and
endeavored to get subscriptions for stock, but without much success.
Meanwhile, the publication in the newspapers of information relating to the
Dutch Flat route cost him his position with the Sacramento Valley Railroad,
for the trustee of the company, J. Mora Moss, took the position that the
information acquired by Judah while an employee of the Sacramento Valley
belonged to the railroad company, and should not have been published
without its consent. It is said that Judah was very indignant, but to no avail.
[7]

By October or November, 1860, the record thus shows that Judah had
satisfied himself of the existence of a railroad route across the Sierras, and
that he was intensely interested in having this railroad built. He was not
personally a man of capital, although not entirely without means, and
success in transforming his bare project into an actual operating line
depended entirely upon the financial support which he could obtain. In
November, accordingly, we find Judah endeavoring to give wide circulation
to the results of his discoveries.
Under date of November 1, 1860, a circular letter was issued directing
the attention of the public to “some newly discovered facts with reference
to the route of the Pacific Railroad through California.” This letter asserted
that a practicable line had been discovered “from the city of Sacramento
upon the divide between Bear River and North Fork of the American, via
Illinois Town and Dutch Flat, through Lake Pass on the Truckee River,
which gives nearly a direct line to Washoe, with maximum grades of 100
feet per mile.” The estimated length of line in California was 115 miles. It
was said that if the Pacific Railroad bill then pending in Congress should be
passed, providing an appropriation of $13,000 per mile from the navigable
waters of the Sacramento River to the base of the Sierra Nevadas; thence
$24,000 per mile to the summit; thence an additional $3,000 per mile for
each degree of longitude crossed until the 109th degree was reached, the
entire road could be graded without appeal to private investors, leaving only
the iron, rolling stock, etc., to be provided from private means. The
projected railroad might connect with the Sacramento Valley Railroad at

Folsom, or with the California Central Railroad at Lincoln. Subscriptions
were asked to an amount of $1,000 per mile for 115 miles, with 10 per cent
paid in, to allow the organization of a company under the state law; and it
was promised that the money subscribed would be used to make a thorough,
practical railroad survey.[8]
In a letter dated the previous day, and addressed to John C. Burck,
member of Congress from California, Judah added a few details:
We go out of Summit Valley through what I call Lake Pass, while Fremont’s route, or
the old Emigrant road, goes over Truckee Pass, which is about 700 feet higher, and a few
miles off my route. We strike the foot of Truckee Lake, or the cabins of the Donner party,
nine miles from the summit, and from there it is an easy grade down the Truckee River,
descending about 40 feet per mile, over a smooth country. The elevation of the pass is
6,690 feet. There are two other passes leading out of Summit Valley, which I had not time
to explore, but either of them are practicable, although a little higher. This route is at least
150 miles shorter than the Beckwourth route; crosses the state at the narrowest point, and is
on a direct line to the Washoe mines. I will undertake to build a railroad over this route in
two years, for $70,000 per mile, from Sacramento City to the state line or Washoe. Thus
the question of crossing the Sierra Nevada, I consider solved.

After the tentative organization of his proposed railroad, and the
publication of the news of his discoveries in the newspapers, Judah went to
San Francisco. He managed to get in touch with some capitalists, but was
unable to secure their support. If Congress did not pass a Pacific Railroad
bill, they said, no railroad could be built; if a bill was passed, the road still
could not be completed for ten or twenty years. They had other interests,
and were disinclined to consider a scheme of this sort, however technically
feasible. If we may believe the newspapers of the time, no inconsiderable
reason for the reluctance of the men approached was the provision of the
constitution of California making stockholders liable for their proportion of
all the debts and liabilities of any company in which they held stock.[9]

Sacramento Meetings
When he failed to secure support in San Francisco, Judah went to
Sacramento. The city of the plains, as it was then affectionately called by its
inhabitants, was less wealthy than San Francisco, but for that very reason
might be expected to take an interest in a project which promised her, for
some years at least, a position of relative advantage with respect to the trade
of the interior. The leading newspaper in that city, the Sacramento Union,
could be counted on to support any plausible Pacific railroad scheme for

political reasons. The citizens had further the advantage of first-hand
experience with the workings of the Sacramento Valley Railroad, which had
been opened from Sacramento to Folsom in 1856, and was still the only
railroad in the state.
It does not, however, appear that these various factors stirred the people
of Sacramento to any extraordinary enthusiasm over Judah’s scheme, or that
they regarded him in any other light than that of an engineer with a risky
plan, which it was very desirable to have someone other than themselves
finance. Judah, however, called a meeting at a local hotel, and people came.
He told them he had made twenty-three barometrical reconnaissances over
the Sierras, and had found a line. He needed money to carry the project
further, in particular to make a thorough instrumental survey, and he asked
them what they would subscribe. Nobody subscribed very much.
Huntington says that some gave a barrel of flour, and some a sack of
potatoes. Still, the additional subscriptions necessary to the legal
organization of Judah’s company probably amounted to as much as
$56,500[10] on the 115 miles of line contemplated, and small miscellaneous
offerings were not likely to carry the promoter very far.

Collis P. Huntington
It is at this juncture that we first hear the names of Collis P. Huntington,
Leland Stanford, Charles Crocker, and Mark Hopkins, all prosperous
business men in Sacramento. Huntington and Hopkins ran one of the largest
hardware stores in the town. Stanford and Crocker were merchants, and in
addition, Stanford had dabbled in California politics to the extent of
becoming a candidate for the position of state treasurer in 1857 and for that
of governor in 1859, getting badly beaten on both occasions. It is difficult,
even at this late date, to estimate the qualities of the four men with
confidence. Beyond question, Huntington had the greatest genius for
business of the four. Born in Connecticut, and self-supporting from the age
of fourteen, he was a trader par excellence. In his youth he peddled watch
findings from New York to the Missouri River. Later, it is related of him
that he started for California with a capital of $1,200, which he increased to
$4,000 during an enforced stay of three months on the Isthmus of Panama.
He was cool, calculating, unscrupulous, a tireless worker, and a man with
few interests outside of work. Enterprise for the public good interested him

little. He had few friends, and some of these he lost in later years. Narrow
in his sympathies, vindictive, sometimes untruthful, sarcastic, and
domineering, he gained his success through the keenness of his mind and
the energy and persistence of his character, and also through qualities of
courage and imagination which were not absent from his business plans.

Sketch of train on the Sacramento Valley Railroad, 1860

Leland Stanford
Stanford was a New York lawyer, who had practiced four years in
Wisconsin between 1848 and 1852, and had emigrated to California in the
last-named year to seek his fortunes in that state. Stanford came to
California poor as the proverbial church mouse. Bassett, who was later his
secretary, and who was likely to know the facts, says that two of Stanford’s
brothers set him up in business in El Dorado County, near Latrobe, with a
stock of miners’ supplies. Here Stanford remained a while, in partnership
with a man named Smith. Stanford and Smith were said to have done a
good business. They thought they were making money until they found that
the San Francisco firm with which they dealt was charging them interest on
unpaid balances; whereupon they promptly closed up, retiring with their
debts paid, but with very little cash.
From El Dorado County Stanford went to Michigan Bluffs, in Placer
County, still trading, and in 1855 he moved to Sacramento to take over the
business which his brothers had established there. Presumably his
operations in Michigan Bluffs had provided him with a little capital. What
was quite as much to the point, he had made a number of friends in the
mining district, and it is not unreasonable to suppose that his attention had
been directed toward politics. In 1857 and 1859, as has been mentioned, he
ran for office, but without success. About this time a prospector in the

vicinity of Auburn struck a rich pocket of decayed quartz. He knew
Stanford, and put his name down for an interest in the claim. From this
mine Stanford is reported to have cleaned up about $60,000, a sum which
put him in comparatively easy circumstances. In 1861 Stanford ran again
for the office of governor, and this time was elected on the Republican
ticket. He cannot be said to have yet shown any talent for statesmanship,
but he was known as a staunch Union man and a faithful Republican, and
he had a local popularity besides, which could be trusted to bring in some
votes. After his term of office as governor, Stanford held no political
position until 1885, when he was elected United States senator in place of
A. A. Sargent. This office he retained until his death. He appears at one time
to have had aspirations towards the presidency of the United States, though
his candidacy could hardly have been considered seriously. Certainly he
served with distinction neither as governor nor as senator.
Stanford’s most marked traits were tenacity of purpose, and a certain
rude energy in execution. His associates credited him with great solidity of
judgment. Like Huntington, he was unscrupulous in the methods which he
employed to reach his ends, but, unlike him, he showed ambition if not
capacity outside of the business field. In private life, Stanford was
distinguished by his love of horses, and by his donations to the university
founded in memory of his son. One must hold him inferior to Huntington in
business affairs, vain and extravagant. Yet not only his political influence,
but the virile power of the man, the attitude of mind which once led an
enemy to say of him that “no she lion defending her whelps or a bear her
cubs, will make a more savage fight than will Mr. Stanford in defense of his
material interests,” were invaluable to the transcontinental railroad project
in the years of its development.[11]

Crocker and Hopkins
The other two members of the quartette may be dismissed with fewer
words. Charles Crocker had no more education than Huntington. He had
been peddler, iron maker, gold miner, and trader. In 1855 he was alderman
of the city of Sacramento. First and last, his strong point was the handling
of men. It was Crocker who drove the work of construction, roaring up and
down the line, as he put it, like a mad bull. In deciding the larger problems
of policy which arose later, there is no evidence that he had an important

part. Indeed, Crocker endeavored to sell his holdings to his associates in
1871, and only continued in the organization because the others proved
unable to buy him out.[12]
Last of all, we have to mention Mark Hopkins, the “inside man.”
Hopkins died in 1878, so that his connection with railroad work lasted only
fourteen years, and during part of this time he was ill. Less is known of him
than of any of his associates. He was the man of detail, the careful
scrutinizer of contracts. He was Huntington’s partner in the hardware
business for twenty-four years, and yet in all that time, according to
Huntington, he never bought or sold as much as $10,000 worth of goods.[13]
That is to say, he was no trader. Bancroft speaks of him as the balance
wheel in the business. We hear of him later as objecting to personal
indorsements by the partners of Central Pacific notes. Mr. Crocker once
said of him that he was a long-headed man without much executive ability
but a wonderfully good man for an executive officer to counsel with.
Possibly such a man played a useful part in the Central Pacific organization.

Survey Financed
Huntington, Stanford, Hopkins, and Crocker knew each other as
merchants will. Crocker and Stanford may also have met in a political way.
The four of them seem to have been friends, at least as early as 1860. Now
it appears that Huntington and Crocker, and possibly Stanford and Hopkins
also, attended one of Judah’s meetings in Sacramento, and were somewhat
impressed by his statements. This was the second stage in the Central
Pacific enterprise, when the promoter was in the presence of capitalists, and
was seeking to convince them that a probability of profit lay in his plans.
Huntington says that he spoke to Judah after the public meeting, and that
Judah came to his house the following evening. He adds that subsequently
he, Huntington, talked with Hopkins and Stanford, and persuaded them to
join him in contributing the money necessary to finance an instrumental
survey across the mountains. Other persons who agreed to share in the
expense were Charles Marsh, James Peel, L. A. Booth, and Judah himself—
each assuming one-seventh of the cost.[14] Charles Crocker was brought in a
little later.
The attitude of all these men was of course cautious. Judah had caught
their attention, but as yet they would not commit themselves very far. The

survey might cost them fifteen or twenty thousand dollars apiece, and they
might never go further with the scheme. They thought they could build a
railroad if anyone could, and there might be money in it, yet they knew that
even to finance surveys involved considerable risk.[15]

Likelihood of Government Aid
Although we have no direct evidence to this effect, it seems very
probable that the chance of profit to be secured in building a
transcontinental railroad under government auspices stood out more
prominently in the eyes of Huntington and his friends than any
consideration of the ultimate earnings of the railroad, once it should have
been built. What should two dry goods merchants and two dealers in
hardware, who knew nothing first hand about railroad operation, have cared
about the administration of a railroad 800 miles long? If they wanted
interest on an investment, why money commanded 2 per cent a month in
Sacramento itself. Only the prospect of still greater gains was likely to
attract a speculative trader like Huntington, and the source of such profit
could be found only in construction of the road. If this was the real
inducement, and if the likelihood of a government subsidy was kept in mind
from the first, it was fortunate for Mr. Judah that, owing to his familiarity
with conditions both at Washington and in California, he was in a position
to inform his prospective clients of the likelihood of government aid no less
fully and authoritatively than he could advise them concerning routes over
the Sierras.
Indeed it was only on the question of government assistance that Judah
could supply business men of Sacramento with information of a definite
sort. He really knew little about the probable cost of a transcontinental line.
In his original report of November, 1860, he had declared that the Central
Pacific could be built for an appropriation ranging from $30,000 to $72,000
per mile, varying with the difficulty of the ground; but this was an estimate
based on a very cursory examination of the line, and could pretend to no
exactness. Possibly he was influenced by the fact that the Sacramento
Valley Railroad had been contracted for in 1854 at $45,000 per mile,
payable 44 per cent in capital stock of the company, 39 per cent in 10 per
cent bonds, and 17 per cent in cash. This was equivalent to perhaps $33,000
in cash. The contract price in this case did not include, however, the cost of

right-of-way, depot grounds, and engineering expenses, for which
additional stock was reserved.[16] Only one year later, when the first
instrumental survey of the Central Pacific was completed, Judah was forced
to change his estimate to $88,428 per mile for the first 140 miles of that
railroad, including 51 miles estimated at $1,000,000 per mile or above.
Even these figures were later revised.

Estimating Probable Earnings
Nor was Judah’s information about probable earnings a great deal more
trustworthy than that relating to probable costs. There are various ways of
estimating the earnings which a new railroad is likely to secure—yet all of
them may give curious results when applied to territory which has never
enjoyed the benefits of any rail transportation at all, as was substantially the
case with California before the Civil War. In general, engineers in
California had to reckon with the facts that the population of the state was
small; that it had only three cities of importance—San Francisco,
Sacramento, and Stockton; that there was but one important business,
mining; and that a dense traffic could accordingly be expected only in the
distant future after the development of the country served. As a practical
expedient most engineers in California who desired elaborate data had some
more or less careful count made of the business moving over their projected
route by pack train, wagon train, stage, or boat, and then made the broad
assumption that this same volume, or this volume increased by an assumed
factor, would move over a railroad during its early years. Such was the
nature of the estimate made by the incorporators of the Sacramento Valley
Railroad in 1853,[17] of the Stockton and Copperopolis in 1862,[18] of the
Placerville and Sacramento Valley Railroad in 1863,[19] and of the North
Pacific Coast in 1873.[20] Judah had no greater facilities than other
engineers of the time, and in his own estimates followed the prevailing
custom.[21]

Estimates of this nature were not accurate, and it was unreasonable to
suppose that they should be accurate. Judah in 1862 put the probable gross
receipts of the Central Pacific on the first 160 miles out of Sacramento at
$4,654,240, or $29,089 per mile. Mr. Montague, who succeeded him,
estimated the annual receipts as far as Dutch Flat at $27,209 per mile and
for the whole road, as far as Nevada Territory, he named the figures of
$5,456,050, or $34,100 per mile. These were very optimistic figures. As a
matter of fact, the earnings of the Central Pacific never much exceeded
$14,000 a mile, and during the early period, up to 1870, were as often
below $10,000 a mile as they were above it. If it had not been for an
operating ratio which in 1866 and 1867 touched the extraordinary figure of
23 per cent, and which did not reach 50 per cent until 1877, the owners of
this road could scarcely have kept it out of receivers’ hands, so great was
the miscalculation.

Organization of Company
We may assume, then, that Huntington and his friends went into the
Central Pacific project as a speculation from which they hoped to retire
with a profit derived largely from construction paid for out of government
funds. Adopting this assumption, the next steps in advancing the enterprise
may be briefly described. The meetings in Sacramento which have been
mentioned took place in the winter of 1860-61. No progress in surveys
could be made at that time, while the Sierra passes were covered with snow.
In April, however, a meeting of subscribers to the stock of the Central
Pacific Railroad was held in Sacramento, and on the 28th of June, 1861, a
company was organized under the general law of the state, to be known as
the Central Pacific Railroad of California. The capital of this corporation
was set at $8,500,000, divided into shares of $100 each. The railroad
contemplated was to run from Sacramento to the eastern boundary of
California, over an estimated distance of 115 miles. Huntington, Hopkins,
Stanford, and Crocker subscribed to 150 shares each, as did James Bailey
and Theodore Judah. Charles Marsh took 50 shares, and other parties
varying, but lesser amounts, to a total of 1,245 shares, or more than the
$1,000 per mile required by the law. Leland Stanford, Charles Crocker,
James Bailey, Theodore D. Judah, L. A. Booth, C. P. Huntington, Mark
Hopkins, D. W. Strong, and Charles Marsh were the first directors.

Instrumental Survey Made
As soon as the season permitted, Judah was sent back into the
mountains, and in October, 1861, the directors had before them the
substance of his second report, this time based on an instrumental survey.
Judah now thought that a railroad from Sacramento to the state line would
cost $12,380,000, or $88,428 per mile. He did not push his surveys beyond
the point at which he reached the Truckee River, but from his general
knowledge of the country he estimated that the 451 miles between Lassen’s
Meadows and Salt Lake could be built for $45,000 per mile, and that the
whole road of 733 miles could be constructed for $41,415,000, or an
average of $56,500 per mile.[22]
In every way this second report was a more careful piece of work than
the one which had preceded it. The new route differed from that
recommended in November, 1860, mainly in that it ran from Sacramento

through Lincoln and Centralia instead of through Folsom, and also in the
greater detail of its location. The principal characteristics of the line were
two: (1) that it followed a nearly continuous ridge from Lincoln to the
summit of the mountains, and (2) that east of the summit the road wound
down the side of the mountain to Lake Truckee, following the Truckee
River from the lake in the direction of Humbolt Sink, and entirely avoiding
the second summit of the Sierras and the crossing of the Washoe Mountains.
This is substantially the line of the Central Pacific today. The maximum
grade which Judah allowed himself was 105 feet to the mile. Judah did not
at this time re-examine alternative routes via Georgetown and via Henness
Pass, which he had considered and rejected the previous fall. Nor did he
refer to the line via Beckwourth’s Pass, the present route of the Western
Pacific, which he later admitted to be easier in grade, if longer in distance,
or to the possibility of a route directly east from Folsom via Placerville
around the south end of Lake Tahoe. It is probable, however, that these two
last-named routes were familiar to him in a general way, as considerable
quantities of freight consigned to the Nevada mines were already moving
over them.
Emphasis should be laid upon Judah’s survey of October, 1861, because
the continuance of the Sacramento capitalists in the enterprise depended
upon its favorable outcome. After it was completed Huntington and his
friends became, on the whole and except during certain intervals of
weakness, inclined to see the project through even at the risk of their
personal fortunes, provided reasonable government assistance could be
secured. It was with this understanding that Judah went back to Washington
in 1861 to procure the passage of needed legislation, and it was in this spirit
that a formal beginning of construction upon the Central Pacific was made
at Sacramento on January 8, 1863.

CHAPTER II

RESOURCES FOR CONSTRUCTION—STATE
AND LOCAL AID

Source of Funds
Some years after the Central Pacific and Western Pacific railroads were
completed, Leland Stanford laid before a committee chosen by Congress
the following memorandum showing the receipts of these two roads from
all sources up to December 31, 1869:

Memorandum Showing the Receipts of the Central and Western Pacific
Railroads from All Sources to December 31, 1869

Approximate
Par Sum
Source of Funds Value Realized
United States bonds issued to Central
and Western Pacific $27,855,680 $20,735,000
Central and Western Pacific first
mortgage bonds 27,855,560 20,750,000
Central Pacific convertible bonds 1,483,000 830,000
Central Pacific state aid bonds 1,500,000 980,000
City and County bonds:
San Francisco to Central Pacific 400,000 300,000
Sacramento to Central Pacific 300,000 190,000

Placer County to Central Pacific 250,000 160,000
San Francisco to Western Pacific 250,000 175,000
San Joaquin County to Western
Pacific 250,000
125,000
Santa Clara County to Western Pacific 150,000
100,000
Land sales, balance Central Pacific 107,000
Profit and loss balance, January 1, 1870 1,610,000
————— —————
Total $46,062,000
Company owed Contract and Finance Company 1,827,000
—————
Grand total $47,889,000

We have in the foregoing table a summation of the resources on which
Judah and the Huntington group were able to draw in order to build a
transcontinental road. It will be noticed that there is no mention in the table
of the personal fortunes of the associates, unless the contribution of these
gentlemen appears in the profit and loss balance, or in the debt to the
Contract and Finance Company—none of the earnings of the railroad
during construction, and none of the proceeds of the sale of Central Pacific
capital stock. Under these categories some slight addition to Stanford’s list
must probably be made, though the importance of the addition will not be
great.
Collectively the fortunes of the associates, while considerable, were not
sufficient to cover more than the preliminary expenses of the work. Judah
had but little capital, while, according to Huntington’s own statement some
years later, the combined assets of Stanford, Crocker, and the firm of
Huntington and Hopkins, amounted to something like $1,000,000 when the
construction of the Central Pacific was begun.[23] Other estimates put the
figure at $160,000,[24] or even as low as $109,000.[25] We do not know, as a
matter of fact, how much property the associates possessed, but we do
know that it was slight compared with the undertaking which they had in
hand.

Earnings and Stock Issues
Probably, indeed, the earnings of the Central Pacific Railroad during
construction were more important than the contributions of the partners.
Between 1863 and 1869, according to the calculations of the United States
Pacific Railway Commission, the gross earnings of the Central Pacific
amounted to $10,807,508.76, its operating expenses to $4,700,625.56, and
its net earnings to $6,106,884.20. The surplus after the deduction of interest
and taxes for this period amounted to $2,427,533.80.[26] Most of these
earnings came from local business, although an attempt was made to
provide facilities for through travel before 1869, by arranging stage
accommodation for stretches not yet covered by rails.
If we add three or four million dollars to the receipts listed in Stanford’s
table, we shall have made liberal allowance for railroad earnings and
partnership contributions up to 1869. This allowance would not be
materially increased if account were taken of sales of Central Pacific stock.
The authorized stock issue of the Central Pacific Railroad in 1862 was
$8,500,000. In 1864 this was raised to $20,000,000, and in 1868 it was
made $100,000,000. In spite of these large issues, the evidence is perfectly
clear that there were substantially no cash subscriptions to Central Pacific
stock, nor any market for this stock when issued. It is on record, for
example, that one M. D. Boruck opened an office at the corner of Bush and
Montgomery streets in San Francisco on behalf of the company, and kept it
open, off and on, for about twenty-two days in November and December,
1862, and in February, 1863. He secured three subscriptions to an aggregate
of twelve or fifteen shares.[27]
We know also that Crocker went personally to Virginia City to sell
stock, but without success. He says of this experience:
They wanted to know what I expected the road would earn. I said I did not know,
though it would earn good interest on the money invested, especially to those who went in
at bed rock. “Well,” they said, “do you think it will make 2 per cent a month?” “No,” said
I, “I do not.” “Well,” they answered, “we can get 2 per cent a month for our money here,”
and they would not think of going into a speculation that would not promise that at once.
[28]

Stanford says that he bought 2,300 shares of Central Pacific at ten cents
on the dollar at one time, in order to accommodate a stockholder,[29] and it
appears that Charles and A. B. Crocker transferred their stock to

Huntington, Hopkins, and Stanford in 1873, for $13 a share.[30] No attempt
to sell Central Pacific stock generally was made until 1873, and it was not
listed on the Stock Exchange until 1874.[31]

Bond Sales
As a matter of fact, there was no sale at the beginning even for Central
Pacific mortgage bonds. Huntington went to New York to get these
securities started among the moneyed men there, and after a while he had
some small success. But D. O. Mills gave it as his deliberate judgment on a
later occasion that there was the greatest difficulty in securing loans on the
bonds the Central Pacific had to offer—including government, county,
convertible, state aid, and first mortgage bonds—to as much as 75 per cent
of the face value of the issues.[32] Iron for the first 50 miles out of
Sacramento was delivered to the associates only after they had given their
own personal obligations secured by deposit of the company’s bonds. An
agreement was entered into, besides, that Huntington and his friends would
be responsible, as individuals, for ten years, for the payment of interest on
these bonds.[33]
After 1864 conditions improved somewhat, and first mortgage bonds
were disposed of at about 75, while convertible and state aid bonds brought
56 and 65 respectively.[34] Yet at the time when the construction of the
Central Pacific Railroad was finished the private property of every one of
the directors of the company was mortgaged up to the limit of all his
individual credit would possibly allow and bear. The notes of the four
associates were outstanding everywhere, many of them bearing interest
rates as high as from 10 to 12 per cent, and the statement is made that
Leland Stanford alone upon one occasion had his account at the bank
overdrawn to the extent of $1,300,000.[35]
The consideration of possible Central Pacific Railroad receipts, other
than those derived from government aid and perhaps from the sale of the
company’s first mortgage bonds, brings us back to Stanford’s list as
containing substantially all the assets upon which the promoters of the
Central Pacific were able to rely. Almost half of these assets were derived
directly from political bodies of one type or another, and the value of the
remainder of those assets was dependent for the most part upon the security
which was afforded by the government donations made to the company.

State and Local Grants
Let us now consider with more care the circumstances under which the
local and federal authorities extended such generous aid to the
transcontinental project, and the extent and quality of the aid given. We may
begin with the state and local grants, and in order to assist the reader, a
portion of the table which was printed on page 21 will be set forth again at
this point in slightly changed form. As thus presented the table is as
follows:
Aid Derived by Central and Western Pacific Railroads From State
and Local Governments in California

Approximate
Par Sum
Source of Aid Value Realized
Aid by Cities:
San Francisco, donation to Central
Pacific $400,000 $300,000
Sacramento, subscription to Central
Pacific 300,000 190,000
San Francisco, donation to Western
Pacific 250,000 175,000
Aid by Counties:
Placer County, subscription to Central
Pacific 250,000 160,000
San Joaquin County, subscription to
Western Pacific 250,000 125,000
Santa Clara County, subscription to
Western Pacific 150,000 100,000
Aid by State:
Assumption of interest for twenty years
on $1,500,000 7 per cent bonds.

Arguments for Local Aid

Aid from local political bodies was considered legitimate in the early
sixties, and was extended freely to a great number of corporations. Voters
were told that the construction of railroads increased land values. Until
transportation should be improved, it was argued, agriculture could make
but little progress, because the products of agriculture could not be brought
to market. The mining interest was depressed in 1870, and in partial
explanation publicists pointed out that freight charges to the mines ranged
from $50 to $180 a ton. Nor was even more precise calculation lacking. An
advocate of subsidies in 1870 stated:
It costs for passage to San Francisco from Visalia $25 and consumes generally a day and
a half. By rail the trip could be made in eight hours, at a cost of $10, thus saving $15 and
nearly a day in time. If on the average, each adult makes one visit per annum to the upper
country, and taking 1,300, the number of registered voters, as the adult population, it costs
every passenger for the round trip $50 in cash and three days in time—excess over railway
fare, $30; board for two extra days, $4; value of time at $2 per day, $4; total excess, $38;
total loss to 1,300 passengers, $49,400. I contend, therefore, that the people of Tulare
County are now actually paying, in addition to the loss or inconvenience resulting from
isolation from market, the sum of $77,780 per annum, for the privilege of being without a
railroad.

There was little that was novel in this sort of argument, or in the further
contention that the increase of the tax roll of the counties, due to railroad
construction, would yield a revenue more than sufficient to cover the taxes
incident to the granting of a subsidy. Better transportation meant wider
markets, denser population, higher values. Increasing values and volume of
sales meant larger profits, higher wages, lower prices, and generally
growing prosperity. These things were matters of reasonable anticipation, so
that hard-headed business men had quite as much ground as usually
underlies business action to approve of even a considerable pledge of state
and county property in order to hasten the building of a railroad system. It
could not be known whether or not railways would be constructed without
subsidies. As we look at the situation today it seems probable that this
would have been done, and that railroad building would not even have been
greatly delayed. The risk in waiting was, however, great, and the difficulties
of a conservative policy were enhanced by the competition of towns, each
seeking priority of railroad connection.

Playing Towns Against Each Other

There is evidence that the promoters of the Central Pacific were
perfectly aware of the possibilities of securing local subsidies by playing
one California town against another. Huntington wrote David D. Colton in
1871 that the company ought to get a large amount of land and other good
things from parties having interests along the line between Spadra and San
Gregorio Pass, if it would build them a railroad on which to get out.[36] T.
G. Phelps, president of the Southern Pacific, speaking in the same vein, told
Colonel Baker, of Tulare, that it was his private opinion that if that county
would donate $100,000 to the company, it would run its road through the
town of Visalia. We also know that pressure was brought to bear upon the
city of Stockton, to induce that city to grant a right-of-way, as well as other
privileges, to the Western Pacific,[37] and it is notorious that the fears of San
Francisco were played upon in order to obtain terminal facilities on San
Francisco Bay.
How this policy appeared from the point of view of the opponents of the
Central Pacific, may be gathered from a description offered by a member of
the Constitutional Convention of 1878:
They start out their railway track and survey their line near a thriving village. They go to
the most prominent citizens of that village and say, “If you will give us so many thousand
dollars we will run through here; if you do not we will run by,” and in every instance where
the subsidy was not granted, that course was taken, and the effect was just as they said, to
kill off the little town. Here was the town of Paradise, in Stanislaus County; because they
did not get what they wanted, they established another town 4 miles from there. In every
instance where they were refused a subsidy, in money, unless their terms were acceded to,
they have established a depot near to the place, and always have frozen them out. As stated
by the gentleman from Los Angeles, General Howard, they have blackmailed Los Angeles
County $230,000 as a condition of doing that which the law compelled them to do.

County Stock Subscriptions
Perhaps the earliest California statute in aid of railway construction was
the act approved May 1, 1852, granting to the United States a right-of-way
through the state for the purpose of constructing a railway from the Atlantic
to the Pacific oceans.[38] In 1857 the supervisors of Yuba County were
authorized to submit to the electors of that county a proposal to subscribe
$200,000 to a railroad between Marysville and Benicia.[39] And during the
following two years the San Francisco and Marysville Railroad not only
received a land grant,[40] but secured an enactment, making it the duty of
the Board of Supervisors of Sutter County to submit to popular vote the

question of a $50,000 subscription to its capital stock,[41] and the duty of
the supervisors of Solano and Yolo counties to call elections in those
counties with similar intent.[42] No subscriptions were made under these
acts.
It seems to have been the intention of the legislature to treat the Central
Pacific and the Western Pacific railroads after the same general fashion as
other railroads had been treated—that is to say, to allow counties and cities
interested to subscribe freely to their stock. By virtue of an act dated April
16, 1859, any county could so subscribe up to 5 per cent of its assessment
roll when popular approval had been secured.[43] This was not, however,
enough. Between March 21, 1863, and April 4, 1864, the legislature passed
eight acts granting special concessions to the Central Pacific and to the
Western Pacific. Mr. Stanford had become governor of the state in January,
1862, and this legislation had of course his cordial approval.
In March, 1863, the supervisors of San Joaquin County were authorized
to hold a popular election on the question of subscribing $250,000 to the
capital stock of the Western Pacific.[44] In April, Placer County was
authorized to consider a subscription of equal amount to the stock of the
Central Pacific.[45] Next, Santa Clara County was authorized to hold an
election and to subscribe $150,000 to the Western Pacific, if it so desired.
[46]
Sacramento received the same privilege in April, to the extent of being
permitted to take 3,000 shares of the Central Pacific,[47] and was in addition
allowed to give away rights-of-way and certain rights of construction of
considerable though indefinite value;[48] while San Francisco was permitted
to subscribe $400,000 to the stock of the Western Pacific and $600,000 to
that of the Central Pacific, making $1,000,000 in all.[49]
Invariably subscriptions contemplated in the acts were to be made in
bonds running twenty or thirty years, and bearing 7 or 8 per cent interest.
Counties were to enjoy the usual privileges of stockholders, but were
protected by special clauses against the proportional liability for debts of
the corporation resting upon the ordinary stockholder by virtue of state law.
The proceeds of county bonds issued in subscriptions were to be used for
construction of the road, and it was provided that at least an equal amount
of other funds obtained from stockholders was to be so used. It was thus the
intention of the legislature that funds for construction should not be entirely
derived from county subsidies.

Direct State Aid
In addition to the acts permitting county subscriptions, mention should
be made of two important acts by which the state granted direct assistance.
The first of these laws was dated April 25, 1863. It authorized the
comptroller of the state to draw warrants in favor of the Central Pacific to
the extent of $10,000 per mile, the warrants to be issued when the first 20
miles, the second 20 miles, and the last 10 out of 50 miles were finished.
These warrants were to bear 7 per cent interest if not cashed, because of
lack of money in the treasury to pay them.[50]
The second act, dated April 4, 1864, repealed the act just quoted, and
proposed that the state government, instead of drawing warrants, should
assume interest on 1,500 of the company bonds, bearing 7 per cent, and
running for twenty years. This grant, like the earlier one, was made on
certain conditions, such as that the company should transport free of charge
public convicts going to the state prison, material for the construction of the
state capitol, troops, munitions of war, and the like, that it should construct
at least 20 miles of line annually, and in the case of the Act of 1864, that it
should deed over certain granite quarries in Placer County.[51]
On the face of it this grant was illegal, because of clauses in the state
constitution which forbade the legislature to create liabilities in excess of
$300,000 without submitting the proposal to popular vote, or to loan or give
the credit of the state in any manner, in aid of any individual, association, or
corporation.[52] But it was sustained on the theory that the act amounted to
an appropriation in anticipation of revenue, and so did not create a debt at
all. Thus the company was able to draw its first interest money in January,
1865.[53]

Opposition to Aid in San Francisco
The various acts just referred to were of course permissive, yet in
general the counties seemed very willing to give up to the limit of their
legal power. The two exceptions were the county of Placer and the city and
county of San Francisco. In Placer County there was a very active campaign
against the bonds, supported by newspapers such as the Placer Herald and
the Advocate. The proposal for a bond issue was carried, but only by a
majority of 409 in a total vote of 3,810.[54]

In the case of San Francisco, the city delegation in the legislature
divided five to five on the proposal to authorize the city to subscribe. When
the law was finally passed, a long and interesting struggle ensued. The first
step after the passage of the act was to hold an election in San Francisco in
order to ascertain whether the people would approve of a subscription to
railroad bonds. This election took place in May, 1863, and the necessary
popular consent was secured. There is reason to believe, however, that
illegitimate means were employed to carry the election. We have affidavits
that Philip Stanford went to the polls at San Francisco in a buggy, carrying a
bag of money; that the said Stanford put his hand frequently in the bag of
money and took money, some $20 pieces and some $5 pieces, to a
considerable amount therefrom, and scattered the said money among the
voters at the said polls, at the same time calling on them to vote in favor of
the said subscription. Another eyewitness confirmed this account, adding
that while the sum of money spent by the said Stanford was considerable,
he could not tell how much as the crowd around the buggy of the said
Stanford was so great. Still another testified to having received a written
order on Stanford and others for $20, in return for which he and a man
named Ross were to endeavor to influence voters at the polls to vote for the
subscription.[55]
These affidavits were later supported by the assertion of Hon. William
A. Piper, on the floor of the House of Representatives at Washington, to the
effect that he, Piper, was an eyewitness at the election, and saw the brother
of Leland Stanford openly going about the polling places, scattering gold
and silver to influence and buy votes for the municipal subsidy. Statements
of this sort are too detailed and circumstantial to be brushed lightly aside.

