In its comparison of the prices of the years 1864–9, with those of 1860, the Aldrich Committee arrived, in 1893, at the following result:
| Year | Food | Bar Iron Rolled | Rails, Iron | Metals & Implements exc. Pocket Knives | All Articles | |
|---|---|---|---|---|---|---|
| 1864 | 165.8 | 249.3 | 262.5 | 198.0 | 190.5 | |
| 1865 | 216.5 | 181.1 | 205.5 | 218.7 | 216.8 | |
| 1866 | 173.8 | 167.0 | 180.7 | 192.7 | 191.0 | |
| 1867 | 163.9 | 148.2 | 173.2 | 178.9 | 172.2 | |
| 1868 | 164.2 | 145.8 | 164.3 | 167.1 | 160.5 | |
| 1869 | 162.9 | 139.0 | 160.9 | 157.9 | 153.5 |
These figures may be divided by the premium on gold, in order roughly to ascertain gold prices. The index numbers then become:
| Year | Food | Bar Iron Rolled | Rails, Iron | Metals & Implements exc. Pocket Knives | All Articles | |
|---|---|---|---|---|---|---|
| 1865 | 100.1 | 83.7 | 95.0 | 101.1 | 100.3 | |
| 1866 | 124.1 | 119.2 | 128.9 | 137.5 | 136.3 | |
| 1867 | 121.8 | 110.1 | 128.6 | 132.9 | 127.9 | |
| 1868 | 118.6 | 105.2 | 118.6 | 120.6 | 115.9 | |
| 1869 | 120.1 | 102.5 | 118.6 | 116.4 | 113.2[458] |
The tables show that both currency and gold prices were much higher in 1866 than before the war, and that both remained high while the Union Pacific was being built. Wages were also above the normal, and for similar reasons. During the war the demand for men and goods of all kinds was great. After 1865 the country turned with tremendous energy to industry; and the upward swing, which was unchecked until the panic of 1873, and which was especially directed toward railroad building, maintained both wages and prices at an unusual height. Besides this, American rails were at the time in a period of transition from iron to steel; and much of the work carried through at such expense had completely to be done over within the next ten years.
The high prices were made higher by the speed of construction. The Union Pacific built west from the Missouri River, but at the same time the Central Pacific was building east from Sacramento, under similar conditions as to government aid. The two roads were expected to meet at the western boundary of Nevada; but to encourage their early completion, the Act of 1862 authorized the road which first reached the designated point to continue construction, east or west as the case might be, until junction with the second road should be made. Since the amount of land granted depended on the mileage completed, the haste of the companies was feverish. “The Union Pacific Company,” says Davis,[459] “had its parties of graders working 200 miles in advance of its completed line in places as far west as Humboldt Wells.” The Central Pacific had completed 105 miles east of Sacramento by the autumn of 1867, hauling iron and supplies over the mountains without waiting for the piercing of its tunnels. No less than 1038 miles of the Union Pacific, including the difficult stretch over the Rocky Mountains, were completed by 1869, four years after construction was commenced. The prize of additional land was thereby secured, but this land was long unsalable, and the cost of construction was largely increased.
Finally, large sums were misapplied through a construction company. The story of the Crédit Mobilier has been so often told that only brief mention need be made of it here.[460] In 1864 T. C. Durant, vice-president of the Union Pacific, induced one H. M. Hoxie to bid for a contract to build from Omaha to the one hundredth meridian. Hoxie was financially irresponsible, and four days later assigned the contract to a company composed of Durant and other stockholders of the Union Pacific. Meanwhile Durant had purchased the charter of the Pennsylvania Fiscal Agency, a corporation which possessed convenient powers. Later in 1864 the members of Durant’s construction company were given stock in the Fiscal Agency, now called the Crédit Mobilier of America, for the amounts they had paid in, and stockholders of the Union Pacific were allowed to receive Crédit Mobilier stock for the amounts they had paid in on their Union Pacific shares. Stockholders of the Union Pacific thus became also stockholders of the Crédit Mobilier, and in their former capacity were enabled to vote lucrative contracts to themselves as constructors of the railroad. Durant’s company assigned its contract to the Crédit Mobilier. Subsequently it was found more convenient to assign contracts to certain individuals, who transferred them to seven trustees, who built the required road with funds furnished by the Crédit Mobilier, and turned over the profits to that organization, but the practical result was the same.