THE THURMAN ACT
A Loan, Not a Subsidy
The original loan of the United States government to the Central and
Western Pacific railroads amounted to $27,855,680. The bonds which
were issued to the companies were United States currency bonds,
bearing 6 per cent interest, payable semiannually and maturing at the
end of thirty years. They fell due therefore between 1895 and 1899.
Some question has been raised as to whether these bonds were to be
regarded as a loan or as a donation to the corporations which received
them. Setting aside the fact that a loan at a critical moment may be
almost as serviceable to the recipient as a gift, the evidence shows
that the unquestionable purpose of Congress in 1862 and 1864 was that
principal and interest of the bonds should be met by the railroads for
the benefit of which they were issued. It follows that this bond issue
constituted an advance to the Central and Western Pacific railroads,
not a gift; a loan, not a donation. It was the contention of Mr.
Huntington, indeed, that the very name “subsidy” was a misnomer. He
said:
The Central Pacific never got a subsidy; they got the loan of a small
subsidy. The government loaned money at six per cent and they expected
and did receive direct benefits from the time the road was built. It
was not a subsidy in any way.... A subsidy as I believe is where you
give ... For instance if you will build a railroad I will give you
$10,000 as a subsidy; as to being a loan of money it is no such thing.
It is only a business negotiation.[516]
We must therefore recognize that the government advances to the
Central Pacific did not constitute a subsidy in the ordinary meaning
of that term. At the same time it should be observed that the Pacific
railroads occupied a peculiarly advantageous position in respect to
the loans which the government made to them. As will presently appear,
although interest on this loan was charged, the companies were not
obliged to pay a cent of this interest until the maturity of the
bonds. This unusual concession was declared by the Supreme Court to be
the necessary result of the absence of a precise stipulation to the
contrary in the Acts of 1862 and 1864. The court said:
It is one thing to be required to pay principal and interest when
the bonds have reached maturity, and a wholly different thing to be
required to pay the interest every six months, and the principal at
the end of thirty years. The obligations are so different, that they
cannot both grow out of the words employed, and it is necessary to
superadd other words in order to include the payment of semiannual
interest as it falls due.[517]
Payment of Simple Interest at Maturity
A second concession to the Pacific railroads was made when no interest
on deferred interest payments was exacted. Ordinarily in such cases
interest is compounded at intervals of six months. On a thirty-year
loan of $27,855,680, issued under the conditions which characterized
the subsidies to the Central and Western Pacific railroads, the
difference between simple interest and interest compounded semiannually
would be $113,974,300. That is to say, simple interest would amount
to $50,140,224 at the end of thirty years, while compound interest
would equal the materially greater sum of $164,114,524. Put another
way, the value in January, 1865, of the right to receive the principal
of the government loan increased by simple interest according to the
terms and at the dates contemplated by the Acts of 1862 and 1864, was
only $13,000,000. This was the value of the monetary consideration
which the federal government accepted from the Central and Western
Pacific railroads. On the other hand, the value of the advance made
by the government to the same railroads as of the same date was
$23,000,000, or a difference of $10,000,000. This computation assumes
that government bonds were sold at par, and that the current rate of
interest was 6 per cent. The difference indicated would be reduced if
government bonds were assumed to have sold for less than par, and it
would be increased were a higher rate of interest than 6 per cent used
in the calculation. Discussions of the Acts of 1862 and 1864 usually
fail to make clear that the government demanded simple interest only on
its loan, but as a matter of fact this was a feature of the contract
which was of substantial value to the beneficiary.
