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ARGUMENT OF WHEELER H. FEt'K IIAM
before the
HOUSE COMMITTEE ON PACIFIC RAILROADS
JANUARY 28, 1888,
IN BEHALF OF CERTAIN STOCKHOLDERS OF THE
CENTRAL PACIFIC RAILWAY COMPANY.
Burgoyne Quick Printing Co., cor. Walker and Centre, N. Y.
ARGUMENT OF WHEELER H. PECKHAM
before the
HOUSE COMMITTEE ON PACIFIC RAILROADS, JANUARY
28, 1888, IN BEHALF OF CERTAIN STOCKHOLDERS
OF THE CENTRAL PACIFIC RAILWAY COMPANY.
Mr. Chairman and Gentlemen :
I appear before you at tlie request of Mr. Bretliertou and as his
counsel, representing him and other stockholders of the Central
Pacific Railway Company, similarly situated. My instructions and
my object are to present to you the views of such stockholders, and
to ask you to consider the situation between the Government and
the Central Pacific Railway Company from the point of view of these
stockholders and as it appears to them. I have nothing new to
offer to you ; it is not my purpose to refer to or comment upon any
facts not thoroughly well known to all parties interested in this con¬
troversy, and the evidence for which may not be found in existing
public documents accessible to all. My principal object is to
divorce thoroughly and completely the question which is really pre¬
sented for your consideration here from those other questions which
have been considered by the Commission appointed by the Presi¬
dent, under the Act of Congress of 1887, and which concern, espe¬
cially, the gentlemen who were the controlling stockholders and
directors in the Central Pacific Railway Company in its earlier days,
and against whom complaints have been made by such Commis-
2
sioners. I am anxious to impress upon you that in the solution
of the practical question between the Government and the Central
Pacific Railway Company as to when and how the debt of the Rail¬
way Company to the United States shall be liquidated and paid, no
aid can be derived from the consideration of any questions relating
to the past administration of the company's affiairs. The Central
Pacific Railway Company is an entity in itself" by and through
the several Acts of Congress it made its contract with the Govern¬
ment ; the only possible right of the Government is that those
contracts 011 behalf of the Railway Company should be fulfilled.
No wrong can be done by the Railway Company to the United
States, unless by breach of such contracts. If the gentlemen referred
to have done anything for which there may be cause of complaint, the
injury is to the company more than to the Government ; for the
Government can be injured only so far as the injury to the com¬
pany shall prevent the fulfillment of its contracts with the Gov¬
ernment.
Mr. Bretherton himself has urged to you the fact that the stock¬
holders, of whom he is one, and whom he represents, are innocent
purchasers for a valuable consideration of the stock of this Company,
at a period subsequent to all the acts of the directors and stock¬
holders which are complained of ; but the truth is that the status of
the Railway Company, as such, is technically and legally quite as
good as can be that of any stockholder, no matter how much he may
have paid for his stock, how late he may have bought it, and no
matter in how absolute good faith his purchase may have been made.
The contract with the Government was not with the men whose acts
are complained of; it was with the Railway Company. The contract
of the Railway Company with the Government has been fully carried
out by the Railway Company. The complaint of the Government now
is—not that the Railway Company has not carried out its contract,
but that certain individuals have, during a considerable past period,
despoiled it, the Railway Company, of its property, and thereby ren¬
dered its ability in the future to comply with its contract with the
Government problematical. I must ask of you to keep these two
3
tilings separate in your minds, and to remember that the Railway
Company has the right to ask to be dealt with by the Government
to-day upon the assumption that it has hitherto fully complied with
its contracts, upon the assumption that it will in the future comply
with them to the utmost of its ability, and upon a recognition of the
fact that it is not to be blamed, still more not to be punished, for the
alleged wrongful acts of those who had control of it in past times as
officers and directors, which alleged wrongful acts must have resulted
in far greater injury to the Company and to its stockholders than can
have been done to the Government.
Of course, you understand me as in no way conceding that any
such wrongful acts have been done, or that there is an}" ground what¬
ever for Government complaint of the acts of these individuals. I
neither concede nor deny it; it is not the subject matter of my pres¬
ent discussion ; I leave that for those who are interested. Both
sides are fully able to take care of themselves, and the controversy
does not concern me or my clients.
