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by

Fred G. Athearn, Esq.

Western Counsel
The Union Pacific Railroad Company
723 Balboa Building,
San Francisco, California

1922

A PLAIN STATEMENT
OF THE FACTS

Central Pacific and Union Pacific History

In 1862 and 1864, the Congress of the United States, by appropriate legislation, incorporated the Union Pacific Company to build from the Missouri River westward, and by the same acts authorized the Central Pacific to build eastwardly from the Pacific Coast, at or near San Francisco, to a common meeting point with the Union Pacific. These acts of Congress authorized the issue of first mortgage bonds, and also second mortgage bonds, aggregating $32,000 for each ordinary mile, $64,000 for each mile in less mountainous country, and $96,000 for each mile in mountainous country, and made a land grant of public lands of twenty square miles for each linear mile of railroad construction. These acts provided that these two railroads should be operated as one continuous line, and that neither should discriminate against the other.

The Central Pacific Property

The Central Pacific begins at Ogden, Utah, and runs to the Oakland Mole on the eastern side of San Francisco, Bay, via Sacramento, Stockton, and Niles. It also extends down the east side of the San Joaquin Valley as far ar as Goshen junction, passing through the cities of Modesto, Merced, Madera and Fresno. It extends into the Santa Clara Valley as far as San Jose by way of Niles. It runs northward up the Sacramento Valley as far as the California-Oregon line. At Weed, California, there is a branch line that runs northward by way of Klamath Falls as far as Kirk. A line beginning at Natron, Oregon, and extending southward to Oak Ridge was built by the Central Pacific and was intended to meet the line that passes through Klamath Falls. This latter line was for the purpose of tapping the rich timber belts of Southern Oregon and Northern California. It also owns the line that runs from Fernley, Nevada, through Susanville, California, to Westwood, as well as the line from Hazen, Nevada, to Mojave, California, running through Tonopah junction and Owenyo.

In 1865 the Southern Pacific Railroad Company was organized for the purpose of constructing a railroad from San Francisco Bay via San Diego and the eastern boundary of California, and to connect with the contemplated railroad to be built westward from the Mississippi River. In 1867 this road was changed to turn eastward without going as far south as San Diego.

In 1866 and 1871 the Congress of the United States passed acts authorizing the Southern Pacific Railroad Company to connect with the Atlantic & Pacific Railroad Company and the Texas & Pacific Railroad Company, respectively, and made a subsidy of public lands as an aid and as an inducement to the construction of the road.

So, with Government aid, the Central Pacific and Southern Pacific Railroads were launched as independent, competing lines in the State of California and as parts of two through transcontinental routes from the Atlantic seaboard to the Pacific Ocean.

The leading promoters of the Central Pacific were Leland Stanford, Collis P. Huntington, Mark Hopkins, and Charles Crocker. None of these promoters had any interest whatever in the Southern Pacific Railroad until after the completion of the main line of the Central Pacific. Until 1870 the Southern Pacific had no officers, directors or stockholders in common with the Central Pacific.

Leland Stanford, the President of the Central Pacific, testified to the Pacific Railroad Commission in 1887:

"It soon became apparent that the best interests of the Central Pacific required that the control of the Southern Pacific should be in the same hands, and that that road should work in perfect harmony with the Central Pacific. It became a necessity, therefore, that we should control the Southern Pacific and when opportunity offered, we availed ourselves of it and purchased the controlling interest in that road. We early saw that if that line of railroad was completed, if it crossed the Sierra Nevada Mountains, all the valleys of the State would be open to it and it would be a very serious competitor to the Central Pacific. So we tried to control it. And we have succeeded in controlling it, and the consequence is that it has never been operated to the prejudice of the Central Pacific. Neither we ourselves, individually, nor any of the Central Pacific people, are in any manner responsible for the building of the Southern Pacific line."

There were no common directors for these two railroad corporations - the Central Pacific and the Southern Pacific - before 1870. In every year from the beginning to 1899, with the exception of 1876, 1883 and 1887, a majority of the directors were diverse. In 1895, '96 and '97, the two companies, had only one director in common. In 1894, '98 and '99 they had no directors in common.

In 1885 the Southern Pacific Company of Kentucky acquired control of the Southern Pacific Railroad and of the Central Pacific by 99-year leases and that Kentucky corporation has held control under these leases and modified forms of control ever since.

The Harriman Period

Prior to the year 1901, Mr. E. H. Harriman acquired the Union Pacific, refinanced that road and put it on a financial basis which today is second to none in the United States. It is recognized as the most carefully and thoroughly financed road now being operated. Upon the acquisition of the Union Pacific, Mr. Harriman found that while under the acts of Congress the Union Pacific was designed to connect with the Central Pacific at Ogden and that the two roads should be operated as one continuous line without discrimination either in favor of or against either of the roads, the Union Pacific was being discriminated against by the Central Pacific. It was found that this discrimination was due to the fact act that the Southern Pacific controlled the Central Pacific, and that the Southern Pacific also owned a road that ran from San Francisco along the coast line to Los Angeles, as well as down the west side of the San Joaquin Valley, over the Tehachapi Mountains to Los Angeles and from Los Angeles to New Orleans, running by way of El Paso and Galveston, Texas; that the Southern Pacific also owned, or controlled the line from Oakland to Portland, Oregon. The line of the Southern Pacific via New Orleans being a very much longer line, the Southern Pacific, by diverting freight that originated on the Central Pacific lines and sending it byway of El Paso and New Orleans to the East, got a long haul and earned 100% of the freight charges, while if this same traffic were sent over the Central Pacific short haul to the East, it would get only an 800-mile haul, which is about one-third of the haul that it would get by sending it via its Sunset Route.

In order to avoid this discrimination against the Union Pacific by the Central Pacific, Mr. Harriman endeavored to buy the Central Pacific. He was unable to do this, so he proceeded to get control of the Southern Pacific, which controlled the Central Pacific. He acquired control of the Southern Pacific in 1901. From 1901 to 1912 the Southern Pacific and Central Pacific were operated by the Union Pacific and the discrimination against the Union Pacific by the Central Pacific was discontinued.

Millions for Improvement

At the time the Union Pacific took control of the Southern Pacific and Central Pacific both the roads were very much in need of repairs and equipment. The Union Pacific immediately advanced many millions of dollars for the rehabilitation of the Southern Pacific and the purchase of equipment. Of this aspect the following quotations taken from the annual reports to the stockholders of the Union Pacific for the fiscal years ending June 30, 1903 and 1904, are enlightening:

"It was deemed expedient, however, to aid the Southern Pacific in temporarily financing its large expenditure for reconstruction, betterments and improvements to its property and for much needed equipment. For this purpose $15,396,119.12 was advanced by the Union Pacific Railroad Company to the Southern Pacific Company, repayable on demand. Of this sum. the Union Pacific Railroad Company provided from its surplus cash funds $1,146,119.12 and incurred loans for the remainder. The work in hand on the line of the Southern Pacific will be finished before the end of the year and it is expected that it will result in a satisfactory saving in the cost of operation and in other directions. Since the close of the fiscal year the Union Pacific Railroad Company sold $10,000,000.00 face value of its 5% collateral notes maturing February 1st, 1905. The greater part of the proceeds of this sale was loaned to the Southern Pacific Company; the remainder was used to repay in part the Union Pacific Railroad for outlays amounting to $11,873,824.34 incurred by it in advancing funds to auxiliary and allied companies for the construction of new lines, purchase of two new steamships and for other equipment. With the exception of these loans and short term notes the company has no floating debts, and they have a large excess of assets in the demand loan to the Southern Pacific in advancing for account of construction of new lines and equipment and in free assets in the form of unpledged stocks and bonds.

"There were sold during the year $10,000,000.00 face value Union Pacific 5% collateral notes maturing February 1st, 1905. The proceeds were used in further advancing to the Southern Pacific in the construction and investment in net income from operation completion of the steamships Manchuria and Mongolia, referred to in the last Annual Report, and in, the purchase of other equipment.

"In addition to the above mentioned short term notes, the company have incurred loans to the amount, of $13,128,000.00. Against these liabilities they have a large excess in demand loans to the Southern Pacific which on June 30th, 1904, amounted to $20,460,927.43."

