Grover Cleveland

Special Message

January 17, 1888

To the Senate and House of Representatives:

On the 3d day of March last an act was passed authorizing the appointment of three commissioners who should investigate the affairs of such railroads as have received aid from the United States Government. Among other things, the contemplated investigation included a history of the construction of these roads, their relations and indebtedness to the Government, and the question whether in the interest of the United States any extension of the time for the performance of the obligations of said roads to the Government should be granted; and if so, the said commissioners were directed to submit a scheme for such extension.

The commissioners were further directed by said act to report in full to the President upon all the matters submitted to them, and he was by said act required to forward said report to Congress with such recommendations or comments as he should see fit to make in the premises.

The commissioners immediately after their selection entered upon the discharge of their duties, and have prosecuted their inquiries with commendable industry, intelligence, and thoroughness. A large amount of testimony has been taken, and all the facts have been developed which appear to be necessary for the consideration of the questions arising from the condition of these aided railroads and their relations to the Government.

The commissioners have, however, been unable to agree upon the manner in which these railroads should be treated respecting their indebtedness to the United States, or to unite upon the plan best calculated to secure the payment of such indebtedness.

This disagreement has resulted in the preparation of two reports, both of which are herewith submitted to the Congress.

These reports exhibit such transactions and schemes connected with the construction of the aided roads and their management, and suggest the invention of such devices on the part of those having them in charge, for the apparent purpose of defeating any chance for the Government's reimbursement, that any adjustment or plan of settlement should be predicated upon the substantial interests of the Government rather than any forbearance or generosity deserved by the companies.

The wide publication which has already been given to the substance of the commissioners' reports obviates the necessity of detailing in this communication the facts found upon the investigation.

The majority report, while condemning the methods adopted by those who formerly had charge of the Union Pacific Railroad, declares that since its present management was inaugurated, in 1884, its affairs have been fairly and prudently conducted, and that the present administration "has devoted itself honestly and intelligently to the herculean task of rescuing the Union Pacific Railway from the insolvency which seriously threatened it at the inception of its work;" that it" has devoted itself, by rigid economy, by intelligent management, and by an application of every dollar of the earning capacity of the system to its improvement and betterment, to place that company on a sound and enduring financial foundation."

The condition of the present management of the Union Pacific Company has an important bearing upon its ability to comply with the terms of any settlement of its indebtedness which may be offered by the Government.

The majority of the commission are in favor of an extension of the time for the payment of the Government indebtedness of these companies, upon certain conditions; but the chairman of the commission, presenting the minority report, recommends, both upon principle and policy, the institution of proceedings for the forfeiture of the charters of the corporations and the winding up of their affairs.

I have been furnished with a statement or argument in defense of the transactions connected with the construction of the Central Pacific road and its branch lines, from which it may not be amiss to quote for the purpose of showing how some of the operations of the directors of such road, strongly condemned by the commissioners, are defended by the directors themselves. After speaking of a contract for the construction of one of these branch lines by a corporation called the Contract and Finance Company, owned by certain directors of the Central Pacific Railroad, this language is used:

It may be said of this contract, as of many others that were let to the different construction companies in which the directors of the Central Pacific have been stockholders, that they built the road with the moneys furnished by themselves and had the road for their outlay. In other words, they paid to the construction company the bonds and stock of the railroad so constructed, and waited until such time as they could develop sufficient business on the road built to induce the public to buy the bonds or the stock. If the country through which the railroad ran developed sufficient business, then the project was a success; if it did not, then the operation was a loss. These gentlemen took all the responsibility; any loss occurring was necessarily theirs, and of right the profit belonged to them.

But it is said that they violated a well-known rule of equity in dealing with themselves; that they, were trustees, and that they were representing both sides of the contract.

