PRWED miEllEiT OF PAflFIE Rillil« DERIS.
• •
EXTRA.CTS
\
« ^ FROM THE
ANNUAL REPOET ,
OF
H. A. TAYLOR,
COMMISSIONER OF RAILROADS
/
FOE
THE YEAlR 1892.
»
WASHINGTON:
GOVERNMENT PRINTING OFFICE.
1892. \
.• '''■ >' 1 i
t
LIBRARY
BUREAU OF RAILWAY ECONOMICS,
WASHINGTON, D. C.
I^.L -CLftKK W
REPORT
OF THE
COMMISSIONER OF RAILROADS.
departaient op the interior,
Office of Commissioner of Eailroads,
Washington, D. C., November 1, 1892.
Sir: Incompliance with the provisions of law creating this Bureau,
I have the honor to submit my fourth annual report as to the operations
and conditions of the railroads which have received subsidies from the
United States. Particular attention is given to the affairs of the roads
indebted to the Governmentfor bonds issued in aid of their construction,
A careful inspection has been made of all the bonded and many of
the land-grant roads during the past year' by the engineer of this
Bureau charged with this duty. His report to the Commissioner gives
full details as to the physical condition of the various roads coming
under the jurisdiction of this Bureau. It will be found by a perusal of
this report (Appendix Ho. 1) that the roads are generally undergoing
many substantial improvements. These improvements, when they are
made upon the bonded roads, are of especial value to the Government,
as they not only increase the earning capacity of the roads, and thereby
the amount of net earnings to be paid in liquidation of the debts due
the Government, but they add largely to the worth of the property and
thus increase the value of the securities held by the Government for
bonds issued to aid the roads.
During the year the bookkeepers of the Bureau have visited the offices
of the various bonded roads and thoroughly examined their books and
accounts, in order to ascertain the actual amount of their net earnings.
Elsewhere will be found full financial statements of the bonded com¬
panies.
The operations of the bonded roads for the past year show a consid¬
erable increase in the volume of traffic, ffhere is also shown something
of an increase in net earnings. The conspicuous features of the reports,
however, are in the facts that the increases in net earnings do not at all
keep pace with the increases in gross earnings. This is owing to the
reduction in rates necessitated by the constantly increasing competition.
Each year new avenues for transcontinental trade are opened or old
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ones improved, and day by day fiercer grows the comi>etition. The
Oanadiaii Pacific has done much to lower the rates to and from the
Pacific coast. Another important line, the Great Northern, is now
under construction and will soon be completed from St. Paul to Puget
Sound. It is now running regular trains to Spokane, and will have its
entire line to the coast in operation early in 1893. This will still further
divide the transcontinental traffic and lower the rates.
Wliile this condition of things brings substantial benefits to the ship¬
pers and passengers over the Pacific roads, to the public generally, and
incidentally to the Government in its relations as a patron of these
roads, it seriouslj' afl'ects the Government in its relations as a creditor
of certain of the roads. The law requires the roads indebted to the
Government to pay each year certain prescribed percentages of their
net earnings in liquidation of their debts. If, from any cause, the
amount of net earnings is reduced, then the amounts due the Govern¬
ment are proportionately reduced. No matter how great the volume of
traffic may be, if the closeness of competition so reduces the rates as to
yield no income beyond paying the expenses of operation, maintenance,
and interest on the first-mortgage bonds, then the Government gets
nothing. The framers of the law under which collections are made
from the bonded roads did not rightly forecast the future business sit¬
uation. They apparently looked for a large increase in traffic, incident
to the development of the country along the lines of the roads, but did
not foresee the competition that would be created and the reduction of
rates that would follow. It was expected that the payments required
by the law would be sufficient to meet the interest and establish a sink¬
ing fund that would, at their maturity, pay the principal of the subsidy
bonds. These calculations were greatly at fault. The amounts re¬
ceived by the Government under the law have only served to meet a
small proportion of the interest that has accrued, and so the debts have
constantly and largely increased. Tiiis is the fault of the law and not
of the railroad companies.
The railroad companies have i)aid yearly to the Government all that
the law requires them to pay. I make this statement to correct a false
impression generally entertained by the public. The Pacific railroads
are not in default to the Government. They have paid yearly all that
the law, as defined by the Supreme Court of the United States, requhest
them to pay.
It is quite unnecessai y, however, at this time to discuss the efficiency
of existing laws in securing the payment by the bonded roads of their
debts to the Government. There is not likely to be any further legisla¬
tion on this subject, except such as will relate to a final settlement and'.-
readjustment. In a very short time the subsidy bonds, both jmncipail
and interest, will fall due. The first series of the subsidy bonds matures,
in a little over two years. The average date of maturity will be about^
July, 1897. It is not expected that the bonded roads can meet thei^
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obligations when they become due. The Government will be compelled
to resort to foreclosure or to make some terms of settlement and ex¬
tension. Within the last few years numerous bills have been intro¬
duced into each branch of Congress looking to this end, and several
are now before both Senate and House committees on Pacific railroads.
During the last session of Congress I was instructed by the honora¬
ble Secretary of the Interior to make a special report on a bill (S. 751)
that had been referred to him by the Senate Select Committee on Pa¬
cific Railroads. I prepared the report, but as I was informed by the
chairman of the committee that no action would be taken on it during
the last session, I did not submit it, but present it herewith as a part of
my annual report. It is as follows :
SPECIAL REPORT.
Depaetment of the Interige,
Office Comjiissionee of Raileoads,
Washington, D. G., April 1,1892.
Sir : I am in receipt, by reference from your office, with instructions
to report on same, of Senate bill 751, together with a letter from Sen¬
ator Frye, chairman of the Select Committee on Pacific Railroads, in
which he requests that you will give your views in relation to the pro¬
priety of the enactment into law of such bill, and that you will suggest
such amendments as occur to you to be necessary. I beg leave to re¬
port as follows :
The roads in aid of whose construction the Government issued bonds
were the Union Pacific Railroad, from Omaha, Nebr., to 5 miles west
of Ogden, 1,038 miles; the Kansas Pacific Railway, from Kansas City
to a point 394 miles west; the Central Branch Union Pacific Railroad,
from Atchison to Waterville, Kaiis., 100 miles; these three lines now
being a part of the Union Pacific system.