New Construction

During this period of Union Pacific control - 1901 to 1912 - a great deal of work was done on the Southern Pacific and Central Pacific lines. The Lucian cutoff across Great Salt Lake was built; the shops at Sparks, Nevada, were constructed; many line changes and double tracking, both in Nevada and California, were completed or contracted to be built. The line from Blinco to Sacramento was double tracked. New steel bridges were built over the Sacramento and American Rivers. The Dumbarton cutoff was constructed; the line between Tracy and Sacramento was double tracked; the gauge of the line from Alameda to Santa Cruz via San Jose was widened. A road was constructed from Sacramento to Walnut Grove. The Weed lumber road was purchased and extended through Klamath Falls to Kirk; the line from Natron to Oak Ridge was built. The suburban lines on the east side of the Bay of San Francisco were electrified. The line from Fernley, Nevada, to Westwood, California, was constructed. All of this work was done while the Union Pacific controlled the Central Pacific.

Dissolution of Union Pacific and Southern Pacific

The United States Government brought a suit to have it declared that the ownership of the Southern Pacific by the Union Pacific was unlawful and in violation of the Sherman Anti-Trust Act. In 1912 the United States Supreme Court handed down a decision declaring that the ownership by the Union Pacific of the Southern Pacific was unlawful and ordered the Union Pacific to sell all of its interests in the Southern Pacific. This the Union Pacific did and, of course, thereupon the Central Pacific came again under the control of the Southern Pacific, through the lease already referred to. Immediately the old system of discrimination by the Central Pacific against the Union Pacific again went into effect, and this, notwithstanding the fact that Congress originally designed these two roads, the Union Pacific and Central Pacific, to operate as one road, one continuous line, to the Pacific coast, without any discrimination of one against the other. This fact was very clearly pointed out by the Supreme Court in its decision in the Union Pacific case, reported in 226 US 61, where the Court says:

"The purpose of Congress, to secure one permanent road to the coast, so far as physical continuity is concerned, is apparent; but we do not think the acts stop with that requirement. It is provided that facilities as to rates, time, and, transportation shall be without any discrimination of any kind in favor of either of said companies, or adverse to the road or business of any or either of the others; and the purpose of Congress to secure a continuous line of road, operating from the Missouri River to the Pacific coast as one road, is further emphasized in the act of Congress of June 20, 1874 (18 Stat. at L. 111, chap. 331, U. S. Compt. Stat. 1901, p. 3577), making it an offense for any officer or agent of the companies authorized to construct the roads, or engaged in the operation thereof, to refuse to operate and use the same for all purposes of communication, travel, and transportation, so far as the public and government are concerned, as one continuous line, and making it a misdemeanor to refuse, in such operation and use, to afford and secure to each of said roads, equal advantages and facilities as to rates, time and transportation, without any discrimination of any kind in favor of or adverse to any or either of said companies.

"The obligation to keep faith with the government continued, as did the legislative power of Congress concerning these roads, notwithstanding changed forms of ownership and organization. (Union P. R. Co. vs. Mason City & Ft. D. R. Co., 199 US 160, 50 L. ed. 134, 26 Sup. Ct. Rep. 19.)"

Southern Pacific Once Proposed Separation

In 1913 the Southern Pacific made an application to the Railroad Commission of California for permission to sell the Central Pacific to the Union Pacific. The terms of the sale were all agreed upon and permission was finally granted by the Railroad Commission of California, subject to certain conditions as to the use by roads other than the Union Pacific and Southern Pacific of lines and terminal facilities of the Central Pacific, which conditions were unsatisfactory to the Union Pacific and the sale did not take place. The agreement of 1913 is of value, in the present case, as showing how completely it proved to be possible to overcome the difficulties of a dissolution if the parties in interest were moved to do so. The testimony of Mr. William Sproule, President of the Southern Pacific Company, and the statement of Mr. William F. Herrin, Chief Counsel for the Southern Pacific Company, given before the California Railroad Commission, as to the desirability and feasibility of the separation of the Central Pacific and Southern Pacific properties are illuminating. Mr. Herrin, in his statement before the commission, summing up all that the Southern Pacific's witnesses had said before the commission on their company's application to sell the Central Pacific, said:

"Now, the Southern Pacific Company, I think, has accomplished for its benefit a very large transaction which you cannot overlook certainly, with the demands that are upon the Southern Pacific Company with respect to the lines it retains. * * * Now, this transaction gives it some eighty or ninety million dollars; it is well provided with funds; and I think that certainly is to the benefit, the very large benefit, of the Southern Pacific Company; I think it is also to the benefit of the territory we serve."

The Government's Suit of 1914 to Force the SP to Divest Itself of the CP

The United States government brought, in 1914, suit against the Southern Pacific to compel it to divest itself of the control of the Central Pacific line. That case was carried to the highest court in the land and on May 29, 1922, the United States Supreme Court decided that the control of the Central Pacific by the Southern Pacific was a restraint of competition and violative of the Sherman Anti-Trust Act, and directed that the Southern Pacific divest itself of its control of the Central Pacific. (259 US 214)

No clearer statement of facts and principles upon which the dissolution was ordered can be made than was made by the Supreme Court in the decision just referred to. The following excerpts from the opinion of the Supreme Court handed down May 29, 1922, are quoted in point:

"Under principles settled in the Union Pacific case (226 US 61) the acquisition by the Southern Pacific Company of the stock of the Central Pacific Railway Company in 1899, unless justified by the special circumstances relied upon, to be hereinafter considered, constituted a combination in restraint of trade because it fetters the free and normal flow of competition in interstate traffic and tends to monopolization. In the Union Pacific case this court held that the acquisition by the Union Pacific, which constituted about 1,000 miles of the transcontinental system, to which we have referred, of enough stock in the Southern Pacific to dominate and control it, was violative of the Sherman Act. This case differs from that not at all in principle. These two great systems are normally competitive for the carrying trade in some parts from the east and middle west to the coast, and for the traffic moving to and from central and northern California, including a great volume of ocean-borne traffic which lands on the coast destined across the continent to the Atlantic seaboard and intermediate western and eastern points, or is destined from the latter points to foreign ports via San Francisco or other Pacific Coast points."

* * * * *

"Such combinations, not the result of normal and natural growth and development, but springing from the formation of holding companies, or stock purchases, resulting in the unified control of different roads or systems, naturally competitive, constitute a menace and a restraint upon that freedom of commerce which Congress intended to recognize and protect and which the public is entitled to have protected."

* * * * *

"In the instant case we are not dealing with the principle in the abstract. The proof is ample that the policy of the Southern Pacific system has been to favor transportation on its line by securing for itself, whenever practicable, the carriage of freight which would normally move eastward or westward over the shorter line of the Central Pacific Railroad and its connection, for its own much longer and wholly owned southern route. This course was limited by an arbitrary rule during the time the Union Pacific dominated the Southern Pacific from the stock purchase in 1901 until the so-called 'unmerger' in 1913, as a result of the decision of this court in the Union Pacific case. The compelling motive of this course of conduct is obvious. The Southern Pacific owns and controls the southerly route, and receives 100% of the compensation for freight transported by its road and water lines. Over the Central Pacific route it receives but a fraction of the freight because the Union Pacific with its eastern connections take up the carrying from Ogden to the east. Self-interest dictates the solicitation and procurement of freight for the longer haul by the Southern Pacific lines. While many practices, formerly in vogue, are eliminated by the legislation of Congress regulating interstate commerce, and through rates and transportation may be had under public supervision, there are elements of competition in the granting of special facilities, the prompt carrying and delivery of freight, the ready and agreeable adjustment and settlement of claims, and other elements which that legislation does not control."

* * * * *

"It is conceded in the brief of counsel for the defendants that it is true of all such systems that, other things being equal, freight is preferentially solicited for the 100% haul."

* * * * *

"We reach the conclusion that the stock, ownership in the Central Pacific acquired by the Southern Pacific is violative of the Sherman Act within the principles settled by this Court, certainly since the decision in the Northern Securities case, in 1903."

SP's Campaign Against Decree of
the Supreme Court

Immediately following the announcement of the decree of the United States Supreme Court, there was sent broadcast a large amount of propaganda by the Southern Pacific Company and by certain civic bodies, particularly the San Francisco Chamber of Commerce, in an endeavor to make it appear that the divorcement of the Central Pacific and the Southern Pacific would be a calamity to the State of California and to its industrial, commercial and agricultural development; that service to both shippers and passengers would be most seriously impaired; that the shops at Sacramento and Sparks will have to be largely reduced; that there will be much duplication of facilities, and that rates will probably be increased. All of this propaganda, as I shall show, is utterly without foundation.