Henry P. Coon

Resort to Court
Whether or not the election of 1863 was tainted with corruption, as soon
as it was concluded, San Francisco became bound, on or about the 25th of
May, 1863, to subscribe $600,000 and $400,000 to the stock of the Central
Pacific and Western Pacific railroads, respectively. The fight against
subscriptions, however, did not stop at this point. In an attempt to prevent
action, suit was brought by a man named W. N. French against the Board of
Supervisors, in the case known as “French v. Teschemaker.” French was a
resident of San Francisco and a taxpayer. Teschemaker was a member of the
Board of Supervisors. The suit alleged certain irregularities in the city
election, but rested mainly on the contention that the act authorizing the city
and county to subscribe was void and of no effect, because it provided that
the city and county should not be liable for any of the debts or liabilities of
either the Central Pacific or the Western Pacific railroads beyond the
amount subscribed, and that this provision as to liability should be a part of
all contracts made by the companies for the construction and equipment of

their roads. According to counsel, this was an attempt to create an
exemption from the proportionate liability imposed on all stockholders by
the state constitution, and was not only void in itself, but its lack of force
invalidated the whole subscription, since it was not to be supposed that the
legislature would have passed the other clauses of the act without the
section in question.
On the 23d of May, 1863, Judge Sawyer of the Twelfth Judicial District
granted a temporary injunction. On appeal to the Supreme Court, however,
this injunction was overruled. The court said:
True, the legislature cannot exempt the city and county from liability, but it can
authorize the corporation to refuse to contract with persons who do not waive the
proportionate liability established for their protection. How the individual liability of a
stockholder of a corporation can be a matter of public concern any more than the liability
of a copartner, we are unable to perceive, and we are not aware that it has ever been
claimed that the latter liability had its foundation in public policy. It is merely a liability
created by law, as it might be by contract, and is intended only for the benefit of those who
may deal with corporations. It is but another fund to which the creditor may look when the
social fund has been exhausted, and whether he chooses to look to it or not is a matter of
no concern to the public.... There being, then, only a question of private right involved,
there can be no question but that the party interested in the enforcement of the right may
contract to waive it.[56]

Compromise Plan
The opponents of municipal subscription now turned to the legislature,
and secured the passage of an act authorizing the Board of Supervisors of
San Francisco to compromise and to settle all claims upon the part of the
Western Pacific Railroad and the Central Pacific Railroad for cash or other
security, in place of bonds claimed by the companies, provided the power to
make such compromise should rest in the Board of Supervisors only after
and in case said board should be compelled by final judgment of the
Supreme Court to execute and deliver the bonds specified in the act.[57]
Pursuant to this act of April 14, 1864, the Board of Supervisors
appointed a special committee from among their number to consider and
report a plan for a compromise. This action was taken on May 23, and the
mandamus requiring the supervisors to subscribe $600,000 to the stock of
the Central Pacific, which was essential to the adoption of any compromise,
was issued on June 7.[58] The committee met with Stanford, reported back
to the board, and on June 20 the board passed order No. 582 providing that

the city of San Francisco order, execute, and deliver to the Central Pacific
400 bonds for $1,000 each, in full discharge of all obligations on the part of
the city and county to make any subscription to the capital stock of said
company.
Order No. 582 was duly approved by the mayor on June 21, and became
law on that day. On June 29 the acceptance of the Central Pacific was
signified to the board, in due form, and on June 27 the supervisors
appointed Messrs. Torrey, Bell, and Titcomb a committee to deliver to the
Central Pacific the 400 bonds, with interest coupons attached. Nevertheless
the mayor, Henry P. Coon, the auditor, Henry M. Hale, and the treasurer of
the city, Joseph S. Paxon, constituting the Pacific Railroad Loan Fund
Commissioners, refused to issue the bonds. The result was a petition for a
mandamus directed against these persons individually, which developed
into the case of People v. Coon.

Agreements in Mandamus Proceedings
The main legal points raised in this new litigation were three:
1. The conditions precedent to the issuance of the bonds under the act of
1864 had not been fulfilled, said the petitioner, in that the board of
supervisors had not been compelled by final judgment of the Supreme
Court to execute and deliver the bonds.
2. The second contention was that the railroad company could not call
upon the supervisors to issue bonds on the city’s subscription unless the
railroad should call in from other subscribers the whole amount of their
respective subscriptions, or until, under the Act of 1863, a sum at least
equal to the amount of the bonds should have been expended on the road
from other sources. That either of these things had been done, the
defendants vigorously denied.
3. It was also declared by defendants that the Act of 1864 had been
misconstrued—that it did not relieve San Francisco from her subscription,
but simply authorized the city to liquidate that subscription “in cash or other
security” instead of in bonds. “We claim,” said counsel, “that the act
authorized no more than the reduction of the amount of subscription and a
change of the mode of payment to cash or other security in place of bonds.
It does not authorize a donation of $400,000 or any other amount. In other

words, it authorizes a subscription for any amount less than $600,000,
payable in cash in place of bonds.”[59]
One has the feeling that at this stage of the proceedings, the first and
third of these propositions were not well taken. It was too plainly the
intention of the legislature to allow the city of San Francisco to withdraw
from its subscription for a consideration, to permit weight to be given to
technical points like these. On the other hand, it is very doubtful if the
railroad had at this time either called in from other subscribers the whole
amount of their respective subscriptions, or had expended on the road from
other sources a sum equal to the amount of the bonds. The Supreme Court,
however, did not make even this concession, but promptly issued a
mandamus against Coon, Hale, and Paxon, commanding and requiring them
to execute and deliver without delay, to the Central Pacific Railroad of
California, the 400 bonds of the city and county of San Francisco, described
in the ordinance before referred to.[60]

Further Litigation
Upon the issue of this mandamus, Coon, Hale, and Paxon signed the
400 bonds. According to a subsequent complaint by the railroad, the bonds
so signed were presented by the president of the Board of Supervisors to
William Loewy, clerk of the city and county of San Francisco, at a meeting
at which a quorum of the supervisors was present. Loewy refused or failed
to countersign. On September 27, 1864, a regular meeting of the
supervisors was held, at which resolutions were offered requesting Loewy
to countersign the bonds, and providing for the affixing of the seal of the
city and county to the bonds when countersigned. These resolutions failed
of passage, and instead a resolution was adopted requesting the clerk to
deposit the 400 bonds with the county treasurer, which he did forthwith.
The treasurer then refused to deliver the bonds to the railroad, and fresh
proceedings were instituted before the Supreme Court, this time asking for
a writ of peremptory mandamus commanding Loewy or his successor to
obtain possession of the bonds, and to countersign and assist in delivering
them to the Central Pacific; commanding the Board of Supervisors or their
successors to call a meeting of the board, to notify the clerk of a time and
place at which he might complete the countersigning in the presence of a
quorum of the board; to cause the seal of the city and county to be affixed to

the bonds; and to appoint a committee to deliver the bonds to the Central
Pacific; and commanding the members of the Board of Supervisors who
might be appointed such a committee, to deliver the bonds to the Central
Pacific. It was obviously hoped to tie things down so that no further delay
would be possible.
There seems to have been a split in the Board of Supervisors at this
time. Six of the twelve members made individual returns to the complaint,
and alleged that they had no part in the refusal to deliver the bonds. The
other six and the mayor voted to employ counsel and to defend the suit.

Contentions of Defendants
The case came to a hearing January 7, 1865. In some respects the
defense now rested on new ground; in some new emphasis was given
matters previously brought forward.
The supervisors in January alleged that the election in San Francisco
held May 19, 1863, at which the electors of San Francisco had approved the
subscription to the stock of the Central Pacific, had been carried by
corruption and bribery. This assertion was given great prominence in the
answer of the supervisors, though less in briefs of counsel. Nine instances
were cited where A. P. Stanford had given sums ranging from $5 to $40
apiece to electors, or had thrown handfuls of money among the electors
“and thereupon they scrambled among themselves for the same.” It was
urged that these bribes had had great influence upon the vote and that the
election was void. These facts had not been known to the supervisors on
June 20, 1864, when order No. 582 had been passed, and defendants
believed that knowledge of them would have prevented the passage of the
ordinance.
Besides this, the supervisors declared that the passage of ordinance No.
582 had been procured by false and fraudulent representations by the
railroad company. More important, it was now contended that the Act of
1863 was unconstitutional, in that the legislature was without power to
“impose on a municipal corporation of the state the burden of exclusively
building or aiding to build a work of general interest to the state, which is in
no sense a work of local interest to the corporation on which the burden is
imposed.”

It was pointed out that the Central Pacific was a work of general interest
to the Pacific Coast. It did not come within 100 miles of San Francisco. It
had received large subsidies from the federal government on the ground that
it was of national importance. Counsel declared that:
The true test of whether a tax can be exclusively laid on a municipal corporation, is to
be found in the purpose for which municipal government is confined within local limits.
Citizens living within those limits are exposed to exclusive taxation because, and only
because, a peculiar benefit is conferred upon this locality. When the benefit is shared in by
the rest of the state, then a state tax is levied, because the citizens of San Francisco
received advantage, not in their character as citizens of San Francisco, but as citizens of the
state. The state government is as much a benefit to San Francisco as its own municipal
government. Yet no one would contend that she could be compelled to support the entire
expenses of the former, or that any other city should be compelled to contribute towards
the expenses of the latter.

City Compelled to Subscribe
These and other more technical objections were considered by the
Supreme Court and were swept aside in a decision rendered at the April
term of 1865. The court now held that the legislature had imposed no
burden on San Francisco by the Act of 1863, because under that act the city
got a consideration, namely, the company stock, for its subscription. The
court added:
Nor does it make any difference as to the validity of the compromise whether the bonds
were payable in instalments or in gross, nor whether a legal assessment has been laid on
the capital stock of the company, for irrespective of the time the bonds under the Act of
1863 might become due, the company held a claim against the city which was a proper
subject of and formed a good consideration for a compromise.[61]

This ended the case. It may perhaps be pertinently inquired why it was,
if the subscription required by the Act of 1863 imposed no burden on the
city of San Francisco as the Supreme Court said, that the city could afford
to give $400,000 to get rid of the obligation. Yet, perhaps it would be
fruitless to follow too closely the windings of the judicial mind. Stanford
later declared that the litigation had injured the Central Pacific very much,
[62]
while E. H. Miller, secretary of the company, estimated that the suit cost
the Central Pacific not much less than $100,000. Of the bonds issued, 315
were sold at $751.60 each, amounting to $236,754, while 85 were paid out
at par for rolling stock.[63]

Subscribing Counties Embarrassed
The reluctance of San Francisco to subscribe was not typical of the
general attitude toward the Central Pacific in 1865. But it became more
typical as the years went on. For this, there were several reasons.
In the first place, the state was much disappointed by the fact that the
completion of the Central Pacific did not inaugurate a period of prosperity.
The year 1870 was not a particularly good one in California, and the panic
of 1873, with the intense depression which resulted, was soon to occur.
Among the first effects of the two rail connections with the East, was an
influx of eastern manufactures, unemployment, lower prices, and
dissatisfaction. This in no way meant that the construction of the Central
Pacific had not benefited California, but it gave evidence of a serious
though temporary maladjustment.
Moreover, the bonds which had been so lightly voted, proved a real
burden on the scanty population of the counties, which was in no adequate
way offset by increases in the assessment rolls. Indeed, the railroads in early
years were assessed at figures that were remarkably low. In Placer County,
for instance, the Central Pacific insisted that its road should be assessed at
$6,000 per mile, and succeeded in carrying its point in 1865, 1866, and
1867. In 1868 the assessment was raised to $12,000 per mile. The railroad
protested, and when forced to submit, increased the rate of freight to all
points in Placer County about 40 cents a ton.[64] Nor were taxes even on
such modest valuations easily collected. Between 1866 and 1887 railroad
tax cases were almost constantly before the courts. At times the Central
Pacific refused to pay any taxes at all, on the ground that it held a “federal
franchise,” and at other times it objected to the terms of the law or to the
amount of the assessment.[65] The result was to throw the local tax system
into complete confusion.

Experience of Placer County
Let us refer again to the experience of Placer County. In 1863 the
Central Pacific asked for a subscription of $250,000, promising to add
$9,000,000 to the taxable property of the county. The county tax rate as
fixed in February, 1863, for the following year, was 35 cents on $100, and
the assessed valuation of the county was $3,071,911.78, yielding a revenue
from county taxes of $10,751.69. The railroad company issued an address

while the matter of a subscription was under consideration, pointing out that
8 per cent on a bond issue of $250,000 would amount to $20,000, while a
tax rate of 35 cents on $9,000,000 of increased valuation would yield
$31,500, or a clear excess of $11,500, to the county without considering the
effect of the railroad in increasing the valuation of real estate.
These were the results which voters were led to expect. What happened
was that the assessed valuation of the property of the Central Pacific in
Placer County was $6,000 per mile as late as 1870, when the county sold its
railroad stock; that the total railroad valuation was therefore $553,500, and
that the county tax rate rose from 35 cents to $1.73½. Moreover, the
railroad taxes for 1868 and 1869 were still unsettled and in dispute in 1870
and remained so until 1873. The total receipts of the county from all sources
in 1869 were $127,492.54, of which $46,499.66 were for the state. Against
the $80,992.88 remaining, the $20,000 of interest on the subsidy bonds was
evidently a material charge.
It was probably not true in general that the financial embarrassment in
which many of the counties of California were plunged late in the sixties
was due to the pressure of interest charges on bonds issued in aid of railroad
construction. The highest rates of taxation for county purposes uncovered
by the special legislative committee of 1868 which investigated this matter,
were $36.70 per $1,000 for Tuolumne County, and $40 per $1,000 for
Calaveras County, neither of which counties had issued bonds in aid of
railroads. Extravagance in assistance tendered to railroads was only one of
the financial sins of which the counties had been guilty. Nevertheless the
burden of outstanding indebtedness for railroads was often severe on
communities of declining industry and population, and contributed to the
later severe revulsion in popular sentiment with regard to the desirability of
local aid to railroad enterprise.

Opposition by Other Transportation Interests
It is proper to mention at this point, also, as throwing light upon popular
sentiment, the opposition of the smaller transportation interests of the state
to the development of the Central Pacific project. These interests included
the stage companies, the express companies, the toll roads, and the Pacific
Mail Steamship Company. In the aggregate their influence was

considerable, and it was constantly thrown against the granting of aid to the
Central Pacific.
It is a curious commentary upon the effect of government subsidies, that
the Huntington-Stanford group brought part of this opposition upon
themselves by a deliberate refusal to buy up the Sacramento Valley Railroad
for the reason that it was cheaper to build at the expense of the federal
government from Sacramento to Auburn than to buy a railroad already in
active operation for most of the distance between these points. In cold
figures, it would have cost $400,000 to build a new line out of Sacramento,
and $285,000, according to Central Pacific engineers, to put the Sacramento
Valley Railroad in thoroughly good physical condition. But under federal
legislation, to be described in a later chapter, only $250,000 out of the
$400,000 would have to be paid by the Central Pacific in cash, leaving a
clear gain of $35,000 if the policy of construction were pursued.[66]
The result of this decision was to cause the backers of the Sacramento
Valley project to denounce the Central Pacific enterprise as a fraud.[67]

End of Local Subsidies
In the year 1868, a resolution was introduced into the California State
Senate urging the appointment of a committee to investigate the use of
moneys contributed by the state toward the construction of the Central
Pacific Railroad. This resolution was indefinitely postponed by a vote of 18
to 17. The same year notices began to appear in the press, urging the
legislature to oppose further railroad-aid legislation. In 1869, the
Sacramento Union, while in favor of a grant to the Stockton and Tulare
Railroad, urged the counties to go slow and to secure an amendment to the
general railway law, reducing maximum transportation charges to 10 cents
per passenger per mile, and 15 cents per ton per mile, before voting aid.
These were but symptoms of a profound dissatisfaction with the results
of railroad subsidies. In the fall of 1869 both political parties pronounced
against grants of state aid to railroads, but this could not prevent the passage
of the so-called “Five Per Cent Act” of 1870, authorizing counties to
subscribe to railroad stock up to 5 per cent of their assessed valuation;
although it did encourage Governor Haight to veto two bills in March,
1870, the one authorizing the voters of certain counties in the San Joaquin
Valley to donate their bonds to the San Joaquin Railroad Company at the

rate of $6,000 per mile,[68] and the other providing for the construction of a
railroad by the Southern Pacific through Monterey and San Luis Obispo
counties, and permitting the counties interested to grant aid. The governor
took the position that the proposed subsidies were not only unwise, but that
they were unconstitutional for the reason that a donation to a private
corporation was not a use of funds for a proper purpose.[69] After a fight
which attracted much popular attention, the vetoes of the governor were
sustained.
In 1871, Governor Haight was defeated for re-election by Newton
Booth, the Republican candidate. In the following year, however, the Five
Per Cent Act was repealed, and the period of local subsidies in California
came to an end.

CHAPTER III

FEDERAL LAND GRANTS AND SUBSIDIES

Government Aid Deemed Necessary
Serviceable as local subsidies were, there is no question that the most
important aid granted to the Central Pacific Railroad came from Congress.
[70]
It was perfectly well understood on the Pacific Coast that no
transcontinental railroad could be built without the assistance of the
national government. This was the attitude of the California legislature in
1852, when it instructed its senators in Congress, and requested its
representatives, to vote for an act providing for the construction of a railway
from the Missouri or Mississippi River to the Pacific Ocean, the cost of
which should be borne by the general government.[71] It was also the
position of the Railroad Convention of 1853, which sat at San Francisco
under the presidency of Governor Bigler, and of that better advertised
gathering known as the Pacific Railroad Convention of 1859, the
resolutions of which concerning routes and state bond issues in aid of
railroads gave rise to so much heated discussion.[72]

Judah’s Activities in Washington
Not only was it the attitude of the Pacific Coast that federal aid was
necessary, but, still more important, Judah was able to advise his associates
that Congress looked with favor upon the plan. He was convinced of this of
his own personal knowledge, for he had been in Washington both on his
own account and as a delegate of the Convention of 1859, and had reported
to his constituents that only the pressure of more important matters arising

out of the Civil War prevented favorable action upon the bill which they had
sent him east to support. Upon this information, indeed, much of the plans
of the Huntington-Stanford group was based.
Late in 1861, the Central Pacific Railroad sent Mr. Judah to Washington
to solicit whatever aid the federal government might be disposed to give.
We have in Judah’s report upon this visit, dated September 1, 1862, a very
full account of his negotiations. Judah sailed for the Atlantic states on
October 10, 1861. During the trip he busied himself in talking with Mr.
Sargent, Congressional representative from California, who was his fellow
passenger, and in writing up the results of the survey which he had made
during the summer of 1861. On his arrival in New York he completed this
report, caused 1,000 copies of it to be printed, and distributed the copies
widely where he thought they would do most good. Late in November, after
conference with Senator McDougal, of California, chairman of the Senate
Pacific Railroad Committee, he proceeded to Washington.
From the time of his arrival there to the following July, Judah was
engaged in energetic lobbying. His brief previous visits to the capitol had
acquainted him with the routine of business there, as well as with the
personalities of a considerable number of Congressmen. He was aided, also,
by the fact that Sargent, at the opening of the session, was assigned to the
Pacific Railroad Committee of the House, and by the further circumstance
that, with questionable propriety, he, Judah—interested in the outcome of
the pending legislation as he was—was made clerk of a subcommittee of
the House Committee on Pacific Railroads and secretary of the Senate
Pacific Railroad Committee, with the privilege of the floor of the Senate
and of the House, and charge of all the papers of the Senate committee.
From this position of advantage Judah was able to watch the progress of
the Pacific Railroad bill which Mr. Sargent presently introduced, and to
guide it to a certain extent. We know that it was Judah who procured the
assent of the Kansas company mentioned in the bill to a change which
required its road to meet the Union Pacific at the 100th meridian instead of
at the 102d meridian. It was Judah also who secured the passage of the
amendment retaining for the Central Pacific the timber on mineral land.
Mineral lands were excepted from the lands granted to the Pacific railroads,
and Judah was afraid lest this clause should deprive the Central Pacific of
all benefit from a large part of the lands nominally given it. It was probably
Judah, also, though this is less certain, who secured a change in the terms of

the government subsidy increasing the amount and altering the distribution
so that the largest payments were made for the road across the Sierras and
not for the section east of the California state line, where the difficulties of
construction were less. These were important matters, and Judah should not
have been permitted to urge them from the vantage point of an official
position.[73]
It is perhaps natural to ask whether there is any evidence of improper
methods used by the Central Pacific to obtain the passage of the Pacific
Railroad bill beyond that just referred to. The weight of the record is in the
negative. According to Stanford, Judah had $100,000 in Central Pacific
stock at his disposal to cover his expenses in the East. This stock was not
worth much, and Judah did not use all of it. Besides this, Judah made an
agreement with Hon. S. A. McDougal and Hon. T. G. Phelps, according to
which he assigned to certain parties representing the interests of the San
Francisco and San José Railroad, the rights, grants, and franchises of the
Central Pacific for the portion of road between Sacramento and San
Francisco. This looks like an attempt to quiet opposition in California, from
which some of the California delegation may have profited. There is no
further evidence, however, of any improper bargaining in connection with
the passage of the bill, and it is probable that no money was corruptly used.
If there had been, Campbell and Sargent would hardly have been naïve
enough to send a letter to Judah in behalf of sixty-three senators and
representatives, thanking him for his valuable assistance in aiding the
passage of the Pacific Railroad bill.

The Pacific Railroad Act
Let us now consider the terms of the federal legislation of 1862 and
1864. The Pacific Railroad Act in its first form was signed on July 1, 1862,
[74]
and accepted by the company by letter dated November 1.[75] Bancroft
says that the company was aware that the assistance offered in this act was
not sufficient. The subsidy alone would not build the road, and capitalists
would not subscribe on the security offered. However this may be, Judah
arranged for the purchase of locomotives, cars, and railroad iron before he
left the East, and took measures also to secure early action by the President
on the question of gauge, and on the establishment of the western base of
the Sierra Nevada Mountains.[76]

In December, after Judah’s departure, a bill was introduced to amend the
Act of July, 1862. This measure passed the Senate but was not acted upon
by the House. A year and a half later, however, a new act was passed by
both houses, and became law on the 2d of July, 1864, amending the Act of
1862, and materially increasing the aid which the Central Pacific was to
enjoy.[77] To all intents and purposes the Acts of 1862 and 1864 were one
piece of legislation, and will be treated as such in the analysis which
follows.[78]

Grant of Right-of-Way
What now were the advantages secured to the Central Pacific by the
Acts of 1862 and 1864, and what were the obligations placed upon that
company? We will take up first the advantages, not necessarily in order of
importance.
The first concession which the Central Pacific received under this
legislation was the authority to complete its line from Sacramento to the
eastern boundary of the state of California and thence eastward 150 miles,
provided that the Union Pacific had not by that time built west to a
connection with it. The company was also authorized to build west and
south from Sacramento to San Francisco, or to a point nearby. The Act of
1862 had contained no limitation on construction eastward beyond the
reference to a Union Pacific connection. Huntington said later that the
restriction of 150 miles should not have been inserted in 1864. He added,
however:
I said to Mr. Union Pacific when I saw it, I would take that out as soon as I wanted it
out. In 1866 I went to Washington.... I saw probably every member of Congress and the
Senate except a few men who were interested in the Union Pacific, or had a direct interest
in the Credit Mobilier.... We passed it through the Senate; I think we got thirty-four against
eight opposed to it. I took it over to the House and old Thad Stevens attended to the bill for
me, and it went through the House with a vote, I think, of ninety-four for the bill and thirty-
three against it.[79]

Judah said of the clause as it stood in 1862, that it virtually conceded to
the company the right to construct at least one-half of the line of the Pacific
Railroad. He was positive that it would be found advisable to undertake
construction for about 300 miles easterly from the state line of California.
[80]

In addition to the authority to build, the Central Pacific was given a free
right-of-way 400 feet wide across all government lands, besides necessary
grounds for stations, machine shops, etc., with the privilege of taking earth,
stone, timber, and other materials from the public lands adjacent to the line
of said road for purposes of construction.

Land Grant
The company was also granted ten alternate sections per mile of public
land on each side of the railroad on the line thereof, and within the limits of
20 miles on each side of the road. The government undertook to extinguish
Indian titles, but did not include in its grant mineral lands except coal and
iron lands, or lands sold, reserved, or otherwise disposed of by the United
States, or lands to which a pre-emption, homestead, swamp-land, or other
lawful claim might have attached at the time the line of the road should
have been definitely fixed. The grant was thus not of a specified number of
acres, and no compensation was provided to the company for lands which
might prove to be occupied; but in order to prevent speculation and in a
measure to safeguard the company’s interests, it was provided that at any
time after the passage of the act, and before July 1, 1865, without waiting
for definite location of the road, the company might designate the general
route and file a map, whereupon the Secretary of the Interior should cause
the lands within 25 miles of said route to be withdrawn from pre-emption,
private entry, and sale. When any portion of the route should be finally
located, the Secretary of the Interior should cause the granted lands to be
surveyed and set off so far as might be necessary. As a matter of fact, Judah
filed his map and general designation before he left Washington in 1862.
Lands were to be conveyed to the company on completion of stretches of 20
consecutive miles. A special clause, never enforced, provided that all
granted lands not sold or disposed of by the company within three years
after the entire road should have been completed, should be subject to
settlement and pre-emption like other lands, at a price not exceeding $1.25
per acre to be paid to the company.

Government Subsidy
In the way of a subsidy, Congress ordered the Secretary of the Treasury
to issue to the Central Pacific, United States 6 per cent 30-year bonds, in

amounts varying from $16,000 to $48,000 per mile. The subsidy of $48,000
was granted for the 150 miles east of the western base of the Sierra Nevada
Mountains, this being the most mountainous and difficult portion of the
road. East of this section of line the Central Pacific bond subsidy was to be
$32,000 per mile, but west of it, it was to be only $16,000 per mile. It was
the understanding of the company that these bonds were not redeemable by
the government before maturity, and that until that time the interest charges
were to be taken care of by the government. This last point was later the
subject of litigation in which the company’s contention was sustained.[81]
The subsidy offered by the government inured to the company on the
completion of sections of 20 consecutive miles over the greater part of the
road, except that bonds might be issued up to two-thirds of the value of
uncompleted work when the chief engineer of the company should certify
that a certain proportion of the work required to prepare the road for its
superstructure had been done.

Company’s Obligations
In return for these very considerable privileges, the demands made upon
the Central Pacific do not seem to have been excessive. First and foremost,
the company was required to build its road at the rate of 25 miles each year
after filing its assent to the provisions of the act, and to reach the state line
within four years. The track upon the entire line was to be of a uniform
width, to be determined by the President of the United States, so that, when
completed, cars could be run from the Missouri River to the Pacific Coast.
The grades and curves were not to exceed the maximum grades and curves
of the Baltimore and Ohio Railroad, and the whole line of railroad and
branches, Union Pacific and Central Pacific included, was to be operated
and used for all purposes of communication, travel, and transportation, so
far as the public and the government were concerned, as one connected,
continuous line.
In the second place, demand was made that the company should pay the
principal of the government bonds at maturity, and should meanwhile make
certain payments on account of principal and interest. The following section
taken from the Act of 1862 shows that there is no basis for the contention
sometimes made that the government originally expected no repayment of
its loan.

And be it further enacted that the grants aforesaid are made upon condition that said
Company shall pay said bonds at maturity, and shall keep said railroad and telegraph line
in repair and use, and shall at all times transmit dispatches over said telegraph line, and
transport mail, troops and munitions of war, supplies and public stores upon said railroad
for the Government, whenever required to do so by any department thereof, and that the
department shall at all times have the preference in the use of the same for all the purposes
aforesaid (at fair and reasonable rates of compensation, not to exceed the amounts paid by
private parties for the same kind of service), and all compensation for services rendered for
the Government shall be applied to the payment of said bonds and interest until the whole
amount is fully paid. Said Company may also pay the United States, wholly or in part, in
the same or other bonds, treasury notes, or other evidences of debt against the United
States, to be allowed at par, and after said road is completed, until said bonds and interest
are paid, at least five per-centum of the net earnings of said road shall also be annually
applied to the payment hereof.[82]

In 1864 this section was changed by requiring only one-half of the
compensation for services rendered to the government to be applied to the
payment of bonds issued by the government in aid of construction, but the
declaration that the bonds should be paid was not altered. Not only was this
true, but the government demanded security for repayment. In 1862 it
declared that the issue of said bonds and delivery to the company should
ipso facto constitute a first mortgage on the whole line of the railroad and
telegraph, together with the rolling stock, fixtures, and property of every
kind and description. In 1864 the lien of the United States bonds was
subordinated to that of a second mortgage, but the idea of some security
was preserved.
Third, the government reserved the right to reduce the rates of fare upon
the Central Pacific, as well as upon the other railroads provided for in the
Act of 1862, as unreasonable, when net earnings should exceed 10 per cent
upon cost, exclusive of the 5 per cent to be paid to the United States.
Fourth and last, an annual report was asked for, which was to set forth
earnings, expenses, indebtedness, the amount of stock subscribed, a
description of the lines of road surveyed, and the names and residences of
the stockholders.

Amounts Granted
It is evident that these demands were very moderate indeed. Under the
provisions of the Acts of 1862 and 1864, the Central Pacific and Western
Pacific railroads received $27,855,680 in government bonds, and
10,081,945.18 acres in public lands (up to June 30, 1920). From the bonds

the companies realized $20,735,000, or $24,092 per mile. From the lands,
the Central Pacific received, up to June 30, 1919, the approximate sum of
$17,430,000, about equally divided between receipts from sales and
receipts from other sources, including leases, stumpage, timber, and
miscellaneous. The expenses of the land department may be estimated at
$7,000,000, and the net return therefore was $10,000,000. The yield of the
bond subsidy not only exceeded the returns from the granted lands, but the
subsidy was ten times the aid received from the state and counties put
together, and of course many times the contribution of the partners
themselves. What was almost as important, the grant of this federal
assistance at once raised the company’s credit, so that it could sell its own
first mortgage bonds. The sale of company bonds yielded $20,750,000, or a
total of $41,485,000, for government and company bonds together, directly
attributable to federal aid, and almost immediately available.
From the point of view of serviceability, the land grant referred to in the
Pacific Railroad legislation was much less important than the subsidy in
bonds. Government lands along the line of the Central Pacific had no value
until the road was completed, nor even then until the slow process of
settlement had filled up in a measure the territory through which the
railroad ran. Nor was the amount of the grant so definite as to make it a
satisfactory basis for credit, although land grant bonds were sold in and
after 1870. The theoretical grant was twenty sections, of 12,800 acres to the
mile. The grant did not, however, follow the sinuosities in the track, so that
in the mountain sections it was quite possible for two miles of railroad to be
constructed and yet only one mile of land grant to be obtained.
Not only was this true, but the exceptions provided for in the legislation
were important. The records show that the saving clauses in the statutes,
coupled with the inaccessibility of some of the lands within the nominal
grants, and the differences between the actual mileage of the railroad and
the mileage upon which land was awarded, reduced the area passing to the
railroad by many hundred thousand acres. In California the Central Pacific
was entitled to a nominal grant of 1,843,000 acres, at the rate of twenty
sections per mile for a mileage of 144 miles. At least 887,000 acres of this
amount were known to be lost to the grant as early as 1895, while the final
adjustment will scarcely secure for the company more than half the amount
originally expected. In Nevada the company’s losses approximated one-
ninth and in Utah one-quarter of the nominal grant. The losses on the

California and Oregon up to 1897 were 962,703 acres out of a total grant of
3,266,729 acres, but in this case the law permitted the company to select
additional lands within “indemnity” limits.

Delays in Transferring Title
How far the government lands failed in providing the Central Pacific
with funds with which to build its road, however, can best be understood
when attention is paid to the delays incident to the transfer of title. The
general procedure in transferring title from the government to the company
was as follows:
Under the Act of 1864, the Central Pacific was entitled to receive its
lands upon completion of stretches of 20 consecutive miles in a fashion
acceptable to commissioners appointed by the President of the United
States. Upon acceptance by the government, the sections of land to which
the company was entitled were listed and mapped and sent to the United
States Land Office in the land district in which the land was located. The
lists were examined there by registrars and receivers, and when declared
cleared, the railroad company paid for the surveying, selecting, and
conveying. Upon the payment of the fees, the lists were certified by the
Surveyor-General of the state, and forwarded to the General Land Office at
Washington for further examination. If found correct by the office in
Washington, patents were issued. If there was doubt, the questionable cases
were held for further examination.
In all this procedure delays were frequent. The initiative in the process
of conveyance of land lay with the railroad company and not with the
government, so that failure to file lists with the local land office or failure to
pay into the United States Treasury the cost of surveys of listed lands
prevented progress in the distribution of the grant. On the other hand, the
slowness of the government in making surveys hindered the railroad in its
selections. Still another reason for delay was the fact that within the mineral
belt the Commissioner of the General Land Office required the railroad to
file affidavits defining the mineral or non-mineral character of lands by 40-
acre tracts. This requirement arrested the selection and patenting of lands,
because the government survey did not subdivide tracts of 640 acres, and
there was no way of identifying any particular sixteenth section of a tract.
There were delays also in determining the title to lands claimed by

homesteaders and pre-emptors, and there were delays due to the faulty
organization of the Federal Land Office.

Land Office Responsible for Delays
Opponents of the Central Pacific freely charged that the company
refrained from patenting its land in order to avoid the payment of taxes.
This the company denied, pointing to the fact that the lands listed to June 1,
1887, exceeded the lands patented by 622,612.54 acres, and that the cash
deposited with the United States Land Department to cover the cost of
surveys exceeds the amount charged against the company up to January 15,
1886, by $28,771.92.[83] Mr. Stanford declared that it was the policy of the
company to select its lands and present lists as promptly as possible, in
order that lands might be disposed of to settlers, and it does appear that it
was to the advantage of the Central Pacific to secure title as quickly as it
could in the mineral belts, because the company was protected in its
possession of land, which later turned out to contain minerals, if at the time
of patenting no minerals had been discovered.
The evidence is clear enough that the delay in the patenting of lands to
the Central Pacific Railroad was due mainly to the inadequacy of the staff
in the General Land Office at Washington and not to the policies of the
railroad itself. This is shown by the wide disparity between listings and
patents. The excess of lands selected over lands patented averaged 57,000
acres during the five years ending June 30, 1869. During the next five years
the average excess was 64,000 acres, and during the five years ending June
30, 1886, it rose to 248,000. In 1887, as has been pointed out, there was a
difference of 622,612.54 acres between the amount of acres which had been
listed and those which had been passed to patent. Between 1887 and 1897,
there was no year in which the Central Pacific had less than 300,000 acres
of land listed and selected and the selections on file in the General Land
Office for land in California alone. Yet it is not so important to fix
responsibility in this matter, as to observe that the construction of the
Central Pacific was not aided to any material degree by the lands offered to
it under the legislation of 1862 and 1864. Up to the beginning of 1870, the
company had received only four patents, totaling 144,386.63 acres,[84]
which if sold at $2.50 per acre would have brought it $360,966.57. As a
matter of fact, less than this was disposed of in the early years, and what

was sold was on terms, not for cash in hand. In the later period, land-grant
bonds with a lien on the land grant were sold to investors. The first issue of
such bonds was, however, in 1871.
The bearing of these conditions on the land-grant policy of the United
States is very plain. Congress was legislating in order to get a
transcontinental railroad built. Every form of assistance which could be
immediately transmuted into funds facilitated construction to the full value
of those funds. In contrast with this, assistance which could be realized on
only after a lapse of years, served not as an aid to construction, but as a
reward to promoters for having taken risks. While to some extent the land
grant to the Central Pacific may have aided the sale of Central Pacific first
mortgage bonds, in the main its effect was to give a grossly excessive and
unnecessary profit to a few persons who held most of the stock of the
company, without having invested any considerable capital of their own.
Such a policy needs only to be understood to be condemned.

Fixing Western Base of Sierras
Both the subsidy and the land-grant clauses of the Acts of 1862 and
1864 were to receive interpretation by the courts. The subsidy provisions
will be discussed again in a later chapter, so that the provisions designated
to secure repayment of the government loan need not be considered at this
time. Mention may be made, however, of President Lincoln’s action in
fixing the western base of the Sierras at the point where the line of the
Central Pacific crossed Arcade Creek in the Sacramento Valley, a location 7
miles east of Sacramento, in a country which a casual observer would not
be likely to call mountainous.
It is not at first sight evident why this point was chosen. The junction of
Arcade Creek and the Central Pacific Railroad happens to be at about the
edge of the alluvial plain of the Sacramento River, and so is marked by a
slight rising of the ground. The rise is not, however, great. The beginning of
the Sierra granite is at Rocklin, 22 miles east of Sacramento, and this spot
rather than the one selected has the better right to be considered the real
beginning of the mountains, so far as any single point can be fixed. As a
matter of fact, the advisers of the President, who were in this instance the
political authorities of the state of California, made their recommendation
on the strength of what they conceived to be the purpose of the federal act

rather than on scientific grounds. Mr. Whitney, state geologist, told the
government that the intent of Congress was clearly to give a subsidy of
$48,000 per mile over the most mountainous section of the road. If,
therefore, he said, a distance of 150 miles measured east from the point in
the Sacramento Valley where the ascent commenced would clear the most
difficult and mountainous portion of the Sierra Nevadas and reach the
valley on the eastern slope, then it seemed reasonable that the base of the
Sierra Nevadas should be taken as beginning at that point. He
recommended the place where the line of the Central Pacific crossed Arcade
Creek as such a point.
The same place was selected by the Surveyor-General of the state of
California, on the principle that the two extremities of the 150 miles upon
which the maximum subsidy was to be given should rest upon
corresponding grades, the one to the west, the other to the east of the
mountains. These two recommendations seem to have been controlling,
although the United States Surveyor-General for California suggested a
location further east, where the ascending grade of the Sierras became
plainly perceptible to the naked eye.[85] Since this interpretation of the act
increased the bond subsidy which the Central Pacific was to receive, the
company naturally made no objection.