The Central Pacific Railroad, running from 5 miles west of Ogden,
Utah, to Sacramento, Cal., 737¿ miles; the Western Pacific Railroad,
from Brighton, Cal., to San Jose, Cal., 123 miles; these two lines now
being consolidated and forming a part of the Central Pacific Railroad.
The Sioux City and Pacific Railroad, running from Sioux City, Iowa,
to Fremont, Kebr., a distance of lOlf miles.
This report will not take into account the latter road, as there is no
proposition pending to ftind and extend its debt. The roads mentioned
in the bill will be referred to in this report as the Union Pacific and
Central Pacific. ,
There were bonds issued in aid of these roads in thefollowing amounts :
UnionPacific, $35,139,512 ; Central Pacific, $27,855,680. There have been
paid by the United States in interest on these bonds to December 31,1891,
ij ' '
in excess of payments made by the companies in reimbursement, for
UnionPacific, $20,360,946.32; for Central Pacific, $27,233,432.29. Total
amount due the United States December 31, 1891, from Union Pacific
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$55,500,458.32; from Central Paciüc, $55,089,112.29. The subsiçly
bonds begin to fi\ll due January 10, 1895, and the last are due January
1, 1899. The average date of maturity is about July 1, 1897. First-
mortgage bonds have also been issued on these roads,which constitute
a lien prior to that of the United States, amounting on the Union Pa¬
cific to $35,762,000, and on the Central Pacific to $27,853,000. The
first-mortgage bonds mature at practically the same dates as the sub¬
sidy bonds.
The amended bill submitted herewith I believe, if enacted into law,
would fully protect the interests of the Government and secure the
final payment to it of all the money, principal and interest, due from
the bonded roads.- I do not believe that any measure fixing a shorter
period of payment or a higher rate of interest will be accepted by
the railroad companies. It is useless for the Government to insist upon
terms of settlement that the railroad companies will not agree to» and
folly for the companies to agree to conditions not warranted by their
present financial condition or their friture prospects. ÎIo advantage
can accrue to either party by the one imposing or the other agreeing
to conditions that will not or can not be complied with. The raUroad
companies should be made to pay as rapidly as they can reasonably be
expected to earn the money to pay mth, and. the rate of interest fixed
should be equal with the rate the Government is compelled to pay upon
its obligations. All present security should be held and such furttier
security required to be given as the companies have it in their power
to give. Upon these conditions a settlement would seem to be to the
advantage of both the railroad companies and the Government.
The question to be decided is, will the interests of the Government
be best promoted by agreeing to the terms of this or some similar bill
or by refusing an extension, and, at the maturity of the subsidy bonds,
enforcing its lien upon the roads? This is the question Congress is
called upon to decide. It is rarely that so important a question is sub¬
mitted to that honorable body for determination.
Since the reference to this office of the bill and the request of the
Senate select committee for an opinion as to the propriety of its enact¬
ment into law, in response to which this report is made, I have had
several interviews with the chief owners and ofiäcials of the Union and,
Cential Pacific roads, in order to ascertain, if possible, whether they
really desired a settlement and would be likely to accept any reasonable
terms that Congress might imposé. I am assured by them that they
do wish to see a settlement effected, and they earnestly declare that
they will agree to any conditions with widely the resources of their cbm-
panies will enable them to comply.
It has been frequently asserted in financial circles and stated in the,
newspapers that the managers of these roads were allowing them to
run down by neglecting to keep up their tracks and equipment, and
to maintain the properties generally, with the evident intention of
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cefasiiig a fair settlement and allowing the Grovernment to foreclose its
liens. Such statements are without any foundation in fact. On the
contrary, the roads have been undergoing constant and rapid improve¬
ment for the past few years. In company with the engineer of this
Bureau, who is a thorough expert in all departments of railroad con¬
struction and equipment, I have just made a careful inspection of the
bonded roads, and can therefore give intelligent and accurate testimony
on this point. The roadbeds have been improved by reducing grades,
removing curves, etc., worn steel rails have been replaced by new and
heavier rails of the same material; steel rails have taken the place of
iron ones; iron bridges the place of wood; side trackage has been in¬
creased; station buildings enlarged and new ones built; new machine
shops constructed and supplied with increased and improved appliances,
etc. The expenditures for additions, betterments, and new equipment
on the Union Pacific system from January 1, 1889, to November 30,
1891, amounted to the sum of $11,700,482.85. Upon the aided portion
of the road the expenditures amounted to $4,077,336.16, or an average
of $2,837.53 per mile, and upon the nonaided road the expenditures
amounted to $7,623,145.69, or an average of $1,382.92 per mile. It is
thus seen that the company has expended in the last three years much
more money per mile upon its aided than upon its nonaided hues.
The Central Pacific has expended in the past three years on its aided
lines, under the head of " new construction," the sum of $740,442.28.
It has also expended for new and heavier steel rails, charged to " oper¬
ating expenses," $819,139.94. These rails have been mainly used on
the aided line between Sacramento and Ogden, to improve the track
over the heavy grades of the Sierra Nevada Mountains.
It has also been frequently charged that the Union and Central Pa¬
cific companies have, at various and numerous times, used moneys
which, under existing laws, should have been paid to the Government,
for the purpose of building branch lines upon which the Government
would have no lien, and that this is the principal reason why the debts
of the roads to the Government have continued to increase. These
charges are wholly groundless. No part of the earnings of the Union
or Central Pacific companies, which are required under the law to be
paid to the Govèrnment, have been used for the purpose named, or for
any purpose other than in liquidating their indebtedness to the
Government. It is the uniform practice of this office to ascertain, as
provided by law, the net earnings of the railway companies upon which
the Government has a claim, to wit, the net earnings from the aided
portions of these roads. When this amount is ascertained, 25 per cent
of the sum has been demanded and has been paid into the Treasury of
the United States, either directly in cash or through the allowance for
transportation services rendered by the companies for the Government.
This is in strict compliance with the provisions of the Thurman act,
that 25 per cent of the net earnings of such portions of the lines as have
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been aided by the issue of Government bonds be paid annually into tbe
Treasury.
