FINANCIAL DIFFICULTIES FROM 1870 TO 1879
Excessive Construction
We may now return to the more general considerations affecting Central
Pacific finance which characterized the years from 1870 to 1879. There
is a good deal of evidence that the years during which Mr. Colton was
connected with the Central Pacific enterprise were years of financial
difficulty for the associates, due in part to general depression, in
part to a disproportionate amount of new construction, and in part to
the continued inability of the Huntington-Stanford group for many years
to interest eastern capital in western railroads.
During the years from 1869, when the Central Pacific was first opened
to Ogden, to 1874, the earnings of the Central Pacific main line, both
gross and net, steadily increased. The following table sets forth the
facts relating to this progress, as well as figures for the succeeding
years from 1875 to 1881.
EARNINGS AND EXPENSES OF THE CENTRAL PACIFIC RAILROAD, 1874-81(*)
Period Gross Earnings Operating Expenses Net Earnings
(Calendar years)
November 6 to
December 31, 1869 $ 1,024,680 $ 777,348 $ 247,332
1870 7,519,983 6,009,426 1,510,557
1871 8,862,054 5,937,890 2,924,164
1872 11,963,641 8,645,276 3,318,265
1873 12,867,600 7,822,638 5,044,962
1874 13,726,561 6,468,145 7,258,416
1875 15,665,082 9,937,465 5,727,617
1876 16,994,216 10,970,599 6,023,617
1877 16,471,144 12,761,639 3,709,505
1878 17,530,859 12,005,535 5,525,324
1879 17,153,163 11,126,298 6,026,865
1880 20,508,113 12,814,121 7,693,992
1881 24,094,001 14,546,899 9,547,102
——————————— ——————————— ——————————
$184,381,097 $119,823,379 $64,557,718
═══════════ ═══════════ ══════════
(*)Report compiled by the Commissioner of Railroads, 47th Congress, 1st
Session House, Executive Documents No. 123, 1882, Serial No. 2030.
The greatest continuous drain upon Mr. Huntington and his friends
during the decade from 1870 to 1880 came from the necessity of raising
funds to provide for construction in southern California as described
in earlier chapters. Had business considerations alone controlled,
there is little doubt that this construction would have ceased. It did
not pay for itself, and could not be expected to be profitable until
the country served had been developed. Indeed, Charles Crocker once
declared that when the Southern Pacific was built through the southern
San Joaquin Valley, the company could have started with a railroad
train at Sumner at the south of the valley and come to Stockton, and
with one engine and one train of cars, hauled every living soul that
lived in the valley out at one haul. The settlers between Yuma and San
Bernardino could have been carried in one carload. This was as late as
1876.[240]
Inability to Get Eastern Capital
It was largely owing to this construction, as well as to the general
hard times, that the gross earnings per mile of the Central Pacific
and leased lines fell from $12,068.63 in 1875, to $7,677.84 in 1879.
The Central Pacific did not dare stop work for fear that the federal
government might be persuaded to subsidize another transcontinental
road, and so deprive it of the monopoly which it was so anxious to
retain; but it built as slowly as it could, and endeavored to make up
by retrenching in other directions. Had the associates been able to
sell securities in New York, the slowness with which the earning power
of their system developed would not have been so serious a handicap.
The territory was after all a rich one, and given time was sure to
yield substantial profits. But a market for their stock and bonds
was impossible to secure for many years. We have seen the opinion
expressed by the associates in the Colton settlement, with respect to
the salability of Southern Pacific-Central Pacific securities. There is
no reason to doubt that this judgment was correct. Before 1880 it does
not appear that there was a market for any of the Huntington-Stanford
issues except the Central Pacific first mortgage bonds, and the sale of
these was very slow.[241]
There is evidence that the associates not only recognized this
situation, but that they took what steps they could to meet it. Central
Pacific stock was listed on the New York Stock Exchange in 1874, and
on the San Francisco Stock Exchange in 1878, not so much with the idea
of selling any large number of shares, as in order to make a beginning
which might ultimately lead to an established market. Arrangements
were made to have the stock called at San Francisco every day, and the
associates stood always ready to buy it back at a slight decline. The
payment of dividends was begun in 1873 and continued until by the end
of 1877 the sum of $18,453,670 had been distributed. Yet all this had
little result for many reasons, among which doubtless should be again
mentioned the personal liability attaching under California law to
holders of stock in California corporations.
