OPERATING CHARACTERISTICS OF THE SOUTHERN PACIFIC LINES

Proprietary and Leased Properties

Let us now leave the general questions of rates and competition in California, and return again to the more intimate history of Southern Pacific development, and particularly to the story of the later years. The present chapter describes the organization and operating characteristics of the Southern Pacific system after 1885; the chapters next following take up that all-important financial problem which faced the Central Pacific in the later nineties—the repayment of the government debt.

A glance at the annual report of the Huntington lines shows that from the point of view of ownership the system, as early as 1885, was divided into two parts. The first of these was known as the “proprietary companies,” and included the Southern Pacific Railroad of California, the Southern Pacific Railroad of New Mexico, the Southern Pacific Railroad of Arizona, Morgan’s Louisiana and Texas Railroad and Steamship Company, the Louisiana and Western Railroad, the Texas and New Orleans Railroad, the Galveston, Harrisburg and San Antonio Railway, and the Northern Railway. The second was known as the “leased companies,” and its principal components were the Central Pacific Railroad, the California Pacific Railroad, and the Oregon and California Railroad.

The difference between leased and proprietary lines was not in the operating relations between the two groups and the Southern Pacific Company, for as a matter of fact all were “leased lines” in this regard, but in the circumstance that the Southern Pacific Company held substantially all the stock of the proprietary companies in its treasury as the result of the issue of its own stock in exchange; this was not true of the so-called leased companies. In December, 1896, the Southern Pacific reported 5,250 miles of proprietary lines, and 2,128 miles of leased properties.[497]

From the standpoint of operation the distinction between proprietary and leased lines was completely disregarded, and naturally so because, as has been said, both kinds of properties were operated after the same general fashion. Instead of being classed as proprietary or leased companies, the Southern Pacific lines were divided for operating purposes between the Pacific system including the mileage south of and including Portland, Oregon, and west of Ogden and El Paso, and the Atlantic system, including the railroads east of El Paso. In 1889 local legislation compelled the separate operation of the lines in Texas. In 1896 there were 4,966 miles of main line in the Pacific system, 1,967 miles in Texas, and 445 miles in Louisiana. Mention should also be made of over 3,500 miles of water routes, chiefly those connecting New Orleans and Morgan City with the West Indies and with New York.

Bigness of System

The fact concerning Southern Pacific properties that seems to have most impressed observers was their sheer size. A company controlling 7,300 miles of railroad and 3,500 miles of water lines, and operating between Portland, New Orleans, and New York, was unusually large even to men accustomed to the great eastern corporations which operated in the nineties. The railroad mileage of the Southern Pacific in 1896 exceeded that of the Union Pacific by 2,600 miles, that of the Santa FÉ by 940 miles, and that of the Northern Pacific by 2,800 miles. Even the Pennsylvania Railroad operated only 6,700 miles in 1896, including lines both east and west of Pittsburgh, while the reported mileage of the New York Central and Hudson River Railroad was but 2,395 miles in the same year.

In respect to earnings also, the Southern Pacific bulked large among its contemporaries. In the single year 1892, with its affiliated railroads and ferries, it took in nearly $49,000,000 on 6,486 miles of line, or more than half the earnings of the Santa FÉ, Union Pacific, and Northern Pacific combined. In 1896 the earnings of the Southern Pacific were about the same as in 1892 upon a substantially greater mileage, but the earnings of its competitors had also greatly declined. Naturally enough, the great extent of the Southern Pacific system made its problems those of extensive rather than of intensive operation. Locomotive runs were longer on the Southern Pacific than elsewhere, and more attention was paid to questions of organization, particularly in later years.

There were other features about the Southern Pacific lines, however, besides their length, which deserve at least a passing mention. The system enjoyed, for example, the advantage of a highly diversified traffic. The year 1900 was not exceptional in this regard, yet in 1900, 22 per cent of the freight carried by the Southern Pacific fell in the class of products of agriculture, 17 per cent was manufactures, 15 per cent was products of the forest, 10 per cent products of mines, 8 per cent merchandise, and 4 per cent animal products. When we recall that in the same year 47 per cent of all the freight carried by the Pennsylvania Railroad Company consisted of anthracite and bituminous coal, and that nearly half of the freight transported over the Chicago, Milwaukee and St. Paul Railroad consisted of products of agriculture and of the forest, we can understand the unusual position in which the Southern Pacific was placed.[498]