I may, perhaps, properly say here, that although the debts of the
Union and Central Pacific companies to the Government are yearly'
increasing, yet this increase is not due to any failure of the railway
companies to comply with the provisions of law. The fault rests in the
law itself. Owing to the decreased revenues of the companies, 25 per
cent of their net earnings upon their aided roads does not realize an
amount sufficient to meet the interest which annually accrues upon the
bonds issued in aid of their construction.
I have amended the bill as submitted By the Senate committee as
follows: (See Appendix No. 5.)
(1) Changed the method of computation in ascertaining the present
worth of the debts by compounding the interest for the time between
the settlement and the maturity of the subsidy bonds semiannually,
instead of with two rests only, as provided in the original bill.
(2) Made the rate of interest 2 per centum per annum from the start. '
(3) Inserted special pi'oviso in section 2 requiring the Union Pacific
ßailway Company to assign to the Government all its rights, titles, in¬
terests, and equities in certain mortgages, bonds, stocks, notes, and
other securities of any description held in trust by Drexel, Morgan ,&
Co., trustees, to secure the payment of certain notes given in settlement
of the floating debts of the company.
(4) Section 5. Providing, in case of default by said companies to
make an3* of the payments provided for by this act, that " the Attor¬
ney-General of the United States shall immediately thereupon institute
proper proceedings in a proper court for the appointment of a receiver,"
is amended bj'inserting after the words United States, in the si:5;ty-
eighth line of the section, the words " upon the request of the President
so to do."
(5) Amended section 20 by adding at the end of the section the words,
" subject, however, to the prior lien of the mortgages to the United
States herein provided for."
The essential features of the amended bill submitted herewith are as
follows':
(1) An extension of the debt through a period of one hundred years,
with interest at 2 per centum per annum. Payments of all accrued
interest and a portion of the principal to begin immediately upon the~
passage of the bill and to be made semiannually on the first days of
January and Jul.y of each year. The bill referred to this office, now
before the Senate committee, provides for the payment of but 1 per
centum interest for the first ten years, but that there shall be added
to the principal " a sum to be computed on such a basis, assuming
money to be worth 2 per centum per annum, as to represent the capi¬
talized present worth of a rebate of interest for ten years of 1 per
centum per annum on the total unpaid amounts and on the sum SO'
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added for rebate of interest." I have stricken out this proviso and sa
amended the bill as to require the payment of 2 per centum per annum
interest from the start.
(2) The exact amount of indebtedness is ascertained by adding tO'
the whole amount of the subsidy bonds the interest that has been paidy
or will be required to be paid, before the maturity of the bonds. From
these amounts deduct the payments that have been made. Compute
the present worth on the sums so obtained as provided in the amended
bill, and from that sum so ascertained deduct the amounts in the sink¬
ing funds. This will give the net amounts for which the companies
will be required to give new mortgages and bonds under the proposed
extension.
(3) The companies to issue bonds for the amounts found due fi-om
them, said bonds to be secured by mortgages embracing the entire
properties of such companies, real, personal, and mixed, including all
the right, title, and interest of such companies in any stocks, bonds, or
securities, or lands of any branch or auxiliary companies in which such
companies now have any interest; and all railroads now owned or here¬
after acquired and constructed by such comjjanies, and all their fran¬
chises, telegraph lines, roUing stock, fixtures, and properties of every
kind and description, etc. (See bill for full provisions under this head.)
(4) In case the railroad companies fail to accept the provisions ot
this bill within the time specified therein they shall be required to pay
each year into the sinking funds in the United States Treasury, in ad¬
dition to what they are now required by law to pay into the bond and
interest and sinking funds, an amount which shall, in the aggregate,
equal 75 per cent of their whole net earnings, or three times the
amount the present laws require them to pay.
(5) In case the companies refuse, neglect, or fail to make the pay¬
ments required to be made by this bill, the Attorney-Gieneral, upon the
request of the President so to do, is directed to immediately institute
proper proceedings for the appointment of a receiver, who shall at once
take possession of the roads and operate them in the interest of the
Government, applying all net proceeds to the payment of the princi¬
pal and interest due on the subsidy bonds.
(6) That the Central Pacific shall obtain such modification of its
lease to the Southern Pacific Company as will enable it to carry out
the provisions of this act.
(7) That all liens created and subsisting under existing laws shall
be and remain in full force until the provisions of this act are fully
complied with.
(8) The President is authorized to direct, whenever in his opinion it
may be deemed necessary, the Secretary of the Treasury to pay off any
liens paramount to the liens held by the United States, and upon the
failure of the companies to make repayments, with all costs, expenses,
and interest, thereon, within one year after being notified so Jto do, he
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may, at his discretion and option, declare the whole indebtedness of
said companies due and 'payable at any day thereafter, and all the
Tights of the United States shall thereupon be enforced.
(9) The companies allowed to extend payment of, or refund by issu¬
ing new bonds, the indebtedness now existing by virtue of their first-
mortgage bonds.
(10) In case of any default continuing for ninety days in the regular
payment of interest or principal required to be paid by the terms of
this bill, the entire debt due to the United States from the company
making such default shall, at the option of the President, immediately
mature.
(11) While any bonds issued under this bill shall be held by the Gov-
lernment, and there shall be due ou them any principal or interest, the
United States shall nut pay the company so in default for any services
rendered by any railroad or telegraph line owned, leased, or operated
by such defaulting company.
(12) Forbidding the payment of dividends until interest on first-
mortgage bonds and all principal and interest due upon the bonds is¬
sued under this bill are fully paid.
(13) The companies may pay bonds at anytime if held by the United
States. The United States may sell the bonds at not less than their
full face value and accrued interest thereon.
(14) The act to be enforced by the Attorney-General; to be subject
to alteration, amendment, or repeal; nothing therein to be held to deny,
exclude, or impair any right or remedy in the premises now existing in
favor of the United States.
These are the leading provisions of the bill which accompanies this
report.
The Government has two alternatives xiresented to it : To indorse
this or some similar plan of settlement such as the railroad companies
will agree to, or, failing to do so, to foreclose its liens on the bonded
roads when the subsidy bonds mature. In determining which of these
two policies it is wiser to pursue. Congress will naturally consider, in
■connection with the proposition of settlement and extension, first, the
matter of time; second, security; third, rhte of interest; fourth, results
to follow a failure on the part of the companies to comjply with the law.-
(1) As to time.~i do not regard the question of time as of much
importance. If the money is earning something and the Government
sustains no loss by distributing the payments through a protracted
period, it matters little just how many years the extension covers.