Naturally Southern Pacific securities of any type were still more
difficult to sell than Central Pacific stock. Mr. Huntington found
that the Southern Pacific Railroad was not known in the East, even by
parties who had spent some considerable time in California.[242] To
overcome this he advertised Southern Pacific stock and bonds in a great
variety of ways, sometimes by personal conference with eastern bankers,
sometimes by the issue of pamphlets or by the insertion of items in
the newspapers, sometimes by the manipulation of bond sales upon the
Stock Exchange. Occasionally he bought a few outstanding Southern
Pacific bonds in order to support the credit of the company.[243] But
here again, in spite of his efforts practically no bonds were sold, and
Southern Pacific stock could not be disposed of at any price.
Market for Securities
A good deal of specific testimony by New York brokers is available
to show the estimation in which Central Pacific and Southern Pacific
securities were held late as 1879. It is all cumulative, and to the
effect that no market existed at that time for any of these issues
except Central Pacific first mortgage bonds. Thus S. H. Thayer said of
Central Pacific stock: “I don’t think it would have found any market;
I do not think it would have been possible to have sold it at any
price; the stock had no friends, nobody knew of it, nobody traded in
it; that is, in a general market; I do not know what might have been
done by private negotiation; but in the public market nothing could
have been done with 20,000 shares towards selling it.”[244] Similar
testimony was given by D. O. Mills, of San Francisco. Mr. Mills was
asked what price could have been obtained in the San Francisco market
in 1879 for $13,000,000 in Southern Pacific bonds, and replied that he
did not think these bonds were salable then, that it would have been a
matter of bargain and sale, and would not have depended upon any market
value.[245] Mr. Thayer also testified that the Southern Pacific bonds
were on the stock exchange list in New York, but were bonds no one
dealt in, and about which few were informed.[246]
It would probably be a mistake, in spite of this testimony, to
attribute the reluctance of eastern investors to buy Southern Pacific
bonds solely to unfamiliarity with the security. Not only was the
economic development of southern California slight and the probable
earnings of the Southern Pacific for some years small, but the state as
a whole was not in the seventies an attractive field for investment.
During the decade from 1860 to 1870, California had grown rapidly
in wealth and prosperity. Population had increased and manufactures
had begun to develop. In agriculture, fruits, berries, and grapes
had been added to the important quantities of grain and vegetables
already produced. But the immediate effects of the completion of the
transcontinental railroad had been harmful to California, rather than
beneficial.
For this there were several reasons: (1) speculation in real estate
around San Francisco Bay had so discounted the completion of the line
that the actual opening of communication caused a reaction rather
than an advance; (2) the combination of a stimulated immigration
due to greater facilities for travel, with the sudden release of a
considerable part of the labor used in railroad construction, had
forced down wages, while, on their part, California merchants had
become exposed to competition from eastern distributing houses; (3)
droughts in the South, the decline in the production of the mines,
and the collapse of speculation in Nevada silver properties, all had
given rise to acute suffering and discontent. These things in turn
had reacted on political conditions, and had produced, first, the
so-called sand-lot excitement, and then the agitation that led in 1879
to a revision of the state constitution. Meanwhile the passage of the
Thurman Act, and the various disputes between the Pacific railroads and
the federal government had provided special reasons for distrusting the
securities of the Southern Pacific and Central Pacific companies, quite
apart from conditions peculiar to the section in which their mileage
lay.
Short-Term Borrowing
To repeat, it was this failure to dispose of the railroad stock and
bonds which they had to sell that threw the associates back upon the
necessity of raising money by short-time loans at extravagant rates of
interest, and which, in the late seventies, peculiarly exposed them to
the dangers of stringency in the New York money market. The partners
at times paid as high as 12 per cent for loans.[247] Every element
affecting their credit had to be closely watched, lest lenders refuse
to discount their paper, and interest on the company’s bonds go by
default; for it was a customary practice for the associates to take
care of interest, at least over short periods, by loans.