High Average Earnings

Generally speaking, on a railroad system which handles a large traffic in manufactured goods, the average return per ton per mile will be large. This is particularly true when the company’s coal tonnage is of small proportions. In the case of the Southern Pacific, the effect of such a distribution of business was increased by the fact that the company possessed the well-nigh exclusive control of a large local business on the Pacific Coast, on which high rates could be charged. This was where the efforts of the associates to maintain a monopoly of rail transportation in California bore fruit. Eighty-two per cent in weight of the commercial freight handled in 1883 by the Central Pacific Railroad was classified as local, and almost two-thirds of this company’s earnings were derived from local business. Indeed, the local freight during the early years of operation exceeded expectations as much as the through freight fell behind what was thought would be its probable development. Prior to the construction of the Union and Central Pacific railroads, it was supposed that for many years the through business of the new lines would constitute by far their principal source of revenue. It was also supposed that the traffic of the companies would consist very largely in the transportation across the continent of the products of Asia in transit to the states situated east of the Mississippi River and to Europe. Both of these anticipations proved entirely mistaken.

Partly, then, because of the character of the freight which it handled, and partly because of the fact that a large proportion of its business was local, the average rate upon the Southern Pacific was very high. The average freight receipts of the Central Pacific in 1872 were 3.66 cents per ton per mile. While they declined in subsequent years, the figure was still 2.75 cents in 1878, and 2.14 cents in 1881. In 1878, while the Central Pacific was earning 2.75 cents per ton per mile, the Santa FÉ received only 2.12 cents, the Union Pacific 2.27 cents, the Chicago and Northwestern 1.72 cents, the Pennsylvania .92 cents, and the Lake Shore and Michigan Southern .73 cents.[499] Fourteen years later, the average receipts on the entire Southern Pacific system were exactly twice the average receipts per ton per mile on the Illinois Central, and materially greater than those of most roads in other parts of the country.

It is evident that the average earnings of the Southern Pacific system were superior to those of the other transcontinental railroads, to say nothing of such eastern properties as the Illinois Central and the Chicago and Northwestern. To break the force of the comparison, Mr. Huntington was wont to compare Southern Pacific figures with the averages reported by the Interstate Commerce Commission for the so-called Group X, which included the Pacific Coast. These statistics showed, for example, in 1894, that the average receipts per ton per mile of railroads in Group X were 1.343 cents, while those of the Southern Pacific (Pacific system) were 1.316 cents. Territorial averages, however, made up of returns from small companies and from large, from local and from through concerns, may reasonably be expected to be higher than averages which apply only to large systems. The Southern Pacific received more on the average than its competitors, and almost as much as the group in which it lay, in spite of the fact that it enjoyed a through business in which a great many of the small western lines had no share.

Long Average Haul

The influence of through business on the Southern Pacific lines was, on the whole, opposed to that of the local business. Not only was the through business highly competitive, but, as might be anticipated, it was characterized by an extremely long haul. Indeed, in the year 1895 the average length of haul on the through freight transported over the Pacific system of the Southern Pacific was 844 miles. The average haul of freight on the entire business of the company was 279 miles. During the same year the New York Central Railroad reported an average haul of 169 miles, and the Erie one of 156 miles.

The reason for the extraordinary length of haul on the Southern Pacific lay in the fact that the company served a rich community far removed from eastern centers of population, yet relying to a considerable extent upon these centers both as a market for its produce and as a source for its supplies. Moreover, the commodities of California, such as fruit and lumber, wool, fish, and wine, and the imports through the port of San Francisco, such as tea, sugar, and silk, were sufficiently distinct in character from the typical products of the East to give something of the stability of international division of labor to the movements between the Pacific Coast and the eastern states. Much the same can be said of the transportation of manufactured goods westbound in view of the high price of labor in the West and the scarcity of coal.

These matters have been considered in a preceding chapter. Their effect was to make it easy to secure a great many full cars, or even trainloads, and to reduce terminal expenses to a minimum. Inasmuch, however, as the raw products of California were heavier and took up more space than the manufactured goods received in exchange for them, a very considerable excess of eastbound tonnage often existed. In 1888, to take a year at random for purposes of illustration, the tons of through freight carried one mile eastward on the Pacific system were reported as amounting to 335,330,035, while the through westbound freight amounted to only 232,682,578. This meant light loads and empty mileage on the westbound traffic. The difference would doubtless have been greater had it not been for the large westward moving company freight. Such a tendency called for constant effort on the part of the officials of the Southern Pacific to secure eastern manufactures for westbound transportation, and this effort in turn gave rise to friction between the railroad and the manufacturing interests upon the Pacific Coast.

