That the Secretary of the Treasury is directed to withhold all payments to any railroad company and its assigns, on account of freights or transportation, over their respective roads, of any kind, to the amount of payments made by the United States for interest upon bonds of the United States issued to any such company, and which shall not have been reimbursed together with the five per cent. of net earnings due and unapplied as provided by law; and any such company may bring suit in the court of claims to recover the price of such freight and transportation; and in such suit the right of such company to recover the same upon the law and the facts of the case shall be determined and also the rights of the United States upon the merits of all the points presented by it in answer thereto by them and either party to such suit may appeal to the Supreme Court; and both said courts shall give such cause or causes precedence of all other business.[525]
The intent of Congress in 1873 was that, in order to make a case, the Secretary of the Treasury should withhold the sums demanded by the bond-aided railroads including the Central Pacific, that the companies should sue, and that the court should then decide. In pursuance of this idea, the Union Pacific promptly brought suit against the government in the Court of Claims to recover the amount due from the United States for transportation of government passengers and property after deducting one-half of the amount as required by law. A decision being rendered in favor of the company, the United States appealed to the Supreme Court, where the judgment was affirmed.
The foundation of the government position was that the United States could legitimately offset the interest on subsidy bonds which it was paying currently against the sums due the bond-aided railroads for government transportation. The reply of the court was, first, that the general principles of “set-off” did not apply in the case at bar; and second, that the United States had no claim in any event because the law did not require the Union Pacific (and the same principles applied to other bond-aided railroads) to meet the interest charges on the government advances until the maturity of the bond.[526] A later case added the ruling that the United States had in the matter only the right of a creditor growing out of contract, and could not fall back upon its sovereign rights in order to protect its financial claim.[527]
Not only did the Supreme Court decide completely in favor of the companies in the important matter of “set-off,” and in that relating to the date upon which the Pacific railroads became liable for the payment of accruing interest on the subsidy bonds, but it diminished also the sinking fund payments of the companies by holding that under existing legislation it was proper for the companies, in calculating net earnings, to deduct from gross earnings expenses incurred for enlarging and improving their property. The particular account involved was that of expenditure for station buildings, shops, and fixtures. Such expenditures are not ordinarily charged to operating expenses, and the court admitted that “theoretically” they should not be so charged. The practice was nevertheless justified on the ground of general policy, as likely to encourage a liberal application of earnings to improvements. The same decision also authorized the Central and the Union Pacific to deduct interest on first mortgage bonds from earnings before computing the 5 per cent of net earnings which was to be credited to the sinking fund. This ruling was defended as a legitimate consequence of the concession of priority to the first mortgage bonds.[528]
Need of Governmental Action
While Congress was considering ways and means for enforcing some adequate provision for the eventual repayment of the government’s advance to the Pacific railroads, the Central Pacific declared dividends which amounted to no less than $18,453,670 in the five years from September 13, 1873, to October 1, 1877. In 1873, 3 per cent was declared; in 1874, 5 per cent; in 1875, 10 per cent; and in 1876 and 1877, 8 per cent. To see earnings divided among a group of financiers who were believed to be already overpaid, while the unpaid interest on the government subsidy bonds piled up, was all the more exasperating because of the apparent helplessness of Congress. Some action, however, was presently to be taken. In 1874 a bill was introduced in the Senate to alter and amend the Acts of 1862 and 1864 so as to safeguard the government equity. In 1876 Mr. Thurman, of Ohio, presented another bill, which was reintroduced in 1877, referred to the Committee on Judiciary, and ultimately reached the Senate in March, 1878. This bill ultimately became the Thurman Act of 1878.[529]
The situation as it appeared in 1878 was succinctly presented by Mr. Thurman on the floor of the Senate. The government’s loan to the Central and Western Pacific amounted to $27,855,680. The interest upon that sum for thirty years would be $50,140,224, making a total of $77,995,904. The probable reimbursement from the 5 per cent of net earnings and the half of the transportation accounts would be about $15,000,000, leaving probably due at the maturity of the government loan, should the laws remain unchanged, the sum of $62,995,904, which, added to the amount that would probably be due from the Union Pacific, made an aggregate of $119,248,979.[530] To this amount there was also to be added in estimating the payments which the Central Pacific, Western Pacific, and Union Pacific would be called upon to make in the late nineties, the amount of the first mortgage bonds of the three companies, the lien of which was prior to the lien of the subsidy bonds.
It seemed manifest to Mr. Thurman in March, 1878, that the bare statement of the amount for which the government would be the creditor of the Pacific railroad companies ought to satisfy anyone that some step should be taken by Congress to secure the government from loss. This point of view was not seriously contested. Objection to any action there was, indeed, but not based on any denial of the assertion that the security of the government was becoming impaired.
Thurman Bill