THE PACIFIC RAILROADS.
MR. CHARLES FRANCIS ADAMS JR. BEFORE THE COMMITTEE ON THE PACIFIC
RAILROAD.
The Pacific Railroads subsidized by the Government are suppliants before Congress for relief. The
bonds issued by them having over ten years to run, there is apparently no immediate urgency on either side.
The Government seems content with matters as they stand, and only requires the companies to live up to the
provisions of their charters as construed by the Supreme Court of the United States. The railroad com¬
panies are by no means in a similar equable state of mind, as they no longer pay dividends partly on account
of the Government requirements. It would be impolitic, to say the least, to pay dividends until Govern¬
ment was settled with, if any concession is to be had. To pay dividends on their share capital would be
pretty good evidence of their ability to take care of all their debts.
The Union Pacific, the principal mover in this matter, now stands for two other companies besides itself
—the Kansas Pacific, and the Union Pacific, Central Branch—the former by virtue of consolidation, and the
latter by a purchase of its share capital. The amount of subsidy bonds originally issued to the Union Pacific
was $27,236,512; to the Kansas Pacific, $6,303,000; to the Central Branch, $1,600,000—the aggregate
amount being $35,139,512. According to the report of the Union Pacific for the year ending with 1885,
the amount of interest which had accrued and was unpaid by it on the bonds ($33,359,512) of the consoli¬
dated companies equalled $15,167,214; on those of the Central Branch, $1,534,059. The amount of prin¬
cipal and interest due from the company, January 31, 1885, was $51,840,785. Of the unpaid interest, about
$12,000,000 was due from the Union Pacific, about $3,167,214 from the Kansas Pacific, and $1,534,059
from the Central Branch. The report of the company gives the amount due from the Union and Kansas
Pacific in a gross sum. The report of the Railroad Commissioners, which gives somewhat different amounts,
is for the year ending June 30, 1885.
As a basis of settlement the Union Pacific proposes to pay a gross sum, without interest, in discharge of
the indebtedness due from it and the Kansas Pacific, the amount being arrived at as follows: To the principal
sum, $33,539,512, due from these (now consolidated) companies is to be added the whole amount of interest,
$60,371,121, accrued and to accrue upon the same, the two sums equalling $93,910,633. From such aggre¬
gate is to be deducted the sum of $23,953,179, made up of payments made to the sinking fund under the
Thurman act, transportation on government account, and 5 per cent of net earnings. Upon the balance,
$69,957,453, interest is to be cast at the rate of 3¿ per cent until October 1, 1921—such interest to amount
to $56,548,932. The aggregate, $126,506,385, of the last two sums is to be divided into 140 equal parts of
$903,617 each, two of them being payable without interest each year.
Such is, substantially, the basis upon which it is now proposed that the indebtedness due the Government
from the Union Pacific shall be discharged. The measure proposed includes the Central Pacific as well
as the Union Pacific.
The result intended to be reached may be stated in a manner somewhat more easily understood by the
ordinary mind. The Union Pacific owed the Government at the close of 1885 $48,000,000. The excess of
interest that will be paid by the Government at the maturity of the subsidy bonds over the payments to the
Government, as provided by the present bill, will equal about $4,000,000, so that when the subsidy bonds
fall due the company will be owing the Government $52,000,000. Three and one half per cent on this sum
equals $1,820,000, a sum very nearly equal to that whicli the company proposes to pay for seventy years
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8
without interest in the full discharge of its indebtedness—that is, it proposes to pay per cent for seventy
years upon the sum that will be found due the Government, but no part of the principal sum.
In any proposition for the adjustment of a debt, the first thing that a creditor considers is the value of
the security he holds. The ability of a railroad to pay its debts is the amount of money it can earn. The
Union Pacific claims to earn annually an amount much greater than all its fixed charges, and these include
the interest on a large amount of indebtedness subordinated by way of security to that of the Government.
The Government's lien is itself subordinated to bonds of the company of equal amount—$33,532,512. The
interest annually accruing on both classes equals $4,024,741.44. The company must earn such a sum an¬
nually in order to be able to pay the interest on the subsidy bonds. If it is able to earn regularly such an
amount, it can pay the Government bonds at their maturity, as the net earnings can be readily capitalized
probably at 4| per cent. For the six years from the date of the consolidation in 1880 the company has
earned net, over and above operating expenses of all kinds, the sum of $73,971,286, the average net earnings
equalling $12,328,631, a sum threefold greater than that necessary to pay the interest on the Government
and underlying bonds.
There is another test of the ability of the Union Pacific to pay its debts, at least the debts due the Gov¬
ernment—the market price of its bonds held by the public and subordinated to those of the Government.
The Union Pacific proper owes $14,483,000 of 8-per-cent bonds due in 1894, nearly three years before the
Government bonds fall due, and subordinated by way of lien to those of the United States. These bonds are
firm in the market at 119. The Kansas Pacific is owing $14,905,005 6-per-cent bonds, subordinated by way
of lien to those of the Government. These are selling in the open market at 107£. Not a shadow of doubt
is entertained by the holders of either class of bonds of their payment at their maturity; yet their holders
cannot get a dollar until the Government is first paid. If keen-scented capitalists have no hesitation in pay¬
ing a high price for bonds, of which the subsidy bonds have the preference, why should the Government have
any doubt as to the adequacy of the security put up for its own? The holders of the bonds of the company
subordinated to those of the Government have far greater equities than the stockholders. Have they ever
appealed to the Government to consider their hard fate, and ask it to forego on their account a portion of its
own demands? Never. They have all the assurance they want of the sufficiency of their security, the prior
lien of the Government notwithstanding.
It may be proper here to state briefly the security held by the Government for the debts due it from the
railroads. The Kansas Pacific bonds, $6,303,000, are a second lien on the 394 miles of line. The gross
earnings of this line, as reported to the Government for the year ending June 30, 1885, were $4,427,491; net,
$1,916,456. Assuming the principal and interest of the subsidy bonds at their maturity to equal $11,000,000,
the interest on this sum, and upon the $6,303,000 company bonds having the preference, will equal $1,038,-
180, a sum about $900,000 less than the net earnings of the road. Subordinated to these two classes are the
Kansas Pacific consolidated bonds, $14,905,005, selling at a high price. Is it to be supposed the holders of
these bonds, considering the earnings of the company, will not take good care of all the bonds having prefer¬
ence over their own? The question answers itself. So with the bonds of the Union Pacific, Central Branch.
The Union Pacific owns the stock of the Central Branch, for which it paid nearly 250 upon the par of 100.
The net earnings of this line for 1885 were $591,000. The interest accruing annually on the subsidy bonds,
$1,600,000, issued to this branch, equals $96,000. Never were railroad bonds more perfectly secured than are
the Government bonds issued to these two lines. There is no more sense or justice in making a concession
on their account than there would be in paying to the two companies an equal sum out of the public treasury.
The three lines—the Union Pacific, Kansas Pacific, and Central Branch—are included in the same bill for
relief, for the purpose of keeping out of sight the adequacy of the security provided for the payment of the
debts due from the last two companies.
How about the $27,236,512 of bonds issued to the Union Pacific, the main-line mileage of which is
1039 miles? The gross earnings of this mileage the past year were $12,571,093; net do., $4,540,880. To
3
this sum is to be added income from investments, $2,347,666, making a total net of $6,888,546. The
interest on the subsidy and first-mortgage company bonds equals $3,288,446, the net income being twice
greater. A large sum was paid by way of interest on bonds subordinated by way of security to those of the
Government; but after the payment of all charges against earnings the company carried to the credit of
income, as the net result for 1885, the sum $3,344,281—a sum equalling nearly 6 per cent on the stock of the
company. According to the showing which the company makes annually, it would be difficult to find bonds
better secured than those of the United States issued to this company. Were bonds of it bearing interest at
the rate of 6 per cent, and having the same security as those of the subsidy bonds issued to this line upon
the market, they would be readily taken at 115. All the bonds of the Union Pacific, whether prior or subor¬
dinate by way of lien to those of the United States, are without a flaw so far as provision for their payment is
concerned. The only question, so far as the Government is concerned, is how much of its security it will
relinquish to the company to be handed over to the stockholders in the shape of dividends.