Claims for Indemnity
It was of course expected by Congress that the Pacific railroads would
make adequate provisions during the life of the bonds to meet the
interest and principal due at their maturity. Before discussing the
disputes concerning the size and nature of the sinking funds which
should have been erected, a few words may be said regarding certain
equities to which the Stanford-Huntington group repeatedly alluded as
constituting reasons for not paying the bonds at all. These equities
may be briefly enumerated as follows:
The first equity was said to have arisen out of the loss which it was
claimed the Central Pacific had sustained through failure to sell
the bonds received by it from the government at par. This loss was
estimated at $7,120,074, a sum which was raised by accrued interest
up to the time of the maturity of the bonds to the very considerable
figure of $19,936,206. According to Stanford, the government loan
netted the company only 65 cents on the dollar. He said:
Indeed, if the company had taken advantage of the time allowed by
Congress for the completion of the road, they could not only have sold
the government bonds at par, but could also have disposed of their own
first mortgage bonds at their face value, which would have been a net
gain, over and above what was actually received, of $7,120,074, the
interest on which for thirty years would have been $12,816,132, which
would make an aggregate saving on the government bonds and the bonds
issued by the company, principal and interest in round numbers, of
about $40,000,000.[518]
In the second place the Central Pacific insisted that there should be
credited to it a portion of the amount which the government saved in
the transportation of government employees and freight as a result of
the rapid construction of its railroad. Under the terms of the Acts
of 1862 and 1864, the Central Pacific and Union Pacific might have
delayed completion of their road until July, 1876. As a matter of fact
the through line from Sacramento to Ogden was opened in May, 1869. The
consequent saving to the government was estimated at $47,763,178, of
which the Central Pacific proportion was set at $21,971,062. A similar
calculation laid before the United States Pacific Railway Commission in
1886 reached the conclusion that the total saving to the government up
to January 1 of that year had reached the sum of $139,347,741 on the
Union and Central Pacific combined. The basis for these estimates was
found in a comparison of the rates which the government had paid for
rail movement and the rates which it would have had to pay for ox team
and mule team transportation.
Still a third claim was based upon an alleged loss of business
consequent upon government subsidies to other transcontinental roads.
The loss of earnings to the two roads from this cause was set at
$37,000,000, of which the Central Pacific share was put at 46 per cent,
or $17,000,000. Stanford did not deny that the government had a right
in its discretion to aid other lines of railroad, but he took the
position that if Congress found it in the interest of the country to do
something which deprived the Central Pacific of the means of paying
its debts, then it should compensate the Central Pacific for this
action.[519]
No Basis for Claims
These three principal claims for indemnity were set up by officials of
the Southern Pacific at one time or another as complete offsets to the
obligations laid upon the company by the Acts of 1862 and 1864. Among
minor equities should be mentioned also an alleged loss to the Southern
Pacific by reason of the government’s slowness in issuing patents to
land. Another claim was based on a loss in respect to sinking fund
investments of the company; and still another on the shipment of United
States mails by other than bond-aided lines when the use of the latter
was possible.
There was no real reason, however, why the government should have
reduced its claims against the Pacific companies because of any of the
equities mentioned. The administration certainly gave no guaranty in
1864 that the subsidy bonds would sell at par. The government offered
the bonds for what they were worth, and the companies accepted them
on that basis. Nor did the government at any time agree to preserve a
monopoly of transcontinental business for the Central route, or to send
its own freight over the Central and Union Pacific railroads to any
greater extent than might prove convenient. On these points the facts
are perfectly clear. It would seem clear, also, that the government was
under no obligation to share with the companies any saving which it
had made by reason of the early construction of the transcontinental
line. The companies had built more rapidly than had been expected, it
is true, but the construction was pushed in their own interest, not in
that of the government, and gave rise to no proper claim against the
latter. The other points in the companies’ contentions do not deserve
special mention.
Sinking Fund Provisions
We may now return to the question of the government debt and its
repayment. The Laws of 1862 and 1864 contained two provisions intended
to enforce the original stipulation that principal and interest of
the subsidy bonds should be paid by the beneficiaries. These laws
required that 5 per cent of the net earnings of the Central Pacific
after the completion of the road,[520] and second, that one-half of the
compensation for services rendered to the government should be annually
applied to the payment of interest and principal of the subsidy bonds
until the whole amount was fully paid. It was then expected that these
two sources of income would provide a fund sufficient to meet both
principal and interest in full.[521]
This expectation was not, however, fulfilled. On the contrary, it was
already apparent in the seventies that the amount which the companies
would be called upon to repay was mounting up much more rapidly than
the credits designed to meet it. Six per cent interest upon $27,855,680
of bonds called for an annual interest of $1,671,340.80. From 1867 to
October 31, 1877, the one-half of transportation account for carrying
mails, troops, supplies, etc., withheld by the government and credited
to the Central Pacific sinking fund was only $1,423,555.74, or less
than $200,000 a year.[522] The 5 per cent of net earnings account
averaged $331,481 from 1872 to 1876.[523] The total annual payment
by the Central and Western Pacific railroad companies, therefore,
approximated $530,000, leaving a deficit of over $1,100,000 a year. At
this rate it was not unreasonable to suppose that the Central Pacific
would be much more heavily in debt to the government at the maturity of
the bonds than it was at the time of their original issue.
