EXECUTIVE MANSION, _January 17, 1888_.
_To the Senate and House of Representatives_:
On the 3d day of March last an act was passed authorizing the
appointment of three commissioners who should investigate the affairs of
such railroads as have received aid from the United States Government.
Among other things, the contemplated investigation included a history of
the construction of these roads, their relations and indebtedness to the
Government, and the question whether in the interest of the United
States any extension of the time for the performance of the obligations
of said roads to the Government should be granted; and if so, the said
commissioners were directed to submit a scheme for such extension.
The commissioners were further directed by said act to report in full to
the President upon all the matters submitted to them, and he was by said
act required to forward said report to Congress with such
recommendations or comments as he should see fit to make in the
premises.
The commissioners immediately after their selection entered upon the
discharge of their duties, and have prosecuted their inquiries with
commendable industry, intelligence, and thoroughness. A large amount of
testimony has been taken, and all the facts have been developed which
appear to be necessary for the consideration of the questions arising
from the condition of these aided railroads and their relations to the
Government.
The commissioners have, however, been unable to agree upon the manner in
which these railroads should be treated respecting their indebtedness to
the United States, or to unite upon the plan best calculated to secure
the payment of such indebtedness.
This disagreement has resulted in the preparation of two reports, both
of which are herewith submitted to the Congress.
These reports exhibit such transactions and schemes connected with the
construction of the aided roads and their management, and suggest the
invention of such devices on the part of those having them in charge,
for the apparent purpose of defeating any chance for the Government's
reimbursement, that any adjustment or plan of settlement should be
predicated upon the substantial interests of the Government rather than
any forbearance or generosity deserved by the companies.
The wide publication which has already been given to the substance of
the commissioners' reports obviates the necessity of detailing in this
communication the facts found upon the investigation.
The majority report, while condemning the methods adopted by those who
formerly had charge of the Union Pacific Railroad, declares that since
its present management was inaugurated, in 1884, its affairs have been
fairly and prudently conducted, and that the present administration "has
devoted itself honestly and intelligently to the herculean task of
rescuing the Union Pacific Railway from the insolvency which seriously
threatened it at the inception of its work;" that it "has devoted
itself, by rigid economy, by intelligent management, and by an
application of every dollar of the earning capacity of the system to its
improvement and betterment, to place that company on a sound and
enduring financial foundation."
The condition of the present management of the Union Pacific Company has
an important bearing upon its ability to comply with the terms of any
settlement of its indebtedness which may be offered by the Government.
The majority of the commission are in favor of an extension of the time
for the payment of the Government indebtedness of these companies, upon
certain conditions; but the chairman of the commission, presenting the
minority report, recommends, both upon principle and policy, the
institution of proceedings for the forfeiture of the charters of the
corporations and the winding up of their affairs.
I have been furnished with a statement or argument in defense of the
transactions connected with the construction of the Central Pacific road
and its branch lines, from which it may not be amiss to quote for the
purpose of showing how some of the operations of the directors of such
road, strongly condemned by the commissioners, are defended by the
directors themselves. After speaking of a contract for the construction
of one of these branch lines by a corporation called the Contract and
Finance Company, owned by certain directors of the Central Pacific
Railroad, this language is used:
It may be said of this contract, as of many others that were let to the
different construction companies in which the directors of the Central
Pacific have been stockholders, that they built the road with the moneys
furnished by themselves and had the road for their outlay. In other
words, they paid to the construction company the bonds and stock of the
railroad so constructed, and waited until such time as they could
develop sufficient business on the road built to induce the public to
buy the bonds or the stock. If the country through which the railroad
ran developed sufficient business, then the project was a success; if it
did not, then the operation was a loss. These gentlemen took all the
responsibility; any loss occurring was necessarily theirs, and of right
the profit belonged to them.
But it is said that they violated a well-known rule of equity in dealing
with themselves; that they were trustees, and that they were
representing both sides of the contract.