Conditions of Land Grant
In regard to the land grant, the Land Office was called on for a great
many decisions after 1864, mostly in interpretation of the exemptions
carried in the federal legislation. The cases were not all brought by or
against the Central Pacific, but they nevertheless affected its rights.
In general, the grant of land to the Central Pacific was held to be an
absolute unconditional present grant. The route not being at the time
determined, the grant was in the nature of a float, and the title did not attach
to any specific sections until they were capable of identification. When once
identified, however, the title attached to specific sections as of the date of
the grant, except in the case of sections which were specifically reserved.
[86]
While the grant was a present grant, it conveyed only land which was
public land, that is to say, portions of the public domain which were open to
sale or other disposition under general laws at the time the grant was made.
This definition did not include lands which became public subsequent to the

date of the grant, or lands reserved by competent authority for any purpose
or in any manner, whether or not the reservations were mentioned in the
granting act.[87]
It followed from the theory that the land grant was a present grant, that a
valid homestead entry existing at the date of the passage of the Land Grant
Act excepted the land covered from the area granted to the railroad even
though the entry were canceled prior to the definite location of the railroad
line.[88] The same effect was produced by an uncanceled and unexpired pre-
emption claim, or by any other valid claim or reservation which was alive at
the date of approval of the granting act. In cases like these the cancellation
of the claim restored the land in question to the public domain, but did not
operate to replace it within the railroad grant.[89]
Yet, although the theory that the grant took effect as of the date of the
granting act was strictly applied against the railroad, the settler enjoyed the
protection of a milder rule laid down in the statute itself. Section 7 of the
Act of 1862 required the railroad company to designate the general route of
the road within a stated time, and instructed the Secretary of the Interior
thereupon to withdraw lands within 15 miles (changed to 25 miles in 1864)
of the route designated from pre-emption, private entry, and sale; and
Section 3 provided that the land grant to the railroad should not include
lands to which a pre-emption or homestead claim might have attached at the
time the line of road was definitely fixed. Pre-emption or homestead claims
might therefore be established after the passage of the land-grant statute,
provided that this was done before the lands were withdrawn from
settlement.[90] Indeed, the Secretary of the Interior ruled that settlement and
occupation exempted land from the grant even though the settler failed
formally to assert his claim.[91] After the lands embraced in the grant were
withdrawn from pre-emption, private entry, and sale, a settler could not
secure acreage by subsequent occupation, although he settled prior to the
time when the Central Pacific acquired actual title.

Losses Due to Spanish and Mexican Grants
A class of cases distinct from those of ordinary settlers arose in
connection with Spanish and Mexican grants. It appeared that when
California became a state, the Spanish and Mexican grants were both
indefinite and unrecorded, so that it was not known just what lands were

public domain and what lands were private. On March 3, 1861, Congress
passed an act creating a Board of Land Commissioners in California, and
provided that all persons claiming land in California by virtue of any right
or title derived from either the Spanish or Mexican governments, should
present the same to the board within two years for adjudication, with
privilege of appeal to the United States courts.[92]
Following this act, many claims were presented. The United States
Supreme Court held that land within the boundaries of alleged Spanish or
Mexican lands which were sub judice at the time the Secretary of the
Interior ordered the withdrawal of lands along the route of the road, were
not embraced in the land granted to the company. There were many sections
of California lands which were sub judice on August 2, 1862, and this fact
caused serious loss to the Central Pacific in its grant in California. In
addition to losses from the cause just mentioned, the company suffered
from the indefiniteness of the Spanish and Mexican grants, and from the
delay in determining the extent and boundaries of the Spanish and Mexican
claims.

Policy Toward Settlers
It was the policy of the company to invite settlers upon its lands before
the lands were patented, and then to select and apply for patents on lands
which settlers desired to buy.[93] Sometimes, indeed, the company leased
unpatented land to cattlemen at low rates, in spite of its lack of title. Actual
transfers were made by bargain and sale deed warranting to the purchaser
the entire title acquired by the company from the federal government. The
prices ranged from $2.50 to $20 per acre, but little was sold at a price above
$5. Usually land covered with tall timber was held at $5, and that covered
with pine at $10. The actual cost to the purchaser was slightly greater,
because he was compelled to pay for the acknowledgment of three
signatures to the deed, and for the recording, amounting in all to perhaps
$5.50 or $6. On the other hand, the company granted as much as five years’
credit, and through the practice of selling land seekers’ tickets from San
Francisco, Sacramento, San José, Lathrop, and Los Angeles to points along
the line of railroad, which were accepted as cash on the purchaser’s first
payment for his land, it practically furnished free transportation for
California terminals to the sections bought. This last practice, at least, was

in force on the Southern Pacific in 1880, and presumably on the Central
Pacific also.
All in all, the Central Pacific does not seem to have attempted to
withhold its lands from the market, and there is no evidence that the
settlement of the coast was retarded by the inability of prospective settlers
to get land. The price which the Central Pacific could exact was held in
check by the retention by the government of alternate sections, while the
large sums which the company spent for advertising redounded to the
advantage of the government as well as to that of the railroad. To the
general statement that the Central Pacific was not unreasonably grasping in
its capacity as landed proprietor, exception must be made of its treatment of
timber lands in the North, of which mention will be made elsewhere.
The land-grant policy of the government was a mistake, but it was a
mistake because it unnecessarily enriched a few men by securing to them an
extravagant share in the unearned increment due to the development of the
state of California, without aiding them materially in the task which the
government most desired them to perform—not because the grantees
endeavored to build up landed estates or to discourage the growth of
population. Compared with the land grant, the bond subsidy was distinctly
the better policy.

CHAPTER IV

PROGRESS OF CONSTRUCTION—
CONSTRUCTION COMPANIES

Commencement of Construction
The construction of the Central Pacific Railroad of California was
begun at Sacramento on the 8th of January, 1863. The day the work started
was rainy and calculated to damp the most cheerful of spirits. There was,
however, a brass band, banners, flags, speeches, and a crowd standing on
bundles of hay near the levee to keep its feet dry. Two wagon-loads of earth
were driven up before the platform on which were gathered the dignitaries
present, and Stanford, then governor of California, seized a shovel and
deposited the first earth for the embankment. The enthusiastic Charles
Crocker promptly called for nine cheers. The sun smiled brightly, and
everybody, for the moment at least, felt happy that after so many years of
dreaming, they now saw with their own eyes the actual commencement of a
Pacific railroad.[94]
It was fortunate that Mr. Crocker was enthusiastic, for the difficulties
which the Central Pacific had to overcome were serious. The chief
difficulties were as follows:
Gradients. Some reference has been made in the previous chapter to the
elevations which the Central Pacific had to surmount. The highest point
which the company had to reach was Summit Station, 105 miles from
Sacramento, at an altitude of 7,042 feet. Since Sacramento lay only 56 feet
above sea level, to reach this point required an ascent of 6,986 feet in a
distance of 105 miles, more or less, according as the route chosen was

longer or shorter. The company’s engineer said in 1864 that if it had been
possible to maintain a continuous ascending grade, the maximum grade,
from the foothills to the summit of the Sierras could have been reduced to
80 feet per mile.
In the attempt to approach this ideal condition the Central Pacific
surveyed and resurveyed continuously until its rails were actually on the
ground. Barometrical reconnaissances were made in 1862 and 1863 on lines
via Downieville and Yuba Gap, and via Oroville and Beckwourth’s Pass, in
addition to the surveys via Georgetown, Dutch Flat, and Henness Pass, to
which earlier reference has been made (page 20).[95] Location surveys
reached Alta in 1863, the state line in 1866, and Ogden in 1868.[96] After
Mr. Judah’s death almost an entire relocation of the line from the 31st to the
48th section was made in 1864 in order to avoid tunneling, and to reduce
cost,[97] and still later it was found desirable to shift the whole route
between Dutch Flat and Emigrant Gap from the Bear River side of the
ridge, up which the Central Pacific was proceeding, to the American River
side. This change avoided some 20 miles of 116-foot grade, together with a
great deal of curvature.[98]
The final result of these various surveys was a line with maximum
grades of 116 feet to the mile. This does not compare unfavorably with
most of the transcontinental routes subsequently built. It is interesting to
observe, however, that the Central Pacific summit is some 2,000 feet higher
than the altitude of Beckwourth’s Pass, and that the maximum grade of the
Western Pacific Railway, built years afterwards through that pass, is only
52.8 feet to the mile, or one per cent. Neither Judah nor his immediate
successors, therefore, discovered the best route across the Central Sierras.

Temperature. A second physical difficulty incident to mountain
construction was found in the mountain climate. The summer climate of the
Sierras is delightful, at least at altitudes of about 6,000 to 7,000 feet. At
lower elevations the temperature is often uncomfortably warm. But the
winter climate is quite different. As early as August the nights begin to get
cold, the first snows come in November, while in January the trails become
impassable, and the high levels are unvisited by man until the following
year. The official record shows that the greater part of the mountain
construction on the Central Pacific occurred between July, 1866, and July,
1868.
Mr. Stanford has testified that both the winter of 1866-67 and that of
1867-68 were unusually severe, and his engineers have dwelt in great detail
upon the consequent impediments to their work. Not only did the frozen
earth resist pick and shovel, but there were snow banks from 30 to 100 feet
deep. It was necessary to remove this snow to permit excavation, and to

keep clear the space to be occupied by embankments in order to prevent
settling. When the summit was approached tunnels had to be driven through
the snow to the rock face. As the whole working force could not be
employed in the tunnels, the surplus labor, with all its supplies, was hauled
beyond the summit and put to work, at great expense, in the cañons of the
Truckee River. The first snow sheds were built in the summer of 1867, and
in the following years it was decided to cover all the cuts and points where
the road crossed the paths of the great avalanches beyond the summit. The
total length of sheds and galleries built by the fall of 1869 was 37 miles,
and the cost was $2,000,000.[99]
In addition to the difficulties caused by snow, it must be remembered
that the frozen earth, though uncovered, was difficult to work. Not only was
it necessary to blast out material which could have been cheaply moved at a
more favorable time, but, when piled into embankments, the ground settled
in the spring as the frost was leaving, and required constant attention.[100]
All the various obstacles raised by climate would have been minimized
if construction had proceeded more slowly. Indeed, Mr. Hood and Mr.
Strobridge, engineers in charge of construction, agreed that if the Central
Pacific had been built at less speed, and as such railways are usually
constructed, the expense would have been from 70 to 75 per cent less than
the actual cost. The saving would not have been due altogether to the
abandonment of winter construction, but this would have been an important
factor. The Central Pacific, however, preferred speed to economy, in the
hope of outstripping the Union Pacific in the race for the business of
Nevada, and for the subsidies and land grants offered by Congress.
Supplies. A further obstacle in the way of successful construction of the
Central Pacific lay in the difficulty of getting supplies. Wood and stone
could be procured in the mountains, but iron, coal, and manufactured
articles of all sorts, including rails, locomotives, and cars, were brought
from Sacramento or from the East. Prices in general were high, in part
because of the war. The first ten locomotives purchased by the Central
Pacific Railway cost upwards of $191,000; the second ten upwards of
$215,000. Iron rails cost $91.70 per ton at the mills. The price of powder
increased from $2.25 to $6 during the period of construction. The cost of
food was exorbitant. Hay was worth $100 a ton out upon the line, and oats

about 14 or 15 cents a pound. Stanford says he sold one potato for $2.50.
[101]

In the cases cited, high cost of transportation often played an important
part in determining the final prices, and in general, indeed, the expense of
moving supplies was comparable with the initial cost. Among many
possible illustrations one may mention the fact that shipments of rails via
the Isthmus of Panama as late as 1868 cost, for transportation alone, $51.97
per ton, making the total cost of the rail delivered at Sacramento, $143.67,
not including charges for transfer from ships at San Francisco, nor for
transportation up the Sacramento River. Nor was this freight rate high when
compared with the cost of wagon hauls in the mountains, when material had
to be transported away from the finished track. Mr. Huntington tells of
meeting some teams with ties in the Wahsatch Mountains. He continues:
They had seven ties on that wagon. I asked where they were hauled from, and they said
from a certain canon. They said it took three days to get a load up to the top of the
Wahsatch Mountains and to get back to their work. I asked them what they had a day for
their teams, and they said $10. This would make the cost of each tie more than $6. I passed
back that way in the night in January, and I saw a large fire burning near the Wahsatch
summit, and I stopped to look at it. They had, I think, some twenty to twenty-five ties
burning. They said it was so fearfully cold they could not stand it without having a fire to
warm themselves.

Fortunately for the company, the cost of labor on the Central Pacific and
transcontinental lines does not seem to have been excessive. The total
number of men employed ranged from 1,200 in 1864, to 14,000 or 14,500
in 1867, when construction was at its height. White men, of whom there
were some 2,500 or 3,000 in 1867, received $35 a month and board as
common laborers, and from $3 to $5 a day as skilled mechanics. Most of
the track laborers, however, were Chinamen, who were paid $35 a month,
and boarded themselves.[102] These Chinamen proved reliable and willing
workers, and, because of his experience with them, it was with distinct
reluctance that Mr. Stanford in later years allied himself with the friends of
Chinese exclusion.[103]

Letting of Construction Contracts
Such obstacles as these made the task upon which the Huntington-
Stanford group had entered a formidable one indeed. Just how the
difficulties should be met, Mr. Huntington himself did not know.

Arrangements were first made with small contractors for the building of
stretches of road from Sacramento towards Newcastle. Charles Crocker
resigned his directorship in 1862 and took the first contract for 18 miles.
Then Cyrus Collins and Brothers got a contract which they did not
complete, and other contracts were let to Turton, Knox and Ryan, C. D.
Bates, and S. D. Smith. Mr. Crocker says the people raised a hue and cry
saying that he was a favored contractor, so that the directors told him that he
could not have more than two miles of the road between the 18th and 30th
sections.[104] He adds that the independent contractors got to bidding
against each other for laborers, and thus put up the price. Huntington was
told that the smaller contractors quarreled with each other, and tried to
“scoop” labor from each other;[105] while Mr. Stanford says that the small
contractors did not finish their sections in consecutive order, that they did
not hurry, and could not be sufficiently controlled.[106]
At any rate, after the completion of section 29, no more contracts were
let to anyone except Charles Crocker and Company. According to the
associates, it was not so much a question of price as one of organization and
control. This may be true, or it may be that the associates finally decided
that it would be easier to make a satisfactory profit out of government
subsidies by doing the building themselves, than by beating down
subcontractors to the lowest possible contract price. It should be noticed
that the change in policy referred to did not take place until 1864, when the
federal Act of 1862 had been passed and that of 1864 was imminent, and
that the Central Pacific did not select any single contractor, but gave all its
work to Charles Crocker, one of the original associates.

Contracts with Crocker
The first contract with Charles Crocker, covering sections 1 to 18,
provided for a lump sum payment of $400,000, of which $250,000 was to
be in cash, $100,000 in bonds of the company, and $50,000 in capital stock.
This was also the type of contract made with other contractors up to section
30, although the amounts paid varied. At least one bill for extras was
allowed Mr. Crocker. Sections 30 and 31 were built by Crocker, and after
these were completed he was permitted to continue without a written
contract.

In June, 1865, Mr. Hopkins made a report to the president and directors
of the Central Pacific upon the general subject of contracts. In this report
Hopkins dwelt upon the necessity of rapid construction for the purpose of
capturing the passenger traffic between Sacramento and Virginia City; and
also in order to comply with the acts of Congress and the state legislature,
which required rapid construction of the road. Persons of large capital, he
said, seemed unwilling to bind themselves to construct the road as rapidly
as necessary. Charles Crocker and Company, on the other hand, had pushed
and were pushing the work with extraordinary vigor and success, and had in
all cases complied with the orders and directions of the officers of the
company. He recommended, therefore, that arrangements be continued with
that firm, at rates specified in an accompanying resolution.[107] The
directors thereupon adopted this report, and resolved as follows:
Resolved and ordered that Charles Crocker and Company be allowed and paid for all
work done and material furnished, or which may hereafter be done and furnished, until the
further order of the Board of Directors, in the construction of the railroad of the Company,
from section 43 eastward, subject to and in accordance with the terms, conditions and
stipulations set forth in the contract with said Charles Crocker and Company, dated
September 19, 1863, except so far as the same are modified or changed by this order, at the
following rates and prices, and in accordance with the following classification, to-wit:
[Here are inserted the rates for clearing and grubbing, and excavation in various kinds
of rock, etc.]
The payments to be made monthly, according to the monthly estimates, five-eighths
thereof in gold coin, and the remaining three-eighths in the capital stock of the Company,
at the rate of two dollars of capital stock for each one dollar of said three-eighths of said
estimate, with the privilege of paying said three-eighths in gold coin in lieu of said stock, at
the election of said Company, to be made at the time of such payment.

Summit Valley. Altitude 6,960 feet. Emigrant Mountain
and Railroad Pass in the distance

Payments in Cash and Stock
The essence of this arrangement was that Mr. Crocker was to go ahead
indefinitely and that he was to be paid not a given sum per mile, but at a
given rate of so much per unit for each class of work which he might find it
necessary to do. Payments were to be made in cash, and also up to a certain
per cent in stock, taken at a valuation of 50 cents on the dollar. Under date
of April 16, 1866, Mr. Crocker requested that stock be given him at a
valuation of 30 cents on the dollar, instead of 50 cents, and this was agreed
to.[108]
The change from a 50-cent to a 30-cent valuation was made ostensibly
because Crocker and Company could not realize more than 30 cents on the
stock which they were receiving. As a matter of fact, Crocker could not sell
Central Pacific stock at any price, so that the alteration of the contract
merely increased his chance for a speculative gain, to be realized after
construction should have been completed. Mr. Stanford has said that the
directors did not care very much what the prices were, so long as the work
was done. Under the contract, the Central Pacific Railroad itself, through
Mr. Huntington, purchased locomotives and cars for Crocker and Company,
and charged for them at cost.[109] Bonds were also sent from San Francisco
to Huntington, but it was Huntington’s impression that they were sold for

the company, not for the contractors. In any case, Huntington rendered an
account every month of what he had done, and Hopkins settled with the
company or with the contractors, as the case might be.[110] Describing the
situation at a later date, Crocker said, “It was decided that I should go on
immediately and see what I could do. I did go on until we got tied up in
suits and I had to stop. I could not get any money. They had all the money I
had, and all I could borrow. That was the time that I would have been very
glad to take a clean shirt, lose all I had, and quit.”
The total payments made to Charles Crocker or to Charles Crocker and
Company, under the various arrangements just described, were as follows:
[111]

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

Cash, or its equivalent, including material furnished
him $8,853,117.93
Bonds, taken at par 100,000.00
Stock, taken at 50 cents on the dollar 2,696,200.00
Stock, taken at 30 cents on the dollar 11,947,530.00
Stock, taken at par value 57,980.22
——————
Total $23,654,828.15
═════════

If we take the cash payments at par and the bonds at 75, this would
make the tidy sum of $69,210 per mile on 129 miles. When we bear in mind
that Crocker accepted the contract for the first 18 miles out of Sacramento
at a price including a cash payment of only $13,800 per mile, and that the
arrangements with the small contractors who followed him were distinctly
less favorable, it is possible to say with some confidence that the profits on
the Crocker contracts were considerable. Whatever they were, Mr. Crocker
shared them with his associates by depositing at a later date $14,000,000 in
Central Pacific stock in the treasury of the Contract and Finance Company,
(discussed in the next section) for the benefit of the stockholders of that

organization. Inasmuch as Stanford was one of the principal stockholders in
the Contract and Finance Company, his later categorical denial before the
United States Pacific Railway Commission that he had participated in the
profits of the Crocker contracts makes interesting reading.[112]

“Contract and Finance Company”
When the Central Pacific approached the state line of California in the
latter part of 1867, the associates told Mr. Crocker that they did not think it
best for him to go any further. They said they wanted more capital—they
wanted to engage heavy men in the enterprise.[113] Crocker had not been
successful in persuading capitalists to go in with him, while it was believed
that investors were deterred from taking stock in the Central Pacific by
reason of the liability which would be thereby incurred under California
law. Either Huntington or Stanford—both claim the credit—conceived the
idea that there would be an advantage in organizing a corporation to
undertake the construction work. The subject was mentioned on the
occasion of one of Huntington’s visits to California, although the company
was formed while Huntington was in the East.[114] The name finally decided
upon for the new corporation was that of “Contract and Finance Company.”
Articles of association were filed in October, 1867. W. E. Brown, Theodore
J. Milliken, and B. R. Crocker attended to the details. Milliken was a
merchant in Sacramento, and the other two were connected with the Central
Pacific.
According to its articles of incorporation, the Contract and Finance
Company was formed for the purpose of engaging in and carrying on the
business of constructing, purchasing, leasing, selling, holding, maintaining,
operating, and repairing railroads, wagon and transit roads, steamboats,
vessels, telegraph lines, and rolling stock of railroads; the purchasing,
holding, hypothecating, and selling of bonds and stocks issued by railroad
and other companies or corporations; the purchasing and using of iron and
other materials for railroad and telegraph lines; the borrowing and loaning
of money; the conducting of an express and stage business, and any and all
other kinds of business connected with or pertaining to railroads and
telegraph lines; the transportation of persons and property, on land and
water; and the purchasing, holding, leasing, and selling of real estate of all
kinds. The capital stock was set at $5,000,000.

Failure to Attract Outside Capital
It is the unanimous testimony of the associates that the real and only
reason for forming the Contract and Finance Company was that outside
capital might be induced to come in. Huntington says that when the
company was organized, he went with new energy to capitalists in the East
to induce them to take a share in the risks and profits of construction. Yet
from the point of view of attracting outside capital, the Contract and
Finance Company was a complete failure. William and Commodore
Garrison, of New York, A. A. Selover, Moses Taylor, and William E.
Dodge, among others, considered the matter, but all concluded that the risk
was too great. In California, Stanford applied to D. O. Mills, W. C. Ralston,
Haggin and Tevis, Michael Reese—in short, to everybody whom he thought
he might possibly induce to take an interest—but in vain.[115] The result of
the failure to secure outside subscriptions to the Contract and Finance
Company was that the associates had to take up the stock of that company
themselves. Crocker was made president at an early date, and apparently
took the bulk of the stock in the first instance. Then, when it was evident
that no outside investors would come in, he put the stock back, and
Stanford, Hopkins, Huntington, and E. B. Crocker took equal shares with
him—each subscribing for 10,000 shares out of the 50,000 outstanding.[116]
Later a little stock was disposed of to outsiders, but when the Contract and
Finance Company got into the courts the associates bought this back.
Throughout the whole life of the Contract and Finance Company the
stockholders were the same men who held the bulk of the stock of the
Central Pacific Railroad. Contracts between the finance company and the
railroad company were therefore made by the associates in one capacity,
with themselves in another capacity, a situation unfortunately not unique in
the history of American railroad building. An unusual feature of the
arrangement, however, which was common to arrangements with other
construction companies formed by the associates, was that the funds of the
Contract and Finance Company, over and above the sums received from the
Central Pacific, were derived from loans to the company by its stockholders
and not from payments on the stock subscribed. There is no evidence that
Hopkins, Stanford, Huntington, or either of the Crockers paid a cent in cash
on their subscriptions. Instead, they gave their notes. To provide the
Contract and Finance Company with funds, they deposited money,

sometimes more and sometimes less, paying interest on their notes, and
receiving credit for interest on their balances, each partner as a rule putting
in all the funds which he could spare, and having an individual account kept
of his transactions. The Contract and Finance Company was, therefore,
always heavily in debt, although the debt was owed to its own stockholders.
The advantages of this arrangement would seem to be two: first, that it
concealed effectively the profits which the company was making; and
second, that it did not limit any stockholder to a proportionate share in the
burdens and gains of the undertaking. If any of the associates desired to
participate more heavily than his friends, or less heavily, he could do so.
Such a privilege was probably not important before 1869, but it became so
later.

Contracts with Construction Company
A word may now be said about the contracts which the Contract and
Finance Company secured. Under date of December 3, 1867, Mr. Stanford,
as president of the Central Pacific, reported to his directors that he had
made a contract for the construction and equipment of the railway and
telegraph line of the company lying east of the eastern boundary of the line
of California, and presented a draft of the contract, which the directors
approved.[117] Leland Stanford, E. B. Crocker, Mark Hopkins, and E. H.
Miller, Jr., were present and voted. Mr. Miller explains that he did not
understand at the time who the owners of the Contract and Finance
Company were, and that nothing was said about it at the meeting. The
contract provided that the Contract and Finance Company should build the
road of the Central Pacific from the state line, eastward, 552 miles. It was to
grade the road, build the bridges, lay the track, build and complete a
telegraph line, furnish telegraph offices and instruments, furnish rails, ties,
buildings, roundhouses, turntables, and a specified number of engines and
cars and running material per mile. On its part, the Central Pacific agreed to
pay $86,000 per mile, half in cash and half in Central Pacific stock, and in
practice the Central Pacific provided the equipment and the iron, charging
them to the Contract and Finance Company at cost. This statement relative
to the terms of the contract with the construction company is made on the
strength of the recollections of parties interested,[118] for the actual contract
is one of the missing documents characteristic of Central Pacific history.
Stanford describes the contract as an exhaustive one. That is to say, the

Central Pacific turned over all it had and the Contract and Finance
Company built the road and got the profits, if there were any.
The apparent advantages of an arrangement with a construction
company as compared with those of construction by the Central Pacific
itself, were those connected with specialization of the work. A company
which does nothing but construction and which does that all the time, may
be expected to have a force more highly trained in this particular grade of
work, and a more abundant supply of tools and material than an
organization which builds railroads only occasionally. The unfortunate
necessity of hiring men for each new job and discharging them at the
completion of the job is avoided. In the case of the Central Pacific this
advantage was somewhat illusory, it is true, for the reason that the Contract
and Finance Company on its first contract, whatever might have been the
fact later, could scarcely have had an advantage over the railroad; and as for
tools, the Contract and Finance Company had no machine tools at all at the
beginning, and had to rely on the railroad not only for cars and engines to
transport its men, but for equipment for large construction of any sort. The
real reason for using a construction company in this case was a financial
and not an operating one.

Profits of Construction
Much has been said about the profits of the Contract and Finance
Company. Here, again, books are missing, having been packed into boxes
by the industrious Mark Hopkins in 1873, and never again produced.[119] A
man named John Miller, one-time secretary of the Contract and Finance
Company, and defaulter to the alleged extent of $900,000 at a subsequent
period, was in possession of transcripts from these books, if we may believe
his statement; but even these transcripts disappeared, if indeed they ever
existed.[120] We do not know, therefore, how much construction cost the
Contract and Finance Company, and we cannot calculate with any accuracy
the profit obtained.
It does appear that the work done by the Contract and Finance Company
cost the Central Pacific, in all $23,736,000 in cash and the same amount in
capital stock.[121] If we add to this $100,000 in cash and $2,900,000 in
bonds paid to the Union Pacific for the stretch of land from Promontory
Point to a point five miles west of Ogden, and $1,072,874.79 for snowsheds

and other extra work performed in 1870, we have a total of $51,544,874.79,
of which $24,908,874.79 was in cash. Taken in connection with the Crocker
contracts, this makes an aggregate of $33,761,992.72 in cash, $3,000,000 in
bonds, and $38,437,710.22 in stock. It was the judgment of the United
States Pacific Railway Commission that the total cost of building the 690
miles from Sacramento to Promontory Point, and of purchasing from the
Union Pacific 47½ miles of road from Promontory Point to the end of the
Central Pacific line, 5 miles west of Ogden, did not exceed $36,000,000,
and this included 9 miles built by small contractors, the payment for which
is not included in the figures just given.[122]

Summit tunnel (altitude 7,042 feet) before completion—
Sierra Nevada Mountains

In a word, if the conclusions of the United States Pacific Railway
Commission are to be relied upon, and they were made by engineers
relatively soon after the completion of the road, the builders of the Central
Pacific were able to accomplish their contracts with the cash and the
proceeds of the company’s bonds that were turned over to them, and to
retain their Central Pacific stock as a clear profit. If we compare this stock
surplus with the probable cash investment in the road, taking the shares at
any reasonable valuation, say at $15 or $20 per share, the profit does not

seem excessive. If we compare it with the contributions of the associates,
however, and this is the more reasonable because the associates received the
full benefit of the difference between cost and receipts, it represents, on the
most conservative calculation, 500 or 600 per cent for an investment which
probably did not exceed $1,000,000, over a period of six years. To this
should be added the proceeds of the land grant and of the local subsidies.
The federal government seems in these matters to have assumed the
major portion of the risk, and the associates seem to have derived the
profits. Nor is this point of view vitiated by the fact that the federal
government was ultimately repaid its loan in full, for the reason that the
repayment was not at the expense of the associates, but was made possible
by a credit arising out of the earnings of the road, and represented merely a
shifting of the burden of the debt due the federal authorities to the
communities along the line.
Besides the completion of the main line of the Central Pacific, the
Contract and Finance Company built a portion of the California and Oregon
Railroad, part of the Western Pacific, and the entire San Joaquin Valley
branch of the Central Pacific from Lathrop to Goshen. The arrangements
between the Contract and Finance Company and Central Pacific for this
work varied, but substantial additional profits were secured. In 1874, the
Contract and Finance Company was dissolved. There is some dispute as to
whether its assets were divided into four or five parts, but both Stanford and
Crocker have testified that their dividend consisted of approximately
$13,000,000 in Central Pacific stock, at par.[123] At the same time the
stockholders of the construction company assumed its debts, amounting to
perhaps $1,600,000.[124]

CHAPTER V

THE SEARCH FOR A TERMINAL

Progress of Construction
Under its various construction contracts, the Central Pacific steadily
progressed, between 1863 and 1869, from Sacramento to a junction with the
Union Pacific near Ogden. The official statement of the progress of
construction is as follows:[125]

January 8,
Broke ground at Sacramento
1863
October 27,
Laid first rail
1863
Constructed
Sacramento to Roseville (18 miles)
in 1863

Road opened as follows:
To Newcastle 31 miles January, 1865
” Auburn 36 ” May 15, 1865
” Clipper Gap 42 ” June 10, 1865
September 4,
” Colfax 54 ”
1865
” Secret Town 66 ” May 8, 1866
” Alta 78 ” July 10, 1866

November 9,
” Cisco 94 ”
1866
” Summit 105 ” July, 1867
” State Line 278 ” January, 1868
” Reno 294 ” May, 1868
” Wadsworth 329 ” July, 1868
(362 miles constructed in 1868)
April 15,
” Monument Point 667 ”
1869
” Ogden 743 ” May 10, 1869
Driving last spike, and opened for
business from Sacramento; distance
San Francisco to Ogden, per time
card 883 ” May 10, 1869

Relations with Western Pacific
It has already been noted that the line from Sacramento via Stockton to
San José was not part of the original plan, and that the rights, grants, and
franchises of the Central Pacific in it were assigned to other parties in the
course of the Congressional fight. The original assignment of December 4,
1862, was to a group of men which included Timothy Dane, the original
projector, and president of the San Francisco and San José Railroad, Charles
McLoughlin, and A. H. Houston. In 1864, the first assignees having waived
their rights, the Central Pacific Railroad made the same assignment to the
Western Pacific Railroad of California.[126] The Western Pacific Railroad in
turn let contracts for construction to Houston and McLoughlin, but by 1867,
McLoughlin had become involved in litigation regarding his contracts and
asked that all arrangements between himself and the Western Pacific be
canceled.[127]
This led the Western Pacific to enter into a contract with the Contract
and Finance Company, with the result that substantially all the stock of the
first-named corporation came into the hands of the Huntington group.
McLoughlin retained the federal land grant; the federal subsidy, however, of
$16,000 per mile, reverted to the Western Pacific as did the local subsidies,

and through it passed to the Contract and Finance Company. The railroad
from Sacramento to San José was opened September 15, 1869; on June 22,
1870, the Central Pacific and the Western Pacific filed articles of
consolidation.

Lack of Terminal Facilities
In September, 1869, the transcontinental railroad from Omaha to San
José was in working order. It would be an exaggeration to say that the line
was in good shape. There was little or no ballast, and a good rain was said
to make miles of the road-bed run like wet soap. Little had been done to
eliminate grades and curves, sleeping-car accommodation at first was
insufficient, the journey speed from Sacramento to Ogden was only 19
miles an hour, while schedules were not always adhered to. Cars were
heated by stoves, and passengers disembarked for their meals. But in a
measure these were conditions to be expected at the start, and interfered
only in a minor degree with the interest and excitement of a transcontinental
trip. The great fact was that a railroad existed which could be used, and over
which relatively direct, rapid, and cheap communication with the East could
be secured.
The greatest weakness of the Central Pacific Railroad in 1869 lay in its
lack of terminal facilities on San Francisco Bay. When the company
decided to begin work at Sacramento, its reasonable expectation had been
that a railroad under one management would be built from that city around
the southern end of San Francisco Bay to the city of San Francisco. The
Central Pacific was willing to forego the advantage of this construction
itself in order to gain friends, and did it the more willingly because this
stretch of line was likely to be unprofitable by reason of steamship
competition on the bay and on the Sacramento River. These conditions
changed, however, when the Contract and Finance Company took over the
construction of the railroad from Sacramento to San José. The Central
Pacific interest then obtained a connection of its own with Niles near
Oakland, and it was thus led to consider the question of terminals on the
eastern side of San Francisco Bay.
The easiest part of San Francisco Bay for the Western Pacific Railroad
to reach was undoubtedly the shore south of Oakland or Alameda. It would
probably have been possible to build from Stockton to Richmond, as the

Santa Fé did later, or to develop Benicia or Port Costa, or even to build a
terminus on an island in the bay. Yet as compared with these alternatives,
the Oakland terminus had many advantages. It was near to the Western
Pacific main line; it was served by two railroads which possessed valuable
franchises that could be bought at not too great expense; and, most
important of all, the conditions under which the water-front at Oakland was
held were favorable to the acquisition of the necessary terminal facilities.