Right of “Set-Off”
Alarmed at the probable failure of the sinking fund provisions, the
Secretary of the Treasury, on advice of the Attorney-General, withheld
from the Central Pacific Railroad _all_ the compensation due it for
services rendered to the government. The same action was taken with
respect to the other bond-aided lines. This was clearly illegal, and
Congress accordingly passed the Act of March 3, 1871, directing payment
of the sums withheld.[524] On passage of the Act of 1871, the Secretary
of the Treasury began to pay to the Central Pacific and to the other
bond-aided companies, the 50 per cent of compensation for services
rendered to the government which the statutes required. Since, however,
there seemed to be a legitimate difference of opinion as to whether the
government should continue to pay money to companies already heavily in
debt to it, Congress proceeded two years later to pass the Act of March
3, 1873, which, in effect, remitted the whole controversy to the court.
The terms of the Act of 1873 were as follows:
That the Secretary of the Treasury is directed to withhold all
payments to any railroad company and its assigns, on account of
freights or transportation, over their respective roads, of any kind,
to the amount of payments made by the United States for interest upon
bonds of the United States issued to any such company, and which
shall not have been reimbursed together with the five per cent. of
net earnings due and unapplied as provided by law; and any such
company may bring suit in the court of claims to recover the price of
such freight and transportation; and in such suit the right of such
company to recover the same upon the law and the facts of the case
shall be determined and also the rights of the United States upon the
merits of all the points presented by it in answer thereto by them and
either party to such suit may appeal to the Supreme Court; and both
said courts shall give such cause or causes precedence of all other
business.[525]
The intent of Congress in 1873 was that, in order to make a case, the
Secretary of the Treasury should withhold the sums demanded by the
bond-aided railroads including the Central Pacific, that the companies
should sue, and that the court should then decide. In pursuance of this
idea, the Union Pacific promptly brought suit against the government
in the Court of Claims to recover the amount due from the United
States for transportation of government passengers and property after
deducting one-half of the amount as required by law. A decision being
rendered in favor of the company, the United States appealed to the
Supreme Court, where the judgment was affirmed.
The foundation of the government position was that the United States
could legitimately offset the interest on subsidy bonds which it was
paying currently against the sums due the bond-aided railroads for
government transportation. The reply of the court was, first, that the
general principles of “set-off” did not apply in the case at bar; and
second, that the United States had no claim in any event because the
law did not require the Union Pacific (and the same principles applied
to other bond-aided railroads) to meet the interest charges on the
government advances until the maturity of the bond.[526] A later case
added the ruling that the United States had in the matter only the
right of a creditor growing out of contract, and could not fall back
upon its sovereign rights in order to protect its financial claim.[527]
Not only did the Supreme Court decide completely in favor of the
companies in the important matter of “set-off,” and in that relating to
the date upon which the Pacific railroads became liable for the payment
of accruing interest on the subsidy bonds, but it diminished also the
sinking fund payments of the companies by holding that under existing
legislation it was proper for the companies, in calculating net
earnings, to deduct from gross earnings expenses incurred for enlarging
and improving their property. The particular account involved was
that of expenditure for station buildings, shops, and fixtures. Such
expenditures are not ordinarily charged to operating expenses, and the
court admitted that “theoretically” they should not be so charged. The
practice was nevertheless justified on the ground of general policy, as
likely to encourage a liberal application of earnings to improvements.