There seems no reason to expect that any permanent financial condition
will exist that will j)reveut the Government from securing all the money
it needs at a I'ate of interest not in excess of that to be paid by the rail¬
road companies under the terms of this bill. If this be true, then no
loss can result by reason of a long extension.
(2) As to security.—The question of security is one of paramount-
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nnportaiice. The plan of settlement to be adopted should require the
companies to put up all the additional securities that they can possibly
command. What the Government should insist upon is such a settle¬
ment as will render full repayments of its advances certain at some
elate, although the time may be qtiite remote. The bill provides that
the compauies must give the Governmeut a mortgage on their "prop¬
erty of every kind and description, as well as that which they, their
successors, or assigns may hereafter acquire, subject to any bona ñde
lawfully prior and paramount lien." The question then is : What ad¬
ditional securities can the companies give?
First, as to the Central Pacific. The Government now holds a sec¬
ond mortgage on a line running from Ogdeu, Utah, to San Jo'se, Cal.,
860 miles. The greater part of this distance the road runs through
a mountain and desert country, almost uninhabited and worthless.
More than half the line, 451 miles, lies in Nevada, tjie population
of which, always very small, has decreased, the mineral wealth is
apparently largely exhausted, and the agricultural possibilities lim¬
ited and remote. This portion of the road must depend almost wholly
upon through business, as it is not likely ever to develop any consider-
-erable local traffic. The aided line of the Central Pacific is entirely
without valuable terminal facilities. It does not even touch Oakland
or San Francisco, where the great bulk of the Pacific coast trade cen¬
ters. It would not be possible to operate it independently of its
branches, upon which the Government has no lien, except at a great
loss. Access must be had to the terminals on the Bay of San Francisco.
These are immensely valuable, estimated at many millions. In ad¬
dition to the terminals the Central Pacific Company has nearly
500 miles of road, embracing suburban lines near San Francisco, and
mainly located in the Sacramento and San Joaquin valleys, the most
fertile in California, which are nonaided, and which, with the aided
line, go to make up the Central Pacific system. This bill provides that
these auxiliary lines, with their terminals, including piers, docks,
ferryboats, etc., at Oakland and San Francisco, shall be mortgaged to
the Government as additional security for the carrying out its pro¬
visions. Just what these properties may be worth over and above the
present liens against them is a question upon which the best informed
men would naturally differ, and I shall hazard no estimate. All who
are familiar with the situation will agree, however, that they are rap¬
idly increasiug in value and that for the purposes of the operation of the
aided line they are invaluable.
The Union Pacific lines, on which the Government has a lien, run
from Omaha to Ogden, 1,038 miles ; from Kansas City 394 miles west, and
firom Atchison to Waterville, Kans., 100 miles, making, of aided lines,
1,532 miles. In addition to the aided lines the Union Pacific has a total
Of 6,412 miles of branch lines upon which the Government has no lien.
íThese with the aided lines make ixp the Union Pacific system. This
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bill provides that all the branch lines be included in the mortgage to
be given to the Government. While these lines are now mortgaged,
which liens would be paramount to the Government lien, yet they are
continually increasing in value, and it is only through their operation
that the main line cau be made profitable. These branches reach many
important points, such as Denver, Portland, Salt Lake City, and other
commercial centers not reached by the aided lines, and at these places
own extensive and rapidly appreciating terminal properties. Pull de¬
tails of the business operations and financial condition of these branch
lines are to be found in the annual reports of the Union Pacific Com¬
pany now on file in this office. These branch lines, traversing as they
do mainly a new country, but one which is rapidly developing in mining,
manufacturiftg, and agricultural industries, are very certain to speedily
increase their traffic and ultimately to become worth much more than
the amount of the liens now existing against them. A mortgage upon
these would largely add to the Government's secui'ity.
The Union Pixcific also owns a valuable equity in a large amount of
bonds, stocks, and personal property, which this bill provides shall be
assigned to the Government as further security for carrying out its
provisions. These bonds and stocks amount at their par value to a trifle
over $100,000,000 ; they are estimated to be actually worth $42,000,000.
This estimate of the actual worth of these securities was not made by
the company owning them, but by a committee of its creditors, who
proposed to loan their money to the company, taking these securities
as collateral. This is the situation in reference to the $100,000,000
represented by the bonds, stocks, etc., referred to.
The Union Pacific Company had long been carrying a heavy floating
debt. It found, a few months ago, that it was so pressing that some
provision must be made for its settlement. A meeting of the creditors
was called, and as the company had no money with which to meet their
demands and no available securities on which to raise money, except
the bonds, stocks, etc., mentioued, it was arranged that the company
should issue three-year G per cent notes and execute a trust indenturei
to Diexel, Morgan & Co., trustees, depositing with them all these
bonds, stocks, etc., as security for the payment of the notes. This
arrangement has been carried out and the $100,000,000 of bonds and
stocks are now in the hands of Drexel, Morgan & Co., trustees. This
<' creditors' agreement " provides that the issue of the three-year 6 per
cent notes provided for under it shall be limited to $24,000,000. The
actual floating indebtedness of the Union Pacific was 1 ess than $20,000,000.
Up to this time but about $18,000,000 in these notes have been issued.
It was the desire of the company to be allowed to raise a few millions
in excess of the amount necessary to pay its floating debt to make some
important extensions, particularly to extend their Oregon lines to
Puget Sound so as to compete for the large and rapidly increasing
traffic of that section.
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These securities, now held in trust by Drexel, Morgan & Co., are
mainly ñrst-uiortgage bonds on the branch lines of the Union Pacific,
on their extensive coal mines, etc., and have certain fixed values. The
creditors' committee, composed of the shrewdest financiers in New
York, in estimating their actual value, in all cases figured them below
,the prices at which they were quoted on the market. The stocks were
figured at merely nominal prices, over $20,000,000 par value being esti¬
mated at $2,000,000. There is every reason to believe that the estimate
of the actual value of these securities is a very conservative one. If
this be true, the transfer of the company's interest in these bonds,
stocks, etc., would bring to the Government much additional security.