Benefits of Competition

It must be conceded that competition is a good thing. It is not competition in rates of which I speak, but competition in service. Rebates have been done away with and everyone is glad of it. Rates are now regulated, but service, such as the sending out of agricultural experts to aid the farmer, industrial agents to induce the location of manufacturing plants along the lines of the railroad, the building of branch feeders to develop the resources of the country and produce new traffic, the quick handling of traffic, fast train service, the prompt supplying of empty cars for shipments, a courteous handling of and attitude toward the public, and the prompt and agreeable adjustment of claims for damaged goods - all these things are matters which are not regulated, but they are the things which constitute the class of service that builds up a community.

Northern and Central California, as well as the State of Nevada, with its vast mineral and agricultural possibilities, because of lack of competition, have never had this kind of service during the control of the Central Pacific by the Southern Pacific. We might take a leaf from the book of the metropolis of the south, Los Angeles, which has three competing transcontinental railroads. That city today is engaged in a greater campaign of harbor development than any other city on the Pacific Coast. The harbor about the Bay of San Francisco, because of lack of railroad competition, has not developed as it should have. We are told, however, that if the Central Pacific and Southern Pacific lines are separated that, because of the fact that they are so inextricably woven together, it would tear the Southern Pacific system all to pieces and would seriously inconvenience travelers and shippers and would have a tendency to increase rates.

These contentions now being made by the representatives of the Southern Pacific Company and by the San Francisco Chamber of Commerce are not only contrary to the facts, but are inconsistent with the mandate of the Supreme Court, as well as with the position taken by Mr. William Sproule, President, and Mr. William F. Herrin, Chief Counsel, of the Southern Pacific, and by the San Francisco Chamber of Commerce in 1913. Indeed, there is a striking inconsistency even as between Mr. Max Thelen, former president of the California Railroad Commission, and now special counsel for the Southern Pacific, and Mr. C. W. Durbrow, attorney and rate specialist for the Southern Pacific, as to some of these matters.

The tendency of competition to reduce rates is too well known by shippers to need to be urged here. The inter-mountain country has for years fought for rates which would tend to put it on a parity with States enjoying water competition, but the fight is bound to be a losing fight as long as railroads operating in States having water competition are able to maintain a practical monopoly of a large portion of the rail transportation facilities of the coast territory, because of the fact that they are so constituted that their earning power can be maintained without being forced to meet water competition. This is exactly the position that the Southern Pacific is in today with its control of the Central Pacific.

Mr. Sproule, as President of the Southern Pacific, testified in 1913 that in the event of the separation of the Central Pacific and Southern Pacific, he was thinking very carefully over the question of whether his company should not, in view of the expected alignment, take steps to restore to the Sunset Route, a material share of the business which it has lost to the water lines. In other words, he was planning in the event of separation to cut rates with a view to recovering to the rail line once more the business which is now going by sea.

Decree Meets Alleged Difficulties

The Central Pacific has been maintained as a separate corporate entity and all of its accounts are separately kept. It is operated by the Southern Pacific under a lease and when, in 1913, the Southern Pacific offered to sell the Central Pacific to the Union Pacific, all of the operating difficulties, by the joint use of trackage and terminal facilities, were worked out. What has been done once can be done again. It is neither impossible nor difficult. In fact, the decree of the Supreme Court of the United States specifically provides for the separation of these two roads, so as to avoid all the difficulties which it is said will come about. Here is the mandate of the Supreme Court in that regard:

"We direct that a decree be entered severing the control by the Southern Pacific of the Central Pacific by stock ownership or by lease. But, in accomplishing this purpose, so far as compatible therewith, the mortgage lien asserted in the brief filed for the Central Union Trust Company shall be protected.

"In addition, the several terminal lines and cutoffs leading to San Francisco Bay which have been constructed or acquired during the unified control of the two systems for the purpose of affording direct or convenient access to the Bay and to the principal terminal facilities about the Bay should be dealt with, either by way of apportionment or by provisions for joint or common use, in such manner as will secure to both companies such full, convenient, and ready access to the Bay and to terminal facilities thereon that each company will be able freely to compete with the other, to serve the public efficiently, and to accomplish the purpose of the legislation under which it was constructed. And a like course should be pursued in dealing with the lines extending from San Francisco Bay to Sacramento and to Portland, Oregon."

Arizona's Argument

At the recent conference of the Railroad Commissions of the Western States, held in San Francisco on June 20, 1922, Mr. Johnson, the Commissioner from Arizona, stated that Arizona was opposed to the separation of the Central Pacific and Southern Pacific for the reason that if that were done, then the traffic that now originates on the Central Pacific lines would not move through Arizona via the Sunset Route of the Southern Pacific, and hence would reduce the amount of traffic moving through the State, and therefore, reduce the number of men that it would be necessary to employ to take care of the traffic. That might be true if there were no other results of the separation and Central and Northern California and the States of Nevada and Utah would be the only parts of the country benefitted through a larger volume of traffic moving over the short line to the Atlantic seaboard instead of over the long line by way of New Orleans. But according to the testimony of Mr. Sproule, there would be increased activity in building up the Southern Pacific and in developing traffic served by it, and this inevitably would be highly beneficial to both Southern California and the State of Arizona, where so large a portion of the Southern Pacific lines are situated. Mr. Herrin, Chief Counsel for the Southern Pacific Company, in his argument before the California Railroad Commission in 1913, said that the demands upon the Southern Pacific with respect to the lines it would retain would be very large and would require a large amount of money to make those betterments and improvements and to keep up those lines; "and now that it has only interest for the transcontinental line called the Sunset line, of course, it must put that line up to good standard and maintain it so that it can compete with the Central route, Santa Fe and Western Pacific."

Now if it is true, and the Supreme Court found it was, that the Southern Pacific has been diverting the traffic originating on the Central Pacific lines to its Sunset Route, instead of letting it go over, its normal, natural route, via Sacramento, Nevada and Utah, it must be manifest that if the shop force at any point, either at Sacramento or Sparks, is necessary to take care of the traffic that now moves over the Central Pacific, it will be necessary to increase the force at those shops when all of the traffic originating on the Central Pacific lines moves eastward in the manner that it naturally and normally should.

Joint Use of Terminals

We have heard much about the difficulties involved in a two-line or three-line haul. All that is meant by that is that the traffic may move over more than one railroad. That sort of thing happens every day in the year and on every railroad, but the freight is not shifted from rom one car to another, nor does a passenger have to change from one car to another. Anyone who has shipped freight from or to the East knows that it moves on several lines before it reaches its destination. Anyone who has traveled as a passenger to the East knows that he passes over several lines before he reaches his destination, but he does not change cars and seldom does he change trains. There are literally hundreds of cases of joint use of tracks and terminals. In California the Santa Fe has used for years, and is still using, jointly with the Southern Pacific the line from Mojave to Bakersfield over the Tehachapi Mountains. The Los Angeles and Salt Lake Railroad uses the Santa Fe from Daggett to San Bernardino and Riverside and has a contract for the joint use of the Southern Pacific from San Bernardino to Riverside. The Rock Island uses the Union Pacific from Kansas City to Topeka, Kansas. The Union Pacific, Northern Pacific, Milwaukee and Great Northern use each other's lines indiscriminately between Portland and Seattle.

Real Competition

But the most important thing for or the State of California is the fact act that the operation of the Central Pacific in connection with some strong road will give real railroad competition in the great agricultural valleys of Northern and Central California, such as the valleys of Santa Clara, San Joaquin and Sacramento. It will give the producer a direct, short route to the East. It will give the city of San Jose a direct line to the Atlantic seaboard. It will give Fresno, Madera, Merced and Modesto in the San Joaquin Valley a direct short line to the East. It will put the city of Stockton on a through, transcontinental railroad. It will bring another competing, transcontinental railroad into the. cities of Berkeley, Oakland and Alameda.

But we are told that if the Central Pacific is taken away from the Southern Pacific it would so weaken the Southern Pacific that it might not be able to meet its great operating deficit on the Pacific Electric Lines, that system of electric lines in Los Angeles County that honeycombs the entire community. The Pacific Electric for the five years from 1917 to 1921 lost $7,358,712.31. The argument is that shippers and producers on the Central Pacific should make up this great loss at the cost of the development of their own territory by permitting the traffic to be diverted via the Southern Pacific long haul and thus give a greater earning power to the Southern Pacific at the expense of the Central Pacific.