The answer is that they did not find anybody else to deal with. They could not find anyone who would take the chances of building a road through what was then an almost uninhabited country and accept the bonds and stock of the road in payment. And when it is said that they were trustees, if they did occupy such relation it was merely technical, for they represented only their own interests on both sides, there being no one else concerned in the transaction. They became the incorporators of the company that was to build the road subscribed for its stock, and were the only subscribers; therefore it is difficult to see how anyone was wronged by their action. The rule of equity invoked, which has its origin in the injunction "No man can serve two masters," certainly did not apply to them, because they were acting in their own interests and were not charged with the duty of caring for others rights, there being no other persons interested in the subject-matter.

In view of this statement and the facts developed in the commissioners' reports, it seems proper to recall the grants and benefits derived from the General Government by both the Union and Central Pacific companies for the purpose of aiding the construction of their roads.

By an act passed in 1862 it was provided that there should be advanced to said companies by the United States, to aid in such construction, the bonds of the Government amounting to $16,000 for every mile constructed, as often as a section of 40 miles of said roads should be built; that there should also be granted to said companies, upon the completion of every said section of 40 miles of road, five entire sections of public land for each mile so built; that the entire charges earned by said roads on account of transportation and service for the Government should be applied to the reimbursement of the bonds advanced by the United States and the interest thereon, and that to secure the repayment of the bonds so advanced, and interest, the issue and delivery to said companies of said bonds should constitute a first mortgage on the whole line of their roads and on their rolling stock, fixtures, and property of every kind and description.

The liberal donations, advances, and privileges provided for in this law were granted by the General Government for the purpose of securing the construction of these roads, which would complete the connection between our eastern and western coasts; and they were based upon a consideration of the public benefits which would accrue to the entire country from such consideration.

But the projectors of these roads were not content, and the sentiment which then seemed to pervade the Congress had not reached the limit of its generosity. Two years after the passage of this law it was supplemented and amended in various important particulars in favor of these companies by an act which provided, among other things, that the bonds, at the rate already specified, should be delivered upon the completion of sections of 20 miles in length instead of 40; that the lands to be conveyed to said companies on the completion of each section of said road should be ten sections per mile instead of five; that only half of the charges for transportation and service due from time to time from the United States should be retained and applied to the advances made to said companies by the Government, thus obliging immediate payment to its debtor of the other half of said charges, and that the lien of the United States to secure the reimbursement of the amount advanced to said companies in bonds, which lien was declared by the law of 1862 to constitute a first mortgage upon all the property of said companies, should become a junior lien and be subordinated to a mortgage which the companies were by the amendatory act authorized to execute to secure bonds which they might from time to time issue in sums not exceeding the amount of the United States bonds which should be advanced to them.

The immense advantages to the companies of this amendatory act are apparent; and in these days we may well wonder that even the anticipated public importance of the construction of these roads induced what must now appear to be a rather reckless and unguarded appropriation of the public funds and the public domain.

Under the operation of these laws the principal of the bonds which have been advanced is $64,023,512, as given in the reports of the commissioners; the interest to November 1, 1887, is calculated to be $76,024,206.58, making an aggregate at the date named of $140,047,718.58. The interest calculated to the maturity of the bonds added to the principal produces an aggregate of $178,884,759.50. Against these amounts there has been repaid by the companies the sum of $30,955,039.61.

It is almost needless to state that the companies have availed themselves to the utmost extent of the permission given them to issue their bonds and to mortgage their property to secure the payment of the same, by an incumbrance having preference to the Government' s lien and precisely equal to it in amount.

It will be seen that there was available for the building of each mile of these roads $16,000 of United States bonds, due in thirty years, with 6 per cent interest; $16,000 in bonds of the companies, secured by a first mortgage on all their property, and ten sections of Government land, to say nothing of the stock of the companies.

When the relations created between the Government and these companies by the legislation referred to is considered, it is astonishing that the claim should be made that the directors of these roads owed no duty except to themselves in their construction; that they need regard no interests but their own, and that they were justified in contracting with themselves and making such bargains as resulted in conveying to their pockets all the assets of the companies. As a lienor the Government was vitally interested in the amount of the mortgage to which its security had been subordinated, and it had the right to insist that none of the bonds secured by this prior mortgage should be issued fraudulently or for the purpose of division among these stockholders without consideration.