The debt of the Central Pacific Railway Company to the Govern¬
ment is not due for some years yet to come ; its maturity, however,
is so near approaching that careful business men concede the impor¬
tance of preparation for that time. The company desires to confer
with the Government—these stockholders, whom we represent, also so
desire—as to the best and most feasible manner for accomplishing
the satisfactory liquidation and payment of the debt when it shall
become due. You, gentlemen, for all purposes of this discussion
before you, must be considered as representing and as being the
Government, and to you we desire to present the case from our
standpoint, and to say what seems to us to be equitable and fair.
When, in the year 1862, the construction of a transcontinental
railway appeared to be of transcendent importance, Congress passed
the act by which Government aid, to the extent of $16,000 per mile
of bonds and five sections per mile of land, were given to such
persons or corporations as should build the roads therein referred to.
By the terms of the act, the Government bonds so issued, or to be
issued, were made a first lien upon the road to be constructed, and
4
to aid in the construction of which they were issued. Congress
extended this aid to such persons or corporations as should build
these roads, not as a mere loan properly and sufficiently secured,
not in any degree as an investment; but mainly and primarily in order
to give the needed stimulus to private enterprise and to those pos¬
sessed of private capital, to the end that a road needed by Govern¬
ment might be built. Although this fact is probably within the
memories of most of us here present, and we know that it is a part
of the history of the times in which we have lived, yet it is also
adjudged, in one of the early litigated controversies of these com¬
panies with the Government, to have been the controlling motive
which secured the passage of the act.
In the case of the United States against the Union Pacific Rail¬
way Company and others, reported in the 91st U. S. Reps., page 72,
the question was: When was the company bound, under the proper
construction of the acts of 1802 and 1861, to repay to the Govern¬
ment the interest which the Government paid on its bonds, by the
terms thereof ? The companies claimed that, under the acts, they
were not bound to pay that interest until the due date of the prin¬
cipal of the bonds, while the United States claimed that the com¬
panies were bound to jxay to the United States that interest so fast
as it was paid by the United States, and upon the due date of the
interest itself. Mr. Justice Davis, in delivering the opinion of the
Court, on page 79, said :
" Many of the provisions in the original Act of 1862, are outside
" of the usual course of legislative action concerning grants to the
" railroads, and cannot be properly construed without reference to
" the circumstances which existed when it was passed. The war
" of the Rebellion was in progress, and owing to complications with
" England, the country had become alarmed for the safety of our
" Pacific possessions. The loss of them was feared, in ease those
" complications should result in an open rupture ; but even if this
" fear were groundless, it was quile apparent that we were unable
" to furnish that degree of protection to the people occupying them
" which every Government owes to its citizens. It is true the
5
" threatened danger was happily averted ; but wisdom pointed out
" the necessity of making a suitable provision for the future. This
" could be done in no better way than by the construction of a rail-
" road across the continent. Such a road would bind together the
" widely separated parts of our common country, and furnish a
" cheap and expeditious mode for the transportation of troops and
" supplies. If it did nothing more than to afford the required
" protection to the Pacific States, it was felt that the Government,
" in the performance of an imperative duty, could not justly with-
" hold the aid necessary to it; and so strong and pervading was this
" opinion, that it is by no means certain that the people would not
" have justified Congress if it had departed from the then settled
" policy of the country regarding works of internal improvement
" and charged the Government itself with the direct execution of
" the enterprise."
" This enterprise was viewed as a national undertaking for national
" purposes ; and the public mind was directed to the end in view,
" rather than to the particular means of securing it. Although this
" road was a military necessity, there were other reasons active at
" the time in producing an opinion for its completion besides the
" protection of an exposed frontier. There was a vast unpeopled
" territory lying between the Missouri and the Sacramento Pi vers,
" which teaspractically worthless without the facilities afforded by a
" railroad for the transportation of persons and property. With
" this constructed, the agricultural and mineral resources of this
" territory could be developed, settlements made where settlements
" were possible, and thereby the wealth and power of the United States
" largely increased ; and there was also a pressing want, in time
" of peace even, of an improved and cheaper method of transporta-
" tiou of the mails and of supplies for the army and the Indians."
