OPERATING CHARACTERISTICS OF THE SOUTHERN PACIFIC LINES
Proprietary and Leased Properties
Let us now leave the general questions of rates and competition in
California, and return again to the more intimate history of Southern
Pacific development, and particularly to the story of the later
years. The present chapter describes the organization and operating
characteristics of the Southern Pacific system after 1885; the chapters
next following take up that all-important financial problem which
faced the Central Pacific in the later nineties—the repayment of the
government debt.
A glance at the annual report of the Huntington lines shows that
from the point of view of ownership the system, as early as 1885,
was divided into two parts. The first of these was known as the
“proprietary companies,” and included the Southern Pacific Railroad
of California, the Southern Pacific Railroad of New Mexico, the
Southern Pacific Railroad of Arizona, Morgan’s Louisiana and Texas
Railroad and Steamship Company, the Louisiana and Western Railroad,
the Texas and New Orleans Railroad, the Galveston, Harrisburg and San
Antonio Railway, and the Northern Railway. The second was known as
the “leased companies,” and its principal components were the Central
Pacific Railroad, the California Pacific Railroad, and the Oregon and
California Railroad.
The difference between leased and proprietary lines was not in the
operating relations between the two groups and the Southern Pacific
Company, for as a matter of fact all were “leased lines” in this
regard, but in the circumstance that the Southern Pacific Company
held substantially all the stock of the proprietary companies in its
treasury as the result of the issue of its own stock in exchange; this
was not true of the so-called leased companies. In December, 1896, the
Southern Pacific reported 5,250 miles of proprietary lines, and 2,128
miles of leased properties.[497]
From the standpoint of operation the distinction between proprietary
and leased lines was completely disregarded, and naturally so because,
as has been said, both kinds of properties were operated after the same
general fashion. Instead of being classed as proprietary or leased
companies, the Southern Pacific lines were divided for operating
purposes between the Pacific system including the mileage south of and
including Portland, Oregon, and west of Ogden and El Paso, and the
Atlantic system, including the railroads east of El Paso. In 1889 local
legislation compelled the separate operation of the lines in Texas. In
1896 there were 4,966 miles of main line in the Pacific system, 1,967
miles in Texas, and 445 miles in Louisiana. Mention should also be
made of over 3,500 miles of water routes, chiefly those connecting New
Orleans and Morgan City with the West Indies and with New York.
Bigness of System
The fact concerning Southern Pacific properties that seems to have
most impressed observers was their sheer size. A company controlling
7,300 miles of railroad and 3,500 miles of water lines, and operating
between Portland, New Orleans, and New York, was unusually large even
to men accustomed to the great eastern corporations which operated
in the nineties. The railroad mileage of the Southern Pacific in 1896
exceeded that of the Union Pacific by 2,600 miles, that of the Santa
Fé by 940 miles, and that of the Northern Pacific by 2,800 miles. Even
the Pennsylvania Railroad operated only 6,700 miles in 1896, including
lines both east and west of Pittsburgh, while the reported mileage of
the New York Central and Hudson River Railroad was but 2,395 miles in
the same year.
In respect to earnings also, the Southern Pacific bulked large among
its contemporaries. In the single year 1892, with its affiliated
railroads and ferries, it took in nearly $49,000,000 on 6,486 miles of
line, or more than half the earnings of the Santa Fé, Union Pacific,
and Northern Pacific combined. In 1896 the earnings of the Southern
Pacific were about the same as in 1892 upon a substantially greater
mileage, but the earnings of its competitors had also greatly declined.
Naturally enough, the great extent of the Southern Pacific system made
its problems those of extensive rather than of intensive operation.
Locomotive runs were longer on the Southern Pacific than elsewhere, and
more attention was paid to questions of organization, particularly in
later years.