This is certainly a very remarkable argument. The truth of the matter is that the Pacific Electric lines were built because of competition and they act as feeders for the Southern Pacific. As a separate corporate entity they do not in and of themselves show a profit. Feeder lines seldom are, in and of themselves, profitable. It is only as a feeder serves to increase the profit of the main line that it is valuable. A feeder, as much a part of transportation system as an engine or freight car, alone it is not profitable, but as a part of the entire transportation system it plays its part and makes the business of railroading pay. Indeed, so valuable are the Pacific Electric lines as feeders that there is no doubt that should the Southern Pacific desire at any time to be relieved of carrying the burden of the heavy operating deficit the Union Pacific or any other transcontinental line will be very glad to take over the Pacific Electric lines and rid the Southern Pacific of that burden.

A Change of View

Mr. William Sproule, President of the Southern Pacific Company, has been recognized for years as a traffic expert. He now disagrees with the United States Supreme Court in its application of the federal statutes. In other words, he now asserts that the principle of railroad competition does not apply when it comes to the separation of the Central Pacific and Southern Pacific. I confess my total inability to make this position square with this same gentleman's testimony before the Railroad Commission of California when the Southern Pacific was endeavoring to sell the Central Pacific to the Union Pacific. Mr. Sproule's testimony is diametrically opposed to the position he now takes.

Principles Unalterable

It is most strongly argued, however, that conditions have changed since 1914, when the suit was filed by the Government to compel the Southern Pacific to relinquish its control of the Central Pacific and that the Supreme Court was under a legal necessity to decide the case as the law stood in 1914, at which time the Transportation Act of 1920 was not on the statute books.

Laws may be changed from time-to time by Congress and legislatures, but economic principles are more stable and the economic principle of competition has been true since the days of earliest reported history, and it is true today. The principle has been crystallized into the commercial axiom, "Competition is the life of trade."

Court Knew What It Was Doing

But let us reason about the decision of the United States Supreme Court. Does it seem at all reasonable that the Supreme Court would take the trouble to spend all the time it did spend in arriving at a decision in the Central Pacific case if it knew that its decision might be set at naught by the Interstate Commerce Commission under authority granted to that Commission under the Transportation Act of 1920? The court takes judicial notice of the Federal statutes. When the Central Pacific case was decided the Supreme Court knew that the Transportation Act of 1920 was on the statute books, and it might well have said; "Why should we decide this case? It is within the power of the Interstate Commerce Commission to consolidate these various lines into systems and it may be that the Interstate Commerce Commission will want to consolidate the Central Pacific with the Southern Pacific. Therefore, we will simply dismiss this case with the direction that it be taken up with the Interstate Commerce Commission, because whatever we may decide regarding the divorcement of the Central Pacific from the Southern Pacific, it will still remain in the hands of the Interstate Commerce Commission to make such disposition of the Central Pacific as it chooses."

But this is not what the Supreme Court did. It decided that the Central Pacific should be divorced from the Southern Pacific and did it knowing that the Transportation Act of 1920 was in effect, and it is very clear why it did it. It did it first; because the control of the Central Pacific by the Southern Pacific was in violation of the Sherman Act, and second; because it was violative of the very acts under which the Central Pacific was constructed the acts of 1862 and 1864. It did it further because of the fact that it recognized the limitation placed upon the Interstate Commerce Commission in the matter of consolidating railroads into various systems.

Transportation Act

In that connection a quotation from Paragraph 4 of Section 5 of the Act empowering the Interstate Commerce Commission to consolidate the railway properties of Continental United States into a limited number of systems, is illuminative. It reads as follows:

"The Commission shall, as soon as practicable, prepare and adopt a plan for the consolidation of the railway properties of the Continental United States into a limited number of systems. In the division of such railways into such systems, under such plan, competition shall be preserved as fully as possible and wherever practicable the existing competition and channels of trade and commerce shall be maintained."

A Traffic Manager Testifies

In 1913, when the proposal to sell the Central Pacific to the Union Pacific was under consideration, the then traffic manager of the San Francisco Chamber of Commerce, Mr. Win. R. Wheeler, under examination by Mr. Seth Mann, present attorney for the traffic department of the San Francisco Chamber of Commerce, testified and introduced in evidence a telegram to Mr. Garrit Fort under date of February 7, 1913, reading as follows:

"Yours sixth while I heartily approve of separation of Central Pacific from Southern Pacific and the establishment of Central's managerial operating headquarters in San Francisco you will appreciate that I will not be in a position to lend intelligent assistance until after I am advised of the details connecting certain trackage and running rights in this State."

Again in 1913, Mr. Wheeler testified as follows:

"There is one thing I want to say before I leave the stand and that is the advantages of additional roads with regard to competition. It is a popular fallacy, I think, that because there is not a rate war, because there is not, a cutting of rates, general demoralization of rates, following the advent of a new road into a territory, that, therefore, there is no competition. There is competition in the service and that is what we desire. There is also competition in this respect, that, if we have two roads who have a voice in the rate question, you stand 100 per cent, or double, the chance of gaining tariff concessions that you do if there is only one road to deal with; if there are three roads, you stand three times the chance of getting your concessions; or, if four, four times, and so on; in other word words, you do not find or are not as apt to find three men of one mind as you are two men of one mind, and so on as the number grows. We have already had an example of that here in San Francisco: There was a proposition something more than a year ago to advance rates between San Francisco and Stockton, make a very material advance, on the part of the railroads, and the fact that it required the assent of three roads instead of-two was the only thing that prevented that advance going into effect at that time; we were successful in convincing one of the roads that it was unfair to us to raise those rates and they declined to join in the advance. That is all I have to say."

San Francisco Chamber of Commerce

These statements were made by men who are recognized as traffic men. That is what they said under oath in 1913. The principles there enunciated are just as true today as they were then. They then took the position that competition was a valuable thing in the matter of building up a community. The executive committee of the San Francisco Chamber of Commerce was apparently of the same opinion, for on February 18, 1913, it adopted a resolution, which resolution was introduced in evidence. It read as follows:

"Resolved, That so far ar as we are at present advised, we approve of the terms of the proposed agreement dated February 8, 1913, between the Union Pacific Company, and the Southern Pacific Company, et al., relating to leases, sales, trackage rights and joint use of terminals, which terms are to be submitted to the California Railroad Commission for consent and approval, and are referred to in subdivision 2 of section 8 on page 32 of said proposed agreement, with the exception of the clause found on page 13 of Exhibit B, which reads:

'No additional companies shall be admitted to use the property except by the written consent of both the Pacific Company and the Central Company'

and;

"Resolved, That the Manager and Attorney of the Traffic Bureau are hereby authorized to express the attitude of the Chamber in this regard before the California Railroad Commission, at the hearing to be held February 19, 1913, or any adjournments thereof.

"And be it further resolved, That a copy of this Resolution be immediately transmitted to the Chairman of the Executive Committee of the Union Pacific Railroad Company."

That was the resolution passed by the executive committee of the San Francisco Chamber of Commerce approving the sale of the Central Pacific to the Union Pacific in 1913. How can that position be reconciled with the position that is today being taken by that same Chamber of Commerce?

Finally, we are told that if the Union Pacific would perchance acquire the Central Pacific, the Union Pacific would dominate the Pacific Coast because it has a line into Los Angeles and a line into Portland, Oregon.

A Competitive Transcontinental Line Restored

All traffic moved over the Union Pacific out of Los Angeles moves over the Salt Lake line and connects with the Union Pacific at Ogden. All traffic moved over the Union Pacific controlled lines at Portland, moves to connect with the Union Pacific at Granger and Ogden, each territory getting a short direct haul. Traffic is not moved from Los Angeles to Portland or from Portland to Los Angeles and thence East. There are not two lines to the East, but only one. The Southern Pacific has one line, the Central Pacific which runs part of the way East and a line that runs all the way East via New Orleans. The line that runs part of the way East, the Central Pacific, is used, not in competition with any other line, but for the purpose of aiding the long haul line via New Orleans. Should the Union Pacific acquire control of the Central Pacific the traffic would move by the shortest and most direct route to the Eastern points because there would be no advantage whatsoever in moving it over a long haul, as it would get no greater division of the freight charges.

Therefore, should the Union Pacific acquire control of the Central Pacific it would mean such active, aggressive competitions for Northern and Central California that it would force development of every kind through the entire territory. It would make every railroad coming into San Francisco "stand on its toes" and do business efficiently.

