Acts of 1862 and 1864—High cost of construction—Forced combination with the Kansas Pacific and the Denver Pacific—Unprofitable branches—Adams’s administration—Financial difficulties—Debt to the Government—Receivership and reorganization—Later history.

The construction of the union Pacific was made possible by direct grants of lands and government bonds by Congress. The motive for the project was military and political as well as economic; on the one hand California was to be cemented to the union, and aggression on the part of England was to be forestalled; on the other a great and fertile territory was to be opened and an additional market provided for the products of the East.

In 1862 the first act “to aid in the construction of a Railroad and Telegraph Line from the Missouri River to the Pacific Ocean, and to secure to the Government the Use of the same for Postal, Military, and Other Purposes” was passed.456. It created a corporation to be known as the union Pacific Railroad Company, with a capital of 100,000 shares of $1000 each, and authorized it to construct a railroad from the one hundredth meridian of longitude west from Greenwich at a point within the territory of Nebraska westward to the western boundary of the territory of Nevada. It granted the right of way, and in addition five additional sections per mile on each side of the track, plus a varying amount of United States bonds per mile, the use and delivery of which was to constitute a first mortgage on the property of the company. All compensation for services rendered to the Government was to be applied to the payment of these bonds and interest thereon; and after the road was completed, until the bonds and interest should have been paid, at least 5 per cent of the net earnings of the road was to be annually applied to the payment thereof. The directors were to be not less than fifteen in number, of whom two were to be appointed by the President of the United States. It was hoped that the offer would be sufficient to attract private capital to the undertaking,221 and when it failed in this, the inducements were increased. The Act of 1864 amended that of 1862. It reduced the par value of the shares of stock from $1000 to $100, and increased their number from 100,000 to 1,000,000. It increased the land grant from five to ten alternate sections per mile, and subordinated the government lien to the rank of a second mortgage. Only one-half the compensation for services rendered for the Government was required to be applied to the payment of the bonds issued by the Government. The directors were to be twenty in number, of whom five were to be appointed by the Federal President.457

It was under these main provisions that the union Pacific Railroad was constructed. In their final shape they were intended to provide for the greater part of the cost of construction, while allowing the company to supply deficiencies by the issue of its own first mortgage bonds. Capitalization under these conditions would not have been excessive; the Government’s investment would have redounded unmistakably to its own benefit, as well as to that of the country, and the corporation would have looked forward to a long and prosperous career. Three things interfered to swell the cost of the construction of the road, and with that its capitalization: First, construction was carried on during a time of high prices, swollen not only by depreciation of the currency, but by artificial conditions occasioned by the war; second, the normal level of the prices paid was raised by the speed with which the road was completed; third, construction was entrusted to a construction company, the famous Crédit Mobilier.

In its comparison of the prices of the years 1864–9, with those of 1860, the Aldrich Committee arrived, in 1893, at the following result:
Year     Food     Bar Iron
Rolled     Rails,
Iron     Metals &
Implements
exc. Pocket
Knives     All Articles     ?
1864     165.8     249.3     262.5     198.0     190.5     ?
1865     216.5     181.1     205.5     218.7     216.8     ?
1866     173.8     167.0     180.7     192.7     191.0     ?
1867     163.9     148.2     173.2     178.9     172.2     ?
1868     164.2     145.8     164.3     167.1     160.5     ?
1869     162.9     139.0     160.9     157.9     153.5     ?

222 These figures may be divided by the premium on gold, in order roughly to ascertain gold prices. The index numbers then become:
Year     Food     Bar Iron
Rolled     Rails,
Iron     Metals &
Implements
exc. Pocket
Knives     All Articles          ?
1865     100.1     ?83.7     ?95.0     101.1     100.3          ?
1866     124.1     119.2     128.9     137.5     136.3          ?
1867     121.8     110.1     128.6     132.9     127.9          ?
1868     118.6     105.2     118.6     120.6     115.9          ?
1869     120.1     102.5     118.6     116.4     113.2458     ?

The tables show that both currency and gold prices were much higher in 1866 than before the war, and that both remained high while the union Pacific was being built. Wages were also above the normal, and for similar reasons. During the war the demand for men and goods of all kinds was great. After 1865 the country turned with tremendous energy to industry; and the upward swing, which was unchecked until the panic of 1873, and which was especially directed toward railroad building, maintained both wages and prices at an unusual height. Besides this, American rails were at the time in a period of transition from iron to steel; and much of the work carried through at such expense had completely to be done over within the next ten years.

