PROGRESS OF CONSTRUCTION—CONSTRUCTION COMPANIES
Commencement of Construction
The construction of the Central Pacific Railroad of California was
begun at Sacramento on the 8th of January, 1863. The day the work
started was rainy and calculated to damp the most cheerful of spirits.
There was, however, a brass band, banners, flags, speeches, and a
crowd standing on bundles of hay near the levee to keep its feet dry.
Two wagon-loads of earth were driven up before the platform on which
were gathered the dignitaries present, and Stanford, then governor
of California, seized a shovel and deposited the first earth for the
embankment. The enthusiastic Charles Crocker promptly called for nine
cheers. The sun smiled brightly, and everybody, for the moment at
least, felt happy that after so many years of dreaming, they now saw
with their own eyes the actual commencement of a Pacific railroad.[94]
It was fortunate that Mr. Crocker was enthusiastic, for the
difficulties which the Central Pacific had to overcome were serious.
The chief difficulties were as follows:
_Gradients._ Some reference has been made in the previous chapter to
the elevations which the Central Pacific had to surmount. The highest
point which the company had to reach was Summit Station, 105 miles from
Sacramento, at an altitude of 7,042 feet. Since Sacramento lay only 56
feet above sea level, to reach this point required an ascent of 6,986
feet in a distance of 105 miles, more or less, according as the route
chosen was longer or shorter. The company’s engineer said in 1864 that
if it had been possible to maintain a continuous ascending grade, the
maximum grade, from the foothills to the summit of the Sierras could
have been reduced to 80 feet per mile.
In the attempt to approach this ideal condition the Central Pacific
surveyed and resurveyed continuously until its rails were actually on
the ground. Barometrical reconnaissances were made in 1862 and 1863 on
lines via Downieville and Yuba Gap, and via Oroville and Beckwourth’s
Pass, in addition to the surveys via Georgetown, Dutch Flat, and
Henness Pass, to which earlier reference has been made (page 20).[95]
Location surveys reached Alta in 1863, the state line in 1866, and
Ogden in 1868.[96] After Mr. Judah’s death almost an entire relocation
of the line from the 31st to the 48th section was made in 1864 in
order to avoid tunneling, and to reduce cost,[97] and still later
it was found desirable to shift the whole route between Dutch Flat
and Emigrant Gap from the Bear River side of the ridge, up which the
Central Pacific was proceeding, to the American River side. This change
avoided some 20 miles of 116-foot grade, together with a great deal of
curvature.[98]
The final result of these various surveys was a line with maximum
grades of 116 feet to the mile. This does not compare unfavorably
with most of the transcontinental routes subsequently built. It is
interesting to observe, however, that the Central Pacific summit is
some 2,000 feet higher than the altitude of Beckwourth’s Pass, and
that the maximum grade of the Western Pacific Railway, built years
afterwards through that pass, is only 52.8 feet to the mile, or one per
cent. Neither Judah nor his immediate successors, therefore, discovered
the best route across the Central Sierras.
[Illustration]
_Temperature._ A second physical difficulty incident to mountain
construction was found in the mountain climate. The summer climate of
the Sierras is delightful, at least at altitudes of about 6,000 to
7,000 feet. At lower elevations the temperature is often uncomfortably
warm. But the winter climate is quite different. As early as August the
nights begin to get cold, the first snows come in November, while in
January the trails become impassable, and the high levels are unvisited
by man until the following year. The official record shows that the
greater part of the mountain construction on the Central Pacific
occurred between July, 1866, and July, 1868.
Mr. Stanford has testified that both the winter of 1866-67 and that of
1867-68 were unusually severe, and his engineers have dwelt in great
detail upon the consequent impediments to their work. Not only did the
frozen earth resist pick and shovel, but there were snow banks from
30 to 100 feet deep. It was necessary to remove this snow to permit
excavation, and to keep clear the space to be occupied by embankments
in order to prevent settling. When the summit was approached tunnels
had to be driven through the snow to the rock face. As the whole
working force could not be employed in the tunnels, the surplus labor,
with all its supplies, was hauled beyond the summit and put to work,
at great expense, in the cañons of the Truckee River. The first snow
sheds were built in the summer of 1867, and in the following years it
was decided to cover all the cuts and points where the road crossed
the paths of the great avalanches beyond the summit. The total length
of sheds and galleries built by the fall of 1869 was 37 miles, and the
cost was $2,000,000.[99]
In addition to the difficulties caused by snow, it must be remembered
that the frozen earth, though uncovered, was difficult to work.
