nearly 12 per cent. on the funded debt not including subsidy bonds, and over 14 per cent. on each item for the Central Pacific. And, if we accept the statement that some two-thirds of the nominal cost of the roads represented waste and corruption, the percentages would be much higher. The inference that the companies were at this time well able to pay the five per cent. seems justified. CHAPTER VIII ADMINISTRATION OF THE PACIFIC RAILWAY ACTS AND MANAGEMENT OF THE PACIFIC RAIL WAYS: 1864-1887 (Continued) 2. SINKING FUNDS; THE THURMAN ACT OF 1878 By 1876 Congress had come to fear that the government might never realize the principal of the subsidy bonds. The government had lost in the courts; the means provided for repayment of interest had proved inadequate, giving rise to an increasing indebtedness; while the railway companies were taking no steps to provide for meeting their obligations to the government upon maturity. The weakness of a second mortgage was realized. The accompanying table illustrates the situation which confronted the public financiers:1 Principal of subsidy bonds... Interest to maturity without compound- $64,623,512 116,322,321 Total claim of government....... $180,945,833 Deficiency 36,000,000 $144,945,833 In this situation the railways had to some extent the same interests as their public creditor, for their finances were hampered by that ever threatening sword of Damocles, hostile legislation. It would lend strength to their securities to have some 1 Rep. of Com., 1875-76, no. 440, p. 19. The $36,000,000 is the estimate for 5 per cent. of net earnings, and transportation service. provision for retiring their maturing subsidy bonds with interest. The position is well stated by the president of the Union Pacific in a letter written in 1875:2 "The mortgage held by the government, in its terms and by judicial decision of the United States circuit court, cannot be enforced until the maturity of the bonds, which is near the close of the present century. "The bonds are accumulating an interest-account, also uncollectible until the principal is due. The principal and interest when due will amount to the very large aggregate of over seventy-seven millions of dollars, though the actual amount advanced by the government was only $27,236,512. "For this very large amount the government has only a second mortgage, and if it be allowed to accumulate, without any provision being made to meet it, the company will probably be utterly unable to pay it. "At the same time, it is equally manifest that the government will be unable to collect it, except upon the assumption that it will advance the money to discharge prior mortgages, and run the road on government account-a policy which wise statesmanship could not advise. "By standing still, therefore, the company has a load of debt accumulating for which no provision is made, and the government is drifting further and further from the opportunity to secure a just return for its advances." Thus the interests of both parties dictated some provision in the way of a sinking fund; as to the exact provision, however, there was difference of opinion. That the railway felt itself in a position to decide is evidenced by these words from its annual report: "That no legislation on this subject will be binding unless assented to by the stockholders is now generally conceded." The first step taken by Congress was negative in character. The act of March 3, 1873, provided that the Union Pacific Railroad Company should issue no new stock nor mortgages or 2 Letter from Sidney Dillon, president of Union Facific, to B. H. Bristow, secretary of treasury, dated Feb. 9, 1875; found in Rep. of Com., 1875-76, no. 440, p. 93. Rept. to Stockholders of Union Pac. R. R. for 1876, p. 10. pledges made on property or future earnings without leave of Congress, except for funding or renewing debts then existing. This prohibition seems to have had little effect and was evaded in practice.* As early as 1874 the Union Pacific Company proposed a settlement through annual payments sufficient to retire its debt to the United States; in 1875 both Union Pacific and Central Pacific made proposals to Congress involving fixed annual payments and the crediting of the roads with the amounts claimed by them for transportation and mail service; and in 1876 bills for sinking funds were introduced at the instance of the Union Pacific and Central Pacific companies. The most salient feature of these railway bills was the proposition that their unsold lands be taken at a value of $2.50 per acre and carried to the credit of the sinking fund. Furthermore the sinking fund was to be credited with the amount which might be due the companies for transportation of mails, troops, etc., to the end of 1875; while semi-annual payments would be made by the companies sufficient, together with the above amounts, to retire the government bonds with interest at maturity. On January 1, 1876, the Union Pacific had on hand 10,884,039 acres of land, which, at $2.50 would have meant a credit of over $27,000,000; similarly the Central Pacific could have paid over $21,000,000 in this easy fashion. The Union Pacific actually proposed to apply only 6,000,000 acres of the above amount. Some of the objections to accepting the railways' proposition were as follows:8 Their object was held to be to escape taxation on the lands, and to prevent the pre-emption of the same. If the government took the lands at $2.50 an acre it must sell them at that price plus interest to date of sale or suffer loss; whereas, if they were pre-empted at $1.25, the price of the lands retained by the railway companies would be decreased. Furthermore, it was their poor lands that the railways proposed to turn over to the government, the Union Pacific offering all lying See below, p. 102 f. Rept. of Union Pac. R. R. Co. for 1884, p. 187. Exec. Docs., 1875-76, no. 25. 744 Cong., 1 Sess., S. 687, and S. 870, and H. Rec., 3138. Cong. Rec., 1875-76, p. 3809 fr. west of the 100th meridian in Nebraska, Wyoming, and Utah. Finally, the fact of the worthlessness of the lands made it probable that the government would ultimately lose them; they remained subject to land-grant and sinking fund bonds of the companies, and, though the bill provided that "whenever" they should be sold the companies would free them from such encumbrances, the prospect of sale was remote. Also, when the Union Pacific proposed to pay annually the sum of $500,000, to be put at 6 per cent. interest and to be in full settlement of all claims by the government, it was fairly clear that, inasmuch as the sums claimed by the government for 5 per cent. of net earnings and half transportation exceeded that sum and would be currently applied to payment of the government's interest expenditures, without allowing interest. to the company and reducing its obligation, a further imposition on the government's generosity was intended. At this time (1876) the House showed its temper by passing a bill, the main provisions of which were: that any money due from the United States to any subsidized railway company should be withheld to the amount of the government's claims; that all claims due the United States and unreasonably withheld should bear 6 per cent. interest; and that such railways should establish sinking funds for the payment of interest and principal of loans. It was declared unlawful to pay dividends while in default for sixty days; and any director or officer interested in any contract with a railway company, except for his own compensation, was made liable to fine and imprisonment. The main line of opposition to this bill was the vested rights plea. Mr. Hurd (O.) argued that the bill was unconstitutional and impaired the obligation of contracts.10 This attitude was vigorously assailed. It was maintained that Congress might alter, amend, or repeal, the right to prescribe the method according to which the companies should meet their obligation following from this reserved power. The com Ibid., p. 4432. The Union Pacific was to pay $750,000 annually for ten years beginning 1876, and $1,000,000 a year thereafter till its debt was settled; the Central Pacific, Kansas Pacific, Central Branch Union Pacific, and Sioux City and Pacific were to pay lesser sums. 10 Ibid., p. 4457. |