The high prices were made higher by the speed of construction. The union Pacific built west from the Missouri River, but at the same time the Central Pacific was building east from Sacramento, under similar conditions as to government aid. The two roads were expected to meet at the western boundary of Nevada; but to encourage their early completion, the Act of 1862 authorized the road which first reached the designated point to continue construction, east or west as the case might be, until junction with the second road should be made. Since the amount of land granted depended on the mileage completed, the haste of the companies was feverish. “The union Pacific Company,” says Davis,459 “had its parties of graders working 200 miles in advance of its completed223 line in places as far west as Humboldt Wells.” The Central Pacific had completed 105 miles east of Sacramento by the autumn of 1867, hauling iron and supplies over the mountains without waiting for the piercing of its tunnels. No less than 1038 miles of the union Pacific, including the difficult stretch over the Rocky Mountains, were completed by 1869, four years after construction was commenced. The prize of additional land was thereby secured, but this land was long unsalable, and the cost of construction was largely increased.

Finally, large sums were misapplied through a construction company. The story of the Crédit Mobilier has been so often told that only brief mention need be made of it here.460 In 1864 T. C. Durant, vice-president of the union Pacific, induced one H. M. Hoxie to bid for a contract to build from Omaha to the one hundredth meridian. Hoxie was financially irresponsible, and four days later assigned the contract to a company composed of Durant and other stockholders of the union Pacific. Meanwhile Durant had purchased the charter of the Pennsylvania Fiscal Agency, a corporation which possessed convenient powers. Later in 1864 the members of Durant’s construction company were given stock in the Fiscal Agency, now called the Crédit Mobilier of America, for the amounts they had paid in, and stockholders of the union Pacific were allowed to receive Crédit Mobilier stock for the amounts they had paid in on their union Pacific shares. Stockholders of the union Pacific thus became also stockholders of the Crédit Mobilier, and in their former capacity were enabled to vote lucrative contracts to themselves as constructors of the railroad. Durant’s company assigned its contract to the Crédit Mobilier. Subsequently it was found more convenient to assign contracts to certain individuals, who transferred them to seven trustees, who built the required road with funds furnished by the Crédit Mobilier, and turned over the profits to that organization, but the practical result was the same.461 These various devices removed all incentive to economy on the224 part of the union Pacific stockholders. Instead of gaining by cheap construction, they profited by dear; instead of aiming to reduce the cost in every possible way, they schemed at making the construction contracts as lucrative as possible to the persons to whom they were assigned. The advantages to them as stockholders of the Crédit Mobilier outweighed the disadvantages to them as stockholders of the union Pacific. The profits realized by the Crédit Mobilier are still a subject of dispute. H. K. White figures them as 27? per cent, or $16,700,000; Davis says that the profit was safely over $20,000,000; but whereas White calculates the percentage of profits to the total cost of construction, Davis insists that a large part of the capital invested was replaced on the completion of each section of twenty miles by the proceeds of the government bonds and railway bonds and stock, and that though from $50,000,000 to $70,000,000 were expended, in all probability not more than $10,000,000 were sunk at any one time; in which case a profit of $20,000,000, spread over four years, represents $5,000,000 per year, or 50 per cent annually on the capital employed. Finally, the union Pacific Railway Commission estimated the actual cash profits at $23,366,320, and remarked that the obligations incurred by the railroad company represented a very much larger sum, being measured by the bonds and stock at their par values.462

The result of the three factors was a corporation bonded at an extremely high rate. The cost of road in 1870 was reported to be $106,245,978, or $102,951 per mile, against which was a capitalization of $107,907,300, or $104,561 per mile, of which $32,715 per mile was stock, $26,080 government bonds, and $45,765 first mortgage, land grant, and income bonds. In 1873 the net earnings were $4,092,032, and the interest on the funded debt, not including the government interest, was $3,403,660. In 1874 the figures were $5,291,243 and $3,431,720; in other words, the corporation started with a heavy handicap, which its monopoly of transcontinental business at first helped to overcome, but which grew heavier and225 heavier as the years went on. During the seventies, to repeat, the union Pacific enjoyed generally large prosperity. The volume of stock outstanding remained the same, the bonded indebtedness but slightly increased, and the ratio of operating expenses to receipts declined. The first dividend was paid in 1875; in 1876 and 1877 8 per cent was declared, in 1878 5? per cent, and in 1879 6 per cent. In 1880, however, a consolidation took place with the Kansas Pacific and Denver Pacific railroads, and this operation may well receive somewhat detailed consideration.