" It was in the presence of these facts that Congress undertook to
" deal with the subject of this railroad. The difficulties in the way
" of building it were great, and by many intelligent persons considered
" insurmountable."
" Although a free people, when resolved upon a course of action,
6
" can accomplish great results, the scheme for building a railroad
" two thousand miles in length, over deserts, across mountains and
" through a country inhabited by Indians jealous of the intrusion
" upon their rights,was universally regarded at the time as a bold and
" hazardous undertaking. It is nothing to the purpose that the
" apprehended difficulties in a great measure disappeared after trial,
" and that the road was constructed at less cost of time and money
" than had been considered possible. No argument can be drawn
" from the wisdom that comes after the fact. Congress acted with
" reference to a state of things believed at the time to exist; and in
" interpreting its legislation no aid can be derived from subsequent
" events. The project of building the road was not conceived for
" private ends; and the prevalent opinion was that it could not be
" worked out by private capital alone. It ivas a national work,
" originating in national necessities and requiring nationcd assistance."
Animated by the spirit thus described in the decision of the
Supreme Court of the United States, Congress passed this act, by
which it loaned to the corporation which should undertake the
building of the roads its bonds, on which it paid interest semi¬
annually, upon the condition that the corporations should pay the
amount of the principal of those bonds, with the interest thereon,
only at maturity of the bond ; thus relieving the companies from the
payment of interest pending the running of the bonds, except the
five per cent, upon the net earnings and the charges to the Govern¬
ment for the transportation of Government goods which by the
act were required to be paid. The inducements held out by this
act were found insufficient to induce the building of the roads.
That fact shows how well founded was the language of Mr. Justice
Davis in describing the enterprise as " a bold and hazardous under¬
taking." The result was the passage of the Act of 1861, by which
one-half only, instead of the whole, of the charges for transporta¬
tion of Government goods was reserved to the Government, and by
which the lien for the repayment of the Government bonds was sub¬
ordinated to a first mortgage authorized to be executed by the
7
roads, and by which the donation of public lands was increased to
ten, instead of five, sections per mile.
In the passing of that Act, Congress was undoubtedly animated
by the same considerations which were stated by Mr. Justice Davis
to have been the cause of the legislation of 1862. The undertaking
was regarded as bold and hazardous; it was felt that capital would
be slow to undertake such an enterprise, and that to obtain it, extra¬
ordinary inducements must be held out. One of the most important
of those inducements was the postponement of the time of payment
of interest to the due date of the maturity of the bonds ; thus alloiv-
ing the corqooration to use a portion of their earnings, which otherwise
ivould have been required to be used for the payment of that interest,
for such other purposes as the corporation in its judgment might
deem best. The inducements held out by the Act of 1864 proved
sufficient; the building of the road was undertaken by the several
companies, and the enterprise was carried on with great energy and
capacity, and the roads were finished long before the stipulated time,
to wit, in May, 1869. The benefit resulting to the Government from
their completion surely has justified the action of Congress in ex¬
tending the Government aid; even should the Government lose
directly the whole amount of the bonds which they gave to the
roads, it still would have largely profited by the building of the roads,
in the saving of expenses which it otherwise would have incurred.
Now, I desire particularly to call to the attention of the com¬
mittee the fact that at the time of the completion of those roads, in
May, 1869, substantially all of the acts of the individual stock¬
holders and directors, of which so much complaint has been made,
had been done. The Government bonds had all been issued; the
prior mortgage bonds had all been issued, and the stock had all been
issued ; the contract with the Finance Company had been made and
fully executed.
In 1873 public attention was called to these alleged wrongdoings
with special and peculiar emphasis. The Commissioners in their re¬
port (page 73) say :
" In 1873 the disclosures made by the examination conducted by
8
" tlie Wilson Committee excited mucli public attention and indigna-
" tion with reference to similar practices affecting the Union Pacific
" Railroad Company through the intervention of the Credit Mobilier.
" Comparatively little attention was given by that Committee to the
" affairs of the Central Pacific Railway Company."