The answer is that they did not find anybody else to deal with. They
could not find anyone who would take the chances of building a road
through what was then an almost uninhabited country and accept the bonds
and stock of the road, in payment. And when it is said that they were
trustees, if they did occupy such relation it was merely technical, for
they represented only their own interests on both sides, there being no
one else concerned in the transaction. They became the incorporators of
the company that was to build the road, subscribed for its stock, and
were the only subscribers; therefore it is difficult to see how anyone
was wronged by their action. The rule of equity invoked, which has its
origin in the injunction "No man can serve two masters," certainly did
not apply to them, because they were acting in their own interests and
were not charged with the duty of caring for others' rights, there being
no other persons interested in the subject-matter.
In view of this statement and the facts developed in the commissioners'
reports, it seems proper to recall the grants and benefits derived from
the General Government by both the Union and Central Pacific companies
for the purpose of aiding the construction of their roads.
By an act passed in 1862 it was provided that there should be advanced
to said companies by the United States, to aid in such construction, the
bonds of the Government amounting to $16,000 for every mile constructed,
as often as a section of 40 miles of said roads should be built; that
there should also be granted to said companies, upon the completion of
every said section of 40 miles of road, five entire sections of public
land for each mile so built; that the entire charges earned by said
roads on account of transportation and service for the Government should
be applied to the reimbursement of the bonds advanced by the United
States and the interest thereon, and that to secure the repayment of
the bonds so advanced, and interest, the issue and delivery to said
companies of said bonds should constitute a first mortgage on the whole
line of their roads and on their rolling stock, fixtures, and property
of every kind and description.
The liberal donations, advances, and privileges provided for in this law
were granted by the General Government for the purpose of securing the
construction of these roads, which would complete the connection between
our eastern and western coasts; and they were based upon a consideration
of the public benefits which would accrue to the entire country from
such consideration.
But the projectors of these roads were not content, and the sentiment
which then seemed to pervade the Congress had not reached the limit
of its generosity. Two years after the passage of this law it was
supplemented and amended in various important particulars in favor of
these companies by an act which provided, among other things, that the
bonds, at the rate already specified, should be delivered upon the
completion of sections of 20 miles in length instead of 40; that the
lands to be conveyed to said companies on the completion of each section
of said road should be ten sections per mile instead of five; that only
half of the charges for transportation and service due from time to time
from the United States should be retained and applied to the advances
made to said companies by the Government, thus obliging immediate
payment to its debtor of the other half of said charges, and that the
lien of the United States to secure the reimbursement of the amount
advanced to said companies in bonds, which lien was declared by the law
of 1862 to constitute a first mortgage upon all the property of said
companies, should become a junior lien and be subordinated to a mortgage
which the companies were by the amendatory act authorized to execute
to secure bonds which they might from time to time issue in sums not
exceeding the amount of the United States bonds which should be advanced
to them.
The immense advantages to the companies of this amendatory act are
apparent; and in these days we may well wonder that even the anticipated
public importance of the construction of these roads induced what must
now appear to be a rather reckless and unguarded appropriation of the
public funds and the public domain.
Under the operation of these laws the principal of the bonds which
have been advanced is $64,023,512, as given in the reports of the
commissioners; the interest to November 1, 1887, is calculated
to be $76,024,206.58, making an aggregate at the date named of
$140,047,718.58. The interest calculated to the maturity of the bonds
added to the principal produces an aggregate of $178,884,759.50.
Against these amounts there has been repaid by the companies the sum
of $30,955,039.61.
It is almost needless to state that the companies have availed
themselves to the utmost extent of the permission given them to issue
their bonds and to mortgage their property to secure the payment of the
same, by an incumbrance having preference to the Government's lien and
precisely equal to it in amount.
It will be seen that there was available for the building of each mile
of these roads $16,000 of United States bonds, due in thirty years, with
6 per cent interest; $16,000 in bonds of the companies, secured by a
first mortgage on all their property, and ten sections of Government
land, to say nothing of the stock of the companies.
When the relations created between the Government and these companies by
the legislation referred to is considered, it is astonishing that the
claim should be made that the directors of these roads owed no duty
except to themselves in their construction; that they need regard no
interests but their own, and that they were justified in contracting
with themselves and making such bargains as resulted in conveying
to their pockets all the assets of the companies. As a lienor the
Government was vitally interested in the amount of the mortgage to which
its security had been subordinated, and it had the right to insist that
none of the bonds secured by this prior mortgage should be issued
fraudulently or for the purpose of division among these stockholders
without consideration.
