The fact has already been mentioned that the lease of the Southern Pacific system to the Central Pacific never included what was known as the Northern Division, running from San Francisco through Gilroy to Tres Pinos and from Carnadero to Soledad. Its officers reported directly to the executive officials of the Southern Pacific Company, and not to Mr. Towne. The difference in treatment of this part of the line was striking. The Northern Division lay west of the Coast Range, and was separated to some extent from the lines of the San Joaquin Valley; yet it gave the main system entrance to the important city of San Francisco, and should have been operated in close harmony with its connections at San José.
One suspects that Mr. Huntington desired to separate the Central Pacific and the Southern Pacific in the public mind in order that he might more successfully oppose Mr. Scott’s Texas and Pacific plans at Washington. “I think it unfortunate,” he wrote in 1875, “that he [Stanford] should so closely connect the Central Pacific with the Southern Pacific, as that is the only weapon our enemies have to fight us with in Congress.”[201] “I think it important,” he said in another letter about the same time, “that the Southern Pacific should be disconnected from the Central as much as it well can be. And ... I think it should have a superintendent that does not connect with the Central Pacific, although I think it would be difficult to get a man as good as Towne.”[202] Opinions like these were likely to perpetuate distinctions between the Central Pacific and the Southern Pacific railroads which could not be explained on other grounds.
Arrangement Reversed
A second stage in the connection between the Central Pacific and the Southern Pacific companies began in 1885 when a lease of the Central Pacific to the Southern Pacific took the place of the earlier arrangement in which the Central Pacific was the lessee. It appears that Timothy Hopkins, treasurer of the Central Pacific and director of the Southern Pacific Railroad of California, received a telegram from Mr. Stanford in the summer of 1884, asking him to come to New York. When Hopkins arrived he found Stanford, Huntington, and Crocker, and it was explained to him that the meeting was desired in order to go over the affairs of the associates generally, and in particular to take up the question of the organization of a new company for the purpose of holding and operating the railroad companies that were owned by the associates and controlled by them, both those under the management of the Central Pacific and those east of El Paso in Texas and Louisiana.[203] The meeting was recognized as important and minutes were kept, which have been preserved.
There were several circumstances which made a reorganization at this time desirable. In the first place, the period of exceptional profits for the Central Pacific was passing away with the decline in the mining business in Nevada and the opening of other transcontinental lines. In the second place, the Southern Pacific was beginning to realize the earning power which it was to have as a completed road. It had now a through line to New Orleans; it reached San Francisco while the Central Pacific did not; it was handling 45 per cent of the transcontinental business in 1885; and while it could hardly yet be called a profitable enterprise, its prospects were bright. Southern Pacific bonds were first sold in New York in considerable quantities in 1880, when they brought between 86 and 90. Except on the supposition that the ownership of the Central Pacific and Southern Pacific was identical, there was beginning to be reason for the owners of the latter to feel dissatisfied with a lease like that of 1880, which compelled them to be contented with a fixed return.
Stock Holdings
On this last point the evidence, though not entirely conclusive, offers some interesting suggestions. Up to 1880 the number of stockholders in the Central Pacific remained small. Mr. Huntington had stock of the four associates for sale, and made efforts to place it in New York, but without success. In 1878 the report of the Central Pacific Railroad to the California Railroad Commission showed 82 stockholders, of whom 56, with a total holding of 432,563 shares, were residents of California. Mark Hopkins held 102,812 shares when he died in that same year, and Mr. Huntington, Mr. Stanford, and Mr. Crocker presumably possessed equal amounts. During the early eighties, however, while the Central Pacific was paying substantial dividends, large quantities of stock were sold in Europe. James Speyer has testified that when he came into the New York office of Speyer and Company, some time between 1883 and 1885, large blocks were held in England and Holland. The sales had been made before 1884, probably at a price above 50.
No record of the amount disposed of in these years is available,[204] but it is known that in 1884 the number of shares standing in the names of Huntington, Stanford, Crocker, and the Hopkins interests was considerably less than a majority of the stock outstanding.[205] Mr. Jackson, employee in the secretary’s office of the Central Pacific in 1885, estimated the amount at from 30,000 to 35,000 shares apiece.[206] According to Mr. Brown, who inventoried the stock of the associates in 1884, the combined holdings of Stanford, Huntington, Crocker, and Mrs. Hopkins, including stock in the name of the Pacific Improvement Company, were 157,535 shares out of a total outstanding of 592,755 shares at this date.[207] Timothy Hopkins later suggested that Brown’s figures might have included only stock free and available, and that the associates might have owned other stock pledged as collateral, but this was only a suggestion, without proof. As final bits of evidence, it is on record that Crocker possessed 34,049 shares of Central Pacific stock at his death in 1889,[208] while Stanford told the United States Pacific Railway Commission in 1887 that he owned 32,000 shares.[209]
The conclusion to which this evidence leads is that Huntington and his friends did not own as much as 30 per cent of the Central Pacific shares outstanding when they met together in New York in 1884. Their control of the company depended on the proxies which were sent them, and in particular upon the fact that the individual liability imposed on corporation stockholders under California law led new purchasers of Central Pacific stock to delay recording their ownership, or even to place their stock under the name of third persons in New York. Dividends were collected by presentation of coupons clipped from stock certificates.[210] Mr. Klink testified that the majority of the stock was voted by proxy in 1885, and that the bulk of it was in the name of people in the New York office of the company. On the other hand, during the period in which the ownership of the Central Pacific became scattered, the stock of the Southern Pacific continued to be closely held by the original associates: Stanford, Huntington, Crocker, and the estate of Mark Hopkins.
It is not difficult to understand why the associates should have gradually shifted their main interest from the Central Pacific to the Southern Pacific if we remember that their interests were widely extended as the result of their building enterprises in Southern California, and that Central Pacific securities were the only parts of their holdings on which they could realize in cash. Southern Pacific stock and bonds had no market in New York; Central Pacific stock and bonds had such a market. Doubtless, the associates could not have afforded to dispose of their Central Pacific holdings if this would have imperiled their control of the Ogden route, but such a result did not necessarily follow, as we shall see. Having sold Central Pacific securities in large quantities, however, it was natural for the Stanford-Huntington group to wish to make the company in which their main interest now lay a dominant partner in the Central Pacific-Southern Pacific combination. And this is probably the explanation of the transaction which we are about to describe.