There was, however, sufficient investigation made into the affairs
of the Central Company to show the general method and manner by
which the road was built and to indicate the basis for all the charges
which were then and subsequently made. The roads had declined
to pay the interest upon the Government bonds as it fell due; pub¬
lic attention was called to that fact; in consequence thereof the Act
of 1873 was passed, pursuant to which the suit above referred to
was brought to test the question whether the roads were liable to
pay such interest as it fell due or only at the date of maturity of the
principal. The Court, as we have seen, decided that the position
assumed by the roads was correct, and that they were not bound to
pay the interest until the maturity of the principal.
Surely no public investigation ever excited more general and
complete attention than that of the investigation by Congress into
the method of building the Union Pacific and Central Pacific Rail¬
ways, and the part therein taken by the Credit Mobilier corpora¬
tion. It cannot be claimed that everything was not then practically
known which is supposed now to be known, or that anything has
since occurred which should justify action which would not have
been justified it that time. The language of the committee, that
" the disclosures excited much public attention," is hardly strong
enough to properly describe the fact. It is not too much to say
that there was not a man in the country, from Maine to California,
of average intelligence and capacity, whose attention was not more
or less directed to these matters and who did not form some opinion
with regard to them.
The first public action taken in respect to the roads is shown in
the Act of March 3d, 1873, requiring the Attorney-General to bring
a suit in the name of the United States, in order to reach the prop¬
erty which it was charged had been fraudulently and improperly
9
disposed of by theofficers and directors of the Union Pacific Rail¬
road Company. Pursuant to that act, such suit was brought iu the
Circuit Court of the United States for the District of Connecticut,
and at the April Term thereof in 1874 the bill was dismissed. The
judgment of the Supreme Court of the United States on appeal
therefrom, affirming the judgment of the Court below, is reported in
98 U. S. Reps., page 569. The result of that suit is well described
on page 21 of the Report of the Railway Commission, and in these
words:
" The essential ground taken by the Court is that in such suit
" the United States must be treated as an ordinary creditor, and
" that until the debt is due, it has no better standing than any credi-
" tor at large to enforce equitable remedies looking to the greater
" security, or to the preservation or ultimate payment of its claim."
In other words, the Court held that the Government had made a
contract with the Railway Company, and that so long as the Railway
Company was not in default in the performance of its contract with
the Government, the Government had no cause of action, and no
standing in the Court to complain of the disposition of the moneys
of the corporation, upon which it had no lien. The necessary effect
of the decision was also to hold that the Government lien did not
extend to such moneys of the corporation, the disposition of which
was complained of ; or, if it did, that such disposition was not such
an impairment of the Government lien as to allow of the filing of a
bill to stay waste on the ground of impairment of the security.
The head note to this case, on page 170 in the Eleventh Sub¬
division, is in these words :
" This bill exhibits no right on the part of the United States to
" relief, founded on the contract. The company has completed its
" road, keeps it in running order and carries all that is required by
" the Government. To the latter nothing is due, and it has the
" security which by law it provided."
I call the attention of the committee thus especially to the fact
that up to the time of the decision of this case it was impossible for
stockholders to have more absolute and complete assurance that their
10
company had fully complied with all the terms and conditions of
the contract between it and the Government, and that it was fully at
liberty to apply its revenues in the shape of dividends on its stock ;
and even further than that, that so far as Government was concerned
the company, as such, was at liberty to apply its income or its prop¬
erty in such manner and way that although a complaining stock¬
holder might be entitled to relief against such acts, yet the Govern¬
ment would have 110 cause of complaint.
The language of subdivision nine of the head note is in these
words :
" Though the bill set up many fraudulent transactions on the
" part of the directors of the Company or some of its stockholders,
" for which the other stockholders would be entitled to relief, the
" latter are not parties, and neither the frame of the bill nor the
" provisions of the act authorize any relief or recovery in their
" favor."
True, this is a case against the Union Pacific Railway Company;
but it construes the same act under which the Central Pacific Rail¬
road Company acted and adjudges substantially the same trans¬
actions. It is an adjudication by the highest Court in the land,
that the roads have done all that their contract required; that their
application of the income of the road was such as was contemplated
by the acts, and that the United States had 110 cause of complaint,
and that the application of the income had been proper.