The above figures of earnings and profits, taken from the reports made public by the Company, tell the
whole story of its ability to pay all its debts in full. Mr. Adams shows conclusively in his reports that the
Company can pay its debts, but he says enough must be left to it to make the Union Pacific a dividend-paying
road ; otherwise everything will go to the dogs. Listen for a moment to his argument before the Railroad
Committee:
" There are two ways of making money out of the operation of a railroad :—one is the legitimate way ;
the other is the illegitimate way. In the first case the railroad is operated on business principles, by those
representing a body of bona-fide stockholders ; in the second case it is operated by the representatives of those
who have obtained control over it in order to make what they can out of it,—in other words, by wreckers.
To-day the Union Pacific Railroad is operated in the interests of bona-fide stockholders. It is operated legiti¬
mately. Under existing conditions this cannot long go on. If the legitimate stockholder finds that he can
get no return from his property, he will unquestionably sell his property to those who can get a return from
it ; in other words, a non-dividend-paying stock is sure to drift gradually into the hands of wreckers. This is a
principle of such general acceptance that examples need not be cited. Recent experience is replete with them.
"The Wall-street wrecker, too, has a keen scent. Among men, he is very much what the wolf is among
beasts of prey, or the fin-back, shovel-nose shark among fishes. The common enemy of mankind, whenever
a large corporation is in difficulties—even before those managing its affairs realize the fact—the wrecker is on
hand. It was my fortune to take charge of the affairs of the Union Pacific Railway Co. at a time of great
financial trouble. The failure of Grant & Ward had just taken place; the company was in debt ; its relations
with the Government were disturbed. From that day to this, there has been no time when I was not con¬
scious of the close proximity of the wrecker—just as the traveller in the woods might hear the distant cry of
wolves; just as a mariner in the tropics sees the fins of sharks rippling the water as they move towards his
vessel, or prowl about it. The emissaries of the wrecker lurk about the corridors of the departments here in
Washington, and you meet them in the lobbies and committee-rooms of the Capitol. They are always writ¬
ing letters to Cabinet officers ; they induce unwary members of Congress to offer resolutions of inquiry, or to
submit for reference measures calculated to do no injury ; they send communications, over all kinds of sig¬
natures, to newspapers. Thus they manipulate the Wall-street market, and, through fluctations in values,
eke out a precarious living. Themselves broken-down hangers-on, blackmailers, not unseldom discredited
clerks, or unprosecuted defaulters, they have always at their tongue's end the nauseous cant of reform. None
so honest, so thoughtful of the dear public, so anxious that the Government should get its dues, as they !—
they !—who never yet in their lives consciously uttered a true word or did an honest day's work !
" Such are the men and their emissaries who have long been greedily eying the Union Pacific. There
are good pickings on it still. In their moments of confidence, and among themselves, they openly and long¬
ingly express an abiding faith that, could they once break down the present stockholders' management, they
would have things all their own way. A Government receivership is their dream. Just now I chance to
stand between them and their prey. Cannot Congress or the Government, the Committee on Pacific Railroads,
or the Secretary of the Interior, be so worked upon that one or the other will drive me out ? Then, at last, the
wrecker would have his day long waited for. And so, month after month, and session after session, they
prowl about these entries and lobbies and corridors and committee-rooms, observant, hopeful, hungry, care¬
fully snapping up meanwhile each unconsidered trifle."
4
In this long piece of incoherent rigmarole, Mr. Adams attempts to establish two things—that the road
must, for the salvation of the Government, be dividend-paying, and that, for the first time in its history, an
honest and able man stands at the helm. The wolves and sharks that would wreck the concern are simply
thrown in, in order to show his matchless power in fighting them. What if the whole tribe of sharks, black¬
mailers, and unprosecuted defaulters in the United States—"creatures who never consciously uttered a
word of truth, and never did an honest day's work"—are in hot pursuit of the Union Pacific? Are they in the
employ of that company? No, they cannot even get inside of its doors. Can they turn business to, or divert
it from the road ? Not a penny. Are they in Congress, as were the old directors of the Union Pacific,
voting into their own pockets, according to Mr. Adams, whatever sums they choose? No. What is the dream,
then, that impels them in their hot pursuit ? A Government receiver for the road! That appointed, they can
gorge upon the prostrate carcass till, for the first time in their lives, they are full. By whom is their receiver,
who is to lead them on to plunder, to be appointed? By the Supreme Court of the United States. This august
tribunal is to join hands with all the thieves and scalawags in creation, to go into copartnership with them in
their robberies and crimes. Certainly, in talking as he did, Mr. Adams was out of his wits, or he assumed
he was addressing a pack of fools.
The first thing, where relief is wanted, is to produce a clean record. To do this, Mr. Adams had to dis¬
pose of some very disagreeable reminiscences :
" There is a prevalent idea" (to copy from his argument before the Railroad Committee) " that the stock¬
holders of the Union Pacific obtained their interest in the property through scandalous transactions con¬
nected with the construction of the road. The odor of the Crédit Mobilier hangs about their title-deeds. I
do not propose to more than allude to the Crédit Mobilier. It has become a mere cant name. To the aver¬
age mind unfamiliar with the subject, vague, terrible, scandalous. In point of fact, it was a mere ordinary
piece of financial machinery through which the work of building a railroad was done. But there is nothing
so hopeless to contend with as an intangible phrase, when it once gets hold of the public mind. The old
Crédit Mobilier, though a mere nursery goblin, is a name to conjure with."
And who imprinted this "mere nursery goblin," " this intangible phrase," " this name to conjure with,"
so firmly upon the public mind? Hear !
" The Union Pacific was built," said Mr. Adams, in an article written at the time, " by an organization
known as the Crédit Mobilier, which received for so doing all the unissued stock, the proceeds of the bonds
sold, the Government bonds, and all the earnings of the road; in fact, all its available assets. Its profits
were reputed to have been enormous, and they made the fortunes of many, and perhaps most of those con¬
nected with it. Who, then, constituted the Crédit Mobilier? It was but another name for the Pacific Rail¬
road ring. The members of the ring were in Congress ; they were directors, they were stockholders, they
were contractors. In Washington they voted the subsidies, in New York they x'eceived them, and in the
Crédit Mobilier they divided them. Ever-shifting characters they were, now engineering a bill, now a bridge;
they received money into one hand as a corporation, they paid it into the other as a contractor. As stock¬
holders they owned the road; as mortgagees they had a lien upon it; as directors they contracted for its con¬
struction; as members of the Crédit Mobilier they built it. What is the community to pay for it? The
line from Chicago to New York represents now but $60,000 to the mile as the result of many years of infla¬
tion, while the line between Omaha and San Francisco begins life with the cost of $115,000 per mile. It
would be safe to say that this road cost considerably less than one half this sum; the difference in the price
paid for every vicious element of railroad construction and management; costly construction entailing future
taxation on trade; tens of millions of fictitious capital; a road built by the sale of its bonds and with the aid
of subsidies, every element of real outlay recklessly exaggerated; and the whole of it some day to make itself
felt as a burden upon the trade which it creates."
Such was the creature now changed by Mr. Adams's facile speech before the Railroad Committee into
"the mere ordinary machinery through which the work of building a railroad was done." Does "a mere
ordinary machinery by which a railroad is constructed" vote in Congress the money for its construction,
bribing that body, and doing acts which a committee of Congress declared warranted the revocation of the
5
charter of the railroad company, and for which one of the[ leading members of this "mere machinery" was sol¬
emnly censured in his seat by a vote of the House of Representatives, make vast fortunes for all connected
with this " mere ordinary machinery" by enormous issujes of stock and bonds in excess of the cost of their
road, and dividing among themselves, in the shape of dividends, the proceeds of the very bonds their Gov¬
ernment granted to them for the construction of their road ? Ho! It is a "railroad ring," corrupt, rapa¬
cious, omnipresent, just the creature described by Mr. Adams the Union Pacific ring to be, that does all these
things.
