Chapters on the History of the Southern Pacific

by Stuart Daggett

We may say with some confidence that the nature of the lien of the second mortgage subsidy bonds of the United States depended, under the Thurman Act, upon the power of Congress to alter, amend, and repeal the terms of the Acts of 1862 and 1864 in respect to the security provided for the government loan.

Court Decisions

Now on the question of the meaning of the “saving clause” in the Act of 1864, the courts had not in 1897, and still have not, satisfactorily passed. That the clause did not authorize unlimited changes in the provisions of existing legislation was evident. The majority of the Supreme Court expressed the view in the sinking fund cases that the reserved power could not be used to undo what had already been done or to unmake contracts which had already been made, but that Congress could provide for what should be done in the future, and might even direct what preparation should be made for the due performance of contracts already entered into.[573] Under this interpretation the Supreme Court upheld the clauses in the Thurman law which required the Pacific railroads to pay certain moneys into a sinking fund.

The same court in 1895 decided that a federal act which required bond-aided railroads to operate their own telegraph lines was a legitimate amendment of the clause of the Act of 1862 which authorized these companies to enter into agreements with specified private corporations for the rendering of telegraph service.[574]

Again, in Menotti v. Dillon (1897), the court approved an amendment to the land-grant provisions of the Act of 1862 designed to quiet litigation in land cases in California;[575] and in Union Pacific v. Mason City and Fort Dodge, it sustained a law of 1871 which authorized the Union Pacific to issue bonds for the construction of a bridge across the Missouri River at Omaha, but required the company to permit the trains of all railroads terminating at the Missouri River at Omaha to use the new bridge up to a fair limit of its capacity and on payment of a reasonable compensation.[576]

None of these cases, however, can fairly be taken as precedents for so radical an alteration in a bargain made as would have been produced by an extension of the lien of the subsidy bonds to non-aided portions of the Pacific railroads. On this precise point the nearest approach to a decision is found in a dictum growing out of litigation under the Thurman law with respect to the proper handling of compensation for government services. As explained in the previous chapter, the government contended at one time that all compensation for services rendered to the government by the Central Pacific Railroad should be paid into a sinking fund for the eventual retirement of the subsidy bonds or should be applied in liquidation of interest on these bonds, whether these services were rendered on bond-aided or on non-bond-aided portions of the company’s lines. When this contention reached the Supreme Court it was rejected, on the ground that the Thurman Act, properly interpreted, applied only to the bond-aided lines.

The court went on to remark, moreover, that the construction which the government here sought to place upon the law would not only render the second section of the Thurman Act a breach of faith on the part of the United States, but would make it an invasion of the constitutional rights of the railroad company.[577] This indicates that the court would not have approved a law which clearly compelled the Central Pacific to turn over to the government the compensation for the transportation of government troops and supplies earned over sections of its lines which had not received a subsidy in government bonds. If this really represented the attitude of the court, then it seems still more unlikely that an attempt to extend the lien of subsidy bonds to these same non-bond-aided sections would have been sustained.

Critical Situation

It is reasonable to suppose that the repeated discussion of refunding plans in Washington was due to the fact that Congress was of the opinion that a rigid insistence by the government upon its legal rights would result in a minimum rather than a maximum recovery from the Pacific railroads. At the same time, the shrewder heads in the legislature were perhaps hopeful that results might be obtained by negotiation which could not be secured by legal proceedings. Hence the refusal to approve of any specific plan for the settlement of the debt.

In the year 1897 the pending maturity of the United States subsidy bonds made the situation too critical for action to be much further delayed. On March 4, 1897, the 54th Congress and the second administration of President Cleveland came to an end, and the administration of President McKinley began. A special session of Congress, called by the new President, convened on March 15. During this session Mr. Gear introduced a bill for the appointment of a commission to settle the debt of the Central Pacific and Western Pacific railroads to the government.[578] This bill failed to pass. In December, 1897, the first regular session of the 55th Congress convened. By this time the maturity of a large portion of the subsidy bonds was distant only a few weeks. That is to say, the bonds issued to the Central and Western Pacific railroads matured as follows: