RESOURCES FOR CONSTRUCTION—STATE AND LOCAL AID
Source of Funds
Some years after the Central Pacific and Western Pacific railroads were
completed, Leland Stanford laid before a committee chosen by Congress
the following memorandum showing the receipts of these two roads from
all sources up to December 31, 1869:
MEMORANDUM SHOWING THE RECEIPTS OF THE CENTRAL AND WESTERN PACIFIC
RAILROADS FROM ALL SOURCES TO DECEMBER 31, 1869
Approximate
Par Sum
Source of Funds Value Realized
United States bonds issued to Central and
Western Pacific $27,855,680 $20,735,000
Central and Western Pacific first mortgage
bonds 27,855,560 20,750,000
Central Pacific convertible bonds 1,483,000 830,000
Central Pacific state aid bonds 1,500,000 980,000
City and County bonds:
San Francisco to Central Pacific 400,000 300,000
Sacramento to Central Pacific 300,000 190,000
Placer County to Central Pacific 250,000 160,000
San Francisco to Western Pacific 250,000 175,000
San Joaquin County to Western Pacific 250,000 125,000
Santa Clara County to Western Pacific 150,000 100,000
Land sales, balance Central Pacific 107,000
Profit and loss balance, January 1, 1870 1,610,000
———————— ———————————
Total $46,062,000
Company owed Contract and Finance Company 1,827,000
———————————
Grand total $47,889,000
We have in the foregoing table a summation of the resources on which
Judah and the Huntington group were able to draw in order to build a
transcontinental road. It will be noticed that there is no mention
in the table of the personal fortunes of the associates, unless the
contribution of these gentlemen appears in the profit and loss balance,
or in the debt to the Contract and Finance Company—none of the
earnings of the railroad during construction, and none of the proceeds
of the sale of Central Pacific capital stock. Under these categories
some slight addition to Stanford’s list must probably be made, though
the importance of the addition will not be great.
Collectively the fortunes of the associates, while considerable, were
not sufficient to cover more than the preliminary expenses of the work.
Judah had but little capital, while, according to Huntington’s own
statement some years later, the combined assets of Stanford, Crocker,
and the firm of Huntington and Hopkins, amounted to something like
$1,000,000 when the construction of the Central Pacific was begun.[23]
Other estimates put the figure at $160,000,[24] or even as low as
$109,000.[25] We do not know, as a matter of fact, how much property
the associates possessed, but we do know that it was slight compared
with the undertaking which they had in hand.
Earnings and Stock Issues
Probably, indeed, the earnings of the Central Pacific Railroad during
construction were more important than the contributions of the
partners. Between 1863 and 1869, according to the calculations of the
United States Pacific Railway Commission, the gross earnings of the
Central Pacific amounted to $10,807,508.76, its operating expenses
to $4,700,625.56, and its net earnings to $6,106,884.20. The surplus
after the deduction of interest and taxes for this period amounted to
$2,427,533.80.[26] Most of these earnings came from local business,
although an attempt was made to provide facilities for through travel
before 1869, by arranging stage accommodation for stretches not yet
covered by rails.
If we add three or four million dollars to the receipts listed in
Stanford’s table, we shall have made liberal allowance for railroad
earnings and partnership contributions up to 1869. This allowance
would not be materially increased if account were taken of sales of
Central Pacific stock. The authorized stock issue of the Central
Pacific Railroad in 1862 was $8,500,000. In 1864 this was raised
to $20,000,000, and in 1868 it was made $100,000,000. In spite of
these large issues, the evidence is perfectly clear that there were
substantially no cash subscriptions to Central Pacific stock, nor any
market for this stock when issued. It is on record, for example, that
one M. D. Boruck opened an office at the corner of Bush and Montgomery
streets in San Francisco on behalf of the company, and kept it open,
off and on, for about twenty-two days in November and December, 1862,
and in February, 1863. He secured three subscriptions to an aggregate
of twelve or fifteen shares.[27]
We know also that Crocker went personally to Virginia City to sell
stock, but without success. He says of this experience:
They wanted to know what I expected the road would earn. I said I did
not know, though it would earn good interest on the money invested,
especially to those who went in at bed rock. “Well,” they said, “do
you think it will make 2 per cent a month?” “No,” said I, “I do not.”
