Conditions in California grew worse rather than better after the notes were sent, but those in the East improved, and the indorsed notes do not seem to have been used. Yet, of course, the large accumulation of floating indebtedness of the Central Pacific could not be hidden altogether, and the credit of the company was correspondingly impaired.[256]
Sale of Securities
The first successful negotiations for the sale of Central Pacific and Southern Pacific securities were initiated in 1878 with the firm of Speyer and Company, of New York, and resulted in two agreements, dated the 27th and 28th of January, 1880, respectively. On the former date Huntington agreed to deliver, on or before January 31, 1880, as might be demanded, 50,000 shares of the capital stock of the Central Pacific Railroad at 72, ex-dividend, to Roswell P. Flower, John D. Prince, and Daniel Probst, representing a syndicate formed for the purpose. In case the parties took the stock just referred to, Huntington agreed further to deliver 50,000 more shares within six months from the date of the agreement, at 77. In any event, and provided that the syndicate took the first 50,000 shares mentioned in the agreement, Huntington undertook that no other Central Pacific stock beyond a stipulated amount of 40,000 shares should be sold to any other parties for a period of seven months from the date of the agreement.[257]
The syndicate which took Central Pacific stock at this time seems to have considered the enterprise a speculation justified by the resumption of dividends by the company, and by the improving stock market conditions of the time. Mr. Probst said that the general market had become so strong in the latter part of 1879 that it was a good time to sell anything.[258] On conclusion of the agreement a regular stock market campaign was opened with the usual accompaniment of matched sales to give an appearance of activity.[259] The stock nevertheless steadily declined, and the option held by the syndicate to take a second block of shares was not exercised.
The day after the arrangement for the purchase of the Central Pacific stock was concluded, and partly because of its conclusion, Speyer and Company entered into a written contract with the Western Development Company, containing a variety of provisions which together show the factors upon which the value of Southern Pacific securities then depended in the eyes of eastern bankers. Under an agreement dated January 28, the Western Development Company agreed to sell to Speyer and Company $1,000,000 in Southern Pacific bonds, within ten days, at 86. Within the year it undertook, in addition, to sell, if Speyer and Company should wish to buy, an additional $4,000,000 in bonds, at 87.51, and a still further amount of $5,000,000 at 90. On their part, the Western Development and Southern Pacific companies agreed not to sell any of the said bonds within a year to others than Speyer and Company, and the Central Pacific agreed not to issue bonds under the mortgage in question, to exceed $40,000 per mile.
Terms of Contract with Bankers
The more important features of the agreement with Speyer and Company in 1878 were, however, the following, relating to the lease arrangements between the Central Pacific and the Southern Pacific. Under these provisions the Southern Pacific agreed to secure a new lease from the Central Pacific within three months, containing (1) a provision that the lease should continue five years from the 1st of May, 1879; (2) a provision that the lease should be extended if the Southern Pacific was not connected with the eastern system of railroads, on the 32d parallel, within five years, until such connection should be made, provided that the extension of time should not exceed five years; and (3) a provision that the Central Pacific should pay a rental under the lease, sufficient to cover interest.
The Southern Pacific also agreed with Speyer and Company that if at any time before the expiration of nine years from the date of the lease contemplated, a railroad should be extended so as to connect the railroad of the party of the first part with the eastern system of roads, and the Central Pacific Railroad Company should refuse to prorate with the party of the first part, then the party of the first part would, before the expiration of one year from the date of such refusal, fill up or cause to be filled up one of the two gaps then unfinished between Tres Pinos and Huron, and between Soledad and near Lerdo, whichever it might choose to build.
The Southern Pacific finally undertook to furnish to the parties of the third part, within ninety days from the execution of the agreement, the written opinion and certificate of the chief engineer of the Southern Pacific, that the line of road either between Tres Pinos and Huron or between Soledad and near Lerdo could be completed and put in running order within twelve months of the commencement of work thereon, and could be constructed for the bonds reserved per mile.