Notwithstanding these decisions and the construction of the acts
therein adjudged, the public mind was not satisfied. The roads had
now been built, and the public looked upon them and the enterprise
as in the past, rather than in the future. Difficulties had dis¬
appeared ; those which had existed and had been surmounted, the
public had forgotten; they remembered the one great surpassing
fact—that the parties mainly interested in the enterprise had
amassed great fortunes—that the United States had made a contract
by which the revenues of the road were allowed to be used pending
a long period of time, without reference to the ultimate extinction
of the debt to the Government, and that by the terms of that
11
contract, the Government was actually paying out, 011 account of the
bonds, a far larger amount of interest than it was receiving, either
by the payment or transportation provisions. Great indignation,
too, existed, because of the scandal connected with the Credit
Mobilier investigation.
Pursuant to this condition of things, in order to remedy it so far
as possible, in order to do justice to all parties then interested in
these railroads, in order to require them so to administer their
finances that they would be able on its due date to fulfill their con¬
tract with the Government for the reimbursement of the Govern¬
ment Bonds—the act was passed, commonly called the " Thurman
Act." It was approved May 7th, 1878, and is found in the 20th
Statutes at Large, page 56. It is entitled, "An Act to alter and
amend the Act of 1862, and also to alter and amend the Act of
July 2d, 1864," and was passed in view of the construction of those
acts which had been given by the Supreme Court in the two cases
to which Ave have referred. The material provisions of that act were
the establishment of a sinking fund, for the ultimate payment of the
Government debt, that sinking fund to be paid to the Treasurer of
the United States, and to be by him invested in United States bonds.
It provided for the retention by the Government of the whole
amount, instead of the half, of compensation which might fiom time
to time be due to the Railway Company for services rendered for the
Government, the one-half thereof, as required by the Act of 1864, to
he presently applied to the payment of the interest paid by the
United States as it should become due, and the other half thereof to
be turned into the sinking fund. The act also required the payment
into the sinking fund of twenty-five per cent, of the net earnings of
the company, provided the same should not exceed the sum of
$1,200,000.
This act was intended to be a complete and final solution of the
controversies between the Raihvay Company and the Government.
At the time it Avas passed, the cases before referred to had long been
decided. The probable incapacity of the roads, as theretofore con¬
ducted and managed, to pay the amount due the GoA-ernment at
12
maturity, was foreseen, aud by this act was intended to be provided
for. In passing the act, Congress supposed and intended that the
Railway Companies would be able, out of their income, to do what
was required under the act, and also to continue to pay a reasonable
dividend to stockholders. Dividends on the stock had been paid in
each year since 1873 ; they were discontinued in 1877. The act
assumed, by virtue of the sovereignty of the United States, to inter¬
fere in the affairs of the Railroad Company, and direct how it should
be managed, with a view to the payment of the debt to the United
States at its maturity. Of course, no other creditor would have had
that power. The Government, as creditor, dissatisfied with the way
in which the affairs of the company were managed, interfered and
assumed by this act so to manage them as should be satisfactory to
itself, to the end that due provisions for the payment of its debts
should be made, and at the same time intended and allowed that,
pending the period from the date of the act to the maturity of the
debt, dividends should continue to be paid upon the stock.
In the report of the House Committee to the Forty-fourth Con¬
gress on the subject of a sinking fund for the Pacific Railroads, it is
stated that the companies are making large profits, and are abun¬
dantly able to indemnify the Government against future loss and pay
liberal dividends, besides, on the par value of the stock ; that with
the Central Pacific Railroad Company the net earnings are nearly
fifteen per cent, on the nominal capital stock (Forty-fourth Con¬
gress, First Session Rep., No. 410, p. 14).
The Judiciary Committee, when submitting to the Senate the
Thurman Bill (Forty-fourth Congress, Second Session Rep., Ill,
page 9), stated "that this company would be able to make payments
under the bill of $1,900,000, and have a surplus sufficient for a
handsome dividend for the shareholders; that after all the require¬
ments of the Acts of 1862 and 1864, and all other charges, the
annual amount that would be divided among shareholders, should no
sinking fund be created, would be nine per cent, on the nominal
value of the stock of $4,888,795. If the bill we report become a law,
this amount will be diminished by the amount required to be paid
13
into tlie sinking fund, say $1,400,000, leaving $3,488,795, after the
payment of all expenses and interest, and tlie payments into the
sinking fund, to be divided among the shareholders, being six and
four-tenths per cent on the nominal value of their stock ; that even
were the earnings of a non-subsidized road permitted, the company
would still be able to divide from four and a half to five per cent,
among the stockholders—a dividend that comparatively few roads
in the United States are able to make."