The same decision also authorized the Central and the Union Pacific to
deduct interest on first mortgage bonds from earnings before computing
the 5 per cent of net earnings which was to be credited to the sinking
fund. This ruling was defended as a legitimate consequence of the
concession of priority to the first mortgage bonds.[528]
Need of Governmental Action
While Congress was considering ways and means for enforcing some
adequate provision for the eventual repayment of the government’s
advance to the Pacific railroads, the Central Pacific declared
dividends which amounted to no less than $18,453,670 in the five years
from September 13, 1873, to October 1, 1877. In 1873, 3 per cent was
declared; in 1874, 5 per cent; in 1875, 10 per cent; and in 1876 and
1877, 8 per cent. To see earnings divided among a group of financiers
who were believed to be already overpaid, while the unpaid interest on
the government subsidy bonds piled up, was all the more exasperating
because of the apparent helplessness of Congress. Some action, however,
was presently to be taken. In 1874 a bill was introduced in the Senate
to alter and amend the Acts of 1862 and 1864 so as to safeguard the
government equity. In 1876 Mr. Thurman, of Ohio, presented another
bill, which was reintroduced in 1877, referred to the Committee on
Judiciary, and ultimately reached the Senate in March, 1878. This bill
ultimately became the Thurman Act of 1878.[529]
The situation as it appeared in 1878 was succinctly presented by Mr.
Thurman on the floor of the Senate. The government’s loan to the
Central and Western Pacific amounted to $27,855,680. The interest
upon that sum for thirty years would be $50,140,224, making a total
of $77,995,904. The probable reimbursement from the 5 per cent of net
earnings and the half of the transportation accounts would be about
$15,000,000, leaving probably due at the maturity of the government
loan, should the laws remain unchanged, the sum of $62,995,904, which,
added to the amount that would probably be due from the Union Pacific,
made an aggregate of $119,248,979.[530] To this amount there was also
to be added in estimating the payments which the Central Pacific,
Western Pacific, and Union Pacific would be called upon to make in the
late nineties, the amount of the first mortgage bonds of the three
companies, the lien of which was prior to the lien of the subsidy bonds.
It seemed manifest to Mr. Thurman in March, 1878, that the bare
statement of the amount for which the government would be the creditor
of the Pacific railroad companies ought to satisfy anyone that some
step should be taken by Congress to secure the government from loss.
This point of view was not seriously contested. Objection to any
action there was, indeed, but not based on any denial of the assertion
that the security of the government was becoming impaired.
Thurman Bill
On the basis of the admitted need, Mr. Thurman, in behalf of the
Committee on the Judiciary of the United States Senate, made a series
of concrete proposals. The essence of the Thurman plan was that the
annual payments of the Pacific railroads for the eventual retirement of
the government debt should be largely increased. It was contemplated
that 5 per cent of the net earnings of these railroads, together with
half of the sums due to the companies for government transportation,
should continue to be applied to the retirement of the subsidy bonds.
This annual appropriation Mr. Thurman estimated at $531,000. But it was
now intended that in addition to this sum there should be retained by
the government and credited to a sinking fund, the other half of the
sums due to the companies for government transportation; proceeding
still further, the Thurman bill provided that in case the whole of the
government transportation accounts, added to the 5 per cent of net
earnings, did not make a sum equal to 25 per cent of net earnings, then
the Pacific railroads should pay into the sinking fund such sums not
exceeding $1,200,000 for the Central Pacific and $850,000 for the Union
Pacific, as would bring the companies’ payment up to 25 per cent.
Textually, the section of the Thurman bill relating to the Central
Pacific sinking fund read as follows:
Sec. 4. That there shall be carried to the credit of the said
fund, on the first day of February in each year, the one-half of
the compensation for service hereinbefore named, rendered for the
Government by said Central Pacific Railroad Company, not applied in
liquidation of interest; and, in addition thereto, the said company
shall, on said day in each year, pay into the Treasury, to the credit
of said sinking fund the sum of one million, two hundred thousand
dollars, or so much thereof as shall be necessary to make the five
per centum of the net earnings of its said road payable to the United
States under said act of eighteen hundred and sixty-two, and the
whole sum earned by it as compensation for service rendered for the
United States, together with the sum by this section required to be
paid, amount in the aggregate to twenty-five per cent of the whole
net earnings of said railroad company, ascertained and defined as
hereinbefore provided, for the year ending on the thirty-first day of
December next preceding.[531]
Mr. Thurman estimated the total payments which the Central Pacific
would have to make under his bill at $1,900,000 annually, or
substantially more than the accruing 6 per cent on the subsidy
loans.[532] In case earnings should be insufficient to meet interest
charges on underlying first mortgage bonds after the deduction of 25
per cent, the Secretary of the Treasury was authorized to remit as much
of the 25 per cent as might be necessary to avoid default.
