Throughout the whole life of the Contract and Finance Company the stockholders were the same men who held the bulk of the stock of the Central Pacific Railroad. Contracts between the finance company and the railroad company were therefore made by the associates in one capacity, with themselves in another capacity, a situation unfortunately not unique in the history of American railroad building. An unusual feature of the arrangement, however, which was common to arrangements with other construction companies formed by the associates, was that the funds of the Contract and Finance Company, over and above the sums received from the Central Pacific, were derived from loans to the company by its stockholders and not from payments on the stock subscribed. There is no evidence that Hopkins, Stanford, Huntington, or either of the Crockers paid a cent in cash on their subscriptions. Instead, they gave their notes. To provide the Contract and Finance Company with funds, they deposited money, sometimes more and sometimes less, paying interest on their notes, and receiving credit for interest on their balances, each partner as a rule putting in all the funds which he could spare, and having an individual account kept of his transactions. The Contract and Finance Company was, therefore, always heavily in debt, although the debt was owed to its own stockholders. The advantages of this arrangement would seem to be two: first, that it concealed effectively the profits which the company was making; and second, that it did not limit any stockholder to a proportionate share in the burdens and gains of the undertaking. If any of the associates desired to participate more heavily than his friends, or less heavily, he could do so. Such a privilege was probably not important before 1869, but it became so later.
Contracts with Construction Company
A word may now be said about the contracts which the Contract and Finance Company secured. Under date of December 3, 1867, Mr. Stanford, as president of the Central Pacific, reported to his directors that he had made a contract for the construction and equipment of the railway and telegraph line of the company lying east of the eastern boundary of the line of California, and presented a draft of the contract, which the directors approved.[117] Leland Stanford, E. B. Crocker, Mark Hopkins, and E. H. Miller, Jr., were present and voted. Mr. Miller explains that he did not understand at the time who the owners of the Contract and Finance Company were, and that nothing was said about it at the meeting. The contract provided that the Contract and Finance Company should build the road of the Central Pacific from the state line, eastward, 552 miles. It was to grade the road, build the bridges, lay the track, build and complete a telegraph line, furnish telegraph offices and instruments, furnish rails, ties, buildings, roundhouses, turntables, and a specified number of engines and cars and running material per mile. On its part, the Central Pacific agreed to pay $86,000 per mile, half in cash and half in Central Pacific stock, and in practice the Central Pacific provided the equipment and the iron, charging them to the Contract and Finance Company at cost. This statement relative to the terms of the contract with the construction company is made on the strength of the recollections of parties interested,[118] for the actual contract is one of the missing documents characteristic of Central Pacific history. Stanford describes the contract as an exhaustive one. That is to say, the Central Pacific turned over all it had and the Contract and Finance Company built the road and got the profits, if there were any.
The apparent advantages of an arrangement with a construction company as compared with those of construction by the Central Pacific itself, were those connected with specialization of the work. A company which does nothing but construction and which does that all the time, may be expected to have a force more highly trained in this particular grade of work, and a more abundant supply of tools and material than an organization which builds railroads only occasionally. The unfortunate necessity of hiring men for each new job and discharging them at the completion of the job is avoided. In the case of the Central Pacific this advantage was somewhat illusory, it is true, for the reason that the Contract and Finance Company on its first contract, whatever might have been the fact later, could scarcely have had an advantage over the railroad; and as for tools, the Contract and Finance Company had no machine tools at all at the beginning, and had to rely on the railroad not only for cars and engines to transport its men, but for equipment for large construction of any sort. The real reason for using a construction company in this case was a financial and not an operating one.
Profits of Construction
Much has been said about the profits of the Contract and Finance Company. Here, again, books are missing, having been packed into boxes by the industrious Mark Hopkins in 1873, and never again produced.[119] A man named John Miller, one-time secretary of the Contract and Finance Company, and defaulter to the alleged extent of $900,000 at a subsequent period, was in possession of transcripts from these books, if we may believe his statement; but even these transcripts disappeared, if indeed they ever existed.[120] We do not know, therefore, how much construction cost the Contract and Finance Company, and we cannot calculate with any accuracy the profit obtained.
It does appear that the work done by the Contract and Finance Company cost the Central Pacific, in all $23,736,000 in cash and the same amount in capital stock.[121] If we add to this $100,000 in cash and $2,900,000 in bonds paid to the Union Pacific for the stretch of land from Promontory Point to a point five miles west of Ogden, and $1,072,874.79 for snowsheds and other extra work performed in 1870, we have a total of $51,544,874.79, of which $24,908,874.79 was in cash. Taken in connection with the Crocker contracts, this makes an aggregate of $33,761,992.72 in cash, $3,000,000 in bonds, and $38,437,710.22 in stock. It was the judgment of the United States Pacific Railway Commission that the total cost of building the 690 miles from Sacramento to Promontory Point, and of purchasing from the Union Pacific 47½ miles of road from Promontory Point to the end of the Central Pacific line, 5 miles west of Ogden, did not exceed $36,000,000, and this included 9 miles built by small contractors, the payment for which is not included in the figures just given.[122]
Summit tunnel (altitude 7,042 feet) before completion—Sierra Nevada Mountains