The doctrine of complete independence on the part of the directors of these companies and their freedom from any obligation to care for other interests than their own in the construction of these roads seems to have developed the natural consequences of its application, portrayed as follows in the majority report of the commissioners:

The result is that those who have controlled and directed the construction and development of these companies have become possessed of their surplus assets through issues of bonds, stocks, and payment of dividends voted by themselves, while the great creditor, the United States, finds itself substantially without adequate security for the repayment of its loans.

The laws enacted in aid of these roads, while they illustrated a profuse liberality and a generous surrender of the Government's advantages, which it is hoped experience has corrected, were nevertheless passed upon the theory that the roads should be constructed according to the common rules of business, fairness, and duty, and that their value and their ability to pay their debts should not be impaired by unfair manipulations; and when the Government subordinated its lien to another it was in the expectation that the prior lien would represent in its amount only such bonds as should be necessarily issued by the companies for the construction of their roads at fair prices, agreed upon in an honest way between real and substantial parties. For the purpose of saving or improving the security afforded by its junior lien the Government should have the right now to purge this paramount lien of all that is fraudulent, fictitious, or unconscionable. If the transfer to innocent hands of bonds of this character secured by such first mortgage prevents their cancellation, it might be well to seek a remedy against those who issued and transferred them. If legislation is needed to secure such a remedy, the Congress can readily supply it.

I desire to call attention also to the fact that if all that was to be done on the part of the Government to fully vest in these companies the grants and advantages contemplated by the acts passed in their interest has not yet been perfected, and if the failure of such companies to perform in good faith their part of the contract justifies such a course, the power rests with the Congress to withhold further performance on the part of the Government. If donated lands are not yet granted to these companies, and if their violation of contract and of duty are such as in justice and morals forfeit their rights to such lands, Congressional action should intervene to prevent further consummation. Executive power must be exercised according to existing laws, and Executive discretion is probably not broad enough to reach such difficulties.

The California and Oregon Railroad is now a part of the Central Pacific system, and is a land-grant road. Its construction has been carried on with the same features and incidents which have characterized the other constructions of this system, as is made apparent on pages 78, 79, and 80 of the report of the majority of the commissioners. I have in my hands for approval the report of the commissioners appointed to examine two completed sections of this road. Upon such approval the company or the Central Pacific Company will be entitled to patents for a large quantity of public lands. I especially commend to the attention of Congress this condition of affairs, in order that it may determine whether or not it should intervene to save these lands for settlers, if such a course is justifiable.

It is quite time that the troublesome complications surrounding this entire subject, which has been transmitted to us as a legacy from former days, should be adjusted and settled.

No one, I think, expects that these railroad companies will be able to pay their immense indebtedness to the Government at its maturity.

Any proceeding or arrangement that would result now, or at any other time, in putting these roads, or any portion of them, in the possession and control of the Government is, in my opinion, to be rejected, certainly as long as there is the least chance for indemnification through any other means. I suppose we are hardly justified in indulging the irritation and indignation naturally arising from a contemplation of malfeasance to such an extent as to lead to the useless destruction of these roads or loss of the advances made by the Government. I believe that our efforts should be in a more practical direction, and should tend, with no condonation of wrongdoing, to the collection by the Government, on behalf of the people, of the public money now in jeopardy.

While the plan presented by a majority of the commission appears to be well devised and gives at least partial promise of the results sought, the fact will not escape attention that its success depends upon its acceptance by the companies and their ability to perform its conditions after acceptance. It is exceedingly important that any adjustment now made should be final and effective. These considerations suggest the possibility that the remedy proposed in the majority report might well be applied to a part only of these aided railroad companies.

The settlement and determination of the questions involved are peculiarly within the province of the Congress. The subject has been made quite a familiar one by Congressional discussion. This is now supplemented in a valuable manner by the facts presented in the reports herewith submitted.

The public interest urges prompt and efficient action.


Grover Cleveland, Special Message Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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