Oakland Water-Front
The situation at Oakland was briefly as follows: The first army of
settlers in the city had been squatters on a portion of the Peralta grant.
Among these had been Horace W. Carpentier, Edson Adams, and A. J.
Moon. In 1852 the state legislature had incorporated the town of Oakland,
had fixed its boundary, and had granted to it the land lying between high
tide and ship channel along the whole of its water-front, with a view to
facilitating the construction of walls and other improvements.[128] There
were 75 to 100 inhabitants in Oakland at this time, with half a dozen
residences, two hotels, a wharf, and two warehouses. There were no streets
—only cattle trails.[129]
As soon as incorporated, the town held an election, and chose Adams,
Moon, Carpentier, and two others as trustees. Mr. Carpentier did not qualify
or serve. On May 17 and 18, 1852, the board of trustees made two
important grants: In the first place, it gave to Horace Carpentier for the
period of thirty-seven years, the exclusive right to construct wharves, piers,
and docks at any point within the corporate limits of Oakland, with the right
of collecting wharfage and dockage; and in the second place, it sold,
granted, and released to the said Carpentier all the town title in the land
lying within the limits of the town of Oakland between high tide and ship
channel.
In return for this grant Carpentier agreed to build three wharves and a
schoolhouse, and to pay to the town 2 per cent of his wharfage receipts—
certainly a modest recompense. Mr. Marier, president of the board of
trustees, later testified that Carpentier told him when the deed was signed
that he would be willing at any time to reconvey the property to the town on
being reimbursed for the moneys he had expended; and this was also the
recollection of others.[130] But the understanding, if any existed, never could

be enforced,[131] so that Carpentier was firmly established in his control of
the tide-lands of the city of Oakland, and in spite of petitions, riots, and
litigation, sat unshaken in 1867 when the Central Pacific became interested
in the matter.[132]

Oakland Water Front Company
Sometime prior to 1867 Carpentier had several talks with Leland
Stanford, and endeavored to persuade him to build north from Niles across
the Ravenswood cut-off. In the fall of 1867, Carpentier and Stanford talked
again, and Stanford came to entertain the idea as a matter of reasonable
negotiation. John P. Felton was engaged by the city of Oakland to look into
its rights. Carpentier says that he offered the railroad one-half of his water-
front if it would make his property its terminus. He says that this mode of
adjustment was acquiesced in by Mayor Merritt and Mr. Felton, and that
about the end of the year (1867), it came to be understood between them
and Governor Stanford and himself that something should be done on
approximately this basis.[133] Judge E. B. Crocker, however, attorney for the
Central Pacific, asked that outstanding disputes regarding the water-front be
first settled. The legislature was soon to be in session, and it was urged that
all should act together in trying to get an authorization for the settlement of
difficulties.
This was done.[134] On the 27th of March, 1868, as a part of a series of
compromise arrangements, the Oakland Water Front Company was
incorporated. The subscribers and original directors were H. W. Carpentier,
president; Samuel Merritt, vice-president; Lloyd Tevis, secretary; Leland
Stanford, treasurer; E. R. Carpentier and J. B. Felton. Mr. Tevis and H. W.
Carpentier were in the same year directors of the Southern Pacific Railroad
Company. The Oakland Water Front Company was capitalized for
$5,000,000, and the stock was divided into 50,000 shares. Of these shares
H. W. Carpentier subscribed for 23,000, or 46 per cent; Stanford for 17,500,
or 35 per cent; and Felton for 4,999, or 10 per cent. Lloyd Tevis took 2,500
shares, E. R. Carpentier 2,000 shares, and Samuel Merritt 1 share.
On March 31, Mr. Carpentier deeded to the new corporation all the
water-front of the city of Oakland, that is to say, all the lands, and the lands
covered with water lying between high tide and ship channel, being the
water-front lands described in and granted in the act of incorporation of

May 4, 1852. He excepted from this deed only that water-front lying
between the middle of Washington Street and the middle of Franklin Street
and extending southerly to a line parallel with First Street. By Section 2 of
an agreement made the following day, the Oakland Water Front Company
agreed to deed this last-named area to the city of Oakland.[135]

Cession of Land by Water Front Company
On April 1, 1868, two further agreements were signed. One, styled an
indenture, was between the Oakland Water Front Company, the Western
Pacific Railroad Company, Carpentier, Felton, and Stanford. Under this
indenture, and in consideration of the deed of March 31, the Oakland Water
Front Company declared that it held the property conveyed to it subject to
covenants which were particularly set forth as follows:
The Western Pacific Railroad agreed to select within three months 500
acres from the property conveyed by the deed of March 31, including not
more than one-half mile of frontage on ship channel, together with not to
exceed two strips of land over the remainder of the premises from high-
water mark to the parcels selected. The strips running from high-water mark
were each to be not more than 100 feet wide at grade.
The Oakland Water Front Company agreed to convey to the Western
Pacific Railroad the 500 acres selected, and to grant an exclusive right-of-
way over the hundred-foot strips. It undertook, moreover, to sell no land
west of the 500 acres, provided that these were located out to a westerly
water-front of 24 feet depth of water at low tide, and to place no
obstructions in front of them, or to do anything to obstruct the free approach
of vessels to the parcels.
The Water Front Company further agreed to convey to the city of
Oakland on demand “so much of the premises as [lay] between the middle
of Franklin Street and the easterly line of Webster Street, and extending out
to a line parallel with First Street, and two hundred feet southerly of the
present wharf at the foot of Broadway,” with the right of wharfage,
dockage, and tolls thereon, and to designate and dedicate as a navigable
water course for public use, the channel of San Antonio Creek, from ship
channel to the town of San Antonio, to a width of not less than 200 feet over
the shallow water at the bar, and 300 feet wide above that place.

The Water Front Company, in the third place, undertook to convey
25,000 shares of its stock to Carpentier, 5,000 shares to Felton, and 20,000
shares to Stanford.
Finally, the Water Front Company authorized the city of Oakland, or
other parties, to construct a dam above the Oakland bridge, across the
estuary, so as to keep the land above submerged to high-tide mark, for the
use of the owners of the adjoining lands, and of the public.
The second paper, also signed on April 1, was an agreement between the
Western Pacific Railroad Company, Leland Stanford, and the Water Front
Company. By it the railroad agreed to construct or to purchase within
eighteen months and to complete a railroad from its main line, then at Niles,
to and connecting with the parcels of land described in the indenture of the
same date, together with the necessary buildings and structures for a freight
and passenger depot on the premises. The railroad agreed to expend in new
work within three years $500,000. The railroad company agreed that in
construction across the estuary between Oakland proper and Brooklyn it
would leave a space for forty feet free for the passage of vessels.[136]

Attitude of City
Up to this point the city had not entered into any contracts. On April 1,
however, the city council passed an ordinance ratifying and confirming the
grants made under the early ordinances of 1852 and 1853, and the
conveyance by Mr. Marier as president of the board of trustees, and granted,
sold, and conveyed to the said Carpentier in fee simple forever, the city
water-front, that is to say, the lands lying between high tide and ship
channel. This ordinance further provided that Carpentier should convey to
the Oakland Water Front Company the property and franchises conveyed at
that time by the city to him, to be used in accordance with the terms and
stipulations of the contract between the Oakland Water Front Company, the
Western Pacific Railroad Company, and other parties. On the following day
the council passed still another ordinance reciting that inasmuch as the
terms and stipulations previously provided had been complied with by
Carpentier, the grant was finally settled upon him.[137]
The result of these somewhat complicated negotiations was that the
Central Pacific acquired 500 acres of water-front property in Oakland, with
a frontage of one-half mile on ship channel, merely as a reward for coming

to the city. In addition, Mr. Stanford, acting presumably on behalf of his
associates, received 40 per cent of the capital stock of the Oakland Water
Front Company, which on its part owned substantially all of the water-front
remaining. The city attorney, who was supposed to represent the interests of
the city, was rewarded with 10 per cent of the stock of the Oakland Water
Front Company, and the position of director. The mayor of the city, Mr.
Merritt, was made vice-president of the same corporation, although the
extent of his personal interest in it is not known. He seems to have held
only qualifying shares.[138]
In subsequent years the relations between the city of Oakland and the
Oakland Water Front Company were repeatedly subjects of most bitter
controversy. Extravagant as had been the consideration of the grant to the
Central Pacific for coming to Oakland, this matter was less serious than the
circumstance that the control of the remaining water-front by the Central
Pacific through the Oakland Water Front Company appeared to make it
impossible for any rival transportation company to gain a footing in the city.
The city long endeavored to free itself from this monopoly. It contended at
one time that Carpentier had secured the election of his own agents to the
board of trustees which had made his grant, and that in any case Carpentier
had agreed to reconvey the property to the city. Neither statement could be
proved. On the contrary, in 1897 the Supreme Court of California definitely
pronounced the compromise of 1868 binding upon the municipality,
although it interpreted the words “ship channel” to mean the low-tide line
and not a depth of three fathoms at low tide as had at first been supposed.
[139]

Water-Front Monopoly Broken
Ten years later the title of the Oakland Water Front Company was again
questioned in a case brought by the Western Pacific Railroad Company. By
this time two jetties had been built by the United States government
extending the lines of San Antonio Creek westward to deep water. As a
result of the deposit of material taken out of the channel of the estuary and
placed north of the northern training wall, and of additional deposits from
dredging operations conducted by the Central Pacific and by private parties,
the line of low tide had been moved appreciably out into the bay. Under the
general rule that accretions belong to the proprietors of riparian lands, the

Southern Pacific, as successor to the Oakland Water Front Company,
asserted title up to the limit of the new line of low tide. This claim the
federal court denied. The limit of the railroad company’s property was
declared to be the low-tide line of 1852, extending first northwesterly and
then northeasterly from the mouth of the San Antonio estuary at Sand Point
as indicated in the map on page 93.[140]

Map of Oakland and Brooklyn, showing location of Central Pacific
terminals, 1871

This at one stroke transformed the Southern Pacific’s holding from a
water-front to an interior location, by making it clear that the title to the
substantial area between the bulkhead line of the city of Oakland and the
low-water mark of 1852 lay in the city and not in private hands. The city
had indeed given away its water-front as it existed in 1852, but the creation
of a new water-front during the following years relieved it of the effects of
its negligence. It thus appears that the alienation of the water-front of
Oakland in 1868 did not permanently vest in the Central Pacific interest
control of the tide-lands to which the compromise of that year referred. For
the time being, however, the company secured a well-nigh complete
monopoly. Not only had it convenient access to tide-water for its own
trains, but it was able for many years to keep other railroads from obtaining
a similar advantage. Up to this point, however, no arrangement had been
completed for a terminus on the San Francisco side of San Francisco Bay.

Proposed Grant of San Francisco Water-Front
In order to establish the Central Pacific with complete adequacy, the
associates accordingly now turned to the western side of San Francisco Bay
and took steps to provide terminal facilities in the city of San Francisco
itself. Possibly this was because they had acquired or were about to acquire
a controlling interest in the San Francisco and San José Railroad; possibly it
was due to Carpentier’s influence, or perhaps it was merely a recognition of
the advantages of a terminal location in San Francisco.
Unlike Oakland, the city of San Francisco had never received title to all
its tide-lands from the state, and application had to be made to the
legislature at Sacramento, direct. Early in 1868 the Senate Committee on
Commerce and Navigation, of the state legislature, reported a bill granting
to the Western Pacific Railroad Company and to the Southern Pacific
Railroad Company, submerged and tide-lands in the Bay of San Francisco,
from the foot of Channel Street to Point San Bruno, with the right to extend
the railroads of said companies or construct branches thereof, and to
purchase other railroads, and use the same for the purpose of reaching the
place or places on said premises selected as termini for said railroads, and
to maintain and operate the same by steam or other power from the present
lines of said railroads to the said termini on said premises, and with all
necessary and proper depots, side-tracks, etc.
The boundaries of this extraordinary grant are indicated on the map on
page 96.[141]
The total length from the foot of Channel Street to Point San Bruno was
a little over 8 miles. The maximum breadth was approximately 2½ miles,
and the area was estimated by opponents of the scheme to be not less than
6,620 acres. The value of such a water-front on the principal city of the
Pacific Coast was to be measured in millions of dollars, and its importance
to the Huntington interests was not limited to a money value alone. The
possession of the San Francisco water-front south of Channel Street meant
the occupation of the only part of the city at which a first-class railroad
could reach tide-water. The reason for this is that all railroads must come
into the city of San Francisco from the south or the southwest on account of
the shape of the peninsula, and no railroad can conceivably be allowed to
cross the main thoroughfare. Market Street, or to penetrate the thinly settled
residential districts in the north.

Boundaries of Railroad Tide-Land Grant, as proposed in
1868.

The bill provided that the Central Pacific, Western Pacific, Southern
Pacific, and the San Francisco and San José railroads, which were the
proposed grantees, should pay the fair market cash value of the submerged
lands at the time of the passage of the act, being not less than $100 per acre
for the lands lying north of Point Avisadero. But it was also provided that
the surplus over $100 due for the land north of Point Avisadero might be
spent in reclamation and improvement of the premises, and the companies
were to receive patents if within five years not less than $1,000,000, in
addition to such surplus, had been spent in this way. In plain English, the

tide-lands were to be sold for $100 an acre, but in the case of some of them
the beneficiaries might be required to spend additional amounts in
improvements. The Senate committee defended its recommendation by
saying that it was desirable to have the water-front improved, and that this
was the way to have the thing done. It expected that the railroads would
build a sea-wall; and observed that this wall, water-front, and docks would
be subject to the control of the state harbor commissioners. How a rival
railroad in the future would get access to the docks, it did not say.[142]

Scheme Opposed
Generally speaking, arrangements for the alienation of city water-front
property into private hands are to be looked upon with suspicion unless
extensive powers of control are reserved by state or city, and unless there is
provision for the reversion of the property, including improvements, to the
public at the end of a stipulated time not too far removed, on conditions and
in a manner clearly stated. In the particular case in hand there were no such
safe-guards to the public interest, except a general reservation of
jurisdiction and control over the water-front by the State Board of Harbor
Commissioners, and a provision that the grantees should charge no tolls or
wharfage on the water-front sold to them. This was not enough. It was
therefore fortunate under the circumstances that the improvident nature of
the proposed contract was understood and its defects given full publicity by
the San Francisco press. The San Francisco Bulletin commented as follows:
The scheme is an outrageous one. A proposition to sell to the Railroad Companies at a
reasonable price, so much of the southern water-front as would be actually necessary for
depots, warehouses, workshops, etc., might be considered favorably, but a proposal to give
to what is or will be virtually a single corporation two-thirds of the frontage of a city
destined to be the second in America, is utterly indefensible ... this immense property will
be worth eventually as much as the Pacific Railroad itself.[143]

The Alta said:
If the parties who have so modestly presented their humble petition for this concession
had gone one step farther, and asked for a grant of the whole State of California—all its
tide and marsh lands—the control of all its rivers, bays and inlets, we do not know that the
public amazement would have been any greater.[144]

Even the conservative San Francisco Times suggested that it would be
well for the railroad companies to submit detailed estimates of the land

needed for terminals and the uses to which this land was to be put,[145]
while it refrained from commenting on the Bulletin’s assertions that it was
the intent of the railroads to locate their terminus well south of the city of
San Francisco to the great profit of parties from Sacramento who were
buying lands around Hunter’s Point.

Another Plan Substituted
Whether or not this last accusation was well founded, the opposition of
the city grew so intense that the legislature did not dare to carry out its
original plan.[146] Instead, the Southern Pacific and Western Pacific were
offered each 150 acres, to be located by the companies within specified
limits south of Channel Street, and still later the amount was reduced to 30
acres apiece, and a donation was substituted for a sale. So amended, the act
became law on March 30, 1868. It granted and donated to the Southern
Pacific Railroad Company and to the Western Pacific Railroad Company
for a terminus in the city of San Francisco, to each of said companies, 30
acres, exclusive of streets, basements, public squares, and docks. The land
was to be selected by the railroad companies within ninety days, but it was
to lie south of Channel Street, and outside of the Red-Line water-front of
Mission Bay, and was not to extend beyond 24 feet of water at low tide, nor
to within 300 feet of the line which should be selected by the tide-land
commissioners as the permanent water line of the front of the city. A 200-
foot right-of-way was given to the companies to provide access to their
tide-lands. The lands were to be located and $100,000 spent upon them by
each of the grantees within thirty months, or the grant would revert to the
state.[147]
Compared with their original projects, the Act of 1868 represented a
considerable check to the plans of Mr. Stanford and his friends. Yet the
grant in San Francisco was important, and, added to what had been secured
in Oakland, provided satisfactorily for the Central Pacific’s transportation
needs.
In 1871 the San Francisco supervisors granted to the Southern Pacific
and Central Pacific railroads rights on various streets in the city in order
that they might reach and enjoy their lands and depot grounds in Mission
Bay. Late in the same year Stanford indicated his willingness to make
Mission Bay the main terminus of both the Central Pacific and Southern

Pacific, in consideration of a subsidy of $3,000,000 and of alterations in the
terms of the Mission Bay grant so as to make it more acceptable. Nothing
came of these last negotiations, nor of somewhat similar proposals made in
1872 by a citizens’ committee engaged in fighting the Goat Island scheme
(see below) and submitted to popular vote. In 1873-74, however, the city
granted Stanford additional though minor franchises, enabling him to run
trains on certain city streets.

Proposed Occupation of Goat Island
It will be readily understood that feeling ran high both in Oakland and
San Francisco while the railroad negotiations for terminal facilities were
going on. Nor was the public excitement allayed by the attempt of the
Huntington group to occupy Goat Island, which occurred at the same time.
Goat Island, formerly known as “Yerba Buena” Island, is a small body of
land lying about midway between San Francisco and Oakland. Reference to
the inset accompanying the map of Oakland will show its exact location. It
is obvious enough why the Central Pacific wanted the use of this island and
of the mud flats lying directly north. It is just as obvious why, in the
absence of regulation, the public should have objected to its exclusive
occupation by any single railroad company. Yet, in March, 1868, one day
after the action granting to the Central Pacific and to the Southern Pacific
60 acres of tide-lands in San Francisco, the state legislature granted to the
Terminal Central Pacific Railroad Company—a corporation controlled by
the associates—a defined area not to exceed 150 acres of the submerged
shoal lands north of the island, with the right to reclaim these lands for
railroad depot and commercial purposes, and to connect them by a bridge
with the Oakland, Alameda, and Contra Costa shores. The company agreed
to pay the fair appraised value of the lands into the state treasury, and to put
into operation within four years a first-class rail and ferry communication
between the city of San Francisco, the premises conveyed to it, Oakland
and Vallejo.[148]
Two years later the time for the completion of the promised road was
extended, and a railway to the Straits of Carquinez, opposite Vallejo, was
accepted as sufficient to fulfil the requirement of a line to the town of
Vallejo itself,[149] and in 1871 a still further extension of time was given.
The road which the Southern Pacific proposed to build was probably that

indicated in the notice of new construction filed at Sacramento in March,
1867—that is to say, it was a line running from Sacramento east of the
Sacramento River past Freeport, crossing the mouth of the San Joaquin
River, and continuing west through Antioch and over the hills to San
Francisco Bay. Such a road could easily have been brought to Carquinez
Straits, but it could not have reached Vallejo. The associates did not at this
time intend to enter the territory west of the Sacramento River.

Project Lapses
Following the vote of the California legislature, a bill was introduced in
Congress, providing for the grant to the Central Pacific Company of the
right to use Goat Island itself. This logical sequence to the state legislation
was opposed by the United States military authorities and by the city of San
Francisco. It appeared that residents of San Francisco anticipated the
permanent loss of a large part of the transcontinental business if the Central
Pacific should occupy Goat Island. The San Francisco Bulletin insisted that
there was room enough on the island and on the adjacent flat to
accommodate all the warehouses and large shipping, mercantile, and
financial establishments of a seaport of 500,000 inhabitants. It was stated
that the advantages of the location would draw the warehouses, that other
firms would follow, and that men who had business on the island would not
live in San Francisco, but would make their homes on the eastern side of the
Bay where land was cheaper, more level, and more fertile. These statements
were generally believed.
Nothing was done in 1869, 1870, or 1871 beyond the steps just
mentioned. In March, 1872, however, the San Francisco chamber of
commerce passed resolutions and prepared a memorial addressed to the
President and to Congress opposing the proposed grant, and a mass meeting
was held in San Francisco to make public protest. Following this,
conferences were held between a committee of citizens and the president of
the Central Pacific in the hope of arriving at some general understanding
relative to terminal facilities, and eventually the whole Goat Island project
lapsed.[150]

Purchase of Other Roads

By the middle of 1868 the Central Pacific had thus secured satisfactory
water-front facilities in both Oakland and San Francisco, amounting in the
case of the former city, through the Oakland Water Front Company, to
monopoly control. Needless to say, it had also abundant accommodations at
Sacramento. Through the Southern Pacific Railroad it had also franchises in
San Francisco, including the right to maintain tracks in the vicinity of Third
and Townsend Streets. Up to August, 1868, however, it does not seem to
have made the connections between its main line and Oakland that were
necessary to enable its trains to reach San Francisco Bay at all. In that
month Stanford, Huntington, Hopkins, and Crocker bought a majority of the
stock of the San Francisco and Oakland Railroad, and the following year
they purchased likewise the San Francisco and Alameda Railroad. The first-
named company had 2 or 3 miles of track eastward from Oakland’s point.
The Alameda company had about 16 to 18 miles. Both had valuable
franchises, and both owned ferry-boats and piers extending some distance
into the bay. In 1870 both of the companies were joined in the San
Francisco, Oakland and Alameda Railroad, and in the same year this
company was consolidated with the Central Pacific. By 1869 the gap
between the end of the San Francisco and Alameda Railroad and Niles had
been filled, and this in a real sense completed the transcontinental line.

CHAPTER VI

ACQUISITION OF THE CALIFORNIA PACIFIC

Tendency to Monopoly Control
The first intimation that the Central Pacific Railroad was on its way to
something like a monopoly control in the state of California is to be found
in the negotiations for terminals on San Francisco Bay. But it was not long
before more evidence came to light. Looking back with the advantage of
knowledge of the company’s later history, it seems probable that the
possibilities of monopoly control of the railway business of California were
present to the owners of the Central Pacific as early as 1868. The task of
securing such control was not, after all, so very great. California had few
railroads in the sixties, and those which were in operation were small and
unprosperous, and could be cheaply acquired.
Besides this, the topography of the state lent itself to schemes of
conquest by a sharp separation of the interior valleys from each other and
from the coast. It was not necessary to occupy the whole country, for an
effective control over one valley could be maintained in spite of the fact
that an adjacent valley was in hostile hands. Nor was there any public
opinion in California at the time thoughtfully critical of monopoly, as such.
The country was new. Theories covering the relations of large corporations
to the consuming public had not been developed. People hated monopolies
because monopolies meant high prices; but the very persons who were most
likely to object to monopoly were also likely to seek positions of advantage
for themselves when possible.
Under conditions like these, Stanford, Huntington, Hopkins, and
Crocker were almost sure to attempt to dominate the railway system of the

state as soon as they determined to make their connection with it more than
temporary. This decision was made as the Central Pacific approached
Ogden in 1868 and 1869. Had the associates been able to sell out before this
time, it is likely that they would have done so. Indeed, it is credibly reported
that 80 per cent of the stock of the Central Pacific was offered to D. O.
Mills as late as 1873, for a price of $20,000,000,[151] and this was probably
the last of several offers made to different parties.
The evidence seems to show, however, that by 1870 the Huntington
group were inclined to remain in the railroad business. Strategically, the
associates then occupied a very strong position. They possessed the only
railroad line from California to the East. They dominated the Oakland
water-front, and held important concessions in San Francisco. Branch lines,
like long tentacles, stretched from Roseville north to Chico, on the way to
the Oregon state line,[152] and from Lathrop south to Modesto, to be
extended to Goshen by August 1, 1872.[153] By 1869 the Sacramento Valley
Railroad, with its extension to Placerville, had been bought, and the
California Central Railroad from Folsom to Marysville was under Central
Pacific control. Even the budding project for a Southern Pacific Railroad
had received the attention of Stanford and his associates. Indeed, the only
really weak spots in the associates’ position were their failure fully to
occupy the San Joaquin Valley, and the fact that they did not control the
short line between Sacramento and San Francisco. We will, accordingly,
consider the situation and the policy of the Huntington group in these
respects.

Map of California Railroad, about 1870.

Competition of California Pacific
The most direct railroad route from Sacramento to San Francisco is by
way of Vallejo or Benicia, across the Straits of Carquinez, and along the
eastern shore of San Francisco Bay. In 1865, after the Central Pacific had
begun work in earnest, the California Pacific Railroad Company was
incorporated to occupy this route from Sacramento as far as Vallejo.
Contracts were let, though no material progress was made for two years. In
1867 the work was taken up with fresh energy, and in 1869 the road was
finished between Vallejo and Sacramento, with a branch from Davisville to
Marysville. The newly built Napa Valley Railroad from Adalanta,
California, to Calistoga, was acquired at the same time. In 1870 the system

reported 163 miles of road, of which 22 miles consisted of a ferry
connection from Vallejo to the city of San Francisco.
It seems more probable that the California Pacific was originally
intended as a connection for the Central Pacific than that it was built as a
competitor with the larger road. This was satisfactory enough to the Central
Pacific so long as this company terminated at Sacramento. But there is no
manner of doubt that the California Pacific became a formidable competitor
to the Central Pacific when the latter acquired its circuitous line to Oakland
via Stockton. This was especially true with respect to the passenger
business. The distance from Sacramento to San Francisco via Vallejo was
87 miles, via Stockton 137½ miles; the time via Vallejo was 3½ hours, via
Stockton 5 hours. It appears that transcontinental passengers on Central
Pacific trains often changed cars at Sacramento, sacrificing the balance of
their through ticket and paying extra fare in order to save time.[154] Of the
local passenger business between Sacramento and San Francisco, the
California Pacific claimed three-fourths. How large a share of the freight
went by the shorter line does not appear, but it must have been considerable,
for Mr. Stubbs later estimated that the cost of operating the Benicia route
could not have been more than 50 per cent of the cost of operating the
Western Pacific,[155] and it is in evidence that the Central Pacific sent most
of its freight via Benicia as soon as it obtained control of both lines.
It should be remembered also that in addition to its competition for local
business, the California Pacific had ambitious plans in other directions. We
know, for example, that it proposed an extension eastward via
Beckwourth’s Pass to a connection with the Union Pacific, at or near
Ogden. This line was to be built by the California Pacific Railroad Eastern
Extension Company, incorporated at Sacramento in March, 1871, with a
capital stock of $50,000,000.[156] Other reports credited it with an intention
to enter the San Joaquin Valley;[157] while its influence in Sonoma, Marin
and Napa counties was recognized. In short, by 1870 the California Pacific
was not only important in respect to what it had actually accomplished, but
it had in it the germ of a railroad system in no way inferior to that of the
Central Pacific itself.

Rival’s Weakness

Unfortunately for the California Pacific, the company’s physical and
financial position in 1871 did not measure up to the magnitude of its
ambitions. Counsel for the Central Pacific in later years drew a vivid picture
of the condition of the railroad in 1867 which probably contained more than
a grain of truth. According to this account, the right-of-way of the
California Pacific was unfenced, its sidings were few, and its stations were
insufficient. The road-bed was almost wholly unballasted, and inadequately
supplied with ties. Embankments were so narrow that the ends of the ties
projected on both sides. The slope of the cuts was insufficient and upon the
Napa branch the rails were fastened to the ties with wrought nails without
heads which were bent back over the flanges of the rails after being partly
driven, in order to hold the rails in position.[158]
On the other hand, in spite of the imperfect character of its construction,
the California Pacific had paid large prices to contractors in its bonds and
stock. In December, 1870, the company was compelled to borrow money to
meet the January interest of 1871. By the following spring it was indebted
to the extent of $8,450,000, of which $1,200,000 was floating debt, and had
to prepare to meet an annual interest charge of $667,500. This was more
than the company’s earnings could stand.
In 1871 the Central Pacific, taking advantage of the weakness of its
rival, proceeded to the attack by arranging to construct a branch from
Sacramento, by way of Davisville, to Vallejo. In pursuance of this
arrangement it accumulated iron and ties, made surveys, and succeeded in
effecting a contract with an organization known as the Bridge Company of
the City of Sacramento, for the exclusive use of its bridge for their new
enterprise.[159] The California Pacific was already suffering from the
competition of river boats, and the construction of the new road would have
ruined it. The pressing nature of the danger was appreciated by the
managers of the road, and Milton S. Latham, director and treasurer of the
California Pacific, and agent for the holders of three-fourths of the capital
stock of that company, promptly opened negotiations with the Central
Pacific, through Collis P. Huntington, for an adjustment of difficulties. This
was precisely the situation which the Central Pacific desired to bring about.

Control of California Pacific Acquired

The agreement that resulted from the conditions described may
probably be explained as an elaboration of the Central Pacific’s statement to
Mr. Latham that the company was willing to buy the California Pacific but
did not have the money. It took the form of the following consecutive
transactions:
By agreement dated July 13, 1871, between Latham, Leland Stanford,
and Mark Hopkins, Mr. Latham agreed to deliver 76,101 shares of the
California Pacific Railroad Company, to assign three-fourths of the capital
stock of the California Pacific Eastern Railroad Extension Company to the
other parties to the contract, and to stipulate that the total indebtedness of
the two companies named should not exceed $8,421,000. In consideration
of this delivery, Stanford and Hopkins agreed to pay to Latham $1,579,000
in bonds of the California Pacific Railroad Company.
On August 9, 1871, Mr. Latham presented, and the directors of the
California Pacific at a formal meeting approved, resolutions to the effect
that the sum of $1,600,000 was necessary for the purpose of constructing
and completing an additional track, and for strengthening the California
Pacific embankments across the tule lands. The directors further voted that
the money be borrowed, and the necessary bonds be issued. President
Jackson then stated to the board that a contract had been made, and the
execution of this contract was approved.
Under date of August 9, 1871, the California Pacific covenanted with
Stanford, Hopkins, and Huntington for the construction referred to in the
previous paragraph. The associates agreed
... to enlarge the embankment of the railroad of the said party of the second part, where
embankment is required, and erect and widen the trestle work, where trestle work is
required, from the bridge across the Sacramento River to Davisville, in the county of Yolo,
in the State of California, and place thereon a good and sufficient superstructure, consisting
of timber and ties and iron railroad thereon, so as to make an additional railroad track from
said bridge to said Davisville, fully equal to the present railroad on the present
embankment and to connect the same with proper switches with both the main track to
Vallejo, and the track to Marysville of the railroads of the party of the second part. Said
parties of the first part to furnish all the material for the said additional railroad track, and
embankment, and trestle work, and to have the same completed and ready for use on or
before the first day of January, in the year one thousand eight hundred and seventy-three.

In consideration of this construction, the California Pacific was to pay
the associates 1,600 second mortgage California Pacific bonds.

On August 19, 1871, the Huntington group, now controlling a majority
of the board of directors of the California Pacific, entered into an agreement
with the California Pacific under which the Central Pacific undertook to pay
the California Pacific $5,000 per month, to furnish the equipment for
passenger business, and to guarantee the interest on 1,600 second mortgage
bonds, while the California Pacific in return agreed to transport to or from
San Francisco, passengers beginning or ending their trips on the Central
Pacific or connecting roads, and to maintain its fare for other passengers at
$4 between San Francisco and Sacramento. On September 1, 1871, the
Central Pacific took full control of the California Pacific, and moved its
offices from San Francisco to Sacramento.[160]

Motives Behind Transactions
Two explanations of these transactions are possible. Counsel for the
Central Pacific, in 1886, maintained that the contracts fell into two distinct
classes or groups. The California Pacific, according to this point of view,
arranged for an additional track between Sacramento Bridge and Davisville,
and for still more important enlargement in embankments and widening and
erection of trestle work, by the transfer to defendants of second mortgage
bonds. These bonds, it was alleged, though considerable in amount, had
little value because of the desperate financial condition of the California
Pacific. In the second place, the Central Pacific gave value to bonds which
it held by a guaranty, and used them to buy a controlling interest in
California Pacific stock. Of this, the minority stockholders of the
corporation had no right to complain.
Counsel on the other side maintained that the essential feature of the
whole transaction was the purchase of California Pacific stock, and that the
various contracts merely supplied a method of buying this stock without
paying for it. Starting, therefore, with the contract of July 13, they pointed
out that the defendants agreed to purchase California Pacific stock from
Latham with California Pacific bonds which were not yet in existence,
stipulating for full control of the California Pacific before payment should
be made, in order that they might obtain the purchase price from that
company. When Latham announced that he was ready to deliver the stock, it
became necessary for the defendants to secure about $1,600,000 in
California Pacific bonds. These bonds could be legally issued only for new

construction, hence the contract for a second track from Sacramento to
Davisville. When issued, and in the hands of the defendants, it was
necessary to have the Central Pacific’s guaranty. For this the Central Pacific
required the California Pacific to enter into the traffic agreement of August
19, obtaining thus a full quid pro quo. The result was that the California
Pacific furnished first the bonds and then a consideration for the Central
Pacific’s guaranty, which together served to purchase the California Pacific
stock.

Plausible Explanation
There were several circumstances which made this second version
plausible. It seems extraordinary, for one thing, that a company in the straits
to which the California Pacific was reduced should have issued bonds for
double-tracking 13 miles of road.[161] If it be answered that the
strengthening of the road against the immediate danger of flood was the real
reason for the issue, then it was still extraordinary that the time limit for
construction of the work should be set as it was, eighteen months away, on
January 1, 1873. As a matter of fact, the section of the California Pacific
across the tule lands was washed away before the associates got around to
strengthening it. This made it impossible for Stanford, Huntington, and
Hopkins, or the Contract and Finance Company, to which they had assigned
their contract, to carry out the original agreement. Instead, Mr. Montague,
chief engineer of the California Pacific, reported to his board that the cost
of restoring the washed-out line would be equal to the cost of carrying out
the original contract, and the board, on November 15, 1872, authorized the
substitution of this work for that agreed on in the contract of August 9,
1871.
Owing to the subsequent destruction of the books of the Contract and
Finance Company, there is no way of telling accurately what the cost of
restoration actually was. The Contract and Finance Company finished the
job, however, in six weeks after the work was actually commenced, and
what information is available leads one to doubt if the expense was very
great. Another circumstance which raises a question as to the good faith of
the consideration offered for the 1,600 California Pacific bonds, is the
coincidence that the par value of the bonds issued for construction was
practically identical with the amount needed to pay for the 76,101 shares of

stock sold by Latham to Stanford, Huntington, and Hopkins. Still another
peculiar incident was that of the execution, contemporaneously with the
main contract, of a supplementary agreement, under which the Stanford
group agreed to pay Latham $250,000 in a six months’ note, besides the
other consideration for California Pacific stock, if he would visit New York
at once, obtain the consent of the stockholders whom he represented, and
personally assume all the obligations of the California Pacific above the
sum of $8,421,000 specified in the bond.
Whatever the true motives for the transaction described, the coincidence
of the stock sale with the other transactions relieved the representatives of
the California Pacific of any intense interest in the matter, and must
inevitably have made them pliable as to terms. The directors present at the
meeting of August 9, when the contract for the construction of the second
track was approved, were Jackson, Hammond, Latham, Sullivan, and
Atherton. Of these gentlemen, Hammond, Sullivan, and Atherton each held
five shares only, transferred to their names to qualify them as directors;
while the shares of Latham and Jackson were ready for transfer to Stanford,
Huntington, and Hopkins. Hammond, vice-president of the company, as
well as a director, subsequently said, referring to the contract for a second
track: “I don’t recollect that I ever saw or knew what that contract was, until
it was brought into the board.... This contract was made with a party who
was purchasing the majority of the stock of that company, and whose
interest would be to do that work in a workmanlike manner.” Certainly this
was not a desirable point of view for a representative of the California
Pacific to take.

Undisputed Control
The inevitable result of the various contracts and agreements which
have been described was to place the Huntington group in undisputed
control of the California Pacific. On August 10, 1871, Mr. Stanford was
elected president vice Jackson, and on August 2, Mark Hopkins was elected
treasurer vice Latham. The following year Hammond and Moses Hopkins
took the positions of president and treasurer, respectively, while Stanford
and Mark Hopkins and Collis P. Huntington were appointed general agents
of the company, with large powers.

Once in control, Stanford and his associates proceeded to make the best
use they could of the California Pacific in connection with other roads in
their system. It does not appear that they felt any particular tenderness
toward the enterprise. Most of the operating arrangements between the
Central Pacific and the California Pacific were subsequently arranged by
Mr. Towne for both parties, on terms favorable to the Central Pacific. It is
on record that the California Pacific was allowed but $1 out of $16.75, the
fare from Reno to San Francisco, for its haul from Sacramento to San
Francisco, although the total distance was 240 miles, and the Sacramento-
San Francisco haul amounted to 92 miles. Likewise, contracts were made
with the Contract and Finance Company which were later complained of as
extravagant. Special mention is made of lumber which was bought of the
Contract and Finance Company at $30 a thousand when the market price
was $18. Mr. Towne was asked in 1886:
Q. You say that you have done all that you could to increase the earnings of the
California Pacific, do you?
A. Having a due regard for the other company; yes, sir.
Q. Did you make that qualification?
A. I do now.

Perhaps a policy of this sort was to be expected as the result of the
conquest of a dangerous rival. Yet certain other arrangements between the
Central Pacific and the California Pacific went beyond what one might have
expected. It appears, for instance, that soon after the Stanford group
obtained control of the last-named company, that portion of the contract of
August 8, 1871, which provided for the payment of $5,000 monthly by the
Central Pacific to the California Pacific, was eliminated. This elimination
was said to have taken place by “mutual consent,” a meaningless phrase
when the same men had charge of the negotiations for both sides.