Attached to this report as Appendix No. 1 (see Appendix No. 3), will
be found the "creditors' agreement" referred to, together with a list of
the bonds, stocks, etc., and the values put upon them by the creditors'
committee.
Aside from the actual money value represented by these securities,
there is another very important consideration in connection with getting
them under Government control. In the list are represented stocks
that constitute a concrolling interest in all the branch lines of the Union
Pacific system. If, for any reason, after accepting this bill, the Union
Pacific should neglect or refuse or be unable to comply with its pro¬
visions, and the Government should foreclose on the aided lines, it
would then be of the utmost importance that the Government be in a
position to control the management of the branch lines. In no other
way could it make the operation of the aided lines profitable.
It is for these reasons that I have amended the bill now before the
Senate committee by inserting a provision compelling the Union Pacific
Company to assign to the Government, as one of the conditions of a
settlement, all its rights, interests, and equities in connection with the
bonds, stocks, and other personal property now held in trust for it by
Brexel, Morgan & Co.
I have sujjmitted no estimates of my own as to the value of the ad¬
ditional securities which this bill contem})lates shall be given to the
Government by the Union Pacific if a settlement is eflected. I have
simply submitted the facts of the situation. I will add, however, that
in February, 1890, the Senate Select Committee on Pacific Eailroads,
after thoroughly inspecting the lines of the company, taking testimony
of experts as to their worth, ascertaining the amount of their indebt¬
edness, estimating the value of the securities, lands, etc., owned by the
company; in short, after a full and exhaustive investigation of the
whole subject, reported that the additional security to be received by
the United States, in the event of a settlement similar to the one now
proposed, would amount to $92,460,545.
(3) As to the rate of interest.—The rate of interest provided in the bill is
2 per centum per annum, payable semi-annually. Payments of all accrued
interest and a portion of the principal must be made each six months.
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The installments to be paid are so divided that, as the payments of in¬
terest decrease in amount the payments on the principal will increase
so as to equalize the amounts of the semiannual payments throughout
the period for which the debts are extended. Two per centum is a very
low rate of interest, and yet it seems that at present the Government
can secure money at that rate. In fact, 2 per centum Government bonds
are now quoted at a small premium. If the Government extends these
debts it ought to receive upon them such a rate of interest as will in¬
demnify it from any loss by reason of the extension. This is all it can
rightfully demand. The Government should not seek to speculate on the
extension of these debts, nor should the railroad companies desire or be
permitted to secure terms of settlement that will involve the Govern¬
ment in a loss. One hand should wash the other. The Govelmment
should receive from the railroad companies in interest upon their obli¬
gations just the rate that it is compelled to pay upon its own obliga¬
tions.
The correct way to Judge of the ability of the companies to meet the
requirements of the bill is by their net earnings. They must earn the
money to pay with. By this standard it will readily be seen that 2 per
centum is all they can afford to paj-, and in my Judgment it is as high
a rate as they will agree to pay. ^
(1) The results to follow u failure by the companies to accept the bill
and carry out its provisions.—I am unable to see how the interests of
the Government can be put in peril by the enactment of this bill into
law, even if the railroad companies do not accept it, or, accepting iifc, fail
to comply with its provisions. If they neglect or refuse to accept it,
then under its terms they are required to pay yearly to the Government
75 per centum of their net earnings instead of being comj)elled to pay 25
per centum as they now are under existing laws. If they accept the bill
and fail to comply strictly with it provisions, then authority is given
to immediately foreclose upon the roads. The Government surrenders
none of its rights that exist under present laws by the en.iictment of a
new law. In the expressive parlance of the street, " it keeps all it has
got and gets all it can." It releases no present security, removes no
existing restrictions, grants no new conditions, barring the extension
of time, but provides that " nothing herein contained shall be held to
deny, exclude, or impair any right or remedy in the premises now ex¬
isting in favor of the United States."
If the Government decides not to settle with the railroad companies
and extend their debts, but to seek for reimbursement of its advances
through foreclosure on the lines on which it has liens, then the i)ropo-
sitions to consider are, rtrst, their cost to the Government; second, their
earning capacity; third, the ability of the Government to profitably
operate them.
(1) How much will the roads cost the Government ?—They will cost the
amount of the first-mortgage bonds, of the subsidy bonds, and ofthe
15
interest tliat will have been paid on the subsidy bonds, in excess of the-
repayments made by the companies. Taking July 1, 1897, as the date
bf average maturity of the subsidy bonds, and assuming that the com¬
panies, under existing laws, will pay for the next five years the same
amounts they have paid for the last five years, the cost July 1,1897, of
the roads would closely approximate the sura of $186,000,000. This-
wül be an average of $77,716.96 per mile for all the aided roads on
which the G-overnment can foreclose. This sum is made up as follows
First-mortgage bonds, $63.615,000, or an average of $26,580.45 per mile;
subsidy bonds, $62,995,192, or an average of $26,321.47 per mile; inter¬
est paid by the U nited States in excess of repayments made by the-
companies, $59,389,818, or an average of $24,815.03 per mile, making
the grand total of $186,000,000, or an average of $77,716.96 per mile.
These are the figures on the aggregate of the aided lines, 2,393.30 miles..
Taking the two systems separately, the figures are as follows : Central
Pacific first-mortgage bonds, $27,853,000; subsidy bonds, $27,855,680;
excess of interest, $34,223,894; making a total of $89,932,574.94, or an
average of $104,490.14 i)er mile on 860.68 miles of road. Union Pacific-
first-mortgage bonds, $35,762,000; subsidy bonds, $35,139,512; excess
of interest, $25,165,913.06; making a total of $96,067,425.06, oran aver¬
age of $62,682 per mile on 1,532.62 miles of road. It would not seem
desirable for the Government to acquire railroad properties at these
figures.
(2) Their earning capacity.—Having ascertained the net cost to the-
Government, the next question isas to their earning, capacity. Xo-
body wiU suppose that the roads could be sold for enough to reimbirrse
the Government for their cost. The question is, c-an they be operated
by the Government so as to pay their expenses of operation, mainte¬
nance, etc., and leave a sui'plus large enough to paj^ the interest and
finally extinguish the principal of the Government debt"? This is an
important question. The way to most accirrately answer it would seem-
to be to take the past earnings of the roads as a basis upon which to
estimate their future earnings. If we do this we find that the earn¬
ings as shown by the reports of the companies for the past few years
would not yield amounts sufficient to pay the expenses of operation,
maintenance, the necessary new construction, equipment, etc.. and leave
a balance that would ])ay the interest on the cost of the roads to the-
Government and eventually the principal.