# # # # #

BITS OF HISTORY

Contentions in 1885 and 1896

When on March 1, 1885, it was announced that the Southern Pacific Railroad had been leased to a newly formed corporation known as the Southern Pacific Company of Kentucky, there was manifest in the press and public discussions of California a great uneasiness. It was predicted that this was another step toward perpetuating the monopoly of rail facilities in California, which Mr. Stanford and his colleagues in the operation of the Central Pacific had formed in 1870 by bringing the operation of the Southern Pacific into "perfect harmony" with the Central Pacific.

But when on April 1, 1885, it was announced that the Central Pacific, by an agreement signed February 17, 1885, had been leased for 99 years also to the Southern Pacific Company of Kentucky, this uneasiness turned to indignant protest. The leading newspapers of the State voiced emphatic condemnation of the deal. It was asserted that these two leases placed the railroad transportation business of California and across the continent in complete control of one group of railway operators and that that control would be administered to the very serious hurt of the public interest. Competition, it was stated, had been throttled. Indignation meetings were held to protest to Congress that the Central Pacific lease was violative of the public rights and of the letter and plain intent of the acts of Congress of 1862, '64 and '66, under which construction of the Pacific railways was authorized.

It was recalled at that time that the railroad corporations had received enormous aid from rom the Government in the form of free rights-of-way, by Government issue of bonds to aid the construction of the roads for which the Government benevolently took a second lien upon the railroad properties, by permission to the railroads to issue first mortgage bonds in their own name and by bonds issued by the several counties through which the Central Pacific passed and turned over to the Central Pacific builders to be used to aid construction, and that because of these acts of public aid, the public was a part owner in the Central Pacific-Union Pacific line. As an example of the public temper at that time, there is reprinted the following editorial from the conservative San Francisco Chronicle of its issue of April 3, 1885:

"THE LAST RAILWAY DODGE"

"The managers of the California monopoly are fertile in resources. It now turns out that while the people of California were wondering from what source help could come the railway triumvirate was concocting a scheme which was calculated to defeat all attempts to bring the railways under subjection. The last report of the Railway Commission of Kentucky hints that the Legislature of that State is under the control of C. P. Huntington and his associates, and now comes the proof of the fact in the passage of an Act incorporating the Southern Pacific Company, with power to lease and operate railroads in other states. The corporators are Stanford, Crocker, Huntington & Co. Then followed the lease, first of the Southern Pacific Railroad, next of the Central Pacific Railroad, branches and leased lines, for ninety-nine years to this Kentucky corporation. The lease went into effect yesterday, and henceforth the people of California, if they have to complain of the railroads, are expected to deal with a Kentucky corporation, with headquarters at Frankfort or Louisville. The idea is to divest the State courts of jurisdiction over suits against the monopoly to transfer them to the United States courts, meaning Justice Field and Justice Sawyer. The Kentucky Corporation kindly guarantees the holders of Central Pacific stock - which is mere water - 7 per cent on its present price, and agrees to pay two and a half times as much if the earnings warrant. Is not this a pretty contrivance?

"But sharpers constantly overreach themselves, and there is no reason to believe that this ingenious trick will stand the test of examination in the courts. Our State courts cannot, by any action of the legislature of Kentucky, be divested of their right to control corporations doing business in this State. The property is here, the business is here, the managers are here, the interests affected are here, the goods to be moved are here. The damage done by overcharges and discriminations will be felt here. It is here, not in Kentucky, that the corporations must answer to courts of justice. The Supreme Court, with all its faults, will not tolerate the notion that a company can escape its liability to the courts of its own State by procuring bogus incorporation in another. Huntington & Co. will find, before they are through with this fight, that instead of evading home responsibility, they have only increased the odium under which they labor, and made themselves more hateful than they were.

"The Central Pacific Railroad Company and the Southern Pacific Railroad Company are California corporations, operating under the laws of this State. They cannot shuffle off their subjection to our laws by a sham lease to a sham corporation organized by their own officers. Neither the courts nor the State officials will recognize the lease or the charter of the Kentucky concern. They will deal with companies as State corporations, subject to our laws. If ever we have a Railway Commission with manhood enough to do its duty it will be the stricter with these companies, because they have now shown a disposition to evade home control and skulk under a foreign jurisdiction. There is no jury in the State that will not be more severe with them, now that they have tried to make out that they are not California institutions, and to plead that they are owned and run and controlled in Kentucky.

"How Kentucky must have fallen from the honorable place it filled in the days of Henry Clay! It seems now to be the private preserve of C. P. Huntington. Time was when Kentuckians owned themselves. Now they are owned by a Wall street sharper, a railway huckster, who uses the Legislature not only for the purpose of the Chesapeake & Ohio, but to pass any acts he may need to defeat the popular will in other States."

The same newspaper said editorially on April 6, 1885, in comparing the Central Pacific and Southern Pacific to the Pennsylvania Railroad:

"The difference between the two is simply this: The Pennsylvania company calculates to make its money by the excellence, punctuality, and cheapness of its service. The California company expects to make its money by overcharges and deficient service; by controlling the Legislature and the Railway Commission; by evading the control of the courts by making an assignment, with intent to defraud the people, to a sham Kentucky corporation. This explains the whole story. Not only does the California corporation win as much odium as the Pennsylvania corporation acquires popularity, but it makes less money. Not only do our railway managers so conduct their business that the surest passport to popularity for a public man is to pursue a course of unswerving hostility to them, but they are actually all the time in financial hot water, driven to all sorts of dodges to keep the wolf from the door. This sham lease to the sham Southern Pacific Company of Kentucky is nothing but a trick to float a new issue of Southern Pacific bonds, which must be sold to provide the monopoly with the money it absolutely needs. If, instead of trying to pass Heath amendments and 6th of June bills, it would devote its attention to reducing its fares and increasing the rate of speed of its trains, it would not need to sell bonds, or to make assignments to phantom corporations in Kentucky."

These expressions are typical of the opinion which prevailed immediately after the Southern Pacific monopoly was exposed in 1885. The protests against the leases which created the monopoly became calmer, but they did not entirely die. They continued until 1896, when they broke out afresh. In the early part of that year, during the first session of the 54th Congress, there was pending the so-called Refunding Act by which the debt of the Central Pacific to the Government, which was in default of accrued payments, was proposed to be the subject of a new agreement between the railroad company and the Federal Government.

At that time the people of San Francisco were particularly aroused, and Mayor Sutro was granted a two months' leave by the City Council to go to Washington and do everything possible to defeat the passage of this Refunding Act. While this Act was pending in Congress a report was submitted by the Committee on Pacific Railroads to the Committee of the Whole House on the State of the Union. It is dated April 27, 1896, and the following extract is illuminating as well as interesting:

"Representatives Bowers, Barham, Maguire, and Hilborn, all of California, objected to any refunding, and wanted the Government to foreclose. They showed that the Central Pacific was owned by or leased to the Southern Pacific Company of Kentucky, which company also owned or controlled the Southern Pacific Railroad, a competing line.

"All the California delegation, with one exception it is said, are a unit against any refunding which will vest both these roads, the Southern Pacific and the Central Pacific, in the same control; that is, in the present control: They contend that the case is within the principle that has given rise to the prohibition in the constitution and laws of so many States to any leasing or consolidation or parallel or competing lines, and within the principle of the anti-trust law of Congress, and that in this instance the monopoly has exerted the oppression, for the prevention of which the laws referred to were enacted. They suggest that either the Government, without actually operating the Central Pacific maintain it as a sort of a railroad turnpike for the use of any or all other companies, or that the road be sold to purchasers of the Union Pacific or any other company that will afford competition with the Southern Pacific."

The Supreme Court in its determination of the suit of the Government to divorce the Central Pacific from Southern Pacific control, and which it decided on May 29, 1922, found in effect that what the people in 1885 and 1896 said would happen had happened. Rights to which the people were entitled in those days had been taken away from rom them. A railway monopoly had been brought into existence. It had operated in restraint of trade and constituted a menace to that freedom of commerce which the people are entitled to have protected. Competition had been stifled. And by this decision the United States Supreme Court restores to the people those rights which were taken from them in 1870, 1885 and 1896.

IRRECONCILABLE
CONTENTIONS

The Chamber of Commerce of San Francisco has an official record in connection with the efforts of the people of California and the acts of the Federal Government in their behalf to have restored competitive conditions in the railway business in their State.

First: When, in 1913, the voluntary application of the Southern Pacific Company to the California Railroad Commissioner for permission to sell the Central Pacific to the Union Pacific Railroad Company was filed, the San Francisco Chamber of Commerce passed a resolution in which it approved of the terms of the proposed agreement to sell the Central Pacific and separate it from Southern Pacific control and operation. And by the same resolution the manager and attorney of the Traffic Bureau of the Chamber were authorized and instructed to express this attitude of the Chamber before the California Railroad Commission, at the public hearing. This was done and the Chamber's resolution appears in the official transcript of testimony and exhibits.

