The election of Abraham Lincoln as the sixteenth President of the United States, together with the commencement of the Civil War, brought the subject of a Pacific Railroad clearly before the public and before Congress. Durant's group had already paid the cost of the surveys and had urged that the road be built. It had also been decided by Congress that the road, if built, should be constructed by a private corporation assisted by the government. Politicians of many degrees of ability had their favorite plans, but it was not until March, 1860, when Samuel R. Curtis,º representative from Iowa, was named chairman of the Select Committee of Congress, to which all Pacific railroad bills were referred, that a proper law began to take shape. Earlier, the northern route to Ogden had come to the fore, as had a proposal for two roads, one on the central route, favored by a majority of the committee, and one on the 32nd parallel of latitude, the southern route.
p200 With the secession of the Confederate States the southern route was, of course, eliminated, but the Northern Pacific supporters still remained active. St. Louis was situated too close to the disputed territory, which fact allowed the Chicago interests to become the most active and influential.
A special session of Congress was called, and it was at this session that Representative Curtis introduced his bill for the creation of the company to build the road. Again the Northern Pacific and the St. Louis interests presented their bills. Notwithstanding, the final bill creating the Union Pacific Railroad and recognizing the Central Pacific Railroad was at last passed in June, 1862. The Senate vote on June 20 was twenty-five to five, and the House vote on June 24 was 104 to twenty-one. The long contest over the project was ended when President Lincoln placed his signature on the bill on July 21.
It has often been said that both the Union Pacific and the Central Pacific influenced Congress unfairly in the proceedings that led to the passage of the Act. The fact is that both parties did use their influence with Congress, but the efforts of the Union Pacific were greater, since the Union Pacific Company was organized by the federal government, while the Central Pacific Company came under the laws of California. It was also supposed at that time that the Union Pacific would build westward to the border of California, there to meet the Central Pacific.
The Act of 1862 bore marks of the politicians' work. The Union Pacific Company was created, to be composed of 158 persons, whose names were duly listed. To this body were added five commissioners representing the national government. These 163 men were from twenty-five states, including California and Oregon. The group, which was called the Board of Commissioners of the Union Pacific Railroad and Telegraph Company, were to open books for subscription for stock. When 2,000 shares had been subscribed and 10 per cent paid in, a meeting of the stockholders was to be called by the commissioners, at p201which meeting directors were to be elected. After the work of the commissioners had been done, the stockholders were to conduct the affairs of the company.
The stockholders were to meet annually and make the usual by-laws, rules, and regulations to govern the company. There were to be thirteen directors selected by the stockholders, with the government appointing two directors who could not be stockholders. The directors were to appoint the officers of the company. The corporation was "authorized and empowered to lay out, locate, construct, furnish, maintain and enjoy a continuous railroad and telegraph, with appurtenances, from a point on the one hundredth meridian of longitude west from Greenwich, between the south margin of the Republican River, and the north margin of the valley of the Platte River on the territory of Nebraska to the western boundary of the Nevada territory." The point was to be selected by the President of the United States after actual surveys had been made. The road was to meet the Central Pacific Railroad of California. Rights of way 400 feet wide over public lands were granted the company, as were necessary grounds for stations, shops, and other buildings.
The land grant consisted of public lands "to the amount of five alternate sections per mile on each side of said railroad, on the line thereof, and within the limits of •ten miles on each side of said road not sold, reserved or otherwise disposed of by the United States." All mineral lands were excepted from the grant, but the timber could be used. Patents to the land were to be issued when •forty miles of railroad had been completed.
The credit of the government took the form of subsidy bonds given to the company as a loan to be repaid in thirty years. The bonds were to bear 6 per cent interest, which could be "paid in United States Treasury notes, or any other money of currency which the United States have or shall declare lawful money and a legal tender." The bonds were to be of $1,000 denomination, and on completion of •forty miles of road and its acceptance by p202the government commissioners, sixteen bonds per mile were to be given to the companies. The bonds were to be a first mortgage on the railroad and telegraph line, and in case of default in repayment by the company, the government could take possession of the property. It also provided, "that for three hundred miles of said road most mountainous and difficult of construction, to wit, one hundred and fifty miles westerlyº from the eastern base of the Rocky Mountains, and one hundred and fifty miles eastwardlyº from the western base of the Sierra Nevada Mountains, said points to be fixed by the President of the United States, the bonds to be issued to aid in the construction thereof shall be treble the number per mile hereinbefore provided, and the same shall be issued, and the lands herein granted to set apart upon the construction of every •twenty miles thereof, upon the certificate of the commissioners as aforesaid that twenty consecutive miles of the same are completed; and between the sections last named of one hundred and fifty miles each, the bonds to be issued to aid in the construction thereof shall be double the number per mile first mentioned." It was further provided that "no more than fifty thousand of said bonds be issued under this act."
Other railroads were authorized to share in the grants. The Leavenworth, Pawnee and Western Company of Kansas could construct some line and a connection with the Union Pacific on the 100th meridian. The Hannibal and St. Joseph Railroad and the Pacific Railroad Company of Missouri could unite with the Kansas company. The companies could even enter California if the Central Pacific failed to build to the state line. The Central Pacific Railroad Company of California, "after completing its road across said state is authorized to continue the construction of said railroad and telegraph through the territories of the United States to the Missouri River, including the branch roads specified in this act upon the routes hereinbefore and hereinafter indicated on the terms and conditions provided in this act to the said Union Pacific Railroad Company, until p203said roads shall meet and connect and the whole line of said railroad and branches and telegraph is completed."
