ACQUISITION OF THE CALIFORNIA PACIFIC
Tendency to Monopoly Control
The first intimation that the Central Pacific Railroad was on its way
to something like a monopoly control in the state of California is to
be found in the negotiations for terminals on San Francisco Bay. But
it was not long before more evidence came to light. Looking back with
the advantage of knowledge of the company’s later history, it seems
probable that the possibilities of monopoly control of the railway
business of California were present to the owners of the Central
Pacific as early as 1868. The task of securing such control was not,
after all, so very great. California had few railroads in the sixties,
and those which were in operation were small and unprosperous, and
could be cheaply acquired.
Besides this, the topography of the state lent itself to schemes of
conquest by a sharp separation of the interior valleys from each other
and from the coast. It was not necessary to occupy the whole country,
for an effective control over one valley could be maintained in spite
of the fact that an adjacent valley was in hostile hands. Nor was there
any public opinion in California at the time thoughtfully critical of
monopoly, as such. The country was new. Theories covering the relations
of large corporations to the consuming public had not been developed.
People hated monopolies because monopolies meant high prices; but the
very persons who were most likely to object to monopoly were also
likely to seek positions of advantage for themselves when possible.
Under conditions like these, Stanford, Huntington, Hopkins, and
Crocker were almost sure to attempt to dominate the railway system of
the state as soon as they determined to make their connection with it
more than temporary. This decision was made as the Central Pacific
approached Ogden in 1868 and 1869. Had the associates been able to
sell out before this time, it is likely that they would have done so.
Indeed, it is credibly reported that 80 per cent of the stock of the
Central Pacific was offered to D. O. Mills as late as 1873, for a price
of $20,000,000,[151] and this was probably the last of several offers
made to different parties.
The evidence seems to show, however, that by 1870 the Huntington group
were inclined to remain in the railroad business. Strategically, the
associates then occupied a very strong position. They possessed the
only railroad line from California to the East. They dominated the
Oakland water-front, and held important concessions in San Francisco.
Branch lines, like long tentacles, stretched from Roseville north to
Chico, on the way to the Oregon state line,[152] and from Lathrop south
to Modesto, to be extended to Goshen by August 1, 1872.[153] By 1869
the Sacramento Valley Railroad, with its extension to Placerville,
had been bought, and the California Central Railroad from Folsom
to Marysville was under Central Pacific control. Even the budding
project for a Southern Pacific Railroad had received the attention of
Stanford and his associates. Indeed, the only really weak spots in
the associates’ position were their failure fully to occupy the San
Joaquin Valley, and the fact that they did not control the short line
between Sacramento and San Francisco. We will, accordingly, consider
the situation and the policy of the Huntington group in these respects.
[Illustration: Map of California Railroad, about 1870.]
Competition of California Pacific
The most direct railroad route from Sacramento to San Francisco is by
way of Vallejo or Benicia, across the Straits of Carquinez, and along
the eastern shore of San Francisco Bay. In 1865, after the Central
Pacific had begun work in earnest, the California Pacific Railroad
Company was incorporated to occupy this route from Sacramento as far
as Vallejo. Contracts were let, though no material progress was made
for two years. In 1867 the work was taken up with fresh energy, and
in 1869 the road was finished between Vallejo and Sacramento, with
a branch from Davisville to Marysville. The newly built Napa Valley
Railroad from Adalanta, California, to Calistoga, was acquired at the
same time. In 1870 the system reported 163 miles of road, of which 22
miles consisted of a ferry connection from Vallejo to the city of San
Francisco.
It seems more probable that the California Pacific was originally
intended as a connection for the Central Pacific than that it was built
as a competitor with the larger road. This was satisfactory enough to
the Central Pacific so long as this company terminated at Sacramento.