There were other features about the Southern Pacific lines, however,
besides their length, which deserve at least a passing mention. The
system enjoyed, for example, the advantage of a highly diversified
traffic. The year 1900 was not exceptional in this regard, yet in 1900,
22 per cent of the freight carried by the Southern Pacific fell in the
class of products of agriculture, 17 per cent was manufactures, 15
per cent was products of the forest, 10 per cent products of mines, 8
per cent merchandise, and 4 per cent animal products. When we recall
that in the same year 47 per cent of all the freight carried by the
Pennsylvania Railroad Company consisted of anthracite and bituminous
coal, and that nearly half of the freight transported over the
Chicago, Milwaukee and St. Paul Railroad consisted of products of
agriculture and of the forest, we can understand the unusual position
in which the Southern Pacific was placed.[498]
High Average Earnings
Generally speaking, on a railroad system which handles a large traffic
in manufactured goods, the average return per ton per mile will be
large. This is particularly true when the company’s coal tonnage is
of small proportions. In the case of the Southern Pacific, the effect
of such a distribution of business was increased by the fact that the
company possessed the well-nigh exclusive control of a large local
business on the Pacific Coast, on which high rates could be charged.
This was where the efforts of the associates to maintain a monopoly
of rail transportation in California bore fruit. Eighty-two per cent
in weight of the commercial freight handled in 1883 by the Central
Pacific Railroad was classified as local, and almost two-thirds of
this company’s earnings were derived from local business. Indeed, the
local freight during the early years of operation exceeded expectations
as much as the through freight fell behind what was thought would
be its probable development. Prior to the construction of the Union
and Central Pacific railroads, it was supposed that for many years
the through business of the new lines would constitute by far their
principal source of revenue. It was also supposed that the traffic
of the companies would consist very largely in the transportation
across the continent of the products of Asia in transit to the states
situated east of the Mississippi River and to Europe. Both of these
anticipations proved entirely mistaken.
Partly, then, because of the character of the freight which it handled,
and partly because of the fact that a large proportion of its business
was local, the average rate upon the Southern Pacific was very high.
The average freight receipts of the Central Pacific in 1872 were 3.66
cents per ton per mile. While they declined in subsequent years, the
figure was still 2.75 cents in 1878, and 2.14 cents in 1881. In 1878,
while the Central Pacific was earning 2.75 cents per ton per mile, the
Santa Fé received only 2.12 cents, the Union Pacific 2.27 cents, the
Chicago and Northwestern 1.72 cents, the Pennsylvania .92 cents, and
the Lake Shore and Michigan Southern .73 cents.[499] Fourteen years
later, the average receipts on the entire Southern Pacific system were
exactly twice the average receipts per ton per mile on the Illinois
Central, and materially greater than those of most roads in other parts
of the country.
It is evident that the average earnings of the Southern Pacific system
were superior to those of the other transcontinental railroads, to
say nothing of such eastern properties as the Illinois Central and
the Chicago and Northwestern. To break the force of the comparison,
Mr. Huntington was wont to compare Southern Pacific figures with
the averages reported by the Interstate Commerce Commission for the
so-called Group X, which included the Pacific Coast. These statistics
showed, for example, in 1894, that the average receipts per ton per
mile of railroads in Group X were 1.343 cents, while those of the
Southern Pacific (Pacific system) were 1.316 cents. Territorial
averages, however, made up of returns from small companies and from
large, from local and from through concerns, may reasonably be expected
to be higher than averages which apply only to large systems. The
Southern Pacific received more on the average than its competitors,
and almost as much as the group in which it lay, in spite of the fact
that it enjoyed a through business in which a great many of the small
western lines had no share.
Long Average Haul
The influence of through business on the Southern Pacific lines was,
on the whole, opposed to that of the local business. Not only was the
through business highly competitive, but, as might be anticipated, it
was characterized by an extremely long haul. Indeed, in the year 1895
the average length of haul on the through freight transported over the
Pacific system of the Southern Pacific was 844 miles. The average haul
of freight on the entire business of the company was 279 miles. During
the same year the New York Central Railroad reported an average haul of
169 miles, and the Erie one of 156 miles.
The reason for the extraordinary length of haul on the Southern Pacific
lay in the fact that the company served a rich community far removed
from eastern centers of population, yet relying to a considerable
extent upon these centers both as a market for its produce and as a
source for its supplies. Moreover, the commodities of California, such
as fruit and lumber, wool, fish, and wine, and the imports through the
port of San Francisco, such as tea, sugar, and silk, were sufficiently
distinct in character from the typical products of the East to give
something of the stability of international division of labor to the
movements between the Pacific Coast and the eastern states. Much the
same can be said of the transportation of manufactured goods westbound
in view of the high price of labor in the West and the scarcity of coal.