Disappointing Results
From the point of view of the government, the clauses of the Thurman
bill relating to the annual payments of the companies were of the first
importance, because upon them depended the adequacy of the provision
for the eventual cancellation of the government debt. As a matter of
fact, the payments were less than Senator Thurman anticipated, because
the earnings of the Pacific railroads proved disappointing. Instead
of $1,900,000 annually, the average contribution up to 1897 was only
$629,690. In particular, the clauses requiring the companies to add to
the sums earned from government transportation and that measured by 5
per cent of net earnings sufficient to bring the total up to 25 per
cent of net earnings, were ineffective. In but one year after 1883 was
anything paid on this last account. Indeed, the earnings of the Central
Pacific fell so low that the government transportation and 5 per cent
accounts at times amounted to 50 per cent of net earnings without any
addition from other sources.
It was assumed by some speakers on the Thurman bill in the Senate, that
under the proposed plan the total contribution of the Pacific railroads
toward the reduction of the government debt was to be paid into a
sinking fund. This was not, however, the case, as a careful reading of
the statement already made will make clear. Instead, the payments which
these railroads had been making under the Acts of 1862 and 1864 were
to be continued, and were to be credited directly to the railroad debt
as before. The money was to be held in the United States Treasury, and
no interest was to be allowed upon it.[533] It was only the balance,
comprising the half of the payment due the companies for government
transportation which they had received under the Act of 1864, and such
additional payment, not exceeding $1,200,000 or $850,000 respectively,
as would be necessary to bring the whole contribution of the companies
under the proposed law up to 25 per cent of net earnings, which was
credited to the sinking fund. The distinction is important, because
the sums paid into the sinking fund earned compound interest, whereas
the sums credited to bond and interest account earned no interest at
all. That is to say, the contributions to the sinking fund were to be
invested in government bonds, and the interest on these bonds was to be
reinvested semiannually in the same security, but other payments merely
gave rise to credits on the government books.
Sinking Fund Investments
The mention of the sinking fund leads naturally, however, to a
reference to the provisions of the Thurman bill relating to sinking
fund investments. Mr. Thurman proposed in 1878 that the sums credited
to the Pacific railroads’ sinking funds be used to purchase United
States bonds, preferably 5 per cent bonds because other outstanding
issues were either insufficient in amount or had only a short time to
run. Up to June 30, 1897, about $6,000,000 were available for such
purchases. But this limitation of the field of investment seriously
crippled the earning power of the fund by requiring the purchase of
securities of classes which either bore low rates of interest or which
commanded considerable premiums in the market. The average premium paid
by the Central Pacific up to 1883 was approximately 13 per cent.[534]
In 1891 the Commissioner of Railroads reported that between the date of
the creation of the sinking fund in 1878 and the date of his report,
on June 30, 1891, the government had bought bonds with a par value of
$6,138,800 for the Central Pacific, for which it had paid a premium
of $1,110,409.62, or an average of 18 per cent. At times the premium
paid had gone as high as 35 per cent,[535] and in the earlier years the
payments on account of premiums materially exceeded the earnings of
the sinking fund in the way of interest. This excess disappeared, of
course, as the fund grew larger, but the absolute amount of the premium
continued to grow.