“Well,” they answered, “we can get 2 per cent a month for our money
here,” and they would not think of going into a speculation that would
not promise that at once.[28]
Stanford says that he bought 2,300 shares of Central Pacific at
ten cents on the dollar at one time, in order to accommodate a
stockholder,[29] and it appears that Charles and A. B. Crocker
transferred their stock to Huntington, Hopkins, and Stanford in 1873,
for $13 a share.[30] No attempt to sell Central Pacific stock generally
was made until 1873, and it was not listed on the Stock Exchange until
1874.[31]
Bond Sales
As a matter of fact, there was no sale at the beginning even for
Central Pacific mortgage bonds. Huntington went to New York to get
these securities started among the moneyed men there, and after a while
he had some small success. But D. O. Mills gave it as his deliberate
judgment on a later occasion that there was the greatest difficulty in
securing loans on the bonds the Central Pacific had to offer—including
government, county, convertible, state aid, and first mortgage
bonds—to as much as 75 per cent of the face value of the issues.[32]
Iron for the first 50 miles out of Sacramento was delivered to the
associates only after they had given their own personal obligations
secured by deposit of the company’s bonds. An agreement was entered
into, besides, that Huntington and his friends would be responsible,
as individuals, for ten years, for the payment of interest on these
bonds.[33]
After 1864 conditions improved somewhat, and first mortgage bonds were
disposed of at about 75, while convertible and state aid bonds brought
56 and 65 respectively.[34] Yet at the time when the construction of
the Central Pacific Railroad was finished the private property of every
one of the directors of the company was mortgaged up to the limit of
all his individual credit would possibly allow and bear. The notes of
the four associates were outstanding everywhere, many of them bearing
interest rates as high as from 10 to 12 per cent, and the statement is
made that Leland Stanford alone upon one occasion had his account at
the bank overdrawn to the extent of $1,300,000.[35]
The consideration of possible Central Pacific Railroad receipts, other
than those derived from government aid and perhaps from the sale of
the company’s first mortgage bonds, brings us back to Stanford’s list
as containing substantially all the assets upon which the promoters of
the Central Pacific were able to rely. Almost half of these assets were
derived directly from political bodies of one type or another, and the
value of the remainder of those assets was dependent for the most part
upon the security which was afforded by the government donations made
to the company.
State and Local Grants
Let us now consider with more care the circumstances under which
the local and federal authorities extended such generous aid to the
transcontinental project, and the extent and quality of the aid given.
We may begin with the state and local grants, and in order to assist
the reader, a portion of the table which was printed on page 21 will
be set forth again at this point in slightly changed form. As thus
presented the table is as follows:
AID DERIVED BY CENTRAL AND WESTERN PACIFIC RAILROADS FROM STATE AND
LOCAL GOVERNMENTS IN CALIFORNIA
Approximate
Par Sum
Source of Aid Value Realized
Aid by Cities:
San Francisco, donation to Central
Pacific $400,000 $300,000
Sacramento, subscription to Central
Pacific 300,000 190,000
San Francisco, donation to Western
Pacific 250,000 175,000
Aid by Counties:
Placer County, subscription to Central
Pacific 250,000 160,000
San Joaquin County, subscription to Western
Pacific 250,000 125,000
Santa Clara County, subscription to Western
Pacific 150,000 100,000
Aid by State:
Assumption of interest for twenty years on
$1,500,000 7 per cent bonds.
Arguments for Local Aid
Aid from local political bodies was considered legitimate in the early
sixties, and was extended freely to a great number of corporations.
Voters were told that the construction of railroads increased land
values. Until transportation should be improved, it was argued,
agriculture could make but little progress, because the products of
agriculture could not be brought to market. The mining interest was
depressed in 1870, and in partial explanation publicists pointed out
that freight charges to the mines ranged from $50 to $180 a ton. Nor
was even more precise calculation lacking. An advocate of subsidies in
1870 stated:
It costs for passage to San Francisco from Visalia $25 and consumes
generally a day and a half. By rail the trip could be made in eight
hours, at a cost of $10, thus saving $15 and nearly a day in time.
If on the average, each adult makes one visit per annum to the upper
country, and taking 1,300, the number of registered voters, as the
adult population, it costs every passenger for the round trip $50 in
cash and three days in time—excess over railway fare, $30; board for
two extra days, $4; value of time at $2 per day, $4; total excess,
$38; total loss to 1,300 passengers, $49,400. I contend, therefore,
that the people of Tulare County are now actually paying, in addition
to the loss or inconvenience resulting from isolation from market,
the sum of $77,780 per annum, for the privilege of being without a
railroad.
