Friday, March 05, 2010

CPRR & UPRR went broke and consumed millions of taxpayer dollars vs. debt repaid plus government windfall

Hillsdale College Professor Burt Folsom writes that " ... James J. Hill privately financed his Great Northern Railroad–the only transcontinental railroad never to go bankrupt. By contrast, the Union Pacific and Central Pacific Railroads–with massive federal aid–both went broke during the 1890s and both consumed millions of taxpayer dollars in financing."

FACT CHECK: As explained by Kyle Wyatt below, the Central Pacific Railroad never went into bankruptcy.


By contrast, our understanding is that the Central and Union Pacific Railroads did not receive government subsidies because the government railroad bonds had to be and were repaid in full with interest, that according to the U.S. Supreme Court the government and the railroads shared equally in the increased value of the land grants, and that the U.S. government got a billion dollar discount on mail and other transportation costs. So although the CPRR spoke of a "subsidy" in their bond prospectus, the net economic result was that the bonds were a repaid loan (not that the railroad wasn't accused of attempting – unsuccessfully – to avoid repaying), the worthless western lands to the extent they were made valuable by the completion of the railroad (much was so arid that it remained worthless), more of the value went to the government and eventual landowners than to the railroad, and the U.S. government received a financial windfall due to the prolonged subsidy that the railroads provided to the U.S. government for its transportation costs as part of the deal to fund the construction.
See,
No government subsides for CPRR or UPRR;
Role of government in railroad financing.

"Railroad Reorganization: Union Pacific." By Stuart Daggett, Ph.D., Harvard Economic Studies, 1908, states on page 256 that: " ... the government debt was paid off in cash ... both principal and interest were paid in full." Regarding the CPRR and Western Pacific RR, Tutorow, p. 1004 reports that final payment to the government was organized by a commission appointed by an 1898 act of congress, determined to be $58,812,715.48 on Feb. 1, 1899, and that the complex transaction was completed on February 1, 1909 when the last of the government debt was duly paid.
See,
Cost;
Dollars per mile of track;
Railroad Reorganization, 1908.

So which is correct? Did both the CPRR & UPRR go broke and consume millions of taxpayer dollars or was the debt repaid in full plus the U.S. government received a financial windfall due to the prolonged subsidy that the railroads provided to the government for its transportation costs through the mid 20th century?

36 Comments:

Anonymous Anonymous said...

Also, "both went broke during the 1890s and both consumed millions of taxpayer dollars in financing" fails to take into account that (however self serving) both railroads in effect hired themselves to do the construction, via Crocker's company, the Contract and Finance Company, and the Credit Mobilier. So, bankruptcy of the railroad operating companies after much of the money was moved to their construction companies does not mean that the entire enterprise was unprofitable. So if the entrepreneurs got rich and the government got repaid in full it would be incorrect to conclude that bankruptcies imply that the first transcontinental railroad construction projects were ill conceived and unjustified. (It's hard to be sure of the details since legally those construction company records were private and the U.S. government was ultimately unsuccessful in getting full disclosure of the railroad finances especially after the company books disappeared.)

3/07/2010 4:48 AM  
Blogger CPRR Discussion Group said...

From: "Don Snoddy" ddsnoddy@gmail.com

If you look at the UP reorganization files, it is clear that in addition to buying the right of way from Omaha to Ogden, for $55 million, the government bonds were also paid to the sum of $50 million. See attached for an accurate breakdown prepared by the UP Law Dept in 1902:
Cost of Railroads purchased by Union Pacific, 1902.

—Don Snoddy

3/07/2010 10:33 AM  
Blogger CPRR Discussion Group said...

From: "Wendell Huffman" wendellhuffman@hotmail.com

Professor Folsom is raking muck.

By the time the railroad was completed in 1869, the Central Pacific had received federal bonds with a face value of $25,885,120. To be useful as anything other than co-lateral, the bonds to be sold to investors for cash. It is possible that some were traded to venders for locomotives or cars. The cash value of the bonds varied with the prospects of the railroad, and in the early days, during the Civil War, with the prospects of the country. Thus, the bonds rarely sold at par, and the company actually received only $18,765,047 in usable cash from their sale.