The principal bonds in which the sinking funds were invested up to
1882 were the United States currency sixes, the 5 per cent funded loan
of 1881, and the 4 per cent funded loan of 1907. In 1881 the funded
fives matured and were continued at 3½ per cent. In 1882 the Treasurer
of the United States exchanged these bonds for a new 3 per cent
issue. Inasmuch as the bonds which bore the higher interest rates all
commanded a premium, the actual yield of the fund up to 1886 was only
from 2½ to 3 per cent. This condition was recognized as disadvantageous
by all concerned. The Commissioner of Railroads declared in 1883 that
it would require a century or more at the rate provided in the Thurman
Act to accumulate a fund sufficient to discharge the railroad debt,
with a strong probability that even then it could not be done.[536] The
Auditor of Railroads in 1879, the Secretary of the Treasury in 1881,
and the Commissioner of Railroads, in various reports, all urged that
the field for investment of the sinking funds be widened, at least
to include the first mortgage bonds of the Pacific railroads. Since
the lien of these bonds was prior to that of the sinking fund itself,
it seemed appropriate to allow the Secretary of the Treasury to buy
them with sinking fund money. The suggestion was adopted by Congress
in 1887,[537] with the result that interest on the funds placed in
this new investment amounted to 4.15 per cent. This was a substantial
increase from the 2½ or 3 per cent realized from government bonds,
though still less than the 6 per cent carried by the subsidy bonds
themselves.[538]
Passage of Bill
The Thurman bill was carefully considered by the Senate before its
enactment, and may fairly be said to embody the best judgment of
Congress at the time of its enactment. The final vote in the Senate was
taken on April 9, 1879. Forty Senators voted for the bill, and twenty
against it.[539] If paired votes for and against the act be included,
the vote was forty-four to twenty-six. Twenty-seven Democrats voted for
the bill, and six against it. Yet in spite of this strong Democratic
party support and the opposition of Senators Blaine and Conkling,
nearly as many Republicans went on record for the bill as voted or were
paired against it. In the House there were but two votes against the
bill compared with 243 in favor of it.[540]
In neither house was there marked party or sectional division.
Doubtless the passage of the act was made easier by the general
unpopularity of railroad enterprise in 1878, although adequate reasons
for additional legislation undoubtedly existed. It was the period of
the aftermath of the panic of 1873—the epoch of Granger legislation
and railroad control bills, of revelations regarding rebates and
construction frauds. Sentiment ran strongly against great railroad
corporations. Railroads still had stalwart supporters, but it is
putting it mildly to say that the presumption in doubtful cases was
against them.
Feeling of Railroad Men
There is plenty of evidence, nevertheless, that railroad men felt very
bitter that the Thurman bill should ever have been passed. Stanford
declared that no act so destructive to private right had ever before
been attempted in this country, and that only two examples of such
atrocity could be found in English history; one being the suppression
of the order of Templars in the time of Edward the Second, and the
other, the suppression of the religious houses in the time of Henry
the Eighth. Undoubtedly, also, the railroads were active in Congress
in the attempt to prevent the passage of the Thurman Act. The
reader’s attention has already been directed in a previous chapter
to correspondence relating to the Thurman bill which passed between
Huntington and Colton in 1877 and 1878. It will be recalled that in
January, 1878, Huntington wrote that matters did not look well at
Washington. He thought, however, that the railroad would not be much
hurt, although “the boys are very hungry, and it will cost considerably
to be saved.” Some time before this, in May, 1877, Huntington wrote:
We must have friends in Congress from the West Coast, as it is very
important. I think that we can kill the open highway, and get a fair
sinking fund bill by which we can get time beyond the maturity of the
bonds that the Government loaned us, to pay the indebtedness.[541]
Again, in November, Huntington said:
Some parties are making great efforts to pass a bill through Congress
that will compel the Union Pacific and Central Pacific to pay large
sums into a sinking fund, and I have some fears that such a bill will
pass.... The temper of Congress is not good and I fear we may be
hurt.[542]
A letter from Colton dated March 5, 1878, reads:
By the telegraph this morning in the papers I see outline of Thurman’s
Sinking Fund Bill, etc. It does seem as though the whole world, Courts
and all, were determined to rob us.
* * * * *
I know you are having a terrible struggle on that side, and think of
you very often, but, Huntington, I see no way but to fight it out on
these lines, and fight them inch by inch while we last; let’s look to
paying our debts, incurring no more, and stand by the wreck to the
last. We can at least die game.[543]
When the Thurman bill passed the Senate, the correspondence took a
still more gloomy turn. Huntington wrote Colton on April 19, 1878,
that in his judgment the House would follow the Senate’s lead. He
had made some mistakes, of which the greatest was Gould’s going to
Washington. Colton replied, on April 29:
We all agree with you that this Congress is simply a band of robbers.