But there is no manner of doubt that the California Pacific became a
formidable competitor to the Central Pacific when the latter acquired
its circuitous line to Oakland via Stockton. This was especially true
with respect to the passenger business. The distance from Sacramento to
San Francisco via Vallejo was 87 miles, via Stockton 137½ miles; the
time via Vallejo was 3½ hours, via Stockton 5 hours. It appears that
transcontinental passengers on Central Pacific trains often changed
cars at Sacramento, sacrificing the balance of their through ticket and
paying extra fare in order to save time.[154] Of the local passenger
business between Sacramento and San Francisco, the California Pacific
claimed three-fourths. How large a share of the freight went by the
shorter line does not appear, but it must have been considerable, for
Mr. Stubbs later estimated that the cost of operating the Benicia route
could not have been more than 50 per cent of the cost of operating the
Western Pacific,[155] and it is in evidence that the Central Pacific
sent most of its freight via Benicia as soon as it obtained control of
both lines.
It should be remembered also that in addition to its competition for
local business, the California Pacific had ambitious plans in other
directions. We know, for example, that it proposed an extension
eastward via Beckwourth’s Pass to a connection with the Union Pacific,
at or near Ogden. This line was to be built by the California Pacific
Railroad Eastern Extension Company, incorporated at Sacramento in
March, 1871, with a capital stock of $50,000,000.[156] Other reports
credited it with an intention to enter the San Joaquin Valley;[157]
while its influence in Sonoma, Marin and Napa counties was recognized.
In short, by 1870 the California Pacific was not only important in
respect to what it had actually accomplished, but it had in it the germ
of a railroad system in no way inferior to that of the Central Pacific
itself.
Rival’s Weakness
Unfortunately for the California Pacific, the company’s physical and
financial position in 1871 did not measure up to the magnitude of
its ambitions. Counsel for the Central Pacific in later years drew a
vivid picture of the condition of the railroad in 1867 which probably
contained more than a grain of truth. According to this account, the
right-of-way of the California Pacific was unfenced, its sidings were
few, and its stations were insufficient. The road-bed was almost
wholly unballasted, and inadequately supplied with ties. Embankments
were so narrow that the ends of the ties projected on both sides. The
slope of the cuts was insufficient and upon the Napa branch the rails
were fastened to the ties with wrought nails without heads which were
bent back over the flanges of the rails after being partly driven, in
order to hold the rails in position.[158]
On the other hand, in spite of the imperfect character of its
construction, the California Pacific had paid large prices to
contractors in its bonds and stock. In December, 1870, the company was
compelled to borrow money to meet the January interest of 1871. By the
following spring it was indebted to the extent of $8,450,000, of which
$1,200,000 was floating debt, and had to prepare to meet an annual
interest charge of $667,500. This was more than the company’s earnings
could stand.
In 1871 the Central Pacific, taking advantage of the weakness of its
rival, proceeded to the attack by arranging to construct a branch from
Sacramento, by way of Davisville, to Vallejo. In pursuance of this
arrangement it accumulated iron and ties, made surveys, and succeeded
in effecting a contract with an organization known as the Bridge
Company of the City of Sacramento, for the exclusive use of its bridge
for their new enterprise.[159] The California Pacific was already
suffering from the competition of river boats, and the construction of
the new road would have ruined it. The pressing nature of the danger
was appreciated by the managers of the road, and Milton S. Latham,
director and treasurer of the California Pacific, and agent for the
holders of three-fourths of the capital stock of that company, promptly
opened negotiations with the Central Pacific, through Collis P.
Huntington, for an adjustment of difficulties. This was precisely the
situation which the Central Pacific desired to bring about.
Control of California Pacific Acquired
The agreement that resulted from the conditions described may probably
be explained as an elaboration of the Central Pacific’s statement
to Mr. Latham that the company was willing to buy the California
Pacific but did not have the money. It took the form of the following
consecutive transactions:
By agreement dated July 13, 1871, between Latham, Leland Stanford,
and Mark Hopkins, Mr. Latham agreed to deliver 76,101 shares of the
California Pacific Railroad Company, to assign three-fourths of the
capital stock of the California Pacific Eastern Railroad Extension
Company to the other parties to the contract, and to stipulate that
the total indebtedness of the two companies named should not exceed
$8,421,000. In consideration of this delivery, Stanford and Hopkins
agreed to pay to Latham $1,579,000 in bonds of the California Pacific
Railroad Company.