There was little that was novel in this sort of argument, or in the
further contention that the increase of the tax roll of the counties,
due to railroad construction, would yield a revenue more than
sufficient to cover the taxes incident to the granting of a subsidy.
Better transportation meant wider markets, denser population, higher
values. Increasing values and volume of sales meant larger profits,
higher wages, lower prices, and generally growing prosperity. These
things were matters of reasonable anticipation, so that hard-headed
business men had quite as much ground as usually underlies business
action to approve of even a considerable pledge of state and county
property in order to hasten the building of a railroad system. It could
not be known whether or not railways would be constructed without
subsidies. As we look at the situation today it seems probable that
this would have been done, and that railroad building would not even
have been greatly delayed. The risk in waiting was, however, great,
and the difficulties of a conservative policy were enhanced by the
competition of towns, each seeking priority of railroad connection.
Playing Towns Against Each Other
There is evidence that the promoters of the Central Pacific were
perfectly aware of the possibilities of securing local subsidies by
playing one California town against another. Huntington wrote David D.
Colton in 1871 that the company ought to get a large amount of land and
other good things from parties having interests along the line between
Spadra and San Gregorio Pass, if it would build them a railroad on
which to get out.[36] T. G. Phelps, president of the Southern Pacific,
speaking in the same vein, told Colonel Baker, of Tulare, that it was
his private opinion that if that county would donate $100,000 to the
company, it would run its road through the town of Visalia. We also
know that pressure was brought to bear upon the city of Stockton, to
induce that city to grant a right-of-way, as well as other privileges,
to the Western Pacific,[37] and it is notorious that the fears of San
Francisco were played upon in order to obtain terminal facilities on
San Francisco Bay.
How this policy appeared from the point of view of the opponents of the
Central Pacific, may be gathered from a description offered by a member
of the Constitutional Convention of 1878:
They start out their railway track and survey their line near a
thriving village. They go to the most prominent citizens of that
village and say, “If you will give us so many thousand dollars we will
run through here; if you do not we will run by,” and in every instance
where the subsidy was not granted, that course was taken, and the
effect was just as they said, to kill off the little town. Here was
the town of Paradise, in Stanislaus County; because they did not get
what they wanted, they established another town 4 miles from there.
In every instance where they were refused a subsidy, in money, unless
their terms were acceded to, they have established a depot near to the
place, and always have frozen them out. As stated by the gentleman
from Los Angeles, General Howard, they have blackmailed Los Angeles
County $230,000 as a condition of doing that which the law compelled
them to do.
County Stock Subscriptions
Perhaps the earliest California statute in aid of railway construction
was the act approved May 1, 1852, granting to the United States a
right-of-way through the state for the purpose of constructing a
railway from the Atlantic to the Pacific oceans.[38] In 1857 the
supervisors of Yuba County were authorized to submit to the electors
of that county a proposal to subscribe $200,000 to a railroad between
Marysville and Benicia.[39] And during the following two years the
San Francisco and Marysville Railroad not only received a land
grant,[40] but secured an enactment, making it the duty of the Board
of Supervisors of Sutter County to submit to popular vote the question
of a $50,000 subscription to its capital stock,[41] and the duty of
the supervisors of Solano and Yolo counties to call elections in those
counties with similar intent.[42] No subscriptions were made under
these acts.
It seems to have been the intention of the legislature to treat the
Central Pacific and the Western Pacific railroads after the same
general fashion as other railroads had been treated—that is to say,
to allow counties and cities interested to subscribe freely to their
stock. By virtue of an act dated April 16, 1859, any county could so
subscribe up to 5 per cent of its assessment roll when popular approval
had been secured.[43] This was not, however, enough. Between March 21,
1863, and April 4, 1864, the legislature passed eight acts granting
special concessions to the Central Pacific and to the Western Pacific.
Mr. Stanford had become governor of the state in January, 1862, and
this legislation had of course his cordial approval.