The Kansas Pacific, as well as the union Pacific, was a creation of the Acts of 1862 and 1864, which required it to be constructed from Kansas City westwardly to form a junction with the union Pacific at a point on the one hundredth meridian. Later, an Act of July 3, 1866, authorized it to change its route, and to connect with the union Pacific at a point not more than fifty miles westwardly from the meridian of Denver in Colorado.463 Like the union Pacific the Kansas Pacific was built by means of construction contracts, which resulted in a total capitalization on its 638 miles of line of $9,437,950 in stock and $22,651,000 in bonds, or $14,793 and $33,455 respectively per mile,—high figures in view of the comparatively level character of the country traversed.464 The road was not a paying one. It was poorly built and poorly managed, and running parallel with the union Pacific, it had to meet competition of a very bitter kind. The report of Mr. Calhoun, expert accountant for the United States Pacific Railway Commission of 1887, showed that the total receipts of the road from 1867 to 1879 had aggregated $9,220,218, while the bond and interest account, exclusive of United States interest, had amounted to $15,745,287; leaving a deficit of $6,525,069, or, including the United States accrued interest, of $11,330,772.465 That is, the Kansas Pacific was in a state of chronic insolvency. In 1874 it was placed in the hands of receivers, and the following year, by an arrangement with its creditors, it funded a considerable amount of overdue interest.466

226 In 1878 a number of securityholders of the Kansas Pacific got together in an attempt to reorganize that property, to take it out of receivers’ hands, and to “unite in interest the Kansas Pacific and union Pacific Railway Companies.” Twelve large securityholders consented to contribute to a common pool or fund holdings of securities taken at a fixed valuation, their interests in the pool to be proportional to the amounts of said securities and stock taken at the value referred to.467 For the securities deposited they were to receive stock at a reduced rate: thus for eight shares of old stock they were to receive one share of new; for $2000 unsubordinated income bonds they were to get ten shares, and for $10,000 subordinated income bonds thirty shares of new stock.468 The final result would have been to replace securities with a par value of $17,330,350 by stock with a par of $4,855,300, and greatly to lighten the burdens upon the road; though it must be remembered that the $17,330,350 were less than half of the total volume of securities outstanding, that the payment of interest on much of these had been optional only, and that no provision was made for the floating debt.

The scheme fell through, according to Mr. Gould, who was a party to the agreement, because securityholders outside of the pool refused to consent to so drastic a reduction of their holdings; and at his suggestion a consolidated mortgage was substituted for the issues of stock. This mortgage was for forty years at 6 per cent. The total issue was to be for $30,000,000, of which $24,000,000 were to be issued at once for the retirement of earlier bond issues and for payment of arrears of interest.469 Like the previous proposition the scheme contemplated a scaling in the principal of the junior securities, and the same rates of commutation were retained; but in this case the old Kansas Pacific stock was withdrawn from the operation of the plan, and certain reservations were made for other purposes, so that an actual increase in indebtedness was finally to227 result, and even the interest charges were certain to increase.470 For the time being, however, by force of the reduction of interest on the funding mortgage in January, 1879, from 10 to 7 per cent, and by the disallowance of some claims for overdue interest, relief was obtained, while the consolidated mortgage was duly issued.

The Kansas Pacific ran west to Denver. Between Denver and Cheyenne the Denver Pacific, 106 miles long, served as a connecting link between the larger systems. The Denver Pacific stock was held by the Kansas Pacific, and 29,979 shares of it were pledged in 1877 as part security for an issue of 10 per cent funding mortgage bonds.471 The total earnings of the Denver Pacific from 1870 to 1879 had been $3,122,141; the expenses had been $1,709,477, and the net earnings from operation $1,412,664, or an average per annum of $141,266; while for the first eight years of that time the annual interest charge had been about $185,000. The only value of the Denver Pacific stock lay in the control which it secured over a connecting link between Denver and Cheyenne.472

Under the conditions of competition existing between the union Pacific, Kansas Pacific, and Denver Pacific, some sort of agreement or consolidation was both desirable and likely. The Kansas Pacific was entirely dependent on its competitor for access to western business, and this was soon perceived to be equivalent to continuous bankruptcy. Extension to Ogden would have removed the dependence; but this, while to be dreaded by the union Pacific, was beyond the power of the Kansas Pacific for financial reasons, and no capitalist or group of capitalists before 1878 or 1879 seemed interested in the undertaking. On the other hand, rates were low, and the very success of its exclusive policy forced the union Pacific to meet the competition of a road which, with no interest charges to pay, was able to cut all rates to the very verge of the cost of operation.

