yrf TilE PACIFIC RAILROADS, THE RELATIONS F^XISTING BETWEEN THEM AND THE GOVERNMENT OF the UiNITED STATES. NEW YORK, 1879. fc . A THE PACIFIC RAILEOADS, AND THE RELATIONS EXISTING BETWEEN THEM AND THE GOYERNMENToF THE UNITED STATES. 1-UrNru Vm- i,iUr., ?rfr, > e-2 - 13^ NEW YORK, 1879. M 3 West 21st Street, New York, 27 Feb., 1879. Bjexry V. Poor, Esq. : Dear Sir : I understand that you have prepared a paper concerning the legal relations of the Union Pacific Railroad Compa- ny to the Government under the decisions of the Supreme Court of the United States. Not doubting from your connection with the enterprise in its incipient stages, and from the attention you have given to the subject to the present time, that your paper will be calculated to correct some prevailing misapprehensions, I trust it will find its way to the public. I have had no stock in the Company since my resignation as President ten years ago ; nor have I been concerned in any way with its transactions, or any outside movements relating to it. But I regard it as one of the great enterprises of the age, the rapid accomplishment of which caused more astonishment in other countries than anything we have achieved, and as a larger con- tributor to our growth and prosperity than any one other cause. I do not doubt that it will continue to be so, whatever combinations may be formed by speculators in Wall Street to enhance or depress the market value of its stock. I did not, as you know, approve or assent to the Credit Mobilier contracts, which were mac.^ while I was in Europe ; but this is a matter entirely apart from the legal relations of the Company to the Government. These should be understood by the whole Community not only for ihe purpose of removing mis- conception, by which the public mind is unjustly prejudiced, but to prevent legislative bodies, under the influence of the prevalent and not unr^^ural jealousy of large corporations, from being misled and hurried into ill-considered and unauthorized enactments. Yours truly, JOHN A. DIX. The Union Pacific and the Centeal Pacific Raiit EOADS and their EeLATIONS TO THE . / A* -> United States. >K.i ' 'I ' i.^- - ' ^ New York, 6 Marcli, 1879. Hon. John A. Dix, Dear Sir: Recent decisions of the Supreme Court of tlie United States, the Tribunal of final resort, have at last established and defined beyond controversy the respective rights of the two Pacific Eailroad Companies and those of the Government, growing out of the act for their incorporation j the acts additional thereto ', the issue of bonds by the Government in aid of, and the contracts for, the construction of the Eoads of the two Companies. Act incorporating the pacific companies, and the govern- ment SUBSIDY. TheActof Congress of July 1, 1862, incorporating the Union Pacific ri Company, tlie Central Pacific deriving its charter not from the Unit- '^ ed States, but from the State of California, provided for the issue of V. bonds by the Government in aid of the Roads, equaling $16,000, $32,- 4 3 ^ 000, and $48,000 per mile, according to the character of the country traversed, the intention being to apportion the bonds in ratio to cost. The bonds were simply obligations of the Government, to wliich the Railroad Companies were in no way parties. The bonds were six per cents, payable in thirty years ; the interest payable semi-annually. To secure the payment of both principal and interest, a first mort- gage was created, by statute, upon the respective Roads. For the payment of the principal and interest thus secured it was provid ed by the act of incorporation (sec. 6) that : '^ All compensation for services rendered for the Government shall ho applied to the payment of said bonds and interest until the whole amount is fully paid j * * * * and after said road is completed, until said bonds and interest are paid, at least five per centum of the net earnings of the said road shall also be annually applied to the payment thereof." The companies thus chartered were duly organized, but so hazard- ous was the enterprise regarded that no parties possessing adequate capital could be found to embark in it. The feeling in reference to it was well expressed by Hon. Justin S. Morrill, at that time one of the leading and best informed members of the House. In a speech in reference to the project, pending t!ie passage of the Bill, he said : "I am not to be deceived by any promises that this is to bo built and run by any other parties than the United States. Every dollar that it takes to construct the road is to be contributed by the United States. There is not a capitalist that will invest a dollar in it if he is to be responsible, for any considerable distance. * * If it could be constructed it could not be kept in operation except at the expense of the government. If this road were built to-day, therefore, and given to the United States, the United States are not in a condition to accept it, even as a gift, if compelled to run it; nor will they be till the population has so far increased as to give the road some freight and some local business. As a commercial and economical question such road is utterly defenseless." (See Con. Globe, 2d Session 37 Congress, Page 1,708.) Mr. Morrill, in his speech, only too faithfully represented the con- viction which prevailed among conservative minds, and capital is always