The bonds were indeed a loan from the government, not a donation. The company was obligated to repay the entire $25.9 million, plus interest, 30 years after issue. The matter of the redemption of the United States bonds was at the heart of the United States Pacific Railway Commission hearing in 1887, and the railroad’s position is outlined in Roscoe Conkling’s summary of that testimony in The Central Pacific Railroad Company in Equitable Account with the United States (New York, 1887). I'm not sure the railroad ever tried to get out of repaying the bonds. The issue of contention was the sinking fund which was set aside for the repayment.

In fact, the Central Pacific was unable to repay the bonds when due. I presume the government had to step up and redeem the bonds, but I do not know what actually happened at that point. In the end, the Southern Pacific (rather than the Central Pacific) repaid the government. As part of this arrangement, the SP traded SP stock for CP stock, which is ultimately how the CP became a SP property. The final settlement was reported in the Annual Report of the Commissioner of Railroads to the Secretary of the Interior for the year ending June 30, 1899. The SP eventually paid to the government $58,812,715 in several installments. The final payment was made in 1909. David Myrick recounts this on page 29 of Railroads of Nevada (Berkeley: Howell-North, 1962).

While the government loaned the Central Pacific bonds, it gave the company every other section of land for 20 miles on both sides of its right-of-way. This amounted to nearly eight million acres. However, little of the Central Pacific’s land grant was attractive to settlers, and by 1880 only 295,886 acres had been sold. At an average price of $3.77 per acre, this yielded barely enough to pay for 18 miles of railroad, at the average cost of $64,000 per mile. In the long run the land grant was more valuable, being leased for mineral rights and grazing. Still, the land was no more valuable to the railroad than the adjacent land was to the govenment, and it was the railroad that gave that land its value (by providing transportation access) and paid the cost of surveying.

I have no idea how the Union Pacific fared in the matter of the bonds and land. They certainly did better in the sale of land as their land was more productive. There were a number of railroads other than the CP and UP which received bonds and land under the various Pacific Railroad Acts. It would be interesting to see how they each resolved their debt. However, the federal government came out pretty good on the CP, making $58 million dollars for essentially doing nothing but print the bonds.

—Wendell

3/07/2010 8:00 PM  
Blogger CPRR Discussion Group said...

See writings about Central Pacific Railroad debt.

3/07/2010 8:17 PM  
Blogger CPRR Discussion Group said...

From: kylewyatt@aol.com

The Union Pacific did indeed go bankrupt in the 1890s and was sold in foreclosure and reorganized under bankruptcy laws - even broken up, with most but not quite all parts reacquired and reassembled by EH Harriman. Per Daggett, Railroad Reorganization. pp 256-57, the sale and reorganization of the Union Pacific out of bankruptcy in 1897 included paying the Government bonds, principle and interest, in full and in cash.

On the other hand, the Central Pacific (and related Southern Pacific) never did go into bankruptcy - not in the 1890s and not even in the 1930s. The Central Pacific Railroad WAS reorganized in 1899, becoming the Central Pacific Railway. This reorganization was in part to finance the full payment of its share of the government bonds, principle and interest, but was in the nature of reorganizations that many companies commonly do to further their business goals, and was NOT under bankruptcy laws. Stock and bond holders of the Central Pacific Railroad did not lose their investments under this reorganization, but had their investments converted into securities of the new Central Pacific Railway.

Turning to the Great Northern, it appears to be true that from its organization in 1889 until its merger into the Burlington Northern in 1970, the Great Northern Railway was never reorganized. However, the 1889 formation of the Great Northern was itself a reorganization of several earlier Hill lines to further its expansion. In a similar light, the Southern Pacific Company was organized in 1884 as a holding and controlling entity. Both the Central Pacific Railroad AND the Southern Pacific Railroad were leased to the Southern Pacific Company in 1885. The Southern Pacific Railroad was finally merged into this self-same Southern Pacific Company in 1955, and the Central Pacific Railway (reorganized form the Central Pacific railroad in 1899) was finally merged into the Southern Pacific company in 1959.

I suppose the semantics and economics of "Government subsidies" could be debated – both the government bonds and the land grants - but in the common usage of the time (throughout the latter 19th century) the government generally was considered to have given the railroads subsidies - the eventual repayment of the bonds, the discounts on Government shipments, and the increase in value of adjacent Government lands not withstanding. If nothing else, consider the access to financing that the Government provided, that was not otherwise available at the time, as a subsidy. The Central and Union Pacific railroads, and the other transcontinental land grant railroads could not have been built when they were without that Government support.

[continued below]

3/08/2010 6:28 AM  
Blogger CPRR Discussion Group said...