[461] These various devices removed all incentive to economy on the part of the Union Pacific stockholders. Instead of gaining by cheap construction, they profited by dear; instead of aiming to reduce the cost in every possible way, they schemed at making the construction contracts as lucrative as possible to the persons to whom they were assigned. The advantages to them as stockholders of the Crédit Mobilier outweighed the disadvantages to them as stockholders of the Union Pacific. The profits realized by the Crédit Mobilier are still a subject of dispute. H. K. White figures them as 27½ per cent, or $16,700,000; Davis says that the profit was safely over $20,000,000; but whereas White calculates the percentage of profits to the total cost of construction, Davis insists that a large part of the capital invested was replaced on the completion of each section of twenty miles by the proceeds of the government bonds and railway bonds and stock, and that though from $50,000,000 to $70,000,000 were expended, in all probability not more than $10,000,000 were sunk at any one time; in which case a profit of $20,000,000, spread over four years, represents $5,000,000 per year, or 50 per cent annually on the capital employed. Finally, the Union Pacific Railway Commission estimated the actual cash profits at $23,366,320, and remarked that the obligations incurred by the railroad company represented a very much larger sum, being measured by the bonds and stock at their par values.[462]
The result of the three factors was a corporation bonded at an extremely high rate. The cost of road in 1870 was reported to be $106,245,978, or $102,951 per mile, against which was a capitalization of $107,907,300, or $104,561 per mile, of which $32,715 per mile was stock, $26,080 government bonds, and $45,765 first mortgage, land grant, and income bonds. In 1873 the net earnings were $4,092,032, and the interest on the funded debt, not including the government interest, was $3,403,660. In 1874 the figures were $5,291,243 and $3,431,720; in other words, the corporation started with a heavy handicap, which its monopoly of transcontinental business at first helped to overcome, but which grew heavier and heavier as the years went on. During the seventies, to repeat, the Union Pacific enjoyed generally large prosperity. The volume of stock outstanding remained the same, the bonded indebtedness but slightly increased, and the ratio of operating expenses to receipts declined. The first dividend was paid in 1875; in 1876 and 1877 8 per cent was declared, in 1878 5½ per cent, and in 1879 6 per cent. In 1880, however, a consolidation took place with the Kansas Pacific and Denver Pacific railroads, and this operation may well receive somewhat detailed consideration.
The Kansas Pacific, as well as the Union Pacific, was a creation of the Acts of 1862 and 1864, which required it to be constructed from Kansas City westwardly to form a junction with the Union Pacific at a point on the one hundredth meridian. Later, an Act of July 3, 1866, authorized it to change its route, and to connect with the Union Pacific at a point not more than fifty miles westwardly from the meridian of Denver in Colorado.[463] Like the Union Pacific the Kansas Pacific was built by means of construction contracts, which resulted in a total capitalization on its 638 miles of line of $9,437,950 in stock and $22,651,000 in bonds, or $14,793 and $33,455 respectively per mile,—high figures in view of the comparatively level character of the country traversed.[464] The road was not a paying one. It was poorly built and poorly managed, and running parallel with the Union Pacific, it had to meet competition of a very bitter kind. The report of Mr. Calhoun, expert accountant for the United States Pacific Railway Commission of 1887, showed that the total receipts of the road from 1867 to 1879 had aggregated $9,220,218, while the bond and interest account, exclusive of United States interest, had amounted to $15,745,287; leaving a deficit of $6,525,069, or, including the United States accrued interest, of $11,330,772.[465] That is, the Kansas Pacific was in a state of chronic insolvency. In 1874 it was placed in the hands of receivers, and the following year, by an arrangement with its creditors, it funded a considerable amount of overdue interest.[466]
In 1878 a number of securityholders of the Kansas Pacific got together in an attempt to reorganize that property, to take it out of receivers’ hands, and to “unite in interest the Kansas Pacific and Union Pacific Railway Companies.” Twelve large securityholders consented to contribute to a common pool or fund holdings of securities taken at a fixed valuation, their interests in the pool to be proportional to the amounts of said securities and stock taken at the value referred to.[467] For the securities deposited they were to receive stock at a reduced rate: thus for eight shares of old stock they were to receive one share of new; for $2000 unsubordinated income bonds they were to get ten shares, and for $10,000 subordinated income bonds thirty shares of new stock.[468] The final result would have been to replace securities with a par value of $17,330,350 by stock with a par of $4,855,300, and greatly to lighten the burdens upon the road; though it must be remembered that the $17,330,350 were less than half of the total volume of securities outstanding, that the payment of interest on much of these had been optional only, and that no provision was made for the floating debt.