These matters have been considered in a preceding chapter. Their
effect was to make it easy to secure a great many full cars, or even
trainloads, and to reduce terminal expenses to a minimum. Inasmuch,
however, as the raw products of California were heavier and took up
more space than the manufactured goods received in exchange for them,
a very considerable excess of eastbound tonnage often existed. In
1888, to take a year at random for purposes of illustration, the tons
of through freight carried one mile eastward on the Pacific system
were reported as amounting to 335,330,035, while the through westbound
freight amounted to only 232,682,578. This meant light loads and empty
mileage on the westbound traffic. The difference would doubtless have
been greater had it not been for the large westward moving company
freight. Such a tendency called for constant effort on the part of the
officials of the Southern Pacific to secure eastern manufactures for
westbound transportation, and this effort in turn gave rise to friction
between the railroad and the manufacturing interests upon the Pacific
Coast.
On the other hand, the tendency of the passenger traffic was in the
direction of an excess of westbound business, because of the migration
of permanent settlers to California. During the three years from 1888
to 1890, 328,892 through passengers were reported as moving westward
on the Pacific system alone, and only 241,643 as moving eastward, or
an excess of 36 per cent in favor of the West. The excess of westbound
passenger traffic during these three years reached the large total of
76,580,470 passengers, or more than the total eastbound movement in any
one year of the period.
Earnings Density
The greatest density of earnings on the Southern Pacific system was
on properties such as the Central Pacific and the California Pacific,
which together with the Northern Railway formed the main trunk line
from San Francisco to the East. In 1895 the Central Pacific earned
$9,537 per mile and the California Pacific $9,266, amounts which were
far inferior to the results of the operation of railroads in thickly
settled districts east of the Mississippi River, but which yet exceeded
the returns on the Santa Fé, the Illinois Central, and even those
reported on the western portions of such a railroad as the Baltimore
and Ohio.
Next to the California Pacific in the Southern Pacific system, in
respect to earnings, came, in 1895, the South Pacific Coast Railroad,
with gross earnings of $8,000 per mile; the Southern Pacific railroads
of New Mexico, California, and Arizona, with earnings ranging from
$6,500 to $5,800; the Northern Railway with $5,177; and finally the
Northern California and the Oregon and California Railroad companies,
with earnings per mile of $2,600 and $2,400, respectively. The figures
so far given all relate to the Pacific system. In general it may be
said that the earnings of Atlantic system lines were slightly greater
per mile than those of the western properties. This statement does not,
however, hold good of all the Atlantic companies, nor, on the average,
for the Texas roads, statistics for which are given separately.
Diversion of Traffic to El Paso Route
Unquestionably there was a difference in interest between different
parts of the Southern Pacific system, particularly between the Central
Pacific or Ogden route, and the Southern Pacific or El Paso route.
When the Southern Pacific was first completed to El Paso, the question
was raised as to whether it would be the policy of the management
of the whole system to divert all transcontinental freight via the
southern route. In a letter to a bureau of the United States Treasury
Department, Mr. Huntington observed that it would be necessary to
continue to do a large part of the through business over the Central
Pacific in order that that road might be enabled to meet its interest
charges and the requirements of the government indebtedness. The point
was evidently regarded as one which called for a decision as to policy.
Mr. Huntington further pointed out that it would be injudicious for
the Southern Pacific to push any advantage too strongly which it might
have, lest it provoke retaliatory action by other lines.[500]
The early practice of the Southern Pacific did not, however, altogether
accord with this counsel of moderation, and the company seems not only
to have been very active, but actually to have succeeded in capturing
as much as 90 per cent of the New York-San Francisco business; also,
while it did not permanently retain so large a share of the through
freight which moved by rail, it continued to carry the major portion of
the westbound traffic from the Atlantic seaboard to California until
perhaps the year 1887.[501] Some of the freight which the Southern
Pacific handled during this period was new business, but a considerable
portion of it was taken from the Central Pacific.