The directors of the Union Pacific having, through the instrumentality of the Crédit Mobilier, got some
$65,000,000 of its securities of various kinds issued in excess of the cost of construction, the public, by exorbi¬
tant and oppressive rates of charges, were to turn them at their par value into gold. Complete success was
achieved.
Two extracts—that given from Mr. Adams's Crédit Mobilier article, and another from the report of the
Government directors for 1884—present a full and complete history of the company from the very beginning
to the great break-down in 1884. The one is a history of gross fraud, the other of gross oppression.
" During a long period in the life of the Union Pacific," said that report, " it was a perfect and absolute
monopoly. The profits of its operations were princely. In view of the present unsettled commercial and
financial conditions, and particularly as they concern the Union Pacific, the past history of the company
now appears like a travesty upon corporation management. While it was earning the money to acquire and
pay for over $40,000,000 of securities, and to declare more than $23,000,000 in dividends upon stock which
the now president (Mr. Adams) of the road declared represented little but the energy of the promoters of the
road, and all this from transportation, time and opportunity, when a fund for the liquidation of this in¬
debtedness might have been easily established, were eithèr carelessly or purposely permitted to pass by. . . .
The road has been a complete and absolute monopoly so far as the traffic department has been concerned. This
department for years, and until very lately, has been conducted upon the theory that the Union Pacific
would be always able to maintain its monopoly, and upon the principle that corporate extortion is a per¬
formance in which a railway management may indefinitely indulge with impunity. How that new com¬
petitors have entered the field, the fruits of the disastrous policy appear on every hand; the road, in addition
to its own burdens, is compelled to bear a load of aggravated ill-will, not only on its own line, but at the com¬
mercial centres. This has come almost exclusively and as a natural result from the system and methods to
which we refer, so that now, when the Union Pacific is in need of every resource it can command, its manage¬
ment is hampered with this feeling of animosity to it."
i
With the Union Pacific as a suppliant instead of assailant, the early history of the company, including
the Crédit Mobilier, was not only a model of patriotism and purity with Mr Adams, but of wise and prudent
forecast so far as the provisions for the payment of its debts were concerned, especially those due to the
United States.
"That the Union Pacific Railway Company up to the year 1878, when the Thurman act was passed,"
said Mr. Adams in his report for 1884, "had no intention whatever of making any provision to meet the
Government debt which matures in 1896, has been so frequently asserted that it is now taken for granted as
an admitted fact. Yet this assertion is wholly erroneous. Though my connection with the Union Pacific
as a stockholder dates only from 1881, and though I have been on its board of direction for less than two
years, yet I am alle to state with emphasis that there has been no time in the history of the company, so far
as I can ascertain, when there was not in the minds of the directors a settled plan as to the manner in which
the Government debt should be paid at maturity.
"As a Government director in 1878 I had one, and only one, conversation with Mr. Gould, then in
practical control of the company. That conversation related to this very subject. So far from having any
design of evading obligations to the Government, Mr. Gould, I remember, then submitted to me a plan for
meeting them in advance of maturity. This plan was no more than a development of that which had already
long existed in the minds of other of the company's directors. Briefly, it was this; and I do not hesitate to
say that, in my opinion, it was the most beneficent, thp most business-like, and the most financially sound
of all the plans to meet the obligations to the Government which have yet been suggested. Accepting the
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Union Pacific as the first of the transcontinental routes, the plan of the directors was to secure for it, through
an auxiliary railroad system, a practical control of the vast region of country then unoccupied by railroad
companies, which lay both north and south of the original line. This auxiliary system was to be con¬
structed out of the surplus earnings and other spare income of the company, and the bonds and securi¬
ties representing it were to remain in the Union Pacific treasury as assets. Before the year 1880, this plan
had been developed to such an extent that the company then owned six hundred miles of auxiliary road,
represented by thirteen millions of stock and bonds. . . . Such being the case, the plan of the management
of the road down to the year 1880 was, from a railroad and business point of view, the soundest that could
be devised. Surplus earnings were turned into the business, as it were. They were represented there by
assets, in which lay the control of the auxiliary system which secured to the Union Pacific that traffic on
which it lived. Thus, practically, the surplus earnings of the company, after the payment of reasonable
dividends to the stockholders, constituted a fund which was regularly applied to the railroad development of
the neighboring region, furnishing what was imperatively needed, and at the same time giving to the Union
Pacific the bulk of its most remunerative traffic. The Thurman act superseded this plan. The money which
had theretofore been turned into the business, and made of inestimable value in developing the country, was,
by the operation of that act, diverted to a sinking fund. In place, therefore, of supplying Nevada, Utah,
Wyoming, and Idaho with railroads, and insuring large profits to the Union Pacific, this money was placed
where it has, as the record shows, failed to be of use to any one. In the sinking fund it has not earned two
per cent interest, instead of the fifty per cent which it would have earned had it been applied according to
the policy of the management. Neither have the people of the interior got the railroads they needed.
" The plan of the directors was to continue the system I have described. They believed that by the year
1894, when the Government debt would become due, the assets in the company's treasury, representing its
auxiliary system, would be at least $80,000,000, and not improbably $100,000,000. The company would then
have been in a position to meet the Government, and offer it this large railroad property as security for its
debt. That it would have been ample security I do not question. I think that no railroad man familiar
with the situation would question it. Had the Government then declined to renew its loan upon this
security at a reduced rate of interest, it would have been possible for the company to go into the money
market, and, placing a mortgage upon the whole property, to raise the sum necessary for paying the
Government off. As I have said, under the operation of the Thurman act it was not possible to con¬
tinue this policy of the directors. The sinking fund was substituted in its place; and the course of
events has proved the sinking-fund plan a failure."
A little history will show that the preceding statement of Mr. Adams that at a very early date the com¬
pany had a well-matured plan for the payment of the Government debt was a pure invention.
No sooner was the Union Pacific Kailroad fairly opened than Congress, apprehensive that its loans
to it, or the greater part of them, might never be paid, began the agitation of the subject of additional
provision therefor. For this purpose a committee of the House was appointed to inquire into the con¬
duct of the company and to report what additional security should be exacted from it. That committee,
of which Mr. Jeremiah Wilson, now resident attorney of the company at Washington, was chairman, and
Mr. George F. Hoar of Massachusetts a member, made a full report in which a merciless exposure of
the early frauds and briberies of the company was made, the report being accompanied by a bill direct¬
ing, among other things, that the Secretary of the Treasury withhold all payments to the company on
account of Government transportation. In their report of February 20, 1873, the committee, among other
things, said:
" Your committee find themselves constrained to report that the moneys borrowed by the corporation,
under a power given them, only to meet the necessities of the corporation and the endowment of the road,
have been distributed in dividends among the corporators; that the stock was issued, not to the men who
have paid for it at par in money, but who paid for it not over thirty cents on the dollar in road-making ;
that of the Government directors, some of them have neglected their duties, and others have been interested
in the transactions by which the provisions of the organic law have been evaded ; that at least one of the
commissioners appointed by the President has been directly bribed to betray his trust by the gift of $25,000 ;
that the chief engineer of the road was largely interested in the contracts for construction ; and that there
7
has been an attempt to prevent the exercise of the reserved power in Congress by inducing influential mem¬
bers of Congress to become interested in the profits of the transaction. So that of the safeguards above enu¬
merated, none seems to be left but the sense of duty on the part of the corporators. . . .
" The result of these proceedings was this :
"While the charter of the Crédit Mobilier required its affairs to be managed by a board of directors, and
its principal business office to be in Philadelphia, the actual conduct of its affairs was wholly by men acting as
a board of trustees in the city of New York ; so that this unlawful arrangement attempted to disguise, and
did in effect disguise, these persons by means of a fictitious and pretended and not a real use of the corporate
powers of the Crédit Mobilier.
"While the charter of the Union Pacific Railroad Company required its corporate powers to be wielded
by a board of fifteen directors, ten of whom should be bona-fide holders of stock, and should be elected by the
stockholders representing capital which had been actually paid in full, and in money, this contrivance vir¬
tually placed all the power and control of said railroad corporation, its property and franchises, in the hands
of the same persons, and beyond the management provided by law, thereby disguising, and intending to dis¬
guise, an unlawful seizure of the powers of the company, unlawful use of its name in the issue of stock,
bonds, and scrip, and an unlawful distribution of its property among the parties.