In December, 1876, Huntington wrote that the January interest would
this time have to come out of earnings, as he had been away from New
York so much that he had not been able to secure loans there.[248]
The same month Huntington complained of certain pamphlets which one
A. A. Cohen had been sending East. “If the parties that inaugurate
such fights as we now have with Cohen,” he wrote, “and have with the
_Sacramento Union_ and Senator Booth ... had to raise money outside
of California, where our property cannot be seen, I am disposed to
think such fights would be few.”[249] In May, 1877, Huntington let
his partners know that reports from California to the effect that the
railroad magnates there were spending their money for personal expenses
with unexampled recklessness had hurt the Central Pacific credit.[250]
At another time he reported that the rumor was abroad that the Central
Pacific had no power under its charter to give notes for money, and
that this had been denied.[251]
All through 1877 the letters exchanged between Huntington and his
partners in the West show the strain which the Central Pacific was
under. Huntington was continually wiring for money in lots of $50,000
to $100,000. Colton was sending it, sometimes by telegraphic transfer,
sometimes in coin. As early as in May, 1877, Colton was talking of dull
business and of reducing expenses. On August 23 he said that he did
not exactly like the present financial outlook. The following day he
spoke of the need of keeping credit good. “We cannot afford to ever be
called on for money,” he wrote, “and not be able instantly to respond.
Our affairs are too extended and extensive for us to take any chances
of suspicion. It would hurt us in many ways, and take a long time to
restore confidence.... I will now commence to renew our loans for six
or twelve months, and take in sail everywhere.”[252] In September he
repeated, “I am going to send you, for the next three months, every
dollar I can, and, for God’s sake, keep all you can for the January
interest. That must be paid. We will not pay out a dollar here, I am
not obliged to. I read _every_ department a lecture on economy about
once a week.”[253] Earlier in the year the accounts of the Huntington
group with the London and San Francisco Bank and with the Bank of
California had been overdrawn from $150,000 to $350,000 each, and
Colton was picking up every dollar outside which he could secure
without showing his hand.[254]
Indorsement of Notes
As a general practice the associates seem to have refused to put their
personal indorsement on the notes which they discounted. Huntington was
very insistent that no indorsements be given; yet in January, 1878,
conditions had grown so bad that Huntington asked the associates to
indorse 100 blank notes and send them to him, to be used as a last
resort, and this was done in spite of the violent protest of Mark
Hopkins. Colton wrote Huntington:
I told him [Hopkins] I felt the wise thing for us _all_ to do, was to
stand in and protect all interests against the debts now owing, but to
_all_ agree _not to incur any more, not to build any_ more road, or
to buy _any_ steamship, or property, either jointly or individually,
until we got out of debt, and had the money in bank to pay for what
we bought. That proposition just met his views, and he said that if I
would agree that we would _all_ live up to that, he would sign 20 of
the blank notes, which he did, 10 of each.[255]
[Illustration: Mark Hopkins]
Conditions in California grew worse rather than better after the notes
were sent, but those in the East improved, and the indorsed notes do
not seem to have been used. Yet, of course, the large accumulation
of floating indebtedness of the Central Pacific could not be hidden
altogether, and the credit of the company was correspondingly
impaired.[256]
Sale of Securities
The first successful negotiations for the sale of Central Pacific and
Southern Pacific securities were initiated in 1878 with the firm of
Speyer and Company, of New York, and resulted in two agreements, dated
the 27th and 28th of January, 1880, respectively. On the former date
Huntington agreed to deliver, on or before January 31, 1880, as might
be demanded, 50,000 shares of the capital stock of the Central Pacific
Railroad at 72, ex-dividend, to Roswell P. Flower, John D. Prince, and
Daniel Probst, representing a syndicate formed for the purpose. In
case the parties took the stock just referred to, Huntington agreed
further to deliver 50,000 more shares within six months from the date
of the agreement, at 77. In any event, and provided that the syndicate
took the first 50,000 shares mentioned in the agreement, Huntington
undertook that no other Central Pacific stock beyond a stipulated
amount of 40,000 shares should be sold to any other parties for a
period of seven months from the date of the agreement.[257]
The syndicate which took Central Pacific stock at this time seems
to have considered the enterprise a speculation justified by the
resumption of dividends by the company, and by the improving stock
market conditions of the time. Mr. Probst said that the general market
had become so strong in the latter part of 1879 that it was a good time
to sell anything.[258] On conclusion of the agreement a regular stock
market campaign was opened with the usual accompaniment of matched
sales to give an appearance of activity.[259] The stock nevertheless
steadily declined, and the option held by the syndicate to take a
second block of shares was not exercised.