As early as 1875 there was talk of an agreement whereby the Kansas Pacific was to give up its claims for a pro rate on its Pacific business in return for a monopoly of the local business of Colorado,228 and in connection with the deal was to acquire the Colorado Central Railroad on issue of $10,000,000 Kansas Pacific stock to parties designated by the union Pacific Company; but this was never carried out. In 1878, when Gould began to be interested in the property, a union by means of stock control seemed feasible. Gould’s first purchases were of bonds, and it was as a bondholder that he entered the pool of 1878; but with the purchase of the holdings of the “St. Louis parties,” he and his friends obtained control of a majority of Kansas Pacific stock. In fact one of the provisions of the pool was that if on the first day of June, 1878, it should be found that Messrs. Gould, Dillon, and Ames, all large stockholders in the union Pacific, had not a majority interest in said pool, then they should have an option on such an amount of other interest ratably and for cash as on the basis of the schedule should give them such an interest; and though this majority did not necessarily involve a majority of stock, the operations of the pool aided Gould in the acquisition of control. The union between the union Pacific and the Kansas Pacific thus secured was, however, of the frailest kind; for Mr. Gould at no time had the permanent interest of either road at heart, and looked for his personal profit rather in their struggles than in agreement between them. For this reason, as he bought Kansas Pacific, Gould sold union Pacific stock, reducing his holdings from about 200,000 to about 27,000 shares.473 In 1879 the situation of the two roads was thus much the same as before, and the harmony apparent was of the most superficial kind. One change, however, had taken place to the serious disadvantage of the union Pacific; for the Kansas Pacific, although still badly built and dependent upon its rival for an adjustment of rates sufficiently favorable to let it into the western business, had now interested in it a group of capitalists quite capable of financing an extension to Ogden, and even of securing connections from Kansas City to the East.

In 1879, doubtless relying upon the strength of Kansas Pacific’s new backing, Gould proposed to the union Pacific a consolidation of the union, Kansas, and Denver Pacific roads, in which the shares of each were to figure equally at par. The terms were absurd229 by every test of productive capacity which could have been applied. The relative earning power and annual interest per mile of the three roads at this time were given by a government accountant as follows:
      Annual Net
Earnings per mile     Annual
Interest per mile     ?
union Pacific     $5617     $3185          ?
Kansas Pacific     ?1602     ?2295          ?
Denver Pacific     ?1333     ?1750474     ?

The union Pacific had reported an annual surplus, the other two roads an annual deficit; the union Pacific had not defaulted, the Kansas and Denver Pacific had done little else; the highest mark which the Kansas Pacific stock had touched in January, 1879, had been 13, that of the union Pacific had been 68?. But the question, as Gould well knew, was not one of productive but one of destructive capacity, and the means of coercion which he employed was a demonstration of the ease with which the Kansas Pacific could be made formidable as a competing line. In November, 1879, he purchased the Missouri Pacific from Kansas City to St. Louis; about the same time he bought two minor roads between the Kansas Pacific and the union Pacific in Kansas, and announced his intention of extending the Kansas Pacific to Salt Lake City, there to connect with the Central Pacific and to form a third transcontinental route. The story is clearly told in the report of the United States Pacific Railway Commission.475 The result was the consent of the union Pacific directors to the terms imposed, and the execution of an agreement dated January 14, 1880, whereby the union and the Kansas Pacific, with all their respective assets and liabilities, were put together at par of their respective capitals,—$36,762,300 and $10,000,000,—to which was added the capital of the Denver Pacific, $4,000,000, forming a new company called the union Pacific Railway Company, with a capital of $50,762,300, and a bonded indebtedness of $92,984,624.476 This corporation was larger in every way than the old union Pacific Railroad, except in one particular—earnings above fixed charges. It had 1821 miles of line instead of230 1042; $22,455,134 gross earnings instead of $13,201,077; $10,545,119 operating expenses instead of $5,475,503; and yet, since the consolidation was a union of some strength with a vast deal of weakness, there were few who profited by it save the holders of Kansas Pacific or Denver Pacific stocks. Those lucky and skilful individuals saw the quotations of Kansas Pacific common rise from a high level of 13 in January, 1879, to one of 59 in June, and of 92? in December; and the stock which had been a football in the market thus become of such value that in 1887 Gould was able to lay before a committee of Congress, in justification of the terms described, a table which showed for 1880 market prices of Kansas and union Pacific stock which were approximately the same.477