Not only was it necessary to blast out material which could have
been cheaply moved at a more favorable time, but, when piled into
embankments, the ground settled in the spring as the frost was leaving,
and required constant attention.[100]
All the various obstacles raised by climate would have been minimized
if construction had proceeded more slowly. Indeed, Mr. Hood and Mr.
Strobridge, engineers in charge of construction, agreed that if the
Central Pacific had been built at less speed, and as such railways are
usually constructed, the expense would have been from 70 to 75 per
cent less than the actual cost. The saving would not have been due
altogether to the abandonment of winter construction, but this would
have been an important factor. The Central Pacific, however, preferred
speed to economy, in the hope of outstripping the Union Pacific in the
race for the business of Nevada, and for the subsidies and land grants
offered by Congress.
_Supplies._ A further obstacle in the way of successful construction
of the Central Pacific lay in the difficulty of getting supplies. Wood
and stone could be procured in the mountains, but iron, coal, and
manufactured articles of all sorts, including rails, locomotives, and
cars, were brought from Sacramento or from the East. Prices in general
were high, in part because of the war. The first ten locomotives
purchased by the Central Pacific Railway cost upwards of $191,000; the
second ten upwards of $215,000. Iron rails cost $91.70 per ton at the
mills. The price of powder increased from $2.25 to $6 during the period
of construction. The cost of food was exorbitant. Hay was worth $100 a
ton out upon the line, and oats about 14 or 15 cents a pound. Stanford
says he sold one potato for $2.50.[101]
In the cases cited, high cost of transportation often played an
important part in determining the final prices, and in general,
indeed, the expense of moving supplies was comparable with the initial
cost. Among many possible illustrations one may mention the fact that
shipments of rails via the Isthmus of Panama as late as 1868 cost, for
transportation alone, $51.97 per ton, making the total cost of the rail
delivered at Sacramento, $143.67, not including charges for transfer
from ships at San Francisco, nor for transportation up the Sacramento
River. Nor was this freight rate high when compared with the cost of
wagon hauls in the mountains, when material had to be transported away
from the finished track. Mr. Huntington tells of meeting some teams
with ties in the Wahsatch Mountains. He continues:
They had seven ties on that wagon. I asked where they were hauled
from, and they said from a certain canon. They said it took three days
to get a load up to the top of the Wahsatch Mountains and to get back
to their work. I asked them what they had a day for their teams, and
they said $10. This would make the cost of each tie more than $6. I
passed back that way in the night in January, and I saw a large fire
burning near the Wahsatch summit, and I stopped to look at it. They
had, I think, some twenty to twenty-five ties burning. They said it
was so fearfully cold they could not stand it without having a fire to
warm themselves.
Fortunately for the company, the cost of labor on the Central Pacific
and transcontinental lines does not seem to have been excessive. The
total number of men employed ranged from 1,200 in 1864, to 14,000 or
14,500 in 1867, when construction was at its height. White men, of whom
there were some 2,500 or 3,000 in 1867, received $35 a month and board
as common laborers, and from $3 to $5 a day as skilled mechanics. Most
of the track laborers, however, were Chinamen, who were paid $35 a
month, and boarded themselves.[102] These Chinamen proved reliable and
willing workers, and, because of his experience with them, it was with
distinct reluctance that Mr. Stanford in later years allied himself
with the friends of Chinese exclusion.[103]
Letting of Construction Contracts
Such obstacles as these made the task upon which the
Huntington-Stanford group had entered a formidable one indeed. Just how
the difficulties should be met, Mr. Huntington himself did not know.
Arrangements were first made with small contractors for the building of
stretches of road from Sacramento towards Newcastle. Charles Crocker
resigned his directorship in 1862 and took the first contract for 18
miles. Then Cyrus Collins and Brothers got a contract which they did
not complete, and other contracts were let to Turton, Knox and Ryan, C.
