Enter the Transcontinental Railroads

On April 4, 1876, the board of directors of the Panama Railroad, with Trenor W. Park as president, met in New York to determine vital matters of policy. The material condition of the company was the worst since the railroad had been completed. The well-kept wharves left by the old management had been suffered to fall into decay. The seasoned superintendents had given place to raw and cheap men, who were not equal to the exacting duties. For a perilously long time no new rails had been laid, no bridges repaired; again and again freight rates on local traffic had been advanced in direct violation of the fundamental concession from New Granada. The chaotic relations with the Pacific Mail left by the fall of Stockwell had become still farther involved by the fact that a small organization, the Panama Transit Company, fishing in these troubled waters, had secured an exclusive through traffic arrangement for a year, shutting out all other lines from profitable Panama trade.

The outcome of the meeting was a formal offer made by the railroad to the Pacific Mail, of a joint rate, if it would elect a governing board not interested in the transcontinental railways. From the critical directors' meeting called to con

sider this offer, Jay Gould and Sydney Dillon, still minority holders, absented themselves. The others, seeing the company threatened at either terminal, wavered for a while and finally voted to cast their lot with the Panama.

Remorselessly then the overland interests pursued their ends until in July, 1876, they had arranged a modus vivendi between their own transcontinental lines and the steamship company. By this first agreement, space on each of the Pacific Mail vessels was leased jointly by the Union and Central Pacific Railroads and $5 was paid for every overland passenger. The condition attached was that the steamer line should make such prices on freights that high-class trade would be thrown to the railroads, that they should not fill to full capacity, and should run but a limited number of ships. sured revenue of $90,000 per month was the bait and one year only the duration of the agreement. So the first of the Pacific Mail compacts in restraint of trade was begun. Next year the subsidy was raised to $100,000 per month and the transcontinental interests were firmly in the saddle.

An as

In 1878, wittingly or unwittingly, the Panama Railroad was betrayed to them. In a fifteen-year-contract with the Pacific Mail Steamship Company and the

Panama Railroad, the latter surrendered the exclusive right to issue through bills of lading across the Isthmus. Thus at length the circle toward which the overland railroads had been working was completed. They dominated the Pacific Mail, fixing its rates and regulating the carriage of freight and passengers; the Pacific Mail, in its turn, held the Panama Railroad in the grip of an exclusive contract. So with the only competitor safely tied up for fifteen years, Jay Gould and Collis P. Huntington rested upon their labors in the year 1878 in the consciousness that theirs was the transportation business of the West, safe from all assaults.

With the completion of the Central and Southern Pacific Railroads by private and commendable enterprise spending lavishly the proceeds of government guaranteed or subsidized securities, there had come a most crucial situation. The Panama route in its fullest bloom of prosperity was on one side, on the other side was a highly capitalized, hastily built, overland-railway, running across a sparsely settled continent, where the real support of local business had to await a generation of immigration. The overland railway had to depend for earnings on west-bound through business. The east-bound earnings came in a higher proportion from passengers. To pay the expenses of operation, maintenance and interest on bonds, to create the credit needed for branches and extensions fully to occupy their territory, the transcontinental railways had to have and hold a remunerative business. Compagnie Universelle du Canal Interoceanique

In 1879 the "International Congress for Surveys for an Interoceanic Canal" met at Paris under the presidency of Ferdinand de Lesseps, hero of the Suez and foremost of the world's engineers. The commission vote of seventy-eight to eight recommended a sea level canal at Panama.

Then commenced the colossal tragedy of the French. It opened in the masked hostility of America, the abortive attempts in France to form a company, the volte face of the press and the financiers who had been opposing it, and advanced with pomp and pageantry to the inauguration of work in 1881.