There is more or less evidence that it was the practice of the Southern
Pacific management to lay special emphasis upon the advantages of the
southern route, in the attempt to divert as much business as possible
to what was known as a 100 per cent line. That shippers believed such
a policy was being followed, is evident from statements which appeared
in the public press. It was currently asserted, for instance, that
ticket and traveling agents of the Southern Pacific all over the state
of California were instructed to use their best endeavors to induce
passengers to move by way of the southern line instead of by way of
Ogden.[502] It was claimed that better time was made over the Southern
Pacific than over the Central Pacific, and that freight shipments were
more easily traced.
Speaking of westbound freight, a San Francisco merchant was quoted in
1896 as stating that the Southern Pacific delivered freight from New
York to San Francisco in from twelve to twenty days. Should the freight
not come to hand promptly, officials of the company were said to be
exceedingly careful to discover the causes of the delay and to see that
the goods were pushed forward as rapidly as possible. On the other
hand, if freight came via Chicago and Ogden, all the way from 18 to
28 days might be spent upon the journey, while information as to the
causes of delay was difficult to obtain.[503]
Testimony of Employees and Officials
One may readily concede that complaints of the character referred
to are to be accepted only with reservations; yet there is later
information which bears out the substance of the charges in convincing
fashion. When the Southern Pacific system was attacked in 1914 as a
combination in restraint of trade, a great many railroad employees were
put upon the stand, and testimony was secured which related not only
to current policy, but also to practices which had been followed by
members of the Southern Pacific staff for a number of years in the past.
It appears without substantial contradiction from the testimony in
this case, that Southern Pacific, and even Central Pacific employees,
solicited for the Sunset route before its combination with the Union
Pacific in preference to the route via Ogden in order to obtain the
long haul, even when the Sunset route was very roundabout. Mr. Connor,
commercial agent of the Southern Pacific at Cincinnati from 1889 to
1901, testified that his office had directed its exclusive time and
attention to securing traffic from California points for the New
Orleans gateway. Shipments moving via Ogden he regarded as lost and
reported them accordingly.[504] Mr. Sproule said that the same was true
of the whole Central Freight Association territory, from Buffalo and
Pittsburgh on the east, to Chicago and St. Louis on the west.[505]
Mr. Spence, director of traffic of the Southern Pacific Company,
admitted that effort was made to send business to California via New
Orleans when the point of origin was in territory east of a line drawn
from Toledo through Indianapolis and Terre Haute to St. Louis.[506] Mr.
Lovett thought that Southern Pacific solicitors even in Chicago did not
work against the solicitation of lines leading to New Orleans, though
acting independently they would solicit business via Ogden.[507] It is
in the record, also, that Southern Pacific solicitors in 1914 sought
freight from the Atlantic seaboard to Oregon and Nevada through the New
Orleans gateway,[508] and that the great bulk of wool from western and
central Nevada destined to the Atlantic seaboard actually moved west
to Sacramento and then south and east over the Sunset line, instead of
taking the direct route via Ogden.[509]
Complaints of Others
This direct testimony of Southern Pacific employees is in harmony with
repeated assertions made by persons outside of the organization, and
seems to indicate that some discrimination against the Central Pacific
and in favor of the Southern Pacific on transcontinental business
was encouraged by those in control of the Southern Pacific Company’s
affairs. As well informed a man as P. P. Shelby, traffic manager of
the Union Pacific, declared in 1887 that he knew by conversation with
shippers that the Central Pacific had diverted all the traffic they
could control to the Sunset route ever since the Southern Pacific
was completed, commencing in 1882. All kinds of merchandise had been
diverted, especially such goods as canned fruits, canned fish, and
wool. Asked whether the Union Pacific would carry 25 per cent more
freight if the Central Pacific were separated from the Southern
Pacific, Mr. Shelby qualified his statement by saying that it was hard
to answer the question. The Southern Pacific gave the Central Pacific
a good deal of freight which that company would not have received were
the two lines segregated. Had they been two independent lines, under
independent management, the Southern Pacific would not have given the
Central Pacific any freight at all.[510]
Similar charges were made by representatives of interests such as
those of the English stockholders of the Central Pacific, who asserted
that Mr. Huntington wished to ruin the Central Pacific, and dwelt
upon the advantages of bankruptcy to a company from which the United
States government was about to attempt to collect a debt. Knowing as
we do that the Huntington-Stanford group shifted the weight of their
investments from the Central to the Southern Pacific in the eighties,
there is of course ground for suspicion that the diversion of freight,
to which the evidence that has been quoted refers, was part of a
carefully thought-out plan, and that more than traffic matters were
involved.