In considering this question as to whether the roads under Govern¬
ment operation could reasonably be expected to net enough to pay the
interest on and eventually the principal of the debt, I have assumed
money to be worth but 2 j)er centum per annum. Although money
can be had at this low rate on such undoubted security as Government
bonds, yet it would be the height of business folly for the Government
or any individual or corporation to enter into any business enterprise,
surrounded by all the hazards which forever threaten acti\'e business,.
16
that only promised under favorable conditions to yield 2 per centunf
dividends. Business policies and principles are the same, whether
applied to the Grovernn^ent or individuals. While au individual might
loan his money at 2 per centum when he was certain to receive his in¬
terest and the return of his principal, no prudent man would ever think
-of investing his money in active business which, if successful, would
only yield 2 per centum, and if unsuccessful would involve the loss of
perhaps both interest and principal. The Government should be guided
by this same rule of business prudence in determining its action with
reference to the debts of the Pacific roads. It might wisely extend
their debts at 2 per centum interest, receiving such security as would
seem to insure their ultimate payment; but to assume the extraordinary
hazards of operating the roads on a basis of only receiving 2 jjcr centum
dividends from them under favorable conditions would seem to be the
extreme of financial folly.
(3) Gould the Government profitably operate the roads? In my opinion
it conld not. I do not believe that, even under fair conditions—that
is, if it could obtain full control of all the roads, rights, and franchises
that are controlled, owned, and exercised by the Union and Central
Pacific companies—it could so handle the properties as to make them
profitable. I know of no instance, in this or any other country, where
railroads have been operated profitably and to the best advantage
of the public while under governmental control. While the General
Government has never owned or operated railroads, several of the
States have experimented in that direction, and always with disas¬
trous results. Xo less than six or eight have made the attempt and
abandoned it. In 1866 Massachusetts took the Troy and Greenfield
line, including the Hoosac Tunnel, but the property is now in the pos¬
session of the Fitchburg Railroad Company. Michigan, in 1836, went
into railroad construction and operation, including the Michigan Cen¬
tral and Southern and some other lines. In 1846 and 1850 the roads
were sold and a provision was incorporated into the constitution in¬
hibiting the State from being thereafter engaged in any work of internal
improvement. Illinois at one time put $ 1,000,000 into a railroad con¬
necting Meredosia and Springfield, and afterward sold it for $100,000,
or a tenth of the cost, and it is now a part of the Wabash system. In¬
diana, in 1836, put $1,200,000 into a railroad projected from Madison, on
the Ohio Eiver, to Indianapolis, but ceased to operate it in 1843, and a
private corporation took the road and finished it in 1849. Georgia built
the Western and Atlantic, operated it some years, then leased it to a
private corporation, and it is now in the hands of receiver's. Missouri
and Virginia have both been interested in railroad properties, and in
each case suffered heavy losses. Pennsylvania, many years ago, began
the construction of a railroad from Philadelphia to Columbia, to con¬
nect with a canal extending to the base of the Allegheny Mountains.
It later sold the works to private corporations " as the result of a con-
17
îfictiou, drawn û'oui experience and never shaken, that transportation
innst be regarded as a private enterprise, and not as a public function."
In no country in Europe has the Government ownership and control
of railroads been satisfactory to the people, and the tendency has con¬
stantly been toward placing the management of transportation prop¬
erties in the hands of private corporations. In all cases where gov¬
ernmental control is the most absolute are the rates the highest and
the service least satisfactory. The cost of railroad transportation in
the United States is less than that upon the lines of any country which
owns and manages its railroads, though in such countries the wages
of labor are much less than with us.
In these facts the United States may find a lesson to profitably study
and a warning to heed.
I have stated that, in my judgment, the Government could not profit¬
ably operate the roads in question, even under fair conditions ; that is,
supposing it controlled all the branch lines that serve as feeders to
the main lines. It certainly may be safely asserted as true beyond
any question that the main lines can not be profitably operated except
in connection with the branch lines. It is the business derived from
the branches that makes it possible to operate the trunk lines Vith
profit. In this opinion every committee, commission, board of Govern¬
ment directors, and all others who have been charged with the duty of
officially investigating the subject fully concur.
Now, look at the situation and the conditions that would prevail in
the event of a foreclosure of its liens by the Government. The liens
are only on the trunk lines. The Government, by its foreclosure, would
get no interest in or control over any of the branches. On the Cen¬
tral Pacific it would acquire 860 miles out of a total of 1,360, and on the
Union Pacific 1,532 miles out of a total of 7,944. As I have said, most
of the main line of the Central runs through an uninhabited and worth¬
less region. It is almost without local traffic for more than half its
length. It has no terminal faciUties on the Bay of San Francisco, where
the biilk of the Pacific coast trade centers. It mainly receives its busi¬
ness from the nonaided lines of the system with which it is now con¬
nected. The Senate Select Committee on Pacific Railroads, in its re¬
port of date February 17, 1890, says on this point:
These branch lines have all been valuable feeders to the original road, and as now
^»erated perform a valuable service iu protecting its traffic from the grasp of com¬
petitors.
Upon the question of terminals the same report says :
Without these roads (the nonaided lines) the Central Pacitto would end in the
interior of the State and would be, to a very great extent, at the mercy of the other
lines until it should build its own line to the coast.
Under such conditions it would be folly to expect that the aided line
^of the Central Pacific, if foreclosed upon by the Government, could be
operated with profit.
11395 2
18
The coiiditiou of the Uniou Pacific is somewhat similar, although its
main trunk line, running from Omaha to Ogden, traverses a much bet¬
ter country than does the Central, and its local traffic is much greater.