Also consider that only two privately financed transcontinental rail lines – in the US AND Canada – did NOT go bankrupt at one time or another (and largely because of said transcontinental construction) – the Great Northern and the San Pedro, Los Angeles & Salt Lake (a subsidiary of the reorganized Union Pacific under Harriman). The Western Pacific (and the Denver & Rio Grande), the Milwaukee Road (referred to as the St Paul Road at the time), the Grand Trunk Pacific, and the Canadian Northern ALL went bankrupt directly because of transcontinental construction (so much for Folsom's seeming argument that somehow private railroad construction avoids bankruptcy). In fact Grand Trunk Pacific (and affiliated Grand Trunk) and the Canadian Northern were such a financial mess that the Canadian Government ended up forming the Government-owned Canadian National to straighten it all out (think Conrail for a somewhat similar US parallel). For that matter, among land grant transcontinental railroads, only the Central Pacific/Southern Pacific (and I think the Canadian Pacific) did NOT go bankrupt at some point or other. In addition to the Union Pacific/Oregon Short Line and the Oregon Railway & Navigation, the Northern Pacific and the Santa Fe/Atlantic & Pacific all went into bankruptcy. Let's face it – large scale railroad construction was risky business, regardless of how it was financed.

So let's revisit Folsom's contention for lines that cross the Rockies (or the extensions of that range). The never-bankrupt Transcontinental railroads include Great Northern, San Pedro Los Angeles & Salt Lake (the Harriman revitalized Union Pacific's subsidiary), Southern Pacific Company (encompassing both Central Pacific and Southern Pacific Railroads) and Canadian Pacific – that's three Government aided lines to two private lines. On the gone bankrupt side we have Union Pacific (encompassing also Oregon Short Line), Northern Pacific, Santa Fe/Atlantic & Pacific, Western Pacific, Milwaukee Road, Denver & Rio Grande (at least one bankruptcy before its role in the Western Pacific), Grand Trunk Pacific, and Canadian Northern - that's four government aided lines to five private lines. Hmm, looks like the odds are poorer for the private roads.

—Kyle

3/08/2010 6:29 AM  
Blogger CPRR Discussion Group said...

Also see Professor Burton W. Folsom's book The Myth of the Robber Barons: A New Look at the Rise of Big Business in America.

4/07/2010 12:17 PM  
Blogger CPRR Discussion Group said...

We have long admired the Hillsdale College free market oriented viewpoint and hope to see more discussion of the issue of how to best achieve private funding of great projects with high risk and only long term or diffused profitability that seem a mismatch with the needs of private investors so that the argument will not be ceded to the statists.

4/07/2010 12:22 PM  
Anonymous Anonymous said...

In Railroads, Robber Barons, and Unbridled Capitalism BOB ADELMANN writes,

"Remember that political entrepreneurs become wealthy at the taxpayers’ expense and use the power of government to protect that wealth, while free-market entrepreneurs become wealthy only when they successfully meet their customers’ demands."

[Courtesy Google Alerts.]

7/16/2010 9:47 AM  
Blogger CPRR Discussion Group said...

The same comment regarding the Central Pacific Railroad not ever going bankrupt also applies to the article, Silicon Valley, beware of feds bearing R&D gifts by William F. Shughart II, Special to the Mercury News, 03/16/2011.

3/17/2011 3:28 AM  
Blogger CPRR Discussion Group said...

The same comment regarding the Central Pacific Railroad not ever going bankrupt also applies to Lincoln Catches up with the War by Steven Bernstein.

3/21/2011 4:42 AM  
Anonymous Anonymous said...

In the Pacific Railroad Act of 1862, the Union Pacific received financing from the government in the form of bonds. So in this sense it is true that the government did not subsidize the construction of the railroad via cash subsidies

BUT the UP did receive land grants on a per milage basis. These parcels of land were sold off, where possible, to help finance construction costs.

Credit Mobilier was a device from which shareholders of both UP and CM were able to generate profits at the expense of the UP.

3/29/2011 9:42 PM  
Anonymous Anonymous said...

However, large portions of the land grants for the CPRR were arid land not suitable for farming that proved to be worthless.

Also, the government kept half of the land, so that any increased value of the land as a result of completing the railroad went half to the government. If you give away half of something to make the half that you keep much more valuable than the original whole, is the half given away really a subsidy?

3/30/2011 12:28 AM  
Anonymous Anonymous said...