On the other hand, the tendency of the passenger traffic was in the direction of an excess of westbound business, because of the migration of permanent settlers to California. During the three years from 1888 to 1890, 328,892 through passengers were reported as moving westward on the Pacific system alone, and only 241,643 as moving eastward, or an excess of 36 per cent in favor of the West. The excess of westbound passenger traffic during these three years reached the large total of 76,580,470 passengers, or more than the total eastbound movement in any one year of the period.

Earnings Density

The greatest density of earnings on the Southern Pacific system was on properties such as the Central Pacific and the California Pacific, which together with the Northern Railway formed the main trunk line from San Francisco to the East. In 1895 the Central Pacific earned $9,537 per mile and the California Pacific $9,266, amounts which were far inferior to the results of the operation of railroads in thickly settled districts east of the Mississippi River, but which yet exceeded the returns on the Santa FÉ, the Illinois Central, and even those reported on the western portions of such a railroad as the Baltimore and Ohio.

Next to the California Pacific in the Southern Pacific system, in respect to earnings, came, in 1895, the South Pacific Coast Railroad, with gross earnings of $8,000 per mile; the Southern Pacific railroads of New Mexico, California, and Arizona, with earnings ranging from $6,500 to $5,800; the Northern Railway with $5,177; and finally the Northern California and the Oregon and California Railroad companies, with earnings per mile of $2,600 and $2,400, respectively. The figures so far given all relate to the Pacific system. In general it may be said that the earnings of Atlantic system lines were slightly greater per mile than those of the western properties. This statement does not, however, hold good of all the Atlantic companies, nor, on the average, for the Texas roads, statistics for which are given separately.

Diversion of Traffic to El Paso Route

Unquestionably there was a difference in interest between different parts of the Southern Pacific system, particularly between the Central Pacific or Ogden route, and the Southern Pacific or El Paso route. When the Southern Pacific was first completed to El Paso, the question was raised as to whether it would be the policy of the management of the whole system to divert all transcontinental freight via the southern route. In a letter to a bureau of the United States Treasury Department, Mr. Huntington observed that it would be necessary to continue to do a large part of the through business over the Central Pacific in order that that road might be enabled to meet its interest charges and the requirements of the government indebtedness. The point was evidently regarded as one which called for a decision as to policy. Mr. Huntington further pointed out that it would be injudicious for the Southern Pacific to push any advantage too strongly which it might have, lest it provoke retaliatory action by other lines.[500]

The early practice of the Southern Pacific did not, however, altogether accord with this counsel of moderation, and the company seems not only to have been very active, but actually to have succeeded in capturing as much as 90 per cent of the New York-San Francisco business; also, while it did not permanently retain so large a share of the through freight which moved by rail, it continued to carry the major portion of the westbound traffic from the Atlantic seaboard to California until perhaps the year 1887.[501] Some of the freight which the Southern Pacific handled during this period was new business, but a considerable portion of it was taken from the Central Pacific.

There is more or less evidence that it was the practice of the Southern Pacific management to lay special emphasis upon the advantages of the southern route, in the attempt to divert as much business as possible to what was known as a 100 per cent line. That shippers believed such a policy was being followed, is evident from statements which appeared in the public press. It was currently asserted, for instance, that ticket and traveling agents of the Southern Pacific all over the state of California were instructed to use their best endeavors to induce passengers to move by way of the southern line instead of by way of Ogden.[502] It was claimed that better time was made over the Southern Pacific than over the Central Pacific, and that freight shipments were more easily traced.

Speaking of westbound freight, a San Francisco merchant was quoted in 1896 as stating that the Southern Pacific delivered freight from New York to San Francisco in from twelve to twenty days. Should the freight not come to hand promptly, officials of the company were said to be exceedingly careful to discover the causes of the delay and to see that the goods were pushed forward as rapidly as possible. On the other hand, if freight came via Chicago and Ogden, all the way from 18 to 28 days might be spent upon the journey, while information as to the causes of delay was difficult to obtain.[503]

Testimony of Employees and Officials

One may readily concede that complaints of the character referred to are to be accepted only with reservations; yet there is later information which bears out the substance of the charges in convincing fashion. When the Southern Pacific system was attacked in 1914 as a combination in restraint of trade, a great many railroad employees were put upon the stand, and testimony was secured which related not only to current policy, but also to practices which had been followed by members of the Southern Pacific staff for a number of years in the past.

