Pacific Mail and Panama Railroad
The difficulty in bringing about a substantial lessening of competition by agreement with a water carrier is found in the fact that the sea is free, so that new ships and new shipping companies can readily take the place of those that are withdrawn. The peculiar strength of the Pacific Mail in negotiating with the railroad company lay in the fact that it enjoyed for many years the exclusive privilege of through-billing freight between San Francisco and New York, including the privilege of quoting a through rate. From all other steamship companies the Panama Railroad exacted a local rate for hauling freight across the Isthmus.[357] Inasmuch as this local rate was very high, it was impossible for a competing steamship company to handle through business at a profit. It was thus the railroad which determined whether competition by way of the Isthmus of Panama should succeed or fail. It may be added that after the year 1893 the Panama Railroad assumed the responsibility not only of the rail haul across the Isthmus, but of the water connection between Colon and New York as well, thus becoming the preponderant partner in respect to length of route, as well as in respect to strategic position.
In return for the exclusive right of through-billing, and of quoting through rates, as well as for its agreements not to operate vessels in the Pacific, the Panama Railroad was promised a certain division of the through rate, which was not to be less monthly than a stipulated minimum. The minimum varied, but always was a substantial part of the payment which the transcontinental railroads were making to the Pacific Mail. In 1878 the railroads guaranteed the Pacific Mail $90,000 a month, out of which the Panama Railroad received $75,000. When the Pacific Mail subsidy was lowered from $90,000 to $75,000, the amount guaranteed to the Panama Railroad fell off from $75,000 to $55,000.
It is a matter of history also that during the years 1876 to 1878, the Panama Railroad not only was a party to the elaborate traffic agreement with the Pacific Mail which has been described, but that it exercised for a time direct control of the steamship company by domination of its president and board of directors. This control was the outcome of a conflict between Jay Gould, then president of the Pacific Mail, and Trenor W. Park, of the Panama Railroad, which in 1875 resulted in the election of a board of directors satisfactory to the latter and in the choice of a new president.
The lever which the railroad used at this time was the cancellation of its contract with the Pacific Mail, the organization of a company known as the Pacific Transit Company, the purchase of three old refitted warships, and the threat to engage in active competition. Mr. Park was asked if he would desist from his attack on the Pacific Mail if a neutral board of directors were elected. He consented to this, and was satisfied by a board composed for the most part of Panama Railroad men. This was followed by the consolidation of the Pacific Mail and the Panama Transit Company, by the renewal of contracts between railroad and steamship, and finally in 1878, by the execution of a bill of sale by the steamship to the railroad company for twenty-two steamers to secure a loan of $1,000,000 in Panama Railroad bonds for four years.[358]
Railroads’ Main Reliance
It thus appears that during the first ten years after the completion of the Central Pacific, the interests of the Panama Railroad and those of the Pacific Mail were closely bound together, so that during this period an agreement with the former was sufficient to control the route over which both were operating. It was upon this fact that the transcontinental railroads chiefly relied. Nor was there any important change in the relations between the Panama Railroad and the Pacific Mail, or in those between the Pacific Mail and the transcontinental railroads during the following twelve years. Mr. Park’s control of the Pacific Mail proved only temporary, it is true, and the terms of the contracts between the parties changed from time to time; yet the principle of a guaranty of earnings to the Pacific Mail in return for the maintenance of rates was always adhered to, and the Panama Railroad always received the lion’s share of this guaranty for a division. The amount of the subsidy paid by the railroad has already been given. When in 1885 the Pacific Mail received $85,000 per month from the transcontinental lines, it paid over $70,000 to the Panama Railroad. When the Pacific Mail subsidy was reduced to $65,000 in 1887, the payment to the Isthmian railroad likewise fell to $55,000. In 1881 the Panama Canal Company, a French corporation under the direction of De Lesseps, purchased the Panama Railroad for $20,000,000; but this does not seem to have affected the relations between the last-named railroad and the Pacific Mail.