The Act provided for the initial point to be located on the 100th meridian, which in the Platte Valley was about 247 miles west of the western border of Iowa. That point was near Fort Kearney. The Union Pacific was utilized to build to that point on the same terms, and three other roads were given the same privilege. The Union Pacific was obliged to build the line from Sioux City whenever some other line had been built westward across Iowa to that point. The Missouri branch was to be constructed by the Leavenworth, Pawnee and Western Railroad Company. This road afterward became the Union Pacific Railway Company, Eastern Division. From St. Joseph the branch was to be an extension of the Hannibal and St. Joseph.
There were numerous other provisions of the Act, a few of which may be mentioned. The road was to be completed and ready for use by July 1, 1876, or the roads would be forfeited to the United States. The railroad companies could arrange with existing telegraph companies to have the telegraph lines placed along the railway. When net earnings exceeded 10 per cent the government could reduce rates. The companies must keep the lines in repair and transmit dispatches and transport mails, troops, and munitions of war, supplies and public stores, and the compensation for such services must not exceed that charged private parties. The companies must accept the terms of the Act by a given date. The several companies might consolidate after completing the roads. The track should be of a uniform width as fixed by the President, and the grades and curves should not exceed the maximum of the Baltimore and Ohio Railroad. Provision was made for the retention of 15 per cent of the bonds until the road was entirely completed.
After the first act was passed, the President set the gauge of the road at five feet, but Congress decreed, on March 3, 1863, that the gauge should be four feet, eight and a half inches.
In conformity with the Law of 1862, a convention of the commissioners of the Union Pacific Railroad and Telegraph Company was held at Bryan Hall in Chicago on September 2, 1862. Seventy-three delegates from twenty states were present, which number included the five members appointed by the government. From California came three delegates, James T. Ryan, D. O. Mills, the banker, and John R. Robinson. From that state also came O. M. Wozencroft, appointed by the President. Apparently from that time on, however, no California men were interested in the Union Pacific.
The convention organized by selecting Major General Samuel R. Curtis of Iowa as temporary chairman. The permanent officers of the company were William B. Ogden of Chicago, president; Thomas W. Olcott of New York, treasurer; and Henry V. Poor of New York, secretary. The convention passed resolutions having to do with the Civil War, approved the action of Congress in delegating the railroad construction to an incorporated company, passed several other minor resolutions, and arranged to open stock subscription books in thirty-four cities on the first Wednesday of the following November. After this the convention adjourned, sine die.
The officers of the company appointed by the convention did indeed open subscription books in thirty-five cities and advertised them in numerous newspapers. Two weeks were allowed for the books to be open, but it was not until September, 1863, after a year had passed, that 2,000 shares had been subscribed and the necessary 10 per cent paid to the treasurer. There obviously was no wild rush to subscribe, since the total of subscribers numbered only 123. Most of the subscriptions were for twenty shares, although there were eight for fifty shares. Brigham Young purchased five shares.
On September 25, 1863, a call for a meeting of the stockholders was issued, and at the meeting held October 29, thirty directors p205were named, even though the law provided for only thirteen. The list included General Dix and Thomas C. Durant. The next day sixteen directors and the two government directors met to elect Major General John A. Dix as president, Thomas C. Durant as vice president, John J. Cisco as treasurer, and Henry V. Poor as secretary. Because of the scattered residences of the directors, an executive committee of seven was authorized to conduct the affairs of the company. Work on the railroad was to be started as soon as the President of the United States selected an eastern terminus. Dr. Durant submitted a report on the work he had done in sending survey parties into the field and on the instructions given them. The Union Pacific Railroad, after years of talk and over a year spent in organizing, was at last started.
To show that the company meant business, arrangements were made for breaking ground for the new line at Omaha. The misinterpreted decision of President Lincoln was rendered on November 17, and the ceremonies took place December 2, 1863. Hosts of people came and politicians talked. The Governor of Nebraska and the Mayor of Council Bluffs spoke, as did George Francis Train, together with Messrs. Monell, Larimer, and Poppleton. Omaha itself made a general holiday of the great occasion. Numerous telegrams from Washington personages were read, General Dix from New York congratulated Peter Dey, and from New York Durant sent a long telegram of explanation to the committee in charge of the arrangements. Brigham Young was terse in his telegram. The Mayor of Denver pledged the mountains of Colorado gold to the aid of the enterprise, although no one seemed to know how he was going to deliver it. Even Leland Stanford waxed poetic when he stated that "mountain and desert shall soon be overcome." Such things were always said on occasions of that sort. The troubles were to come later.
In the year 1864, following the ground breaking and after some work of grading had been done, Durant decided to change p206the location of the road out of Omaha. In so doing, the line was lengthened nine miles and the railroad debt increased by $450,000. This action stirred up controversy that lasted until late in 1865. In the meantime the Hoxie construction contract of October 3, 1864, was signed, and a course charted that was to be followed by the company until the road was completed.
After the Act of 1862 had created the Union Pacific Railroad Company, efforts to attract capital had failed, owing to a number of causes. The country was involved in the Civil War, which claimed the attention of most of the better men of the country. Then, too, the fact that the government subsidy bonds constituted a first mortgage on the road and since it was not known what the road would cost nor what the future would be, the possibility that the government would foreclose its mortgage and take the property was frightening to private capital. Other important factors were the characters of Durant and of that flamboyant individual, George Francis Train, the men who were in possession of the railroad company and were the active promoters of the project. Cautious men simply would not involve when operators of their type were in control. Something had to be done in order to interest capital in building the road. In California, the men in charge of the Central Pacific were having the same difficulties about money, although their character was different and inspired more confidence.