They were such a set of cowards they dare not go onto the highway and
give the man they rob an even show with them, but went to Congress and
did it through that channel. But Huntington, we will live to see many
of these fellows come to grief. I trust the day will soon come that
we can get in a shape that you can avoid going to Washington during a
session of Congress. A few sessions like the present one and the last
will wear you out....
* * * * *
I think you will remember I wrote you once or twice that in my opinion
Jay Gould would be a heavy load for us to carry in Washington or
elsewhere, whenever we had connections with him that would affect our
interests, on account of the general feeling against him. So I am not
surprised to read what you say of him and the Funding bill, but it was
a thing we could not help, as I understand it....
* * * * *
I hope Congress will adjourn soon, and that you will be able to get
out here as early as possible, for I want very much to see you again.
There is much for us all to talk over and look after. I do not think
you will find anyone to buy you out, nor do I want you to. I think we
must stick to the wreck.[544]
Letters such as those quoted display the state of mind of the Central
Pacific associates during the months when the Thurman bill was under
discussion. It was perhaps natural that they should have opposed
sinking fund legislation, for this cut into the surplus which the
Central Pacific would otherwise have had for dividends, and depressed
the price of the railroad’s securities. Nor, indeed, was it perfectly
clear that the new legislation did not constitute a breach of the
contract between the Pacific railroad companies and the government
which could be deduced from the Acts of 1862 and 1864. The legislation
in these acts had, it is true, reserved to subsequent Congresses the
right of amendment and repeal, but it was uncertain, nevertheless,
to what extent this right could properly be exercised. On this point
a decision of the Supreme Court was had in 1878, upholding the
constitutionality of the Thurman Law on broad grounds, but by a divided
court.[545]
Charge Against Railroad
The unfortunate fact about the Thurman Act, however, was not that it
excited the anger of representatives of the railroad companies to which
it applied, but that it proved a failure in its primary purpose of
providing for the eventual retirement of the subsidy bonds. But before
summarizing the workings of the law in this respect, a word may be
said regarding certain disputes which occurred in the course of its
administration.
In February, 1881, Thomas French, Auditor of Railroads, made the charge
that the Central Pacific was diverting business from the subsidized
portions of its line to its leased properties in order to lessen the
payments required under the Thurman law. The basis for this charge, so
far as reported, appeared to lie in the fact that the net earnings of
the Central Pacific were decreasing, while those of the Union Pacific
were going up. Mr. French suggested that the Pacific railroads be
required to contribute up to 50 per cent of net earnings for retirement
of the government debt, instead of up to 25 per cent as then required
by the law.[546]
Mr. French’s suggestion was not adopted, but the government
subsequently advanced the claim that it had the right to retain
all the compensation for service rendered to the government by the
bond-aided companies without regard to the conditions of construction
of particular sections of the road. The company took a different view
of the matter, but in deference to an opinion of the Attorney-General
on this point, the Secretary of the Treasury in 1884 withheld
compensation on the entire mileage of the Pacific railroads pending an
authoritative decision. The Supreme Court, however, ruled in favor of
the companies,[547] and the sums withheld had to be paid over.
In subsequent years the earnings of the portions of the Central and
Union Pacific which had received no bond subsidies were credited, in so
far as they arose from government business, as a part of the 5 per cent
of net earnings which these companies were required to apply to the
eventual retirement of the government debt. This meant a considerable
amount of bookkeeping, which was increased by other claims of the
companies of which no detailed mention is here made. Indeed, when the
final settlement was concluded between the Central Pacific and the
government, credits to this one company were allowed by the United
States to the amount of no less than $1,162,939.48.[548]
Definition of Net Earnings
In addition to the controversy over earnings on government
transportation over non-bond-aided lines, there developed a second
difference of opinion over the calculation of the net earnings of the
Pacific railroads. It has already been observed that the Law of 1862,
as interpreted by the Supreme Court, allowed the Pacific railroad
companies to charge expenditures for additions and improvements to
operating expenses, and thus to reduce their net earnings, upon the
size of which the rate of provision for repayment of the government
debt depended. The Central Pacific insisted that the same practice was
legitimate under the Thurman law. But in this last-named legislation
the wording of the clause relating to net earnings had been changed.