This shows, so far as we can gather it from the reports of com¬
mittees, the idea entertained by Congress in the passage of the
Thurman Act.
We now call attention to the views entertained by the Supreme
Court of the United States when called upon in the suits brought
under the act to pass upon its constitutionality. The case is re¬
ported in 99 U. S. Reps., page 700. On page 24, the Court, in com¬
menting upon the general purposes and equity of the act, say :
" The company has been in the receipt of large earnings since
" the completion of its road, and after paying the interest on its own
" bonds at maturity, has been dividing the remainder, or a very con-
" siderable portion of it, from time to time, among its stockholders,
" without layiug by anything to meet the enormous debt which, con-
" sidering the amount, is so soon to become due. It is easy to see
" that in this way the stockholders of the present time are receiving
" in the shape of dividends that which those of the future may be
" compelled to lose. It is hardly to be presumed that this great
" weight of pecuniary obligation can be removed without interfering
" with dividends hereafter, unless at once some preparation is made,
" by sinking fund or otherunse, to prevent it." * * * Tlie Act
" establishes a sinking fund for the payment of debts when they
" mature, but does not pay the debts. * * * This is no m0re
" for the benefit of the creditors than it is for the corporation itself;
" it tends to give permanency to the value of the stock and bonds, and is
" in the direct interest of a faithful administration of its affairs. It
" simply compels the managers for the time being to do what they
" ought to do voluntarily. The fund to be created is not so much
14
" for the security of the creditors as the ultimate protection of the
" -public and the corporators " (page 725).
" On page 72G the Court says :
The Act " takes nothing from the corporation or the stockholders
" which actually belongs to tlieni; it oppresses no one and inflicts
" no wrong ; it simply gives further assurauce of the continued
" solvency and prosperity of a corporation in which the public are so
" largely interested, and adds another guarantee to the permanent
" and lasting value of its vast amount, of securities. * * *
" The right of the stockholders to a division of the earnings of the
" corporation is a privilege derived from the charter. When the
" charter and its amendments first became laws, it was by no means
" sure that the enterprise would prove a financial success. No statu-
" tory restraint was then put upon the power of declaring dividends.
" It was not certain that the stock would ever find a place on the
" list of marketable securities, or that there would be any bonds
" subsequent in lien to that of the United States which could need
" legislative or other protection. * * * Now, it is known that the
" stock of the company has found its way to the markets of the
" world* ; that large issues of the bonds have been made beyond
" what was originally contemplated, and that the company has gone
" on for years dividing its earnings without any regard to its increas-
" ing debt, or to the protection of those whose rights may be injured
" if this practice is permitted to continue. For this reason Congress
" has interfered, and under its reserved power limited the privilege
" of declaring dividends on current, earnings so as to confine the
" stockholders to what is left after suitable provision has been made
" for the protection of creditors and stockholders against the dis-
" astrous consequences of a constantly increasing debt. As this
" increase cannot be kept down by payment unless voluntarily made
" by the corporation, the next best thing has been done, that is to
" say, a fund safely invested, which, increases as the debt increases,
* This is said of the Union Pacific Railroad Company.
15
" lias been established and set apart to meet the debt when the time
" comes that payment can be required."
By the establishment of this fund, the Governmet took the mat¬
ter from the control of the companies, thereby assuming all respon¬
sibility as to the results of its operation. The Central Pacific Railway
Company, prior to the passage of the act, offered to establish in its
own treasury a sinking fund on a different basis from that proposed
by Congress in the United States Treasury, and which would abso¬
lutely provide for the payment of the debt and interest, and that no
dividends should be paid until such provisions were made ; but the
Government refused to allow this, and excluded the Company from
making any other payment towards the debt to the United States
than that required by the Thurman Sinking Fund Act. In this case,
the Supreme Court of the United States held that the Thurman Act
was constitutional, and that the companies were bound to comply
with its provisions. The Central Pacific Railway Company has so
complied ; has made the requisite payments into the sinking fund to
the Treasurer of the United States, and has done everything by that
act required to be done.