Second: When, in 1914, the Government of the United States filed a suit in the United States District Court of Utah for the divorcement of the Central Pacific from Southern Pacific control, and the Southern Pacific then did not want to surrender its control over the Central Pacific and was contesting the Government suit, the San Francisco Chamber of Commerce passed a resolution protesting against the Government suit and against the idea of separating the Central Pacific from Southern Pacific control.

Third: When, in 1922, the United States Supreme Court handed down a decision ordering the separation of the Central Pacific from Southern Pacific control upon a plan and after a fashion not substantially different from the plan agreed upon and which the San Francisco Chamber of Commerce endorsed in 1913, and the Southern Pacific arose in opposition to the Supreme Court and its decision, the San Francisco Chamber of Commerce passed a resolution protesting and complaining against the Supreme Court and its decision.

The San Francisco Chamber of Commerce has at least been consistent in its public as well as its private alignment with the schemes and aspirations, of the Southern Pacific Company.

THE DURBROW-THELEN
DISAGREEMENT

In a speech before the Commonwealth Club of California, which the Southern Pacific later circulated in printed form, Max Thelen, the former President of the California Railroad Commission, but now employed as special counsel for the Southern Pacific Company in its propaganda campaign against the Supreme Court's decision, expatiated at length on the inconvenience which he alleged would follow separation of the Central Pacific from Southern Pacific control. He said:

"The tearing of the Central Pacific from the Southern Pacific will result in two fragmentary railroad systems trying to render the service now performed by a single, unified system. Branch lines would be separated from their trunk lines. Terminals would be disconnected from the lines now serving them. Roundabout routes would be largely substituted for present direct lines. For towns in the Sacramento and San Joaquin Valleys, also between other points in California, and between points in California and neighboring states, two and three-line hauls would be substituted for the present single line hauls. Freight would have to be dragged from one car to another and from one station to another. Passengers would have to leave their coach in the middle of the night at dismal places, such as Goshen Junction, and transfer to another coach of a different line, etc., etc."

Before a meeting of the Board of Governors of the Civic League of Improvement Clubs and Associations in San Francisco, on July 7th, Mr. Fred G. Athearn, Western Counsel for the Union Pacific, took up this argument of Mr. Thelen's for discussion. He declared that every traveler and shipper knew that it was a groundless bugaboo without any basis of fact or reason. Then Mr. C. W. Durbrow, counsel and rate specialist for the Southern Pacific, Mr. Thelen's colleague in the employ of that corporation, replied to Mr. Athearn in the following words, which are taken from the stenographic record of the joint discussion:

"Now, I want to say just a few words, if you please, because my time is almost expired, with reference to some of these other suggestions, that have been made. A great deal of stress has been laid here upon this two-line-haul proposition, and changing cars in the middle of the night in your nightgown, and trucking freight from one car to another, and all that kind of bunk - that is all it is, bunk. Who I said to the Union Pacific counsel that you have to do that? Did I say it? Did any representative of the Southern Pacific say it? No. Some boob out in the country told him that, and he is setting that up as a strawman and trying to demolish it."

THE THELEN-SPROULE
DISAGREEMENT

In a pamphlet circulated by the Southern Pacific Company entitled, "The Proposed Central Pacific - Southern Pacific Unmerger" by Max Thelen, the following statements appeared:

Thelen's Fright

Effect of Proposed Unmerger on Rates.

"The unmerging would not reduce rates, either local or transcontinental. If any change in rates should result, it would be an increase and not a decrease, because two-line hauls are more expensive than one-line hauls and also because of the duplicate operating expenses and the enormous duplicate investments which would necessarily be made by these railroads in branch lines, main lines, shops, terminal facilities, rolling stock, and other property in an effort to bind up the gashes caused by the dismemberment of the present single system."

Effect of Proposed Unmerger on Financial
Stability of Southern Pacific

"The tearing away of the Central Pacific would be a terrible blow to the Southern Pacific. The Southern Pacific would lose practically all of its deciduous fruit business, a large part of the citrus and dried fruit traffic, and, in a word, practically all its transcontinental business of Northern and Central California and Oregon.

"It would have taken away from it many of its most profitable feeders in California. It could not hope, with its long swing to the south to Galveston and New Orleans, to compete successfully on any substantial amount of transcontinental business except that to and from Southern California. And as to that business, the position of the Southern Pacific has already been weakened since 1914 by the opening of the Panama Canal and the entry of the Union Pacific into Los Angeles."

Effect of Proposed Unmerger on Maintenance of
Effective Competition

"The acquisition of the Central Pacific by the Union Pacific would give to the Union Pacific a position of overwhelming strength which would prevent competition on terms of equality with the Santa Fe, Western Pacific, and what would be left of the Southern Pacific. The best interests of California require that, all of these three railroads be kept strong, with a fair chance to compete."

Sproule's Comforting Reply

In February, 1913, Mr. William Sproule, President of the Southern Pacific Company, was one of the principal witnesses at the hearing before the California Railroad Commission when the Southern Pacific Company made a voluntary application to the Commission for permission to sell the Central Pacific to the Union Pacific. The following excerpts from Mr. Sproule's testimony given under oath, are taken from the official transcript of the hearing:

Q. Then is it or is it not your opinion that the transfer of the ownership of the stock of the Central Pacific from the Southern Pacific to the Union Pacific will reduce the transcontinental rates from California, east and west?

A. Well, the greater the number of roads in here, the less likelihood there is of maintaining rates at the present parity.

Q. I don't believe the substitution of one additional transcontinental line will reduce railroad rates one cent. Do you believe that?

A. I cannot say that, Mr. Chairman. If the advent of one would not, then the advent of two should not, and the advent of three would not be likely to. The only answer that I can make you is that the tendency of an increased number of railroads competing for the same traffic is that, in their zeal to get the business, they reach out with the shipper and reach conclusions as to rates which do reduce rates. The greater the number of railroads contending for any piece of traffic, the greater the tendency to reduce rates. (148-149.)

Q. Is it your opinion it will improve, first, the service of the Union Pacific and Central Pacific, and second, the service of the Southern Pacific?

A. Competition always improves service, and the competition will be chiefly in the service.

A. The effect as to local points not competitive would probably be unnoticed, depending, however on the polity of the new owners. The effect from competitive points, Fresno, for example, would be to give Fresno three railroads where it now has only two, at Tehama to give it two railroads where it now has only one, at Sacramento three railroads where it now has two, at points on the joint line between Sacramento and Oakland, by way of Benicia, two roads where they now have one, the Union Pacific on that line having been free to make what rates it pleases, as we are, free to make what rates we please. (152.)

A. The fact is we have a distinct advantage in the through business in having one continuous line from Northern California to Atlantic seaboard and to the Gulf also; it gives us business in which the continuity of service and of attention and responsibility is attractive to the shipper and far ar offsets the question of short line, aside from which there is to be remembered that, from a point of a few miles south of Fresno, the El Paso route is just as good as the route via Ogden, and the difference in distance between San Francisco to Fresno is not enough to offset the other conditions governing the commercial distribution of the business of this company, and if all the lines were on the alert, the El Paso routes will get their share of the business, in former years did get it, in later years have always got a good proportion of it, and under conditions of active work by the Southern Pacific in connection with its El Paso routes, this tonnage would be materially increased; in other words, under this change, pursuant to this agreement, it is the Central Pacific that is likely to lose the business and the Southern Pacific that is likely to get business, because the Southern has been the ally of the Ogden route heretofore and now, because it is a competitor, its forces will be exerted in taking the business from the Ogden route. (174-175.)

* * * * *

A. We are not by any means in the lion's maw of the Union Pacific; we will have the Western Pacific and Santa Fe soliciting us for this business, too. (182.)

Q. Who is going to get the lion's share of that [dried fruit] from California-the Southern Pacific or Union Pacific by reason of this arrangement?

A. Well, I will bet on the Union Pacific not getting the lion's share of it. (183.)

Q. As Colonel Loveland suggests, each of the Iowa lines will, of course, be pulling for the Union Pacific, the same as the Rock Island will be pulling for you ?