On August 9, 1871, Mr. Latham presented, and the directors of the
California Pacific at a formal meeting approved, resolutions to the
effect that the sum of $1,600,000 was necessary for the purpose of
constructing and completing an additional track, and for strengthening
the California Pacific embankments across the tule lands. The directors
further voted that the money be borrowed, and the necessary bonds be
issued. President Jackson then stated to the board that a contract had
been made, and the execution of this contract was approved.
Under date of August 9, 1871, the California Pacific covenanted with
Stanford, Hopkins, and Huntington for the construction referred to in
the previous paragraph. The associates agreed
... to enlarge the embankment of the railroad of the said party of
the second part, where embankment is required, and erect and widen
the trestle work, where trestle work is required, from the bridge
across the Sacramento River to Davisville, in the county of Yolo,
in the State of California, and place thereon a good and sufficient
superstructure, consisting of timber and ties and iron railroad
thereon, so as to make an additional railroad track from said bridge
to said Davisville, fully equal to the present railroad on the present
embankment and to connect the same with proper switches with both the
main track to Vallejo, and the track to Marysville of the railroads
of the party of the second part. Said parties of the first part to
furnish all the material for the said additional railroad track, and
embankment, and trestle work, and to have the same completed and
ready for use on or before the first day of January, in the year one
thousand eight hundred and seventy-three.
In consideration of this construction, the California Pacific was to
pay the associates 1,600 second mortgage California Pacific bonds.
On August 19, 1871, the Huntington group, now controlling a majority
of the board of directors of the California Pacific, entered into an
agreement with the California Pacific under which the Central Pacific
undertook to pay the California Pacific $5,000 per month, to furnish
the equipment for passenger business, and to guarantee the interest on
1,600 second mortgage bonds, while the California Pacific in return
agreed to transport to or from San Francisco, passengers beginning or
ending their trips on the Central Pacific or connecting roads, and to
maintain its fare for other passengers at $4 between San Francisco and
Sacramento. On September 1, 1871, the Central Pacific took full control
of the California Pacific, and moved its offices from San Francisco to
Sacramento.[160]
Motives Behind Transactions
Two explanations of these transactions are possible. Counsel for the
Central Pacific, in 1886, maintained that the contracts fell into two
distinct classes or groups. The California Pacific, according to this
point of view, arranged for an additional track between Sacramento
Bridge and Davisville, and for still more important enlargement
in embankments and widening and erection of trestle work, by the
transfer to defendants of second mortgage bonds. These bonds, it was
alleged, though considerable in amount, had little value because of
the desperate financial condition of the California Pacific. In the
second place, the Central Pacific gave value to bonds which it held by
a guaranty, and used them to buy a controlling interest in California
Pacific stock. Of this, the minority stockholders of the corporation
had no right to complain.
Counsel on the other side maintained that the essential feature of the
whole transaction was the purchase of California Pacific stock, and
that the various contracts merely supplied a method of buying this
stock without paying for it. Starting, therefore, with the contract
of July 13, they pointed out that the defendants agreed to purchase
California Pacific stock from Latham with California Pacific bonds
which were not yet in existence, stipulating for full control of
the California Pacific before payment should be made, in order that
they might obtain the purchase price from that company. When Latham
announced that he was ready to deliver the stock, it became necessary
for the defendants to secure about $1,600,000 in California Pacific
bonds. These bonds could be legally issued only for new construction,
hence the contract for a second track from Sacramento to Davisville.