It will thus be seen that Congress, and following Congress, the
Supreme Court of the United States, understood that by this act
final provision had been made for the payment of the debt at matur¬
ity, and that they, as it were, said to the country and to the public
that such provision had been made, and that by compliance with this
act and the application of twenty-five per cent, of its net earnings to
the purposes required by the act, the seventy-five per cent, would be
left free to apply to the payment of dividends upon stock, and that
such seventy-five per cent, would be large enough to divide an equiv¬
alent of six per cent, upon the par value of the stock.
Up to the period of the passage of the Thurman Act, and its con¬
struction by the Supreme Court of the United States, substantially
all the stock of the Central Pacific Railway Company remained in the
hands of the four principal stockholders who are alone charged with
any wrongdoing with respect to the assets of the Central Pacific Rail¬
way Company. The Pacific Railway Commission, on page 87 of
16
tlieir report, state that but little stock was sold by Stanford, Hunt¬
ington, Hopkins and Crocker until 1880 ; that between 1873, when
dividends were first commenced, until 1877, when dividends ceased,
they were substantially the only stockholders of the Central Pacific
Railway; that nearly the entire amount of dividends declared dur¬
ing these years was therefore received by those four persons. We
are not, therefore, called upon to go outside of the record and ap¬
peal to what is matter of public notoriety and to what can be estab¬
lished by reference to the stock transactions of the New York Stock
Exchange or of the Stock Exchanges in San Francisco or other
large cities, to show that the public lias become interested in this
stock of the Central Pacific Railway Company only since—and we
cannot but infer, relying upon—the provisions of the Thurman Act
and the interpretation thereof of the Supreme Court of the United
States. Almost immediately following such decision, which was
made some time in the early spring of 1879, large amounts of this
stock were thrown upon the market, and it has been ever since that
date very largely bought and sold at the various stock exchanges in
this country and in Europe. Very nearly, if not quite, half of the
stock ill the company is now held by persons who have purchased
the same since the passage of the Thurman Act and its construction
by the Supreme Court of the United States. Tliej- bought it sub¬
sequently to the discovery of all these alleged frauds by the original
directors; subsequently to the knowledge that the Goverment, fully
informed of these alleged frauds, had passed acts and brought suits to
remedy them; fully informed of the fact that, after the defeat of the
Government in its efforts to reach the alleged wrongdoers, the Thur¬
man Act had been passed with the intent and for the purpose of set¬
tling the whole controversy, providing for the ultimate payment of
the debt, and allowing the application, in the meantime, of seventy-
five per cent, of the net earnings to the payment of dividends.
These stockholders say to you, that whether or not the alleged
wrongs of the directors have any relevancy in the adjustment of the
relations between the corporation itself and the Government, surely
they have none so far as the corporation represents the interests of
17
these stockholders, who have purchased their stock since, and re¬
lying upon, the provisions of the Thurman Act and its interpreta¬
tion by the Court. They have believed that the act would do what
the Government, in its several branches, said that it would do ; they
have believed that the sinking fund placed in the hands of the
Treasurer of the United States would do what the Congress and
the Court said that it would do ; and now, when the question arises
as to the adjustment and ultimate payment of this debt to the Gov¬
ernment, they earnestly and solemnly protest against the considera¬
tion of any questions of fraud or wrong by the directors and former
exclusive stockholders of the company, should such consideration
result in any injury to them.
True, it is now conceded that the Thurman Act has been a failure.
The Commissioners give the reasons for such failure :
Fikst. The very large decrease in the net earnings of the com¬
pany, on which the twenty-five per cent, reserved by the act was
to be paid, which decrease has, in the main, been caused by the
very large reductions in freight and passenger rates which have oc¬
curred during the past four years.
Second. The failure of the fund to earn compound interest at
the rate of five per cent., as had been expected.
Other causes, they say, may have contributed, but the two named
are the controlling causes to which the failure of the Thurman Act
is due (see page 18 of the Report).
