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:

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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

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]

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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]