In March, 1863, the supervisors of San Joaquin County were authorized
to hold a popular election on the question of subscribing $250,000 to
the capital stock of the Western Pacific.[44] In April, Placer County
was authorized to consider a subscription of equal amount to the stock
of the Central Pacific.[45] Next, Santa Clara County was authorized to
hold an election and to subscribe $150,000 to the Western Pacific, if
it so desired.[46] Sacramento received the same privilege in April,
to the extent of being permitted to take 3,000 shares of the Central
Pacific,[47] and was in addition allowed to give away rights-of-way
and certain rights of construction of considerable though indefinite
value;[48] while San Francisco was permitted to subscribe $400,000 to
the stock of the Western Pacific and $600,000 to that of the Central
Pacific, making $1,000,000 in all.[49]
Invariably subscriptions contemplated in the acts were to be made in
bonds running twenty or thirty years, and bearing 7 or 8 per cent
interest. Counties were to enjoy the usual privileges of stockholders,
but were protected by special clauses against the proportional
liability for debts of the corporation resting upon the ordinary
stockholder by virtue of state law. The proceeds of county bonds issued
in subscriptions were to be used for construction of the road, and it
was provided that at least an equal amount of other funds obtained
from stockholders was to be so used. It was thus the intention of the
legislature that funds for construction should not be entirely derived
from county subsidies.
Direct State Aid
In addition to the acts permitting county subscriptions, mention
should be made of two important acts by which the state granted direct
assistance. The first of these laws was dated April 25, 1863. It
authorized the comptroller of the state to draw warrants in favor of
the Central Pacific to the extent of $10,000 per mile, the warrants to
be issued when the first 20 miles, the second 20 miles, and the last 10
out of 50 miles were finished. These warrants were to bear 7 per cent
interest if not cashed, because of lack of money in the treasury to pay
them.[50]
The second act, dated April 4, 1864, repealed the act just quoted, and
proposed that the state government, instead of drawing warrants, should
assume interest on 1,500 of the company bonds, bearing 7 per cent, and
running for twenty years. This grant, like the earlier one, was made
on certain conditions, such as that the company should transport free
of charge public convicts going to the state prison, material for the
construction of the state capitol, troops, munitions of war, and the
like, that it should construct at least 20 miles of line annually,
and in the case of the Act of 1864, that it should deed over certain
granite quarries in Placer County.[51]
On the face of it this grant was illegal, because of clauses in the
state constitution which forbade the legislature to create liabilities
in excess of $300,000 without submitting the proposal to popular vote,
or to loan or give the credit of the state in any manner, in aid of any
individual, association, or corporation.[52] But it was sustained on
the theory that the act amounted to an appropriation in anticipation of
revenue, and so did not create a debt at all. Thus the company was able
to draw its first interest money in January, 1865.[53]
Opposition to Aid in San Francisco
The various acts just referred to were of course permissive, yet in
general the counties seemed very willing to give up to the limit of
their legal power. The two exceptions were the county of Placer and
the city and county of San Francisco. In Placer County there was a very
active campaign against the bonds, supported by newspapers such as the
_Placer Herald_ and the _Advocate_. The proposal for a bond issue was
carried, but only by a majority of 409 in a total vote of 3,810.[54]
In the case of San Francisco, the city delegation in the legislature
divided five to five on the proposal to authorize the city to
subscribe. When the law was finally passed, a long and interesting
struggle ensued. The first step after the passage of the act was to
hold an election in San Francisco in order to ascertain whether the
people would approve of a subscription to railroad bonds. This election
took place in May, 1863, and the necessary popular consent was secured.
There is reason to believe, however, that illegitimate means were
employed to carry the election. We have affidavits that Philip Stanford
went to the polls at San Francisco in a buggy, carrying a bag of money;
that the said Stanford put his hand frequently in the bag of money
and took money, some $20 pieces and some $5 pieces, to a considerable
amount therefrom, and scattered the said money among the voters at
the said polls, at the same time calling on them to vote in favor of
the said subscription. Another eyewitness confirmed this account,
adding that while the sum of money spent by the said Stanford was
considerable, he could not tell how much as the crowd around the buggy
of the said Stanford was so great. Still another testified to having
received a written order on Stanford and others for $20, in return for
which he and a man named Ross were to endeavor to influence voters at
the polls to vote for the subscription.[55]
These affidavits were later supported by the assertion of Hon. William
A. Piper, on the floor of the House of Representatives at Washington,
to the effect that he, Piper, was an eyewitness at the election, and
saw the brother of Leland Stanford openly going about the polling
places, scattering gold and silver to influence and buy votes for
the municipal subsidy. Statements of this sort are too detailed and
circumstantial to be brushed lightly aside.
