On the basis of the admitted need, Mr. Thurman, in behalf of the Committee on the Judiciary of the United States Senate, made a series of concrete proposals. The essence of the Thurman plan was that the annual payments of the Pacific railroads for the eventual retirement of the government debt should be largely increased. It was contemplated that 5 per cent of the net earnings of these railroads, together with half of the sums due to the companies for government transportation, should continue to be applied to the retirement of the subsidy bonds. This annual appropriation Mr. Thurman estimated at $531,000. But it was now intended that in addition to this sum there should be retained by the government and credited to a sinking fund, the other half of the sums due to the companies for government transportation; proceeding still further, the Thurman bill provided that in case the whole of the government transportation accounts, added to the 5 per cent of net earnings, did not make a sum equal to 25 per cent of net earnings, then the Pacific railroads should pay into the sinking fund such sums not exceeding $1,200,000 for the Central Pacific and $850,000 for the Union Pacific, as would bring the companies’ payment up to 25 per cent.
Textually, the section of the Thurman bill relating to the Central Pacific sinking fund read as follows:
Sec. 4. That there shall be carried to the credit of the said fund, on the first day of February in each year, the one-half of the compensation for service hereinbefore named, rendered for the Government by said Central Pacific Railroad Company, not applied in liquidation of interest; and, in addition thereto, the said company shall, on said day in each year, pay into the Treasury, to the credit of said sinking fund the sum of one million, two hundred thousand dollars, or so much thereof as shall be necessary to make the five per centum of the net earnings of its said road payable to the United States under said act of eighteen hundred and sixty-two, and the whole sum earned by it as compensation for service rendered for the United States, together with the sum by this section required to be paid, amount in the aggregate to twenty-five per cent of the whole net earnings of said railroad company, ascertained and defined as hereinbefore provided, for the year ending on the thirty-first day of December next preceding.[531]
Mr. Thurman estimated the total payments which the Central Pacific would have to make under his bill at $1,900,000 annually, or substantially more than the accruing 6 per cent on the subsidy loans.[532] In case earnings should be insufficient to meet interest charges on underlying first mortgage bonds after the deduction of 25 per cent, the Secretary of the Treasury was authorized to remit as much of the 25 per cent as might be necessary to avoid default.
Disappointing Results
From the point of view of the government, the clauses of the Thurman bill relating to the annual payments of the companies were of the first importance, because upon them depended the adequacy of the provision for the eventual cancellation of the government debt. As a matter of fact, the payments were less than Senator Thurman anticipated, because the earnings of the Pacific railroads proved disappointing. Instead of $1,900,000 annually, the average contribution up to 1897 was only $629,690. In particular, the clauses requiring the companies to add to the sums earned from government transportation and that measured by 5 per cent of net earnings sufficient to bring the total up to 25 per cent of net earnings, were ineffective. In but one year after 1883 was anything paid on this last account. Indeed, the earnings of the Central Pacific fell so low that the government transportation and 5 per cent accounts at times amounted to 50 per cent of net earnings without any addition from other sources.
It was assumed by some speakers on the Thurman bill in the Senate, that under the proposed plan the total contribution of the Pacific railroads toward the reduction of the government debt was to be paid into a sinking fund. This was not, however, the case, as a careful reading of the statement already made will make clear. Instead, the payments which these railroads had been making under the Acts of 1862 and 1864 were to be continued, and were to be credited directly to the railroad debt as before. The money was to be held in the United States Treasury, and no interest was to be allowed upon it.[533] It was only the balance, comprising the half of the payment due the companies for government transportation which they had received under the Act of 1864, and such additional payment, not exceeding $1,200,000 or $850,000 respectively, as would be necessary to bring the whole contribution of the companies under the proposed law up to 25 per cent of net earnings, which was credited to the sinking fund. The distinction is important, because the sums paid into the sinking fund earned compound interest, whereas the sums credited to bond and interest account earned no interest at all. That is to say, the contributions to the sinking fund were to be invested in government bonds, and the interest on these bonds was to be reinvested semiannually in the same security, but other payments merely gave rise to credits on the government books.
Sinking Fund Investments
The mention of the sinking fund leads naturally, however, to a reference to the provisions of the Thurman bill relating to sinking fund investments. Mr. Thurman proposed in 1878 that the sums credited to the Pacific railroads’ sinking funds be used to purchase United States bonds, preferably 5 per cent bonds because other outstanding issues were either insufficient in amount or had only a short time to run. Up to June 30, 1897, about $6,000,000 were available for such purchases. But this limitation of the field of investment seriously crippled the earning power of the fund by requiring the purchase of securities of classes which either bore low rates of interest or which commanded considerable premiums in the market. The average premium paid by the Central Pacific up to 1883 was approximately 13 per cent.[534] In 1891 the Commissioner of Railroads reported that between the date of the creation of the sinking fund in 1878 and the date of his report, on June 30, 1891, the government had bought bonds with a par value of $6,138,800 for the Central Pacific, for which it had paid a premium of $1,110,409.62, or an average of 18 per cent. At times the premium paid had gone as high as 35 per cent,[535] and in the earlier years the payments on account of premiums materially exceeded the earnings of the sinking fund in the way of interest. This excess disappeared, of course, as the fund grew larger, but the absolute amount of the premium continued to grow.
The principal bonds in which the sinking funds were invested up to 1882 were the United States currency sixes, the 5 per cent funded loan of 1881, and the 4 per cent funded loan of 1907. In 1881 the funded fives matured and were continued at 3½ per cent. In 1882 the Treasurer of the United States exchanged these bonds for a new 3 per cent issue. Inasmuch as the bonds which bore the higher interest rates all commanded a premium, the actual yield of the fund up to 1886 was only from 2½ to 3 per cent. This condition was recognized as disadvantageous by all concerned. The Commissioner of Railroads declared in 1883 that it would require a century or more at the rate provided in the Thurman Act to accumulate a fund sufficient to discharge the railroad debt, with a strong probability that even then it could not be done.[536] The Auditor of Railroads in 1879, the Secretary of the Treasury in 1881, and the Commissioner of Railroads, in various reports, all urged that the field for investment of the sinking funds be widened, at least to include the first mortgage bonds of the Pacific railroads. Since the lien of these bonds was prior to that of the sinking fund itself, it seemed appropriate to allow the Secretary of the Treasury to buy them with sinking fund money. The suggestion was adopted by Congress in 1887,[537] with the result that interest on the funds placed in this new investment amounted to 4.15 per cent. This was a substantial increase from the 2½ or 3 per cent realized from government bonds, though still less than the 6 per cent carried by the subsidy bonds themselves.[538]