The day after the arrangement for the purchase of the Central Pacific
stock was concluded, and partly because of its conclusion, Speyer and
Company entered into a written contract with the Western Development
Company, containing a variety of provisions which together show the
factors upon which the value of Southern Pacific securities then
depended in the eyes of eastern bankers. Under an agreement dated
January 28, the Western Development Company agreed to sell to Speyer
and Company $1,000,000 in Southern Pacific bonds, within ten days,
at 86. Within the year it undertook, in addition, to sell, if Speyer
and Company should wish to buy, an additional $4,000,000 in bonds, at
87.51, and a still further amount of $5,000,000 at 90. On their part,
the Western Development and Southern Pacific companies agreed not to
sell any of the said bonds within a year to others than Speyer and
Company, and the Central Pacific agreed not to issue bonds under the
mortgage in question, to exceed $40,000 per mile.
Terms of Contract with Bankers
The more important features of the agreement with Speyer and Company in
1878 were, however, the following, relating to the lease arrangements
between the Central Pacific and the Southern Pacific. Under these
provisions the Southern Pacific agreed to secure a new lease from the
Central Pacific within three months, containing (1) a provision that
the lease should continue five years from the 1st of May, 1879; (2)
a provision that the lease should be extended if the Southern Pacific
was not connected with the eastern system of railroads, on the 32d
parallel, within five years, until such connection should be made,
provided that the extension of time should not exceed five years; and
(3) a provision that the Central Pacific should pay a rental under the
lease, sufficient to cover interest.
The Southern Pacific also agreed with Speyer and Company that if at
any time before the expiration of nine years from the date of the
lease contemplated, a railroad should be extended so as to connect
the railroad of the party of the first part with the eastern system
of roads, and the Central Pacific Railroad Company should refuse to
prorate with the party of the first part, then the party of the first
part would, before the expiration of one year from the date of such
refusal, fill up or cause to be filled up one of the two gaps then
unfinished between Tres Pinos and Huron, and between Soledad and near
Lerdo, whichever it might choose to build.
The Southern Pacific finally undertook to furnish to the parties of the
third part, within ninety days from the execution of the agreement, the
written opinion and certificate of the chief engineer of the Southern
Pacific, that the line of road either between Tres Pinos and Huron or
between Soledad and near Lerdo could be completed and put in running
order within twelve months of the commencement of work thereon, and
could be constructed for the bonds reserved per mile.
The stipulation in the agreements relating to the lease of the Southern
Pacific to the Central Pacific, and those anticipating further
construction along the coast route, are of special interest. It is
evident that the credit of the Central Pacific and not that of the
Southern Pacific was the basis of the whole transaction. At the time
the contract was signed, the option to take Southern Pacific bonds at
86 and 90, respectively, was considered valuable, but in fact this
option was not exercised.
Later Improvement
After 1880 financial conditions generally improved. The earnings
of the Central Pacific-Southern Pacific roads were still subject
to fluctuations, but for several years substantial dividends were
declared, and the sale of large quantities of Central Pacific stock in
Europe enabled the associates to reduce their commitments. Moreover,
by 1883 the long delayed extension to The Needles was completed and
the necessary outlay for new construction was greatly lessened. The
year 1883 may be taken as the close of the construction period of the
Huntington system. Henceforth, in the absence of special disaster, and
subject to successful settlement of its indebtedness to the government,
the solvency of the Central Pacific and Southern Pacific railroads may
be said to have been assured. We may therefore at this point turn away
from the more personal and financial aspects of the enterprise, to the
consideration of certain important political matters with which the
associates were long concerned.