The doctrine of complete independence on the part of the directors of
these companies and their freedom from any obligation to care for other
interests than their own in the construction of these roads seems to
have developed the natural consequences of its application, portrayed as
follows in the majority report of the commissioners:
The result is that those who have controlled and directed the
construction and development of these companies have become possessed
of their surplus assets through issues of bonds, stocks, and payment
of dividends voted by themselves, while the great creditor, the United
States, finds itself substantially without adequate security for the
repayment of its loans.
The laws enacted in aid of these roads, while they illustrated a profuse
liberality and a generous surrender of the Government's advantages,
which it is hoped experience has corrected, were nevertheless passed
upon the theory that the roads should be constructed according to the
common rules of business, fairness, and duty, and that their value and
their ability to pay their debts should not be impaired by unfair
manipulations; and when the Government subordinated its lien to another
it was in the expectation that the prior lien would represent in its
amount only such bonds as should be necessarily issued by the companies
for the construction of their roads at fair prices, agreed upon in an
honest way between real and substantial parties. For the purpose of
saving or improving the security afforded by its junior lien the
Government should have the right now to purge this paramount lien of all
that is fraudulent, fictitious, or unconscionable. If the transfer to
innocent hands of bonds of this character secured by such first mortgage
prevents their cancellation, it might be well to seek a remedy against
those who issued and transferred them. If legislation is needed to
secure such a remedy, the Congress can readily supply it.
I desire to call attention also to the fact that if all that was to be
done on the part of the Government to fully vest in these companies the
grants and advantages contemplated by the acts passed in their interest
has not yet been perfected, and if the failure of such companies to
perform in good faith their part of the contract justifies such a
course, the power rests with the Congress to withhold further
performance on the part of the Government. If donated lands are not yet
granted to these companies, and if their violation of contract and of
duty are such as in justice and morals forfeit their rights to such
lands, Congressional action should intervene to prevent further
consummation. Executive power must be exercised according to existing
laws, and Executive discretion is probably not broad enough to reach
such difficulties.
The California and Oregon Railroad is now a part of the Central Pacific
system, and is a land-grant road. Its construction has been carried on
with the same features and incidents which have characterized the other
constructions of this system, as is made apparent on pages 78, 79, and
80 of the report of the majority of the commissioners. I have in my
hands for approval the report of the commissioners appointed to examine
two completed sections of this road. Upon such approval the company or
the Central Pacific Company will be entitled to patents for a large
quantity of public lands. I especially commend to the attention of
Congress this condition of affairs, in order that it may determine
whether or not it should intervene to save these lands for settlers,
if such a course is justifiable.
It is quite time that the troublesome complications surrounding this
entire subject, which has been transmitted to us as a legacy from former
days, should be adjusted and settled.
No one, I think, expects that these railroad companies will be able to
pay their immense indebtedness to the Government at its maturity.
Any proceeding or arrangement that would result now, or at any other
time, in putting these roads, or any portion of them, in the possession
and control of the Government is, in my opinion, to be rejected,
certainly as long as there is the least chance for indemnification
through any other means.
I suppose we are hardly justified in indulging the irritation and
indignation naturally arising from a contemplation of malfeasance to
such an extent as to lead to the useless destruction of these roads or
loss of the advances made by the Government. I believe that our efforts
should be in a more practical direction, and should tend, with no
condonation of wrongdoing, to the collection by the Government, on
behalf of the people, of the public money now in jeopardy.
While the plan presented by a majority of the commission appears to be
well devised and gives at least partial promise of the results sought,
the fact will not escape attention that its success depends upon its
acceptance by the companies and their ability to perform its conditions
after acceptance. It is exceedingly important that any adjustment now
made should be final and effective. These considerations suggest the
possibility that the remedy proposed in the majority report might well
be applied to a part only of these aided railroad companies.
The settlement and determination of the questions involved are
peculiarly within the province of the Congress. The subject has been
made quite a familiar one by Congressional discussion. This is now
supplemented in a valuable manner by the facts presented in the reports
herewith submitted.
The public interest urges prompt and efficient action.