Chapters on the History of the Southern Pacific

by Stuart Daggett

CHAPTER XXI

FINAL SETTLEMENT OF THE CENTRAL PACIFIC INDEBTEDNESS TO THE GOVERNMENT

Refunding Proposals

It is the purpose of the present chapter to describe proposals for the settlement of the government’s claims against the Central Pacific Railroad which were made between 1878 and the date of maturity of the subsidy bonds, and to explain in some detail the adjustment finally arrived at in 1899.

Soon after it became apparent that the Thurman law would not provide adequately for the retirement of the federal subsidy bonds at their maturity, agitation began for other and more stringent arrangements. As early as 1882, the Commissioner of Railroads suggested that the indebtedness of the Pacific railroads be changed from a running book account and that there be a settlement and actual delivery of interest-bearing bonds for the amount found to be due upon a convenient day, say July 1, 1883. On this day he proposed that the companies should deliver to the government 100 redemption bonds, each representing a hundredth part of the indebtedness. One bond was to fall due thereafter every six months, and interest was to accrue as before upon the unpaid bonds outstanding.[552]

Five years later the United States Pacific Railway Commission, in an important report, recommended also that the net indebtedness of the Central Pacific Railroad Company be ascertained as of a certain date—this time as of July 1, 1888—and that arrangements be made to fund the amount so determined into new railroad fifty-year 3 per cent bonds, which should be made a lien upon all the property which the Central Pacific owned or in which it had an interest.[553] Congress was not ready, however, to refund the Pacific railroad debts upon the terms proposed either by the Commissioner of Railroads or by this special body of experts.

The next official report was that issued by a select committee to which the United States Pacific Railway Commission report was referred. This committee report was known as the Frye-Davis report, from the names of the Senators who transmitted the sections dealing with the Union and Central Pacific railroads, respectively. The committee was instructed to, and did, personally examine the roads of the Union, Kansas, Central, and Western Pacific Railroad companies, together with that of the Central Branch Union Pacific. It further prepared a plan for refunding the Pacific railroad debt.

So far as the Central Pacific was concerned, the committee proposed that the company should pay its debt in seventy-five years from date, with interest at 2 per cent. In view of the serious financial condition of the company, and the alleged necessity of building several bridges and some additional mileage in California, 1 per cent of the 2 per cent was to be capitalized for ten years. During the first ten years the company’s annual payment was thus to be from $600,000 to $650,000 per year; after that time it was to be about $1,400,000 annually. The Frye-Davis committee therefore required a smaller payment and contemplated a longer extension of time than did the United States Pacific Railway Commission. Like its predecessor, it demanded from the Central Pacific, as security, a mortgage on all the roads and property of every name and description which the Central Pacific possessed, including a mortgage on the whole road from four miles west of Ogden to San José. This mortgage was to include the lease of the Central Pacific to the Southern Pacific, and there was now inserted a provision that the rental paid by the latter should never be less than the sums that the bill called for from the Central Pacific, thus making the Southern Pacific in effect a guarantor of the arrangement.[554]

Further Reports

In 1894 still another report was rendered, this time by James Reilly, of Pennsylvania, from the House Committee on Pacific Railroads. The report reviewed briefly the history of the relations between the Pacific railroads and the government. It was opposed to foreclosure. Instead, it suggested that the debt due to the United States be calculated as of January 1, 1895, and be funded into railroad 3 per cent bonds. The companies were then to begin paying on the debt at the rate of one-half of 1 per cent semiannually, for a period of ten years, commencing on the 1st of July, 1895. For the next period of ten years, three-quarters of 1 per cent was to be paid; for the next period 1 per cent; and so continuing that the railroad bonds, and therefore the principal of the debt, should be wiped out in fifty years. Meanwhile the railroads were to pay off their first mortgage bonds, leaving the new funding bonds a prior lien upon the property of the companies, including both the aided and the non-aided portions. Nothing was done with this report except to submit it.[555]