Chapters on the History of the Southern Pacific

by Stuart Daggett

(*)Report compiled by the Commissioner of Railroads, 47th Congress, 1st Session House, Executive Documents No. 123, 1882, Serial No. 2030.

The greatest continuous drain upon Mr. Huntington and his friends during the decade from 1870 to 1880 came from the necessity of raising funds to provide for construction in southern California as described in earlier chapters. Had business considerations alone controlled, there is little doubt that this construction would have ceased. It did not pay for itself, and could not be expected to be profitable until the country served had been developed. Indeed, Charles Crocker once declared that when the Southern Pacific was built through the southern San Joaquin Valley, the company could have started with a railroad train at Sumner at the south of the valley and come to Stockton, and with one engine and one train of cars, hauled every living soul that lived in the valley out at one haul. The settlers between Yuma and San Bernardino could have been carried in one carload. This was as late as 1876.[240]

Inability to Get Eastern Capital

It was largely owing to this construction, as well as to the general hard times, that the gross earnings per mile of the Central Pacific and leased lines fell from $12,068.63 in 1875, to $7,677.84 in 1879. The Central Pacific did not dare stop work for fear that the federal government might be persuaded to subsidize another transcontinental road, and so deprive it of the monopoly which it was so anxious to retain; but it built as slowly as it could, and endeavored to make up by retrenching in other directions. Had the associates been able to sell securities in New York, the slowness with which the earning power of their system developed would not have been so serious a handicap. The territory was after all a rich one, and given time was sure to yield substantial profits. But a market for their stock and bonds was impossible to secure for many years. We have seen the opinion expressed by the associates in the Colton settlement, with respect to the salability of Southern Pacific-Central Pacific securities. There is no reason to doubt that this judgment was correct. Before 1880 it does not appear that there was a market for any of the Huntington-Stanford issues except the Central Pacific first mortgage bonds, and the sale of these was very slow.[241]

There is evidence that the associates not only recognized this situation, but that they took what steps they could to meet it. Central Pacific stock was listed on the New York Stock Exchange in 1874, and on the San Francisco Stock Exchange in 1878, not so much with the idea of selling any large number of shares, as in order to make a beginning which might ultimately lead to an established market. Arrangements were made to have the stock called at San Francisco every day, and the associates stood always ready to buy it back at a slight decline. The payment of dividends was begun in 1873 and continued until by the end of 1877 the sum of $18,453,670 had been distributed. Yet all this had little result for many reasons, among which doubtless should be again mentioned the personal liability attaching under California law to holders of stock in California corporations.

Naturally Southern Pacific securities of any type were still more difficult to sell than Central Pacific stock. Mr. Huntington found that the Southern Pacific Railroad was not known in the East, even by parties who had spent some considerable time in California.[242] To overcome this he advertised Southern Pacific stock and bonds in a great variety of ways, sometimes by personal conference with eastern bankers, sometimes by the issue of pamphlets or by the insertion of items in the newspapers, sometimes by the manipulation of bond sales upon the Stock Exchange. Occasionally he bought a few outstanding Southern Pacific bonds in order to support the credit of the company.[243] But here again, in spite of his efforts practically no bonds were sold, and Southern Pacific stock could not be disposed of at any price.

Market for Securities

A good deal of specific testimony by New York brokers is available to show the estimation in which Central Pacific and Southern Pacific securities were held late as 1879. It is all cumulative, and to the effect that no market existed at that time for any of these issues except Central Pacific first mortgage bonds. Thus S. H. Thayer said of Central Pacific stock: “I don’t think it would have found any market; I do not think it would have been possible to have sold it at any price; the stock had no friends, nobody knew of it, nobody traded in it; that is, in a general market; I do not know what might have been done by private negotiation; but in the public market nothing could have been done with 20,000 shares towards selling it.”[244] Similar testimony was given by D. O. Mills, of San Francisco. Mr. Mills was asked what price could have been obtained in the San Francisco market in 1879 for $13,000,000 in Southern Pacific bonds, and replied that he did not think these bonds were salable then, that it would have been a matter of bargain and sale, and would not have depended upon any market value.[245] Mr. Thayer also testified that the Southern Pacific bonds were on the stock exchange list in New York, but were bonds no one dealt in, and about which few were informed.[246]

It would probably be a mistake, in spite of this testimony, to attribute the reluctance of eastern investors to buy Southern Pacific bonds solely to unfamiliarity with the security. Not only was the economic development of southern California slight and the probable earnings of the Southern Pacific for some years small, but the state as a whole was not in the seventies an attractive field for investment. During the decade from 1860 to 1870, California had grown rapidly in wealth and prosperity. Population had increased and manufactures had begun to develop. In agriculture, fruits, berries, and grapes had been added to the important quantities of grain and vegetables already produced. But the immediate effects of the completion of the transcontinental railroad had been harmful to California, rather than beneficial.