" While the United States subordinated its own lien to secure reimbursement of a loan of its bonds to a
mortgage to secure the bonds of the company for a like amount for the purpose of constructing the road,
moneys have in fact been borrowed under the privilege so conferred, and distributed in dividends.
"We think the facts we have stated would furnish ground for judgment of forfeiture of all the franchises
of the corporation, including the principal franchise to be a corporation, on proper process. . . . We have no
doubt, also, of the right of Congress to repeal the charter, which is expressly reserved in the act of 1862."
Such was Mr. Adams's "mere ordinary machinery for building a railroad" "which disguised an un¬
lawful seizure of the powers of the railroad company, an unlawful use of its name in the issue of stock,
bonds and scrip, and an unlawful distribution of its property among the parties."
The bill reported by the Wilson committee became a law. It was resisted by the company on the
ground that no part of the interest on the Government bonds was due until the bonds were due. The Su¬
preme Court of the United States, to which an appeal was taken from the Court of Claims, sustained the po¬
sition taken by the company. Pending their suit, the Committee on the Judiciary of the House were instructed
to inquire :
"What legislation, if any, may be necessary, just, and proper to secure indemnity to the United States
for advances of interest paid, or to be paid, by the Treasury Department on account of subsidy bonds issued
to the several so-called Pacific Railroad companies, and to secure indemnity against liability to pay the prin¬
cipal of such bonds, either by requiring the creation of a sinking fund or otherwise, as may be proper, and to
make inquiry as to other subjects relating to said companies.
In pursuance of this order, the committee so appointed reported that :
" The railroad companies now claim that they are not bound or liable to pay'any of the interest advanced,
or to be advanced, by the Government until the maturity of the 'subsidy bonds,' thirty years from their date,
except as the application of one half of the charges for transportation and other services may be so applied,
with also the application of five per cent of the annual net earnings of the roads. But these will fall far
short of paying the interest.
"There is no law which in such cases gives to the United States interest on advances made in paying
the interest on the 'subsidy bonds,' nor, indeed, on any liability of any company to the Government. The
effect, therefore, will be, if the claims of the railroad company prevail, and even if they should at the matu¬
rity of the subsidy bonds, about twenty years from this time, then repay any balance of advances, that the
Government would be without compensation for the use of the money advanced, and not so reimbursed.
This loss to the Government would in value and amount reach many millions.
"The railroad companies concede that one half of the compensation for services and perhaps five per
cent of the net earnings of the roads should be applied, so far as they will go, in reducing the interest ac¬
count; but they claim that they are not required in any other manner to pay any of the interest until the
maturity of the subsidy bonds, and not even then."
8
The Wilson bill was resisted by the company on the ground that nothing was due to the United States,
either on account of the principal or interest, of the trust, except one half of the earnings on account of
Government transportation. This position was for a while sustained By the Supreme Court of the United
States in an action brought by the company, as provided, to recover one half of the charges (some $500,000)
on Government account that had been withheld. In its hour of triumph, the company thought it a good time
to show how generous it could be, and submitted a proposition to the Government to pay $500,000 annually
for a term of ten years, beginning with July 1,1875; $750,000 annually for ten years, beginning with July 1,
1885; and $1,000,000 annually thereafter until the principal sum of the subsidy bonds, and the interest to
accrue on the same, were fully paid in manner following: All these payments were to be made half-
yearly. To these payments was to be added the sum of $800,000 claimed by the company to be due it at
the time from the Government. All such payments were to be made to the United States, and were to con¬
stitute in its Treasury a sinking fund. Upon all payments the United States, as the beneficiary of the fund,
was to allow interest to be computed half-year]}', and upon the interest accruing on them at the rate of six
per cent. The amount which the company would have to pay under this proposition was about $26,000,000.
The interest, compounded every six months, was to pay the balance. The Government was to be allowed no
interest upon the interest paid by it,—that is, while the Government was to pay $77,000,000, the company,
from the manner in which interest on its payments was to be calculated, was to pay only about $26,000,000
a sum $51,000,000 less than that which the Government would be compelled to pay.
In reference to the above proposition, the President of the company, in his report for 1875, said:
" The late decision of the United States Supreme Court, decreeing that the interest paid by the Gov¬
ernment upon the Government bonds is to be paid by the company at the time and in the manner of the
principal of the bonds (leaving half of the Government transportation to be paid to the company), has lifted
from the property the only cloud that rested upon it : by that decision there is due the company from the
Government $1,095,517.02, which will undoubtedly be paid as soon as the remaining question now pend¬
ing in the U. S. Court—being ' What is due under the 6th Section of the Act of 1862, known as the Five
Per Cent Clause? '—is decided.
"It is also believed that when all the questions are finally settled by the courts, the Government will
accept the company's proposition, and agree upon some plan that shall provide a sinking fund, or a fixed
sum to be paid by the company, to meet the Government debt and interest. Although the company under
the decisions are relieved from making any provision of this nature, they are disposed to carry out any plan
that will do justice to the company and the Government, and that shall not be burdensome to the property,
and that will settle finally, and for all time, all questions bearing upon the points heretofore in dispute, and
the company have so informed the Executive Department of the Government and Congress.
"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 on interest account, also uncollected, until the principal is due.
Principal and interest, when due, will amount to the very large aggregate of over $77,000,000, though the
actual amount advanced by the Government was only $27,236,512. For this very large amount the Govern¬
ment 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 farther and
farther from the opportunity to secure a just return for its advances. To do nothing is to injure both the
Government and the company, perhaps irretrievably to both. In this dilemma, I venture to make a proposi¬
tion, which offers, on the part of the company, all it can possibly do, and secures to the Government a sub¬
stantial return for its advances. ...
" The company claims that the doctrine of this case (that decided in favor of the company) evidently is,
9
that there is nothing due to the Government from the company on account of either principal or interest until
the maturity of the subsidy bonds, except one half of such sum as the Government may create by its demands
for transportation, and that, in fact, the only mode of reimbursement now provided by law, either before, at,
or after the maturity of the bonds, is this one half of Government transportation, which is made by the 10th
section of the Act of July 2, 1864, to run so long in the f uture as there may be anything due to the Government,
and even as against parties who may become possessed of the roacl under and by virtue of a foreclosure of the
first mortgage." (See Report of the company for 1875.)
The preceding extract shows the action of the company at the very time that, according to Mi-. Adams,
it had matured such a wise and beneficent plan for the payment, in full, of the Government debt.
"The plan of the management of the road down to the year 1880," said Mr. Adams, in his report for
1884, " was from a railroad and business point of view the soundest that could be desired. Surplus earnings
were turned into business, as it were. They were represented by assets in which lay the control of the
auxiliary system which secured to the Union Pacific the traffic on which it lived. Thus, practically, the sur¬
plus earnings of the company, after the payment of reasonable dividends to the stockholders, constituted a
fund which has been regularly applied to the railroad development of the neighboring region, furnishing what
was imperatively needed, at the same time giving to the Union Pacific the bulk of its most remunerative
traffic. The Thurman act superseded this plan. The money tvhich had been heretofore turned into the business,
and made of inestimable value in developing the country, was by the operation of that act diverted into a sink¬
ing fund. In place of supplying Nevada, Utah, Wyoming, and Idaho with railroads and insuring large
profits to the Union Pacific, this money was placed where it has, as the record shows, failed to be of use to any
one. . . . Now, what has been the difference in money results between the policy imposed by the Govern¬
ment and the policy pursued by the company ? In 1878 the Government passed the Thurman act ; the
Thurman act practically said : ' Instead of investing your money in auxiliary railroads which the country
needs, and which will secure traffic to the main line, you shall put your money into the Treasury of the United
States, there to accumulate as a sinking fund.' When the courts had passed upon that law, and declared
that the company must obey it, the company did obey it. The money which should have been invested in
branch lines was put into the Treasury as a sinking fund. What was the result ? In all some $46,000,000,
as I compute it, has been invested in the auxiliary system. These $46,000,000, as nearly as can be ascertained,
return an annual profit to the company of $5,000,000, which is four per cent per annum upon the invest¬
ment, not a bad return. 'The Thurman bill,' said Mr. Adams in his late report, 'has brought the Union
Pacific system into a position of imminent danger. Our money has been taken out of our hands and hidden
away in a napkin. [Considering the relative amount, a very small napkin would suffice.] Other corporations,
not trammelled as we are, are pressing in upon us. The Chicago and Northwestern is pressing in from the
north; the Chicago, Burlington, and Quincy is pressing in from the east; the Missouri Pacific is pressing in
from the south. The territory upon which the Union Pacific depended for its continued existence is being,
little by little, filched away. To put the case thoroughly, the company may be considered as occupying:
somewhat the position of a business man would occupy whose principal creditor held his arms while his.