It was under such conditions that a bill was introduced in Congress to liberalize the existing law in order to rectify the conditions that held the project back. President Lincoln was in favor of a change, and powerful lobbies led by Durant of the Union Pacific and Huntington of the Central Pacific worked for passage of the bill. What arguments they used will never be known, but the result was the Act of 1864, passed in June and signed by the President on July 2, 1864. The most important change from the Act of 1862 related to the status of the subsidy bonds and to the amount of the land grant. The rate of bonds per mile for constructing different sections of the road was not p207changed, but the two railroad companies were now permitted to issue first-mortgage bonds of their own in an amount not to exceed the government bonds. In this way the government held not a first but a second mortgage on the road. Thus the greatest stumbling block in the way of financing the project was removed. The issuance of government bonds as the road was completed was also liberalized. Two thirds of the bonds could be issued when grading was completed, and the other third was to be available when the rails were laid and equipment was in place. The Act also provided that no bonds were to be retained by the government.
The land grants in the new law were doubled in amount. They consisted of ten alternate sections on each side of the line to a distance of •ten miles each way, with permission to issue patents for the lands whenever •twenty miles of railroad had been built and accepted. These grants included lands with coal and iron. Under the Law of 1862, whatever the railroads earned for transporting government troops and materials was to be retained and placed to the credit of the roads. The Law of 1864 required that one half the sum earned should be paid directly to the railroads.
The time for completion of the road was extended one year, to July 1, 1877. The right to condemn private lands for right of way was granted. The number of directors was increased to fifteen and the number of government directors was increased to five. In addition, three government commissioners were provided, whose duties were to make periodic examinations. The Central Pacific was limited to an extension into Nevada of 150 miles, in place of the former provision that the road could build eastward until it met the road building westward. It was not until July 3, 1866, that the former permission was restored, under which the Central Pacific built eastward until it met the Union Pacific at Promontory, Utah. As a final evidence of government good faith, it was "further enacted, that Congress may at any time, alter, amend or repeal this act."
Even though the Law of 1864 permitted a satisfactory form of financing, and though the Civil War ended early in 1865, only •forty miles of railroad were completed by the end of 1865. It had been left to Durant and his friends to raise money, some of which was indeed obtained by those promoters. In order to secure to themselves a part of the funds that became available from the sale of bonds, the first of the construction contracts was signed.
The laws that today govern and provide for the limited liability corporation had not been passed in 1864. However, the legislature of Pennsylvania had chartered the Pennsylvania Fiscal Agency with general powers, and it was this charter that Durant bought, changing its name to the Credit Mobilier. This name was the same as that of a French company formed for general financing and construction purposes. The capital stock was set at $2,000,000, later raised to $2,500,000, and again to $3,750,000. It obviated the risk that individual partnerships had for the several partners, as the liability for the debts of the concern was limited by the number of shares held by any one individual. This was the company that financed the Union Pacific, acting as the actual contractor in one case and as the real contractor in the other two contracts.
While Peter Dey was in charge of the first work at Omaha, the work was awarded to small contractors, but such procedure was not satisfactory to Vice President and General Manager Durant. Therefore Durant made an arrangement with an employee of the company, a man of no financial standing, to contract for the first •100 miles of the road. This was Mr. Herbert M. Hoxie, who made an offer to build that much of the line for the uniform amount of $50,000 per mile. On September 23, 1864, the offer was accepted by the railroad company. The contracts required that Hoxie build and equip the 100 miles of line and side tracks. There were several other clauses covering the burnetizing of ties; the cost of any one bridge was limited to p209$85,000; and equipment of buildings, tanks, etc., was not to exceed a cost of $5,000 per mile. If railroad iron cost over $130 per ton, the excess was to be paid by the company. Hoxie agreed to take the company's first-mortgage bonds at 80 per cent of their par value and land grant bonds at 70 per cent of par and to subscribe for $500,000 of Union Pacific stock.
On October 4 of the same year the contract was extended to cover 247 miles, which was the distance of the 100th meridian, the initial point of the railroad indicated in the law. Hoxie then agreed to assign the contract to five men: four directors of the railroad, T. C. Durant, Cornelius Bushnell, C. A. Lambard, and H. S. McComb, and a fifth, H. S. Gray, a stockholder. The five men thus became the contractor. The provision of the law that full price should be paid for the railroad company stock was evaded by the contractor giving a check in full amount for the stock subscribed, which check was then handed back as payment on the contract without going through a bank. It was another illustration of a well-known fact that no law can be passed that is not easy to evade, provided all parties to a transaction desire to do so. The five men formed a partnership and together subscribed $1,600,000, which was used to build the road. Twenty-five per cent was paid in before the partners became afraid their individual risk was too great. Hoxie and the other then assigned everything to the Credit Mobilier, with the $1,600,000 being applied to the purchase of Credit Mobilier stock. The Credit Mobilier thus became the actual contractor for building the railroad.
It was because of the high prices paid for the construction that Dey resigned as chief engineer and notified General Dix that the road was being overcapitalized. General Dix, however, did nothing about it.
The arrangement with the Credit Mobilier provided sufficient funds for the building of the 247 miles west of Omaha, including the excess length of nine miles added by the change p210at that city. On October 5, 1866, the contract was completed. It had taken nearly three years from the date of the ground-breaking ceremonies at Omaha to build 247 miles on the easiest part of the route of the railroad, namely along the Platte River from Elkhorn to a point near Fort Kearney.
It was quite clear, therefore, that this first group of men headed by Durant could not finance the railroad project. Stronger men were needed and were soon found in the Ames brothers, Oakes and Oliver. It was these men who brought to the project large wealth of their own and who were also able to bring in other investors of equal financial standing who would provide the funds. They knew of the Credit Mobilier and what it was doing in 1865, for they were then stockholders. With them were friends and business associates, notably Alley, Hazard, and Dillon, whose names thereafter appeared in the proceedings of both companies. Oliver Ames was elected a director of the Union Pacific in October, 1866, and became president in November of that year when General Dix was appointed Minister to France. Although a stockholder in the Credit Mobilier, he was never an officer of the company. Oakes Ames became connected with the Credit Mobilier in August, 1865, and was also a stockholder in Union Pacific and a director, although he, too, was never an officer of the company. He was, as has been mentioned, a member of the United States House of Representatives for several terms, being there in 1864 when the Act of that year was passed. Practically all the stockholders of the Union Pacific, together with all the officers, were stockholders in the Credit Mobilier. For the most part, the personnel of the two companies was the same.