When issued, and in the hands of the defendants, it was necessary to
have the Central Pacific’s guaranty. For this the Central Pacific
required the California Pacific to enter into the traffic agreement
of August 19, obtaining thus a full _quid pro quo_. The result was
that the California Pacific furnished first the bonds and then a
consideration for the Central Pacific’s guaranty, which together served
to purchase the California Pacific stock.
Plausible Explanation
There were several circumstances which made this second version
plausible. It seems extraordinary, for one thing, that a company in
the straits to which the California Pacific was reduced should have
issued bonds for double-tracking 13 miles of road.[161] If it be
answered that the strengthening of the road against the immediate
danger of flood was the real reason for the issue, then it was still
extraordinary that the time limit for construction of the work should
be set as it was, eighteen months away, on January 1, 1873. As a matter
of fact, the section of the California Pacific across the tule lands
was washed away before the associates got around to strengthening it.
This made it impossible for Stanford, Huntington, and Hopkins, or
the Contract and Finance Company, to which they had assigned their
contract, to carry out the original agreement. Instead, Mr. Montague,
chief engineer of the California Pacific, reported to his board that
the cost of restoring the washed-out line would be equal to the cost
of carrying out the original contract, and the board, on November 15,
1872, authorized the substitution of this work for that agreed on in
the contract of August 9, 1871.
Owing to the subsequent destruction of the books of the Contract and
Finance Company, there is no way of telling accurately what the cost
of restoration actually was. The Contract and Finance Company finished
the job, however, in six weeks after the work was actually commenced,
and what information is available leads one to doubt if the expense was
very great. Another circumstance which raises a question as to the good
faith of the consideration offered for the 1,600 California Pacific
bonds, is the coincidence that the par value of the bonds issued for
construction was practically identical with the amount needed to pay
for the 76,101 shares of stock sold by Latham to Stanford, Huntington,
and Hopkins. Still another peculiar incident was that of the execution,
contemporaneously with the main contract, of a supplementary agreement,
under which the Stanford group agreed to pay Latham $250,000 in a six
months’ note, besides the other consideration for California Pacific
stock, if he would visit New York at once, obtain the consent of
the stockholders whom he represented, and personally assume all the
obligations of the California Pacific above the sum of $8,421,000
specified in the bond.
Whatever the true motives for the transaction described, the
coincidence of the stock sale with the other transactions relieved the
representatives of the California Pacific of any intense interest in
the matter, and must inevitably have made them pliable as to terms.
The directors present at the meeting of August 9, when the contract
for the construction of the second track was approved, were Jackson,
Hammond, Latham, Sullivan, and Atherton. Of these gentlemen, Hammond,
Sullivan, and Atherton each held five shares only, transferred to
their names to qualify them as directors; while the shares of Latham
and Jackson were ready for transfer to Stanford, Huntington, and
Hopkins. Hammond, vice-president of the company, as well as a director,
subsequently said, referring to the contract for a second track: “I
don’t recollect that I ever saw or knew what that contract was, until
it was brought into the board.... This contract was made with a party
who was purchasing the majority of the stock of that company, and whose
interest would be to do that work in a workmanlike manner.” Certainly
this was not a desirable point of view for a representative of the
California Pacific to take.
Undisputed Control
The inevitable result of the various contracts and agreements which
have been described was to place the Huntington group in undisputed
control of the California Pacific. On August 10, 1871, Mr. Stanford was
elected president _vice_ Jackson, and on August 2, Mark Hopkins was
elected treasurer _vice_ Latham. The following year Hammond and Moses
Hopkins took the positions of president and treasurer, respectively,
while Stanford and Mark Hopkins and Collis P. Huntington were appointed
general agents of the company, with large powers.