However, it is only by securing the business of its auxiliary lines that
it is enabled to show any net returns. Its local traffic would fall far
short of paying its expenses of operation. The transcontinental busi¬
ness has been so divided by the building of new lines, and the rates so
reduced by the increasing competition, that the margin of profit on that
class of business is extremely small. Ho railroads not having a good
local traffic are able to earn even the smallest dividends. The aided
line of the Union Pacific is also without proper terminals. There is a
controversy as to whether the Government has any lien on the bridge
connecting Council Bluffs with Omaha. Ho subsidy bonds were issued
in aid of the bridge or the line approaching it on the eastern side of the
river. The act of Congress provided that the eastern terminus should
be on the east bank of the Missouri River, and this office has always
treated the Omaha bridge as a part of the aided line, and demanded
that 25 per cent of its net earnings be paid annually into the Treasury.
The companj'^ has never paid this except under protest.
Sfiould the courts decide adversely to the Government, the aided
line would terminate at Omaha and have no means of crossing its
trains over the river and connecting with the lines running east from
Council Bluffs. The aided hue of the Union Pacific does not touch the
leading commercial cities west of tlie Missouri River, such as Denver,
Salt Lake City, Portland, and others. These are reached only by means
of the branch lines. It ought not to require any argument to show that
under these conditions it would be impossible for the Government to
realize any profit fi'om the operations of the aided lines of the Union
Pacific should it foreclose its lien. A simple statement of the facts of
the situation tells the story. Looking these facts squarely in the face,
I can come to no other conclusion than that the Government would suf¬
fer great loss should it decide to refuse the settlement provide4 for in
the accompanying bill, and seek, through foreclosure of its liens on the
aided roads, to recover the advances it has made and is yet to make on
their behalf.
It may not be improper to state in this connection, as showing the
judgment upon this subject of many eminent men, that every commit¬
tee, commission, board of Government directors, successive Secretaries
of the Interior, railroad commissioners. President Cleveland, and others
charged with the duty of investigating the question, and who have
given it exhaustive consideration, have all agreed without a dissènting
opinion that a settlement should be had and the debts of the roads
extended.
I have considered the question so far purely as a financial one,.in
which only the Government and the railroad companies are interested.
In its consideration I have sought to apply business principles toa
19
business proposition. I have purposely avoided gi,ving long arrays of
figures in regard to the condition of the companies, as statistics are
often more confirsing than instructive. I hiwe made no estimates as to
probable values. The main facts and figures which I have given can
be easily verified.
I am aware that there is much of prejudice against the bonded roads,
and misinformation as to their conduct and affairs, but with this I do
not care to deal. On the one hand maiij' charges are made against the
roads that are not warranted by the facts, and on the other hand the
companies claim credits and equities which I think ought not to be
considered. It is not pertinent to the questions involved in this report
to defend or assail the management of the companies, past or present.
Justice and expediency should be considered in deciding upon the best
plan of action under the circumstances as they exist.
In determining the question as to whether the Government shall
extend the debts of the bonded roads as provided in this bill, or shall
wait until the maturity of the subsidy bonds and then foreclose on the
roads, there is a consideration, other than those heretofore presented,
that it seems to me should appeal to the judgment of Congress. The
interests of the people living along the lines and depending wholly
upon the Union and Central Pacific roads for their transportation fa¬
cilities are directly and vitally involved in this controversy. There is
only one way in which the railroad companies can pay their debts ;
that is, by earning the money to pay them with. They have no sur¬
plus funds and no sources of income except from the operation of their
roads. If the terms of settlement enforced by Congress demand too
speedy payments or too high a rate of interest, then, if the roads at¬
tempt to comply with such terms, they can do so only by levying
exorbitant rates upon their traffic. This would be a hardship upon
the people living along their lines. There would be no escape for those
who depend entirely upon these roads for their transportation. Through
rates could not be advanced; competition would prevent that. The
forces of commerce are more potential than any railroad company in
fixing the rates from competing centers. The burden woirld inevitably
^est upon the local traffic.
The Union and Central Pacific lines traverse, to more or less extent,
fifteen States and Territories, embracing an area of 1,6(17,694 square
miles, or forty-six per centum of the entire area of the United States.
A large share of this vast territory depends wholly upon these roads.
It is mainly a new country, sparsely inhabited and but slightly devel¬
oped. It has a wealth of resources almost beyond limit, and its possi¬
bilities as to population and wealth can scarcely be fully realized.
Any action of the Government, whether of settlement or foreclosure,
that promises to unfavorably affect the interests of this great region,
should be avoided if possible.
Briefly summarized, the facts show that a settlement would give to
20
the Goveriimeut mach additional security, that the Government would
yield none of its present rights, that payments of all interest and a pact
of the principal would beghi at once and be made each six months until
the debts were fully paid.
Attached to this report is Appendix No. 2 (see Appendix No. 4),
which shows approximately what the debts of the companies would
amount to on July 1, 1892, and the payments, principal and interest,
that would be required to be made under the terms of the accompany¬
ing bill.
A foreclosure would require an investment of about $186,000,000, or
$77,716.96 per mile for the roads to which the Government would
acquire ownership. The roads secured would be only trunk lines, with¬
out the necessary feeders or terminals. The Government could not
reasonably expect to operate the roads with profit.
I am of the opinion that, in view of the foregoing facts, it would be
sound business judgment to settle with the railroad companies and ex¬
tend their debts under the provisions of the accompanying bill, rather
than to foreclose on the roads and seek reimbursement for their cost to
the Government either thx-ougli their sale or operation. I am sure that
when the facts of the situation are fully understood, and the alterna¬
tive of settlement or foreclosure is squarely presented, as it must be,
Congress will decide, and the people approve the decision, that it is
wise to make a settlement which promises to secure the payment of all
the interest and a part of the principal of the debts each six months
from the date of settlement, rather than to resort to a foreclosure that
involves the additional investment of au amount equal to the original
debt. It is time to be getting more money out of the bonded railroads
rather than putting more into them.
By the passage of this bill the Government hazards nothing. It
waives no existing rights, releases no present securities, impairs no
existing obligations. If the railroads reftise to accept it, or, accepting,
neglect or refuse to comply with its provisions, the interests of the
Government will not be thereby in any way put in peril. If the rail¬
road companies accept it and discharge their obligations under it, as
they agree to do, then would it prove a happy solution of this vexed
question.
A careful study of all the facts of the situation leads me to the con¬
clusion that the interests of the Government and of the people along
the lines of the bonded I'oads would be best protected by such a settle¬
ment as is provided for in the amended bill submitted herewith.