D. Bates, and S. D. Smith. Mr. Crocker says the people raised a hue and
cry saying that he was a favored contractor, so that the directors told
him that he could not have more than two miles of the road between the
18th and 30th sections.[104] He adds that the independent contractors
got to bidding against each other for laborers, and thus put up the
price. Huntington was told that the smaller contractors quarreled with
each other, and tried to “scoop” labor from each other;[105] while
Mr. Stanford says that the small contractors did not finish their
sections in consecutive order, that they did not hurry, and could not
be sufficiently controlled.[106]
At any rate, after the completion of section 29, no more contracts
were let to anyone except Charles Crocker and Company. According
to the associates, it was not so much a question of price as one
of organization and control. This may be true, or it may be that
the associates finally decided that it would be easier to make a
satisfactory profit out of government subsidies by doing the building
themselves, than by beating down subcontractors to the lowest possible
contract price. It should be noticed that the change in policy referred
to did not take place until 1864, when the federal Act of 1862 had been
passed and that of 1864 was imminent, and that the Central Pacific did
not select any single contractor, but gave all its work to Charles
Crocker, one of the original associates.
Contracts with Crocker
The first contract with Charles Crocker, covering sections 1 to 18,
provided for a lump sum payment of $400,000, of which $250,000 was to
be in cash, $100,000 in bonds of the company, and $50,000 in capital
stock. This was also the type of contract made with other contractors
up to section 30, although the amounts paid varied. At least one bill
for extras was allowed Mr. Crocker. Sections 30 and 31 were built by
Crocker, and after these were completed he was permitted to continue
without a written contract.
In June, 1865, Mr. Hopkins made a report to the president and directors
of the Central Pacific upon the general subject of contracts. In this
report Hopkins dwelt upon the necessity of rapid construction for the
purpose of capturing the passenger traffic between Sacramento and
Virginia City; and also in order to comply with the acts of Congress
and the state legislature, which required rapid construction of the
road. Persons of large capital, he said, seemed unwilling to bind
themselves to construct the road as rapidly as necessary. Charles
Crocker and Company, on the other hand, had pushed and were pushing
the work with extraordinary vigor and success, and had in all cases
complied with the orders and directions of the officers of the company.
He recommended, therefore, that arrangements be continued with that
firm, at rates specified in an accompanying resolution.[107] The
directors thereupon adopted this report, and resolved as follows:
_Resolved and ordered_ that Charles Crocker and Company be allowed
and paid for all work done and material furnished, or which may
hereafter be done and furnished, until the further order of the Board
of Directors, in the construction of the railroad of the Company, from
section 43 eastward, subject to and in accordance with the terms,
conditions and stipulations set forth in the contract with said
Charles Crocker and Company, dated September 19, 1863, except so far
as the same are modified or changed by this order, at the following
rates and prices, and in accordance with the following classification,
to-wit:
[Here are inserted the rates for clearing and grubbing, and excavation
in various kinds of rock, etc.]
The payments to be made monthly, according to the monthly estimates,
five-eighths thereof in gold coin, and the remaining three-eighths
in the capital stock of the Company, at the rate of two dollars of
capital stock for each one dollar of said three-eighths of said
estimate, with the privilege of paying said three-eighths in gold coin
in lieu of said stock, at the election of said Company, to be made at
the time of such payment.
[Illustration: Summit Valley. Altitude 6,960 feet. Emigrant Mountain
and Railroad Pass in the distance]
Payments in Cash and Stock
The essence of this arrangement was that Mr. Crocker was to go ahead
indefinitely and that he was to be paid not a given sum per mile,
but at a given rate of so much per unit for each class of work which
he might find it necessary to do. Payments were to be made in cash,
and also up to a certain per cent in stock, taken at a valuation of
50 cents on the dollar. Under date of April 16, 1866, Mr. Crocker
requested that stock be given him at a valuation of 30 cents on the
dollar, instead of 50 cents, and this was agreed to.[108]
The change from a 50-cent to a 30-cent valuation was made ostensibly
because Crocker and Company could not realize more than 30 cents on the
stock which they were receiving. As a matter of fact, Crocker could
not sell Central Pacific stock at any price, so that the alteration
of the contract merely increased his chance for a speculative gain,
to be realized after construction should have been completed. Mr.