[Illustration: Henry P. Coon]
Resort to Court
Whether or not the election of 1863 was tainted with corruption, as
soon as it was concluded, San Francisco became bound, on or about the
25th of May, 1863, to subscribe $600,000 and $400,000 to the stock of
the Central Pacific and Western Pacific railroads, respectively. The
fight against subscriptions, however, did not stop at this point. In
an attempt to prevent action, suit was brought by a man named W. N.
French against the Board of Supervisors, in the case known as “French
v. Teschemaker.” French was a resident of San Francisco and a taxpayer.
Teschemaker was a member of the Board of Supervisors. The suit alleged
certain irregularities in the city election, but rested mainly on the
contention that the act authorizing the city and county to subscribe
was void and of no effect, because it provided that the city and county
should not be liable for any of the debts or liabilities of either the
Central Pacific or the Western Pacific railroads beyond the amount
subscribed, and that this provision as to liability should be a part of
all contracts made by the companies for the construction and equipment
of their roads. According to counsel, this was an attempt to create an
exemption from the proportionate liability imposed on all stockholders
by the state constitution, and was not only void in itself, but its
lack of force invalidated the whole subscription, since it was not to
be supposed that the legislature would have passed the other clauses of
the act without the section in question.
On the 23d of May, 1863, Judge Sawyer of the Twelfth Judicial District
granted a temporary injunction. On appeal to the Supreme Court,
however, this injunction was overruled. The court said:
True, the legislature cannot exempt the city and county from
liability, but it can authorize the corporation to refuse to contract
with persons who do not waive the proportionate liability established
for their protection. How the individual liability of a stockholder
of a corporation can be a matter of public concern any more than the
liability of a copartner, we are unable to perceive, and we are not
aware that it has ever been claimed that the latter liability had its
foundation in public policy. It is merely a liability created by law,
as it might be by contract, and is intended only for the benefit of
those who may deal with corporations. It is but another fund to which
the creditor may look when the social fund has been exhausted, and
whether he chooses to look to it or not is a matter of no concern to
the public.... There being, then, only a question of private right
involved, there can be no question but that the party interested in
the enforcement of the right may contract to waive it.[56]
Compromise Plan
The opponents of municipal subscription now turned to the legislature,
and secured the passage of an act authorizing the Board of Supervisors
of San Francisco to compromise and to settle all claims upon the part
of the Western Pacific Railroad and the Central Pacific Railroad for
cash or other security, in place of bonds claimed by the companies,
provided the power to make such compromise should rest in the Board of
Supervisors only after and in case said board should be compelled by
final judgment of the Supreme Court to execute and deliver the bonds
specified in the act.[57]
Pursuant to this act of April 14, 1864, the Board of Supervisors
appointed a special committee from among their number to consider and
report a plan for a compromise. This action was taken on May 23, and
the mandamus requiring the supervisors to subscribe $600,000 to the
stock of the Central Pacific, which was essential to the adoption
of any compromise, was issued on June 7.[58] The committee met with
Stanford, reported back to the board, and on June 20 the board passed
order No. 582 providing that the city of San Francisco order, execute,
and deliver to the Central Pacific 400 bonds for $1,000 each, in full
discharge of all obligations on the part of the city and county to make
any subscription to the capital stock of said company.
Order No. 582 was duly approved by the mayor on June 21, and became
law on that day. On June 29 the acceptance of the Central Pacific was
signified to the board, in due form, and on June 27 the supervisors
appointed Messrs. Torrey, Bell, and Titcomb a committee to deliver to
the Central Pacific the 400 bonds, with interest coupons attached.
Nevertheless the mayor, Henry P. Coon, the auditor, Henry M. Hale, and
the treasurer of the city, Joseph S. Paxon, constituting the Pacific
Railroad Loan Fund Commissioners, refused to issue the bonds. The
result was a petition for a mandamus directed against these persons
individually, which developed into the case of People v. Coon.
Agreements in Mandamus Proceedings
The main legal points raised in this new litigation were three:
1. The conditions precedent to the issuance of the bonds under the act
of 1864 had not been fulfilled, said the petitioner, in that the board
of supervisors had not been compelled by final judgment of the Supreme
Court to execute and deliver the bonds.
2. The second contention was that the railroad company could not call
upon the supervisors to issue bonds on the city’s subscription unless
the railroad should call in from other subscribers the whole amount of
their respective subscriptions, or until, under the Act of 1863, a sum
at least equal to the amount of the bonds should have been expended on
the road from other sources. That either of these things had been done,
the defendants vigorously denied.