Unlike the condition of the UPRR, the CPRR did not "slap together tracks in amazingly shoddy and illogical logistical fashion". To the contrary, inspection at the completion of the road showed that the CPRR was "well and substantially built ... " and was "a first-class railroad and is constructed of the best materials and in a most durable and permanent manner".

12/17/2011 10:05 AM  
Anonymous Anonymous said...

Same mistakes yet again in the American Spectator in a commentary by Hillsdale College Professors Burton Folsom, Jr. and Anita Folsom: "the Union Pacific and Central Pacific Railroads went from Omaha to Sacramento, and were heavily subsidized by Washington. Both went bankrupt (the Union Pacific several times)."

Once again, the CPRR was well built with first class construction, was financed without subsidy (just like a home mortgage that must be and was repaid in full with interest is not a bank subsidy for the home buyer; the western land grants were mostly of worthless arid land, and any increase in value was shared 50% with the federal government, which also just the opposite made a billion dollars windfall on the deal in railroad subsidies for the federal government's transportation costs), and the CPRR did not ever go bankrupt.

1/09/2012 9:15 AM  
Blogger CPRR Discussion Group said...

See related discussion about a new book: Railroaded: The Transcontinentals and the Making of Modern America by Stanford University Professor Richard White.

1/09/2012 4:01 PM  
Blogger CPRR Discussion Group said...

To: Burt Folsom
Subject: CPRR did not go bankrupt, was not subsidized, and was not of shoddy construction

Dear Professor Folsom,

We are concerned because what is written on our CPRR.org website and our discussion.cprr.net blog and your writings about the first transcontinental railroad disagree and cannot both be correct. We would appreciate your assistance, as the case for freedom is not helped by getting the history wrong.

Our understanding is that the Central Pacific Railroad never went bankrupt, was not subsidized by the federal government, and was not of shoddy construction, for the reasons set forth at,

1) CPRR/UPRR went broke

2) No government subsides

3) Robber barons

4) Role of government.

Your comments or corrections would be greatly appreciated.

1/16/2012 12:32 AM  
Blogger CPRR Discussion Group said...

From: "Burt Folsom" bfolsom@hillsdale.edu

I will be glad to read this because I want to get the story right. The UP, of course, had several bankruptcies. The CP was different I agree, but I thought the CP went bust in the Panic of 1893. If that information is incorrect, I will be glad to change my argument.

—Burt Folsom

1/16/2012 12:34 AM  
Blogger CPRR Discussion Group said...

To: "Burt Folsom" bfolsom@hillsdale.edu

Thanks. Will look forward to your comments.

Regarding the Union Pacific, the essence of the Crédit Mobilier scandal was that the UPRR hired its insiders to do the railroad construction (while bribing members of Congress with insider stock), thus siphoning UPRR capital out of the railroad company and into the construction company to be paid out as "profits" to the insiders. With this type of fraud, and with the bonds having been paid in full, how is it possible to infer from a bankruptcy much of anything about the profitability, wisdom, prematurity, etc., of that railroad when bankruptcy could merely be due to the money missing from the railroad that it had indirectly paid to insiders?

Was surprised to see the CBS 60 minutes expose recently that insider securities trading is still legal for members of Congress – guess that nothing much has changed in 150 years.

1/16/2012 12:39 AM  
Blogger CPRR Discussion Group said...

From: "Burt Folsom" bfolsom@hillsdale.edu

I have written an essay on James J. Hill and the Great Northern. For that essay, I did some work on the Central Pacific. I would be glad to send you that essay (in a book entitled THE MYTH OF THE ROBBER BARONS) and get your critique for my next edition. You could give me your take on the CPRR, and I would be interested in what you have to say.

—Burt

1/16/2012 12:42 AM  
Blogger CPRR Discussion Group said...

Also see, The Great American Railroad War: How Ambrose Bierce and Frank Norris Took On the Central Pacific Railroad by Dennis Drabelle, St. Martin’s ... "telling of the Central Pacific’s attempts to avoid repaying U.S. government bonds."

[Courtesy Google Alerts.]

4/17/2012 7:21 AM  
Anonymous Anonymous said...

Is there any truth to the claim by Ben Adler (blog at The Nation) that " ... Stanford ... purchased his Senate seat in order to get the federal government to forgive a loan that was coming due for the Central Pacific railroad company. He failed to do so."

[Courtesy of Google Alerts.]

6/22/2012 5:56 AM  
Blogger CPRR Discussion Group said...