It appears without substantial contradiction from the testimony in this case, that Southern Pacific, and even Central Pacific employees, solicited for the Sunset route before its combination with the Union Pacific in preference to the route via Ogden in order to obtain the long haul, even when the Sunset route was very roundabout. Mr. Connor, commercial agent of the Southern Pacific at Cincinnati from 1889 to 1901, testified that his office had directed its exclusive time and attention to securing traffic from California points for the New Orleans gateway. Shipments moving via Ogden he regarded as lost and reported them accordingly.[504] Mr. Sproule said that the same was true of the whole Central Freight Association territory, from Buffalo and Pittsburgh on the east, to Chicago and St. Louis on the west.[505]

Mr. Spence, director of traffic of the Southern Pacific Company, admitted that effort was made to send business to California via New Orleans when the point of origin was in territory east of a line drawn from Toledo through Indianapolis and Terre Haute to St. Louis.[506] Mr. Lovett thought that Southern Pacific solicitors even in Chicago did not work against the solicitation of lines leading to New Orleans, though acting independently they would solicit business via Ogden.[507] It is in the record, also, that Southern Pacific solicitors in 1914 sought freight from the Atlantic seaboard to Oregon and Nevada through the New Orleans gateway,[508] and that the great bulk of wool from western and central Nevada destined to the Atlantic seaboard actually moved west to Sacramento and then south and east over the Sunset line, instead of taking the direct route via Ogden.[509]

Complaints of Others

This direct testimony of Southern Pacific employees is in harmony with repeated assertions made by persons outside of the organization, and seems to indicate that some discrimination against the Central Pacific and in favor of the Southern Pacific on transcontinental business was encouraged by those in control of the Southern Pacific Company’s affairs. As well informed a man as P. P. Shelby, traffic manager of the Union Pacific, declared in 1887 that he knew by conversation with shippers that the Central Pacific had diverted all the traffic they could control to the Sunset route ever since the Southern Pacific was completed, commencing in 1882. All kinds of merchandise had been diverted, especially such goods as canned fruits, canned fish, and wool. Asked whether the Union Pacific would carry 25 per cent more freight if the Central Pacific were separated from the Southern Pacific, Mr. Shelby qualified his statement by saying that it was hard to answer the question. The Southern Pacific gave the Central Pacific a good deal of freight which that company would not have received were the two lines segregated. Had they been two independent lines, under independent management, the Southern Pacific would not have given the Central Pacific any freight at all.[510]

Similar charges were made by representatives of interests such as those of the English stockholders of the Central Pacific, who asserted that Mr. Huntington wished to ruin the Central Pacific, and dwelt upon the advantages of bankruptcy to a company from which the United States government was about to attempt to collect a debt. Knowing as we do that the Huntington-Stanford group shifted the weight of their investments from the Central to the Southern Pacific in the eighties, there is of course ground for suspicion that the diversion of freight, to which the evidence that has been quoted refers, was part of a carefully thought-out plan, and that more than traffic matters were involved.

Real Reasons for Traffic Diversion

Yet the truth of the matter probably is that while some diversion from the Central to the Southern route occurred, this diversion, although looked upon with equanimity by Mr. Huntington, was not part of an attack upon the Central Pacific, but may be explained by certain simple traffic considerations. There were at least two good reasons why an attempt should have been made to handle business from New York over the Southern Pacific rather than over the Central Pacific. The first reason was that it was more profitable for the Southern Pacific to take freight from New York by a route which it entirely controlled, than to divide the earnings on such business with the direct lines between New York and Ogden. The second reason was that the Southern Pacific could offer better service on the Sunset route than over the Central Pacific because of the indifference of the lines east of Omaha. The Central Pacific business was done on a different classification from that in use in the East. Also, many classes of freight were taken at low rates because of water competition, so that the divisions accruing to eastern lines were very small, and their interest in the traffic correspondingly slight.