Independent Security Holders
It has been charged, also, that Stanford and Huntington deliberately
endeavored at this time to depress the value of California Pacific mortgage
securities in order to induce independent holders to reduce their claims. In
support of this contention there is evidence that very strong pressure was
brought to bear upon independent security holders in 1874, and that as a
result of this pressure the fixed charges of the California Pacific were

reduced from $763,500 in 1875, to $303,500 in 1886. No part of this burden
was borne by the second mortgage bonds held by Stanford, Huntington,
Hopkins, and Crocker, nor was any assessment levied upon the company’s
stock.
As a part of the campaign, during the period mentioned, wide publicity
was given by the management of the California Pacific to financial
difficulties, real or alleged, with which the company was confronted. Thus
in June 1875, the board of directors confessed a judgment of $1,309,041.84
to one J. P. Haggin, assignee of certain claims of the Central Pacific, the
Contract and Finance Company, and the associates, for advances previously
made. Mr. Haggin had no interest in the matter, merely allowing the use of
his name.[162] The following month, Vice-President Gray, of the California
Pacific, made an extremely pessimistic report to his directors, declaring that
the company’s deficit to date was $1,370,061.71, and that a large part of the
outstanding bond issues of the company were represented by no
construction that he was able to discover. On July 25, 1874, finally, a local
capitalist named Michael Reese, acting in all probability on behalf of the
associates, filed sensational charges against Mr. Latham, formerly general
manager of the California Pacific, which called forth as sensational a reply.
[163]
These various activities roused holders of California Pacific Railroad
Extension bonds to petition to have the California Pacific declared
bankrupt, and drew forth a statement from the company, on the other hand,
that it did not regard these bonds as constituting a valid legal claim upon it.
The result was a compromise. The extension bondholders surrendered their
7 per cent bonds for a reduced amount in new 6 per cent securities, and the
outstanding income bonds likewise exchanged their holdings for 3 per cent
bonds. Both classes of bonds were guaranteed by the Central Pacific, and in
consideration of the guaranty the California Pacific was leased to the
Central Pacific on July 1, 1876, for 29 years, at a rental of $550,000 per
year, plus three-fourths of the net earnings of the company above that
amount. At a subsequent period in December, 1879, when the Central
Pacific was about to turn a considerable volume of business over the short
line by way of Benicia, the California Pacific gave up its right to payments
over the $550,000 minimum in consideration of a fixed additional payment
of $50,000 a year.[164]

By and large, the California Pacific proved a good investment for the
larger company, especially after the Northern Railway had been built and a
new route established between Oakland and Sacramento. The reason for its
original acquisition was, nevertheless, in all probability, not the chance of a
direct profit, but the advantage expected from a monopolistic control of the
territory north of San Francisco Bay.

CHAPTER VII

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]

CHAPTER VIII

ORGANIZATION OF THE CENTRAL PACIFIC-
SOUTHERN PACIFIC SYSTEM, FROM 1870 TO
1893

Extent of System
By 1877 the Central Pacific-Southern Pacific combination was in
control of over 85 per cent of all the railroads in 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.

CHAPTER IX

THE CASE OF DAVID D. COLTON

Meeting the Associates
During the seventies the associates took a new partner. This was David
D. Colton, one-time sheriff of Siskiyou County, brigadier-general of militia,
second to Broderick in the famous Terry-Broderick duel, and still later
colonel of United States Volunteers. In spite of these various military titles,
Colton seems never to have seen service. But he had been 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.

CHAPTER X

FINANCIAL DIFFICULTIES FROM 1870 TO 1879

Excessive Construction
We may now return to the more general considerations affecting Central
Pacific finance which characterized the years from 1870 to 1879. There is a
good deal of evidence that the years during which Mr. Colton was
connected with the Central Pacific enterprise were years of financial
difficulty for the associates, due in part to general depression, in part to a
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(*)

January 8, Operating Net
Gross Earnings
1863 Expenses Earnings
(Calendar
years)
November
6 to

December $ $ $
1869 1,024,680 777,348 247,332
31,
1870 7,519,983 6,009,426 1,510,557
1871 8,862,054 5,937,890 2,924,164
1872 11,963,641 8,645,276 3,318,265
1873 12,867,600 7,822,638 5,044,962
1874 13,726,561 6,468,145 7,258,416
1875 15,665,082 9,937,465 5,727,617
1876 16,994,216 10,970,599 6,023,617
1877 16,471,144 12,761,639 3,709,505
1878 17,530,859 12,005,535 5,525,324
1879 17,153,163 11,126,298 6,026,865
1880 20,508,113 12,814,121 7,693,992
1881 24,094,001 14,546,899 9,547,102
————— ————— —————
$184,381,097 $119,823,379 $64,557,718
════════ ════════ ═══════
(*)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.

CHAPTER XI

THE RAILROAD COMMISSION OF 1880 TO
1883

Early Agitation Against Company
It is more difficult to describe the relations of the Central Pacific to the
legislative bodies of California than it is to trace the history of the system in
most other respects, because the details are less matters of public record.
Some connection between the railroad and politics undoubtedly existed at
an early date. Indeed, Stanford and Colton were politicians before they
became railroad men, and the state and local aid which the railroad secured
at the very beginning of its construction but confirmed an attitude favorable
to continued relations between the corporation and the body politic which
these gentlemen might have been expected to approve.
Before 1876, the only regulation which the associates had to encounter
was that resulting from the general railroad law, which required a minimum
subscription before a railroad corporation could commence business,
established proportionate liability of stockholders, and reserved to the
legislature the right to reduce rates when the net income of any company
exceeded 20 per cent. These and other provisions of like tenor were little
calculated to interfere with the profitable operations of a railroad business
except perhaps that the proportionate liability established by the law to
some extent discouraged participation in railroad enterprise. In 1874 and in
1876, maximum rates and fare enactments were discussed in the legislature
but failed of passage. In 1876, nevertheless, the accumulated resentment of
the California public over what it considered the grasping and monopolistic

policy of a selfish corporation led to important additions to the law. This
resentment had been growing for several years. The Sacramento reporter for
the San Francisco Bulletin wrote, in March, 1868:
There is a strong prejudice existing here and daily growing stronger, against the Central
Pacific Railroad Company. The members from Placer, Nevada, and El Dorado counties are
all of them, I suppose, pledged to endeavor to obtain a reduction of the rates of freight and
fare on the line. Petitions, apparently signed by nearly all the residents of the districts
which use the road for the transportation of freight and travel, have poured in upon the
legislature, asking a reduction of prices. It is said that traders who complain of the rates are
discriminated against. A general feeling exists that, considering how liberally it has been
dealt with by Congress and the State, the management of the business and affairs of the
company is extremely illiberal....

In like vein the Stockton Independent said of the owners of the Central
Pacific in 1871:
No set of men on the face of the globe were ever placed in a more enviable position, or
in one where by the exercise of a reasonable foresight, they could have retained their
popularity and the friendship of the people. It is now hardly two years since this work was
completed, and how remarkable has been the change in public sentiment. Along the whole
line of their main trunk road from San Francisco to Ogden, as well as along the various
branch roads of this company, nothing is heard but one continuous murmur of complaint,
and it is safe to assert that this shortsighted, illiberal, and suicidal policy of the company
has so completely changed the sentiment of the people that there is not in a single town on
any of their lines of road, either in this state or Nevada, one individual who approves of
this course, nor one who will speak well of the company, unless it be one of their
subsidized agents or strikers.

Beginnings of State Regulation
It is not necessary to dwell at this point on the reasons for the opinions
voiced in these extracts from the press. The feeling of the general public, of
which these extracts are the reflection, was doubtless due in part to anger at
the methods employed by the Central Pacific in promoting subsidy
legislation, in part to disappointment over the results of railroad
construction, and in part to reaction against policies of the Central Pacific
such as have been outlined in previous chapters. However this may be, the
result was the passage of the so-called O’Connor bill in 1876, which erected
a State Board of Transportation Commissioners, and defined and prohibited
extortion and unjust discrimination. The commissioners were not only to
enforce these prohibitions, but they were given extensive authority to secure
information from the steam railroads of the state, and were charged with the

duty of supervising all such railroads with reference to the security and
accommodation of the public.[260]
It appears from the report of the commissioners appointed under the
O’Connor Act that the railroads in California, and in particular the Central
Pacific, refused to render the reports required by the legislature, and that the
commission was unable to compel them to do so.[261] Two years later the
commissioners were legislated out of office, and a single commissioner was
appointed in their place, acting under a statute similar in most important
respects to that administered by his predecessors.[262] Mr. Tuttle, the new
commissioner, accumulated certain statistics during his two-year term of
office, but otherwise did little to which the railroads could object.
The development of railroad regulation was thus temporarily arrested.
Yet for several reasons the check to the progress of public control was not
lasting. Feeling in the state was running high. The times were hard, both for
reasons affecting the whole country, and because of circumstances peculiar
to the Pacific Coast. The rainfall of the winter of 1876-77 was slight and, as
happens in such cases, great loss of cattle on the ranges occurred, and the
grain crop was seriously deficient. At the same time the yield of the Nevada
silver mines declined—in fact the dividends of the important Consolidated
Virginia mine stopped altogether in January, 1877, to the great disturbance
of the stock market at San Francisco. Under these conditions unemployment
and suffering were the experience of the working classes, while riots and
later, political agitation also resulted. Even the radical labor leader, Dennis
Kearney, in spite of his lack of character and self-restraint, or even of
unusual mental ability, served as the temporary expression at this time of a
real distress, and had some influence on the course of legislation.

Railroad Question in Constitutional Convention
So far as the railroads were concerned, the effect of the unrest
throughout California and the activity of the Workingman’s party is seen in
the railroad clauses of the Constitution of 1879, and of the Act of 1880,
which carried them into effect. The call for a convention was issued by the
same legislature which passed the railroad control bill of 1878.[263] Mr.
Colton thought the call most unfortunate,[264] but there is no reason to
suppose that the legislature had anything particularly radical in mind.

When the convention began its sessions, however, its membership was
found to include a majority of persons determined to force thoroughgoing
regulation upon the railroad system of the state, as well as a minority
opposed to government control of any kind. Just how regulation should be
made effective, it is true, few members of the first-named group knew.
Some were opposed to corporations as a class, and thought that at least
unlimited liability should be imposed on holders of corporate stock. Others
were in favor of declaring railroads public highways, upon which all
persons should be allowed to run cars and locomotives under such
regulations as might be prescribed by law. Still others desired to set a
maximum limit of 10 per cent to the return on investment in railroad
property. The extreme position on the other side was taken by men like
McFarland, of Sacramento, who maintained that the clamor about railroads
and corporations was a mania evolved from the inner consciousness of
members of the convention, as spiders spin their webs.
The discussion of railroad regulation by the Constitutional Convention
of 1879 began on November 18 and ended on December 7. It was
systematically conducted, participated in by men with a wide variety of
views, and resulted in constructive conclusions of importance. More could
scarcely be asked of a deliberative assembly. The main decisions reached
were as given below.

New Regulative Commission
The first conclusion of the Constitutional Convention was that the
regulation of railroads in California should be entrusted to an elective
commission, holding office for four years, and vested with the power to
establish and publish rates, to examine the books and records of
transportation companies, and to prescribe a uniform system of accounts.
Heavy penalties, including fine and imprisonment, were provided for failure
to obey the orders the commissioners might make.
The principal objection made to the establishment of a commission was
that its power would be excessive. It was pointed out that the commission
would combine legislative, judicial, and executive functions, and that its
members could lower rates and increase railroad expenses at will. Mr.
Wilson, of San Francisco, declared:

Here, then, will stand in our government a constitutional triumvirate as great in many
respects as that of Rome in the olden time. They may raise and lower the rates of freight
and fare to suit their powers, and thus they can play with the value of the stock in the
market, and determine the value of the bonds and mortgages on the road.... They will be
sole judges of what are abuses.... They will determine complaints on their own notions of
right and wrong, and however erroneous or malicious their acts, there will be no remedy or
appeal.

Reference was made to the English Railway Commission of 1873 and to the
Massachusetts Commission of 1869, and the Wisconsin experiment of 1874
was held up as something to avoid. The reply to this kind of objection was
that the power to control rates must be lodged somewhere, and that the
legislature was inexpert, slow to act, and subject to corrupt influences.

Other Constitutional Provisions
The second decision of the convention was that a general prohibition of
discrimination should be placed in the fundamental law. The clauses finally
adopted provided that no discrimination in charges or facilities for
transportation should be made by any railroad or other transportation
company between places or persons, or in the facilities for the
transportation of the same classes of freight or passengers within the state,
or coming from or going to any other state. In addition to this general
prohibition, it was enacted that persons and property transported over any
railroad, or by any other transportation company or individual, should be
delivered at any station at charges not exceeding the charges for the
transportation of persons and property of the same class, in the same
direction, to any more distant station. This amounted to a stringent
prohibition of greater charges for shorter than for longer hauls. Speakers
opposed to the discriminative clauses insisted that only unjust
discrimination, not all discrimination, should be prohibited, and pointed out
that the proposed law was unconstitutional in that it applied to commerce
between the states. Neither objection was sufficient to persuade the
convention that the proposals should not be approved.
Besides the fundamental clauses relating to a commission and those
prohibiting and defining discrimination, the Constitutional Convention of
1879 forbade railroads to grant passes to persons holding any office of
honor, trust, or profit in the state; forbade them also to agree to divide
earnings with owners of vessels entering or leaving the state, or, under
certain conditions, with other common carriers; granted to all railroads the

right to connect with, intersect, or cross other railroads; and provided that
no officer or employee of any railroad or canal company should be
interested in the furnishing of material or supplies to such company. One
apparently important clause declared that a railroad which should lower its
rates of fare or freight for the purpose of competing with any other common
carrier, should not again raise these rates without the consent of the
governmental authority in which should be vested the power to regulate
fares and freights.

Act of 1880
Special emphasis should be placed upon the constitutional provisions
adopted in 1879 because they created the framework upon which railroad
regulation in California was to hang for thirty years. For a full
understanding of the system the act of the legislature approved April 15,
1880, should also be consulted. This act defined certain terms used in the
law. It also fixed the salary of the commissioners at $4,000 each, provided a
mechanism for enforcement of the commissioners’ orders through the
courts, placed the office of the board in the city of San Francisco, and
required rates established by the commission to be posted in all offices,
station houses, warehouses, and landing offices to or from which the rates
applied. Finally, it granted to the commission, in general terms, all the
necessary means and the authority to adopt any suitable procedure to make
effective the powers conferred by the Constitution.[265]
Harvey S. Brown, attorney for the Stanford interests, once said that the
Constitution of the state of California was conceived in communistic
malice, was framed by unpardonable ignorance, adopted in frenzied
madness, and was valuable only as a beacon to other states and peoples to
avoid its principles and results.[266]
The document certainly compelled the associates to consider the best
method of defence against a political attack which threatened to sterilize the
monopoly control which they were slowly establishing over the railroad
system of the state. From their point of view the danger was like any other
—one to be met by skilful strategy, displayed in a new field, but resembling
in impelling motive and essential character their action in adjusting rates
and in dominating the terminal situation on San Francisco Bay.

Personnel of First Commission
According to the Constitution, one railroad commissioner was to be
elected from each of three districts into which the state was to be divided.
Elections were held in 1880, and J. S. Cone, C. J. Beerstecher, and George
B. Stoneman were returned. Cone was a ranch owner, business man, and
capitalist at Red Bluff, with an income of $50,000 a year, and property
worth perhaps $200,000. He had been on friendly terms with Stanford
before he became commissioner, and had known most of the prominent
railroad officials of the state for twenty-five years. By association and point
of view he represented the interests of large business in the state. Stoneman
was a politician of the better type, later governor of the state, a Democrat,
and believed to be a defender of the public interest.[267]
The third member of the commission was C. J. Beerstecher, a San
Francisco lawyer with a miscellaneous practice amounting to perhaps $50 a
month. Judge Lawler, of the Superior Court of San Francisco, who knew
Beerstecher well, says that he came to San Francisco, with nothing but a
gripsack, and built up a small practice, mainly divorce suits, among the
poorer classes in the city. For some time Beerstecher used Lawler’s office,
living in rooms in the same building, for which he paid $15 a month;
Lawler befriended him, and a man named Steinman advanced him money
for electioneering expenses. In return for this, apparently, Steinman was
later made bailiff to the railroad commission. That is to say, Beerstecher
was poor, with no reputation to lose, and in circumstances in which his
good-will had value.
One would scarcely expect effective regulation of a commission
composed of a wealthy farmer, a cheap lawyer, and a man who looked to a
career in the public service. Nor was such regulation in fact secured.
Stoneman once told Judge Reagan, of Texas, that when the California
commissioners were elected, he, Stoneman, was elected because it was
understood that he represented the popular interests; another gentleman (J.
S. Cone) was elected because it was understood that he represented the
feeling of the corporations, and a third (Beerstecher) was a sand-lot man.
He added that, having the sand-lot man with him to take care of the interests
of the people, he thought he was all right, but in a short time the sand-lot
man sold out and did not amount to anything.[268] Cone also considered
Beerstecher a reliable pro-railroad man. There is no direct evidence that

Beerstecher accepted railroad money, but the probabilities are strong.
Before discussing this point, however, the activities of the new commission
may be briefly described.

Indifference of Commissioners
The evidence shows that from the very first the three members of the
California commission devoted but a small portion of their time to the work
of regulation. Mr. Beerstecher was accustomed to visit his office twice a
day, spending perhaps an hour there each time. This was while Beerstecher
was a resident of San Francisco. In the latter part of his term he lived in the
Napa Valley and probably spent even less time on his official duties. Nor
did Beerstecher compare unfavorably with his fellow appointees in
application to his work. Governor Stoneman devoted five or six days a
month to affairs of the commission; Mr. Cone about the same. Of 127
meetings held by the board between May 3, 1880, and January 8, 1883,
Cone was present at 99, Stoneham at 80, and Beerstecher at 109.[269]
It seems beyond belief that a new commission, established to initiate
public control of a great industry, should have approached the problem in
this indifferent way. The undertaking called for the fullest exercise of the
powers of all the commission’s members; but it was approached as a casual
task to be accomplished in the spare hours of busy men.
As a natural result of their attitude with respect to the importance and
urgency of railroad regulation, the commissioners failed to make effective
the most primary requirements of the law. Instead of preparing new rates
except as hereinafter stated, the commission established the existing rates of
the companies operating in the state. Instead of prescribing a system of
keeping accounts, the existing system was adopted. Mr. Stoneman once
tried to investigate the railroad books, but said they were all Greek to him,
and he had no authority to employ an expert. Beerstecher testified that the
commission asked certain questions, but that he did not, as an individual
commissioner, consider that it was his business to go prying around into the
business of the railroad companies.[270]
Some slight attention was paid to the posting of rates, but the only
inspection seems to have been by the bailiff of the commission. Doubtless
the original cause for the failure of the commission in the respects
mentioned was lack of money; but it was for the members to formulate

boldly their ideas of what should be done, and to educate public opinion as
to its necessity, making use meanwhile of all the authority which they could
wield. It was gross negligence and indifference to rest content while the law
stood unenforced.

Adoption of First Rate Schedule
The largest task eventually undertaken by the commission was the
formulation of rate schedules for passengers and freight. During the spring
and summer of 1880, the commissioners traveled through the state taking
testimony and hearing complaints. In the winter and spring of 1880-81, they
attempted to formulate results. It appears that in May, 1880, Stoneman
introduced a resolution to the effect that maximum rates in California
should not exceed five cents per ton per mile for distances 100 miles and
over, and six cents per ton per mile for distances under 100 miles, and that
maximum fares should not exceed four cents and five cents per mile within
the same limitations. This was defeated by a vote of two to one. Nothing
was done between this time and February, 1881, when the board
unanimously adopted a schedule of passenger fares with maxima varying
from five cents to three cents per mile.[271]
At the same time that the passenger schedule was introduced Mr. Cone
submitted a freight tariff, which was also adopted. This schedule cut rates
mainly on agricultural products originating in the northern part of the state.
Stoneman objected to it—but later said that he did not prepare an
alternative schedule because he knew it would not be adopted. He did,
however, call the attention of the board to the fact that southern California
was being discriminated against.[272] Beerstecher had no part in the
preparation of the new rates, but made no opposition to them.

Delay in Enforcement
Armed with the new passenger and freight schedules, Mr. Cone went
over to the Southern Pacific offices and left the figures with Mr. Towne,
general manager, for comment. The railroad people at once objected. They
said they were building the Southern Pacific and selling bonds to raise the
money. The proposed reductions would injure their credit and could not be
accepted. Cone was anxious to avoid litigation and to get quick action.[273]
Moreover, Stanford wished to get away and go to Europe, and Cone did not

like to keep him. As Cone said in another connection, Stanford was pretty
winning in his ways. The result was that the railroad agreed not to contest
the new freight rates and Cone consented not to press the reduction in
passenger rates, at least not until October, 1881. There is no evidence that
Cone possessed authority from the commission to negotiate with the
Central Pacific, but he seems to have acted in confidence that Beerstecher
would support him in action favorable to the railroad and Stoneman in
action of contrary tenor.

George Stoneman

As a matter of fact the board did not take further action in regulation of
passenger fares until August, 1882, a year and a half after the question had
first been raised. By this time Cone had become convinced, so he says, that
Stanford would concede no further reduction in railroad charges. On the
15th of August, Stoneman accordingly reintroduced his original passenger
schedule, but slightly changed. The matter was laid over for a month, and in
September, at a meeting at which only Cone and Stoneman were present, a
substitute resolution was adopted, setting a maximum fare of four cents per
mile. Stoneman thought the maximum should be three cents, but Cone
would not consent. The new maxima were suspended in October “until
further order of the board” in order to give the railroad companies an
opportunity to be heard. Before the commission came together again,
however, Stoneman had resigned. This left Beerstecher and Cone—with
two as a quorum. It is eloquent of Beerstecher’s attitude that he attended no
meeting of the board after November 22, 1882, and that on that day his
action in respect to passenger rates was to move to postpone consideration.
In two years and seven months the only reductions in rates and fares
secured by the Railroad Commission were certain cuts in the rates on
products of agriculture conceded to the farmer member of the commission
by his railroad friends. The commission formulated no principles and
worked out no effective procedure. Even its reports to the legislature had
little value. The first two were prepared by Mr. Beerstecher, the third by Mr.
Tuttle, former railroad commissioner but no longer in any official way
connected with regulation work. When the commission was not unanimous
in its decisions, the division usually was that of Cone and Beerstecher
against Stoneman—a fact which leads us back to the question of the nature
of the influence which the Stanford group was able to exert.

Bribery Committed
The charge is made that the Central Pacific bought and paid for
Beerstecher’s services while a member of the Railroad Commission, and
that Cone was so influenced by his personal and business relations with the
managers of the Central Pacific as to be unable to view their activities in the
critical and impartial way which his position demanded. The evidence in the
case is purely circumstantial, but seems to be convincing. So far as the
former is concerned we have the admitted fact that Beerstecher was richer
at the end of his term of office than at the beginning by at least $12,000 and

probably by a good deal more. As he put it, he thought he saved his entire
salary of $4,000 a year as commissioner, during these years. Beerstecher
asserted incidentally that his legal practice while a member of the Railroad
Board amounted to from $1,200 to $1,500 a year—although the records of
the Superior Court of San Francisco, before which Beerstecher practiced,
show that this was highly unlikely,[274] and the testimony of the bailiff to
the commission is directly to the contrary. $12,000 may be regarded as
adequate compensation for a man of Beerstecher’s type.[275]

Gerke Transaction
Cone’s case is not quite so simple. It seems unlikely that a man of his
standing should have consciously accepted a bribe. There is, however,
direct evidence of a reliable character that Cone was given unusual
consideration by the railroad in connection with the purchase of certain
lands in the northern part of the state, and Cone himself admitted that while
he was commissioner he had bought some lands from a man named Gerke
and had resold them within two or three months to the treasurer of the
Southern Pacific at a profit of $100,000.[276]
What happened in the first of these two instances was this: It seems that
there was a tract of about 34,000 acres of the Oregon grant of the Central
Pacific lying east of Cone’s ranch—rough, chapparal land, graded at from
50 cents to $2.50 an acre. Cone was running about 20,000 sheep at the time,
and was using the land without paying for it, as certain other individuals
were also doing. Among these other persons was a man named Wilson, who
was not only a small sheep owner, but an actual settler as well. Wilson
originally applied to purchase from 5,000 to 7,000 acres of the tract, and
was quoted the first graded price, $1.25 to $2.50 an acre. At this quotation
he took some land that had water on it, but in general could not afford to
buy. Later the land was regraded, and Redding, the Central Pacific land
agent, told Wilson that the regrade price was 50 cents. A few months after,
in June, 1881, Wilson applied to purchase, although he believed that the
application was unimportant, since as a settler he was entitled to second
grade. He had the land fenced by this time.
Meanwhile, on the 21st of April, 1880, Cone had negotiated with the
Central Pacific for a tract of 34,097.45 acres, including the land in which
Wilson was interested. He did not offer to purchase, but asked to have the

lands that were free reserved for him, that he might ascertain the bounds of
his range. In fact, when the statement of the cost of the lands was made out
for him he refused to take them at the graded price, and abruptly left the
Central Pacific land office, exhibiting considerable ill feeling. This was the
situation when Wilson applied. Properly considered, Wilson seems to have
been entitled to purchase at the new price. His application was subsequent
to Cone’s conference with the Central Pacific land commissioner, but Cone
had then refused to pay the price asked, which left the lands open. The
Central Pacific, however, through Mr. Redding, its agent, refused to sell.
Mr. Redding later said:
When Mr. Wilson demanded a right to purchase a portion of these lands because Mr.
Cone had bargained for them and then refused to take them, I told Mr. Wilson the
circumstances and said to him that Mr. Cone had refused under so great an exhibition of
temper that it was my duty to wait until Mr. Cone became more calm. I also added that the
new Constitution and the people had given Mr. Cone and his associates powers that were
more extensive than those of the Czar of Russia; that he and his associates could virtually
confiscate the property of the stockholders of the railroad company, and that I could not
afford to add to a quarrel which by any possibility might be construed into an excuse for
unjust action.

The result was that Wilson hunted up Cone and tried to get a
relinquishment. Cone offered to let Wilson have the land at the graded price
—the first graded price, as Wilson understood it. This offer was naturally
refused, and Cone subsequently bought the whole tract for $29,199.67.
Although the facts are somewhat complicated, it seems clear that Mr. Cone
received special treatment, due to his position as railroad commissioner.
Of the Gerke transaction, Cone testified:
I would say that the ranch was held under a deed of trust, and parties were foreclosing
it, and at the time I bought it it would have been sold under a deed of trust in fourteen days,
and the party came to me and asked what I would pay for it and I didn’t dream they
intended to sell it because I didn’t know the condition the land was in, and they insisted on
my making an offer that day for it. I made an offer and it was accepted.
Mr. Storke: What was your profit on that transaction?
A. I think in the neighborhood of one hundred thousand dollars, and the worst trade I
ever made when I sold it.

Finding of Legislative Committee
Dealings of this kind were improper, to say the least, and calculated to
interfere with the impartial discharge of a commissioner’s duties. On the
whole subject a committee of the California legislature reported as follows:

As to the second subject of inquiry, whether the Commissioners, or either of them,
during their term of office, may have made any extraordinary acquisition of property ...
your committee report that in their opinion Commissioner Stoneman did not make any
extraordinary acquisition of property; that Commissioner Cone made a large acquisition to
his wealth, which was already great when he was elected Railroad Commissioner, and your
committee believe that such acquisition of wealth was largely due to extraordinary and
unusual facilities afforded by the railroad officers; and that Commissioner Cone, in the
purchase of thirty-four thousand acres of land for twenty-nine thousand dollars, was made
a privileged purchaser, and received from the railroad company facilities in this regard
denied to other applicants for portions of the tract; and further, that the transaction by
which the Gerke farm was purchased by Commissioner Cone in April, 1881, and sold in
September of the same year to Nicholas Smith, the Treasurer of the Southern Pacific
Railroad Company, at a profit of one hundred thousand dollars, gives rise to the suspicion
that more was contemplated in the purchase and sale than appears on the face of the
transaction. As to Commissioner Beerstecher, your committee find that by general report,
and in the opinion of his associates, he was without means at the time of his election, and
his sudden acquisition of wealth while Commissioner was without adequate explanation....
As to the fourth subject of inquiry, your committee report that Commissioners Cone and
Beerstecher knew of and permitted both systematic and casual discrimination in charges
and facilities for transportation between persons and places by railroad corporations in this
State, and that through their conduct in permitting and upholding the same, Commissioner
Stoneman was unable to accomplish a redress of such discriminations while
Commissioner. Further, under this fourth subject of inquiry, your committee find that
Commissioner Cone sacrificed the best interests of the State through personal friendship
for Governor Stanford, and in return therefor received favors from him; and that
Commissioner Beerstecher’s conduct admits of no other explanation than that he was
bribed, and that in the opinion of this committee Commissioners Cone and Beerstecher
acted in the interests of the railroad corporations rather than of the people.

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

CHAPTER XII

THE SOUTHERN PACIFIC AND POLITICS

Appeals to Public
We may now consider in a more general fashion the political methods of
the Southern Pacific group during the first thirty years of their railroad
history. We have seen that they not only relied upon the talents of their legal
staff in taking advantage of defects in the law, but that in two cases—the
case of the railroad commission of 1880, and that of the subsidy in San
Francisco in 1863—they probably resorted to the direct use of money to
accomplish their ends. Yet a whole state cannot be bought, though
individuals may be, and it would do injustice to the breadth of view of the
associates to suppose that they limited themselves to any such crude device.
Indeed, the frequency with which money bribes were offered probably
diminished as time went on.
Consideration of the general policies of Mr. Stanford and of Mr.
Huntington seems to show that they met the public demand for regulation
of rates and fares in no less than five distinct ways.
The first method consisted of appeals to the general public through
testimony before legislative committees, communications to the
newspapers, letters to private organizations which interested themselves in
the government control of corporations, and other similar devices. By these
various means Stanford, at least, spread his philosophy of industry widely
abroad. He took the general position that agitation upon the subject of
railroads was due to misapprehension of the facts. Most alleged abuses
were imaginary, but the Central Pacific stood ready to correct any that were

shown to exist.[277] Railroad fares and freights were cheaper in California
than anywhere else in the world, all things considered.[278] In case further
reduction were desired, the true policy was to place as few burdens upon
the railroads as possible, to encourage in this way new construction, and to
rely on competition for the desired result. The interests of the railroad and
of the public were the same.[279] Monopolies in the United States were
possible only to the extent that they were beneficent. There was properly no
right of control in the state. The Granger decisions of the Supreme Court of
the United States were a flagrant violation of the principles of free
government. If the people wanted to exercise control over a railroad they
must do as the state does when it exercises the right of eminent domain; that
is to say, they must pay to the individual owners the full value of whatever
was taken for public use. Anything else was confiscation. Moreover, at best,
regulation could not be complete, because it could not ever compel the
shipper to ship equally over all lines, and because, while commerce was
world-wide, American governments could regulate but one link in the
chain. In California, regulation was peculiarly inexpedient so long as the
railway system of the state was incomplete.[280]

Huntington’s Views
Mr. Huntington shared Mr. Stanford’s views, or at least approved the
conclusion to which they led, but does not seem to have courted the same
publicity in respect to the matter. Interviews he distrusted. “I notice,” he
wrote in 1875, “that some correspondent of a San Diego paper has been
interviewing Mr. Crocker. It is very difficult for any one to be interviewed
by an infernal newspaper without getting hurt; and Mr. Crocker is not the
most unlikely to get hurt of all the men I know.”
Yet in spite of this attitude towards the newspaper reporter, Huntington
had a keen appreciation of the importance of shaping public opinion, and
was familiar with the ordinary devices used for the purpose, including the
manipulation of the press. He was concerned over the attitude of the
Sacramento Record Union. “If I owned the paper,” he said, “I would control
it or burn it.”[281] “I wish you would have it sent over the wires as often as
you can that the Southern Pacific is being rapidly built,” he wrote Colton
from New York in 1877.[282] Again, “Yours of November 28 with Northern
Pacific clips is received. Many of the articles are very good. It is much

better that all such articles with petitions be sent direct to members of the
Senate and House, we keeping in the background as much as possible.”[283]
In November, 1875, Huntington wrote Colton that:
Gwynn left for the South yesterday. I think he can do us considerable good if he sticks
for his hard money and anti-subsidy schemes; but if it was understood by the public that he
was here in our interest, it would no doubt hurt us. When he left I told him he must not
write to me, but when he wanted I should know his whereabouts, etc., to write to R. T.
Colburn of Elizabeth, New Jersey.[284]

Influential Individuals Favored
A second method employed by the associates in their efforts to oppose
public regulation of corporate affairs was that of paying personal attention
to men who possessed or were believed to possess influence. In its simplest
form this involved the employment at liberal salaries of the ablest legal
talent which could be found. The policy was, however, pushed much further
than the statement made would indicate. Huntington’s letters to his
associates in the West were full of suggestions as to what should be done
and of commendations for, or criticism of, what had been accomplished.
In April, 1875, Huntington wrote Colton that he had given Dr.
Linderman, director of the United States Mint, a letter of introduction to
him, Colton, at San Francisco. This was because the location of a new
building for the Mint might be of importance to the Central Pacific.[285] In
October of the same year Huntington gave a pass to a certain congressman
and ex-governor, but warned Colton that the man was a slippery fellow and
should not be trusted too much.[286] Crocker wrote to Colton in February,
1875:
I fully appreciate your position there and need of ... a Senator of the United States. We
tried to get him off sooner the best we knew. I think he did not want to go, and I fear when
he gets there he will not be earnest in our interest as formerly. Stanford thinks I am
mistaken and I hope I am.[287]

A letter dated July 26, 1876, shows that Huntington was trying to get up
a party of twenty-five southern members of Congress to visit California
over the Southern Pacific. He wanted none but the best men—that is, men
who would “go for the right as they understand it, and not as Tom Scott[288]
or somebody else understands it,” but he was willing to pay the expenses of

the trip for such men.[289] In order to help persuade representative men to
make this trip, Huntington telegraphed Colton to have some of the
prominent men in San Francisco wire Senator Gordon, of Georgia, urging
that the visit should be made.[290] “I noticed you are looking after the State
Railroad Commission,” Huntington adds in another letter to the same
address, “I think it is time.”[291] Again:
I am sorry to learn that the receipts are so very poor south of San Francisco, but it is a
good time to take the State Railroad Commissioners over the roads. I am glad to notice that
you are looking after the Commissioners. I think it very important.[292]

Still again, in May, 1877, Huntington wrote:
I am glad you are paying some attention to General Taylor and Mr. Kasson. Taylor can
do us much good in the South. I think, by the way, he would like to get some position with
us in California. Mr. Kasson has always been our friend in Congress, and as he is a very
able man, has been able to do us much good, and he has never lost us one dollar. I think I
have written you before about Senator.... He may want to borrow some money, but we are
so short this summer, I do not see how we can let him have any in California.[293]

Letters like these cover only one period and refer to the activity of only
three out of the five associates, but there is sufficient outside evidence of a
general nature to indicate that this policy was systematically followed by
the Stanford group.

Lobbying in Washington and Sacramento
In addition to the attempt in a general way to gain the good-will of the
public or of influential members of it, the Central Pacific was regularly
represented at Washington and Sacramento when legislation was pending.
Huntington, as has been said, took care of the company’s affairs in
Washington. He had offices in New York and Boston also, and divided his
time between the three places while Congress was in session—four days in
Washington, two in New York, and one in Boston.[294] Stanford attended to
matters in Sacramento, either in person or through representatives such as
William Carr or Stephen T. Gage. The latter was also for many years the
company’s agent in Nevada. Both Huntington and Stanford, of course, were
assisted by a corps of lawyers and political aides-de-camp, some of whom
were very highly paid. General Franchot, for instance, Huntington’s chief
assistant, received at one time a salary of $20,000 a year, besides a liberal

expense account. Much criticism has been directed at the activity of Central
Pacific agents in the lobbies at Washington and Sacramento, but a large
portion of it was probably legitimate.

Correspondence from Washington
Certainly the watch which the associates kept on legislation was very
close. Huntington’s own activities in 1875, 1876, 1877, and 1878 are
vividly described in the letters which he wrote Colton during these years,
and some few of these deserve to be reproduced if only for the picture they
suggest of the man who wrote them. In March, 1875, Huntington wrote:
I notice a bill passed the House some few days since, called up by Williams of
Michigan. I forget its title, but it called for reports, etc., etc., from the Pacific roads. Of
course it was something ugly or it would not have passed.[295]

This was mere routine. By June, 1876, however, the legislative work
had increased. Mr. Huntington told Colton:
There is a terrible fight kept up on us in Washington. But while they may bite us, they
will not eat us up. Sherrell telegraphed me to come to Washington in great haste, as
Lawrence was to pass his bill at once; so I went over and got the committee to recall it
from the House back to the committee, so the demagogue from Ohio cannot trouble us
before the 6th of July. In the meantime we will be working on our land proposition in the
Senate. Just what we can do I cannot say, but I shall surely keep trying.[296]

The following month he added:
I returned from Washington last night. Our matters look better there, but we are not out
of danger. It has been so very hot here for the last few weeks that it has come near using
me up. You know I do not spare myself when I have anything to do.[297]

In August, 1876, Huntington wrote Colton:
I have thought I could stand anything, but I am fearful this damnation Congress will kill
me. Senator Edmunds told another Senator yesterday that he would pass his Pacific
Railroad Sinking Fund Bill before Congress adjourned, but I think he will not, and I have
some hope Congress will adjourn by the time this reaches you.[298]

And in March, 1877, he was able to say:
Congress has adjourned, and we have not been hurt, except by the paying out in
Washington of some money for hotel bills, etc.
I am quite sure that we stand better in Washington at this time than we ever did before.

