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.

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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.