By the time the Hoxie contract was completed in October, 1866, the friction between Durant and Oakes Ames had developed to the point where it became necessary to oust Durant from his position in the Credit Mobilier. A similar effort to eliminate him from the Union Pacific failed, and Durant remained as vice president and general manager until the road p211was completed in 1869. Oliver Ames, in his testimony before the Wilson Committee in 1873, said, regarding the $435,000 that had been disbursed by Durant in 1864:
"We examined every bill that is there, in the details to the full amount of $435,000. The charge was that Dr. Durant, instead of spending this money as he alleged he had spent it, for the purpose of getting a charter and for doing all things necessary, had put the money in his own pocket."
Durant's opinion of the others was expressed in his testimony before the Poland Committee, in which he said:
"As I have stated, Mr. Ames, Mr. Alley, and their friends were not original stockholders in the company. They came into it by virtue of their character as contractors and their interests in the Credit Mobilier, and did not come into the direction until after several hundred miles of road had been completed, and nearly five hundred miles had been completed at the time of the execution and assignment of the Oakes Ames contract. The claim of patriotism and of far-seeing, intelligent, and honest policy put forward in their behalf, is ridiculous."
All parties were in agreement that the work should proceed. Durant, in his capacity as vice president, and acting under the authority conferred by a resolution of the executive committee of the railroad, let a contract to L. B. Boomer of Chicago for 150 miles of road west of the 100th meridian, where the Hoxie contract had expired. This contract was never approved by the directors, but the work proceeded. Then the directors of the railroad passed a resolution extending the Hoxie contract •fifty-eight miles, to a point where the Boomer contract had built the road. When Durant heard of this he protested and obtained a court injunction that caused the directors to rescind their action. Then the directors arranged a contract on March 24, 1867, with John M. S. Williams, a stockholder, to build 268 miles west of the initial point, the contract to include the part already constructed. The contract was assigned to the Credit Mobilier, but Durant stopped that with another injunction. In p212June the directors made yet another effort to sign a contract with Williams, but this, too, was stopped by Durant. Durant assumed great credit for himself in thus preventing contracts at high prices on a stretch of road easy to build and parts of which were already constructed. His efforts would appear more altruistic had he not himself later become a party to the Ames contract that covered line already built.
The gist of the matter was that Durant, having been ousted from the Credit Mobilier, was taking his revenge. It was finally recognized that both parties were necessary to each other. Oakes Ames concluded a contract with the railroad company by which he agreed to construct 667 miles of road, extending from the 100th meridian westward, for the following amounts and in this sequence:
|100 miles at||$42,000 per mile||$4,200,000|
|167 miles at||45,000 per mile||7,515,000|
|100 miles at||96,000 per mile||9,600,000|
|100 miles at||80,000 per mile||8,000,000|
|100 miles at||90,000 per mile||9,000,000|
|100 miles at||96,000 per mile||9,600,000|
Of this length of road, 138 miles were already completed and had been accepted by the government. The engineering expenses were borne by the railroad company. The contract covered the line across the Black Hills and through Wyoming Basin about as far west as the present town of Evanston. Afterward there was considerable talk about the contract being a wild venture, which quite possibly it was, since the route had not been selected across the Black Hills and the cost of course was unknown. The Ames contract was ratified by the railroad directors on October 1, 1867.
It is to be remembered that in 1865 General Dodge had discovered what he believed to be the favorable approach to the summit of the hills by way of Lone Tree Creek. As soon as he p213became chief engineering in 1866, he ordered surveys to be made at that place and in his report dated at Omaha, November 15, 1866, he said: "The Lodge Pole Creek main line . . . has the best alignment, costs less per mile, has the best grades and less bridging; and when considered with branch to Denver, enters the best coal fields, and has less road to run and build than any of the other lines.
"Considering the lines in a purely engineering point of view, I do not hesitate to give the opinion that the Lodge Pole Creek approach to the base of the mountains is superior to all others and should be adopted."
Maps and profiles, with grades, distances, and other information, were filed with the report. In forwarding the report to the board of directors, Durant said: "It will be found to contain all the information necessary to enable them to determine upon a location as far west as the crossing of the Laramie River." On November 23, 1866, the "Committee on Location and Construction," to whom the report of General Dodge was referred, "unanimously recommend the adoption of the Lodge Pole Creek line crossing the mountains on the Lone Tree and Crow Creek divide line."
The matter was settled and the road was built on that line. It can hardly be maintained that Oakes Ames was ignorant of the character of the mountain crossing and of the decision as to the location when, ten months after the Dodge report, he entered into the contract to build the line over the mountains.
The most inexcusable part of the Ames contract was that it included a section of the road 138 miles long that had already been constructed. When the Hoxie contract was completed to the 100th meridian, construction went on haphazardly while the factions in New York and Boston quarreled. The cost of the 132 miles in the Platte Valley was $27,000 per mile but it was taken into the Ames contract at $42,000 per mile, with a corresponding profit of $15,000 a mile to the contractors. No valid excuse for this procedure was ever made other than that p214Oakes Ames, in making his proposal, based it on average costs over the 667 miles covered by the contract. This argument will not hold water, for there is no proof that his costs per mile took this into consideration. The company ultimately paid the Credit Mobilier $1,104,000 on this account.