It was to Gould, as chief owner of Kansas Pacific and holder of practically all of the Denver Pacific stock outstanding, that the lion’s share of the profits went; but Mr. Gould was not satisfied with a harvest on these stocks alone. In the course of his operations he had become possessed of certain branch and minor roads in whole or in part. Thus he held $945,887 in bonds of a company known as the St. Joseph & Western Railroad Company, and 5013 shares of its stock; $634,000 in bonds of the St. Joseph Bridge Company; and $59,000 in St. Joseph & Denver Pacific Railroad receivers’ certificates; while to convince the union Pacific directors of the wisdom of accepting his plan of consolidation he had acquired the Missouri Pacific, the Kansas Central, and the Central Branch union Pacific railroads.478 The earning capacity of none of these lines was large, that of the Missouri Pacific being the greatest. The St. Joseph & Western had been sold in foreclosure in 1875, and had continued to be managed thereafter by a receiver. What value it had was due231 to the fact that, as extended to Grand Island, it gave to the union Pacific an outlet to the East other than the one at Omaha. The value of the Bridge Company bonds and of the receivers’ certificates was dependent upon this same property. The Kansas Central was a narrow-gauge road and had been sold under foreclosure in April, 1879. The Central Branch union Pacific had been designed to join with the Kansas Pacific, but had been left without western connection when this latter road had failed to meet the union Pacific at the hundredth meridian. At the time of the consolidation, according to the United States Pacific Railway Commission, “the coupons for six years were in default, and were retained uncancelled as security for the income mortgage. The company had never earned sufficient to pay its own coupons, without taking into account the accruing interest to the United States in any form.”479 The Missouri Pacific was more prosperous, but need not here concern us. Mr. Gould had paid various prices for the above, ranging from $40 for the St. Joseph & Denver bonds to $238 for the stock of the Central Branch union Pacific. In the case of each road he turned over his purchase to the union Pacific for the same or a greater price.480 Thus for the St. Joseph & Western bonds, for which he had paid 40, he received par in union Pacific stock selling as high as 94 in January, 1880; for $634,000 bonds and 4000 shares of stock of the St. Joseph Bridge Company, costing $480,440, he received 6340 shares of union Pacific stock; for $479,000 in bonds and 2521 shares of stock of the Kansas Central, he received 4790 shares of union Pacific; and for 7616 shares of Central Branch union Pacific, costing $1,826,500, he received $913,500 in union Pacific six per cent bonds and $913,500 in Kansas Pacific six per cent bonds.481 The result was the issue of considerable amounts of stock of the consolidated and bonds of the consolidating companies, without equivalent value received.

The union Pacific Railway Company, therefore, began its career in 1880 in worse shape than the union Pacific Railroad Company, which had preceded it, for it suffered not only from an initial watering of stocks and bonds, but from a watering of assets which had232 followed. Including the government subsidy and accrued interest thereon, the total bonds and stocks of the company in 1880 were $179,058,902, or $98,329 per mile, of which $27,876 were stock, $45,372 mortgage bonds, and $25,081 government subsidy and interest. The figures per mile were slightly lower than in 1870, and yet the water in the capitalization was more abundant, for the average value of the assets had declined still more. A dividend-paying road had been combined with non-dividend payers, with the result of large profits to the promoters of the consolidations, but of serious harm to the solvent party.

Between 1880 and 1883 a number of branches were constructed, to provide funds for which the capital stock of the Railway Company was increased $10,000,000. Of these the Denver & South Park was constructed in the years 1881 to 1883, and was the last of Mr. Gould’s gifts to the parent line. This road was handled by several construction companies, in the last of which Gould took a quarter interest, receiving stock of the Denver & South Park Railroad Company as a dividend on his investment.482 In November, 1880, acting in behalf of the union Pacific Railway Company, he bought the stock of the Denver road at par for cash, benefiting in his capacity as quarter owner by his action as representative and stockholder of the union Pacific.483 In relation to the road Mr. Charles F. Adams, Jr., subsequently said: “The chief source of revenue ... was in carrying men and material into Colorado to dig holes in the ground called mines, and until it was discovered that there was nothing in those mines the business was immense.”484 A more important and genuinely beneficial project was the organization in 1881 of the Oregon Short Line Railway Company to construct and operate a railway from Granger on the union Pacific to and into the state of Oregon, a distance of 610 miles, with the intention of securing the Washington and Oregon business. The Northern Pacific was in financial difficulties at the time, and it was not expected that it could anticipate the new road; but even though this expectation was disappointed, and the Oregon Short Line was second in reaching the233 disputed territory, its value was great and steadily grew.485 The road was built by the construction department of the union Pacific, and was financed by the organization of a subsidiary corporation which issued stock and bonds to an amount of $25,000 per mile, one-half of the stock being reserved in the union Pacific treasury for the purpose of control, and the union Pacific guaranteeing the payment of interest on the bonds. This branch at least was not unloaded on the main line by interested parties, and forms an essential part of the system to-day. Other branches were bought or constructed at the time, but do not require detailed mention.