Stanford has said that the directors did not care very much what the
prices were, so long as the work was done. Under the contract, the
Central Pacific Railroad itself, through Mr. Huntington, purchased
locomotives and cars for Crocker and Company, and charged for them at
cost.[109] Bonds were also sent from San Francisco to Huntington, but
it was Huntington’s impression that they were sold for the company,
not for the contractors. In any case, Huntington rendered an account
every month of what he had done, and Hopkins settled with the company
or with the contractors, as the case might be.[110] Describing the
situation at a later date, Crocker said, “It was decided that I should
go on immediately and see what I could do. I did go on until we got
tied up in suits and I had to stop. I could not get any money. They had
all the money I had, and all I could borrow. That was the time that I
would have been very glad to take a clean shirt, lose all I had, and
quit.”
The total payments made to Charles Crocker or to Charles Crocker
and Company, under the various arrangements just described, were as
follows:[111]
TOTAL AMOUNT PAID CHARLES CROCKER AND COMPANY ON HIS CONTRACT AND FOR
EXTRA WORK
Cash, or its equivalent, including material furnished
him $8,853,117.93
Bonds, taken at par 100,000.00
Stock, taken at 50 cents on the dollar 2,696,200.00
Stock, taken at 30 cents on the dollar 11,947,530.00
Stock, taken at par value 57,980.22
——————————————
Total $23,654,828.15
══════════════
If we take the cash payments at par and the bonds at 75, this would
make the tidy sum of $69,210 per mile on 129 miles. When we bear in
mind that Crocker accepted the contract for the first 18 miles out of
Sacramento at a price including a cash payment of only $13,800 per
mile, and that the arrangements with the small contractors who followed
him were distinctly less favorable, it is possible to say with some
confidence that the profits on the Crocker contracts were considerable.
Whatever they were, Mr. Crocker shared them with his associates by
depositing at a later date $14,000,000 in Central Pacific stock in the
treasury of the Contract and Finance Company, (discussed in the next
section) for the benefit of the stockholders of that organization.
Inasmuch as Stanford was one of the principal stockholders in the
Contract and Finance Company, his later categorical denial before the
United States Pacific Railway Commission that he had participated in
the profits of the Crocker contracts makes interesting reading.[112]
“Contract and Finance Company”
When the Central Pacific approached the state line of California in
the latter part of 1867, the associates told Mr. Crocker that they did
not think it best for him to go any further. They said they wanted
more capital—they wanted to engage heavy men in the enterprise.[113]
Crocker had not been successful in persuading capitalists to go in
with him, while it was believed that investors were deterred from
taking stock in the Central Pacific by reason of the liability which
would be thereby incurred under California law. Either Huntington or
Stanford—both claim the credit—conceived the idea that there would be
an advantage in organizing a corporation to undertake the construction
work. The subject was mentioned on the occasion of one of Huntington’s
visits to California, although the company was formed while Huntington
was in the East.[114] The name finally decided upon for the new
corporation was that of “Contract and Finance Company.” Articles of
association were filed in October, 1867. W. E. Brown, Theodore J.
Milliken, and B. R. Crocker attended to the details. Milliken was a
merchant in Sacramento, and the other two were connected with the
Central Pacific.
According to its articles of incorporation, the Contract and Finance
Company was formed for the purpose of engaging in and carrying on
the business of constructing, purchasing, leasing, selling, holding,
maintaining, operating, and repairing railroads, wagon and transit
roads, steamboats, vessels, telegraph lines, and rolling stock of
railroads; the purchasing, holding, hypothecating, and selling of bonds
and stocks issued by railroad and other companies or corporations;
the purchasing and using of iron and other materials for railroad and
telegraph lines; the borrowing and loaning of money; the conducting of
an express and stage business, and any and all other kinds of business
connected with or pertaining to railroads and telegraph lines; the
transportation of persons and property, on land and water; and the
purchasing, holding, leasing, and selling of real estate of all kinds.
The capital stock was set at $5,000,000.