When the Ames contract was settled in 1867, the opposition of Durant had ceased. The contract contained most, if not all, of the objectionable features that he had protested in the earlier contracts proposed by Ames. Arrangements had obviously been made and a compromise effected. Oakes Ames did not perform the contract himself. Within two weeks the contract was assigned to the following seven trustees, who carried it out: Oliver Ames, Sidney Dillon, Cornelius Bushnell, John B. Alley, Henry S. McComb, Benjamin E. Bates, and last, but not least. Thomas C. Durant. In this manner Durant appeared as one of the contractors. Another agreement between Oakes Ames, the Credit Mobilier, and the trustees provided that the contract was to be administered for the benefit of the stockholders of the Credit Mobilier. Durant had insisted that the written consent of all Union Pacific stockholders should be obtained first, which was done.
After this struggle between the factions, the work of construction proceeded rapidly. When the Ames contract was completed, another was made with James W. Davis, who assigned it to the same trustees and the road was completed to the junction with the Central Pacific.
While the conflict between the two groups was going on, the "Fisk raid" of 1867‑1868 took place. It has since been stated that Fisk, who had become notorious in his dealing with the Erie Railroad, tried to blackmail the Union Pacific in an endeavor to have the Credit Mobilier thrown into receivership, all of which would have delayed construction work. Working with the Tweed Ring in New York and with corrupt judges, Fisk made an attempt to secure the papers of the Union Pacific Company. This was prevented by sending them to New Jersey. p215After permission was given by Congress, the office of the company was removed to Boston. There was some intimation that Durant was assisting Fisk, but those charges, like many others that were made then and afterward, were never proved.
As a part of construction of the railroad, interest attaches to the financing of the road, because in the end, without money and the anticipation of profit, the road would not have been built. The data of costs and financing, such as they are, are largely found in the reports of the Wilson Committee of Congress in the investigations of 1872 and 1873. Testimony was given by Henry C. Crane, an officer and assistant treasurer of the Credit Mobilier; by Benjamin F. Ham, a director, assistant secretary, and treasurer of the same company, as well as at times auditor of the Union Pacific; and by E. H. Rollins, treasurer of the Union Pacific after May, 1869.
The total cost of the road, as computed by Mr. Ham was as follows:
|The Hoxie contract||$12,974,416.24|
|The Ames and Davis contracts||80,571,871.04|
|Discount and interest on loans||2,581,180.09|
|Bond interest during construction||4,000,000.00|
|Bond discount (Losses)||10,740,74.91|
|Miscellaneous, 16 items||3,512,591.35|
|Deduct credit sale to Central Pacific Railroad||2,698,620.00|
The above sum given by Mr. Ham represented substantially what the road had cost to the end of 1872. Up to the end of 1870, the reported cost was $108,722,134.35. As work went p216on after the rails were joined in 1869, the difference is explained. The sum given is merely the bookkeeper's summation, which does not represent actual cost. In the sum is included 367,623 shares of stock at its face value of $100 per share, or $36,762,300. The sixteen miscellaneous items mentioned in the table are made up of station buildings, shops and tools, snow sheds, roadway and track, bridging, fencing, telegraph, express outfit, the expenses of government commissioners, legal expense, revenue stamps, preliminary expense, and amounts paid to the Cedar Rapids and Missouri River Railroad. Of the total sum, the three contracts amounted to $93,546,287.28, with expenditures or commitments of the railroad company direct of $20,487,441.24. In both these categories, stock appears at its face value of $100 per share.
Money for construction of the road, whether by the company or by the contractors who took securities in payment for their work, was raised principally by the sale of bonds. The record of bond sales is as follows:
|Class of Bonds||Face Value||Discount||Net Sum Received|
It will be noted that the money realized from the sale of the government subsidy bonds amounted to slightly less than 43 per cent of the total. The statements of the Wilson Committee and of others since that the government furnished practically all of the money for building the road are largely without foundation. In addition, money from other sources was made available by the company.
It can easily be seen that the bonded debt was a heavy burden on the company for many years, especially so when the p217following statement of the interest is added to the above table. The government paid the interest on its bonds until maturity, which relief was of great assistance during the years while the road was beginning to function. Even so, the accumulation of interest into one sum due in thirty years was one of the reasons for the company's final insolvency. The interest on the three types of company bonds was as follows:
|Class of Bonds||Face Value||Annual Interest||Net Sum Received||Actual Interest|
|Total or average||$49,968,000||$3,296,280||$36,318,600.81||9.0%|
While the average rate of interest on the total bonds was about 7 per cent, the actual rate of interest on the cash received from the sale of the bonds was 9 per cent. It was evident that the first-mortgage bonds, even with the government bonds placed second to them, were sold only at a considerable discount, about 12.8 per cent, and that the actual interest on the money received was 7 per cent. When it came to issuing land grant and then income bonds in the desperate struggle to obtain cash, great discounts were absolutely necessary and high rates of interest were paid to obtain money, reaching 12 per cent and 14.7 per cent, as shown in the table. The interest rates are mute evidence of the struggle of the railroad builders to complete the project.
In addition to selling bonds, both the railroad companies and the Credit Mobilier sold the common stock of the railroad. No statement, however, is now available as to the amount or the receipts. In general, the stock was held by the contractors as a profit, although Durant and some others sold their holdings in the years immediately following the joining of the rails in 1869. Calculations as to the value of the stock have since been made on a basis of thirty cents on the dollar, but the price in the p218market varied. Again, the market value of a stock is not necessarily a criterion of its actual value. Only the earnings of the railroad in later years provided a basis of value and such a gauge of value was not available when the road was built.