Finally, to the eastern roads the whole business was unimportant compared with the volume of other kinds of goods which they were handling. The result was that Mr. Stubbs, of the Southern Pacific, complained very vigorously that eastern lines neglected transcontinental business. It took four to six days he said, to get freight through the city of Chicago, and often thirty to thirty-five days to transport it from Omaha to New York. Freight had to be way-billed three times via Ogden as compared with one billing via El Paso. In fact, in 1885 and 1886 the trunk lines practically withdrew from the transcontinental business, and to this withdrawal should be attributed the large proportion of the traffic between San Francisco and New York which was handled by the Sunset route during these years.[511]

These two reasons, of which one still has force, and the other was important for a number of years, are sufficient to account for most of the diversions complained of, and it is not necessary to attribute additional motives to the Huntington management.

As a matter of fact, in spite of the traffic policy described, the gross earnings per mile of the Southern Pacific did not move very differently from those of the Central Pacific during the years from 1886 to 1895, when the data are distinguishable in the companies’ reports. The advances and recessions in volume of traffic were not identical for the two companies during these years, nor did they occur at exactly the same times, but the figures seem to offer no support to the charge that the prosperity of either company was being sacrificed.

It may also be observed that the policy of freight diversion was not confined to the period when the Central Pacific was negotiating with the government for the payment of its debt and with the English stockholders for the adjustment of their claims, nor to the years when the management of the Southern Pacific Company owned Southern Pacific shares and did not own a corresponding amount of the shares of the Central Pacific. In fact, as has been said, the policy of seeking to obtain the benefits of the long haul is still followed by the Southern Pacific Company, and its agents still take credit for sending freight all the way to New York by company lines, although the financial control of both the Southern and the Central Pacific has long been in one set of hands.

Traffic in Early Eighties

Like other systems in the United States, the earnings of the Southern and Central Pacific railroads fluctuated considerably from year to year. It has been pointed out in a previous chapter that during the period from 1870 to 1879 the rapid extension of the Southern Pacific in the South West, and the temporarily unproductive character of the new mileage built, well-nigh caused the bankruptcy of the entire concern. The associates were then saved by the completion of the Southern Pacific main line to The Needles, and by an improvement in general stock market conditions which enabled them to sell securities in New York. In 1885 the Central Pacific retired the greater part of a floating debt of $12,873,946 by an issue of bonds, and for the first time in many years was freed from what had always been a pressing danger.

In spite of this important relief, the years 1882, 1883, 1884, and 1885 were still years of considerable difficulty. Although the mileage of the system now increased but slowly, the revenue per mile declined. Thus the Central Pacific earned $9,449 per mile of line in 1881, $8,437 in 1882, $8,253 in 1883, and $7,496 in 1884. In three years gross earnings per mile dropped 21 per cent. This decline was due to a number of causes. The Central Pacific suffered greatly, for one thing, from the falling off in the tonnage supplied by the Nevada mines. Roads like the Eureka and Palisade, the Nevada Central, the Nevada and California, and the Virginia and Truckee railroads, which were at one time lucrative feeders to the Central Pacific main line, all showed a considerable decline in earnings and business between 1875 and 1885 because of the failure of the mines. The freight received at Palisade, the terminus of the Eureka and Palisade Railroad, declined 74 per cent between 1875 and 1888. The freight received at Battle Mountain, the terminus of the Nevada Central, fell off 78 per cent, while that arriving at Virginia City over the Virginia and Truckee Railroad dropped 86 per cent.

It was estimated that the shrinkage of traffic between 1876 and 1885 was not less than $2,000,000 per annum as compared with the period of highest prosperity of the Nevada country. The decrease was due in the first instance to the working out of the ore deposits, not only of the Comstock lode but of nearly all other camps within the states of Nevada and Utah west of Ogden which were tributary to the Central Pacific line. Following this, there was a large falling off in traffic, consisting of mining machinery and all kinds of supplies previously required by the miners at the mining camps, and also a large falling off in passenger travel as compared with the first and prosperous years of operation.[512]

Besides the loss of the Nevada mining traffic in the late seventies and early eighties, the Central Pacific also had to reckon with a certain loss of business by reason of the opening of transcontinental competing routes such as the Santa FÉ in 1881 and the Northern Pacific in 1883. In the early part of the period the decline in business seems to have been due mainly to local conditions; in 1884, however, as was to be expected, a serious decrease in the earnings from through business occurred.

Later Earnings

As a contrast to the unsatisfactory character of the returns for the years 1883, 1884, and 1885, the reports of the companies show that, taking the Central Pacific-Southern Pacific system as a whole, the total earnings from 1885 to 1891 steadily increased, both in the aggregate and per mile of line. If we compare the condition of the system in 1891 with its condition in 1885, we find a progress which may be summarized as follows:

Comparative Statement of Mileage, Capitalization, Earnings, and Expenses of the Southern Pacific System, 1885,(*) 1886, and 1891

(*) The figures of earnings for 1885 represent the results of from nine to ten months’
operation only.