A. As to that I will urge the general answer that covers all the cases except the deciduous fruit, which is, that the Southern Pacific has hitherto been the allied connection of the Union Pacific; hereafter the Southern Pacific, as to all of that business, will be the active competitor of the Union Pacific, and all the friendly connections of the Southern Pacific will be competitors of the Union Pacific and their connections. Now, it is a case of competition, a case of service and of conditions of distribution, and they might vary from time to time, and will, but in the upshot of it, the Southern Pacific, as such, expects to get more revenue relatively out of the business it hauls than it has obtained hitherto, and for the reason that hitherto everything it fed to the Union Pacific it fed on a mileage pro rata, which will not undoubtedly be the condition, hereafter. (183-184.)

* * * * *

Q. Mr. Sproule, the Central Pacific lines will require a large amount of money immediately and in the future for betterments and improvements, will they not?

A. Yes, running into the tens of millions.

Q. And so far as that is concerned, the Southern Pacific Company is relieved of the obligation of furnishing that money?

A. Yes. (191.)

* * * * *

A. Well we recover into our treasury the greater Part of $100,000,000; we rid ourselves of about $190,000,000 of fixed charges, bonded indebtedness; we relieve ourselves of the most expensive parts of our line to maintain; and relieve ourselves of some unproductive properties, relatively speaking, that it is an advantage to us to divest ourselves of, such as the line south from Hazen; it relieves us also of the necessity of furnishing money to build the Fernley-Lassen line; relieves us of expenditures for double tracking on the Central Pacific which will amount still to many millions of dollars, and the building of a tunnel through the Sierras, if that is done; and relieves us of the future problem of a better facility for crossing the summit of the Sierras; coupled with which it lightens our burdens on the joint line and our terminals, where we will have them to share the expense with us. (195-196.)

THE DIVORCE OF THE
CENTRAL PACIFIC AND
SOUTHERN PACIFIC
RAILROADS

The Entry of Another Transcontinental Railroad into California Would Mean Active Competition, With a Favorable Effect on Rates and Service.

The Change in, Ownership of the Central Pacific Would Not Affect Adversely Either Passenger or Freight Traffic; It Would Not Give the Union Pacific a Dominant Position.

As told by:

Mr. WILLIAM SPROULE, President of the Southern Pacific, in His Testimony Before the California Railroad Commission in February, 1913, When the Southern Pacific Made a Voluntary Application for or Permission to Sell the Central Pacific to the Union Pacific.

Mr. William Sproule, President of the Southern Pacific Company, was one of the principal witnesses at the hearing before the California Railroad Commission in February, 1913, when the Southern Pacific Company made a voluntary application to that Commission to sell the Central Pacific to the Union Pacific. The official number of that application is 409.

There is, perhaps, no one better qualified than Mr. Sproule to state what the effect would be of the separation of the Southern and Central Pacific.

The following is taken from the sworn testimony of Mr. Sproule in the hearing referred to and is submitted without comment. The numbers in parentheses refer to the page of the reporter's Transcript on file in the office of the Railroad Commission on which the testimony quoted may be found.

[Mr. Sproule under Oath]

Q. I wish to ask you, Mr. Sproule, as to the operating and traffic conditions of these lines. Prior to this purchase of the Southern Pacific stock by the Union, was not freight routed according to shippers' requests, but as far as possible, through solicitation, for the longest haul by the Central Pacific's line or via the Southern Pacific Sunset line; would that state generally the operating and traffic conditions ?

[Long Haul via Sunset Route Is Favored]

A. The Southern Pacific secured all the business it could for its longest haul, which was its Sunset Line; it had a preferential arrangement with the Union Pacific, which was of rather a loose-jointed kind, but still the Union Pacific was a strong connection, for which we solicited business; but as a rule we worked with any line that worked with us and we solicited business by all routes and the shipper controlled the routing by every route; the only exception to that, as I remember it, being in the case of oranges, in which the carrier took control of the routing for a time because of the flagrant rebate
conditions that developed and which became a menace to the railroads, both legally and in their revenues, and that was an act of self-defense.

Q. Now, after the Union Pacific acquired control of this 46 per cent of the capital stock of the Southern Pacific Company, what changes, if any, were made in the operating and traffic conditions of the Southern Pacific lines?

[Still Worked for 100 Per Cent Line]

A. So far as the public was concerned, it made no change whatever; so far as the Southern Pacific was concerned, we continued to solicit for our long haul, what we call our 100 per cent line, Sunset Route; we call it the 100 per cent line because if the freight from San Francisco to New York goes that way we get 100 per cent of the revenue; but with respect to the Ogden line, the effect of the Union Pacific coming into our affairs was to make the Southern Pacific the preferred connection of the Union Pacific, and to make the Union Pacific the preferred connection of the Southern Pacific, except as to that Sunset line; the Union Pacific and the Southern Pacific from that date have worked with each other preferentially.

Q. That was to the benefit of the Union?

A. Yes, that was to the benefit of the Union.

Q. And also the Southern?

[Partner with Money When Needed]

A. Essentially, and was also beneficial to the Southern in that it gave us a partner at a time when we needed money and enabled us to improve our properties.

Q. Wasn't that a very large factor of the benefit to the Southern Pacific Company, that the ability of the Union Pacific to finance the moneys necessary to improve these lines was obtained in that way?

A. It was a great benefit, not only to the Southern Pacific Company, but of great benefit it to the public, because it took impoverished roads and put them in first-class condition.

[Roads and Service Improved]

Q. The roads were brought up to high-grade level, were they not?

A. Yes.

Q. And maintained in that way, whereas before that time they could not be for want of money?

A. Yes.

Q. That, of course, gave the public better service and inured to its benefit?

A. It was of great advantage in every respect.

Q. Now, we have before us here this proposed contract and I have asked you about the traffic conditions before the merger and after the merger, and now I ask you as to the change, if any, in these traffic conditions which will be brought about by the adoption of this contract?

[A New Active Competitor]

A. The effect of the contract will be completely to change the relations between the Union Pacific and the Southern Pacific. The Union Pacific, instead of being the preferred connection of the Southern Pacific, will become the Southern Pacific's active competitor, and the Southern Pacific is, by that contract, inevitably forced to become the active competitor of the Union Pacific. I put some emphasis upon that statement because I observe so much misapprehension about it in the public mind, and I would like to go into that as fully as the Commission would desire, so that every aspect of it may be disclosed. (137-139.)

Q. Now, Mr. Sproule, I would like if you would just tell the Commission, just assuming that the contract goes into effect; I don't care how it was made or why it was made, but what will be the effect of that, upon the traffic conditions?

["Union Pacific Will Be the Competitor
of the Southern Pacific at Every
California Terminal."]

A. First, as to transcontinental, hitherto the Southern Pacific has been the connection of the Union Pacific with respect to transcontinental business from all California points; when this contract takes effect, if it takes effect, the Union Pacific will be the competitor of the Southern Pacific at every California terminal; for example, in San Francisco, every 100 pounds of freight or every ticket routed over the Union Pacific is wholly lost to the Southern Pacific; the same is true at Oakland, San Jose, Sacramento, Marysville, Stockton, and is already true of Los Angeles, wherever the business is routed by the San Pedro line in connection with the Union Pacific; but speaking of this immediate territory, at every one of these terminal points we will be in acute competition with the Union Pacific, because if we do not succeed in getting the business by our own hauls and they get it, we don't get one cent of it; at local points, the effect of it will be that, if we are not successful in getting the business for our long haul or hauls, we will have the opportunity of delivering it to our connections at any junction with them that seems advisable; for example, under the same rates, divisions and service, the Western Pacific is just as good a connection for us at Sacramento as the Union Pacific would be; the Santa Fe at Mojave may be a better connection for us than either of them; and our long haul is via Portland on the one hand or via El Paso on the other in connection with the Rock Island or Texas Pacific, or our longest haul by the G. H. & S. A.; but with respect to all that business we have to compete actively with the Union Pacific, where now the Union Pacific is our long haul connection. (141-142.)

Q. Now, the new arrangement on transcontinental business, in your view, will certainly not decrease rates. Will it improve service over what exists today?

[Competition Will Increase, with Tendency to Lower Rates]

A. It necessarily increases the competition between the carriers themselves; the effect of the alliance with the Union Pacific is bound to increase, through a series of years, the activity of the Ogden Route, and the El Paso Routes have been less active; the effect of the new agreement would be to force the Southern Pacific, in connection with its El Paso routes, into very active affiliations and strenuous competition, and where, in the case of business that they cannot get for or the El Paso routes, it is forced to make delivery by the shipper at a short haul junction, it will make that delivery to the Union Pacific, we will say, at Sacramento, or the Western Pacific at Sacramento or Stockton, or the Santa Fe at Mojave, the Southern Pacific's interest being, if it cannot get its long haul, to get the longest haul it can. (144.)