creditors picked his pockets. Such, in plain language, is the present situation with the Union Pacific. What
is the remedy for it? I submit the remedy is a simple one. Nor is it too late to apply it if you will but
look facts in the face, and see them exactly as they are.' "
According to the above the plan for the payment of the Government debt by investments in branch lines,
so wisely devised and so persistently pursued, was rudely arrested by the Thurman act, which said, " In¬
stead of putting your money into auxiliary roads, you shall put it into the Treasury of the United States."
"The money," said Mr. Adams, "which should have been invested in branch lines was put into the Treasury
asa sinking fund. What was the result? In all, some $46,000,000 has been invested in the auxiliary sys¬
tem." "Had" been invested according to Mr. Adams, for the reason that the Thurman act "superseded"
—put an end to all investments in branch lines by putting the net earnings of the company into the sinking
fund.
10
The following statement, compiled from the reports of the company, will show the mileage of the main
line and branches of the Union Pacific system, and the amount invested by it in branch or auxiliary lines
from 1878 to 1885 inclusive:
Roads.
1885.
1884.
1883.
1882.
1881.
1880.
1877.
Dec. 31.
Dec. 31.
Dec. 31.
Dec. 31.
Dec. 31.
Dec. 31.
Dec. 31.
Union division—U. P. Ry. Co..
1,098.94
1,048.70
1,042.40
1,042.40
1,042.40
1,042.40
1,042.44
Kansas division, "
643.51
643.20
638.50
638.50
638.50
638.50
....
Leavenworth branch, "
34
34
34
34
34
34
Cheyenne division, "
106
106
106
106
106
106
Total Consolidated Line......
1,832.45
1,831.90
1,820.90
1,820.90
1,820.90
1,820.90
1,042.44
Omaha & Republican Valley...
258.42
237.45
197.10
197.10
170.20
170.20
60
Omaha, Niobrara & Black
Hills
114.97
114.50
84.10
84.10
84.10
81.90
....
Echo & Park City
31.78
32.27
32
32
32
27
Colorado Central
327.17
327.17
329.46
329.46
329.46
178.30
178.30
Salt Lake & Western
57.60
57.50
57.50
53
....
...»
Denver, South Park & Pacific..
322.25
320.70
324.88
302.50
233.80
....
Utah & Northern
466.18
461.96
461.96
461.96
415.54
347.60
80
Oregon Short Line
610.62
609.95
497.10
239.50
....
....
Greeley, Salt Lake & Pacific ...
53.89
53.89
53.90
39.46
....
....
Lawrence & Emporia
31
31
31
31
31
31
....
Junction City & Fort Kearney..
87.60
87.55
70.10
55.10
55.10
70.10
....
Solomon
57.04
57.04
57.30
57.30
57.30
57.30
....
Salina & Southwestern
35.43
36
36
36
36
36
....
Denver & Boulder Valley
27.00
27
27.80
27.80
27.80
27.80
Golden, Boulder & Caribou ...
5.09
6.10
6
6
6
6
....
Kansas Central
166.14
167.33
169
169
....
....
....
Georgetown, Breckenridge St
Leadville
8.47
8.30
....
....
Montana Railway, Stuart branch
9
8.90
....
....
Laramie & North Park
13.51
....
....
Denver & Middle Park
3.92
....
Total auxiliary lines
2,687.08
2,644.51
2.435.20
2,121.28
1,478.30
1,033.20
318.30
Grand total
4,519.53
4,476.41
4,256.10
3,942.18
3,299.20
2,854.10
1,360.70
Annual increase of mileage
42.57
209.31
313.92
642.98
445.10
714.90
....
Annual increase of investment
in branch lines
$41,77,412
$41,547,728
$38,619,722
$34,410,430
$31,097,677
$19,507,615
$2,912,956
The mileage of the Union Pacific at the time of the passage of the Thurman bill was 1360.40 miles,
made up of main line (including the bridge at Omaha), 1042.40 miles; the Colorado Central, 178 miles; the
Omaha and Republican Valley, 60 miles; and the Utah and Northern, 80 miles. The mileage of the branch
lines equalled 318 miles. The amount invested on them, according to the report of the Government directors
for 1877, was, in the Colorado Central, $667,156; in the Utah and Northern, $130,800; in the Omaha and
Republican Valley, $817,500; total, $1,615,464. It had also invested in the Utah Central $277,000, and in
the Utah Southern $1,020,500, the total investment in the five lines equalling $2,912,956. The Utah Central
and Southern are not included in the Union Pacific system, the latter company owning only a minor portion
of the stock and bonds of the two companies now consolidated into the Utah Central.
11
-The company first published a balance-sheet in 1880. Its annual reports for 1878 and 1879 gaye no
account of its branch lines, nor of the amount invested in them. In 1880 the mileage of the branch lines had
increased to 1,033.20 miles, the increase being 714.90 miles. The amount invested in them at the close of 1880
was $19,507,615, the increase of investment being $16,595,059. Of the new mileage 228 miles came in
through the Kansas Pacific. The new mileage constructed during the three years was 482.90 miles. At
the close of 1885 the branch lines of the company equalled 2,687.08 miles, the increase from the passage of
the Thurman act equalling 2368.78 miles, or, deducting the branch lines received from the Kansas Pacific,
2140.78 miles, the annual average rate of increase being about 270 miles. The investments in branch lines
increased in eight years from $1,615,466 to $41,777,412, the increase equalling $40,181,956, or, deducting the
investment in the Utah Central and Southern lines, $38,863,456. Mr. Adams declared the investment in
branch lines to equal $46,000,000. In such case the increase in eight years of the investment exceeded
$43,000,000.
The results shown in the preceding table place the question of Mr. Adams's sanity or truthfulness in a
very awkward light. "Was the company, after spending some $46,000,000, according to his statement, rudely
arrested from making further expenditures of the kind by the operation of the Thurman act? Or was the
$46,000,000 expended after the Thurman act took effect? He declares that it was spent previous to the
passage of the Thurman act, for after reciting the expenditure of the $46,000,000, and the beneficial results
to the company and the Government, he exclaims: " Now, what has been the difference in money results
between the policy imposed by the Government and the policy pursued by the company? In 1878 the Gov¬
ernment passed the Thurman act. The Thurman act practically said, ' Instead of putting your money into aux¬
iliary railroads, you shall put it into the Treasury of the United States.'" And it was put into the Treasury
of United States, and the beneficent policy so wisely inaugurated, and so well lived up to, came to an end !
• The net earnings of the Union Pacific from 1878 to 1885, inclusive, were $89,193,932. Of this sum
$20,941,241 were paid in dividends, and all but about $2,000,000 upon stock that cost the original owners not
a penny—and very largely to the original owners, as these did not attempt to unload until 1882-3, and not
until the stock rose to a high premium. The only stock ever issued, and paid for in money at par, was the
$10,000,000 issued in the latter part of 1880. The net earnings over and above dividends since 1877, earned
to the credit of income, have been $15,136,789. The two sums representing net profits since 1877 equal $36,-
078,030 and all this after the payments made to the sinking fund. In other words, the net profits of the
company for the eight years, the whole of which might have been expended in construction, were more than
six times greater than the payments made in the same period to the sinking fund !