Gould for the time had obtained from the union Pacific all that he thought possible, and quietly unloaded his stock, while keeping up the payment of dividends. By 1883 he was substantially clear, but he had left his mark; the consolidation of 1880, with the forced purchase of worthless branches, aided as it was by the high capitalization caused by extravagant original construction, and accompanied by a steadily increasing intensity of competition between transcontinental lines, had diminished the surplus to a dangerous extent. At the same time the prosperity of the country as a whole was declining; the wheat crop of 1881 was only three-quarters as large as the crop of 1880, and the corn crop was the smallest since 1874; though the decline was not so marked in Kansas and the far West as in the states east and south of Omaha and Kansas. By 1882, says Noyes, all the markets were moving downward, and after the reaction of that year, the volume of internal trade decreased continuously until after the panic of 1884.486

The evidence of distress on the part of the union Pacific was the mounting up of the floating debt. In November, 1882, President Dillon stated that it then amounted to $3,400,000, and that a loan of $5,000,000 was to be negotiated to take care of it.487 The annual report at the end of the year stated the net debt to be only $842,743, but included in the assets used to offset the gross debt $2,768,437 in fuel and material on hand, and $927,648 in balances due from auxiliary roads; so that early the following year it was again a subject of discussion, and the stockholders recommended to the directors the issue of collateral bonds in order to wipe it out. Pursuant234 to the recommendation the directors executed to the New England Trust Company of Boston an indenture under which it proposed to issue trust bonds to an amount equal to 90 per cent of the securities deposited. By 1884 the gross floating debt amounted, nevertheless, to $11,306,595, as against $9,852,325 gross in 1882, and the quick assets, exclusive of fuel and material, counted up to $8,068,898, instead of to $6,241,145. The chief increase in liabilities, as always, had taken place in bills payable, meaning that the road had been giving its notes for the payment of current indebtedness, with the consequent necessity of paying a high rate of interest, and of making frequent renewals. Meanwhile dividends had been stopped and salaries cut down.

At this juncture Mr. Sidney Dillon resigned the presidency, and Mr. Charles Francis Adams, Jr., was elected his successor. Mr. Dillon was well along in years, was said to be in poor health, and doubtless missed the support which Mr. Gould had been accustomed to render him. Mr. Adams was a younger man, only forty-nine years of age as against the sixty-nine of Mr. Dillon. He had been a member of the Massachusetts Railway Commission from 1869 to 1879, had served as government director of the union Pacific in 1878, and now brought to his position as president an inexhaustible fund of energy, large resourcefulness, and more important still, a nice sense of his obligations towards the bondholders and shareholders of his road. Under his régime the economies earlier initiated were continued and extended; employees were discharged until, by June 28, 1884, the company had only about 10,000 men in its employ instead of the 20,000 who had been on the rolls at one time; and rolling mills, etc., were closed wherever the company found it cheaper to purchase rails and equipment at current prices. This, with the cessation of dividends, left a considerable surplus revenue applicable to the payment of the floating debt. In addition, bonds and stock from the company’s treasury were sold between January 1, 1884, and January 1, 1887, for which $6,550,000 were obtained; and the aggregate of resources made available was $16,200,000, of which $8,251,368 were applied to the floating debt, $6,708,632 to betterment of the road and branch-line construction, and $1,240,000 to increase of equipment.488 In addition the proceeds235 from land sales were used to the same general end. In August, to reassure investors, President Adams stated that no part of the floating debt was pressing, and in November he repeated the statement; the truth of which was made evident by the payment of the last bit of net unfunded indebtedness on August 22, two years later. The result was highly creditable, although the continued cessation of dividends provoked some protest.

