These and other more technical objections were considered by the Supreme Court and were swept aside in a decision rendered at the April term of 1865. The court now held that the legislature had imposed no burden on San Francisco by the Act of 1863, because under that act the city got a consideration, namely, the company stock, for its subscription. The court added:
Nor does it make any difference as to the validity of the compromise whether the bonds were payable in instalments or in gross, nor whether a legal assessment has been laid on the capital stock of the company, for irrespective of the time the bonds under the Act of 1863 might become due, the company held a claim against the city which was a proper subject of and formed a good consideration for a compromise.[61]
This ended the case. It may perhaps be pertinently inquired why it was, if the subscription required by the Act of 1863 imposed no burden on the city of San Francisco as the Supreme Court said, that the city could afford to give $400,000 to get rid of the obligation. Yet, perhaps it would be fruitless to follow too closely the windings of the judicial mind. Stanford later declared that the litigation had injured the Central Pacific very much,[62] while E. H. Miller, secretary of the company, estimated that the suit cost the Central Pacific not much less than $100,000. Of the bonds issued, 315 were sold at $751.60 each, amounting to $236,754, while 85 were paid out at par for rolling stock.[63]
Subscribing Counties Embarrassed
The reluctance of San Francisco to subscribe was not typical of the general attitude toward the Central Pacific in 1865. But it became more typical as the years went on. For this, there were several reasons.
In the first place, the state was much disappointed by the fact that the completion of the Central Pacific did not inaugurate a period of prosperity. The year 1870 was not a particularly good one in California, and the panic of 1873, with the intense depression which resulted, was soon to occur. Among the first effects of the two rail connections with the East, was an influx of eastern manufactures, unemployment, lower prices, and dissatisfaction. This in no way meant that the construction of the Central Pacific had not benefited California, but it gave evidence of a serious though temporary maladjustment.
Moreover, the bonds which had been so lightly voted, proved a real burden on the scanty population of the counties, which was in no adequate way offset by increases in the assessment rolls. Indeed, the railroads in early years were assessed at figures that were remarkably low. In Placer County, for instance, the Central Pacific insisted that its road should be assessed at $6,000 per mile, and succeeded in carrying its point in 1865, 1866, and 1867. In 1868 the assessment was raised to $12,000 per mile. The railroad protested, and when forced to submit, increased the rate of freight to all points in Placer County about 40 cents a ton.[64] Nor were taxes even on such modest valuations easily collected. Between 1866 and 1887 railroad tax cases were almost constantly before the courts. At times the Central Pacific refused to pay any taxes at all, on the ground that it held a “federal franchise,” and at other times it objected to the terms of the law or to the amount of the assessment.[65] The result was to throw the local tax system into complete confusion.
Experience of Placer County
Let us refer again to the experience of Placer County. In 1863 the Central Pacific asked for a subscription of $250,000, promising to add $9,000,000 to the taxable property of the county. The county tax rate as fixed in February, 1863, for the following year, was 35 cents on $100, and the assessed valuation of the county was $3,071,911.78, yielding a revenue from county taxes of $10,751.69. The railroad company issued an address while the matter of a subscription was under consideration, pointing out that 8 per cent on a bond issue of $250,000 would amount to $20,000, while a tax rate of 35 cents on $9,000,000 of increased valuation would yield $31,500, or a clear excess of $11,500, to the county without considering the effect of the railroad in increasing the valuation of real estate.