Mr. Adams is constantly enlarging upon his mighty prowess in saving the company from the terrible
crew of shirtless and shoeless vagabonds seeking to devour it. "Prom the day of the failure of Grant & Ward
there has been no time," he said, in his argument before the Railroad Committee, " when I was not conscious
of the close proximity of the wrecker; just as the traveller in the woods might hear the distant cry of the
wolves; just as the mariner in the tropics sees the fins of the shark rippling the water as he moves towards
his vessel. ... In their moments of confidence, and among themselves, they openly, longingly express an
abiding faith that, could they once break down the present Stockholders' Management, they would have things
all their own way. . . . Just now, I chance to stand between them and their prey. Cannot Congress, or the
Government, or the Committee on Pacific Railroads, or the Secretary of the Interior be so worked upon
that one or the other will drive Me out? Then at last the wrecker would have his day, long waited for."
A little history will dispose of this bit of fine rhetoric in which "me" is the central figure, and show that
the real wreckers of the Union Pacific were not an outside crew unable to get within gunshot of its doors, but
an inside crew; "those," to repeat the words of Mr. Adams, "who as stockholders owned the road; who as
directors contracted for its construction, and who as members of the Crédit Mobilier built it, dividing among
themselves a nominal profit of over $50,000,000. These wreckers, the directors of the company and the stock-
12
holders in the Crédit Mobilier, came very near in dealing it a decisive blow. The United States," said the
report, already referred to, of the Wilson committee, " was not a mere creditor loaning a sum of money upon
mortgage. The railroad corporation was not a mere contractor, bound to furnish a specified structure and
nothing more. The law created a body politic and corporate, bound as a trustee to manage this great publio
franchise and endowment so that not only the security for the great debt due the United States should not bo
impaired, but so that there should be ample resources to perform its great public duties in time of commercial
disaster and in time of war. Congress relied upon the performance of these great trusts by the corporators,
upon their sense of public duty, and upon the fact that they were to deal with and protect a large capital of
their own, which they were to pay in money. . . . Your committee find themselves constrained to report
that the moneys borrowed by the corporation have been distributed in dividends among the corporators. . . .
Instead of securing a solvent, powerful, and well-endowed company, able to perform its public functions
without interruption in times of commercial disaster and in time of war, it is now weak and poor, kept from
bankruptcy only by the voluntary aid of a few capitalists who are interested to maintain it, and liable to fall
into the hands of shrewd and adroit managers."
Here is the story of the wrecking of the Union Pacific by those who had the power to wreck it; by
those who not only never put a dollar of their own money into the concern, but who divided among them¬
selves a portion of the proceeds of the Government bonds, and who, by such proceedings, and by their waste
and extravagance, made the road cost far more than it should have cost; and who, in addition, issued upon
the main line $36,762,300 of stock, and upon the Kansas Pacific $14,000,000—$50,762,300 in all—for which
little or nothing was paid. As the committee declared, the company was so weakened by the extravagance
and rapacity of those owning it that for a long time it was with difficulty saved from bankruptcy. Another
wrecking was the payment for a long time of dividends at a high rate as a means of floating the stock. Now,
these wreckings took place under a management which was pre-eminently that of shareholders. What are the
relations to the road of Mr. Adams's "Shareholders' Management"? It is a delegated one, in which he has
little or nothing at stake, and one in which, consequently, he feels a minimum of interest. A property is well
managed in ratio as it is managed by its owners, and vice versa. The present management is not a stock¬
holders' management. It is a delegated management, and has all the weakness and insecurity of a delegated
management. Mr. Adams must say something, and he plied the ears of the derelict members of the com¬
mittee with all such arrant nonsense, declaring that for the first time in its history the Union Pacific had an
upright and competent management. The stockholders of the company would undoubtedly like to get rid
of paying any of the debts of the company; but it is not they but a powerful Wall-street combination that
is now behind the bill, and gives it all the support it has that is worth having.
It happened that Mr. Adams was one of the Government Directors of the road for 1878. He wrote their
report, in which he swelled after his usual style, lecturing, with an air of immeasurable superiority, the man¬
agers of the concern upon their duties, and denouncing at great length their shortcomings and misconduct,
all with a voluble rhetoric in which he has hardly an equal. In that report, after relating the competition,
particularly with the Kansas Pacific, from which the Union Pacific had suffered severely, he proceeded:
"During the past few years, however, and under the management of those who now control it, the
policy of the Union Pacific has been to protect itself from competition in another way. It has sought to
occupy the territory adjacent to its line in advance, through the construction of a system of branch lines, or
feeders. There are now five of these branch lines in which the Union Pacific is interested, either directly or
indirectly, to the extent of entire possession or in part. These are the Omaha and Kepublican Valley, the
Colorado Central, the Utah Central, the Utah Southern, and the Utah and Northern. It is not deemed
necessary to encumber this report with any details concerning these branch lines, either as touching their
length, or their business and financial relations with the Union Pacific. Meanwhile it, of course, need not he
said that these branch lines, or the securities which represent them, in so far as they are the property of the
Union Pacific Railroad Company, are not covered by the Government mortgages, and contribute to the security
of those mortgages only in so far as these branches are valuable feeders of the main line."
13
The Thurman act was passed May 7, 1878. Mr. Adams's report was dated at Boston, December 7,
1878, seven months after the passage of said act, and may consequently be taken as pretty good evidence of
the number of branch lines which the company had in hand up to the close of 1878, the cost of which up to
the close of 1877 has already been given. Now, this provision of branch lines was, according to Mr. Adams,
not to provide means for the payment of the Government debt, but to ward off competition already threaten¬
ing on every side. Upon the money invested in them Government had no lien, nor was it intended that it should
have any lien as security for its advances. The only effect of the Thurman act was to compel the company,
after it had constructed 318 miles of branch line, at an outlay, according to Mr. Adams, of $46,000,000, to
abandon a policy so wise for itself and so useful to the Government; to fold its arms, and leave vast tracts
of territory unopened, to be rifled from it by enterprising and aggressive rivals ; its proper traffic to be in a
great measure taken away, its business affording no adequate profit to itself or security to Government. Sad!
sad!! sad!!!
It will be observed that Mr. Adams declares that though the company was building lines, not a dollar
of the money invested in them inured in any way to the benefit of the Government. If the plan described
by him for the payment of the Government debt had been formed prior to 1878, would he not at the time
have alluded to it as one of the good things the company was doing, notwithstanding his intense hostility to
it? He well knew that the company at the time was resisting with the greatest vigor the efforts of the Gov¬
ernment for greater security, on the ground that nothing was due from it except the one half of earnings on
Government account. The company would not then, which was not long before a decision was had on the
Thurman act which settled the relation between it and the Government, have been very likely to make pro¬
vision for a debt which it claimed it did not owe. Mr. Adams then regarded the company in the light of its
past history, which in a measure he had written. Up to that time there had been no change in him or in his
views. The time for a change on his part had not come; consequently, he wrote in his report for 1878 as
follows:
" In view of the facts which it is unnecessary more to refer to connected with its organization and con¬
struction,' it seems manifestly right that the Union Pacific should be judged by the most severe standard
known among the railroads of the country. No good reason is apparent why it should not be held strictly to such
tekt, or why its owners or officers should object to it. As a matter of common Jc?iowledge, the road was prac¬
tically built out of the public money, and the stock which now represents its ownership represents little be¬
sides the enterprise and energy which the original proprietors put into the uudertaking. The corporation, on
the other hand, received from the Government an indorsement of unprecedented liberality. . . . Under these
circumstances those representing the Government m the conduct of its affairs would clearly not be justified if in
that inspection they applied any standard short of the highest known to the railroad system of the country.
Especially would this be so where, as in this case, the road as a commercial enterprise has proved a brilliant
success ; when its annual earnings, falling a little short of $13,000,000, are the largest, with five exceptions
only, in our whole railroad system."
When the above was written, Mr. Adams represented the Government which he was bound to protect.