Failure to Attract Outside Capital
It is the unanimous testimony of the associates that the real and
only reason for forming the Contract and Finance Company was that
outside capital might be induced to come in. Huntington says that when
the company was organized, he went with new energy to capitalists in
the East to induce them to take a share in the risks and profits of
construction. Yet from the point of view of attracting outside capital,
the Contract and Finance Company was a complete failure. William
and Commodore Garrison, of New York, A. A. Selover, Moses Taylor,
and William E. Dodge, among others, considered the matter, but all
concluded that the risk was too great. In California, Stanford applied
to D. O. Mills, W. C. Ralston, Haggin and Tevis, Michael Reese—in
short, to everybody whom he thought he might possibly induce to take
an interest—but in vain.[115] The result of the failure to secure
outside subscriptions to the Contract and Finance Company was that the
associates had to take up the stock of that company themselves. Crocker
was made president at an early date, and apparently took the bulk of
the stock in the first instance. Then, when it was evident that no
outside investors would come in, he put the stock back, and Stanford,
Hopkins, Huntington, and E. B. Crocker took equal shares with him—each
subscribing for 10,000 shares out of the 50,000 outstanding.[116] Later
a little stock was disposed of to outsiders, but when the Contract and
Finance Company got into the courts the associates bought this back.
Throughout the whole life of the Contract and Finance Company the
stockholders were the same men who held the bulk of the stock of the
Central Pacific Railroad. Contracts between the finance company and the
railroad company were therefore made by the associates in one capacity,
with themselves in another capacity, a situation unfortunately not
unique in the history of American railroad building. An unusual
feature of the arrangement, however, which was common to arrangements
with other construction companies formed by the associates, was that
the funds of the Contract and Finance Company, over and above the
sums received from the Central Pacific, were derived from loans to
the company by its stockholders and not from payments on the stock
subscribed. There is no evidence that Hopkins, Stanford, Huntington,
or either of the Crockers paid a cent in cash on their subscriptions.
Instead, they gave their notes. To provide the Contract and Finance
Company with funds, they deposited money, sometimes more and sometimes
less, paying interest on their notes, and receiving credit for interest
on their balances, each partner as a rule putting in all the funds
which he could spare, and having an individual account kept of his
transactions. The Contract and Finance Company was, therefore, always
heavily in debt, although the debt was owed to its own stockholders.
The advantages of this arrangement would seem to be two: first, that
it concealed effectively the profits which the company was making; and
second, that it did not limit any stockholder to a proportionate share
in the burdens and gains of the undertaking. If any of the associates
desired to participate more heavily than his friends, or less heavily,
he could do so. Such a privilege was probably not important before
1869, but it became so later.
Contracts with Construction Company
A word may now be said about the contracts which the Contract and
Finance Company secured. Under date of December 3, 1867, Mr. Stanford,
as president of the Central Pacific, reported to his directors that he
had made a contract for the construction and equipment of the railway
and telegraph line of the company lying east of the eastern boundary
of the line of California, and presented a draft of the contract,
which the directors approved.[117] Leland Stanford, E. B. Crocker,
Mark Hopkins, and E. H. Miller, Jr., were present and voted. Mr.
Miller explains that he did not understand at the time who the owners
of the Contract and Finance Company were, and that nothing was said
about it at the meeting. The contract provided that the Contract and
Finance Company should build the road of the Central Pacific from the
state line, eastward, 552 miles. It was to grade the road, build the
bridges, lay the track, build and complete a telegraph line, furnish
telegraph offices and instruments, furnish rails, ties, buildings,
roundhouses, turntables, and a specified number of engines and cars
and running material per mile. On its part, the Central Pacific agreed
to pay $86,000 per mile, half in cash and half in Central Pacific
stock, and in practice the Central Pacific provided the equipment
and the iron, charging them to the Contract and Finance Company at
cost. This statement relative to the terms of the contract with the
construction company is made on the strength of the recollections of
parties interested,[118] for the actual contract is one of the missing
documents characteristic of Central Pacific history. Stanford describes
the contract as an exhaustive one. That is to say, the Central Pacific
turned over all it had and the Contract and Finance Company built the
road and got the profits, if there were any.