3. It was also declared by defendants that the Act of 1864 had
been misconstrued—that it did not relieve San Francisco from her
subscription, but simply authorized the city to liquidate that
subscription “in cash or other security” instead of in bonds. “We
claim,” said counsel, “that the act authorized no more than the
reduction of the amount of subscription and a change of the mode of
payment to cash or other security in place of bonds. It does not
authorize a donation of $400,000 or any other amount. In other words,
it authorizes a subscription for any amount less than $600,000, payable
in cash in place of bonds.”[59]
One has the feeling that at this stage of the proceedings, the first
and third of these propositions were not well taken. It was too plainly
the intention of the legislature to allow the city of San Francisco to
withdraw from its subscription for a consideration, to permit weight
to be given to technical points like these. On the other hand, it is
very doubtful if the railroad had at this time either called in from
other subscribers the whole amount of their respective subscriptions,
or had expended on the road from other sources a sum equal to the
amount of the bonds. The Supreme Court, however, did not make even this
concession, but promptly issued a mandamus against Coon, Hale, and
Paxon, commanding and requiring them to execute and deliver without
delay, to the Central Pacific Railroad of California, the 400 bonds
of the city and county of San Francisco, described in the ordinance
before referred to.[60]
Further Litigation
Upon the issue of this mandamus, Coon, Hale, and Paxon signed the 400
bonds. According to a subsequent complaint by the railroad, the bonds
so signed were presented by the president of the Board of Supervisors
to William Loewy, clerk of the city and county of San Francisco, at
a meeting at which a quorum of the supervisors was present. Loewy
refused or failed to countersign. On September 27, 1864, a regular
meeting of the supervisors was held, at which resolutions were
offered requesting Loewy to countersign the bonds, and providing for
the affixing of the seal of the city and county to the bonds when
countersigned. These resolutions failed of passage, and instead a
resolution was adopted requesting the clerk to deposit the 400 bonds
with the county treasurer, which he did forthwith. The treasurer then
refused to deliver the bonds to the railroad, and fresh proceedings
were instituted before the Supreme Court, this time asking for a writ
of peremptory mandamus commanding Loewy or his successor to obtain
possession of the bonds, and to countersign and assist in delivering
them to the Central Pacific; commanding the Board of Supervisors or
their successors to call a meeting of the board, to notify the clerk
of a time and place at which he might complete the countersigning in
the presence of a quorum of the board; to cause the seal of the city
and county to be affixed to the bonds; and to appoint a committee to
deliver the bonds to the Central Pacific; and commanding the members of
the Board of Supervisors who might be appointed such a committee, to
deliver the bonds to the Central Pacific. It was obviously hoped to tie
things down so that no further delay would be possible.
There seems to have been a split in the Board of Supervisors at
this time. Six of the twelve members made individual returns to the
complaint, and alleged that they had no part in the refusal to deliver
the bonds. The other six and the mayor voted to employ counsel and to
defend the suit.
Contentions of Defendants
The case came to a hearing January 7, 1865. In some respects the
defense now rested on new ground; in some new emphasis was given
matters previously brought forward.
The supervisors in January alleged that the election in San Francisco
held May 19, 1863, at which the electors of San Francisco had approved
the subscription to the stock of the Central Pacific, had been carried
by corruption and bribery. This assertion was given great prominence in
the answer of the supervisors, though less in briefs of counsel. Nine
instances were cited where A. P. Stanford had given sums ranging from
$5 to $40 apiece to electors, or had thrown handfuls of money among the
electors “and thereupon they scrambled among themselves for the same.”
It was urged that these bribes had had great influence upon the vote
and that the election was void. These facts had not been known to the
supervisors on June 20, 1864, when order No. 582 had been passed, and
defendants believed that knowledge of them would have prevented the
passage of the ordinance.
Besides this, the supervisors declared that the passage of ordinance
No. 582 had been procured by false and fraudulent representations by
the railroad company. More important, it was now contended that the
Act of 1863 was unconstitutional, in that the legislature was without
power to “impose on a municipal corporation of the state the burden
of exclusively building or aiding to build a work of general interest
to the state, which is in no sense a work of local interest to the
corporation on which the burden is imposed.”