Under these circumstances, it seems to these stockholders that
the Government should approach the negotiation for some settle¬
ment or contract by which the debt, when due, should be provided
for, in the most liberal and enlarged spirit.
In the history of railroad enterprises in the United States for the
past twenty years, very few railroad companies can be named which,
before entering upon a course of continued prosperity, have not
passed through one or more reorganizations, in consequence of
failure to meet their financial obligations. I venture to say that in
18
not a single one of sncli reorganizations lias the junior interest been
entirely cut off and excluded ; that in not a single one of them has
not some concession been made, even by the most thoroughly and
completely secured bondholder. I have knowledge of many such
reorganizations—I know of none which would not be properly de¬
scribed as above; and I have seen many in which the concession by
first mortgage bondholders was far greater than anything which has
been suggested on the part of the Government with this Railway
Company.
The Railway Commission has reported by bill the scheme for
adjustment of the debts, but it states itself that its scheme is beyond
the capacity of the Central Pacific Railway Company to accept and
carry out. It requires the payment by that company of three per
cent, upon the present value of its debt, when such three per cent,
would be about fifty per cent, more than the total of its present net
income. A bill has also been prepared by your chaiiman with some¬
what similar provisions. The objection to it on the part of the
company is, that it would be foolish to accept such a settlement,
when we know that the first year would probably bring with it a
default in our capacity to carry out its provisions.
We suggest, in place thereof, a scheme which has been prepared
by Mr. Bretherton. We are not prepared to-day to say that the
Central Pacific Railway Company will accept the scheme; we are
not even prepared to say that we ourselves will accept it—because
we are not sufficiently informed as to the financial capacity of the
road to say immediately, at the present time, that it would be able
to accept it and to carry it out; but we can say that we ourselves
would be prepared to accept it and to carry it out, or to accept so
near an approximation to it as the resources of the company will
enable us to do. That scheme consists in an eighty year bond,
secured by a mortgage upon the whole road; the bond would draw
three per cent, interest, but for the first decade two per cent, of the
interest would be funded into a bond which, in its turn, would draw
interest at the rate of three per cent., and during the second decade
19
one per cent, of suck interest would be funded into a similar bond.
Thereafter, the full three per cent, would be paid semi-annually, and
also an additional one per cent., which would constitute the sinking
fund for the redemption of the debt by maturity. This sinking fund
would not be complicated by questions of investment, but would be
applied by way of payment; interest, however, to be paid on it at
the same rate as that which runs upon the bonds.
We are impressed with the idea that the company would be able
to comply with the terms of such an adjustment. It may possibly
be, that the interest would have to be put still lower or the time
extended still longer. I might suggest to the committee that the
value of a bond, other things being equal, increases directly with
the length of time it has to run. Many railroad companies are now
issuing bonds 011 very long time. The West Shore Railway Com¬
pany has just issued a series of bonds running one hundred years.
Fifty to one hundred years is now quite common as the period of a
railroad bond—the longer the bond the lower the rate of interest at
which it can be sold for a definite price. Thus, long time is not
only not an objection, but a point in favor of the bond.
True, we are not authorized on behalf of the Central Pacific
Railway Company to offer such an adjustment as we have stated,
but I am free to say to you, gentlemen, that while to-day we are not
so 'authorized, and while to-day, for all that I know, such scheme
may be wholly repudiated by those who control the Central Pacific
Railway Company, yet, to-morrow, we may be able to represent that
company and to present that scheme to you. The stock of the Cen¬
tral Pacific Railway is no longer held by a small number of stock¬
holders ; it belongs to the great public—to a very large number of
stockholders—and no man can to-day say what will be the issue of a
submission to stockholders as to what should be the policy of that
company. We submit these considerations to you in order that you
may look upon the questions from our standpoint and understand
our views. We ask you, as representing a great nation, as repre¬
senting the great public, to deal with us who have become investors
20
in this unfortunate company, in a fair and liberal spirit. Give us
the time, give us the low rate which you, in your amplitude of
power, in your abundance of resources, are thoroughly able to do,
and we, on our part, will do, as the Central Pacific Railway Company
hitherto has completely and thoroughly done on its part in the past,
all that may be required of us by any law or any contract into which
we shall enter.
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