#***###
CO:UMISSION BECOMMENUKD.
Iri case the bill referred to in the foregoing report, or some other
measure of settleimmt, fails to meet the approval of Congress, a com¬
mission might be provided for to settle with the bonded I'oads. Con-
21
^Ifress ife a large, unwieldy, and bnsy body; it has hardly the time, if it
had the disposition, to consider details. Many members have not time
to ftdly examine into the question and naturally will hesitate to sanction
à settlement, the effects of which they do not fully understand. Nego¬
tiations involving so many complicated questions can not be considered
as ftdly as they should be in so large a body. As has been stated in
my special report, the railroad companies can not be forced into a,set¬
tlement. At the maturity of the bonds the Government can compel
terms of settlement or foreclose its lien, but not previous to that time,
and foreclosure can then be had only by paying off the ñrst-mortgage
bonds.
Heretofore Congress has seen fit to examine into the conditions and
managements of the bonded roads through the medium of commissions
and special committees. I am of the opinion that a settlement with
these roads can best be effected by a special commission appointed for
that purpose. The amount involved is very large. The properties
that will be offered as securities for the payment of the debts are
widely scattered, of various characters, and of uncertain values. To
correctly ascertain their worth will require great labor and the employ¬
ment of the best legal and financial talent. Many complex questions
will arise that can not be safely solved by men not entirely famUiar with
all the facts surrounding them. I have often heard the opinion ex¬
pressed by members of Congress, other high public officials, and lead¬
ing financiers and business men, that the Pacific Railroad question
could never be satisfactorily settled except by a commission. I am of
the opinion that snch a commission should consist of five members, to be
appointed by the President, and to be at all times under his direction
and control, and subject to removal by him in his discretion. The com¬
mission should be entirely nonpartisan, not more than two members
belonging to the same political party. The salaries should be liberal,
such as would command the services of the very best men. The com¬
mission should have the power to employ a stenographer, secretary,
and experts if necessary.
The commissioners, or either of them, should have power to compel
the attendance and testimony of witnesses and the production of all
books, papers, contracts, agreements, and documents that in their judg¬
ment might be needed in intelligently conducting negotiations, and to
administer oaths, and to that end should be authorized to invoke the
aid of the courts of the United States. The commission should be vested
with fall, absolute, and irrevocable power to fully settle all the claims of
the United States against the bonded roads for the bonds issued to such
roads and the interest that has accrued, and been unpaid, or that may
hereafter accrue on such bonds. It should be authorized to give such
extension of time, upon such securities and at such rate of interest as
it might determine upon. In short, it should be vested with the full
power of Congress in the adjustment and extension of the debts due
from the bonded roads to the G-overnment ; their action to be api)roved
by the President. All existing rights of the Government should be pre¬
served, and no settlement made that could be held to deny, exclude, or
impair any right or remedy now existing in favor of the United States.
Should Congress see flt to create such a commission, and it should
be unable to effect a settlement, having due regard to the interests of
the yuited States, the financial abilities of the companies, and the wel¬
fare of the localities through which the roads pass, it might safely be
assumed that the railroad companies do not desire to settle upon terms
that shall be fair and equitable to all interests concerned, and that any
urther action by Congress to this end would be useless. Congress
win shortly be compelled to do one of three things : First, to pass a
law refnnding the railroad debts upon such terms as wUl be accepted
by the companies: second, to create a commission vested with power
of settlement; or, third, to refnse all action looking toward settlement,
and, at the maturity of the subsidy bonds, provide for paying off the
first-mortgage bonds, foreclose the Goveriiment lien, and sell or operate
the roads.
I can not forbear earnestly reiterating the recommendation so often
made by myself, previous heads of this Bureau, higher executive
officials, and committees Of Congress charged with the duty of speciaUy
investigating the subject, that some early legislative action be taken
in the matter. The magnitude of the interests involved may well com¬
mand the early attention of Congress.
* * # # * * , #
H. A. Taylor,
Commissioner.
The Secretary of the Interior.
Secretary's letter of transmittal.
'Die following is a copy of the letter of the Honorable Secretiu'y of
the Interior, transmitting the special repoit above referred to:
Department of the Interior,
Washington, December 15, 1892.
Sir: In reply to your letter of January 2, 1892, requesting my views
njmn Senate bill No. 751, to amend the act of July 1, 1862, and provide
for a settlement of claims growing out of the issue of bonds to aid in
the construction of certain railroads, and to secure to the United States
payment of all indebtedness of certain companies named in said act, I
have the honor to inform you that the matter has received careful con¬
sideration, and I transmit herewith a copy of my annual report, just
issued, in which the subject is discussed, and also a copy of a special
■23
report therein referred to, made by the Commissioner of Kailroads,
under date of April 1, 1892, containing suggestions and proposed,
amendments to the pending bill, which, as stated in my report, meet
with my approval.
Very respectfully,
John W. Noble,
Secretary.
Hon. William P. Frye,
Chairman Select Committee on Pacific Railroads, U. S. Senate.
U.vtracts from the Report of the Secretary of the Interior for the year
endiny June 30, ISOa.
***#***
The recommendations so often made by the present Commissioner,
previous heads of this Bureau, the Secretaries of the Department, and
committees of Congress charged with the duty of specially investi
gating the subject, are earnestly reiterated, that some early legislative
action be taken in the matter. The magnitude of the interests involved
may well command the early attention of Congress.
The views of the Commissioner are familiar to the Secretary, with
whom consultation has been had from time to time, and the recom¬
mendations made in the special report of April I. 1892, of which an
abstract is here presented, are approved.
* * * *= -x:
Extract from the President's Messuye of December O, isyo.
*#****-»
In my last annual message I called attention to the fact that some
legislative action was necessary in order to protect the interests of the
Government in its relations with the Cuion Paciñe Railway. The Com¬
missioner of Railroads has submitted a very full report, giving exact
information as to the debt, the liens upon the comjiany's iiroperty, and
its resources. We must deal witli the question as we find it, and take
that course which will, under existing conditions, best secure the,
interests of theUnited States. I recoumiended in my last annual mes¬
sage that a commission be appointed to deal with this question, and Í
renew that recommendation, and suggest that, tlie eomniission he given
full power.