ORGANIZATION OF THE CENTRAL PACIFIC-SOUTHERN PACIFIC SYSTEM, FROM 1870
TO 1893
Extent of System
By 1877 the Central Pacific-Southern Pacific combination was in control
of over 85 per cent of all the railroads in California, including
all the lines of importance around San Francisco Bay, except the San
Francisco and North Pacific Railroad, and in the Sacramento and San
Joaquin valleys. Not only had the associates established the monopoly
which they desired, but the operations of their system had reached an
extent which they themselves would have thought inconceivable a few
years before. The operated mileage of the Central Pacific-Southern
Pacific line on June 30, 1877, was 2,337.66 miles, the capitalization
$224,952,580, and the gross earnings $22,247,030. There was a
continuous stretch of road from Ogden to Sacramento, San Francisco, and
Oakland, and from these cities to Los Angeles and Yuma, by way of the
San Joaquin Valley; while a line from Mojave to the Colorado River and
The Needles was in course of construction.
Legally and technically, this comprehensive system was divided into
five parts. The original Central Pacific Railroad ran from 5 miles west
of Ogden to Sacramento. In 1870 this company consolidated with the
Western Pacific Railroad, operating between Sacramento and San José
via Stockton, the San Francisco, Oakland and Alameda Railroad, which
connected the Western Pacific with the city of Oakland, the San Joaquin
Valley Railroad branch from Lathrop to Goshen, and the California and
Oregon Railroad, which left the main line of the Central Pacific near
Roseville, and ran in a northwesterly direction to Redding toward the
Oregon boundary. All these lines were directly under one operating
control.
A second important part of the system was the California Pacific
between Sacramento and Vallejo, with a branch from Davis north to
Marysville, and another from Napa Junction to Calistoga. The ownership
of the third portion was vested in the Northern Railway. This company
had been chartered in 1871, and had projected a line from Woodland, on
the California Pacific, to Tehama, of which 82.20 miles were completed
in 1875. In 1878 the company built from Oakland to Martinez, and from
Benicia to Suisun, and still later it constructed a line from Benicia
to Fairfield. This last bit of road enabled Central Pacific trains to
run from Sacramento to San Francisco via Benicia, instead of passing
through Vallejo. The San Pablo and Tulare, completed about the same
time as the road from Oakland to Martinez, connected the Northern
Railway with Tracy on the main line of the Central Pacific.
The fourth part of the Huntington-Stanford system was the Northern
Division of the Southern Pacific Railroad from San Francisco through
San José to Soledad and Tres Pinos. The Tres Pinos line has been
referred to in the previous chapter. The extension from Gilroy to
Soledad up the Salinas Valley was in operation by 1877, and formed
the first part of the route which later became the coast route to
Los Angeles. The fifth and last part of the system was the Southern
Division of the Southern Pacific Railroad from Goshen to Mojave, Los
Angeles, and Yuma, with branches from Alcalde to Huron, and from Los
Angeles to Wilmington. In addition to the main groups mentioned, there
were certain minor extensions, such as the railroads from Sacramento to
Shingle Springs (the Sacramento Valley and Placerville Railroad), from
Stockton to Milton (the Stockton and Copperopolis Railroad), and from
Peters to Oakdale (the Stockton and Visalia Railroad).
Lease and Stock Control
The various parts of the system were held together by a combination
of leases and stock control. The associates in 1877 held all or
a majority of the stock of each railroad company which has been
mentioned. Usually this stock had come to them in their capacity as
shareholders in the various construction companies which had built
the roads. In some cases, however, as with the California Pacific and
the Northern Division of the Southern Pacific, the greater part of it
had been acquired by purchase. But the associates in most instances
preferred to add to their control by stock ownership the further
security of a lease—a procedure which had the additional advantage of
simplifying the conditions under which the companies were operated,
by concentrating operations under a single management. Only in the
case of the Northern Division of the Southern Pacific do they seem to
have temporarily departed from this procedure, and this exception can
probably be explained by the special circumstances of the case.
So long as the same parties held all the securities of all the
companies in the Central Pacific-Southern Pacific system, it made
little difference how payments under the various leases were
determined. Yet the possibility that the Central Pacific might sometime
divest itself of some portion of its property, was kept in mind, and
rentals were fixed so that in most cases they were materially less than
the net earnings of the leased mileage. This was probably not true of
the Southern Pacific in early years, but it had become so by 1880. In
form, the leases showed surprising variety. The rental of the Northern
Railway to the California Pacific in 1876 was at the rate of $1,500
per mile per year.[193] Mr. Stanford thought that this was based on
an estimated cost of construction.[194] In 1879 the same property was
leased to the Central Pacific for a payment of a given sum per mile
for each piece of equipment passing over the road. That is to say, 25
cents per mile was paid for each passenger or freight locomotive, 20
cents for each passenger car, and 8 cents for each freight or caboose
car.[195] This proved to be a very expensive rental, and was changed to
a monthly payment of $47,500.[196]
The lease of the California Pacific to the Central Pacific in 1876
carried a rental of $550,000 per year, plus three-fourths of the net
earnings of the California Pacific above that amount. The Central
Pacific guaranteed principal and interest on $3,000,000 of bonds.