This was a satisfactory showing. The total mileage operated by the Southern Pacific Company and by the Southern Pacific Railroad, Northern Division, increased between 1885 and 1891 from 4,698 miles to 6,376 miles, not including the mileage of the steamship routes between New Orleans and Galveston and New York. The principal elements of new mileage added were certain lines in Oregon, including the property of the Oregon and California Railroad from Portland to the California state line (650 miles); a second road down the San Joaquin Valley on the west bank of the river (190 miles); and additional construction on the Coast Division (150 miles). Comparatively little was added during these years to the Central Pacific main line, or to the properties east of El Paso.

While the mileage operated thus increased by 1,678 miles, or 36 per cent, gross earnings became greater by the sum of $25,000,000, or approximately 100 per cent, and net earnings by $6,429,921, or about 50 per cent. This was accomplished with an increase in bonded indebtedness of only 30 per cent. The increase in stock outstanding was greater, it is true, than the increase in the funded debt, but the new stock issue did not increase the fixed charges of the road, and therefore in no way imperiled its solvency. In none of the figures cited are the so-called subsidy bonds issued by the United States government or the accrued interest upon the same included.

Decline Following 1893

Unfortunately, the progress of the Southern Pacific toward prosperity, which was so considerable between 1885 and 1891, was interrupted by the difficult commercial and industrial years between 1891 and 1897. The effect of world-wide depression upon American railroads is apparent when we observe that in the eastern part of the United States the gross earnings of companies like the New York Central fell off during this period from $21,000 per mile in 1892 to $18,000 per mile in 1897. The Pennsylvania lines west of Pittsburgh earned $44,210,000 in 1891 on a mileage of 3,502 miles. Six years later they hardly equaled this record on a mileage 500 miles greater. Even the protected system of the New York, New Haven and Hartford saw its gross earnings decline from $22,000 per mile in 1891 to $20,000 per mile in 1897.

It was scarcely to be expected that the relatively new system of the Southern Pacific would not suffer with the rest. The figures seem to show, however, that the Huntington lines suffered more than most eastern railroads from the depression in business following the panic of 1893. While it is true that the portion of the roads operated by the Southern Pacific Company which was known as the Atlantic system, comprising the lines east of El Paso, escaped with a decline of earnings from $7,700 per mile to $7,400, or only 43 per cent, the Pacific system, including the Central Pacific and the Southern Pacific Railroad of California, witnessed a decline in its returns from $8,000 per mile in 1891 to $6,400 per mile in 1897, or a loss of from five to six times as much in gross, and a still greater relative decline in net, receipts.

The following table shows the earnings and expenses of the Central Pacific Railroad per mile of road from 1885 to the reorganization of the company in 1898:

Operating Receipts and Expenses of the Central Pacific Railroad of California, 1885-98 per Mile of Road

(*) Six months only.

These figures show very clearly that the gross receipts of the Ogden route increased on the average per mile of road from 1885 to 1891, but that they fell off largely and persistently from 1891 to 1897. Indeed, the net earnings per mile each year from 1894 to 1897 inclusive, were less than those for any of the nine preceding years.

Suspension of Central Pacific Dividends

It seems very likely that this unusual falling off in the receipts of the Central Pacific Railroad Company is to be associated with the exceptionally disturbed traffic conditions on the Pacific Coast during the four or five years beginning in the latter part of 1891. These were the years when the Traffic Association of California was conducting its violent attack upon the Huntington interests. The period was also marked by the dissolution of the Transcontinental Association, and by the construction of the San Francisco and San Joaquin Valley Railroad. It was not to be expected that a campaign such as has been described in previous chapters would fail to have an influence upon the receipts of a company interested in business in, to, and from the state of California, so that a disproportionate decrease in Central Pacific earnings was not surprising. However this may be, the effect of the decline in earnings was to force the Central Pacific to stop the payment of dividends; and the cessation of dividends, together with other elements of uncertainty in the situation to which reference will be made, eventually caused the price of Central Pacific and of Southern Pacific stock to decline.[513]