Real Reasons for Traffic Diversion
Yet the truth of the matter probably is that while some diversion from
the Central to the Southern route occurred, this diversion, although
looked upon with equanimity by Mr. Huntington, was not part of an
attack upon the Central Pacific, but may be explained by certain simple
traffic considerations. There were at least two good reasons why an
attempt should have been made to handle business from New York over
the Southern Pacific rather than over the Central Pacific. The first
reason was that it was more profitable for the Southern Pacific to take
freight from New York by a route which it entirely controlled, than
to divide the earnings on such business with the direct lines between
New York and Ogden. The second reason was that the Southern Pacific
could offer better service on the Sunset route than over the Central
Pacific because of the indifference of the lines east of Omaha. The
Central Pacific business was done on a different classification from
that in use in the East. Also, many classes of freight were taken at
low rates because of water competition, so that the divisions accruing
to eastern lines were very small, and their interest in the traffic
correspondingly slight.
Finally, to the eastern roads the whole business was unimportant
compared with the volume of other kinds of goods which they
were handling. The result was that Mr. Stubbs, of the Southern
Pacific, complained very vigorously that eastern lines neglected
transcontinental business. It took four to six days he said, to get
freight through the city of Chicago, and often thirty to thirty-five
days to transport it from Omaha to New York. Freight had to be
way-billed three times via Ogden as compared with one billing via El
Paso. In fact, in 1885 and 1886 the trunk lines practically withdrew
from the transcontinental business, and to this withdrawal should be
attributed the large proportion of the traffic between San Francisco
and New York which was handled by the Sunset route during these
years.[511]
These two reasons, of which one still has force, and the other was
important for a number of years, are sufficient to account for most
of the diversions complained of, and it is not necessary to attribute
additional motives to the Huntington management.
As a matter of fact, in spite of the traffic policy described, the
gross earnings per mile of the Southern Pacific did not move very
differently from those of the Central Pacific during the years from
1886 to 1895, when the data are distinguishable in the companies’
reports. The advances and recessions in volume of traffic were not
identical for the two companies during these years, nor did they occur
at exactly the same times, but the figures seem to offer no support to
the charge that the prosperity of either company was being sacrificed.
It may also be observed that the policy of freight diversion was
not confined to the period when the Central Pacific was negotiating
with the government for the payment of its debt and with the English
stockholders for the adjustment of their claims, nor to the years when
the management of the Southern Pacific Company owned Southern Pacific
shares and did not own a corresponding amount of the shares of the
Central Pacific. In fact, as has been said, the policy of seeking to
obtain the benefits of the long haul is still followed by the Southern
Pacific Company, and its agents still take credit for sending freight
all the way to New York by company lines, although the financial
control of both the Southern and the Central Pacific has long been in
one set of hands.
Traffic in Early Eighties
Like other systems in the United States, the earnings of the Southern
and Central Pacific railroads fluctuated considerably from year to
year. It has been pointed out in a previous chapter that during the
period from 1870 to 1879 the rapid extension of the Southern Pacific
in the South West, and the temporarily unproductive character of the
new mileage built, well-nigh caused the bankruptcy of the entire
concern. The associates were then saved by the completion of the
Southern Pacific main line to The Needles, and by an improvement in
general stock market conditions which enabled them to sell securities
in New York. In 1885 the Central Pacific retired the greater part of a
floating debt of $12,873,946 by an issue of bonds, and for the first
time in many years was freed from what had always been a pressing
danger.
In spite of this important relief, the years 1882, 1883, 1884, and 1885
were still years of considerable difficulty. Although the mileage of
the system now increased but slowly, the revenue per mile declined.
Thus the Central Pacific earned $9,449 per mile of line in 1881,
$8,437 in 1882, $8,253 in 1883, and $7,496 in 1884. In three years
gross earnings per mile dropped 21 per cent. This decline was due to a
number of causes. The Central Pacific suffered greatly, for one thing,
from the falling off in the tonnage supplied by the Nevada mines.