This was changed to a flat payment of $600,000 per year in 1879.[197]
The Central Pacific leased the Amador branch between Galt and Ione
for $3,500 per month. In the case of the Stockton and Copperopolis,
however, it undertook only to pay principal and interest on $500,000
of thirty-year bonds, at 5 per cent, with the provision, however, that
the net earnings should apply on the Stockton and Copperopolis floating
debt.[198] These variations, if they show nothing else, are persuasive
that the associates had no standard method of procedure but suited
their arrangements to the facts in each individual case.
Lease of Southern Pacific
Perhaps the most interesting relations between the different companies
in the Huntington-Stanford system were those existing between the
Central Pacific and the Southern Pacific—the Central Pacific’s most
important extension. It has already been noted that during the early
period of construction the Southern Pacific lines south of Goshen
were turned over to the Central Pacific operating department as fast
as they were completed. At one time the authority of some Central
Pacific officials reached east to New Orleans, though the general
superintendent, Mr. Towne, seems never to have had jurisdiction beyond
Vermillionville, 144 miles from New Orleans.[199] The advantages of
this arrangement were obvious. Under the lease, the Central Pacific
paid the Southern Pacific $500 per mile per month rental, less $250
per mile per month to cover operating expenses, or a net sum of $250
per mile per month. As amended in 1879 and 1880, the leases made
no mention of the $500 payment, but the Central Pacific engaged to
keep the Southern Pacific in good repair, and to pay $250 per mile
monthly.[200] In its first form the lease contained the implication
that the operating ratio of the Southern Pacific was only 50 per cent,
and it has been suspected that this was deliberately arranged in order
to assist Mr. Huntington in disposing of Southern Pacific securities
in New York. The lease was originally terminable on twelve months’
notice, but in 1880, on demand of New York bankers who contemplated the
purchase of Southern Pacific bonds, it was changed to run for at least
five years.
The fact has already been mentioned that the lease of the Southern
Pacific system to the Central Pacific never included what was known
as the Northern Division, running from San Francisco through Gilroy
to Tres Pinos and from Carnadero to Soledad. Its officers reported
directly to the executive officials of the Southern Pacific Company,
and not to Mr. Towne. The difference in treatment of this part of the
line was striking. The Northern Division lay west of the Coast Range,
and was separated to some extent from the lines of the San Joaquin
Valley; yet it gave the main system entrance to the important city of
San Francisco, and should have been operated in close harmony with its
connections at San José.
One suspects that Mr. Huntington desired to separate the Central
Pacific and the Southern Pacific in the public mind in order that he
might more successfully oppose Mr. Scott’s Texas and Pacific plans
at Washington. “I think it unfortunate,” he wrote in 1875, “that he
[Stanford] should so closely connect the Central Pacific with the
Southern Pacific, as that is the only weapon our enemies have to
fight us with in Congress.”[201] “I think it important,” he said in
another letter about the same time, “that the Southern Pacific should
be disconnected from the Central as much as it well can be. And ... I
think it should have a superintendent that does not connect with the
Central Pacific, although I think it would be difficult to get a man
as good as Towne.”[202] Opinions like these were likely to perpetuate
distinctions between the Central Pacific and the Southern Pacific
railroads which could not be explained on other grounds.
Arrangement Reversed
A second stage in the connection between the Central Pacific and
the Southern Pacific companies began in 1885 when a lease of the
Central Pacific to the Southern Pacific took the place of the earlier
arrangement in which the Central Pacific was the lessee. It appears
that Timothy Hopkins, treasurer of the Central Pacific and director of
the Southern Pacific Railroad of California, received a telegram from
Mr. Stanford in the summer of 1884, asking him to come to New York.
When Hopkins arrived he found Stanford, Huntington, and Crocker, and
it was explained to him that the meeting was desired in order to go
over the affairs of the associates generally, and in particular to
take up the question of the organization of a new company for the
purpose of holding and operating the railroad companies that were
owned by the associates and controlled by them, both those under the
management of the Central Pacific and those east of El Paso in Texas
and Louisiana.[203] The meeting was recognized as important and minutes
were kept, which have been preserved.