He was perfectly familiar with the history of the company. No one had denounced its corruptions in more
scathing terms. The company was then "out" under a ticket of leave; but, from its past offence, it was to
be under the closest surveillance. Nothing was to be presumed in its favor, but everything against it. It had
not only fed ad libitum out of the public crib, but, from its past briberies and corruptions, his prophetic
soul saw too well what was in store from it, for the people and the nation.
" The system of corporate life as applied to industrial development is yet in its infancy. It always tends
to development, always to consolidation ; it is ever grasping new powers, or insidiously exerting covert in¬
fluence. Even now the system threatens the General Government. In a few years more" (this was written
by Mr. Adams in 1869) "we shall see corporations as much exceeding the Erie and New York Central, both
in ability and will for corruption, as they will exceed these roads in wealth and in length of iron track ; we
14
shall see these great roads spanning the continent from ocean to ocean. Now their power is in its infancy.
In a few years they will enact on a larger theatre and on a grander scale, with every feature magnified, the
scenes which were lately witnessed in a single State." The scenes here referred to were those enacted by
Tweed and his associates in which the New York Central was more or less involved. The Central, with its
branches, has a mileage of 953 miles; the Erie, 1295 miles—the mileage of the two being 2248 miles. The
mileage of the Union Pacific is 4519 miles—a mileage more than twice greater than that of the New York
lines. " In ability and will for corruption" the Union Pacific twice exceeds the ability and will for cor¬
ruption of the two great New York lines. Is not the proof patent to the world? Has not the Union
Pacific just got out of the Committee on the Pacific Railroads a bill providing for letting ofE the Union Pacific
from the payment not only of the money advanced from the construction of the road, but of a large amount
of interest accruing on the same? And all this not only without a particle of evidence of the inability of the
company to pay its debts, but upon the assumption that it is as fully able to pay its debts by being left, not¬
withstanding the bill proposed, as a dividend-paying road. Their Report is one of the most disreputable
things in the whole annals of Congressional legislation. Is any additional evidence wanting that Mr.
Adams's vision of 1869 was prophetic of the future? At that time he would have exclaimed, with more than
mortal passion, "Is thy servant a dog, that he should do this thing?" He little dreamed at the time that
"one day he should be king over Syria."
Par from conceiving, at the time referred to by Mr. Adams, any plan for the payment in full of the Gov¬
ernment debt by investments in branch lines to be held therefor, the only plan ever proposed by the com¬
pany previous to the bill now under discussion was a sinking fund which was to relieve the company of all
liability by the payment of about $26,000,000, for a debt which was equal at its maturity to $77,000,000. One
supreme passion has always had possession of the company—to get rid of the Government debt, or a large por¬
tion of it, without paying it. Its managers have always fought with the greatest pertinacity every measure
which if adopted might create an inference that it was liable for the entire debt. This is the whole secret of
its opposition to the Thurman act. This act contemplated, or might be construed as contemplating, the pay¬
ment of the Government debt in full ! This is the sole reason of Mr. Adams's animus toward it. The annual
payments under it are a mere bagatelle not worth a moment's thought, nor did they impair in the slightest
degree the ability of the company to build branch lines. It has always been able to build any extent of
line without using a cent of its income, the public being always ready to take its bonds to any amount
for new lines; or bonds issued against branch lines, of which the Oregon Short Line may be taken as an
example for all. Such is precisely the way that the companies in the West, which Mr. Adams in¬
stances as pressing the Union Pacific so hard,—the Chicago Northwestern, and the Chicago, Burlington,
and Quincy,—build their lines. Mr. Adams assails the Thurman act, not because the payments under it are
of considerable importance to the company, but for the reason that if allowed to stand it may serve as a prec¬
edent for future acts of a similar character contemplating the payment by the company in full of the
Government debt. By its enactment " the Government," Mr. Adams declared, "held the arms of the com¬
pany and rifled its pockets," so that "the territory upon which it depended for its continued existence has
been, little by little, filched away!" The comment upon this false and absurd statement is that at the passage
of the Thurman act the company had 318 miles of branch line all told. It has now 2687 miles of branch lines!
And what was the reason and occasion of the Thurman act? The Government had issued to the Union
Pacific bonds to the amount of $27,239,512. It was paying on this sum annually $1,634,343 by way of in¬
terest. The company returned a pittance in the shape of one half the earnings received from transportation on
Government account. The company has always been incessant in its declarations that it could never pay the
subsidy bonds to amount, with interest, to some $77,000,000 when they were to fall due. The best offer it
had ever made to rid itself of them was about $26,000,000: "this was the best it could possibly do." In the
mean time the company was paying dividends at a good round rate on stock for which not a penny was paid,
and was just entering upon the construction, on a large scale, of branch lines. It was natural that, under such
15
circumstances, Congress should be a little nettled at the position of Government, especially as the company
took the ground that all that it could ever be compelled to pay was one half the earnings on Government ac¬
count. The result was the Thurman act. After a desperate resistance in the courts it was decided that the
company must pay. Now, had the act provided that the payments should be made in direct discharge of a
corresponding amount of accruing interest, the company would never have dared to utter one word of com¬
plaint, so reasonable^ would such a provision have appeared. It was unfortunate for the Government, but
very fortunate for the company, that the sums arising under the Thurman act were not directly applied to
the payment of interest, instead of being paid into the sinking fund. The Government cannot get interest
on its payments of interest. Through the sinking fund, the company gets interest on its payments, so that
when the bonds are due it will have a much larger sum wherewith to meet the overdue interest than the
amounts paid into the sinking fund. But the sinking fund, from the low rate of interest realized, gave Mr.
Adams a chance to talk—to bellow is a more fitting phrase—in which he has falsified all history and proba¬
bility with an impudence and recklessness of assertion characteristic of himself alone.
The effect of the Thurman act has not only been to get out of the company some $6,000,000 which other¬
wise would in great part have been paid out in dividends, but it led to a construction, a matter of the utmost
importance to the Government, of the charter of the company which forever put an end to its pretensions
that no interest was due until the bonds were due; and that no other mode of payment of the bonds was pro¬
vided than one half of the earnings on Government account. If it were competent for Congress to provide
that 25 per cent of the net earnings should be put into a sinking fund to be applied to the payment of the
accruing interest, it is competent for it to declare that the whole of the net earnings, or so much of them as
is necessary, shall be so applied. The result has been that in place of some $26,000,000 offered by the com¬
pany in full discharge of the principal and interest on the subsidy bonds, it now offers $126,000,000—in other
words, the act has forced the company to increase the amount of its offer by $100,000,000! Who, after this,
will say that the Thurman bill was not a great, a wonderful success?
Mr. Adams pleads for the indulgence of Congress on the ground that the Union Pacific was " a tremen¬
dous business gamble—those who went into it did so looking for large profits or a total loss." There was no
gamble about it. Th»re might have been a " gamble" had the directors, who were the owners of the enter¬
prise, put up any money of their own. This they were too sharp to do. They would not move a peg until
Congress, by bribery it was asserted and morally proved, had subordinated the subsidy bonds to an equal
amount to those of the company. Such subordination gave the company bonds to the amount of $54,479,-
024, which could be readily turned into cash, to build a little over 1000 miles of line, which did not prob¬
ably cost over $35,000 to the mile. All the stock and all the bonds subordinated to those of the Govern¬
ment were additional profit.
To repeat, perhaps, what is the real question at issue ? It is whether the Government shall consider the
case of investors who have paid a higher price for their holdings than their present market value. The
whole thing is, in a nutshell,—they have made a bad bargain. Government can ease their lot by giving up a
portion of what is due to it. There is no other question at issue, and this is one that need not be argued. If
Government is to make good the losses of those who have not the sense to take care of themselves, the prec¬
edent of interposing in this case would he a most dangerous one, no matter how urgent the exigency may
be. If Government were in any peril as to the adequacy of the security it holds, it might make an apparent
sacrifice in order to be certain as to a balance due it. But there is no such peril. The company indeed pro¬
claims in a most ominous manner that the Government if it persists must come to grief; but it does not put
forth a particle of evidence in support of its assertion. The committee of Congress which reported the bill now
under discussion echoes the company, without offering the least evidence that the Government debt is not
still well secured. The adequacy of the security is admitted by the company by its assertion that the road,
in order to secure good management, must be dividend-paying; and that if Congress passes the bill now
under discussion it can be dividend-paying. It claimed to earn to last year 4 per cent on its stock. Is Con-
16
gress to be affected by such kind of arguments as these? The dividend-paying periods of this company have
been those of its most corrupt management. Is it not better for Congress to look to its security rather than
be carried away by the specious talk, which is the only thing offered to influence its action?