Q. Well, it is your belief, just as Judge Lovett suggested, that it will not reduce the rates?

A. Except to the extent that competition has a tendency to reduce rates.

Q. Well, do you think that rate reductions will follow ? -

[Insists on Hope of Lower Rates]

A. That has not been considered; I don't know why they should, except as the competition of the railroads themselves or the commercial forces at work bring about rate reductions. (145.)

Q. Yes, but so, Mr. Sproule, do all roads of the United States have power to reduce their rates, but that doesn't prevent them from joining in an application to the Interstate Commerce Commission to increase them?

[Southern Pacific Would Be Free to Cut Rates]

A. Perhaps I can answer your question in another way, Mr. Chairman, if you will permit me, and that is, at present we have a great interest in the. maintenance of transcontinental rates, because we have the longest haul via Ogden, which is the great feeder of the Central Pacific line. If this agreement is put in effect, our principal interest will be in the long line, the Sunset Line. At the present time the Southern Pacific chafes very seriously under the fact that the water lines are permitted to take a great bulk of the business between the Pacific Coast terminals and Atlantic Seaboard, and the Sunset Line is not able to participate in that traffic to the extent that we would like to participate, for the reason that, if we do cut the rates by the Sunset Route, we will cut them by all our other routes and sacrifice the main bulk of our business in order to take care of a portion of it. Now, by this new agreement, we lose all interest in the Ogden Route; our interest is concentrated on the Sunset Line; and I am free to admit that I have been very carefully thinking over the question of whether we should not, in view of the alignment, take steps to restore to the Sunset Line a material share of that business which it has lost to the water lines, simply on the assumption that, if we can load up our trains with it and carry heavy trains instead of light ones, we will thereby increase our gross, somewhat increase our net, and we will have transferred to the rail lines once more the business which is now going by the sea. That is one aspect of the case. (147-148.)

Q. Then is it or is it not your opinion that the transfer of the ownership of the stock of the Central Pacific from the Southern Pacific to the Union Pacific will reduce the transcontinental rates from California, east and west?

A. Well, the greater the number of roads in here, the less likelihood there is of maintaining rates at the present parity.

[The Law of Competition]

Q. I don't believe the substitution of one additional transcontinental line will reduce railroad rates one cent. Do you believe that?

A. I cannot say that, Mr. Chairman. If the advent of one would not, then the advent of two should not, and the advent of three would, not be likely to. The only answer that I can make you is that the tendency of an increased number of railroads competing for the same traffic is that, in their zeal to get the business, they reach out with the shipper and reach conclusions as to rates which do reduce rates. The greater the number of railroads contending for any piece of traffic, the greater the tendency to reduce rates. (148-149.)

Q. Is it your opinion it will improve, first, the service of the Union Pacific and Central Pacific, and second, the service of the Southern Pacific?

[Competition Always Improves Service]

A. Competition always improves service, and the competition will be chiefly in the service.

Q. That is, in time of running?

A. In running time and in the care given the business and the soliciting of it and the care of it after obtaining it; in other words, service and attention.

Q. Let us assume that the Southern Pacific is going to part with the stock of the Central Pacific, thereby giving the Central Pacific control into all the terminals as you have suggested. What will be the natural effect upon rates within the State of California?

[Increase in Rail Facilities]

A. The effect as to local points not competitive would probably be unnoticed, depending, however, on the policy of the new owners. The effect from competitive points, Fresno, for example, would be to give Fresno three railroads where it now has only two, at Tehama to give it two railroads where it now has only one, at Sacramento three railroads where it now has two, at points on the joint line ne between Sacramento and Oakland, by way of Benicia, two roads where they now have one, the Union Pacific on that line having been free to make what rates it pleases, as we are free to make what rates we please. (152.)

Testifying as to the effect the separation of the two roads might have upon the business of the Southern Pacific, Mr. Sproule says:

[Business of Roads Would Be Benefitted]

A. The fact is we have a distinct advantage in the through business in having one continuous line from Northern California to Atlantic Seaboard and to the Gulf also; it gives us business in which the continuity of service and of attention and responsibility is attractive to the shipper and far offsets the question of short line, aside from which there is to be remembered that, from . a point a few miles south of Fresno, the El Paso route is just as good as the route via Ogden, and the difference in distance between San Francisco to Fresno is not enough to offset the other conditions governing the commercial distribution of the business of this company, and if all the lines were on the alert, the El Paso routes will get their share of the business, in former years did get it, in later years have always got a good proportion of it, and under conditions of active work by the Southern Pacific in connection with its El Paso routes, this tonnage would be materially increased; in other words, under this change, pursuant to this agreement it is the Central Pacific that is likely to lose the business and the Southern Pacific that is likely to get business, because the Southern has been the ally of the Ogden route heretofore and now, because it is a competitor, its forces will be exerted in taking the business from the Ogden route. (174-175.).

A. We are not by any means in the lion's maw of the Union Pacific; we will have the Western Pacific and Santa Fe soliciting us for this business, too. (182.)

Q. Who is going to get the lion's share of that [dried fruit] from California - the Southern Pacific or Union Pacific by reason of this arrangement ?

[Union Pacific Would Not Get Lion's Share]

A. Well, I will bet on the Union Pacific not getting the lion's share of it. (183.)

Q. As Colonel Loveland suggests, each of the Iowa lines will, of course, be pulling for the Union Pacific, the same as the Rock Island will be pulling for you ?

[Southern Pacific Expected to Get More Revenue]

A. As to that I will urge the general answer that covers all the cases except the deciduous fruit, which is, that the Southern Pacific has hitherto been the allied connection of the Union Pacific; hereafter the Southern Pacific, as to all of that business, will be the active competitor of the Union Pacific, and all the friendly connections of the Southern Pacific will be competitors of the Union Pacific and their connections. Now, it is a case of competition, a case of service and of conditions of distribution, and they might vary from time to time, and will, but in the upshot of it, the Southern Pacific, as such, expects to get more revenue relatively out of the business it hauls than it has obtained hitherto, and for the reason that hitherto everything it fed to the Union Pacific it fed on a mileage pro rata, which will not undoubtedly be the condition hereafter. (183-184.)

Q. Well, passengers will continue to go as they do now?

[No Effect on Passenger Travel]

A. The change of ownership of the Central Pacific will not affect the passenger. He simply steps into a Union Pacific train at Oakland, on a Union Pacific ferry boat in San Francisco, instead of Southern Pacific ferry boat and Southern Pacific train; but it does not affect his movements in any other way. (185.)

Q. Mr. Sproule, the Central Pacific lines will, require a large amount of money immediately and in the future for betterments and improvements, will they not?

[Great New Expenditures Necessary for Central Pacific]

A. Yes, running into the tens of millions.

Q. And so far as that is concerned, the Southern Pacific Company is relieved of the obligation of furnishing that money?

A. Yes. (191.)

Q. Now, generally, as to the Southern Pacific's financial condition and its maintenance in the future, do you think that, with this trade effected, the financial condition of the company is good and that it can be successfully maintained in the future?

[Southern Pacific Treasury Would be Enriched]

A. Well, we recover into our treasury the greater part of $100,000,000; we rid ourselves of about $190,000,000 of fixed charges, bonded indebtedness; we relieve ourselves of the most expensive parts of our line to maintain; and relieve ourselves of some unproductive properties, relatively speaking, that it is an advantage to us to divest ourselves of, such as the line south from Hazen; it relieves us also of the necessity of furnishing money to build the Fernley-Lassen line; relieves us of expenditures for double tracking on the Central Pacific which will amount still to many millions of dollars, and the building of a tunnel through the Sierras, if that is done; and relieves us of the future problem of a better facility for crossing the summit of the Sierras; coupled with which it lightens our burdens on the joint line and our terminals, where we will have them to share the expense with us. (195-196.)

Q. The natural effect of the segregation of the Sunset Route from the line to Ogden would be to increase the competition from the Atlantic seaboard ?

A. Is to put each Part of the country into more active competition. (260.)

[With the Authority of an Expert]

The foregoing quotations from the testimony of Mr. William Sproule given before the California Railroad Commission at the time the Southern Pacific proposed to enter into an agreement to sell the Central Pacific to the Union Pacific, are illuminative, because they are given by a man who is recognized as a traffic and railroad expert.

Courtesy of the Bruce C. Cooper Collection.