The apparent advantages of an arrangement with a construction company
as compared with those of construction by the Central Pacific itself,
were those connected with specialization of the work. A company which
does nothing but construction and which does that all the time, may be
expected to have a force more highly trained in this particular grade
of work, and a more abundant supply of tools and material than an
organization which builds railroads only occasionally. The unfortunate
necessity of hiring men for each new job and discharging them at the
completion of the job is avoided. In the case of the Central Pacific
this advantage was somewhat illusory, it is true, for the reason that
the Contract and Finance Company on its first contract, whatever might
have been the fact later, could scarcely have had an advantage over the
railroad; and as for tools, the Contract and Finance Company had no
machine tools at all at the beginning, and had to rely on the railroad
not only for cars and engines to transport its men, but for equipment
for large construction of any sort. The real reason for using a
construction company in this case was a financial and not an operating
one.
Profits of Construction
Much has been said about the profits of the Contract and Finance
Company. Here, again, books are missing, having been packed into boxes
by the industrious Mark Hopkins in 1873, and never again produced.[119]
A man named John Miller, one-time secretary of the Contract and
Finance Company, and defaulter to the alleged extent of $900,000 at
a subsequent period, was in possession of transcripts from these
books, if we may believe his statement; but even these transcripts
disappeared, if indeed they ever existed.[120] We do not know,
therefore, how much construction cost the Contract and Finance Company,
and we cannot calculate with any accuracy the profit obtained.
It does appear that the work done by the Contract and Finance Company
cost the Central Pacific, in all $23,736,000 in cash and the same
amount in capital stock.[121] If we add to this $100,000 in cash
and $2,900,000 in bonds paid to the Union Pacific for the stretch
of land from Promontory Point to a point five miles west of Ogden,
and $1,072,874.79 for snowsheds and other extra work performed in
1870, we have a total of $51,544,874.79, of which $24,908,874.79 was
in cash. Taken in connection with the Crocker contracts, this makes
an aggregate of $33,761,992.72 in cash, $3,000,000 in bonds, and
$38,437,710.22 in stock. It was the judgment of the United States
Pacific Railway Commission that the total cost of building the 690
miles from Sacramento to Promontory Point, and of purchasing from
the Union Pacific 47½ miles of road from Promontory Point to the end
of the Central Pacific line, 5 miles west of Ogden, did not exceed
$36,000,000, and this included 9 miles built by small contractors, the
payment for which is not included in the figures just given.[122]
[Illustration: Summit tunnel (altitude 7,042 feet) before
completion—Sierra Nevada Mountains]
In a word, if the conclusions of the United States Pacific Railway
Commission are to be relied upon, and they were made by engineers
relatively soon after the completion of the road, the builders of
the Central Pacific were able to accomplish their contracts with the
cash and the proceeds of the company’s bonds that were turned over to
them, and to retain their Central Pacific stock as a clear profit. If
we compare this stock surplus with the probable cash investment in
the road, taking the shares at any reasonable valuation, say at $15
or $20 per share, the profit does not seem excessive. If we compare
it with the contributions of the associates, however, and this is the
more reasonable because the associates received the full benefit of
the difference between cost and receipts, it represents, on the most
conservative calculation, 500 or 600 per cent for an investment which
probably did not exceed $1,000,000, over a period of six years. To
this should be added the proceeds of the land grant and of the local
subsidies.
The federal government seems in these matters to have assumed the
major portion of the risk, and the associates seem to have derived
the profits. Nor is this point of view vitiated by the fact that the
federal government was ultimately repaid its loan in full, for the
reason that the repayment was not at the expense of the associates, but
was made possible by a credit arising out of the earnings of the road,
and represented merely a shifting of the burden of the debt due the
federal authorities to the communities along the line.
Besides the completion of the main line of the Central Pacific, the
Contract and Finance Company built a portion of the California and
Oregon Railroad, part of the Western Pacific, and the entire San
Joaquin Valley branch of the Central Pacific from Lathrop to Goshen.
The arrangements between the Contract and Finance Company and Central
Pacific for this work varied, but substantial additional profits were
secured. In 1874, the Contract and Finance Company was dissolved.
There is some dispute as to whether its assets were divided into
four or five parts, but both Stanford and Crocker have testified that
their dividend consisted of approximately $13,000,000 in Central
Pacific stock, at par.[123] At the same time the stockholders of
the construction company assumed its debts, amounting to perhaps
$1,600,000.[124]