It is a sufficient objection to the present measure that it postpones some sixty years the full payment of
the Government debt, the degree of risk assumed by the Government being in ratio to the length of time to
which payment is deferred. There can be no reasonable doubt that when the subsidy bonds fall due the prop¬
erty put up for their security will be adequate for their payment. There is very great doubt whether it will be
adequate in twenty years from now. The competition which has so reduced the earnings of the road has only
just begun. At the end of twenty years the company, should the present bill become a law, will be owing the
Government some $92,000,000; at the end of thirty years $74,000,000 will be due. At that time the company
may be wholly unable to make further payments. The first mortgage and subsidy bonds equal, say, $54,000
per mile of the main line of the Union Pacific. Competing roads are being built on every side at a cost of
$20,000 per mile. One of these, the extension of the Chicago, Burlington, and Quincy, has already reached
Denver. The Chicago and Northwestern is rapidly pushing on to Ogden. It is true that the Union Pacific
has two important branch lines, one the Utah and Northern, running north from its Western terminus, and
the Oregon Short Line, running northwest from Grainger, both of which bring business to the main line.
But as soon as these are intercepted by rival lines the rates of the Union Pacific on business received from its
branch lines will be controlled by such rivals, although the business did not originate with them. Shippers
will not pay one line higher rates than other lines offer. If the present bill is not passed, dividends will not
be resumed. . All the net earnings, consequently, will inure, by strengthening the position of the company,
to the benefit of the Government. The latter can afford to wait till 1896-7, its security for such a period being
ample. By waiting, its security, through the net earnings of the road, is pretty certain to increase largely in
value. With the passage of the present bill, the company would at once begin the payment of the dividends,
weakening in an equal degree the amount of the Government security.
An argument strongly urged by Mr. Adams for a concession by the Government is the present wide
distribution of the stock of the company. "Not one in ten of the present Union Pacific stockholders," said
Mr. Adams, in his report for 1884, "were owners of stock at the consolidation in 1880; and not one in one
hundred and fifty were owners of stock in 1875." He wished to emphasize this statement; there is no need
of it. No one questions it. In 1875 the managers of the concern had not begun to unload their stock upon the
public. There had been no opportunity for them to do so. This opportunity had to be created through
years of patient manipulation. The prize was worth the time and labor. Dividends had to be paid for a series
of years to get the public wonted to the stock. As it was, it was for a long time an up-hill business. Dividends
were first paid for 1875 at a rate averaging 7 per cent. The market value of the stock in January of that
year was 38; in July, when the first dividend was paid, 70. The highest price the -stock touched in 1876
was 74-J-; the lowest, 57f. In 1877 the highest point touched was 73; the lowest, 59f. In 1878 the highest
point was 73; the lowest, 61£. In 1879 the highest point was 95; the lowest, 57^. In the mean time divi¬
dends were regularly paid at the rate of 7 per cent. Early in 1880 the Union Pacific and Kansas Pacific
were consolidated, the share capital of the former being $36,762,300; of the latter, $14,000,000. The stock of
the latter with that of the former was issued ivholly without consideration. Of the story of this consolidation
Mr. Adams, so voluble in trifles, makes not the slightest reference. It is enough to say that it was accom¬
plished by a gross violation, by the directors of the Union Pacific, of most sacred trusts. In 1880, after the
consolidation, the price of the stock rose to 109. This was the opportunity for the parties who constructed
the road and got their stock for nothing. Of the holders of the stock at the close of 1885, not one in one
hundred and fifty were holders in 1875. This tells the whole story in a word. The great stockholders, the
directors of the company, by means of dividends paid at a high rate, but probably never earned, succeeded
in raising the appetite of the public to a white heat; and they greedily took the stock, which was fed out to
them as a great favor. The holdings were thus increased at the rate of one hundred and fifty to one. They
17
have now the shell of a concern the substance of which was long ago carried off by a body of the shrewdest
and most unscrupulous men ever banded together. It is the one hundred and fifty stockholders in the place
of one, for whom Mr. Adams now claims to speak, he being one of the victims. Is the lenity of the Govern¬
ment to he extended to them in their misfortunes?
In conclusion Mr. Adams said :
" We thus ask the Government, our partner in a most successful business transaction," said Mr. Adams,
in concluding his argument before the Committee on the Pacific Railroads, February 24, 1886, " to meet us
in an adjustment such as, we believe, would not be unusual among business men. Based upon familiar busi¬
ness principles, it differs in magnitude alone from the every-day transactions of the market. . . . Once those
principles are all settled, the long-discussed Pacific Railroad-question will be found to present no difficulties
that cannot readily be overcome."
What is this copartnership between the Union Pacific and the Government ? The latter chartered the
company, or companies, the Union and Kansas Pacific, now united by consolidation: issued its bonds, to the
extent of $33,539,512, in aid of the construction of their roads, and made to them grants of land to the extent
of 18,000,000 acres. From the lands so granted, the company up to the close of 1885 had received $30,119,-
818 net. The value of the lands unsold, 7,444,546 acres, equalled according to the last report of the com¬
pany, $12,493,670; the two sums making a total of $42,613,488. The dividends paid by the company have
equalled $27,915,660. The amount carried to the credit of income since the consolidation in 1880 equals
$12,632,847. The report for 1880 contained the first balance-sheet made public. The excess of net earnings
over all expenses and dividends up to 1880 equalled $13,134,955, which amount must have been carried to
the credit of income by the old Union Pacific. The value of the lands granted to the company, and the net
earnings realized either in the form of dividends or in credit to income make a total of $96,297,150. The
original stock ($50,762,300) of the company cost their original holders nothing. Assuming that they got rid
of it at fifty cents on the dollar, the total profits of one of the parties to the "copartnership" equalled $121,-
678,400. The above net does not include sums distributed in cash as profits of construction, and which were
in part the proceeds of the sale of the Government bonds.
How about the other party to the " copartnership" which Mr. Adams is proceeding to dissolve,—the
party which in the outset furnished the whole of the partnership capital, by consenting to take a subordinate
portion as security for its loans, the original act providing that its funds should be a first lien on the road?
It has paid the interest on its bonds from the date of their issue at the rate of 6 per cent. A part of this
has been reimbursed ; but the company, not including the Central Branch, still owes the Government all the
principal, and accrued interest to the amount of $15,167,214. Kot only this, but the partner that put up
the whole capital by means of which $121,678,400 profit was realized by the partner that manipulated it, is to
surrender not only the whole amount of money put up, but a large amount of accrued interest in addition,
the whole sum equalling over $50,000,000. It remains to be seen whether a partnership is to be dissolved on
the terms which Mr. Adams now proposes. If the company can avoid the payment of this sum its profits
will be swelled to over $170,000,000.
It may here be remarked that the Government has already, by the terms of its mortgage, a lien upon all
the property of the company, subject only to that of the first mortgage. The act proposed does not increase its
present security in the least degree. Of the $46,000,000 of securities, of which the company makes so much
talk, the greater part of any value is already mortgaged to secure issues of Trust bonds. The greater part of
the balance is mere rubbish—of which the $12,000,000 of the securities of the Denver, South Park and Pacific
is an illustration. The object of the present movement is to get Mr. Adams out of a tight spot in which he
placed himself by cracking up the value of the property in order to show what a smart man he was, in this way,
saddling large amounts of stock upon his personal friends and neighbors; and to make a good operation in Wall
Street. When these two objects are accomplished, any one may take the road that will. The only thing for the
Government to do is to wait where it is, certain that the road will be worth its bonds when they fall due, and
equally certain that in twenty or thirty years it may not be worth a quarter the amount that may be then due.
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