Still a third claim was based upon an alleged loss of business consequent upon government subsidies to other transcontinental roads. The loss of earnings to the two roads from this cause was set at $37,000,000, of which the Central Pacific share was put at 46 per cent, or $17,000,000. Stanford did not deny that the government had a right in its discretion to aid other lines of railroad, but he took the position that if Congress found it in the interest of the country to do something which deprived the Central Pacific of the means of paying its debts, then it should compensate the Central Pacific for this action.[519]
No Basis for Claims
These three principal claims for indemnity were set up by officials of the Southern Pacific at one time or another as complete offsets to the obligations laid upon the company by the Acts of 1862 and 1864. Among minor equities should be mentioned also an alleged loss to the Southern Pacific by reason of the government’s slowness in issuing patents to land. Another claim was based on a loss in respect to sinking fund investments of the company; and still another on the shipment of United States mails by other than bond-aided lines when the use of the latter was possible.
There was no real reason, however, why the government should have reduced its claims against the Pacific companies because of any of the equities mentioned. The administration certainly gave no guaranty in 1864 that the subsidy bonds would sell at par. The government offered the bonds for what they were worth, and the companies accepted them on that basis. Nor did the government at any time agree to preserve a monopoly of transcontinental business for the Central route, or to send its own freight over the Central and Union Pacific railroads to any greater extent than might prove convenient. On these points the facts are perfectly clear. It would seem clear, also, that the government was under no obligation to share with the companies any saving which it had made by reason of the early construction of the transcontinental line. The companies had built more rapidly than had been expected, it is true, but the construction was pushed in their own interest, not in that of the government, and gave rise to no proper claim against the latter. The other points in the companies’ contentions do not deserve special mention.
Sinking Fund Provisions
We may now return to the question of the government debt and its repayment. The Laws of 1862 and 1864 contained two provisions intended to enforce the original stipulation that principal and interest of the subsidy bonds should be paid by the beneficiaries. These laws required that 5 per cent of the net earnings of the Central Pacific after the completion of the road,[520] and second, that one-half of the compensation for services rendered to the government should be annually applied to the payment of interest and principal of the subsidy bonds until the whole amount was fully paid. It was then expected that these two sources of income would provide a fund sufficient to meet both principal and interest in full.[521]
This expectation was not, however, fulfilled. On the contrary, it was already apparent in the seventies that the amount which the companies would be called upon to repay was mounting up much more rapidly than the credits designed to meet it. Six per cent interest upon $27,855,680 of bonds called for an annual interest of $1,671,340.80. From 1867 to October 31, 1877, the one-half of transportation account for carrying mails, troops, supplies, etc., withheld by the government and credited to the Central Pacific sinking fund was only $1,423,555.74, or less than $200,000 a year.[522] The 5 per cent of net earnings account averaged $331,481 from 1872 to 1876.[523] The total annual payment by the Central and Western Pacific railroad companies, therefore, approximated $530,000, leaving a deficit of over $1,100,000 a year. At this rate it was not unreasonable to suppose that the Central Pacific would be much more heavily in debt to the government at the maturity of the bonds than it was at the time of their original issue.
Right of “Set-Off”
Alarmed at the probable failure of the sinking fund provisions, the Secretary of the Treasury, on advice of the Attorney-General, withheld from the Central Pacific Railroad all the compensation due it for services rendered to the government. The same action was taken with respect to the other bond-aided lines. This was clearly illegal, and Congress accordingly passed the Act of March 3, 1871, directing payment of the sums withheld.[524] On passage of the Act of 1871, the Secretary of the Treasury began to pay to the Central Pacific and to the other bond-aided companies, the 50 per cent of compensation for services rendered to the government which the statutes required. Since, however, there seemed to be a legitimate difference of opinion as to whether the government should continue to pay money to companies already heavily in debt to it, Congress proceeded two years later to pass the Act of March 3, 1873, which, in effect, remitted the whole controversy to the court.
The terms of the Act of 1873 were as follows: