Government Commission
While negotiations were going on, Congress passed the Act of July 7, 1897. This act appointed the Secretary of the Treasury, the Secretary of the Interior, and the Attorney-General a commission with full power to settle the indebtedness to the government growing out of the issue of bonds in aid of the Central Pacific and Western Pacific bond-aided railroads. The commission was required to submit any settlement made to the President for his approval, and it was forbidden to accept a less sum in settlement of the debt due the United States than the full amount of the principal and interest of the subsidy bonds. It was empowered to grant an extension of time for repayment not exceeding ten years, at a rate of interest not less than 3 per cent, and to accept such security as might seem expedient.[584] So far as the commission was concerned, this was Mr. Gear’s proposal of the previous year.
It seems probable that negotiations had already reached an advanced stage before the Act of July 7 was passed. Mr. Griggs was later of the impression that the act was drawn and passed to fit a tentative agreement which had already been made.[585] If such were the case the willingness of Congress to entrust the matter to the executive branch of the government, after having once refused to do so, may be explained. Possibly, also, the fact that the Union Pacific had been sold at foreclosure on November 1, 1897, for $58,448,223.75, a sum sufficient to cover the full amount of both first and second mortgage bonds, had weight.[586]
The indebtedness of the Central and Western Pacific railroads to the United States government as of February 1, 1899, was $58,812,715.48. These figures were reached by adding thirty years’ interest at 6 per cent to the original loan of $27,855,680, and by deducting accumulated credits resulting either from the deposits in the sinking fund established by the Thurman law, or from the operation of the bond and interest account originating in the Acts of 1862 and 1864. Comparison of the figure of $58,812,715.48 with the slightly larger amount given in the previous chapter as of June 30, 1897, will show that during the intervening nineteen months the net amount of indebtedness had slightly decreased.
Plan of Settlement
In view of the impending maturity of large quantities of subsidy bonds, the first essential point in the negotiations between Mr. Speyer and the government was necessarily that more time should be allowed the Central Pacific for the payment of its debt. It was agreed that at least certain portions might be extended for as long as ten years. Mr. Speyer was of the opinion that, given this extension, the Central Pacific could repay its debt in full—a striking contrast to the former statements of Central Pacific Railroad men. By paying the debt in full was meant paying with interest on all delayed balances.[587]
In order to cover the matters just referred to, Mr. Speyer agreed in 1898 that the indebtedness of the Central Pacific to the government should be refunded into twenty notes of the railroad company, falling due one every six months, beginning August 1, 1899, and ending February 1, 1909. The notes were to carry interest at 3 per cent per annum, payable semiannually. Taken by itself, this offer was the most liberal that the railroad company had ever made. Yet it represented up to this point only a promise, without security. In order to provide security, Mr. Speyer proposed an additional arrangement, in two parts.
By the first part of the additional agreement, Speyer and Company undertook to purchase the four Central Pacific notes earliest in point of maturity, and to pay the face value thereof as soon as received from the government. This obligation of a reputable banking house to pay the substantial sum of $11,762,543.12 was a valuable thing in itself, and materially increased the attractiveness of the whole plan from the government’s point of view. In consideration for its advance, Speyer and Company received new first mortgage bonds of the Central Pacific Railroad, of an issue presently to be described. By the second part of the same arrangement, each note remaining in the hands of the government was to be secured by deposit of first refunding 4 per cent gold bonds of the Central Pacific equal in amount to the face of the note.[588]
It will, however, be asked how, in view of the outstanding capitalization of the Central Pacific, it was possible to offer a first mortgage security as collateral for the refunding notes. This was provided for by the further reorganization of the Central Pacific, and by the issue in particular of two new classes of bonds, of which the first was to be a 4 per cent, and the second a 3½ per cent issue, having a first and second mortgage lien, respectively, upon all property of which the Central Pacific was possessed.