The railway company, whose line paralleled for nearly the whole distance the

proposed channel, and whose consent by the terms of the original concession from New Granada had to be secured before the canal could be built, was in an extraordinary position of vantage. Here opened a providential opportunity to secure immediate and bounteous cash. For the latter months of 1880 the French were obliged to transport their supplies at regular local railroad rates. This proved so ruinous that they determined to buy the railroad at any cost. The price was ruthlessly adjusted to their necessity. For 68,534 out of 70,000 shares the French company agreed to pay $18,094,000 in yearly installments with six per cent interest. This represented $250 a share, far above normal value. The old directors were to control the road until the whole sum was paid. In addition cash assets were retained by the former owners, amounting to about $1,700,000, much of which had come from the French in the previous year. All told, therefore, the vendors realized $20,000,000 or $282 on each share. A dividend of 5214 per cent is shown by the records to have been declared in 1881.

The French company was obliged to have American directors and to conduct the railroad as a business investment for the benefit of the minority stockholders. It must placate the jealous patriotism of the United States by keeping an American face, and thus the road was run until 1885. Then began the pinch. That stream of fairy gold poured into the coffers of the canal company, inexhaustible as it had seemed, was shrinking alarmingly. officers, though glowing accounts continued to be published daily in the company's bulletin, saw the approaching débâcle. Their efforts were paralyzed by the deluge which they knew was coming. So the line began to fall upon evil days, and its rolling stock and roadbed were once again allowed to deteriorate. earning power declined; there was no surplus for dividends; everything was slipping. In 1887 the first melancholy crisis came.

Its

A reorganization followed, in the canal company and the railroad. Among other dispositions, the latter system was changed and members representing the canal company were included in its directory. The outgoing American board voted a twentythree per cent dividend in farewell. New

capital was secured and the last effort of the great unfortunate Frenchman to give to the world his second oceanic waterway was inaugurated. This time the design was for a multi-locked high-level canal. In 1889 came the final collapse. Work Work had been begun on a canal to be completed in eight years at a cost of $127,600,000. When the receiver assumed the wreck of the bankrupt company, two-fifths of the work had been done, ten years had elapsed and $253,000,000 had been spent. De Lesseps retired a broken man. Investigations tarnished the noblest names in France. Thousands of people were ruined. The crash was the most complete and the most shameful of modern times.

The Railroad After the Debacle

The ordeal through which the railroad had come crippled it beyond repair for some time to come. It was in disorganization and decay. The single track line, forty-eight miles long, had fallen to the last stages of dilapidation, twenty-four road engines, all obsolete, less than half in good repair; nineteen passenger cars; a miscellany of freight cars and switch engines; various wooden buildings, from which a precarious revenue was raised, much jungle real estate and some wooden wharves at Colon completed the assets. To this railroad was joined by a lefthanded marriage the steamer line of three antiquated vessels owned and three others chartered. Weighing down upon these resources was the $200,000 salary and agency list, the $250,000 subsidy, the bond interest upon inflated capital and a nest of abuses in local management.

In 1903, for instance, with only 4,633 first-class paying passengers, there were transported 11,098 civilians and 6,601 troops who rode free. Bonds had been Bonds had been issued to the value of $1,087,000 on account of the La Boca terminal and its total cost set down at $2,148,303.69. The pier, which, with some dredging, made up this item, had been contracted for at $600,000.

It is small wonder that carrying such Sisyphus loads the company was obliged to wring from the commerce vouchsafed it the uttermost farthing. The grip of the transcontinental roads was always relentlessly there, exercised through the main feeder, the Pacific Mail, whose sub

sidy from the overland roads had amounted, in 1894, to over $18,000,000. The sum paid by the steamship company to the Panama Railroad was roughly $12,000,000, from 1887 to 1893. From all the coast north of Panama, the Pacific Mail and the overland railroads adjusted the amount of traffic to be allowed. They arranged the Central American tariffs so that it was as cheap to carry coffee around through the Straits of Magellan. They fixed American rates so that the transcontinental lines favored already in the elements of time and insurance could secure practically all the freight.