Much could be done at this time by able and energetic management; there was, however, much that could not be done; and it is to this that we must attribute Mr. Adams’s failure to put the road in a permanently stable position. For first, the competition which the union Pacific was obliged to meet was constantly increasing in severity. In 1881 the Atchison, Topeka & Santa Fe was extended to a junction with the Southern Pacific at Deming; in 1883, in the language of the annual report, “Not only was the Rio Grande completed to Ogden, making, in connection with the Atchison, Topeka & Santa Fe and the Burlington & Missouri extension of the Chicago, Burlington & Quincy, a direct competing route with the union Pacific from Chicago and all eastern points to a common western terminus, but the Northern Pacific also was connected through, making a third transcontinental route.”489 In 1887 the Atchison built 450 miles of line and the Chicago, Rock Island & Pacific was scarcely behind, so that Kansas and Nebraska were covered with a network of lines, which transformed the natural local traffic of the union Pacific into competitive business of the most uncertain kind. At the same time the profitable high grade business was giving way to a larger volume of mineral traffic, and the average length of haul was increasing, all of which resulted in a decrease of about 45 per cent in the average receipts per ton mile between 1881 and 1890, a slow increase in gross earnings which bore little relation to the greatly increased volume of business done, and a fluctuating progress of net earnings, which were actually over $3,000,000 less in 1889 than they had been eight years before.

And second, during this time the fixed charges of the union Pacific did not materially decrease. They were $7,626,626 when Mr. Adams assumed the presidency, and $7,309,142 five years236 later; and the necessity for further decrease was shown by the fact that the total net income of the road was $11,402,199 in 1884, $10,339,402 in 1889, and $9,561,673 in 1890. What Mr. Adams could do he did, and the funded debt under his régime decreased from $90,760,582 in 1884 to $82,090,585 in 1889, and to $73,968,885 in 1890; the company steadily buying up its own indebtedness: but the conditions which he had to face were too exacting, and the saving made here was offset in other ways.

To save itself the union Pacific was driven to a rapid extension of its branch mileage, which Mr. Adams held to be the only means by which fixed charges could be paid.490 Between 1884 and 1890 3132.45 miles were built or acquired, all under separate organizations, but with their accounts and management under the supervision and control of the officers of the parent line; and the amount invested in branch-line securities was raised from about $28,000,000 in 1881 to $41,879,724 in 1892. These roads reported annual deficits, which were either paid out of earnings or carried as floating debt. The report of the Government Directors in 1891 declared that $15,000,000 out of $21,400,000 of floating debt were the result of expenditures and advances in the construction of branch and tributary lines and the purchase of stock in such lines for the purpose of control.491 But speaking in 1887, Mr. Adams declared the branches to be worth $5,000,000 a year to the main line, entirely apart from anything which appeared in the accounts of the branches themselves, and in a letter to the Government Directors in 1884 he said: “The branches and auxiliary lines of the union Pacific should be considered the only real security the Government has for the repayment of its indebtedness.... Were it not for these branches the union Pacific would be confined to such small local traffic as it could pick up at points directly upon its main line; and to its share of the through transcontinental business which has recently been subdivided by four through the construction of competing routes.”492 The most important of the branches remained the Oregon Short Line, with the connecting line of the Oregon Railway & Navigation237 Company, of which the union Pacific became finally possessed in 1889. This last road had been long considered the natural outlet of the Northern Pacific to the Pacific coast, but had been leased by the union Pacific in 1887 through the Oregon Short Line with a guarantee of 6 per cent dividends upon its stock as well as interest upon its bonds for 999 years. In 1889 negotiations with the Northern Pacific resulted finally in the sale of the Oregon Railway & Navigation stock held by Mr. Villard and his friends. Pending the issue of a collateral trust mortgage the stock was deposited with a trust company, a note was given for the amount, and the sum was carried as floating debt. Whatever the value of the property to the Northern Pacific, it proved of great worth to the union Pacific, providing it with an independent outlet to the coast, and giving it a haul on its main line of over 800 miles on all interchanged traffic. The method of payment proved a dangerous one, however, in that it so largely swelled the volume of the union Pacific’s quick liabilities.

In 1891 Mr. Gould again began buying union Pacific stock. Mr. Adams therefore resigned late in the year, and Mr. Dillon was elected to his position. The time was not ripe for expansion of any kind, and Mr. Gould’s death the following year put an effectual check on any schemes which he might have entertained. The immediate problem was the floating debt, swollen to unwieldy proportions by the acquisition of branch lines, and in particular by the purchase of the Oregon Railway & Navigation Company. During 1890 a block of collateral bonds was issued and sold, but the remainder of the proposed issue was kept back in the hope of a better price. While waiting, Mr. Gould devised a scheme for the postponement of the payment of these and of other quick liabilities by the issue of three-year collateral notes, to be underwritten by a syndicate composed of himself and of other gentlemen interested in the property. These notes were to bear 6 per cent, and were to be issued at 92? to such holders of the floating debt as would accept them, the syndicate taking care of the balance. The authorized amount was to be $24,000,000, of which $5,500,000 were to be issued at once. The plan was declared operative on September 28, 1891. If, now, the union Pacific had been a moderately capitalized corporation, with fixed charges normally well below its earning238 capacity, and if, in 1894, when the notes were to mature, the market conditions had been more favorable than in 1891, it is probable that this scheme, temporary as it was, would have met the needs of the situation. Since neither of these contingencies occurred the insufficiency of the plan may be said to be in part the misfortune of the union Pacific and in part its fault. It was a particular misfortune that the severest panic since 1873 should occur when the road was staggering under a load which it could scarcely bear; but it was altogether a fault that the railroad should have been so burdened as to be able to lay by no reserve in good times for the hard times which were bound to come.