It was pointed out that the Central Pacific was a work of general
interest to the Pacific Coast. It did not come within 100 miles of San
Francisco. It had received large subsidies from the federal government
on the ground that it was of national importance. Counsel declared that:
The true test of whether a tax can be exclusively laid on a municipal
corporation, is to be found in the purpose for which municipal
government is confined within local limits. Citizens living within
those limits are exposed to exclusive taxation because, and only
because, a peculiar benefit is conferred upon this locality. When the
benefit is shared in by the rest of the state, then a state tax is
levied, because the citizens of San Francisco received advantage, not
in their character as citizens of San Francisco, but as citizens of
the state. The state government is as much a benefit to San Francisco
as its own municipal government. Yet no one would contend that she
could be compelled to support the entire expenses of the former, or
that any other city should be compelled to contribute towards the
expenses of the latter.
City Compelled to Subscribe
These and other more technical objections were considered by the
Supreme Court and were swept aside in a decision rendered at the April
term of 1865. The court now held that the legislature had imposed
no burden on San Francisco by the Act of 1863, because under that
act the city got a consideration, namely, the company stock, for its
subscription. The court added:
Nor does it make any difference as to the validity of the compromise
whether the bonds were payable in instalments or in gross, nor whether
a legal assessment has been laid on the capital stock of the company,
for irrespective of the time the bonds under the Act of 1863 might
become due, the company held a claim against the city which was a
proper subject of and formed a good consideration for a compromise.[61]
This ended the case. It may perhaps be pertinently inquired why it
was, if the subscription required by the Act of 1863 imposed no burden
on the city of San Francisco as the Supreme Court said, that the city
could afford to give $400,000 to get rid of the obligation. Yet,
perhaps it would be fruitless to follow too closely the windings of the
judicial mind. Stanford later declared that the litigation had injured
the Central Pacific very much,[62] while E. H. Miller, secretary of
the company, estimated that the suit cost the Central Pacific not much
less than $100,000. Of the bonds issued, 315 were sold at $751.60
each, amounting to $236,754, while 85 were paid out at par for rolling
stock.[63]
Subscribing Counties Embarrassed
The reluctance of San Francisco to subscribe was not typical of the
general attitude toward the Central Pacific in 1865. But it became more
typical as the years went on. For this, there were several reasons.
In the first place, the state was much disappointed by the fact that
the completion of the Central Pacific did not inaugurate a period
of prosperity. The year 1870 was not a particularly good one in
California, and the panic of 1873, with the intense depression which
resulted, was soon to occur. Among the first effects of the two rail
connections with the East, was an influx of eastern manufactures,
unemployment, lower prices, and dissatisfaction. This in no way
meant that the construction of the Central Pacific had not benefited
California, but it gave evidence of a serious though temporary
maladjustment.
Moreover, the bonds which had been so lightly voted, proved a real
burden on the scanty population of the counties, which was in no
adequate way offset by increases in the assessment rolls. Indeed, the
railroads in early years were assessed at figures that were remarkably
low. In Placer County, for instance, the Central Pacific insisted
that its road should be assessed at $6,000 per mile, and succeeded in
carrying its point in 1865, 1866, and 1867. In 1868 the assessment was
raised to $12,000 per mile. The railroad protested, and when forced to
submit, increased the rate of freight to all points in Placer County
about 40 cents a ton.[64] Nor were taxes even on such modest valuations
easily collected. Between 1866 and 1887 railroad tax cases were almost
constantly before the courts. At times the Central Pacific refused to
pay any taxes at all, on the ground that it held a “federal franchise,”
and at other times it objected to the terms of the law or to the amount
of the assessment.[65] The result was to throw the local tax system
into complete confusion.
Experience of Placer County
Let us refer again to the experience of Placer County. In 1863 the
Central Pacific asked for a subscription of $250,000, promising to
add $9,000,000 to the taxable property of the county. The county tax
rate as fixed in February, 1863, for the following year, was 35 cents
on $100, and the assessed valuation of the county was $3,071,911.78,
yielding a revenue from county taxes of $10,751.69. The railroad
company issued an address while the matter of a subscription was under
consideration, pointing out that 8 per cent on a bond issue of $250,000
would amount to $20,000, while a tax rate of 35 cents on $9,000,000 of
increased valuation would yield $31,500, or a clear excess of $11,500,
to the county without considering the effect of the railroad in
increasing the valuation of real estate.