The Pacific Mail Steamship Co. got no aid. I will tell you some things about that some
time. The Sinking Fund Bill did not pass, but is in a much better shape to pass than it has
ever been before. I stayed in Washington two days to fix up the Railroad Committee in the
Senate. Scott was there, working for the same thing, but I beat him for once certain, as the
committee is just what we want it, which is a very important thing for us. You will no
doubt notice before you get this that we were not able to pass the Texas-Pacific bill.[299]

The committee with which Huntington was so content was changed
somewhat later, much to his disgust.[300]
It was not until the first part of 1878, however, that his letters show him
again hard at work. In January, 1878, Huntington wrote to Colton:
I notice what you write of the communists in the California Legislature, and am very
sorry to know it, but the feeling in Congress is not much better, and yet, somehow, I do not
think we shall be much hurt, although Scott is working hard and developing more strength
than I supposed he had. He had the Railroad Committee of the House. I think we have it
now.[301]

The following month he said:
I returned from Washington last night, and I am as near used up as I
ever was in my life before. I am spending my last winter at Washington. As
I feel today, I would not agree to spend another there for all the property we
all have. Our matters are looking fair in Washington, Scott is very bitter in
the discussion. He used some business compliments and all such stuff, and I
am compelled to play him; but it is very distasteful to me.[302]
This letter is followed in the record by a series of others of the same
tenor, which will be presented without comment.
... I have done all I can to prevent certain bills from being reached, and do not think any
bills can be that will hurt us, but if there are, they will pass, as this Congress is, I think, the
worst set of men that have ever been collected together since man was created.[303]
I returned from Washington last night. I am almost happy to think I shall not be called
there again this session, as Congress has adjourned its first session, and may the likes of it
never meet again. I think in all the world’s history never before was such a wild set of
demagogues honored by the name of Congress. We have been hurt some, but some of the
worst bills have been defeated, but we cannot stand many such congresses.[304]

Friend Colton: I returned from Washington this morning and found on my desk yours
of the 10th inst., No. 74. Thurman’s funding bill has not passed the House yet, but it will, I
think, although I am endeavoring to get it to the Judiciary Committee. If I can I think we
can get it amended, but even that is doubtful. There were some mistakes made by us when
the bill was in the Senate; the greatest was in Gould going to Washington; but it is too long

a story to write now. I will tell you when we meet, if we have nothing better to talk of. This
Congress is nothing but an agrarian camp, the worst body of men that ever before got
together in this country. Scott is making a hard fight on his Texas and Pacific bill. He has
made a combination with the Northern Pacific, which will give him some strength, how
much I cannot tell. The Northern Pacific are to ask for guarantee of their bonds by the
United States. I shall come to California soon after Congress adjourns. Find some one to
buy me out of everything there. I am tired and want to quit.[305]

... I notice what you say of Thurman’s Sinking Fund Bill—of course it is bad, but if we
could have amended it so as to make it a finality, and give us 6 per cent on the fund, it
would not have been so bad. It may not pass, but I think it will for this is the worst
Congress we have ever had; if it should, we must beat it in the courts, if we can.
I go to Washington tonight; I should have gone last night, but for the reason that Clara
has been quite sick for some days.
Mr. Sherrell telegraphed me yesterday that I must not fail of being there this morning. I
cannot attend to this Washington business much longer.[306]
I returned from Washington last night. I hope to get through there without being hurt
any more; but it seems as though every committee in both Houses had something before
them that we had an interest in.[307]

Skilled Wire-Pulling
There is no need to comment in any detail upon these letters. Their
occasional indication of discouragement doubtless meant nothing more than
that Huntington sometimes grew tired and hot and angry with the
opposition which he encountered. A characteristic of the man was that he
never really gave up. The Thurman bill referred to will be described in
another connection.
Scott was a railroad man, at one time president of the Pennsylvania
Railroad, who was seeking to persuade Congress to subsidize a
transcontinental railway by the southern route. The land proposition was a
scheme of the associates to induce the federal legislature to buy back a
portion of the Central Pacific land grant at the government price. As a
whole, the letters so far quoted show that Huntington was a persistent and
energetic lobbyist, although the record of Congressional legislation shows
that he was far from uniformly successful.

On the whole, the railroad managers pulled wires with a skill which
rapidly increased with experience. Sometimes the company was made to
appear prominently, and sometimes it was kept in the background when
legislation was desired. Huntington found that some members of Congress
were disinclined to talk to him concerning Southern Pacific matters. In such
cases he had recourse to third parties—perhaps a constituent of the member
in question, perhaps a friend. The same methods were employed in dealing
with state legislation. In 1875 the Southern Pacific desired a franchise
permitting it to build through Arizona. Huntington wrote Colton that he
thought this would cost less if other interests than the associates stood at the
front while the franchises were being obtained, but that after the charters

were obtained it should be known that they were controlled by the Southern
Pacific.[308] He said:
I am inclined to believe that if you could get the right man on that line in Arizona to
work with the few papers they have there, to agitate the question in the territory, asking
that some arrangement be made with the S. P., at the same time offer the S. P. a charter in
the territory that would free the road from taxation, and one that would not allow for any
interference with rates until ten per cent interest was declared on the common stock, I
believe the Legislature could be called together by the people for $5,000 and such a charter
granted. Then we would take the chances of having such a charter made good by Congress
or the State when it became one.[309]

At one time Huntington even suggested that the Southern Pacific might
bear the expense of an extra session of the Arizona legislature in order to
hasten consideration of legislation favorable to the company.[310] The
desired legislation was eventually obtained, but not until February, 1887.

Unethical Dealings
Did or did not the Huntington group, including Stanford at Sacramento
and Reno, and Huntington at Washington, employ improper means in their
endeavor to influence votes? This is another question upon the answer to
which much depends. That passes were issued to members of the
legislature, members of Congress, and judges of courts, and that gentlemen
of these types were entertained at dinner in Sacramento was generally
known. We have Mr. Gage’s statement, at least, that no more than this took
place in Nevada. He told the United States Pacific Railway Commission of
1887, that his expenditures in that state over a period of eight years had
amounted to $2,000, and added:
... and I would like to produce to you the files of the newspapers in order to show the
existence of the misapprehensions that existed among the good people of Nevada, as
indicated by their press, concerning my relations with the legislature of Nevada, session
after session for the sixteen years. I remarked yesterday that it was one of the greatest
sources of regret that I had, the imputations which were cast on my character, and which I
feel I have not deserved, and which I feel I may not live long enough to outgrow. One of
these is that I have spent money in the Nevada legislature for the Central Pacific like water;
and those things were constantly asserted, and I believe frequently believed by a good
many good people in the State, but they were not true. As I asserted to you yesterday, I
have kept an accurate account of the expenses for the first eight years that I was attending
the sessions of the Nevada legislature, which included my personal expenses during that
time, and they figure up $2,000, or a fraction under it, as it was. Now, if any one thinks that
$2,000, or less, could corrupt a legislature for eight years, including the personal expenses

of myself, he must invoice members of the Nevada legislature at a very low price, and
“buy them by the string.”[311]

Mr. Gage would not say, however, when asked pointblank, whether or
not he had paid any money or made any provisions of advantage or reward
to any member of the legislature of California or Nevada.[312] Nor would
Mr. Stanford say more in reply to the inquiries of the United States Pacific
Railway Commission than that the company would not include in any
settlement with the United States, vouchers to which objections were made.
[313]

On the whole, there is a good deal of evidence that the owners of the
Central Pacific went further in influencing legislation than any strict system
of ethics would allow. Huntington once stated his own position as follows:
If you have to pay money to have the right thing done, it is only just and fair to do it....
If a man has the power to do great evil and won’t do right unless he is bribed to do it, I
think the time spent will be gained when it is a man’s duty to go up and bribe the judge. A
man that will cry out against them himself will also do these things himself. If there was
none for it, I would not hesitate.[314]

Further Evidence
More important than the record of such general expressions of opinion
are the affidavits filed in the San Francisco subsidy litigation described in
an earlier chapter. Nor is anyone likely to read the letters of Mr. Huntington
to Mr. Colton in the late seventies without becoming convinced that the
possibility of purchasing votes was constantly before Huntington’s mind.
Huntington wrote Colton at one time that the (Southern Pacific) company
could not get legislation unless it paid more than it was worth.[315] In
another communication he said: “If we pass the Sinking Fund Bill and beat
Scott and the Union Pacific, it will hurt us not less than half flora”;[316] and
in still another we find the cheery comment: “Matters do not look well in
Washington, but I think we shall not be much hurt, although the boys are
very hungry and it will cost considerably to be saved.”[317]
In November, 1877, Huntington wrote Colton:
You have no idea how I am annoyed by this Washington business, and I must and will
give it up after this session. If we are not hurt this session it will be because we pay much
money to prevent it, and you know how hard it is to get it to pay for such purposes; and I
do not see my way clear to get through here and pay the January interest with other bills

payable to January 1st, with less than $2,000,000, and possibly not for that.... I think
Congress will try very hard to pass some kind of a bill to make us commence paying on
what we owe the Government. I am striving very hard to get a bill in such a shape that we
can accept it, as this Washington business will kill me yet if I have to continue the fight
from year to year, and then every year the fight grows more and more expensive; and rather
than let it continue as it is from year to year, as it is, I would rather they take the road and
be done with it.[318]

In one case where the salary to be paid a certain individual was under
consideration, Huntington wrote Colton frankly that it was important that
the man’s friends in Washington should be on the railroad’s side, and that if
this could be brought about a salary of $10,000 to $20,000 a year would be
worth while. Huntington wanted the man to make a proposition in writing,
however, that he would control his friends for a fixed sum.[319] When asked
about the meaning of his correspondence, Huntington denied that these
expressions had any vicious significance. He said he kept on high ground,
[320]
and even objected to the free use of liquor and cigars.[321] Specifically,
he gave instructions to his people never to use money in any immoral or
illegal sense. “Buying votes in a legislature was bad policy,” said he, and
his position in these matters received the formal support of Stanford. But
such assertions are entitled to less weight than Huntington’s less guarded
phrases.

Heavy General and Legal Expenses
There is no question that the control exercised by the Central Pacific
management over the legal and miscellaneous expenses of the company
was informal to the last degree. Huntington had a great deal of money to
spend and he turned it over to trusted agents without too many questions.
He would pay $5,000 or $10,000 at a time to General Franchot, for
instance, without inquiring where it went or how it was paid.[322] Checks
were made out in all cases to I. E. Gates, Mr. Huntington’s assistant in New
York, and were indorsed by him either to payee or in blank.[323] Vouchers
covering such items were made out simply to “Expense,” or to “Legal
expense.”[324] In many cases expenditures authorized by Stanford, Crocker,
or Huntington were represented by no vouchers at all,[325] the filing of
vouchers being subsequently waived at stockholders’ meetings.
All in all, the general and legal expenses of the Central Pacific between
the years 1875 and 1885 averaged over $500,000 annually. The only reply

to the government inquiry as to what this money had been paid out for was
Stanford’s statement already quoted that vouchers to which there were
objections would not be included in any settlement with the United States,
but that the moneys would be treated as still in the treasury.[326] This was
plainly an evasion of the point at issue.

Company in Politics
Still another question is how far the headquarters of the Central Pacific
in the various capitals were used as agencies for the election of legislators
and other persons who owed their position to railroad influence. It is the
unhesitating popular judgment that the railroad at an early date “entered
politics.” In a long letter dated August 26, 1873, Eugene Casserly asserted
that the Central Pacific aimed to be and was a third party in the politics of
the state, holding the balance of power between the Democratic and the
Republican parties, and controlling or seeking to control at will each or both
of them. “This third party,” continued Mr. Casserly, “has the usual attributes
of a political party, the same apparatus and appliances. It has its leaders, its
managers, its editors, its orators, its adherents. It selects these from both
parties, but mostly from the party in the majority. Whether they call
themselves Republicans or Democrats, and however they divide or contend
on party issues, they move as one man in the cause of the railroad against
the people. To that cause they give their first allegiance.”

Bassett Polemic
This statement of Mr. Casserly calls to mind another charge or series of
charges made by a man named J. M. Bassett in the years following 1892.
Mr. Bassett was one of the early pioneers. He came to California in 1851,
and was at various times miner, printer, newspaper man, railroad employee,
and member of the Oakland city council. At one time he was Leland
Stanford’s secretary. After Mr. Stanford had been forced out of the
presidency of the Southern Pacific, Bassett began to publish a series of open
letters to Collis P. Huntington, and continued them weekly, with occasional
intervals, for several years. The sustained vivacity and pungency of this
polemic, and the systematic virulence with which Bassett reviewed and
criticized the Huntington policies make the series a noteworthy journalistic
achievement. Mr. Bassett denounced Mr. Huntington for the

overcapitalization of the Southern Pacific system, for its failure to pay
taxes, for its carelessness of the lives of its employees and of the public, for
its attempt to evade repayment of the debt which it owed to the United
States government, and for the general mismanagement which, he asserted,
had taken place under Huntington’s control. With respect to the interference
of the Southern Pacific in politics, Bassett wrote to Huntington in 1895:
What chief executive of the State, before the present incumbent, has there been who did
not owe his nomination and election to the Southern Pacific Company and in
acknowledgment of his debt hasten to obey its slightest command? Has there ever been a
Board of Railroad Commissioners before last November in which you did not own at least
two members? Have you not named every Harbor Commissioner appointed during the past
twelve years?
Have you not hitherto chosen San Francisco’s Police Commissions and do you not now
exercise a dictatorial power over the city’s police, especially the Harbor Police? Were not
the Judges of the two United States Courts in San Francisco appointed at the instance of
Leland Stanford? How many Superior Courts are there in the State in which a citizen may
bring an action against you in full confidence that he will be fairly and impartially dealt
with? Doubtless there are such but the difficulty is to find them. Before the recent elections
how long did you control the government of San Francisco? Have you not dictated the
government of Oakland for the past twenty-five years? Until last election had you not
continuous control of Alameda County’s government?...[327]

When one desires to test the accuracy of accusations like those of
Casserly and of Bassett, one has first to remember that they are in accord
with the substantially uncontradicted declarations of men of all degrees of
prominence in California over a period of fifty years. Political campaigns
have been waged on the question of the railroad versus the people. Not only
newspapers like the Sacramento Union and the San Francisco Examiner,
but men like John T. Doyle, at one time state railroad commissioner,
General Howard, a leading member of the Constitutional Convention of
1879, and H. H. Haight, at one time governor of the state of California,
have asserted that railroad influence was a real and important factor in the
politics of California. While neither a corporation nor an individual can
properly be convicted on the strength of current report, the presence of so
much smoke, over so long a period, is fair evidence of some fire.

Documentary Evidence
Direct testimony relating to the political activity of the Huntington
group comes from Mr. Huntington himself in two ways. In the first place
there have been published certain letters which passed between Huntington

and his associate, Mr. Colton, in the years 1875 to 1878. These documents
have been referred to in other connections. They came out in the course of
court proceedings, and have the weight of confidential communications, not
intended for publication. Extracts from these letters will presently be given.
Besides this, certain statements were given by Huntington to the press in
1890 which bear directly upon the point at issue. These statements were
intended to discredit Stanford, but in the course of the heated controversy to
which they gave rise they were not denied by Stanford nor withdrawn by
their author.
On May 1, 1875, Huntington wrote Colton:
I noticed what you say of Piper; he is a wild hog; don’t let him come back to
Washington, but as the house is to be largely Democratic, and if he was to be defeated,
likely it would be charged to us, hence, I should think it would be well to beat him with a
Democrat; but I would defeat him anyway, and if he got the nomination put up another
Democrat and run against him, and in that way elect a Republican. Beat him.[328]

Asked to whom the letter referred, Huntington later said that if he
remembered the person, and he thought he did, he was a man whose views
ran contrary to all human interests.[329]
A letter in June, 1876, reads as follows:
I hope ... will be sent back to Congress. I think it would be a misfortune if he was not....
has not always been right, but he is a good fellow and is growing every day.... is always
right, and it would be a misfortune to Cal. not to have him in Congress. Piper is a damned
hog, and should not come back. It is shame enough for a great commercial city like San
Francisco to send a scavenger like him to Congress once....[330]

Again, in November, 1876, Huntington wrote Colton:
I hope ... is elected and ... defeated, as it was generally understood here that our hand
was over one and under the other....[331]

A still later letter relates to the pending election of a senator from
California. Huntington said:
We should be very careful to get a U. S. Senator from Cal. that will be disposed to use
us fairly, and then have the power to help us ..., I think, will be friendly, and there is no
man in the Senate that can push a measure further than he can.[332]

Controversy between Associates

The correspondence which has just been cited is not offered in order to
discredit Mr. Huntington, or for any reason except to show that it was
Huntington’s belief in the years 1875, 1876, and 1877 that the influence of
the Central Pacific should be used to advance the political interests of
persons favorably inclined toward his railroad system and to discourage
those in opposition. The personal controversy which took place between
Stanford and Huntington in 1890 brought out some additional evidence of
the same sort. This dispute arose ostensibly because of the election of
Stanford in 1883-84 as senator from California in place of A. A. Sargent,
one of Huntington’s friends. In reality it was probably only the final
outcome of a growing tension between the two men, due to dissatisfaction
on Huntington’s part with the small amount of time which Stanford devoted
to railroad affairs, and perhaps to jealousy of the prominence which
Stanford enjoyed in public estimation.[333]
However this may be, Stanford resigned the presidency of the Southern
Pacific Company at the annual meeting of the stockholders on April 9,
1890, and Huntington was elected in his place. In his address to the board
of directors of the company, Huntington used the following words:
Gentlemen, for the honor that you have done me in electing me President of the
Southern Pacific Company ... I promise you that I will be as true to the interest of the
company in the future as I have been in the past. I can promise you nothing more, for at all
times my personal interest has been second to that of the company. It shall be so in the
future, and in no case will I use this great corporation to advance my personal ambition at
the expense of its owners, or put my hands into the treasury to defeat the people’s choice,
and thereby put myself into positions that should be filled by others; but to the best of my
ability will I work for the interest of the shareholders of the company and the people,
whom it should serve.[334]

This statement attracted attention, and Huntingdon was asked to
explain. In an interview with a reporter of the San Francisco Examiner he
said further:
From this time on we are going to follow one business. We are railroad men and intend
to conduct a legitimate railroad business. To do that successfully politics must be let
alone.... If a man wants to make a business of politics, all well and good; if he wants to
manage a railroad, all well and good; but he can’t do both at the same time.
I have seen the ante-rooms down here in this building full of men trying to learn or get
something out of politics. Why should they come here? This is no place for them. But then
they were not to blame. The tip went forth that political work was being done at Fourth and
Townsend streets, and they merely followed the tip. Well, there won’t be any more tips sent

out of these railroad offices. Politics have worked enough demoralization in our company
already, and they have gone out of the door never to return....
Things have got to such a state, that if a man wants to be a constable he thinks he has
first got to come down to Fourth and Townsend streets to get permission. Hereafter people
who come to Fourth and Townsend streets must have railroad business to transact. The
Southern Pacific Company is out of politics, and will attend to its business like any other
private company or individual should do.[335]

Such statements naturally led to an open breach between Huntingdon
and Stanford.[336]
The point at issue was not, however, whether it was proper for the
Southern Pacific to defend itself against political attack. On this there is
every reason to suppose that all parties were agreed. It was rather whether
the company should be used as an instrument to advance the personal
interests of individuals. In the same connection the question arose whether
railroad men should act together in political matters not connected with
railroad affairs. Huntington, who had little interest in general politics,
thought they should not. It is probable enough that Stanford or some of his
subordinates had, on the other hand, used their influence as railroad men for
personal and party ends.

Unscrupulousness of Associates
One rises from the study of the political activities of the owners of the
Central Pacific with a feeling of indignation at the selfishness of these men,
their indifference to all save considerations of private gain, and their
readiness to use any and all methods which would advance their financial
interests. The associates met the proposal of government regulation as a
threat to rob them of their property and resisted it as they would have
opposed any other attack. They never conceded that any question of public
interest was involved which it was necessary for them to respect. They
frankly defended the use of money as a method of persuading men to do
what was right—which inevitably meant, of course, what in their judgment
was right. They fell out among themselves, not because any one of them
questioned the philosophy which inspired their opposition to public control,
but because one of them was suspected of using power, developed in the
course of the defense of railroad interests, to advance personal ambitions
which ran counter to the views of his associates. These things should be
plainly stated and their force clearly understood.

It is the writer’s opinion, however, that the amount of money spent by
the Central Pacific in the purchase of legislative or other votes has probably
been overestimated in the public mind. Direct bribery is a clumsy weapon
and one difficult to conceal if practiced on any considerable scale. It was
probably also unnecessary to a corporation such as the Central Pacific with
other favors to bestow. Members of Congress might, indeed, be employed
by the railroad when legislation was pending. Huntington maintained that
this was legitimate,[337] and Gage once admitted that the company had to
employ everybody who could pull a pound. The practice was more easily
defensible than bribery, and could be applied to a better class of men. Other
men might be reached through patronage, still others through discrimination
in rates or through preferences. The suggestion that unfavorable legislation
would hinder construction was potent with legislators from districts which
still lacked rail connection. Yet Huntington once said of a man who was
opposing him and whom he thought he could bribe, that his better judgment
told him the associates could not afford to take the scamp into camp,[338]
and this probably represented the situation at most times. Whether this
worked for the eventual salvation of the Huntington group, is for the
moralist to say.

CHAPTER XIII

WATER COMPETITION

Rate Policy
We may now pass from the question of the relation of the Central
Pacific-Southern Pacific system to legislative bodies in California and in
Washington, to another matter of general importance in respect to which
Southern Pacific policies profoundly affected the development of the West
—the matter of railroad rates. Just as the associates were compelled to face
the possibility of government regulation soon after they were fairly
launched in their careers as railroad men, so they had to consider and
determine the rate policies which they should adopt, independent of
regulation, with respect to the shipping and traveling interests of the
territory which they served. Their decisions in rate matters were certainly of
no less significance than their attitude toward political control, and deserve
the same broad consideration.
We shall attempt in the following chapters to describe the conditions
which affected the ability of the associates to set rates in California and on
business to and from that state, and to consider the attitude of the Southern
Pacific with regard to the more important questions of rates and of
competition which arose. For reasons which will become apparent as the
discussion proceeds, the scope and importance of water competition in the
West will first be set forth.

Water Transportation

One of the most important conditions affecting railroad business in
California is the ease with which freight and passengers may take advantage
of the water routes. The long coast line of California affords relatively few
good harbors, but it is broken in the center by the splendid bay of San
Francisco, and in the south by the less commodious but still adequate ports
of San Pedro and San Diego. Between these termini a considerable
commerce has long been carried on.
Still more important than the coastwise trade, however, has always been
the deep sea commerce of San Francisco, and to a less extent that of the
other ports. San Francisco is a focus for ocean lines connecting the Pacific
Coast of the United States with the Atlantic seaboard, with Europe, with
South America, and with the Orient. Likewise from San Francisco steamers
ply up the Sacramento and San Joaquin rivers, carrying traffic well into the
interior of the state. A mere mention of these facilities is sufficient to
suggest the part which water transportation has played in the commercial
and industrial life of the Far West.

River Traffic
The local river traffic which helps to distribute the cargoes brought by
ocean boats to San Francisco attained some importance as early as 1847. In
that year a small side-wheel steamer seems to have plied between San
Francisco and Sacramento. In 1849 and 1850 larger boats were put on, the
Sacramento was navigated to Colusa, and steamers ascended the San
Joaquin to 150 miles above Stockton. In 1856 two steamers usually left San
Francisco for Sacramento each afternoon at 4 P.M., arriving between 12 and
3 A.M. of the following morning. Corresponding boats left Sacramento at 2
P.M., arriving between 9 and 11 P.M. Often as many as four boats left San
Francisco loaded in one day.[339]
The total tonnage of steam vessels plying on California rivers and bays
was estimated by the State Transportation Commission in 1878 at 30,704.
The bay vessels were all ferry-boats and tugs, but river vessels with a total
tonnage of 10,990 tons made trips of considerable length. Most of these
were small craft, but the larger river steamers ranged between 400 and 520
tons each, while the ferry-boats sometimes reached a size of 1,600 or 1,700
tons. Vallejo, Benicia, Napa, Knight’s Landing, Colusa, Chico, Red Bluff,

Antioch, and Pacheco were among those able to take advantage of the water
service.[340]
Generally speaking, the importance of the river traffic was diminished
by the fact that after 1853 most of it fell under the control of one company,
the California Steam Navigation Company,[341] and that in 1869 this
company sold its steamships to the Central Pacific. The volume of river
traffic also fell off because of railroad competition. In spite of these
drawbacks competition on the river was lively at times and rates were low,
to the disgust of some merchants in the interior cities. The California Steam
Navigation Company charged $8 and $6 per ton for freight, and $10 and $8
for cabin fares from San Francisco to Sacramento and Stockton. Meals were
a dollar apiece. These were, however, the rates in the absence of
competition. When the steamer “Willamette” was brought from Oregon to
Stockton, rates were fixed at $3 for freight, $3 for cabin fare, and $1 for
deck passage. In December, 1860, the fare from Sacramento was $1 in a
cabin and 25 cents for deck accommodation. People traveled because it was
as cheap to go as to remain at home.[342]

Ocean Commerce
The first regular water connection between the eastern and western
coasts of the United States was provided by the clipper ships on the route
around Cape Horn. These swift sailing vessels supplied the gold miners
with the tools and manufactured goods necessary for their enterprises, and
took back such commodities as California was able to export. Oil, soap,
cement, coal, iron, nails, paper, glass, tobacco, liquors, dry goods, and the
like moved west—hides, wool, canned fruits, salmon, sugar, wine, and
grain went east. The business was for the most part handled by ships
chartered for single voyages, not by lines of ships operating on regular
schedules.[343]
As early as October, 1848, however, at least one regular line, the Pacific
Mail Steamship Company, entered the field. The establishment of the
Pacific Mail service was made possible by the grant of a government
contract for the carriage of mails—its profits during the early years were
largely derived from business arising out of the gold discoveries in
California. The business of the Pacific Mail grew rapidly. In 1851 it
operated eleven steamers varying in size from 600 to 1,300 tons, and had a

capital stock of $2,000,000. Thirty years later it operated fourteen ships,
large and small,[344] reported gross earnings of $3,762,083 (1882) and had
$20,000,000 in stock outstanding. At first the Pacific Mail operated
steamships between Panama and San Francisco. Later it extended its service
to Astoria; and still later it established a line across the Pacific to China and
Australia. Among its competitors by sea at one time or another, besides the
clipper ships, were Mr. Vanderbilt’s Atlantic and Pacific Company, the
Mexican Coast Steamship Company, and Messrs. Goodall and Perkins. At
one time Jay Gould, at another Trenor W. Park, of the Panama Railroad,
were dominant in its affairs.

Problem of Water Competition
There is much of romance in the history of ocean transportation into and
out of San Francisco, and in its proper place the story should be told at
length. Some aspects of the water service, indeed, will be touched on later
in this book. Attention is directed to the matter at present, however, not for
its own sake, but because the fact of water competition raised one of the
problems with which the Southern Pacific had to deal. It seems clear that
the associates were compelled to define their attitude toward water
competition as soon as their through line was completed in 1869.
Broadly speaking, the alternatives were competition or agreement. In
respect to the Pacific Mail, however, the situation was complicated by the
fact that the relations between the railroads and the shipping lines were of
two sorts: In the first place, the Pacific Mail served as a valuable connection
for the transcontinental railroads on business originating in or destined to
China and Japan. Tea and silk eastbound were usually delivered by the
steamships to the rail lines at San Francisco. Westbound the higher classes
of manufactured goods likewise moved part way by rail and part way by
water haul. During the ten years ending in February, 1881, the Pacific roads
carried 177,278,505 pounds of tea and other Asiatic goods, secured to them
by the co-operation of the Pacific Mail Steamship Company, resulting in
earnings of $3,264,456.44.[345] On the other hand, the rail and water lines
were competitors in important respects.

Steamship Company Organized

In 1874 the Huntington interests organized the Occidental and Oriental
Steamship Company and chartered three steamships to ply between San
Francisco and the Far East. This was said to be the result of a decision of
the Pacific Mail to make Panama the terminus of its transpacific route,
relegating San Francisco to the secondary position of a port of call.[346]
Huntington wrote to Colton, on November 9, 1874:
I am surprised to learn that anyone should think it was for our interest to put on the
China line seven steamers to start with. I think three is plenty, and we shall, no doubt, have
such an opposition on the start that we shall have to run them at a loss, but with those three
we can make the prices for the old line, and I think there is enough to break them with,
unless the managers of that company are changed, and then we most likely can get their
steamers.[347]

Huntington intended to develop the Occidental and Oriental Steamship
Company as a permanent connection of the Central Pacific for Oriental
business in competition with the Pacific Mail. At the time his decision was
made he discussed with his associates the advisability of asking enough
eastern lines to join with the Central Pacific to form a single
transcontinental route from the Pacific to the Atlantic coasts for export and
import traffic, but decided against this project because it would make
enemies of the railroads which were not included, and because also the
admission of partners would make it impossible for the Central Pacific to
control by itself a majority of the shares of the Occidental and Oriental
Company. Huntington’s letter to Colton on this matter is a model of sound
reasoning on a large question of policy:
I think very likely we could make out a through line. Very likely the Baltimore and Ohio
would come in, and make up a line that would run to Omaha or Fort Kearney, passing
through St. Louis and Chicago. But if this was done, very likely it would be difficult for us
to control the steamship Company, and if we make up this line, leaving out the roads above
mentioned, of course they would not expect any of the China business coming over our
road, and then would they not be likely to work against us by allowing the Pacific Mail
Steamship Company and any other companies to give bills of lading from China and Japan
to Chicago, St. Louis, etc., over their roads, and to bring freight from those points to the
sea coast here, to go by steamer and sail to California?... We cannot be too careful in
starting this steamship line, for it is one of the things that if we go into, I have little doubt
we shall hold it for years, and therefore the more reason why we should hold a majority of
the stock of the company, as almost every road here is controlled by those that are always
short or long of stock and endeavor to render everything bend to their particular wants. If
short, they want to put the stock down, and if long they work for the reverse and we cannot
afford to be in their power.[348]

Ownership of Shares
Doubtless for financial reasons the policy here laid down was departed
from sufficiently to allow the Union Pacific a half-interest in the new
company. For their part, Stanford, Huntington, Hopkins, Crocker and
Colton subscribed each to 10,000 shares of the stock of the Occidental and
Oriental Steamship Company. The account was charged to the Western
Development Company and was held by that company as an asset. The
remaining 50,000 shares were owned by the Union Pacific, and Mr. Gould
shared with the associates the management of the enterprise.[349] It may be
added that the Occidental and Oriental owned no steamers, but chartered
the “Oceanic,” the “Belgic,” and the “Gaelic.” The “Oceanic” was a boat of
3,800 tons; the other ships were of 2,600 tons each.[350] The first dividend
was declared in July, 1878, and by 1881 the rate had been raised to 4 per
cent. Mr. Stanford has testified that the company expected to lose $100,000
a year, but that its owners were pleasantly disappointed.[351]

Agreement with Pacific Mail
There is evidence that as early as 1870 some agreement was entered
into between the Huntington interests and the Pacific Mail Steamship
Company, and that in 1871 a formal contract was concluded by these
companies, defining their relation to each other. The terms of the contract of
1871 are not available, but a subsequent agreement, dated October 1, 1872,
contained the following principal provisions:
The Pacific Mail Steamship Company agreed to provide every month
three first-class steamers to sail from the port of New York for the Isthmus
of Panama, with connecting steamers on the Pacific Ocean for the port of
San Francisco. The company undertook to supply space in these steamers
for an amount of freight not exceeding 14,700 tons annually.
The steamship company accorded to the railroad company the exclusive
right to fix the rates on freight of every description, moving from New York
to San Francisco during the period of the agreement, provided that the rates
should not exceed the rates then in force, nor in any event $160 first-class,
$140 second-class, $90 third-class, and $60 fourth-class and special.
Out of the gross receipts on the freight westbound the steamship
company was first to draw $735,000, or at the rate of $50 per ton on 14,700
tons. If the amount of the freight handled should not equal 14,700 tons, or if

that quantity of freight should be handled but the receipts therefrom should
not amount to $50 per ton, the railroad agreed to make up the difference, so
that the receipts on the first 14,700 tons should always amount to $735,000.
If, on the other hand, the steamship should collect thereon an average rate
exceeding $50, the railroad was to be entitled to the surplus.
In the event that through westbound freight exceeded in volume 14,700
tons, the gross earnings on the excess quantity were to be divided between
steamship company and railroad company as follows: first, $30 per ton was
to be taken by the steamship company; additional receipts up to $50 a ton
were to be divided equally between steamship and railroad; and earnings
over $50 were to go to the railroad.[352]
The essential facts in this agreement were that the steamship company
surrendered the power of fixing the westbound rates in return for a
guarantee of $735,000 a year.

Later Contracts
This feature was also characteristic of later agreements between the
same parties, different as the details of the subsequent arrangements
sometimes were. In 1879 the Union Pacific, Central Pacific, and Pacific
Mail companies agreed that the last-named should set aside space for 600
tons of railroad freight in each of its steamers moving monthly between
New York and San Francisco. The railroads were to exercise full authority
over the through rates of the steamship company, and for their part were to
guarantee that the earnings on the railroad freight shipped were not to be
less than $48,000 monthly westbound, and $35,000 monthly eastbound. In
case the earnings on the 600 tons or less of railroad freight which might be
sent in each vessel exceeded the guaranteed minimum, the balance of
freight money was to be paid over to the railroad, while the moneys
received on all freight between New York and San Francisco and between
San Francisco and New York in excess of 600 tons for each vessel were to
be equally divided between the railroad and the steamship company.[353] An
additional clause in this agreement bound the railroads to pay to the
steamship company $5 for each passenger carried whose ticket was
purchased at a point east of Ogdensburg, Suspension Bridge, Buffalo,
Pittsburgh, and Wheeling, to a point west of Sacramento, and vice versa.

An agreement dated June 1, 1885, between the Transcontinental
Association and the Pacific Mail does not differ strikingly from that of 1879
just summarized, except that the payments per month were to be $85,000
for a two-way service, instead of $83,000, and that there was no passenger
subsidy. Moreover, the right of the steamship company to fix rates for the
use of its capacity above the 600 tons mentioned in the agreement was
specifically reserved. The $85,000 payment in this year represented a
reduction from the figure of $110,000 contained in a contract dated March
4, 1880, and from one of $95,000 concluded in 1882. In 1887 the subsidy
was set at $65,000, and in 1889, when still another arrangement between
the Transcontinental Association and the Pacific Mail was signed, it was put
at $75,000.[354]
From a statement made to the United States Pacific Railway
Commission, it appears that the aggregate earnings guaranteed by the
railroads to the Pacific Mail Steamship Company from September 30, 1871,
to March 21, 1886, were $11,227,939.27. This did not include Central or
South American business. Of the guaranteed sum the steamship company
earned $5,854,113.06, leaving $5,373,826.21 to be made up by the
guarantors. The distribution of the burden among the railroads interested
may be suggested by the fact that out of $146,170.29 which had to be paid
during the three months from January to March, 1886, the Union Pacific
paid $34,652.94, the Central Pacific $31,927.57, the Southern Pacific
$30,172.79, the Santa Fé $15,086.11, the Galveston, Harrisburg and San
Antonio $11,536.82, and seven other companies smaller sums.[355]

Change in Ocean Traffic
The change which took place in the volume of water-borne commerce
in and out of San Francisco coincident with the arrangements between the
railroads and the Pacific Mail which have been described, is clearly
indicated in the following table:[356]

Value of Commodities Shipped from New York to San Francisco and from
San Francisco to New York via Panama each year from 1869 to 1884

Year ended Shipped from New Shipped from San Total
June 30 York to San Francisco to New

Francisco York
1869 $50,015,994 $20,186,035 $70,202,029
1870 15,334,945 3,259,310 18,594,255
1871 9,391,607 2,161,106 11,552,713
1872 6,739,563 3,086,874 9,826,437
1873 3,042,617 3,667,107 6,709,724
1874 7,049,821 1,752,653 8,802,474
1875 6,057,202 2,382,928 8,440,130
1876 4,470,594 1,983,261 6,453,855
1877 3,398,864 2,205,979 5,604,843
1878 3,976,358 3,211,245 7,187,603
1879 2,781,065 2,166,690 4,947,755
1880 2,963,065 2,865,237 5,828,302
1881 815,893 2,598,868 3,414,761
1882 1,270,900 3,153,902 4,424,802
1883 1,192,912 2,394,430 3,587,342
1884 1,040,495 1,264,682 2,305,177

If we compare the year 1869—probably the last in which the Pacific
Mail and the Huntington interests were in active competition—with the
year 1884, it appears that the value of commodities shipped in and out of
San Francisco via Panama during these years declined from about seventy
to about two million dollars. Doubtless this falling off was not all due to
agreements between rail and water carriers. For instance the sudden decline
between 1869 and 1870 was occasioned in large part by the sudden
diversion of bullion shipments from the water routes when the rail lines
were opened, while passengers also rapidly deserted the water for the more
speedy and comfortable rail service. Moreover, at a slightly later date the
special contract system played its part in limiting shipments by sea. Yet it is
not unfair to credit the arrangements between the Huntington group and the
Pacific Mail with a considerable share of the reduction in water tonnage so
desirable from the point of view of the land carriers.