As soon as the railroad was opened for any distance, the completed sections were placed under the operating department, where they began to earn money, notwithstanding the fact that operating trains interfered with the construction trains passing westward to the end of track. By the second of January, 1867, the government had accepted 305 miles of the completed road, which was operated by the company after April of that year. Statistics of operating receipts and expenses are given as follows:
|1867||$1,015,195.29||$ 658,880.54||$ 356,314.75|
Thus, during the three active years of construction, the company came into possession of about two and three quarters million dollars that could be applied to construction purposes, and the first year of through line operation, 1870, the profits justified the faith of the builders that the road would be a paying investment.
In Table 1, above, the total cost to the company, including the stock then issued at par value, was $114,033,728.52. Included in this sum were the discounts on the several types of bonds, referred to by Mr. Ham as losses, of $10,740,747.91. While this amount would have to be amortized in future years, it was not a part of the construction cost. Deducting that sum leaves $103,292,980.61, which may be considered as the sum directly p219contributed by the railroad company. However, as stated before, there is included in the sum noted the stock amounting to $36,762,300, estimated at its face value of $100 per share. The stock realized but a small fraction of this amount when sold. From here on, the estimates were made in 1873 on the basis of thirty cents on the dollar, and using that figure the stock represented a real money value of $11,028,690. This represents a reduction from the cost named above $25,733,610.00, leaving the construction cost to the company of $77,559,370.61.
In their testimony before the Wilson Committee, Mr. Ham and Mr. Crane presented statements of the recorded cost of the three contracts, which are embodied in the following table, together with the face value of the contracts:
|Contract||Contract Price||Contractors Cost||Apparent Profit|
|Hoxie||$12,974,416.24||$ 7,806,183.33||$ 5,168,232.91|
|Add for payments to Credit Mobilier for 58 miles||1,104,000.00|
It is again necessary to call attention to the fact that these are bookkeeper's figures that include stock at its par value and also bonds. Various individuals have tried to determine the actual amount of profit to the contractors, but the data are so meager and lacking in essential parts that only general statements may be made.
In estimating payments by the railroad company to the Ames and Davis trustees, Mr. Ham stated that the trustees subscribed for first-mortgage bonds at 85 per cent of the face value, the land grant bonds at 55 per cent and the income bonds at 60 per p220cent of the face value. As payment for the two contracts, there were received bonds and stocks, the total stock issued being about $30,000,000, which at thirty cents on the dollar would alone reduce the profit $21,000,000, or from $42,825,328.34 to some $22,000,000. Mr. Ham stated that these securities were sold by the trustees at less than the prices paid for them. They sold one $1,000 first-mortgage bond, one similar land grant bond, and fifty shares of stock for $2,000. This, at the purchase price of the bonds as noted, would make the stock worth $12 a share. They sold one income bond and twenty shares of stock for $800. At the stated price of $600 for the bonds, the stock was rated at $10 per share. Mr. Ham also presented his calculated cost of the road, revised to include only the contractors' cost instead of the contract prices given in Table 1, as $71,208,399.18. He also stated that, taking account of the prices that were received by the contractors in disposing of their securities, the profit on the two contracts was not more than $9,000,000. Adding this to the profits on the Hoxie contract, which were not examined, the total profit to the contractors was somewhat over $14,000,000.
Estimates that vary widely were prepared by others who examined the same figures, and may be mentioned briefly.
Mr. Rowland Hazard, one of the executive committee of the seven trustees, in a paper, "The Credit Mobilier of America," stated in 1882: "On (the) basis of (fifty cents on the dollar in 1881 for the Central Pacific stock) the total profit received by the stockholders of the Credit Mobilier was about $15,000,000 and an expenditure of about $70,000,000, or at a little over 20 per cent. This is a high estimate, and is probably more than realized by a great majority of the stockholders. . . . On (the) basis of (the value of the stock as estimated at the time) the total profit would be about $6,000,000, or less than nine per cent on the expenditure." Mr. Hazard apparently considered the contractors' cost to have been over $70,000,000.
The Wilson Committee, after estimating the discount on p221securities of $19,548,455.80, reached the conclusion that the profit was $23,366,319.81 on an expenditure of $50,726,958.94. These calculations were based on the cash value of bonds and on the stock at thirty cents on the dollar. The details are as follows:
|Profit on the Ames and Davis contracts:|
Bonds (cash value)
Twenty-four million of stock
|On the Hoxie contract:|
Stock, $5,147,232.71 at 30
The Wilson Committee also called attention to the relation of the supposed cost of the work of construction to the actual sums of money obtained by the sale of the first-mortgage and of the government subsidy bonds.
|First-mortgage bonds issued||$27,213,000.00|
Sold at a discount of
|Government bonds issued||$27,236,512.00|
Sold at a discount of
The committee reached the conclusion that the cost was $50,720,958.94, the two totals being substantially equal, and that the contractors made a real profit of $23,000,000 on the work. There are several items for which general vouchers only existed as one payment to C. S. Bushnell for $126,000 and one to Thomas C. Durant for $435,754.21, which were unexplained. However, the above does not represent the entire case. The value of the stock included in the preceding calculation estimated p222at thirty cents on the dollar of face value, amounted to $8,744,169.81 or about 33 per cent of the total assumed profit. Had the railroad proved a failure in its earning capacity, the value of the stock would have been far less, and might even have been rendered completely worthless by foreclosure. In such a case, the profits of the contractors would have shrunk to about $15,000,000. This was just one of the risks that the contractors shouldered when building a road into unknown country and in taking part of their payment in stock. As it turned out, the contrary proved to be the case, but there is no question that it could have been otherwise.
The Wilson Committee felt that the railroad builders had misused their trust and had gained enormous profits out of the contracts made with themselves. The railroad men had no such view. They took the stand that the railroad incorporators and the construction company were really one and the same organization, managed by the same individuals. It is no one's affair how much profit they made as long as the security behind the government bond issue was not impaired. At that time the interest of the general public in capitalization and profits of railroads was not recognized. The railroad belonged to those who built it, and if they repaid borrowed money that was all that was asked of them. A suit instigated by the Wilson Committee to recover undue profits was lost in the Supreme Court.