Such details as the $12-a-ton rate to Yokohama, 4,900 miles, and $18 to Panama, 3,260 miles, speak more plainly than any comment. From San Francisco to New York the fare was $90. From San Francisco to Panama, half way, the fare was $100. In order to prevent economically-minded persons from buying a ticket to New York and saving ten per cent on their jaunt to Panama, the company checked all baggage through to New York and would not give it up at any point between. Often vessels made their trips with unfilled holds at a time when the freight traffic overland was at its highest. Ship after ship passed the port of San Diego. Not one would stop to take a pound of freight, all must go to the railroad terminus.

The Pacific Mail brought to the Isthmian Railroad no more in some years than thirteen thousand tons of San Francisco freight. Coffee was shipped to New York via San Francisco, New Orleans and the Morgan line, going several thousand miles out of the direct route in order to divert freight to the Southern Pacific.

The Panama Railroad stockholders could not but realize the value of the birthright they had sold in their time of need in 1893. On the expiration of the fifteen-year contract they attempted to break away from the restricting alliance by announcing themselves ready to make arrangements with any responsible steamer lines. But the forces opposed were of the strongest and no scruple stood in their way. Application was made to the Attorney-General in New York State by the transcontinental interests to force a receivership and disfranchise the stock on the ground that French control was

contrary to the charter. An attempt to arrange a contract with the Chilian Steamship Line for the carriage of South American freight was held up by an injunction for three years on the basis of the old agreement of the railway not to interest itself in Pacific business. The attempt to free the trade of the North Pacific was fought with all the power of a monopoly intrenched in vested trade interests and the possession of docks and terminal rights in every port along the coast. Their one fight for freedom was lost.

The officers of the railroad in 1895 signed another exclusive pooling contract with the Pacific Mail and handed the line back into bondage. The situation was cemented in the exclusive pooling contract deeding to the Pacific Mail the whole North Pacific. The freedom of the south seas was also bartered, and two foreign companies were given the right to fix initial rates here. In 1900 a half-hearted attempt was made to break loose and adopt an open-door policy. But again other interests were too strong. In 1902, with an exclusive Pacific Mail contract, the latest pool was entered into. was the railroad situation when the sentiment in the United States, in favor of a Nicaragua Canal, began to be swung toward Panama.

This

In January, 1902, the officers of the New Panama Canal Company offered to sell all their property and rights to the United States government. In June the President was empowered by the Spooner Act to enter into treaty with Colombia for the right to construct the Panama Canal. The treaty negotiated under this act was ratified by the United States Senate, sent to Bogota and rejected in August. On November 3, a revolution, fomented by persons interested in the New Panama Canal Company in New York and Paris, broke out. Things now began to move.

On November 6 the United States recognized the independence of the Panama Republic and forbade Colombia war vessels to approach within fifty miles of Colon or Panama. November 13 a French gentleman, whose reputation had suffered somewhat in the Panama affairs of an earlier epoch, was empowered by the mushroom republic to negotiate its treaty of sale to the United States. In February our Senate ratified this treaty and on

May 4, 1904, the possessions of the New Panama Canal Company were formally transferred to the United States. price was $40,000,000 to the French company (of which $6,800,000 was allotted as the pro rata value of the railroad) and $10,000,000 to the Republic of Panama. The dominant member of the old Panama Railroad group, who had helped for some years to give an American face to the French management, held the bag. The money was paid. At last the power had come into the hands of the representatives of the American people to lift the incubus of the Isthmus. The dry rot of thirty years, the abuses of the old ownership, the coercions and discriminations were to be all swept aside under the rule of the United States. Trained railway men were sent down under injunctions to make the dirt fly in the canal. A new era was to open with America clearing the way to the glorious freedom of commerce.

Governmental High Finance

It may seem ungenerous at this time to count the cost, but it is nevertheless interesting to figure the capital represented by the government investment and assumed obligations. First, there is the original price of the property; $6,800,000 was the portion of the sum paid the French which was assigned to the railroad stock, or deducting the value of the steamers, $6,532,581; $84,300 was paid for the purchase at par of other shares, and for the final 270 shares $72,120 was paid to one of the old railway group. So much for the direct primary expenditure. But there were outstanding four and one-half per cent bonds to the value of $2,372,000. On all other moneys which the government borrows the usual interest is two per cent, so these bonds actually represent for it an investment to the amount of $5,337,000. Furthermore, there must be returned yearly, $225,000 to amortize and pay interest on subsidy bonds, the aftermath of an advance to an embarrassed Colombian dictator. This represents the interest on $11,250,000 at government rates. Nine years from the treaty date this subsidy annuity originating with the railway concession. becomes $250,000 or the interest of $12,500,000. Therefore, the business investment of the United States in the railroad proper is $23,276,001.

