The San Francisco agitation in 1894 and 1895 was addressed to the comparatively moderate provisions of the Reilly bill, proposing the refunding of the government debt for fifty years at 3 per cent. In 1896, when the more liberal Powers bill was under discussion, the agitation revived. At this time Mayor Sutro, of San Francisco, made an unsuccessful attempt to persuade the people of Kentucky to repeal the charter of the Southern Pacific Company. Although this particular move met with no success, a state anti-funding convention was held at the Metropolitan Temple in San Francisco on January 18, 1896, a new committee was appointed, and a new memorial was framed.
This memorial reiterated and reinforced most of the arguments presented in the memorial of the committee of fifty. It dwelt on the alleged frauds of the Central Pacific and Southern Pacific companies, the uncertainty as to the extent of the property of these corporations, and as to the validity of certain liens against them. The whole matter, the memorial urged, was distinctly one for judicial investigation. It urged that the government let foreclosure take its course. The Central Pacific should not be allowed to confirm possession of money it might have stolen. It was sound policy, the memorial agreed, to make sure that the company really had not enough to pay its debts, and to this end to see that transferred, withdrawn, and stolen assets were restored. Agitation along these same lines continued through 1896, and in January of the following year the legislature adopted a resolution opposing refunding and calling for foreclosure if necessary.[564]
Different Points of View
The fundamental difference between the sentiment in Congress in 1897 and that on the Pacific Coast was that the legislature at Washington addressed itself to Pacific railroad legislation with the object of recovering as much of the government’s advances to the Pacific railroads as was possible under the circumstances. The gains sought were primarily financial. In California, on the other hand, public sentiment was more concerned with railroad service and railroad rates than with finance. And this was a principal reason for the insistence upon foreclosure and the equanimity with which government operation was regarded. That the difference between the two points of view was not more fully appreciated was doubtless because the necessity of shaping its arguments so as to influence Congress led the Pacific Coast to talk in terms of finance, even when they thought in terms of monopoly. So much must be understood in order that the animus behind the San Francisco agitation may be clear.
From the point of view of Congress, the weakness of the government’s position in 1897 lay in the fact that its debt was secured by a second mortgage, and a mortgage which covered, at that, only a portion of the road. There seems to have been substantial unanimity of opinion among official representatives of the government after 1882 and 1883, that the bond-aided parts of the Pacific railroads would not bring at a forced sale a sufficient price to cover both the first and the second mortgage liens upon them. In fact, it was believed that if the Pacific railroad property should be put up at foreclosure sale, no bidder would appear except the Huntington-Stanford interest, and perhaps the Union Pacific Railway. Under these circumstances the price obtained was sure to be low, and it was not unlikely that the result of the sale would be to leave the railroad in the hands of its original owners free from all obligations to the government. “These very men whom you are now scolding about,” said Mr. Powers, of Vermont, in 1897, “the very men who own the terminals and own these connecting lines are the only ones who can safely bid on the property, and probably they will be the only bidders. They would get the property at their own figures.”[565]
Stockholders’ Liability
It is true that there were two possibilities that improved the government’s position slightly. The first was found in the suggestion that directors or stockholders of the Central Pacific might in some way be held individually responsible for the debts of the company. If this could be done, the great wealth of the Stanford-Huntington group made the resource a substantial asset. It was pointed out by anti-railroad men that the Central Pacific was a California corporation, and that under California law each stockholder of a railroad corporation was liable, in proportion to the stock owned and held by him, for all its debts and liabilities. Moreover, the directors of the Central Pacific were said to be liable as directors because of the diversion of Central Pacific funds to the payment of dividends at a time when the company owed the government and its first mortgage bondholders large sums which it was unable to pay. In addition the directors were charged with illegal use of Central Pacific money in the construction of the Southern Pacific Railroad.
Unfortunately for the government, the United States Supreme Court squarely refused to entertain the notion that Central Pacific stockholders were individually liable for repayment of advances which the United States had made to that company. Individual liability depends upon express statutory prescription, and no word upon this point was to be found in the federal laws of 1862 and of 1864. While California railroad stockholders were undoubtedly personally liable to some degree for the debts of California corporations, yet the state law which established this liability was held not to apply to the debt due to the United States. The terms of liability as regards this debt were to be sought, according to the Supreme Court, in the Congressional enactment, and there only. It was said that any other ruling would not only lack solid legal foundation, but would have the unfortunate effect of imposing a heavier burden upon stockholders of the Central Pacific than upon those of the Union Pacific.[566]
Lien of Subsidy Bonds