Pacific Mail and Panama Railroad
The difficulty in bringing about a substantial lessening of competition
by agreement with a water carrier is found in the fact that the sea is free, so
that new ships and new shipping companies can readily take the place of
those that are withdrawn. The peculiar strength of the Pacific Mail in
negotiating with the railroad company lay in the fact that it enjoyed for
many years the exclusive privilege of through-billing freight between San
Francisco and New York, including the privilege of quoting a through rate.
From all other steamship companies the Panama Railroad exacted a local
rate for hauling freight across the Isthmus.[357] Inasmuch as this local rate
was very high, it was impossible for a competing steamship company to
handle through business at a profit. It was thus the railroad which
determined whether competition by way of the Isthmus of Panama should
succeed or fail. It may be added that after the year 1893 the Panama
Railroad assumed the responsibility not only of the rail haul across the
Isthmus, but of the water connection between Colon and New York as well,
thus becoming the preponderant partner in respect to length of route, as well
as in respect to strategic position.
In return for the exclusive right of through-billing, and of quoting
through rates, as well as for its agreements not to operate vessels in the
Pacific, the Panama Railroad was promised a certain division of the through
rate, which was not to be less monthly than a stipulated minimum. The
minimum varied, but always was a substantial part of the payment which
the transcontinental railroads were making to the Pacific Mail. In 1878 the
railroads guaranteed the Pacific Mail $90,000 a month, out of which the
Panama Railroad received $75,000. When the Pacific Mail subsidy was
lowered from $90,000 to $75,000, the amount guaranteed to the Panama
Railroad fell off from $75,000 to $55,000.
It is a matter of history also that during the years 1876 to 1878, the
Panama Railroad not only was a party to the elaborate traffic agreement
with the Pacific Mail which has been described, but that it exercised for a
time direct control of the steamship company by domination of its president
and board of directors. This control was the outcome of a conflict between
Jay Gould, then president of the Pacific Mail, and Trenor W. Park, of the
Panama Railroad, which in 1875 resulted in the election of a board of
directors satisfactory to the latter and in the choice of a new president.

The lever which the railroad used at this time was the cancellation of its
contract with the Pacific Mail, the organization of a company known as the
Pacific Transit Company, the purchase of three old refitted warships, and
the threat to engage in active competition. Mr. Park was asked if he would
desist from his attack on the Pacific Mail if a neutral board of directors
were elected. He consented to this, and was satisfied by a board composed
for the most part of Panama Railroad men. This was followed by the
consolidation of the Pacific Mail and the Panama Transit Company, by the
renewal of contracts between railroad and steamship, and finally in 1878,
by the execution of a bill of sale by the steamship to the railroad company
for twenty-two steamers to secure a loan of $1,000,000 in Panama Railroad
bonds for four years.[358]

Railroads’ Main Reliance
It thus appears that during the first ten years after the completion of the
Central Pacific, the interests of the Panama Railroad and those of the
Pacific Mail were closely bound together, so that during this period an
agreement with the former was sufficient to control the route over which
both were operating. It was upon this fact that the transcontinental railroads
chiefly relied. Nor was there any important change in the relations between
the Panama Railroad and the Pacific Mail, or in those between the Pacific
Mail and the transcontinental railroads during the following twelve years.
Mr. Park’s control of the Pacific Mail proved only temporary, it is true, and
the terms of the contracts between the parties changed from time to time;
yet the principle of a guaranty of earnings to the Pacific Mail in return for
the maintenance of rates was always adhered to, and the Panama Railroad
always received the lion’s share of this guaranty for a division. The amount
of the subsidy paid by the railroad has already been given. When in 1885
the Pacific Mail received $85,000 per month from the transcontinental
lines, it paid over $70,000 to the Panama Railroad. When the Pacific Mail
subsidy was reduced to $65,000 in 1887, the payment to the Isthmian
railroad likewise fell to $55,000. In 1881 the Panama Canal Company, a
French corporation under the direction of De Lesseps, purchased the
Panama Railroad for $20,000,000; but this does not seem to have affected
the relations between the last-named railroad and the Pacific Mail.

CHAPTER XIV

THE RATE SYSTEM OF THE CENTRAL PACIFIC

City and Country in California
For more than forty years the Southern Pacific interests sought with
varying success to modify the intensity of water competition by agreement
with or by purchase of competing lines. During all this period the existence
of alternative water routes was probably the principal influence determining
the relative adjustment of rates between different towns upon the Pacific
Coast. In deciding upon the rates which they should charge, the Southern
Pacific interests had other factors to consider, however, besides the presence
of water competition—factors which can be understood only after a careful
study of local conditions in the Far West.
The state of California is characteristically a country of great distances,
occupied by a relatively sparse and unequally distributed population. Its
industry is primarily agricultural and mining. Although some manufactures
have developed since 1870, such as foundries, woolen and sugar mills,
glass, paper, cordage, powder, tobacco, tin, and hardware manufacturing
concerns, yet even today the absence of adequate supplies of good coal, the
smallness of the local market, and the distance from the great centers of
population in the East hold manufactures within narrow limits. As explained
in the previous chapter, the state is best fitted to produce and export
products of the soil, and raw materials such as grain, fruit, wool, hides, and
later wines, lumber, and oil. To this list should also be added salmon.
In such an economy, the cities of California play the part of distributing
agencies rather than that of centers of industry. Such was the first function
of Stockton, Sacramento, Los Angeles, and indeed of San Francisco itself,

and the work of distribution still remains these cities’ principal means of
support. Originally the chief profit of the northern towns came from
supplying the mining population of the Sierras with supplies brought by sea
from Europe or from the Atlantic Coast of the United States. The nature of
California imports has somewhat changed since the early days; a larger
commerce with the Orient and with the west coast of South America has
developed, and a large part of the freight handled on the Pacific Coast now
comes in by rail. This has multiplied the number of distributing points, and
has to some degree built up the interior of the state. The character of the
cities has not, however, changed and they remain as before—trading and
consuming rather than producing centers.

Conflict of Interest
It follows from this division of labor between town and country on the
Pacific Coast, and from the rivalry of different cities in the distribution of
finished goods, that striking divergencies in point of view have arisen, both
between individual cities, and also between the city communities as a whole
and the farming and manufacturing interests of the state. These differences
have received free expression in the discussion of railroad rates. Inasmuch
as the articles distributed by the towns are in large part imported goods, the
cities as a group have demanded low westbound carload rates from eastern
sources of supply. The larger centers of population, however, have opposed
low rates on small consignments, because that tends to deprive them of a
rehandling profit by promoting direct relations between the consumer and
the eastern wholesale house. As compared with the cities, on the other hand,
the farming interests have been relatively indifferent to the level of
westbound rates, so long as they have enjoyed low eastbound rates on the
product of the farm and field; while the struggling manufacturers have
resisted low rates westbound, because these have exposed them to the
competition of eastern factories. The interests of the consumer have not
until quite recent years been represented.

No Settled Rate Policy
Owing to these persistent conflicts between various classes of shippers,
public opinion in California has not been easily enlisted as a whole in
support of any concrete proposals for the readjustment of railroad rates,

although complaints from all sections have been numerous. There has been,
on the contrary, a persistent series of appeals to the railroad, now to favor
one set of interests, now to favor another—appeals which, when granted,
often have resulted in gross discrimination, and which, when refused, have
swelled the tide of protest against the transportation lines. The serious side
of this situation in California is that the conflict of interest between buyers
of transportation has exposed the railroad to temptations which it has had
neither will nor ability to withstand. Where there is constant demand for
favors there is likely to be discrimination unless the person or institution to
which demand is made is fortified by a clear view of public policy and a
sense of morality more than ordinarily acute.
It is no secret that the Southern Pacific has had neither the one nor the
other of these qualifications. For its part, it has acknowledged no duties
other than those generally incumbent upon private business. It has insisted
upon complete freedom to follow its own advantage. In a speech to the men
in the railroad shops at Sacramento in September, 1873, Stanford explained
his position by asking: “Does Governor Booth sell at the same per cent of
profit his sugar, pork, beans, bacon, lard, candles, soap, spice, coffee,
whiskey, brandy, and other articles? So with the mechanic, the
manufacturer, the farmer, and others. The market price governs. A farmer
takes two and one-half cents for his grain as justly and as cheerfully as one
and one-half cents, the cost of producing being the same.”[359] “The
Southern Pacific,” said Mr. William B. Curtis, of that company, in 1894, in
the same strain, “sells transportation precisely as a merchant disposes of his
wares, adjusting its tariff to conform to the situation with the object in view
of inducing the largest amount of transportation at fair rates.”[360]
This announced willingness to differentiate led in the course of time to
the greatest variety of railroad rates in California, some rates being low,
some high, some public, some secret. Generally speaking, indeed, rates
were low where competition was present, and high where it was absent. The
big man was favored over the little man, the shipper with an alternative
route over the shipper confined to one railroad line. Some of the details of
this interesting system will now be presented.

Separate Rate Classifications

In discussing the adjustment of local charges in California, attention
will be first directed to the absolute level of local railroad rates. Separate
mention must be made of the local classifications and of the local rates.
As late as 1877, each of the principal railroads in California had its own
classification. These were far from being the same. Baled hops moved at
one and one-half times first-class on the Central Pacific. On the Southern
Pacific compressed hops took third-class. On the California Pacific pressed
hops took double first-class. Liquors took one and one-half times first-class
on the Central Pacific (in jars, owner’s risk); second-class on the Southern
Pacific (in glass, packed, owner’s risk); double first-class on the California
Pacific (in jars or glass); first-class on the North Pacific Coast (in glass,
packed, owner’s risk); and double first-class on the San Francisco and
North Pacific (in glass or demijohns, owner’s risk). Window glass took
first-class on the Central Pacific, one and one-half times first-class on the
California Pacific, and fourth-class on the Southern Pacific if not over three
feet long. Boiler flues moved first-class on the Central Pacific, third-class
on the North Pacific Coast, and fourth-or fifth-class according as made of
copper or brass, or of iron, on the Southern Pacific.[361]
Generally speaking, however, the classifications were much less
elaborate than they later became. A committee of the California Senate
observed in 1893 that the theory of the local classification of the Southern
Pacific was to simplify so far as possible. Hence that classification started
out with the announcement, in effect, that all articles not named specifically
therein would be charged for at merchandise rates. It then continued to
indicate the exceptions, enumerating articles that were light, bulky, of
excessive value, liable to damage, etc., proceeding in this way along the
same lines as the Western classification.[362]
When the Santa Fé later built into southern California it brought in the
Western classification, tariffs, rules, and conditions that governed its lines
elsewhere, and applied the Southern Pacific schedules of merchandise rates
to this classification. Since, however, the Southern Pacific had only one
merchandise class, the Santa Fé applied the same rates to each of the first
four classes of the Western classification in California. The result of this
adjustment of tariff to the Western classification was to produce practically
the same revenue as would have resulted from the local classification and
merchandise rates of the Southern Pacific Company. In 1893 the Southern

Pacific itself substituted the Western classification for the one which it had
been using.[363]

Local Rates
Under the law the maximum rate which any California railroad could
charge for the transportation of freight, was 15 cents per ton per mile. In
spite of the statement of Mr. Stanford to the contrary,[364] the evidence is to
the effect that this maximum was generally applied on short-haul local
business as late as 1877 and perhaps afterwards. In some cases, the
published rate was even greater than the maximum, though a note to the
schedule provided that when the calculated rate exceeded the legal
maximum, the latter would apply. The rates on the Central Pacific main line
in 1866 were almost exactly 15 cents per ton per mile.
The report of the California Board of Transportation Commissioners in
1877 showed that generally throughout the state first-class rates for short
hauls ranged from 14 to 30 cents per ton per mile. For the 10 miles from
Lathrop to Stockton the tariff charge was $1.60 per ton, and for the 6 miles
from Pleasanton to Livermore, the rate was $1. The charge from Roseville
Junction to Truckee, 102 miles, was $15.20. When river competition
entered in, rates were markedly reduced. The charge from San Francisco to
Stockton, 92 miles, was $3.20 per ton, or 3½ cents per ton per mile; that
from San Francisco to Sacramento, 140 miles, was $3.60, or 2⅗ cents per
ton per mile. On the other hand, the rates of the California Pacific were
somewhat higher than those of the other lines, except at competitive points.
[365]

In later years the charges of the Southern Pacific naturally declined. Yet
the rate on brick from San Francisco to Soledad in 1892 was 5½ cents per
ton per mile on a haul of 143 miles, and that to San Miguel, 64 miles farther
on, was almost 5 cents per ton per mile.[366] The average receipts per ton
per mile upon the Southern Pacific system were 2.04 cents per ton per mile
for all freight as late as 1885, in spite of the large quantity of long distance
through traffic. Plainly the average receipts on local business were much
greater. There seems little doubt but that the local rates in California were
always distinctly higher than in the eastern states, although they have been
lowered in recent years. The reason was in the main the relatively slight
density of traffic upon all except the trunk routes, as well as the higher cost

of coal, and the successful control of competition to which the Southern
Pacific attained.

Rate Discrimination
Turning now from the absolute level of local rates to the question of the
relations which those rates bore to each other, we come to the question of
discrimination in California. Railroad discrimination may be personal, in
which case it involves the quoting of different rates to different persons for
the same or a similar service, or it may be local, as in instances where the
interests of competing localities are concerned. Either kind of
discrimination is of profound social importance, for, after all, it must be
remembered that the significant question for the producing and distributing
interests of a state is not how much they pay for transportation, but whether
this amount, be it much or little, is less than is paid by their competitors.
The remainder of the present chapter will be devoted to the discussion of
personal discrimination; in the next chapter the topic of local discrimination
will be considered.
The policy of granting special concessions in rates to special shippers
was one which the Southern Pacific followed freely whenever it seemed
likely to increase the profits of the company. There was never any
disposition to apologize for this—it was known to be the practice of other
roads as well, and the Southern Pacific accepted the system as a matter of
course. The methods employed were various. One method was that of
granting passes. Mr. Stubbs explained that passes were commonly issued in
cases where shippers came to the Central Pacific and represented that they
were offered transportation by the company’s competitors over such
competitors’ lines. “They were our patrons,” said Mr. Stubbs, “shipping our
way, and I may say that wherever we were satisfied that the statement was
true, we generally met the case by giving a pass!”[367]

Sudden Tariff Changes
In addition to granting passes, the Southern Pacific discriminated by
changing open rates suddenly for the benefit of persons fortunate enough to
be advised in advance. Mr. Stanford once explained that individual items in
the company’s tariff were changed whenever by so doing the company
could encourage business in any direction.[368] Indeed, a tariff would

scarcely be in force ten days before the necessity for changes would be
apparent.[369]
How this might work was shown in 1892, when complaint was made of
discrimination in favor of the Standard Oil Company. It was then alleged
that the Central Pacific was lowering oil rates from $1.25 per hundred
pounds to 82½ or 90 cents, when the Standard Oil desired to make
shipments from eastern refining points to the Pacific Coast, the rates being
subsequently raised when the shipments had been completed. A letter to the
vice-president of the Standard Oil Company, bearing upon an episode of
this sort, written under date of December 4, 1888, got into the public press,
and seems to establish the fact that transactions of this nature were going
on. The letter follows and is self-explanatory.[370]
San Francisco, December 4, 1888
W. H. Tilford, Vice-President, Standard Oil Company,
26 Broadway, New York

Dear Sir:
· · · · · · · · · · · · · · · · ·
I herewith hand you copy of a letter I have just received from Mr. Sproule, Assistant
General Freight Agent of the Southern Pacific Company, this city. This letter I interpret to
mean the 90-cent rate is for us to stock up from time to time, and that the $1.25 rate will be
in effect whenever we may desire. This $1.25 rate is what Mr. Sproule refers to in the latter
portion of his letter, as my offer of 90 cents to Mr. Stubbs was on condition that he has the
rate of $1.25 put into effect when we might ask him. This letter also reads as if the 90-cent
rate and the $1 rate was to be put in effect January 1st. No doubt Mr. Stubbs was unaware
that we were stocked up at the present rate of 82½.
The Transcontinental Association adjourned at Chicago yesterday, and I understand that
Mr. Stubbs is now on his way home. I will see him on his arrival here, and if Chairman
Leeds of the Transcontinental Association has been notified to put the 90-cent rate in effect
January 1st I will have the same corrected by wire and the $1.25 rate put in. As soon as Mr.
Stubbs reaches home I will telegraph you whether it is intended that the 90-cent rate should
be put in effect January 1st or the $1.25.
Yours truly,
E. A. Tilford

Relations with Standard Oil
The fact that relations between the Southern Pacific and the Standard
Oil Company were very close during the late eighties and early nineties is
well established, not only by the correspondence just referred to, but also by
other available evidence. In June, 1892, to cite a small but interesting
episode, the Union Pacific issued a circular applying a rate of 78½ cents per

hundred pounds on oil from Colorado points to the Pacific Coast. This rate
had been in effect some years before, previous to the organization of the
Western Traffic Association, under a rule which made Missouri River
commodity rates a maximum on business originating west of the 97th
meridian. The rule in question had never been withdrawn, although it
developed that the Southern Pacific had forgotten it, and believed that a rate
of $1.60 applied.
At this time the independent firm of Whittier, Fuller and Company was
endeavoring to find a market for the products of its Colorado plant upon the
Pacific Coast. In order to head off this anticipated competition, the Standard
Oil representative in San Francisco took the matter up with the general
traffic manager of the Southern Pacific, Mr. Gray. The latter at once wired
to Mr. Munroe of the Union Pacific as follows:

San Francisco, June 10, 1892
J. A. Munroe,
Omaha, Nebraska
It is reported you are antagonizing Standard Oil Company in Colorado.
I hope you will do nothing to affect our joint relation with that company
with regard to Pacific Coast business. Have you observed the large tonnage
you have lately been handling for them? I think it is so great you should be
careful how you jeopardize your own interest in this direction.
R. Gray

Under pressure from the Standard Oil, the Southern Pacific followed up
this telegram by refusing to prorate on any basis lower than $1.60. As a
result the objectionable circular was withdrawn.[371]

Rate Rebates
A third method of granting concessions to shippers whom the Central
Pacific desired to favor, was that of the rebate. Rebates were usually
granted in exchange for an undertaking by the shipper to send all his freight
over the lines of the railroads by which the rebate was paid. Mr. Stubbs
once explained to the United States Pacific Railway Commission that the
granting of rebates was a regular practice, not only of the Central Pacific,

but of all its connecting lines. He explained the mechanism of the operation
as follows:
Suppose that you were a merchant, and I should go to you to make a contract for the rail
lines—because all the lines were parties to it between New York and San Francisco. It was
not a Central Pacific affair. You understand that all the lines between San Francisco and
New York, probably embracing all the roads in the East, shared in this reduced rate that
was given to the merchant in consideration of his exclusive patronage—I should go to you
and make a contract, and should say that it is impossible for us, in billing, to bill this to you
at the net rates. We will bill it at the full rates, and when you receive your goods at the
depot you pay the full rates, and we will refund to you the difference between the agreed
rate under the contract and the rates which you have paid. Of course that is an overcharge.
We overcharged those goods above the price that you had previously agreed to pay for the
transportation of them.[372]

In the single year of 1884 the Central Pacific paid out $1,060,275.92 as
refunds in behalf of itself and its connections.

Extent of Practice
Evidence showing how radically published rates were reduced by the
practice of rebating is to be found in the following testimony by G. W.
Luce, now freight traffic manager of the Southern Pacific, and long
connected with the traffic department of that company. Speaking before the
Interstate Commerce Commission of the period about 1887, Mr. Luce said:
Just prior to that time I had in mind, there had been a very severe war in rates. I do not
know whether that was the reason for the creation of this Commission or not, but the
struggle had been very disastrous; two or three lines, I think, were very much crippled,
going into the hands of receivers; and just before the act was passed, effective in April,
1887, I think, the lines got together and said, “Here, let us stop this foolishness; let us have
some standard of rates and see what we can do on that basis. I believe the rates were made
50 per cent of the old tariff rate that had been used for two or three years. I presume the
carriers thought that it would not be judicious to put their rates right up to standard 100 per
cent, so they decided on a 50 per cent tariff.”
The Chairman. You mean 50 per cent more than the published rate, or 50 per cent of
the published rate?
Mr. Luce. Of the published rate....
The Chairman. That means your published rates, which your line had published up to
that time in the eighties, were probably about twice that much?
Mr. Luce. Yes, sir.
The Chairman. And yet that was an effort to bring together a stability of rates, and to
get more out of the traffic than you had been getting during this war, I suppose?
Mr. Luce. Yes, sir.

The Chairman. So that, as a matter of fact, prior to that, you had not been getting even
as much as ... the 50 per cent basis?
Mr. Luce. No, sir.
The Chairman. It was a general departure from the so-called published rates of more
than 50 per cent?
Mr. Luce. Oh, yes.[373]

Concrete Instances
The practice of quoting a lower rate to one person than to another in
order to secure a specific shipment, or in consideration of an agreement for
exclusive patronage of the railroad which granted the rebate, was clearly a
case of personal discrimination. A concrete case which is illustrative of the
general policy with which we are concerned was brought to public notice in
California in the year 1886, when the Central Pacific was charged with
rebating large sums to two favored shippers named Friedlander and Reed. It
appeared in fact that the railroad had paid $6,000 at one time to Friedlander
for rent of a wharf at Vallejo, and 25 cents a ton on a shipment to a certain
Mr. Reed at Knight’s, on business destined to Vallejo. These payments were
explained by the company as follows:
The Friedlander wharf vouchers were explained by showing that, in
consideration of the rental of said wharf, Friedlander agreed to, and did,
send the whole of his immense grain purchases on the Sacramento River,
and at other competing points on the California Pacific, by rail instead of by
steamer and sail; and when one remembers the enormous quantities of
wheat and barley purchased by him, the “grain king of California,” there is
no doubt that the contract was a source of much profit to the company. The
Reed voucher for 25 cents per ton for loading wheat from his warehouse at
Knight’s Landing, was fully explained by Reed himself. He had a
warehouse at that point on the bank of the river, and water craft would take
his grain at the same rate charged by the railroad company, loading and
unloading the same at their own expense, while the railroad company
required the shipper to do the loading. When asked to patronize the railroad,
Reed told Mr. Towne, general manager, that he could have the grain carried
by water at the same price that the Southern Pacific demanded, and that the
steamers and schooners would do the loading without charge. In order to
secure the business, Mr. Towne told Reed that if he would ship by rail, the

company would allow him 25 cents per ton for loading, thus securing
business for the road that would have been otherwise lost.

“Special” Contract System
In all probability the Reed and Friedlander cases were but two of a great
many instances of similar favors granted to large shippers, and to shippers
strategically placed on water lines in California. This is certainly implied in
the testimony of Mr. Stubbs before the United States Pacific Railway
Commission. Moreover, there is good independent evidence to the same
effect in the available data concerning the “seasonal” or “special” contract
system which became notorious in California in the late seventies and early
eighties. The outlines of this last-named arrangement were as follows:
As early as May, 1878, the Central Pacific Railroad offered to guarantee
a maximum rate of $2 per hundred pounds upon all grease wool, eastbound,
moving over its lines from San Francisco to New York. In consideration of
this guaranty it required shippers to undertake to ship all wool which they
sent to destinations east of the meridian of Omaha by way of the Central
Pacific and such connecting lines as the Central Pacific Railroad Company
might elect. In case of failure to live up to the agreement, the shipper bound
himself to pay an additional rate of 75 cents per hundred pounds upon all
shipments made or which might have been made by rail during the time of
the contract. Before this arrangement was insisted on, shippers were
accustomed to forward their finer wools by rail at the $2 rate, but to send
their low-grade wool by sea at a rate of 50 cents per hundred pounds.[374]
The system of special rates and exclusive contracts was not at first
applied to westbound freight, nor to general merchandise, whether moving
east or west. Late in July, 1878, however, notice was given of advances in
westbound merchandise rates which in many instances amounted to as
much as 100 per cent, and at the same time a tender was made of rates
below the published tariff to shippers who entered into special contracts
with the railroad for exclusive handling of their freight. The Central Pacific
management placed the responsibility for the rate advance upon the Union
Pacific, and gave publicity to a telegram of protest signed by Mr. Stanford.
[375]
There is reason to believe, nevertheless, that the Central Pacific
management was cognizant of the matter from the first, and it is certain that

Mr. Stubbs, general traffic manager of the Central Pacific, warmly defended
the system.

Terms of Contract
Under the special contract plan, the railroad company agreed to charge
not more than certain specified rates on articles named in the agreement
shipped from New York, Pittsburgh, Cincinnati, and Chicago, and other
points taking the same rates to the Pacific Coast. Rates on freight not
specifically provided for were not to exceed those published in the general
tariff. In case rival railroads cut rates, or in case competition by the Pacific
Mail should become active, the shipper was to be protected. That is to say,
it was declared to be the intent and purpose of the agreement to guarantee to
the contracting merchant rates which should be as low as those charged and
collected upon the same articles, between the same points, by any other all-
rail route which might compete for the traffic of California at any time
during the term of the contract.
The carrier also agreed that in the event of active competition with the
Pacific Mail for the traffic between New York and San Francisco, the rates
charged by rail during the period of competition should not exceed those
current on Pacific Mail vessels by more than certain named amounts,
ranging from 50 cents on goods taken at rates not exceeding $3.50, to $3 on
goods taken at rates exceeding $6. This guaranty was not to be enforced at
times when the rates of the Pacific Mail were subject to the control of the
railroads.
In consideration of these assurances the shipper agreed to forward “by
way of the railroads owned or operated by the contracting carriers and such
other connecting railroads as might be designated from time to time, all
goods, wares, and merchandise handled by the merchants entering into the
agreement which might or should be purchased in or obtained from any
point in the United States or Canada east of the meridian of Omaha, during
the term of this contract, for sale or use on the Pacific Coast.”[376]

Rates under System
It appears that at the beginning the same rates were quoted to all
shippers signing the contract. That is to say, two rate sheets were published,
one known as the “white list,” and the other as the “pink list.” The white list

contained the open, or public rate; the pink list contained the contract rate.
Contracts were made with individual shippers that if they would give to the
railroad line all of their traffic for a year to the exclusion of ocean carriers,
they would have a rebate down to the figure fixed in the pink list.
Somewhat later, however, jobbers on the Pacific Coast were individually
dealt with, and the rates began to vary.
Mr. Stubbs says in describing this phase of the matter:
We tramped the streets here for a couple of months, explaining our ideas to the principal
importers. By some we were met with cordiality and approval. Others were a little
indifferent. Where a merchant liked the scheme, we would sit down with him, and, by
examining his bills of lading by Cape Horn and his insurance policies, we would get an
idea of the quantity he would ship by the several routes and the cost to him by the use of
the several routes. We would then aim to make the rate so that upon the whole it would
average about the same. We would average the rate while he was using the three routes.

Still later the railroads returned to the one-rate policy. To arrive at this
rate they adopted a plan of “harmonization”; they averaged the rates upon
various commodities which had been charged to various shippers and made
a new schedule of rates, from which they varied as emergency might
require or expediency advise, by the current method of rebating.[377]

Administration of Contracts
The railroad company reserved from the beginning the option of way-
billing the goods and collecting freights according to the printed rates,
agreeing to return the difference on presentation of vouchers to the general
freight agent of the Central Pacific at San Francisco after the lapse of a
reasonable time for auditing and adjusting the bills. The carrier also always
insisted on the privilege of examining the shipper’s books in case it
suspected a violation of the agreement. In some respects, the wording and
administration of the contracts became more stringent in the later years. J.
T. Doyle, a well-informed San Francisco attorney, asserts that at the
beginning merchants were merely forbidden to import goods otherwise than
by rail. Following this the prohibition was extended to the handling or
buying of goods imported by sea by other parties. Finally the boycott
reached to the offending importers themselves, and firms signing the
contracts were bound not to sell or deliver goods to anyone who was in the
habit of importing otherwise than by rail.[378]

Probably there was some difference in the treatment of different
shippers in these matters. Mr. Hawley, a large importer of hardware, told a
committee of the California legislature in 1884 that he was at liberty to buy
a great many things “to sort up with,” even goods sent via the Horn. On the
other hand, there were a good many cancellations of contracts for alleged
violations, and shippers lived in continual apprehension.
Taken as a whole, the special contract system was an exchange of a
rebate by the railroad for an agreement for exclusive patronage on the part
of the shipper. Prior to 1878, bulky, low-grade articles moving between the
Atlantic and the Pacific coasts usually went by sea. Rates were lower and
saving in time not important. High-grade goods and freight requiring quick
transportation went by rail. It was the idea of the railroad that if compelled
to choose, Pacific Coast business men would prefer to import all their
freight by rail rather than to bring it all in by water, and that this would
substantially increase railroad revenues even though incidental concessions
in rates had to be made.

Objections to Contract Plan
This special contract plan was objectionable to shippers for three
reasons. In the first place, it seemed likely to increase the rates which they
would have to pay. Although the railroad undertook at the inception of the
scheme to meet existing rates by water, at least to such an extent that the
total expense to shippers who made special contracts with the railroads
would not be increased, it needed no great prescience to foresee that the
exclusion of water carriers from the business of the Pacific Coast would
sooner or later bring about an increase in transcontinental rates. When
special contracts were offered to merchants in Stockton, Los Angeles,
Marysville, and Sacramento, San Francisco importers made the additional
complaint that their natural advantages as residents in a seaport town were
neutralized.
In the second place, the administration of the plan required a
supervision over the business of individual dealers which was extremely
distasteful. It was asserted that the railroads placed men on the wharves to
take the marks of goods brought in by sea, that they followed up the drays
to see where the goods went, and that they inspected the books of
merchants to make sure that importers who had signed contracts had no

dealings with firms who still patronized the shipping lines. Nor was this a
casual abuse, but a necessary feature in the plan.
Again, the system lent itself to discrimination. Mr. Stubbs insisted that
contract rates were open to all shippers, large or small, who would sign the
necessary papers, but it was not denied that the first arrangements were
made with large dealers only,[379] nor that during at least one period the
whole scheme involved the abandonment of a published and open tariff in
favor of a system of bargains in which each shipper’s rate was individually
and secretly determined. Under such a plan it was inconceivable that
discrimination should not develop.
Ostensibly the offer of a special contract was one which shippers were
free to accept or to reject as they saw fit. Practically, this was not so. If A
took a contract and B did not, the latter’s ability to compete was seriously
impaired. For B had to import some things by rail in any case, while the fact
that less business in the aggregate reached the Pacific Coast by sea reduced
the shipping facilities which B otherwise would have had at his command.
[380]

Transcontinental Traffic Stimulated
Special contracts seem to have been a distinct success from the point of
view of the western carriers. When they were introduced the percentage of
transcontinental freight carried by the rail lines was small, probably not
over 25 per cent of the whole. At the end of six years under the new system
this percentage had risen to between 60 and 75 per cent.[381] The change
was certainly not entirely due to the policy of special contracts, but part of
the change may be attributed to the plan.
The policy was nevertheless given up in 1884 owing to the refusal of
the eastern trunk lines to take any further part in it. According to Mr.
Stubbs, the eastern companies believed that the advantage of the system
hardly paid them for the confusion in their accounts incident to this method
of conducting business. Moreover, there was legitimate apprehension lest
the contracts provoke antagonistic legislation at Washington. Mr. Stubbs
tried to argue the question, but without success.[382]

CHAPTER XV

LOCAL RATES IN CALIFORNIA

Charging What the Traffic Will Bear
The general policy of the associates in dealing with problems of rate-
making in which rival towns were interested, was the same as that which
they adopted to meet differences in competitive power between different
individuals. The tests applied were simple. What was the market to be
reached? Had the community concerned an alternative route? Was there an
alternative source of supply which limited the willingness of the community
to pay freight? If so, was this second source of supply one served by the
Central Pacific, or one which had the benefit of water communication, or
possibly one which possessed a rival rail connection? To what extent should
concession be made from the highest rate which could be charged, in order
to promote the growth of business?[383]
The standard of rate-making just described, which may be summed up
as a policy of charging what the traffic would bear, was not peculiar to the
Southern Pacific at the time it was adopted, nor was it particularly
repugnant to public opinion in California, taken as a whole. The error must
not be made of ascribing to the western communities of the seventies and
eighties a clear conception of the reasons of public policy which are
properly urged today against the unlimited recognition in railway rate
schedules of the competitive forces which still have free play in private
business. Such ideas have slowly developed only during the last forty years.

Limited Encouragement of Business

Nor was the policy of adapting rates to the ability of shippers to pay
inconsistent with the rendering of important service to business men in
California and elsewhere who were seeking to expand their sales. Only a
few illustrations need be given of the promotion of business by rate
adjustments, but they will serve as examples of many more about which
information is on record.
One case of this sort, which shows the willingness of the Southern
Pacific management to respond to what they considered a reasonable
request, had to do with the shipment of beer from a place known as Boca, in
the state of Nevada, to San Francisco. It appears that a gentleman named
Hess once conceived the idea of establishing a brewery at Boca. This town
was 220 miles from San Francisco, and yet all of Mr. Hess’s beer had to
find a market in the latter place, in competition with beer from Milwaukee
and St. Louis. Mr. Stubbs, general traffic manager of the Central Pacific,
welcomed the proposal to build a brewery in the West, and put in special
rates to help shut out the eastern product. Every pound of brewery supplies,
he reasoned, would have to go over the Central Pacific. It was all clear gain,
like so much money picked up out of the ditch. In another case the Southern
Pacific quoted special rates on sugar from San Francisco to the Missouri
River, to enable the California Sugar Refining Company and the American
Sugar Refining Company to sell their sugar at the Missouri River in
competition with sugar reaching New York by water and thence moving
westward.[384]
Still again, in 1884 an attempt was made to persuade the St. Louis-
Kansas City lines to participate in a rate of 75 cents per hundred pounds on
cast iron pipe from St. Louis to the Pacific Coast in order to encourage
production in the Middle West in competition with that on the Atlantic
seaboard. The matter of the 75-cent rate was taken up with J. W. Midgley,
Trunk Line commissioner, who declined temporarily on December 24,
1884, on the ground that the rate would be a special one, and that there was
an understanding that no special rates should be made prior to January 31
next ensuing, pending an anticipated agreement between the
Transcontinental Association and its eastern connections.[385]
In the instances which have been given, the impelling motive of the
Southern Pacific was frankly to increase its profit by increasing the
movement of freight over its line. Yet the shipper was also benefited

because his interests were substantially identical with those of the railroad
company, and he warmly welcomed the powerful support of the railroad
lines. These cases are not unimportant. The enumeration of such isolated
instances, however interesting as they may be, affords no very clear picture
of the aggregate of local rate adjustments with which the Southern Pacific
interests were concerned. For this purpose a more systematic survey of the
rate system administered by the Southern Pacific is necessary, and to this
attention is now directed.

Distance the Governing Factor
The foundation of any system of railroad rates is the distance which
commodities are carried. Generally speaking, the Southern and Central
Pacific railroads, like other companies in the United States and Europe,
varied their local charges with the distance between point of origin and
point of destination. To illustrate this point briefly, two charts are here
presented.

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

The first chart depicts the rates on second-class freight and those on
grain in January, 1876, between Sacramento and points in the Sacramento
Valley north of that city. Second-class freight at this time on the Southern
Pacific included articles such as coal oil, agricultural implements,
machinery, furniture, crated glassware, and wines and liquors. Freight of the
description mentioned ordinarily moved north from the city of Sacramento.
Grain, on the contrary, moved south. It will be observed that rates on the
lines of the Southern Pacific increased with considerable regularity as point

of origin or destination proceeded north into the non-competitive territory
around Tehama and Redding.