It remains to examine the statement of what the profits were. The Wilson Committee rested their case on the testimony of Mr. Ham, the treasurer of the Credit Mobilier. Others differed with him. Oakes Ames stated that the cost of the contracts was $60,000,000, and that on his contract the profit was about 15 per cent. General Dodge believed that the cost as given by Mr. Ames was correct. Where the Wilson Committee erred was in omitting the money obtained from bonds based on land grants and upon earnings. From the $10,400,000 land grant bonds there was obtained $6,063,992.04, and from the $9,355,000 income bonds there was obtained $6,536,600, a total from these p223two census of bonds of $12,600,592.04, which, added to the $50,863,172.05 obtained from the sale of first-mortgage and government bonds, makes a total of $63,463,764.09. The records of the railroad show that the company expended directly $9,746,683.33, which, added to the contract costs to the contractors, makes a total of $60,467,641.27. The two sums are in fair agreement, the total expenditures being less than the sum obtained by the bonds of $2,993,122.82.
It will be recognized that there are various viewpoints from which to estimate the profits on the construction. That of the Wilson committee has been stated. Henry Kirke White estimates the total profit with "$16,710,432.82, or slightly above 27½ per cent of the cost of the road . . . which does not seem an immoderate profit."1
Mr. J. B. Crawford, using the data, finds that the cash value of the net profits was $8,141,903.70 after deducting from a total the loss of the Credit Mobilier capital of $3,750,000 — a total loss. He gives the expenditure as $70,000,000, the profits being about 12½ per cent.2
Mr. Nelson Trottman, at a later date, using the same basic data, reaches the conclusion that the actual cost of the railroad from all sources was $60,467,641, and subtracting this amount from the total capitalization of $110,996,812, obtains what he terms "fictitious capital" of $50,529,171. Repeating statements of the Wilson Committee, he finds the total securities issued in excess of cost as $47,304,513.11. The capital stock is entered at its face value of $100 per share and the land grant bonds at their face value. If the prevailing assumption of thirty cents on the dollar on the stock and the discounted cash realized on the bonds is entered in the table, the contractors' profits amounted to $17,234,895. Mr. Trottman, agreeing with the Wilson committee, finds the cash profit to have been approximately $23,366,514.81.3
p224 Mr. John P. Davis, also using the figures given in the Wilson report and after deducting the capital of the Credit Mobilier, estimates the contractors' profit as $25,771,213.11.4 He criticizes Mr. Crawford and Mr. Hazard for basing the profits on a percentage of the money spent, and seems to imply that the profits should be a reasonable percentage of the capital of the contracting company, or $3,750,000. This contention is made because the contractor was reimbursed as each section of road completed was paid for.
It would have been more helpful to Mr. Davis and the others had they been better acquainted with contracting and contractors. This writer has had contact with such men and their work for half a century. Contractors do not base their proposals on the amount of their capital, which may be very small. They estimate the cost to them of doing the work on a project and add to that sum their anticipated profit as a percentage of the total estimated cost. The contract is taken and the work performed on that basis. For capital, the average contractor depends upon borrowing whatever he requires above his own resources, from a bank or from other sources of funds. Whenever a project is of such a size that it is beyond the financial resources of one contracting company, several combine to do the work with their united resources. Much of the large work in the West in recent years has been done in this manner. The Hoover Dam, for which a contract of approximately $165,000,000 was awarded, is an example. Here, six contracting firms came together to do the work, with money being borrowed from banks to finance the contract. On the other hand, no work of magnitude is done without the owner making payments as it progresses. The financial costs are very much reduced, since it would be the height of folly to require a contractor to furnish capital in any amount, as in the example cited, and rely only upon one payment on completion of the work. In the p225end the owner would pay the cost of this capital, while presumably he would have resources of his own at hand.
The return on capital is fundamental to modern industrial life. Men must make a profit on their ventures, or all industry would stop. What is designated as "costs" in all these discussions refers to direct costs of labor and materials. Contractors' profits are also costs, as legitimate as the wages of the most humble laborer on the work. The contractors' profits, however they may be estimated and whatever they were, are part of the cost of building the railroad. Money does not, of itself, get out and build a railroad. It takes the intense effort of many men — in the present instance, of the Ames brothers and their associates in the East; of Durant, Dodge, Reed, Evans, Casement, and many others in the West, working under discouraging conditions and through long years to bring the enterprise to a successful conclusion. The commentators, casting and recasting the figures of the Wilson Committee Report, fail to appreciate this phase of the subject.
Another element enters into the contractors' profit, and that is the time consumed in doing the work. When the contract extends over a period of years, say four or five, the contractor must assume the risk of rising prices of labor and material. Such a rise may consume his entire profits or, in case of a decline in prices, may augment his profits. A proper contract would take account of such changes, since in the end the owner pays for them.
In the case of the building of the Union Pacific Railroad, the contracting company assumed a number of risks. It had to depend upon selling the securities of the railroad, which it took as payment for work done. The construction period extended over five years and almost anything could happen to the security market in that time. The value of the stock that it took in part payment, was dependent upon the future of the railroad and on the traffic that it would develop. It was quite possible that the stock of the railroad would be valueless. Many p226railroads, built into the fertile portions of the Mississippi Valley, had become insolvent and the stockholders had lost all of their money. Here was a railroad project into an uninhabited region, much of which was and remains complete desert. No one could forecast the possible business for such a road. Of the $23,000,000 estimated profits on the contract, as determined by the Wilson Committee, close to $9,000,000 was based upon a valuation of the stock at thirty cents on the dollar. That valuation may have been a reasonable estimate in 1873. In 1867, when Oakes Ames assumed the burden of his contract, the value of the stock was on the knees of the gods. In this case, as in others, it is easy to be wise and critical after the event. In the history of contracting, it is doubtful if a more venturesome contract was ever signed than that of Oakes Ames.