In 1862 no definition of net earnings had been given. In 1878 it was
provided that net earnings should be calculated “by deducting from the
gross amount of their [the Pacific railroads’] earnings, respectively,
the necessary expenses actually paid within the year in operating the
same and keeping the same in a state of repair, and also the sums
paid by them respectively within the year in discharge of interest
on their first mortgage bonds.” This was deliberately intended as an
amendment of the Act of 1862. As Mr. Thurman told the Senate, it was
his intention to leave the question of the nature of the net earnings,
so far as the past was concerned, for the decision of the Supreme Court
without any retroactive legislation at all, but to define net earnings
for the future.
In spite of the apparently clear wording of the law, and the definite
expression of the views of the Senate Committee on the Judiciary at
the time the act was passed, the Central Pacific still maintained
that it possessed the right to deduct expenditures for improvements
and betterments from gross earnings, in the process of arriving at
the figure of net earnings upon which its contributions toward the
retirement of government indebtedness were in part based. A decision
of the Court of Claims and another by the Supreme Court of the United
States were necessary before this position was abandoned.[549]
Still other controversies arose between the Union Pacific and the
United States government over earnings from the operation of the bridge
across the Missouri River between Council Bluffs and Omaha, over
receipts from the operation of Pullman cars, and over the payments by
the Union and Central Pacific railroads to the Pacific Mail Steamship
Company according to the terms of contracts described in a preceding
chapter.[550]
Inadequacy of Law
The persistent disputes between the government and the railroad
companies over the proper interpretation of the Thurman law made the
administration of the statute difficult. The primary defect of the act,
however, lay in the fact that the contributions which it compelled the
companies to make were too small to provide for the retirement of the
subsidy bonds with interest at their maturity. How far the ultimate
provision under the law fell short of a proper accumulation may be seen
from the table given in the next paragraph, in which the debits and
credits on account of the government loan to the Central and Western
Pacific railroads are given as of June 30, 1897, six months before the
greater part of the subsidy bonds fell due.
According to the Commissioner of Railroads, the account between the
United States and the Central Pacific Railroad stood on the 30th of
June, 1897, as follows:[551]
STATEMENT ON THE GOVERNMENT LOAN TO THE CENTRAL AND WESTERN PACIFIC
RAILROADS, AS OF JUNE 30, 1897
_Debits_:
Principal of subsidy bonds issued $27,855,680.00
Interest paid by the United States 47,954,139.78
——————————————
Total debits $75,809,819.78
══════════════
_Credits_:
Applied to bond and interest account:
Transportation $7,977,535.66
Cash 658,283.26
Applied to sinking fund account:
Transportation 5,027,848.71
Cash 633,992.48
Proceeds of sinking fund investments 1,683,127.38
——————————————
Total credits $15,980,787.49
══════════════
Balance of debt, June 30, 1897 $59,829,032.29
Excess of interest paid by the
United States over all credits $31,973,352.29
The reasons for the inadequacy of the Thurman law were, first, the
failure of the net earnings of the Pacific railroads to increase as
rapidly as had been expected, and second, the meager results of the
sinking fund accumulations. Net earnings were disappointing because
of general business conditions, especially after 1893, and because of
competition from other transcontinental railroads. The accumulation of
the Central Pacific sinking funds proceeded at a slower rate than had
been anticipated, for reasons already given. Up to June 30, 1897, the
table shows that the total proceeds of sinking fund investments by the
Central Pacific Railroad had amounted to only $1,683,127.28. When it is
understood that this was less than a third of the sum which the moneys
paid into the sinking fund would have earned if invested promptly and
continuously at 6 per cent, the loss which resulted from the purchase
of government bonds becomes evident.
After thirty years of contention and nineteen years of operation under
the Thurman law, the accumulated reserve for the retirement of the
subsidy bonds was less than $16,000,000, of which only $7,300,000 was
the result of the Thurman sinking fund. On June 30, 1897, the United
States had actually paid out in interest on its bonds issued in aid of
the Central Pacific Railroad, $31,000,000 more than had been provided
against both the interest and the principal of the debt. Except to the
extent of $7,300,000, the problem remained substantially as it had been
presented in 1878.