With such a condition as this confronting them, a first duty of the American officials in charge was in some way to cut down the monstrously inflated capital of nearly half a million dollars a mile, to call in the money-draining bonds, which was possible at any time on payment of a premium of but half of one per cent over the annual interest, and to put the whole matter on a solid and honest basis.

Instead of retiring bonds the representatives of the commonwealth issued more bonds, $265,000, for repairs to two of the company's steamers almost as soon as the title was passed to the United States. One can not but ask why these "repairs" were not paid for out of the $560,000 distributed just previous to this bond issue as an eight per cent dividend, or why some of the money which went to the five per cent dividend of the succeed ing year's business was not used rather than increase the government debt. But instead, on top of this, still more bonds, $628,000, sold as recently as November, 1905, and the money loaned to the Isthmian Canal Commission, then hastily purchased back from the banker who took them. A new dividend of $350,000 was returned to the national coffers in 1905. So the government, through this railroad, continues to pay twice its usual rate of interest on one of the most outrageously overcapitalized enterprises on this hemisphere.

The next obvious step in defense of American commerce was to abolish the freight pools with the Pacific Mail and the South American lines, if indeed they did not become null and void through their violation of federal law, immediately upon the assumption of sovereignty by the United States. Was this done? A letter notifying the Pacific Mail of the intention to abrogate the contract was not sent until the American Commission had been in possession for seven full months and the formal abrogation did not take place for over a year after the government took control. And how much does this abrogation, so tardily executed, mean, and what does it effect?

The pooled percentage is still shared between the government railroad and the steamship companies. The initial carrier yet fixes the rates so that the whole North Pacific is still tributary to the Pacific Mail.

Who wrote the sophistic provision that similar terms would be granted to any other regular lines and so eliminated the great competition-makers of the sea, the ocean tramps? Was he, who drafted that provision, quite unacquainted with the utter unlikelihood of a regular line's undertaking to wrest a share in Pacifie commerce from a line intrenched in every port and backed by the whole power of the Union Pacific system already in possession of the desired privilege? Whether so or not, the naked fact remains that the United States government, far from releasing the shackles of the Panama route, continues in pooling contract with the Harriman system.

So much for the North. With the South Pacific situation there has been not even a poor pretense of changing the status quo. Rather pathetic was the appeal by the ambassadors and envoys of seven South and Central American governments that the bonds be lifted by the government. Instance upon instance of extortion and discrimination accomplished by the railroad's arrangements with the South American lines was given by them and by others. It was further shown that the foreign companies to whom the government has given, in a nicely expressed language of the last report of the Isthmian Canal Commission, "full authority to fix competitive rates low enough at points of origin to secure business, an agreed percentage of such through rates to accrue to this company," do in the present, as they regularly have in the past, discriminate against America in favor of Europe.

Take some of the instances cited by the South American representatives in their appeal to Secretary Taft:

The nitrate of Chili can not be brought via Panama: The combined tariff rates between the railroad company and the trust of the steamers of the Southern Pacific Coast fix a freight of 47 shillings sterling a ton. That same nitrate

reaches New York by steamers via Magellan, paying 23 shillings a ton.

The Peruvian sugar pays by the Isthmus 30 shillings sterling a ton, and 23 shillings sterling a ton via Magellan.

The cocoa of Guayaquil, via Panama, pays to Europe from 52 to 58 shillings sterling a ton and for New York 65 to 68 shillings sterling

a ton.

Coffee is exported from Central America to Europe, via Magellan, cheaper than by way of

Panama.