There were several circumstances which made a reorganization at this
time desirable. In the first place, the period of exceptional profits
for the Central Pacific was passing away with the decline in the mining
business in Nevada and the opening of other transcontinental lines. In
the second place, the Southern Pacific was beginning to realize the
earning power which it was to have as a completed road. It had now a
through line to New Orleans; it reached San Francisco while the Central
Pacific did not; it was handling 45 per cent of the transcontinental
business in 1885; and while it could hardly yet be called a profitable
enterprise, its prospects were bright. Southern Pacific bonds were
first sold in New York in considerable quantities in 1880, when
they brought between 86 and 90. Except on the supposition that the
ownership of the Central Pacific and Southern Pacific was identical,
there was beginning to be reason for the owners of the latter to feel
dissatisfied with a lease like that of 1880, which compelled them to be
contented with a fixed return.
Stock Holdings
On this last point the evidence, though not entirely conclusive, offers
some interesting suggestions. Up to 1880 the number of stockholders in
the Central Pacific remained small. Mr. Huntington had stock of the
four associates for sale, and made efforts to place it in New York, but
without success. In 1878 the report of the Central Pacific Railroad to
the California Railroad Commission showed 82 stockholders, of whom 56,
with a total holding of 432,563 shares, were residents of California.
Mark Hopkins held 102,812 shares when he died in that same year, and
Mr. Huntington, Mr. Stanford, and Mr. Crocker presumably possessed
equal amounts. During the early eighties, however, while the Central
Pacific was paying substantial dividends, large quantities of stock
were sold in Europe. James Speyer has testified that when he came into
the New York office of Speyer and Company, some time between 1883 and
1885, large blocks were held in England and Holland. The sales had been
made before 1884, probably at a price above 50.
No record of the amount disposed of in these years is available,[204]
but it is known that in 1884 the number of shares standing in the
names of Huntington, Stanford, Crocker, and the Hopkins interests was
considerably less than a majority of the stock outstanding.[205] Mr.
Jackson, employee in the secretary’s office of the Central Pacific in
1885, estimated the amount at from 30,000 to 35,000 shares apiece.[206]
According to Mr. Brown, who inventoried the stock of the associates
in 1884, the combined holdings of Stanford, Huntington, Crocker, and
Mrs. Hopkins, including stock in the name of the Pacific Improvement
Company, were 157,535 shares out of a total outstanding of 592,755
shares at this date.[207] Timothy Hopkins later suggested that Brown’s
figures might have included only stock free and available, and that
the associates might have owned other stock pledged as collateral, but
this was only a suggestion, without proof. As final bits of evidence,
it is on record that Crocker possessed 34,049 shares of Central Pacific
stock at his death in 1889,[208] while Stanford told the United States
Pacific Railway Commission in 1887 that he owned 32,000 shares.[209]
The conclusion to which this evidence leads is that Huntington and
his friends did not own as much as 30 per cent of the Central Pacific
shares outstanding when they met together in New York in 1884. Their
control of the company depended on the proxies which were sent them,
and in particular upon the fact that the individual liability imposed
on corporation stockholders under California law led new purchasers
of Central Pacific stock to delay recording their ownership, or even
to place their stock under the name of third persons in New York.
Dividends were collected by presentation of coupons clipped from stock
certificates.[210] Mr. Klink testified that the majority of the stock
was voted by proxy in 1885, and that the bulk of it was in the name
of people in the New York office of the company. On the other hand,
during the period in which the ownership of the Central Pacific became
scattered, the stock of the Southern Pacific continued to be closely
held by the original associates: Stanford, Huntington, Crocker, and the
estate of Mark Hopkins.
It is not difficult to understand why the associates should have
gradually shifted their main interest from the Central Pacific to
the Southern Pacific if we remember that their interests were widely
extended as the result of their building enterprises in Southern
California, and that Central Pacific securities were the only parts of
their holdings on which they could realize in cash. Southern Pacific
stock and bonds had no market in New York; Central Pacific stock and
bonds had such a market. Doubtless, the associates could not have
afforded to dispose of their Central Pacific holdings if this would
have imperiled their control of the Ogden route, but such a result
did not necessarily follow, as we shall see. Having sold Central
Pacific securities in large quantities, however, it was natural
for the Stanford-Huntington group to wish to make the company in
which their main interest now lay a dominant partner in the Central
Pacific-Southern Pacific combination. And this is probably the
explanation of the transaction which we are about to describe.
New York Meetings
Let us return to the meeting of Huntington and his associates at New
York in the summer and fall of 1884, at which the details of the
reorganization were worked out. The first business there considered
was the purchase of the interest of one T. W. Pierce in the Galveston,
Harrisburg and San Antonio Railway and the making of certain
adjustments of interests of the associates in connection therewith.