Roads like the Eureka and Palisade, the Nevada Central, the Nevada and
California, and the Virginia and Truckee railroads, which were at one
time lucrative feeders to the Central Pacific main line, all showed a
considerable decline in earnings and business between 1875 and 1885
because of the failure of the mines. The freight received at Palisade,
the terminus of the Eureka and Palisade Railroad, declined 74 per
cent between 1875 and 1888. The freight received at Battle Mountain,
the terminus of the Nevada Central, fell off 78 per cent, while that
arriving at Virginia City over the Virginia and Truckee Railroad
dropped 86 per cent.
It was estimated that the shrinkage of traffic between 1876 and 1885
was not less than $2,000,000 per annum as compared with the period
of highest prosperity of the Nevada country. The decrease was due in
the first instance to the working out of the ore deposits, not only
of the Comstock lode but of nearly all other camps within the states
of Nevada and Utah west of Ogden which were tributary to the Central
Pacific line. Following this, there was a large falling off in traffic,
consisting of mining machinery and all kinds of supplies previously
required by the miners at the mining camps, and also a large falling
off in passenger travel as compared with the first and prosperous years
of operation.[512]
Besides the loss of the Nevada mining traffic in the late seventies and
early eighties, the Central Pacific also had to reckon with a certain
loss of business by reason of the opening of transcontinental competing
routes such as the Santa Fé in 1881 and the Northern Pacific in 1883.
In the early part of the period the decline in business seems to have
been due mainly to local conditions; in 1884, however, as was to be
expected, a serious decrease in the earnings from through business
occurred.
Later Earnings
As a contrast to the unsatisfactory character of the returns for the
years 1883, 1884, and 1885, the reports of the companies show that,
taking the Central Pacific-Southern Pacific system as a whole, the
total earnings from 1885 to 1891 steadily increased, both in the
aggregate and per mile of line. If we compare the condition of the
system in 1891 with its condition in 1885, we find a progress which may
be summarized as follows:
COMPARATIVE STATEMENT OF MILEAGE, CAPITALIZATION, EARNINGS, AND
EXPENSES OF THE SOUTHERN PACIFIC SYSTEM, 1885,(*) 1886, and 1891
Item 1885 1886 1891
Mileage operated 4,698 4,847 6,376
Capital stock $171,036,160 $198,668,170 $264,375,066
Funded debt 158,970,716 181,041,680 205,621,373
Gross earnings 25,006,106 31,797,882 50,449,816
Operating expenses 12,149,824 18,514,656 31,163,612
Net earnings 12,856,282 13,283,226 19,286,214
(*) The figures of earnings for 1885 represent the results of from
nine to ten months’ operation only.
This was a satisfactory showing. The total mileage operated by the
Southern Pacific Company and by the Southern Pacific Railroad, Northern
Division, increased between 1885 and 1891 from 4,698 miles to 6,376
miles, not including the mileage of the steamship routes between New
Orleans and Galveston and New York. The principal elements of new
mileage added were certain lines in Oregon, including the property
of the Oregon and California Railroad from Portland to the California
state line (650 miles); a second road down the San Joaquin Valley on
the west bank of the river (190 miles); and additional construction on
the Coast Division (150 miles). Comparatively little was added during
these years to the Central Pacific main line, or to the properties east
of El Paso.
While the mileage operated thus increased by 1,678 miles, or 36 per
cent, gross earnings became greater by the sum of $25,000,000, or
approximately 100 per cent, and net earnings by $6,429,921, or about 50
per cent. This was accomplished with an increase in bonded indebtedness
of only 30 per cent. The increase in stock outstanding was greater, it
is true, than the increase in the funded debt, but the new stock issue
did not increase the fixed charges of the road, and therefore in no way
imperiled its solvency. In none of the figures cited are the so-called
subsidy bonds issued by the United States government or the accrued
interest upon the same included.