From: "Kyle K. Wyatt" kylekwyatt@gmail.com
Subject: Forgive CPRR loan

Stanford sought and won a California seat in the US Senate in 1885 over the opposition of his associates – most notably CP Huntington. In my view, Stanford was always enough of a political animal that his decision to run for the Senate seat is not really all that surprising. And clearly he had the political horsepower to get elected – twice – over the opposition of others generally considered to be politically powerful in California politics. Given his overall history, it scarcely seems likely that his primary purpose in seeking election was simply to get the Central Pacific debt forgiven, although he no doubt had some vested self-interest in that. In any event, he does not appear to have even served on the relevant Senate committees for the railroad debt issue.

That said, once elected he was not particularly powerful or influential in the Senate – nor did he participate much more than he had to, being often absent. As to his political views, he was known to have written several bills to foster worker-owned cooperatives, and to allow issuance of currency backed by land value instead of only gold – both positions advocated by the Populists (both bills never made it out of committee). He also held other views at times in conflict with the "typical" rich peoples view as often portrayed in books and other media, and spoke publicly advocating these ideas.

He also appears to have been one of the major influences within the Central Pacific/Southern Pacific who helped head off major strikes on the CP and SP Railroads when national labor unrest and strikes were heading across the country in the 1870's and 1880's. This was accomplished by railroad management meeting with and negotiating honestly with the railroad workers on issues – before they became a major strike issues. It is quite possible that his death in 1893 set the stage for the combative results of the Pullman Strike in California, when railroad management (under CP Huntington – in New York – and his nephew Henry Huntington – on the scene in San Francisco) used ultimatum instead of negotiation – over-ruling others in management who would have chosen a different path. The striking workers honored their past relationship with Stanford when they gave Jane Stanford a pass allowing her private car to travel home over the struck railroad (although to be sure they saw political advantage in doing so as well).

Stanford could be (and was) many contradictory things all at once. His motives for running for the Senate seat were no doubt complex, and likely even contradictory. It seems unlikely that they could simply be characterized as relating just to the railroad debt.

—Kyle

6/25/2012 7:46 AM  
Anonymous Anonymous said...

The explanation of Stanford's views provides context for understanding why reminiscing years later, CPRR telegraph operator T. R. Jones would write of Governor Stanford that "we employees all loved him."

6/25/2012 7:56 AM  
Anonymous Anonymous said...

"The early years were not easy for UP, as the company became entangled in the Credit Mobilier scandal, exposed in 1872, that involved bribing congressmen and stock speculations.
That trouble led to bankruptcy during the 1870s, the result of which was reorganization of the Union Pacific Railroad as Union Pacific Railway on Jan. 24, 1880. The new company also declared bankruptcy in 1893, but emerged on July 1, 1897, reverting to the original name, Union Pacific Railroad.
"

7/14/2012 6:37 PM  
Anonymous Anonymous said...

Although the debt was repaid in full with interest, is the following statement true? :

"Though the Central Pacific had accepted government loans to cover construction costs, its executives had persuaded and in some cases bribed members of Congress to consider a bill excusing the debt, which amounted to many millions."

8/23/2012 2:02 PM  
Blogger CPRR Discussion Group said...

From: "Wendell Huffman" wendellhuffman@hotmail.com

Bill Marx's review of Dennis Drabelle's The Great American Railroad War states that CP "executives . . . persuaded and in some cases bribed members of Congress to consider a bill excusing the debt" and suggests that Drabelle's book establishes that Ambrose Bierce's writing forced Congress not to pass the bill, leaving the CP responsible for the debt. If this really is Drabelle's thesis, the evidence had better be in his footnotes. If should be simple enough to establish that there really was a bill to excuse the debt. Bills are published. And it may not be all that hard to establish that the CP supported such a bill. (Who can blame it? Though it may be harder to establish that the CP was responsible for the bill.) On the other hand, it may be more difficult to assign responsibility for the defeat of the bill to Bierce. Figuring out why anyone does any particular thing is difficult enough. Figuring out why a congressman did something may be well nigh impossible.

—Wendell

8/23/2012 4:38 PM  
Blogger CPRR Discussion Group said...

From: Bob_Spude@nps.gov

A good discussion is in a study by David Myrick, now on-line.

—Robert L. Spude, Ph D – Regional Historian – Cultural Resources Management – National Park Service – Intermountain Region – 505.988.6770 Voice – 505.988.6876 Fax

The National Park Service cares for special places saved by the American people so that all may experience our heritage.