These were the results which voters were led to expect. What happened
was that the assessed valuation of the property of the Central Pacific
in Placer County was $6,000 per mile as late as 1870, when the county
sold its railroad stock; that the total railroad valuation was
therefore $553,500, and that the county tax rate rose from 35 cents
to $1.73½. Moreover, the railroad taxes for 1868 and 1869 were still
unsettled and in dispute in 1870 and remained so until 1873. The total
receipts of the county from all sources in 1869 were $127,492.54, of
which $46,499.66 were for the state. Against the $80,992.88 remaining,
the $20,000 of interest on the subsidy bonds was evidently a material
charge.
It was probably not true in general that the financial embarrassment
in which many of the counties of California were plunged late in the
sixties was due to the pressure of interest charges on bonds issued in
aid of railroad construction. The highest rates of taxation for county
purposes uncovered by the special legislative committee of 1868 which
investigated this matter, were $36.70 per $1,000 for Tuolumne County,
and $40 per $1,000 for Calaveras County, neither of which counties had
issued bonds in aid of railroads. Extravagance in assistance tendered
to railroads was only one of the financial sins of which the counties
had been guilty. Nevertheless the burden of outstanding indebtedness
for railroads was often severe on communities of declining industry and
population, and contributed to the later severe revulsion in popular
sentiment with regard to the desirability of local aid to railroad
enterprise.
Opposition by Other Transportation Interests
It is proper to mention at this point, also, as throwing light upon
popular sentiment, the opposition of the smaller transportation
interests of the state to the development of the Central Pacific
project. These interests included the stage companies, the express
companies, the toll roads, and the Pacific Mail Steamship Company. In
the aggregate their influence was considerable, and it was constantly
thrown against the granting of aid to the Central Pacific.
It is a curious commentary upon the effect of government subsidies,
that the Huntington-Stanford group brought part of this opposition upon
themselves by a deliberate refusal to buy up the Sacramento Valley
Railroad for the reason that it was cheaper to build at the expense
of the federal government from Sacramento to Auburn than to buy a
railroad already in active operation for most of the distance between
these points. In cold figures, it would have cost $400,000 to build a
new line out of Sacramento, and $285,000, according to Central Pacific
engineers, to put the Sacramento Valley Railroad in thoroughly good
physical condition. But under federal legislation, to be described in a
later chapter, only $250,000 out of the $400,000 would have to be paid
by the Central Pacific in cash, leaving a clear gain of $35,000 if the
policy of construction were pursued.[66]
The result of this decision was to cause the backers of the Sacramento
Valley project to denounce the Central Pacific enterprise as a
fraud.[67]
End of Local Subsidies
In the year 1868, a resolution was introduced into the California State
Senate urging the appointment of a committee to investigate the use of
moneys contributed by the state toward the construction of the Central
Pacific Railroad. This resolution was indefinitely postponed by a vote
of 18 to 17. The same year notices began to appear in the press, urging
the legislature to oppose further railroad-aid legislation. In 1869,
the _Sacramento Union_, while in favor of a grant to the Stockton
and Tulare Railroad, urged the counties to go slow and to secure an
amendment to the general railway law, reducing maximum transportation
charges to 10 cents per passenger per mile, and 15 cents per ton per
mile, before voting aid.
These were but symptoms of a profound dissatisfaction with the results
of railroad subsidies. In the fall of 1869 both political parties
pronounced against grants of state aid to railroads, but this could
not prevent the passage of the so-called “Five Per Cent Act” of 1870,
authorizing counties to subscribe to railroad stock up to 5 per cent
of their assessed valuation; although it did encourage Governor Haight
to veto two bills in March, 1870, the one authorizing the voters of
certain counties in the San Joaquin Valley to donate their bonds to
the San Joaquin Railroad Company at the rate of $6,000 per mile,[68]
and the other providing for the construction of a railroad by the
Southern Pacific through Monterey and San Luis Obispo counties, and
permitting the counties interested to grant aid. The governor took
the position that the proposed subsidies were not only unwise, but
that they were unconstitutional for the reason that a donation to a
private corporation was not a use of funds for a proper purpose.[69]
After a fight which attracted much popular attention, the vetoes of the
governor were sustained.
In 1871, Governor Haight was defeated for re-election by Newton Booth,
the Republican candidate. In the following year, however, the Five Per
Cent Act was repealed, and the period of local subsidies in California
came to an end.