Decline Following 1893
Unfortunately, the progress of the Southern Pacific toward prosperity,
which was so considerable between 1885 and 1891, was interrupted by the
difficult commercial and industrial years between 1891 and 1897. The
effect of world-wide depression upon American railroads is apparent
when we observe that in the eastern part of the United States the gross
earnings of companies like the New York Central fell off during this
period from $21,000 per mile in 1892 to $18,000 per mile in 1897. The
Pennsylvania lines west of Pittsburgh earned $44,210,000 in 1891 on
a mileage of 3,502 miles. Six years later they hardly equaled this
record on a mileage 500 miles greater. Even the protected system of the
New York, New Haven and Hartford saw its gross earnings decline from
$22,000 per mile in 1891 to $20,000 per mile in 1897.
It was scarcely to be expected that the relatively new system of the
Southern Pacific would not suffer with the rest. The figures seem
to show, however, that the Huntington lines suffered more than most
eastern railroads from the depression in business following the panic
of 1893. While it is true that the portion of the roads operated by
the Southern Pacific Company which was known as the Atlantic system,
comprising the lines east of El Paso, escaped with a decline of
earnings from $7,700 per mile to $7,400, or only 43 per cent, the
Pacific system, including the Central Pacific and the Southern Pacific
Railroad of California, witnessed a decline in its returns from $8,000
per mile in 1891 to $6,400 per mile in 1897, or a loss of from five to
six times as much in gross, and a still greater relative decline in
net, receipts.
The following table shows the earnings and expenses of the Central
Pacific Railroad per mile of road from 1885 to the reorganization of
the company in 1898:
OPERATING RECEIPTS AND EXPENSES OF THE CENTRAL PACIFIC RAILROAD OF
CALIFORNIA, 1885-98 PER MILE OF ROAD
Year Gross Earnings Operating Expenses Net Earnings
1885 $ 8,383.26 $3,712.93 $4,670.33
1886 9,135.18 4,445.62 4,689.56
1887 10,092.27 5,394.48 4,697.79
1888 11,641.24 7,079.38 4,561.86
1889 11,416.92 7,178.13 4,238.79
1890 11,715.97 7,259.55 4,456.42
1891 12,224.76 6,771.95 5,452.81
1892 10,745.16 6,548.29 4,196.87
1893 10,488.89 6,267.71 4,221.18
1894 9,578.18 6,008.06 3,570.12
1895 9,534.31 5,990.94 3,543.37
1896 9,159.68 5,706.59 3,453.09
1897 4,270.75(*) 2,715.62(*) 1,555.13(*)
1898 11,595.87 6,769.00 4,826.87
(*) Six months only.
These figures show very clearly that the gross receipts of the Ogden
route increased on the average per mile of road from 1885 to 1891, but
that they fell off largely and persistently from 1891 to 1897. Indeed,
the net earnings per mile each year from 1894 to 1897 inclusive, were
less than those for any of the nine preceding years.
Suspension of Central Pacific Dividends
It seems very likely that this unusual falling off in the receipts
of the Central Pacific Railroad Company is to be associated with the
exceptionally disturbed traffic conditions on the Pacific Coast during
the four or five years beginning in the latter part of 1891. These were
the years when the Traffic Association of California was conducting
its violent attack upon the Huntington interests. The period was
also marked by the dissolution of the Transcontinental Association,
and by the construction of the San Francisco and San Joaquin Valley
Railroad. It was not to be expected that a campaign such as has been
described in previous chapters would fail to have an influence upon
the receipts of a company interested in business in, to, and from the
state of California, so that a disproportionate decrease in Central
Pacific earnings was not surprising. However this may be, the effect of
the decline in earnings was to force the Central Pacific to stop the
payment of dividends; and the cessation of dividends, together with
other elements of uncertainty in the situation to which reference will
be made, eventually caused the price of Central Pacific and of Southern
Pacific stock to decline.[513]
Dividend Policy
In respect to dividends a word should be said here, enough at least to
make clear that the whole dividend policy of the Central Pacific was a
matter which provoked criticism, and that this criticism grew acute at
the close of the period we are discussing. As a general matter it was
charged that the Central Pacific had no business to pay any dividends
at all while its indebtedness to the United States government remained
uncanceled. It was further alleged, with more show of reason, that
the dividends of the eighties were declared in order to assist the
associates in disposing of Central Pacific stock in Europe, and not
because there existed any surplus to which they could be properly and
wisely charged. Finally, enemies of the company asserted, and showed
ground for believing, that the dividends set forth in the annual
reports of the Central Pacific to its stockholders did not represent
all dividends actually declared; they asserted that, in addition, by
special arrangement, considerable sums were paid out in unreported
dividends, which may or may not have reached all holders of the stock.
