Chapters on the History of the Southern Pacific

by Stuart Daggett

Charge Against Railroad

The unfortunate fact about the Thurman Act, however, was not that it excited the anger of representatives of the railroad companies to which it applied, but that it proved a failure in its primary purpose of providing for the eventual retirement of the subsidy bonds. But before summarizing the workings of the law in this respect, a word may be said regarding certain disputes which occurred in the course of its administration.

In February, 1881, Thomas French, Auditor of Railroads, made the charge that the Central Pacific was diverting business from the subsidized portions of its line to its leased properties in order to lessen the payments required under the Thurman law. The basis for this charge, so far as reported, appeared to lie in the fact that the net earnings of the Central Pacific were decreasing, while those of the Union Pacific were going up. Mr. French suggested that the Pacific railroads be required to contribute up to 50 per cent of net earnings for retirement of the government debt, instead of up to 25 per cent as then required by the law.[546]

Mr. French’s suggestion was not adopted, but the government subsequently advanced the claim that it had the right to retain all the compensation for service rendered to the government by the bond-aided companies without regard to the conditions of construction of particular sections of the road. The company took a different view of the matter, but in deference to an opinion of the Attorney-General on this point, the Secretary of the Treasury in 1884 withheld compensation on the entire mileage of the Pacific railroads pending an authoritative decision. The Supreme Court, however, ruled in favor of the companies,[547] and the sums withheld had to be paid over.

In subsequent years the earnings of the portions of the Central and Union Pacific which had received no bond subsidies were credited, in so far as they arose from government business, as a part of the 5 per cent of net earnings which these companies were required to apply to the eventual retirement of the government debt. This meant a considerable amount of bookkeeping, which was increased by other claims of the companies of which no detailed mention is here made. Indeed, when the final settlement was concluded between the Central Pacific and the government, credits to this one company were allowed by the United States to the amount of no less than $1,162,939.48.[548]

Definition of Net Earnings

In addition to the controversy over earnings on government transportation over non-bond-aided lines, there developed a second difference of opinion over the calculation of the net earnings of the Pacific railroads. It has already been observed that the Law of 1862, as interpreted by the Supreme Court, allowed the Pacific railroad companies to charge expenditures for additions and improvements to operating expenses, and thus to reduce their net earnings, upon the size of which the rate of provision for repayment of the government debt depended. The Central Pacific insisted that the same practice was legitimate under the Thurman law. But in this last-named legislation the wording of the clause relating to net earnings had been changed. In 1862 no definition of net earnings had been given. In 1878 it was provided that net earnings should be calculated “by deducting from the gross amount of their [the Pacific railroads’] earnings, respectively, the necessary expenses actually paid within the year in operating the same and keeping the same in a state of repair, and also the sums paid by them respectively within the year in discharge of interest on their first mortgage bonds.” This was deliberately intended as an amendment of the Act of 1862. As Mr. Thurman told the Senate, it was his intention to leave the question of the nature of the net earnings, so far as the past was concerned, for the decision of the Supreme Court without any retroactive legislation at all, but to define net earnings for the future.

In spite of the apparently clear wording of the law, and the definite expression of the views of the Senate Committee on the Judiciary at the time the act was passed, the Central Pacific still maintained that it possessed the right to deduct expenditures for improvements and betterments from gross earnings, in the process of arriving at the figure of net earnings upon which its contributions toward the retirement of government indebtedness were in part based. A decision of the Court of Claims and another by the Supreme Court of the United States were necessary before this position was abandoned.[549]

Still other controversies arose between the Union Pacific and the United States government over earnings from the operation of the bridge across the Missouri River between Council Bluffs and Omaha, over receipts from the operation of Pullman cars, and over the payments by the Union and Central Pacific railroads to the Pacific Mail Steamship Company according to the terms of contracts described in a preceding chapter.[550]