A second possibility which might have strengthened the government’s claim that the lien of the subsidy bonds might be held to extend to the non-bond-aided portions of the Central Pacific as well as to those portions for the construction of which the government had given aid. This was also the contention of Mr. Doyle, of San Francisco. The point was of the highest importance, because if it were denied, the government possessed a mortgage upon only the trunk lines of the Pacific railroads. It had no interest in, and could by foreclosure secure no control over any branches, or over the principal terminals. On the Central Pacific it could acquire by judicial sale only 860 miles from a total of 1,360, and on the Union Pacific 1,532 miles from a total of 7,944. The bond-aided portions of the Central Pacific reached neither Oakland nor San Francisco.[567]
In order to understand the relation of the subsidy bonds to the non-aided portions of the Central Pacific, it is necessary to refer for a moment to the terms of the Pacific railroad legislation. The clauses of the Act of 1862 which relate to the lien of the subsidy bonds of the Central Pacific were to be found in Section 5 of that law. They provided as follows, namely, that:
... the issue of said bonds and delivery to the company shall ipso facto constitute a first mortgage on the whole line of the railroad and telegraph, together with the rolling stock, fixtures and property of every kind and description, and in consideration of which said bonds may be issued; and on the refusal or failure of said company to redeem said bonds, or any part of them, when required so to do by the Secretary of the Treasury, in accordance with the provisions of the act, the said road, with all the rights, functions, immunities, and appurtenances thereunto belonging, and also all lands granted to the said company by the United States, which, at the time of said default, shall remain in the ownership of the said company, may be taken possession of by the Secretary of the Treasury, for the use and benefit of the United States.[568]
By the Act of July 2, 1864, the lien of the subsidy bonds was subordinated to that of first mortgage bonds which the company was then authorized to issue, but no other change in the underlying security was made.[569]
The meaning of Section 5 of the Act of 1862, as amended, was considered by the United States Supreme Court in 1878 in a case brought against the Kansas Pacific Railway to recover 5 per cent of the net earnings of the Kansas Pacific, payment of which was required by Section 6 of the same act. In these matters the Kansas Pacific and the Central Pacific were subject to the same requirements. It appeared that the Kansas Pacific had received subsidy bonds for 393-15/16 miles of line, from the Missouri River to the hundredth meridian, but had actually constructed 637 miles, reaching as far west as Denver. The question arose as to whether the company was responsible to the government for 5 per cent of its net earnings on the whole mileage, or only for 5 per cent on 393-15/16 miles. Upon this point the Supreme Court ruled that “the subsidy bonds granted to the company, being granted only in respect to the original road, terminating at the hundredth meridian, are a lien on that portion only; and that the five per cent of the net earnings is only demandable on the net earnings of said portion.”[570]
Provision in Thurman Law
The decision in the Kansas case clearly meant that the lien of the subsidy bonds authorized by the Act of 1862 did not extend to the non-bond-aided portions of the Central Pacific or to similar sections of any of the other Pacific railroads. This appears to be a conclusive answer to the later government argument, so far as the Act of 1862 is concerned. The legislation of 1862 was, however, amended in 1878, as we have seen in the previous chapter. Section 9 of the Thurman law read as follows:
That all sums due to the United States from any of said companies respectively, whether payable presently or not, and all sums required to be paid to the United States or into the Treasury, or into said sinking fund under this act, or under the acts hereinbefore referred to, or otherwise, are hereby declared to be a lien upon all the property, estate, rights, and franchises of every description granted or conveyed by the United States to any of said companies respectively or jointly, and also upon all the estate and property, real, personal, and mixed, from whatever source derived, subject to any lawfully prior or paramount mortgage lien, or claim thereon.[571]
A comparison of the Thurman law with the Act of 1862 shows that the later law expressly extended the lien of the subsidy bonds to all Pacific railroad property “from whatever source derived,” instead of limiting the lien to property “in consideration of which said bonds may be issued.” It does not appear that this change was particularly considered in the debates on the Thurman bill. Mr. Thurman himself did not mention Section 9 in his opening address, and while members of the Senate discussed at length the power of Congress to alter, amend, or repeal the Act of 1862, they usually had in mind the sinking fund provisions of the Thurman law and not those relating to the lien of the subsidy bonds. The exception to this statement is to be found in a colloquy between Mr. Dawes, of Massachusetts, and Mr. Edmunds, of Vermont. Mr. Dawes called attention on April 3 to the sweeping nature of the amendment contained in Section 9. He was of the opinion that in 1862 Congress never undertook to put a mortgage on anything except that which they granted to the railroad. Under the Thurman Act, however, he understood that all subsequently acquired property was also to be pledged, with the effect, Mr. Dawes added, that, among other results, all payment of dividends would become illegal.
To this criticism Senator Edmunds replied that the Act of 1862 already subjected all the property of the Pacific railroads to the lien of the subsidy bonds. It was the view of the Senator from Vermont that the words “in consideration of which said bonds may be issued” did not have the limiting effect in the Act of 1862 which Mr. Dawes ascribed to them, but rather that they conveyed the idea, with other words in the same clause, that the Secretary of the Treasury might from time to time issue bonds of the United States in consideration of the fact, which the law declared, that every particle of the property of the Pacific companies, real and personal, franchises, tolls, and everything else, were the security upon which the bonds were to be a lien.[572] Subsequent discussion did not serve to clear up the differences in interpretation brought out in the Congressional debate, but the later decision of the Supreme Court showed that, in the principal matter at issue, Mr. Dawes was right.