It appeared in this connection that a gentleman named Sir Rivers
Wilson had come to the United States in 1894 as a representative of
English shareholders.[514] Sir Rivers interviewed officers of the
Central Pacific, inspected the property, and it was reported in the
newspapers after his return to the East that he had arrived at a
compromise with Mr. Huntington. The terms of the compromise were at
first only vaguely understood, but the _London Economist_, in its
issue of March 23, 1895, declared specifically that Mr. Huntington had
undertaken to pay 1 per cent per annum in the shape of dividends until
satisfactory legislation had been obtained for the adjustment of the
Central Pacific’s debt to the government, and that he had also agreed
to pay 2 per cent per annum for two years after the debt question had
been settled, during which time the shareholders would have opportunity
to review their position and to consider effecting an arrangement of a
more permanent character.
Mr. Huntington’s attention was called to this statement of the
_Economist_, but he made no denial of the facts stated. Three years
later Mr. Huntington went further, and admitted that he had agreed with
Sir Rivers Wilson to pay shareholders—all shareholders—an annual
dividend of 1 per cent upon their stock.[515] It was understood that
the money for the secret Central Pacific dividends was loaned to the
Central Pacific by the Southern Pacific, although this detail was not
authoritatively established.
Market Prices of Stock Shares
Neither the Central Pacific nor the Southern Pacific were ever
investment properties under the Huntington régime, in the sense that a
stable return could be expected by holders of their stock, or even in
the sense that the selling price of their shares remained reasonably
uniform or ever reached a quotation in the neighborhood of par. Central
Pacific stock sold at 34 in January, 1885. It rose to 51 in 1886,
fluctuated principally between 26½ and 42 during the years from 1887
to 1892, and then proceeded to fall in value until in the spring of
1897 it was quoted on the New York Stock Exchange at the nominal figure
of 7⅛ per share. The stock was ordinarily not traded in to any extent
probably because so much of it was held abroad.
Southern Pacific stock was listed on the New York market in 1885, but
as has been explained in a previous chapter, quotations on the shares
were for several years artificial. In 1890 the stock sold mostly
between 25 and 35. It declined slightly during the latter part of
1890 and the early part of 1891, but from September, 1891, to August,
1892, most of the sales were between 35 and 40. Beginning in 1893 the
price of Southern Pacific stock began to decline. In 1894 it reached
17½, in 1895, 16¾; and in 1897 it touched the low point of 13½. After
1898 Central Pacific stock left the market, but Southern Pacific stock
recovered to about 50 in the middle of 1901, at which approximate price
46 per cent of it was purchased by the Oregon Short Line.
It is not without interest that the fluctuations in the quotations
of the stock of the Central Pacific were quite as extreme between
1885 and 1890 as were those of the Southern Pacific shares, although
one stock was occasionally a dividend payer and the other was not,
and that the Central Pacific stock was quoted at a distinctly lower
figure between 1894 and 1898 than was the stock of its apparently more
speculative associate. The reason is not to be found in the different
natures of the properties represented by the two stocks, nor in any
difference in operating conditions. It was plainly due to the gradually
approaching maturity of the debt which the Central Pacific owed to the
United States government, and to the complete uncertainty as to the
effect which government action might have upon the solvency of the
Central Pacific Railroad. So long as there seemed a possibility that
the Central Pacific would be called upon to make good, in cash, an
advance which by 1898 would amount to nearly $60,000,000—a sum which
few persons believed that the Central Pacific would be able to pay—the
stock certificates of this company could have only a speculative value.
The question of the best way to meet the huge obligation which had
grown out of the assistance tendered to the Central Pacific Railroad
by the federal government under the Pacific Railroad Acts of 1862 and
1864, was indeed the most important financial problem which the company
had to solve after Mr. Stanford’s death. The two following chapters
will be devoted to an exposition of the points involved in this
transaction, and to a description of the solution finally reached in
the year 1898.