In 1892, therefore, the union Pacific was in a difficult position. Its capitalization was high; its earnings had shown scarcely any increase for five years; its surplus had not been sufficient to prevent the accumulation of a large floating debt; it had to prepare to raise a large sum of money in two years for the payment of its short time notes; and, in addition, there was ahead a fact of which little has been said so far,—the maturing of the government indebtedness.

Briefly sketched, the history of this indebtedness was as follows: The Acts of 1862 and 1864 had provided for the issue of government bonds for stated amounts per mile on the subsidized portions of the system in aid of construction, which bonds were to mature thirty years from date of issue, and to have a lien on the property covered second only to the first mortgage of the company. The rate of interest was 6 per cent, payable to the bondholders by the Government; and in 1875 the Supreme Court decided that the company was not obliged to repay to the Government the accruing interest before the maturity of the bonds.493 This ruling was regarded as a victory for the company, but meant the steady piling up of arrears of interest, lessened only by the retention by the Government of one-half the amounts due for government transportation, and, under the Thurman Act, of such additional sum not in excess of $850,000 as, added to the whole compensation for government services and to the 5 per cent of net earnings set aside under the Act of 1862, should make the annual contribution equal to 25 per239 cent of the net earnings of the company, unless the remaining 75 per cent should be insufficient to pay the interest on the first mortgage bonds; in which case the Secretary of the Treasury was authorized to remit a portion of the 25 per cent of net earnings required.494 The Thurman Act did not fulfil expectations. The Supreme Court in 1891 held that expenditures for new construction and new equipment could not be deducted from gross earnings in ascertaining net earnings,495 but the road met hard times and the maximum limit of the contributions to the sinking fund was not attained, and in investing the fund in government bonds the Secretary of the Treasury was compelled to pay high premiums, thus reducing the net interest; so that from the beginning to 1892 the question of indebtedness to the Government occasioned constant dispute and litigation, introduced uncertainty into the affairs of the railroad, and caused hard feelings between it and the Government. In 1892 the necessity for some settlement was near at hand. The principal of the government debt matured as follows:
November     1, 1895     $640,000     ?
January     1, 1896     1,440,000     ?
February     1, 1896     4,320,000     ?
January     1, 1897     6,640,000     ?
January     1, 1898     17,342,512     ?
January     1, 1899     3,157,000     ?
            $33,539,512     ?

Deducting from this amount the sums paid to the Government and the company’s credits for mail and carriage, and adding arrears of interest, the sum due the Government at the last of 1893 was approximately $52,000,000.496 It was obviously highly difficult for the company to pay this sum in 1892 or 1898 or any other time, and for some years both the company and the Government had been earnestly discussing schemes for refunding, and the advantages and240 disadvantages of the ownership and operation of the road by the United States. Thus in 1892 an overwhelming obligation was hanging over the union Pacific; and did not crush it only because the inability of the road to pay was so evident, and the inadvisability of government ownership was so strongly believed in, that every one felt that the necessary concessions would be made.

In 1893 the sinking-fund 8 per cent bonds matured to the amount of $5,176,000, and were partially extended and partially paid off through the medium of an underwriting syndicate; but this was the last attempt to meet indebtedness coming due. During the year both gross and net earnings fell off enormously, owing to the general depression of business, and particularly to the stagnation upon the Pacific coast. Freight rates were said to be in a state of chaos; and the union Pacific served notice that it would withdraw from the Western Passenger Association on October 10. As the year wore on the continued decrease in earnings made the situation desperate. “The company for the year ending December 31, 1892,” said Mr. John F. Dillon, counsel for the union Pacific, in November, “had a surplus of $2,000,000. In the month of September (1893) there was a loss of net revenue of $1,500,000 as compared with the preceding year, and from January 1 to August 31 there has been a falling off in net revenue of over $2,500,000. The company is ............