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

The second chart displays rates between San Francisco and stations in
the San Joaquin Valley as far south as Fowler, 205 miles distant from point
of origin. These rates are for the year 1892.

Non-competitive rates in the San Joaquin Valley in 1892 increased as
distance grew greater, much as they had increased in the northern territory
sixteen years before. The rates given are for a few commodities only,
namely, agricultural implements, barbed wire, boots and shoes, coal, and
grain; but these are typical of the construction of schedules on a much
larger number of articles. The extent of the increase was relatively greater to
points beyond Lathrop because of the effect of water competition on San
Francisco Bay.

Grades and Traffic Density
These two schedules illustrate a fact which could be readily proved by
repeated examples, namely, that local rates in California were and are first
based on the element of distance. Possibly such a fact might be assumed;
yet in California, as elsewhere, the statement that railroad rates have varied
with the distance traversed needs promptly to be qualified in order to be
true. For, first of all, it was evident at the beginning that costs of
transportation were not solely determined by distance, and that other
considerations had to enter in. One of these other considerations was the
matter of grades. Because of the conditions under which the Central Pacific
was constructed, to say nothing of the extremely mountainous character of
certain portions of the Central Pacific lines, differences in the rates per ton
per mile between the valley and the mountain sections were introduced by
the company at the commencement of its history.
A second characteristic of railway traffic which had a profound effect
upon early railroad tariffs was the relative density of business. Mr. Stanford
advanced the theory that the railroad should strive to secure a certain
average earning per car; and in sections where business was light, as well as
upon commodities which were bulky in proportion to their weight, a high
average rate per hundred pounds was accordingly charged.
Relative grades and relative density of traffic were not the only
conditions relating to cost which influenced the varying level of
transportation rates in California, but, apart from distance, they were
perhaps the most important, and in any case they may be taken as
illustrative of the group of circumstances to which they belong. In addition
to the whole class of facts relating to cost, however, the Southern Pacific
gave heed to matters of value of service in the fixing of its rates. Nothing

will be said here of the principles of classification of freight, principles
which have to do in part with the value of the service rendered; nor of
individual differences between shippers, which have been alluded to in the
preceding chapter in the discussion of personal discrimination. The effect of
competition in distorting distance schedules in California will, however, be
dealt with at some length.

Water Competition
It has already been pointed out that the presence or absence of water
competition has always been a most important factor in determining the
relative adjustment of local rates in the state of California. This competition
has been extremely pervasive. Although the scarcity of good harbors and
the location of the Coast Range of mountains hinders access from the sea
into the interior of California, yet, on the other hand, the ports of San
Diego, San Pedro, and San Francisco, and the long stretches of navigable
water on the Sacramento and San Joaquin rivers have opened the
possibilities of water shipment to a multitude of inland towns. Indeed, in
1883 General Manager Towne, of the Central Pacific, submitted to the State
Railroad Commission a list of fifty-two points in California at which the
Central Pacific and its leased lines met direct water competition. The water
routes included San Francisco Bay and the Sacramento River and sloughs,
Suisun Bay, Napa River, San Joaquin River, Feather River, the Pacific
Ocean, Wilmington Bay, and the Colorado River. In addition, Mr. Towne
enumerated eighty-two points where rates were affected by proximity to the
competitive points previously mentioned.[386] On the face of things, the
extent of the water competition thus indicated was sufficient to warp almost
beyond recognition the simple distance scale of tariffs which a railroad
completely protected from competition would naturally apply.

Low Rates to Competitive Points
An illustration of the effect of the water routes on local rates is found in
the fact that the round trip fare from San Francisco to Sacramento by rail in
1878 was $3, while that to Woodland was $4.25.[387] The San Francisco
Chronicle declared in 1879 that, according to a recently published schedule,
the movement charge for grain, potatoes, vegetables, and wool from
Lathrop to Mojave was exactly the same as to Ravenna, Newhall, or Los

Angeles. The first-named distance was 288 miles, making the movement
mileage rate 7.2 cents; the second-named distance was 337 miles and the
rate per mile was 6.2 cents; the third distance was 356 miles, the rate being
only 5.8 cents; and the distance to Los Angeles was 388 miles, or a mileage
rate of 5.4 cents. The truth of the statement of the Chronicle is established
by data published by the State Commissioners of Transportation in 1877,
which show the striking contrast that existed in 1877 between non-
competitive rates in the interior valleys and rates to points which enjoyed
the advantage of nearness to the water routes.
Low water-compelled rates to Sacramento and to Los Angeles were in
force as early as 1877. Yet this was only a beginning, and as time went on
and the number of towns in California increased, the practice of recognizing
the force of water competition was extended. Moreover, the Southern
Pacific began to quote lower instead of merely equal rates to more distant
points which enjoyed the advantage of nearness to a water location. Since
the ability to make use of a competing railway afforded opportunities
similar to those afforded by ability to use a water route, low rates were also
extended to towns served by more than one railroad line. All this greatly
complicated the rate situation in the state, gave rise to numerous
complaints, and renders difficult the task of concise description.

Rates to Intermediate Points
Official confirmation of the general correctness of the complaint of
discrimination which reached the public press from time to time is found in
a comprehensive investigation of railroad rates in California which the
Railroad Commission of that state undertook as late as the year 1916. This
inquiry was provoked by an application by the Southern Pacific, Santa Fé,
and other railroads in California for relief from the clauses of the amended
state constitution and of the California Public Utilities Act prohibiting
greater charges to intermediate points than were collected on shipments to
more distant points over the same line. Although the legal aspects of the
case were therefore the result of modern legislation, the facts brought out
were typical of conditions of long standing.[388]

Diagram showing adjustment of freight rates between San
Francisco and Stockton, 1916.

Exhibit No. 1 in the case in question referred to class rates in the San
Joaquin Valley. It appeared that class rates between San Francisco, San
José, Port Costa, Stockton, Sacramento, Marysville, and intermediate points
to Los Angeles, were 60 cents per hundred pounds first-class, and
corresponding sums less for the lower classes. These rates were shown to be
controlled by the class rate of the Pacific Coast Steamship Company, which
quoted a through first-class rate of 52 cents, including wharfage and
handling, between San Francisco and Los Angeles via San Pedro. On all-
rail shipments down the valley, as well as on shipments over the coast rail
route, however, water competition was not effective. The rate from San
Francisco to Simi, 429 miles from San Francisco, was therefore 80 cents,
and that to Acton, 415 miles from San Francisco, was 83 cents, although
shipments from San Francisco to Los Angeles passed through Simi and
Acton on their way to Los Angeles over the coast and San Joaquin Valley
routes, respectively.
A condition similar to that at Los Angeles and at points in the San
Joaquin Valley was developed in connection with shipments from San
Francisco to Stockton. The diagram on page 266 will show the relative
position of these two towns as well as that of an intermediate place named
Banta.
The distance between San Francisco and Stockton was 91 miles, and the
first-class rate was 10 cents per hundred pounds. This rate was identical
with the rate charged by boat lines operating on San Francisco Bay, and on

the Sacramento and San Joaquin rivers. But although these boats touched at
some intermediate points, their competition was not everywhere effective;
so that the first-class rate from San Francisco to Banta, 74 miles, could be
and was 17 cents, although freight from San Francisco passed through
Banta on its way to Stockton.

Other Instances
Still another illustration of the influence of water competition upon
local rates in California may be drawn from the territory immediately north
of San Francisco Bay. The towns involved in this adjustment were San
Francisco, Sebastopol, and Santa Rosa, as shown in the diagram on page
268. The first-class rate from San Francisco to Sebastopol on the
Northwestern Pacific was 23 cents. This rate was shown to be limited by the
competition of a rail and water line, including a steamship haul from San
Francisco to Petaluma and a haul over an electric railway from Petaluma to
Sebastopol. The distance from San Francisco to Sebastopol over the
Northwestern Pacific was 58.5 miles. The distances from San Francisco to
the towns of Kenilworth and Santa Rosa, on the same railroad, were 45.7
and 52.5 miles, respectively. Shipments to Sebastopol passed through these
places, but because neither enjoyed the advantage of an alternative route,
the first-class rate to Santa Rosa was 25 cents and that to Kenilworth 28
cents—materially more than was charged for the longer haul to Sebastopol.

Diagram showing adjustment of freight rates between San
Francisco, Santa Rosa, and Sebastopol, 1916.

While instances of the extreme discrimination of a greater charge for a
shorter than for a longer haul were shown in 1916 to be usually the result of
water competition, it has already been suggested that not all cases of
discrimination were of this sort. A particularly striking case of unequal rates
due to rail competition alone was brought out in the same proceedings from
which the preceding illustrations have been drawn, by the application of the
Atchison, Topeka and Santa Fé Railway to continue lower rates from Los
Angeles to Mojave, California, a distance of 212 miles, and to Lindsay, a
distance of 411 miles, than were charged to Kramer, an intermediate point
174 miles from Los Angeles. The relative position of the points is shown in
the diagram given above.

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

In this case the rate to Mojave at the time application was filed was 52
cents first-class, and that to Lindsay 70 cents, while the rate to Kramer was
78 cents. But at both Mojave and Lindsay, the Santa Fé had to meet the
competition of the short Southern Pacific line, while at Kramer this
competition was not effective.

Development of State Retarded
The data which have been presented show that, while the system of
local rates in California was based originally upon distance, it soon became
profoundly modified by conditions of cost, and still more by the presence of
competition at strategic points, and by the occasional necessity of reducing
rates in order to stimulate the movement of freight. The charges for short
hauls in the interior valleys where the Southern or Central Pacific possessed

a monopoly were made high, because traffic was scant and because the
railroad was able to exact a monopoly return. Rates were also regularly
progressive under these conditions. In sharp contrast to the practice which
obtained where the Southern Pacific was the only carrier, rates to points
located upon the coast, on navigable rivers, or on competing railroad lines
were relatively low and were often extremely irregular.
It is generally difficult to criticize a system of rate-making upon a priori
grounds because the test of such a system is to be found only in the form
which it gives to the industrial life of the community to which it is applied.
There is reason to believe, nevertheless, that the local rate structure created
by the Southern Pacific gave an advantage to a few shippers and to a few
towns which affected unfavorably the development of the state. This is the
fundamental objection to any system of rates in which competitive
influences are recognized to an unlimited extent.
Without going further into the matter at this point, we will content
ourselves with adding to our description of local rates in California some
observations upon the attitude of California shippers with respect to railroad
charges.

Conflicting Claims of Cities
The rates of the Southern Pacific and of the Central Pacific railroads
were unpopular in California because they were believed to be too high.
Beyond this, and when it came to questions of relative adjustments, each
community looked at the relations of rates which interested it from the
narrow viewpoint of its individual advantage. Indeed, when one reviews the
course of the controversy between railroad and shipper in the state, it seems
very clear that, apart from questions of excessive profit, the objections
which California cities entertained toward the irregular and unequal rates
charged by the Southern Pacific Company were only slightly based on
considerations of general policy, but were, on the contrary, due to the
feeling of various towns that their distributing areas were unfairly
circumscribed by the manner in which railroad rates were arranged.
One small piece of evidence to show that competition between rival
towns or producing districts was the reason for some of the most bitter
attacks upon the railroad, may be found in the complaint of the anti-
monopolists of Tulare County in 1885 that their fruits, which ought to have

found a market in the southern parts of the state and in Arizona, were
subjected to higher freight rates than were the fruits of Sacramento and of
San José, points more than 200 miles to the north.[389]
A few years earlier the merchants of Stockton insisted that the rates out
of Stockton were extortionate as compared with the rates out of San
Francisco. The distance from Lathrop to Stockton was said to be 10 miles,
and the railroad rate per ton on wheat was $1.20, or 12 cents per mile. The
distance from Lathrop to San Francisco was 82 miles, or more than eight
times the distance to Stockton, but the price per ton for wheat was only
$2.50, or about one quarter the price per ton per mile in the first instance.
The price per ton from Lodi to Stockton was $1.40, and to San Francisco
$2.50; but whereas the last-named sum was less than twice the former, the
distance from Lodi to San Francisco was eight times as great as the distance
to Stockton.[390]
In addition to their contention that mileage rates on shipments into
Stockton compared unfavorably with rates on shipments into San Francisco,
Stockton residents made the general charge that rates up the San Joaquin
Valley were generally less than the rates down the valley. The rate from
Stockton to Merced was said to be $6.80 per ton, but the rate from Merced
to Stockton was $3.40. Stockton objected to forcing of the San Joaquin
Valley to make San Francisco its market.[391]

Interstate Commerce Decision
Complaints similar to those voiced by Stockton were registered by the
people of Los Angeles. In the eyes of inhabitants of that city, the rates on
northbound freight from Los Angeles consigned to the San Joaquin Valley
were relatively higher than the rates from San Francisco south into that
same valley. Yet, dissatisfied as Los Angeles was with the relation which
her rates bore to those out of San Francisco, it seemed to other cities in the
south that her position was on the whole more favorable than was that of
her neighbors. In 1889 a dealer in the city of San Bernardino protested
against being forced to pay a higher rate from eastern points than was
charged the city of Los Angeles. He showed that the rate on agricultural
implements from the Missouri River to San Bernardino was $1.27 per
hundred pounds while to Los Angeles it was $1.07. On stoves the rates were

$1.19 and 99 cents, respectively, and on school furniture $1.55 and $1.35.
This preference was alleged to be discriminative and illegal.[392]
In a decision approving the discrimination against San Bernardino, the
Interstate Commerce Commission in 1890 remarked that originally
southern California had been served from San Francisco direct; and that San
Francisco jobbers had covered its territory. When the railroads reached Los
Angeles they found it to their advantage to grant it low rates, not so much
because it lay near the Pacific Ocean as because the interests of the
Southern Pacific and especially of the Santa Fé demanded that some point
in southern California should be given such a rate that merchandise from
the East could be brought there all-rail and from that point be distributed.
The fact that water competition was not the only influence which
determined the Los Angeles rate from the eastern states was indeed shown
later by the fact that the port of Los Angeles, San Pedro, did not receive a
terminal rate until 1910, although Los Angeles itself had been given
terminal privileges at least twenty years before.[393]
Stockton, Los Angeles, and San Bernardino thus illustrate in their
conflicting claims the constant effort of cities in California to extend the
area over which they might distribute goods. Among other instances of
dispute between California cities may be mentioned the demand of Santa
Barbara in 1907 to be made a Pacific Coast terminal,[394] and the angry
contentions of Santa Clara, San José, Marysville, Santa Rosa, and Fresno in
1914 over the question of relative railroad rates from eastern points.[395]
The characteristics of the system of transcontinental rates which were
involved in these complaints will be discussed in the following chapter.

CHAPTER XVI

THE TRANSCONTINENTAL TARIFF

Market and Railroad Competition
The chief difference between the local situation in California and the
condition of affairs which prevailed in the case of through shipments to
eastern points, lay in the fact that the competition of markets and the rivalry
of competing carriers played a more important part in the through
shipments than they did in local shipments. By market competition we
mean the attempt of geographically distinct producing centers, each aided
by a separate group of railroad lines, to sell in a common area of
consumption. Such competition occurred, for instance, when California
oranges sold in the Mississippi Valley in competition with oranges from
Florida, or when California lemons sold in the same territory in competition
with Sicilian lemons imported at New Orleans or at New York. We have
already seen that cities competed with each other within California itself,
but this competition was less important within the state than it was in the
case of hauls across the continent.
It should be recalled that the Huntington interests possessed a virtual
monopoly of local business, while the extent of the competition between
carriers on through traffic may be briefly indicated by observing that the
Central and Southern Pacific companies had direct relations with no less
than six other transcontinental railroads, namely, the Union Pacific,
completed in 1869; the Santa Fé, which reached the town of Deming and
effected a connection with the Southern Pacific in 1881; the Texas Pacific,
built to El Paso in 1882; the Northern Pacific, opened from St. Paul to
Portland in 1883; the Canadian Pacific, completed in 1887; and the Great

Northern, which was finished in 1893. None of these railroads reached San
Francisco except the Santa Fé, which obtained an independent California
connection in the late nineties. The Santa Fé entered Los Angeles, however,
in 1885, and the Union Pacific enjoyed a connection with Portland through
the Oregon Short Line and the Oregon Railway and Navigation Company
as early as 1884. From Portland, Los Angeles, and Vancouver, freight could
be distributed by water all up and down the Pacific Coast.[396] Moreover,
the competitive relations which Pacific Coast cities bore to each other made
it necessary to keep their rates from the East on an approximate parity, and
caused the Central Pacific to be affected by charges which were not on their
face applicable to any point in which that company had an interest. There
were combinations in respect to transcontinental railroad business from
time to time, but none sufficient to control rates except for short periods.

Transcontinental Rate Adjustment
These differences in conditions between state and interstate traffic
doubtless influenced Mr. Huntington and his advisors when they came to
establish what is known as the transcontinental rate adjustment. Yet any
examination of the through rates charged by the Central Pacific will show
that in their relation to each other, at least, these rates were built upon much
the same principles as the local rates discussed in the previous chapter.
There is no essential difference between a rate schedule which applies a
lower rate between New York and San Francisco than it applies between
New York and Denver, and one which provides a lower charge between San
Francisco and Los Angeles than between San Francisco and Bakersfield.
The tendency in public discussion is to regard the transcontinental rate
structure as different from all other structures. It is not different, either from
the rate systems in force in some other parts of the country, such as the
Southern classification territory, or from the general arrangement of rates in
business local to California. The reason why transcontinental rates to
Pacific terminals are low is that there is competition at terminal points. The
reason why rates to intermediate stations are high is that competition is
lacking at such places. The reason why local rates between San Francisco
and Los Angeles are low is that shipments must be diverted from the water
lines; while the rates from San Francisco to points in the upper San Joaquin

Valley are high either because competition is absent or because it is less
severe. Similar general causes in both cases produce similar results.

Rate Structure
It is necessary to describe the transcontinental system at this point in
order that the reader may have before him the outlines of the rate scheme
for which the Huntington-Stanford group were in part responsible; but in
view of the very general understanding which the public has of the system,
the description will be brief. A summary account is as follows:
The primary fact in transcontinental rate-making is that railroad rates
between the Atlantic and the Pacific coasts of the United States were
originally made, and have remained relatively low. The lowest rates quoted,
however, have never until recently been available at all points in California,
Oregon, and Washington, but only at certain selected cities. The towns to
which low rates have been quoted under the transcontinental adjustment are
called Pacific Coast terminals. Terminals, being mostly located on the
seaboard, or within easy reach of it, enjoy rates low enough to induce their
residents to patronize the rail lines rather than the water lines around the
Horn or the combined rail and water routes across the Isthmus of Panama
and the Isthmus of Tehuantepec. This does not mean, of course, that rail
rates to terminals have been as low as water rates, but it does mean that, all
conditions of shipment, including speed, safety, and regularity, being taken
into account, the advantages of shipment have been equalized. The rates to
and from all terminals have been uniformly the same.
A characteristic feature of the transcontinental rate system is that the
rates to towns and cities in the vicinity of terminals are determined by the
absence of water competition. Inasmuch as a shipper located at an inland
point is obliged to send his goods to the seaboard before he can avail
himself of the advantage of a water haul, it becomes possible to charge him
a rate equal to the sum of the terminal rate and the local rate which he will
have to pay without causing a diversion of his freight from the rail to the
water lines. It is true that there is a certain limit to the total charge which
can be demanded from such a shipper, due to the circumstance that at some
figure the expense of a direct haul from the local point in question to the
final destination of the goods upon a non-competitive mileage basis will be
less than the combination upon the terminal, but this limit is effective only

in the case of communities located a considerable distance to the east of the
seaboard shipping point. One result of the application of this system to local
points is that towns situated upon the direct line between eastern cities and
Pacific terminals often pay higher rates than are charged upon freight
passing through these places and carried possibly several hundred miles
beyond to the coast terminals. Local communities so situated are known as
“intermediate” towns.
These three features of the transcontinental rate structure, namely, that
rates between the Atlantic and the Pacific seaboards are low, that the lowest
rates are charged only to selected towns, and that rates to places other than
terminals are made by combination upon the terminals, are the elements
which have given character to this adjustment, and are therefore the points
in it which are best known. To make a statement of the broad outlines of the
plan complete, however, two other statements must be added.

Group System in the East
The first additional characteristic of transcontinental rates is that on
eastbound business, particularly in the case of the products of California
agriculture, the same rates are applied from intermediate as from terminal
points. This is to place the shipping communities of the state all upon an
equal footing. The second feature has reference to conditions upon the
eastern end of the transcontinental haul, rather than upon the western. In the
eastern part of the country the system of terminal and intermediate rates is
not applied upon transcontinental business. Instead, it has been customary
to divide the area east of the Rocky Mountains into a series of great groups,
now ten in number, and to quote to each of these groups rates which are
either the same in all cases, or which increase as the distance grows greater.
This failure to apply in the East the same principles which govern in the
West has been doubtless due to the insistence of cities like Chicago that her
rates be at least as low on shipments to and from the Pacific Coast as the
rates which New York enjoys, as well as to the desire of railroads which
begin at Chicago or the Mississippi-Missouri River to encourage the growth
of business in the Middle West. Mr. Huntington was credited with the desire
to establish rates from the Missouri River which should be lower than rates
from New York, and the reasons which were in his mind may easily be
imagined. Such rates were actually in effect between 1887 and 1894, but the

principle of graded charges was abandoned as a result of a rate war which
broke out in 1894.[397]

Terminal Points
This brief description of a complicated rate adjustment will show that in
through as well as in local rate-making the Central Pacific management
yielded to the unequal pressure of competition, and particularly of water
competition, at different points. Generally speaking, the most important of
all the forms of competition which the company had to meet was water
competition. Common alike to local and to through transportation, this was
important because it was difficult to control, because it operated on a low
cost basis, because it offered transportation facilities to a very wide variety
of classes of goods, and because its possibilities for expansion were
indefinite.
It is a mistake to believe that only low-grade commodities have been
shipped by the water routes. While it is true that the principal movements
by water are of the coarser freights, such as hardware, rails, pipe, sugar,
hardwood lumber, and asphaltum, yet there has always been also a
considerable transportation of higher grade articles, including cotton ducks
and denims, beans, canned goods, and a large number of kinds of general
merchandise. Indeed, all the canned salmon and a very large percentage of
the canned goods, together with two-thirds of the beans produced in
California, originate near enough to the coast to reach tide-water at an
expense not exceeding 20 cents per hundred pounds. The Interstate
Commerce Commission has remarked that almost every article which
moves from the East to the Pacific Coast has been at times carried by the
ocean,[398] and the truth of this statement is generally conceded in
discussions on the water business.
It was the pervasive character of water competition, and the fact that
such competition was felt upon the Pacific Coast and not at interior points,
which originally established the position of the Pacific terminal.[399] A
terminal point, be it recalled, was, and is, under the transcontinental system,
a place which enjoys rates low enough to attract traffic from the water to the
railroad lines—a point also upon whose rates the rates to other points are
based after the manner of the “basing point” system. San Francisco was a
terminal. So was Stockton, Sacramento, Port Costa, Richmond, Oleum,

Antioch, San José, Santa Clara, Los Angeles, and a considerable list of
other towns. At the beginning the city of San Francisco received a lower
rate than any other town because the competition of the water route
between New York and San Francisco was most evident. Mr. Stanford,
however, disclaimed responsibility for this limitation. His eastern
connections, he said, were to blame. The Central Pacific was willing to be
more liberal from the start, but the other lines would not join with it in
establishing through rates, and insisted on their locals. For this reason goods
originating at interior points were often hauled to San Francisco, and then
back east, in part over the same line by which they had come.[400] Such a
condition was highly unsatisfactory to California towns other than San
Francisco, yet by 1873 Sacramento, Marysville, and San José had been
given terminal rates,[401] and still later the list of terminal points was very
greatly extended. In 1910 there were 152 terminal cities on the Pacific
Coast, of which 97 were in California.[402]

Dissatisfaction with Rate System
Owing to the peculiar intensity of competition at their doors, Pacific
terminals therefore enjoyed exceptional advantages in rates as compared
with their less favored neighbors. On the other hand, even the terminal
cities expressed some dissatisfaction with the transcontinental adjustment. It
appears, for instance, that the growth of great distributing centers was
difficult under the scheme of rates which was applied. So long as terminals
were few in number, a considerable concentration in business was possible.
But when the terminals multiplied, the territory controlled by any single
city became limited by the low rates accorded to the nearby terminal cities,
and expansion in any one spot became difficult. This rendered the volume
of business of the Pacific Coast jobbers comparatively small. In the case of
the Business Men’s League of St. Louis v. the Atchison, Topeka and Santa
Fé, already cited, the two eastern firms of most prominence in the
proceedings were the Simmons Hardware Company, of St. Louis, and
Hibbard, Spencer, Bartlett and Company, of Chicago. The former of these
firms then did business in every part of the United States except New
England, while the representatives of the latter testified that the operations
of his house were limited only by the confines of the earth. Competition by
concerns of this magnitude was difficult for California houses to meet,

especially at times when the eastern firms used the Pacific Coast as surplus
territory in which they could afford to operate at a low margin of profit.
Another ground for dissatisfaction on the part of the coast cities arose
out of their belief that the system as applied, in spite of its recognition of
the advantages of the Pacific Coast, still fell short of the real equities of the
situation. It was insisted that San Francisco was improperly shut out from
Denver, Cheyenne, Salt Lake City, and Ogden. The Southern Pacific was
charged with carrying hats from New York by way of the Union and Central
Pacific routes and then down the San Joaquin Valley to Yuma at a lower rate
of freight than the San Francisco dealer could send the same goods from his
city to the Colorado River.[403] This same complaint was repeated by Mr.
Leeds, of the San Francisco Traffic Association, in October, 1892, with the
observation that if the same rate per mile were applied on eastbound traffic
from San Francisco that was charged on westbound business from Chicago
to Utah common points, then San Francisco would do the lion’s share of the
Utah business instead of a mere 16 per cent.[404]
There is no doubt that a good deal of dissatisfaction with the
transcontinental system was felt first and last by shippers to and from the
terminal cities. Yet, after all, the situation of these cities as a group was
excellent. The communities which were really handicapped were the towns
intermediate between the Pacific terminals and the East, towns which paid
higher rates for less service than did the terminal cities, and which found
that this condition not only increased the cost of living to their consumers,
but prevented their merchants from enjoying a profitable distributing trade.
It seems probable that the associates intended from the beginning to
charge the mountain towns more on through hauls than was exacted from
towns on the coast. Huntington relates a conversation which took place at
Carson, Nevada, in 1861, between Stanford, Dr. Strong, Mr. Crocker, and
himself, representing the railroad, and some twenty representative men of
Nevada. The Nevada people observed that Huntington kept a pretty good
hardware store, but that he was likely to leave it in the mountains if he
started to build a railroad in Nevada. Huntington replied that he would look
out for that, but, he continued, when the road was built he proposed to
charge through rates which, while less than the Nevada people were paying
for goods which then came to San Francisco by boat and were subsequently
teamed across the mountains, would be materially greater than the rates to

San Francisco. “We shall charge you for bringing back,” said he, “almost as
much as we shall charge from New York.” After the road was built
Huntington says he met one of these same men with whom he had talked in
1861. “Said I, ‘You recollect that talk we had in the Curry House in 1861?’
‘Yes, oh yes.’ Well, we talked about that. He said, ‘You’ve got me there,
Huntington.’ ‘Well,’ said I, ‘I said you would grumble. Now,’ said I, ‘you
shut up.’”[405]

Objections
It is to be presumed that Mr. Huntington’s rejoinder was effective in the
particular discussion which he relates. Yet the grievances of the interior
towns found full and repeated expression after 1869, and indeed are still
emphatically presented at the present day. The more fundamental criticisms
of the transcontinental rate system are the following: The principal
objection directed against the whole adjustment is that it leads to charges to
intermediate points which are prima facie unreasonable. Speaking of the
rates on iron and steel, a representative of the Traffic Bureau of Utah called
the attention of the House Committee on Interstate and Foreign Commerce
in 1918 to the fact that the rate on iron and steel articles for export from
Chicago territory to Pacific Coast terminals was 40 cents per hundred
weight or 3.54 mills per ton per mile. He continued:
They take an identical carload of the same commodity, and when it is going to the
Pacific Coast for domestic consumption the rate is 65 cents a hundred, or 5.76 mills per
ton-mile. If they were to apply that rate at the Utah common points—the same 65-cent rate
—it would pay 8.65 mills per ton-mile. But they say, “We cannot afford that; you must pay
10.84. We haul it for a man in Russia for 3.54, but that is only the out-of-pocket cost. We
will make you a rate of 10.84, which is a lower rate than you are entitled to.
I think any article, whether it is transportation or anything else, that could be produced
at some profit at a price of 3.54, when you pay 5.76 for it you are paying a handsome
profit; and if you pay 8.65 for it you are paying an abnormal profit; and if you pay 10.84
for the same thing you are being outrageously imposed upon, which is what we are
doing.”[406]

The second objection of the interior cities is that the system of
transcontinental rates limits the territory in which intermediate wholesale
firms can do a distributing business; and the third ground of complaint,
resulting from the other two, is that the policy of permitting low rail rates to
the coast cities has the effect of building up large cities on the seaboard at
the expense of the whole interior country.

Reply of Railroads
In replying to these objections the coast towns take the position that
they are not especially concerned with the rates to intermountain places, nor
indeed with the rates which the railroads make from coast to coast, except
in the sense that the greater the number of carriers which participate in
transcontinental business, the better the service is likely to be. Secure in the
possession of adequate water connection, they do not expect to pay higher
rates than they have paid in the past, whatever policy the railroads may
adopt. They have no controversy with the intermediate territory, and only
support the present adjustment because they conceive it to be for the best
interests of the country as a whole.
The burden of the defense therefore falls upon the railroads, and the
railroads assert that the policy of quoting low rates to meet the force of
water competition is necessary if the comparatively moderate rates to
intermountain territory are to be continued. Unless—said Mr. Spence of the
Southern Pacific, in his recent testimony before the House Committee on
Interstate Commerce—the rail lines are permitted to make rates which will
hold the through business, the terminal roads will lose all of the net revenue
derived from the port rate upon what is a very large volume of traffic. The
millions of dollars involved cannot be withdrawn from the net revenues of
the railroads without impairing their efficiency and usefulness, while to
compel the carriers to apply sea-compelled rates to all traffic would yield an
inadequate revenue, because it would mean that the traffic as a whole would
be carried at rates which were not sufficient to cover all the elements of
cost, including fixed charges and other similar expenses.[407]

Further Comments
The most casual description of any basing system such as the one which
the railroads apply to transcontinental freight, suggests at once several
matters in respect to which special defense and justification are required.
One just cause of complaint arises out of the fact that the through rate to
any point except to a basing point is made up by the addition of two rates,
each of which includes an allowance for the cost to the carrier of providing
terminal facilities, or four terminals in all, whereas no actual shipment
makes use of terminal facilities at more than two points, namely, the place
of origin and the place of destination.

A second cause for criticism of a basing system is due to the striking
disregard of distance which is inherent in it. Shippers are not only apt to
feel that for reasons of natural right rates for transportation should vary with
the distance moved, but, as we have seen, they are usually quite incapable
of being convinced that the costs of shorter hauls are not less than the costs
of longer ones, so that for this reason also the nearer places should enjoy the
lower rates. Again, and this also has been suggested in the preceding
discussion, a basing system is attacked because it is said to centralize
business unduly by forcing the distributing business into the control of a
few localities such as the Pacific Coast terminals, to the exclusion of
outlying cities which could handle it more cheaply and more conveniently
under a proper adjustment of rates, by reason of their greater nearness both
to centers of supply and of consumption.
There is no question that the rate system upon the Pacific Coast made it
difficult for intermediate and local towns to import supplies directly from
the East and to distribute them through their own organization. This was not
the result of the difference between terminal and local rates alone, but was
the combined result of the practice of the transcontinental carriers with
respect to rates and their practice with regard to carload shipments. That is
to say, the carriers not only quoted generally lower rates, carload against
carload, and small consignment against small consignment, to terminal
cities than to intermediate or to interior towns, but they also granted many
carload ratings to terminals which were altogether denied to their interior
competitors. In some cases this occasioned an extraordinary difference in
the total charge.
On the other hand, it should not be forgotten that to encourage
distribution through Pacific Coast terminals was not necessarily to
concentrate the whole business of distribution. The competition between the
Pacific terminal and the eastern jobber was just as real as that between the
Pacific terminal and the intermediate point. It is sometimes forgotten how
active this eastern competition was. That it continually threatened the
western distributor is shown by the fact that in spite of the advantages
enjoyed by western terminals, 50 per cent of the jobbing business in the
hardware trade in southern California was done in 1902 by houses east of
the Missouri River, so that the Interstate Commerce Commission expressed
the opinion that in the absence of some distinct advantage in the rate it
would be very difficult for Pacific Coast dealers to hold their own.[408] In

central California the proportion of the jobbing business done by eastern
firms ranged from 25 to 40 per cent. Certainly no decentralization in
business would have taken place had the California distributors been
compelled to withdraw in favor of men in Chicago and St. Louis, nor would
the aggregate cost of getting goods from producer to final consumer have
been decreased.

Inconsistency
It has been made clear in the discussion of transcontinental rates, that
the transcontinental carriers as a group have not been consistent in applying
the principles upon which they rely in justification of their charges. Not
only have towns like Los Angeles been given terminal rates for reasons of
general policy, but cities in the Mississippi Valley, upon the other end of the
transcontinental haul, have been granted the same rates as New York on
business to and from the Pacific Coast, in order to place them on an equality
with points on the Atlantic seaboard. As the Interstate Commerce
Commission remarked when the matter was brought to its attention, there is
no logical ground for recognizing the desire of Chicago to compete with
New York, and for refusing to accord the same privilege to Denver.[409] If
market competition is to be recognized in one instance, it should be in
another.
It is a striking fact that when the commission was considering the
question of transcontinental rates in 1910, it appeared that the great bulk of
traffic destined to intermountain cities originated at Chicago or at points
west. Thus out of 21,000,000 pounds of carload freight moved from eastern
territory to Reno, Nevada, during the year 1908, only 4,500,000 pounds
originated east of Chicago, and of approximately 1,000,000 pounds of less
than carload freight concerning which data were available, only 10 per cent
originated at the Atlantic Coast cities of New York, Boston, and
Philadelphia. The commission found in the case in which these facts were
brought out that taking traffic to Reno as a whole, 75 per cent of it had its
source between Chicago and Denver.[410] On this traffic, at least, the effect
of water competition was slight, and yet it is upon the assumed presence of
water competition that the transcontinental system primarily rests.

Not Responsive to Changed Conditions

Nor have the transcontinental carriers been quick to recognize changes
in conditions which, temporarily at least, have eliminated water competition
from coast to coast. When the Panama Canal was opened, considerable
apprehension was felt by the carriers lest the new all-water route between
the Pacific and the Atlantic seaboards should divert a substantial portion of
the transcontinental traffic formerly handled by the railroads. On this
ground the railroads applied to the Interstate Commerce Commission, and
received permission not only to continue the practice of quoting higher rates
to interior towns than were charged between eastern points and the Pacific
Coast,[411] but actually to increase the difference upon a selected list of
eastbound articles.[412] So much was directly in line with previous action
and was to be expected.
The carriers were not, however, so ready to recognize the interruption of
canal traffic as they had been prepared to take notice of its beginning, and
in spite of slides and war conditions which suspended water competition, it
took an order of the Interstate Commerce Commission to secure an equality
in the treatment of intermountain and seaboard cities to which the former in
accordance with the fundamental theory of transcontinental rates were
entitled under the new conditions.[413]
In forming an opinion upon the rate system of the Central Pacific,
however, too much weight must not be attached to inconsistencies in
application so long as these are not altogether arbitrary, any more than to
the demand of competing cities for their “fair share” of the business that is
to be done. City ambitions are limitless, and impossible to reconcile. The
question is not how to determine the territory within which a given city may
be said to have a right to distribute its goods, but whether or not the rate
system introduced by the Huntington group, all things considered, promotes
the interests of the territory which is served better than some system that
may be suggested.

Basing Rate System Necessary
It is the writer’s opinion that the transcontinental rate system has always
had evident defects. In the first place, it has generally provided low rates to
towns and it has quoted low rates on commodities which have no access to
the water routes. In the absence of competition the distance principle should
prevail. Second, it has often failed in the past to make concessions to the