conservative, in reference to the project. No sooner was it seen that the provision made was wholly inadequate than Congress, more than ever impressed with its necessity, passed, on the 2d of July, 1864, an act, in addition to that of 1862, providing that: ^ Only one-half of the compensation for services rendered the Government by the said companies shall be required and applied to the payment of the bonds issued by the Government in. aid of the construction of said roads. ' And further, section 10 of said act, '^that the section five (of the act of 1862) be co modified and amended that the Union Paciiic and Central Pacific Eailroad Companies * * * may issue their first mortgage bonds on their respective railroads and telegraph lines to an amount not exceeding tlie bonds cf the United States, and of even tenor, date, time of maturity, rate and character of interest, with the bonds authorized to be paid to said Eailroad Companies respectively. And the lien of the United States bonds shall be suborainate to that of tlie bonds of either of said companies hereby authorized to be issued on their respective roads, property, and equipment.'' The amended bill not only practically doubled the amount of the Government subsidy, but relieved the Companies of the burden of Government transportation by allowing them to be paid one-half the charges. This provision, it was assumed, would avoid all loss. With their means so increased they at once entered upon the work of construction, and opened the whole line within a period of seven years from the date of the act of incorporation, although they were allowed by it fifteen years therefor. The roads of the two Companies were no sooner opened than ques- tions naturally arose between them and the Government involving the obligation of the Companies to repay to the Government a Eum equal to the interest on its bonds as the same falls due ; and the right of the Government to withhold, on account of such inter- est, all payment for transportation services rendered it; the sum upon which the five per cent, of net earnings should be cast; and the right of the Government to inquire into the contracts and other matters growing out of the construction of the road of the Union Pacific Company. First ^ the obligation of the companies to pat the interest ACCRUING on the GOVERNMENT SUBSIDY, AND THE RIGHT OF THE GOVERNMENT TO WITHHOLD ALL TRANSPORTATION CHARGES ON ITS ACCOUNT. The first of these questions was settled, or was supposed to be set- tled, by an Act (Section 9) of Congress, of March 3d; 1871, which provided that : '* The Secretary of the Treasury is hereby directed to pay over, in money, to the Pacific R;dlroad Companies mentioned in said Act, and performing services for the United States, one-half of the compensa- tion, at the rate provided by law, for said services heretofore or hereafter rendered." Payment of one-lialf of the charges on account of Government transportation continued to be made under the provision of this Act, until January 1, 1873. On the 3d of March of that year, Congress passed an Act which, among other things, provided (Section 2) that: '' The Secretary of the Treasury is directed to withhold all pay- ments to any railroad company audits assigns on account of freights or transportation over their respective roads, of any kind, to the nmountof payments made by the United States for interest upon bonds of the United States issued to such company, and which shall not have been reimbursed, together with the five per cent, of net earnings due and unapplied, as provided by law ; and any such company may bring a suit in the Court of Claims to recover the price of such freight and transportation; and in such suit the right of such company to recover the same upon the law and the facts of the case shall be de- termined j and also the rights of the United States upon the merits of all the points presented by it in answer thereto by them ; and either party to such suit may appeal to the Supreme Court ; and both said courts shall give sach cause or causes i)recedence of all other business." Under the provision of this act, the Union Pacific Railroad Compa- ny brought an action in the Court of Claims to recover of Govern- ment one-half of the transportation charges on its account from Janu- ary 1, 1873, to March ], 1874. The defense was that as a very large sum had been paid by the Government, on- account of interest on its bonds issued to that road, it might properly offset such payments against the claim set up against it. The Court of Claims held such payments to be no defense, and gave judgment to the Company for the sum of $512,632.50, and dismissed the counter claim of the Government. An appeal was then taken by the Government to the Supreme Court of the United States, wi.ich sustained the decision of the court below. In its decision, made October term, 1875 (Justice Davis rendering the opinion), the Court said : '' The proposition for the Government to retain the amount due the Company for services rendered, and apply it toward tiie general indebtedness of the Company to the Government, cannot be con- strued into a requirement that the company khallpay the interest from time to time and the principal when due. It was in the discre- tion of Congress to make this requirement, and then, as collateral to it, provide a special fund or fun