Dividend Policy

In respect to dividends a word should be said here, enough at least to make clear that the whole dividend policy of the Central Pacific was a matter which provoked criticism, and that this criticism grew acute at the close of the period we are discussing. As a general matter it was charged that the Central Pacific had no business to pay any dividends at all while its indebtedness to the United States government remained uncanceled. It was further alleged, with more show of reason, that the dividends of the eighties were declared in order to assist the associates in disposing of Central Pacific stock in Europe, and not because there existed any surplus to which they could be properly and wisely charged. Finally, enemies of the company asserted, and showed ground for believing, that the dividends set forth in the annual reports of the Central Pacific to its stockholders did not represent all dividends actually declared; they asserted that, in addition, by special arrangement, considerable sums were paid out in unreported dividends, which may or may not have reached all holders of the stock.

It appeared in this connection that a gentleman named Sir Rivers Wilson had come to the United States in 1894 as a representative of English shareholders.[514] Sir Rivers interviewed officers of the Central Pacific, inspected the property, and it was reported in the newspapers after his return to the East that he had arrived at a compromise with Mr. Huntington. The terms of the compromise were at first only vaguely understood, but the London Economist, in its issue of March 23, 1895, declared specifically that Mr. Huntington had undertaken to pay 1 per cent per annum in the shape of dividends until satisfactory legislation had been obtained for the adjustment of the Central Pacific’s debt to the government, and that he had also agreed to pay 2 per cent per annum for two years after the debt question had been settled, during which time the shareholders would have opportunity to review their position and to consider effecting an arrangement of a more permanent character.

Mr. Huntington’s attention was called to this statement of the Economist, but he made no denial of the facts stated. Three years later Mr. Huntington went further, and admitted that he had agreed with Sir Rivers Wilson to pay shareholders—all shareholders—an annual dividend of 1 per cent upon their stock.[515] It was understood that the money for the secret Central Pacific dividends was loaned to the Central Pacific by the Southern Pacific, although this detail was not authoritatively established.

Market Prices of Stock Shares

Neither the Central Pacific nor the Southern Pacific were ever investment properties under the Huntington rÉgime, in the sense that a stable return could be expected by holders of their stock, or even in the sense that the selling price of their shares remained reasonably uniform or ever reached a quotation in the neighborhood of par. Central Pacific stock sold at 34 in January, 1885. It rose to 51 in 1886, fluctuated principally between 26½ and 42 during the years from 1887 to 1892, and then proceeded to fall in value until in the spring of 1897 it was quoted on the New York Stock Exchange at the nominal figure of 7? per share. The stock was ordinarily not traded in to any extent probably because so much of it was held abroad.

Southern Pacific stock was listed on the New York market in 1885, but as has been explained in a previous chapter, quotations on the shares were for several years artificial. In 1890 the stock sold mostly between 25 and 35. It declined slightly during the latter part of 1890 and the early part of 1891, but from September, 1891, to August, 1892, most of the sales were between 35 and 40. Beginning in 1893 the price of Southern Pacific stock began to decline. In 1894 it reached 17½, in 1895, 16¾; and in 1897 it touched the low point of 13½. After 1898 Central Pacific stock left the market, but Southern Pacific stock recovered to about 50 in the middle of 1901, at which approximate price 46 per cent of it was purchased by the Oregon Short Line.

It is not without interest that the fluctuations in the quotations of the stock of the Central Pacific were quite as extreme between 1885 and 1890 as were those of the Southern Pacific shares, although one stock was occasionally a dividend payer and the other was not, and that the Central Pacific stock was quoted at a distinctly lower figure between 1894 and 1898 than was the stock of its apparently more speculative associate. The reason is not to be found in the different natures of the properties represented by the two stocks, nor in any difference in operating conditions. It was plainly due to the gradually approaching maturity of the debt which the Central Pacific owed to the United States government, and to the complete uncertainty as to the effect which government action might have upon the solvency of the Central Pacific Railroad. So long as there seemed a possibility that the Central Pacific would be called upon to make good, in cash, an advance which by 1898 would amount to nearly $60,000,000—a sum which few persons believed that the Central Pacific would be able to pay—the stock certificates of this company could have only a speculative value.

The question of the best way to meet the huge obligation which had grown out of the assistance tendered to the Central Pacific Railroad by the federal government under the Pacific Railroad Acts of 1862 and 1864, was indeed the most important financial problem which the company had to solve after Mr. Stanford’s death. The two following chapters will be devoted to an exposition of the points involved in this transaction, and to a description of the solution finally reached in the year 1898.