Articles of association of the San Francisco and San Joaquin Valley Railway Company were filed at Sacramento in February, 1895, and construction was begun at Stockton late in the same year. By the end of December, 26.1 miles had been built, carrying the railroad to the Stanislaus River. During 1896 the track reached Fresno, and in 1897 Bakersfield was attained. On June 30, 1898, the company reported a total mileage of 278.91 miles, including a branch to Visalia. It had at that time an authorized capital stock of $6,000,000, of which $2,464,480 was issued and paid in, a funded debt of $2,671,000, and current liabilities of $110,928. The bonds outstanding were mortgage securities bearing 5 per cent interest and maturing in 1940. In 1897 the company reported gross earnings of $209,133 (of which $178,494 were from freight), and operating expenses of $153,102, on an average operated mileage of 123.44 miles. For the year ending June 30, 1898, the earnings were $411,179 and the operating expenses $282,326, on a mileage, however, which was considerably greater. These were the only years for which statistics are available, for the company was purchased by the Santa Fé in December, 1898.
The circumstance that the San Francisco and San Joaquin Valley Railway was purchased by the Atchison, Topeka and Santa Fé only a few months after the company had completed its road to Bakersfield, served as a dramatic illustration of the fact that alliance with some larger railroad system was considered by its promoters to be essential to the road’s success. There is no question but that this sale of the system came as a shock and a disappointment to many persons whose enthusiasm had been aroused by the proposal to build an independent railroad for the service of shippers in San Francisco and in the San Joaquin Valley. The high hopes of San Francisco merchants could scarcely be satisfied by anything short of a system permanently under the control of the commercial interests of that city. When the San Francisco press declared that San Francisco was preparing to reach out for the trade of all the western part of the American continent, and when the Spreckels committee declared that the new road was to be a people’s road, owned by the people, and operated in the interests of the people,[472] the implication clearly was that the ownership of the property was to remain in the hands of the original subscribers to the stock or in the hands of other persons of like character. Nor was the argument that the construction of the San Francisco and San Joaquin Valley Railway would prevent the diversion of eastern freight from San Francisco to distributing centers of the South,[473] easily to be reconciled with the sale of the railroad to a company which, like the Santa Fé, had a terminus in Los Angeles.
Spreckels Interests
There were, on the other hand, indications from the beginning that the Spreckels group did not intend to commit itself to the permanent management of a railroad system, but that they regarded connection with, and perhaps amalgamation between, the San Francisco and San Joaquin Valley and the Atchison, Topeka and Santa Fé as the natural culmination of the former road’s career. Like Stanford, Mark Hopkins, Huntington, and Crocker, Claus Spreckels, his sons, and the persons most intimately associated with them were not originally railroad men, and were not, when they began railroad construction, particularly interested in the railroad business as a business. They were therefore to be tempted to continue railroad management only by a chance for extraordinary profits—a chance which the San Francisco and San Joaquin Valley Railway did not offer. Looking at the matter from a business standpoint, it is not unreasonable to suppose that they saw that the best opportunity for withdrawing their capital from the valley speculation lay in negotiations with the Santa Fé. Of course this is surmise, and perhaps is mainly plausible as a late interpretation of happenings which we know took place, but it has a certain reasonableness in view of all the facts.
The concrete evidence that combination between the San Francisco and San Joaquin Valley and the Atchison, Topeka and Santa Fé was looked upon as a possibility from the first, is to be found in the provisions of the trust agreement entered into by subscribers to the San Francisco and San Joaquin Valley Railway stock, and in the negotiations between that railroad and the city of San Francisco and the state government of California, over what was known as the China Basin lease.
Trust Agreement
Soon after the promoters of the San Francisco and San Joaquin Valley Railway had successfully organized their corporation, subscribers to the stock of the company were asked to enter into a certain trust agreement or pooling plan designed primarily to prevent the railroad from falling into the hands of the Southern Pacific. Briefly summarized, this plan contemplated the transfer of the stock of the company to seven (later nine) trustees. Individual stockholders so transferring their holdings were to receive trust certificates clothing them with the powers and privileges usual in such cases. The trustees on their part were to administer the railway for a period of ten years unless three-quarters of the certificate holders should request an earlier termination of the trust, or unless all of the subscribers should die.
This administration was, however, subject to restrictions, of which two deserve special notice. In the first place, the trustees undertook to operate the railroad, when completed, on such a basis that the rates and fares charged should be the lowest rates and fares which would yield enough earnings to meet costs of operation, interest, and sinking fund requirements, and to pay a dividend not exceeding 6 per cent upon capital stock paid in. This clause was evidently intended to reassure shippers who had been or might become interested in the new railroad. But besides this, the trustees agreed that they would not knowingly vote said stock “for the benefit or in the interest of any person or corporation or interest hostile to the interest of, or in business competition with the San Francisco and San Joaquin Valley Railway Company, or of or to or in favor of any party or parties or company or companies owning or controlling any parallel line of road to the detriment and injury of the corporation hereinbefore mentioned.”[474]
To this clause there was later added another of the same import, to the effect that the San Francisco and San Joaquin Valley Railway should not be leased to, or consolidated with, any company which might own, control, manage, or operate any of the roads then existing in the San Joaquin Valley, and that neither the trustees nor their successors should have any power as stockholders to assent to any such consolidation or lease, or in any way to put the San Francisco and San Joaquin Valley Railway under the same management as that of any other railroad then existing in the San Joaquin Valley.[475]
In so carefully worded a document as the trust agreement here under consideration, the prohibition of combination with competing railroads or with railroads then existing in the San Joaquin Valley had the force of an affirmative permission to the trustees to consolidate their property with that belonging to any company not in the prohibited class. As a practical matter this meant consolidation with the Santa Fé and with that railroad only, for the reason that there was no other system with which combination would have been significant. The trust agreement was approved at a meeting of stockholders held on April 5, 1895,[476] and by the middle of the following month holders of more than three-fourths of the stock had given written assent to the trust conditions.