The next was the taking of an inventory of securities on hand in New
York and those used as collateral for the payment of liabilities
of Stanford, Huntington, Hopkins, and Crocker. On September 11 the
question of the reorganization of the Southern Pacific system was
taken up, and the following order of business was agreed upon: (1)
consolidation of all the lines of the Southern Pacific system in one
company; (2) separation of Central Pacific business from Southern
Pacific business; (3) leasing of the Central Pacific system to the
Southern Pacific system (new organization); (4) general consolidation
of lines from San Francisco to Newport News.
The fourth item referred to a proposal that Stanford, Crocker, and
the Hopkins estate enter with Huntington into the ownership of the
Chesapeake and Ohio Railroad, opening the way for a transcontinental
rail line from coast to coast. This offer was declined; no further
reference need be made to it.[211]
On September 25, the associates came together again, and from that time
until November 7, meetings were held almost daily. From the meager
reports of the proceedings kept by their secretary, we glean that
more than one plan of adjustment was considered. It was agreed at one
time that the Southern and Central Pacific companies might terminate
their leases, and that the Central might lease from the Southern that
portion of the railroad between Goshen and Mojave. Then a running
arrangement was to be made between the Central Pacific and the Southern
Pacific Company (new organization) to cover the line from Mojave to San
Francisco and other California points.[212]
This plan was not finally adopted. On October 1, Leland Stanford was
appointed a committee of one to formulate his proposed method of
leasing the several roads which should form the through line of the
Southern Pacific Company. It was agreed that the stock of the Southern
Pacific Company, which had been organized the previous year, should be
raised to $100,000,000. During the following three weeks the discussion
turned largely about the details of the Southern Pacific organization
and the best methods of liquidating the Southern Development Company.
On November 5, the question of leasing the Central Pacific system to
the Southern Pacific came up. It was agreed to lease the property, and
temporarily to fix the rental at fixed charges and a guarantee of 2
per cent upon the capital stock, plus all the earnings of the Central
Pacific system over and above that percentage until the amount should
reach 6 per cent. All profits beyond 6 per cent were to go to the
Southern Pacific Company. The last meeting was held on November 7.
Reorganization of System
The result of these exhaustive discussions was a threefold operation.
In the first place, the Southern Pacific Company of Kentucky, organized
in 1884 with a charter granting power to do most things in the world
provided it did not operate in Kentucky, issued $100,000,000 in capital
stock, and acquired in exchange for its certificates the stock of the
Southern Pacific Railroad Company and that of the subsidiary companies
completing the through line to New Orleans.[213]
Secondly, the Southern Pacific Company leased the Southern Pacific
Railroad and these same subsidiaries for ninety-nine years from the
10th of February, 1885, undertaking to keep the properties in repair,
and to pay over 93½ per cent of the net profits to the lessors in
specified proportions.
In the third place, the Southern Pacific Company leased the Central
Pacific Railroad for ninety-nine years from the first of April, 1885,
for a rental which might vary from $1,200,000 to $3,600,000 a year,
according as the earnings of the Central Pacific and leased lines north
of Goshen might be small or large. This substantially corresponded to
the 2 per cent and the 6 per cent on the capital stock mentioned in the
minutes of the associates. The Southern Pacific assumed all Central
Pacific obligations except the payment of the principal of indebtedness
incurred or guaranteed by that company, and various minor adjustments
and assignments were made which it is not necessary to describe.[214]
Mr. Stanford has testified that in fixing the rental of $1,200,000 the
business of the previous years and the prospects of competition in the
future were taken into account.[215] The United States Pacific Railway
Commission approved the terms of the lease two years later.
In 1888 the minimum rental was changed to $1,360,000 and the maximum
to $4,080,000, in consequence of the extension of the Central Pacific
from Delta, California, to a connection with the Oregon and California
Railroad at the Oregon boundary. In 1893 the Southern Pacific
complained that it was suffering very considerable losses under the
lease and the terms were once more revised. Instead of a rental with a
fixed minimum, the Southern Pacific now agreed to pay $10,000 a year
for the leased property, plus all net earnings up to 6 per cent on the
capital stock of the Central Pacific Railroad and one-half the excess
over 6 per cent.[216]
It was provided in the fourth article of the new lease that if the
Southern Pacific should make any advances for payment on account of the
Central Pacific, it should be entitled to receive interest on these
advances at the rate of 6 per cent. On the 22d of March, 1894, this
fourth article of the amended lease was again changed by inserting
the words “lawful interest” instead of “interest at 6 per cent per
annum” upon advances which might be made by the Southern Pacific
Company. At the same time it was agreed between the Central Pacific
and the Southern Pacific that if at any time it appeared that, by the
operation of the agreement, either party was being benefited at the
expense of the other, the agreement should be revised and changed.
On the whole the earnings of the Central Pacific were less than were
expected under the lease, particularly during the years 1888-93. Yet
part of the difficulty arose from preferential solicitation of freight
over the Sunset route, and for the rest the rental of the property was
adjustable, as experience showed.