During the construction period and afterwards, the first government directors served with ability, although it does not appear that they were ever an important factor in the progress of the work or in solving the many problems that were presented.
The law also provided for three government commissioners whose duty it was to make periodical examinations of the road and to report on its decision. These men gave attention to their work, and the fact that one commissioner was an extortionist should not obscure the work of the other two men. This one commissioner refused to accept a section of the completed road until his demands for $25,000 had been complied with. There may have been other attempts at blackmail of this type, but if so they are not on record. In commenting on the work of the commissioners, mention should be made of the good work done by J. L. Williams, a civil engineer of Fort Wayne, Indiana, whose reports bear evidence of careful study by a man competent to understand and appreciate the work of the railroad builders. Mr. Williams also served as government director of the road.
p227 After the joining of the tracks at Promontory, a special five-man commission of Congress, appointed by resolution on April 10, 1869, reviewed the entire railroad and in its report, dated October 30, 1869, gave general approval of the work. It also brought in an itemized statement of work remaining to be done and estimated that the cost would be $1,586,100. The list of requirements dealt largely with temporary work on bridges and culverts, filling of trestles, and changes to reduce grades.
The government directors and commissioners, with varying personnel, continued to function in the years that followed the completion of the original line. Their reports are of interest as showing the work of extending the railroad system and the gradual improvement of the line, and as a discussion of the financial relations with the government. They are not properly a part of this history.
The first section of •forty miles was accepted January 24, 1866, and on the 27th, government bonds in the amount of $640,000 were issued to the company. In all, forty sections were approved from time to time, the last issue of bonds being dated July 4, 1870. A total of $27,236,512 face value government bonds were issued to the company.
An important item in the financing of the railroad was the land grant, upon which bonds were issued and sold by the railroad company. Up to May 26, 1886, the statistics of the land grant were as follows:
|State||Acres Granted||Acres Selected by Company|
p228 The selection of lands was a phrase used to designate lands for which sales had been made, such lands being patented only when sold. In this manner the company avoided taxation on the lands by the states, which point was made the subject of lawsuits that were carried to the Supreme Court of the United States, the Court deciding that unpatented lands were not subject to taxation, as they were legally still in the possession of the government.
The character of the lands varied widely. From the compilation, it may be seen that by far the largest acreage sold by the company was in Nebraska. In the report of the government directors for 1883 it was stated that 8,877,893 acres remained unsold:
These lands were classified as: , 1,000,000 acres; grazing, 7,477,893 acres; and coal, 400,000 acres. A different estimate made by the company listed:
|Agricultural||600,000||acres at $ 3 per acre||$1,800,000|
|Grazing||7,700,000||acres at $ 1 per acre||7,700,000|
|Coal||400,000||acres at $20 per acre||8,000,000|
The agricultural lands were in Nebraska. The arid plains of Utah and western Wyoming were covered with sagebrush or desert sand. The grazing lands were located in central and western Wyoming, northern Colorado, and western Nebraska. At the present time there remain unsold 905,250 acres of the original grant. A final determination of the land grant showed an area of 11,401,296 acres, of which 11,401,176 acres were patented, a difference of only 120 acres.
p229 The land grant was of value to the railroad company beyond the amounts obtained from direct sales. The lands were used as a basis of a bond issue during the construction of the railroad in order to obtain funds. In all, $10,400,000 worth of land grant bonds were sold at a large discount, the amount of money obtained from the sales being $6,063,992.04, or, roughly, sixty cents on the dollar. In his report to the stockholders for 1880, President Dillon stated that "there has been cancelled of these bonds $4,329,000. The land contracts, cash on hand, accrued and accruing interest, amount to a sufficient sum to retire all of the land grant bonds."
For a number of years the question of a bridge over the Missouri River between Omaha and Council Bluffs was in dispute. The Union Pacific Railroad Company did not want to build the bridge, as it would cost a considerable sum and would add little or no revenue from traffic. It was obvious that the railroads centering in Council Bluffs would not build the bridge for the same reasons. Finally, in 1871, the Union Pacific built the bridge but refused to run its main line trains across the structure. A shuttle train was operated across the bridge, with all passengers being forced to change trains at Omaha and again at Council Bluffs, where tolls were charged for the crossing.
The company claimed that the decision of President Lincoln fixing the initial point "on the western boundary of Iowa, east of and opposite to the east line of section 10, in township 15, of range 13, east of the principal meridian in the Territory of Nebraska," really meant on the western bank of the river. They claimed that the Iowa border was the western bank of the stream and the maps of that time show a point on the shore labeled "The Initial Point."
The subject eventually reached the courts, with the United States Supreme Court ruling that the Union Pacific should operate its trains across the bridge, evidently relying upon the well-p230established principle that the center of a stream is the boundary line between two jurisdictions. Undoubtedly General Dodge, when he advised President Lincoln to fix the initial point in Iowa, intended that the terminus of the road should be at his home, Council Bluffs. The river has shifted its course since those days of the builders, with the result that the initial point, as claimed by the railroad, is probably now out in the stream.
To finance the building of the bridge, bonds in the face amount of $2,500,000 were issued and sold at a discount, which provided about $1,750,000 in funds to meet the cost.
1 Henry Kirke White, History of the Union Pacific Railway. 1895.
2 J. B. Crawford, The Credit Mobilier, Its Origin and History. 1880.
3 Nelson Trottman, History of the Union Pacific. 1923.
4 John P. Davis, A.M., The Union Pacific Railway. 1894.
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