Once in control, Stanford and his associates proceeded to make the
best use they could of the California Pacific in connection with other
roads in their system. It does not appear that they felt any particular
tenderness toward the enterprise. Most of the operating arrangements
between the Central Pacific and the California Pacific were
subsequently arranged by Mr. Towne for both parties, on terms favorable
to the Central Pacific. It is on record that the California Pacific was
allowed but $1 out of $16.75, the fare from Reno to San Francisco, for
its haul from Sacramento to San Francisco, although the total distance
was 240 miles, and the Sacramento-San Francisco haul amounted to 92
miles. Likewise, contracts were made with the Contract and Finance
Company which were later complained of as extravagant. Special mention
is made of lumber which was bought of the Contract and Finance Company
at $30 a thousand when the market price was $18. Mr. Towne was asked in
1886:
_Q._ You say that you have done all that you could to increase the
earnings of the California Pacific, do you?
_A._ Having a due regard for the other company; yes, sir.
_Q._ Did you make that qualification?
_A._ I do now.
Perhaps a policy of this sort was to be expected as the result of the
conquest of a dangerous rival. Yet certain other arrangements between
the Central Pacific and the California Pacific went beyond what one
might have expected. It appears, for instance, that soon after the
Stanford group obtained control of the last-named company, that portion
of the contract of August 8, 1871, which provided for the payment of
$5,000 monthly by the Central Pacific to the California Pacific, was
eliminated. This elimination was said to have taken place by “mutual
consent,” a meaningless phrase when the same men had charge of the
negotiations for both sides.
Independent Security Holders
It has been charged, also, that Stanford and Huntington deliberately
endeavored at this time to depress the value of California Pacific
mortgage securities in order to induce independent holders to reduce
their claims. In support of this contention there is evidence that very
strong pressure was brought to bear upon independent security holders
in 1874, and that as a result of this pressure the fixed charges of
the California Pacific were reduced from $763,500 in 1875, to $303,500
in 1886. No part of this burden was borne by the second mortgage
bonds held by Stanford, Huntington, Hopkins, and Crocker, nor was any
assessment levied upon the company’s stock.
As a part of the campaign, during the period mentioned, wide
publicity was given by the management of the California Pacific to
financial difficulties, real or alleged, with which the company was
confronted. Thus in June 1875, the board of directors confessed a
judgment of $1,309,041.84 to one J. P. Haggin, assignee of certain
claims of the Central Pacific, the Contract and Finance Company,
and the associates, for advances previously made. Mr. Haggin had no
interest in the matter, merely allowing the use of his name.[162] The
following month, Vice-President Gray, of the California Pacific, made
an extremely pessimistic report to his directors, declaring that the
company’s deficit to date was $1,370,061.71, and that a large part
of the outstanding bond issues of the company were represented by no
construction that he was able to discover. On July 25, 1874, finally,
a local capitalist named Michael Reese, acting in all probability on
behalf of the associates, filed sensational charges against Mr. Latham,
formerly general manager of the California Pacific, which called forth
as sensational a reply.[163] These various activities roused holders
of California Pacific Railroad Extension bonds to petition to have the
California Pacific declared bankrupt, and drew forth a statement from
the company, on the other hand, that it did not regard these bonds as
constituting a valid legal claim upon it. The result was a compromise.
The extension bondholders surrendered their 7 per cent bonds for a
reduced amount in new 6 per cent securities, and the outstanding
income bonds likewise exchanged their holdings for 3 per cent bonds.
Both classes of bonds were guaranteed by the Central Pacific, and in
consideration of the guaranty the California Pacific was leased to the
Central Pacific on July 1, 1876, for 29 years, at a rental of $550,000
per year, plus three-fourths of the net earnings of the company above
that amount. At a subsequent period in December, 1879, when the Central
Pacific was about to turn a considerable volume of business over the
short line by way of Benicia, the California Pacific gave up its right
to payments over the $550,000 minimum in consideration of a fixed
additional payment of $50,000 a year.[164]
By and large, the California Pacific proved a good investment for the
larger company, especially after the Northern Railway had been built
and a new route established between Oakland and Sacramento. The reason
for its original acquisition was, nevertheless, in all probability,
not the chance of a direct profit, but the advantage expected from a
monopolistic control of the territory north of San Francisco Bay.