8/23/2012 4:45 PM  
Blogger CPRR Discussion Group said...

Refinancing and rebuilding the Central Pacific: 1899-1910 by David F. Myrick.

8/23/2012 4:57 PM  
Anonymous Anonymous said...

Excerpt of The Great American Railroad War.

Courtesy of Google Alerts.

8/24/2012 10:16 AM  
Anonymous Anonymous said...

"Thirty years after the completion, the last survivor of the Central Pacific’s unsavory founding quartet, Collis Huntington, tried to sneak a bill through Congress to forgive the government loans that paid for the construction. William Randolph Hearst, yellow journalist nonpareil, got scent of it and dispatched his ace of the poison pen, Ambrose Bierce, to the East to employ his sourest invective to defeat the scheme."

Unless you have a time machine, isn't there a bit of a logical problem with attempting a linkage of the above to impugn the men who built the Central Pacific Railroad, as all but one of them was already dead in the past, and with Frank Norris' future book The Octopus which had not yet been written?

8/24/2012 7:39 PM  
Blogger CPRR Discussion Group said...

From: "Kyle K. Wyatt" kylekwyatt@gmail.com
RE: Excusing the CPRR debt

Certainly there were proposals considered by Congress that involved forgiving the interest on the debt, and even the principal of the debt. In a quick scan of some California newspapers in the 1890's I came across references to such things, but it was unclear how far such proposals actually got in Congress. There was fierce opposition – quite independent of Bierce and Norris. Keep in mind that more railroads than just the Central Pacific were involved – there were several on the eastern end. And of course by the early 1890's the Union Pacific was itself in bankruptcy and operating under a receiver.

—Kyle

8/25/2012 10:09 AM  
Anonymous Anonymous said...

"Vituperative journalism" is no substitute for our system of justice.

Innocent until proven guilty is the American way, and we are specifically permitted by our Constitution to petition government.

So, Bill Marx offends a sense of fairness when he writes about "a newspaper’s investigative expose of the crimes of a big business giant" ... "an inspired journalistic reaction to the crimes of an earlier age of robber barons" because success is not a crime (notwithstanding his namesake's view of history), and there was never any criminal charge against the Central Pacific Railroad or its founders, much less a trial or conviction.

9/07/2012 9:58 AM  
Anonymous Anonymous said...

This book review in the Washington Times says that rather than trying to get Congress to excuse the CPRR debt:

"The U.S. Pacific Railway Commission debated Central Pacific’s future, with some commissioners recommending debt foreclosure. The majority came up with a 'gentler solution' called the Reilly Bill: The debt would be converted into 50-year government-held bonds at 3 percent interest. (Huntington, the last surviving member of the Big Four, had the audacity to make a counterproposal of 85-year bonds at 2 percent interest.)"

This hardly seems even noteworthy that a debtor would negotiate for the best terms. Eighty-five years wasn't even unusual: The Atcheson Topeka and Santa Fe Railroad, for example, had issued 100 year bonds. Other railroads to issue 100 year bonds include the New York Central in 1897, and Norfolk Southern just raised $250 million, in August, 2010, when it sold bonds to investors due in 2110.

9/21/2012 8:57 AM  
Anonymous Anonymous said...

"The Octopus ... damaged the railroad’s reputation by dramatizing several events in which the railroad had imposed its will on California’s government, businesses, and communities. Unfortunately, some of the events Norris used were based more on legend than fact ... "

10/05/2012 8:33 AM  
Anonymous Anonymous said...

"Hearst and Bierce's casus belli was the repayment of $75 million in 30-year government bonds that had financed the original transcontinental railroad. For decades, while paying handsome dividends to stockholders, the Southern Pacific (which had merged with the Central Pacific) had failed to set aside any money to cover the debt, most of which would come due in 1896. In 1878, a nervous Congress had ordered the railroad to deposit a percentage of its annual earnings in a sinking fund. But the Southern Pacific simply diverted its income into subsidiaries, diluting its profits and reducing the amount it had to contribute. Then, acting through its congressional surrogates, the railroad promoted legislation that would lower its interest rate and give it an additional 35 years to repay interest and principal. It was this extension that Hearst and Bierce set out to thwart. Eventually the legislation was defeated as outrage at the Southern Pacific's practices spread beyond the Examiner's muckraking pages."

10/05/2012 11:09 PM  

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