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

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.