Central Pacific Railroad - Financing

Financing

Construction of the road was financed primarily by 30-year, 6% U.S. Government Bonds authorized by Sec. 5 of the Pacific Railroad Act of 1862. They were issued at the rate of $16,000 per mile of tracked grade completed West of the designated base of the Sierra Nevada Mountains. Sec. 11 of the Act also provided that the issuance of bonds "shall be treble the number per mile" (to $48,000) for tracked grade completed over and within the two mountain ranges (but limited to a total of 300 miles (480 km) at this rate), and "doubled" (to $32,000) per mile of completed grade laid between the two mountain ranges. The U.S. Government Bonds, which constituted a lien upon the railroads and all their fixtures, were repaid in full (and with interest) by the company as and when they became due.

Sec. 10 of the 1864 amending Pacific Railroad Act (13 Statutes at Large, 356) additionally authorized the company to issue its own "First Mortgage Bonds" in total amounts up to (but not exceeding) that of the bonds issued by the United States. Such company-issued securities had priority over the original Government Bonds. (Local and state governments also aided the financing, although the City and County of San Francisco did not do so willingly. This materially slowed early construction efforts.) Sec. 3 of the 1862 Act granted the railroads 10 square miles (26 km2) of public land for every mile laid, except where railroads ran through cities and crossed rivers. This grant was apportioned in 5 sections on alternating sides of the railroad, with each section measuring 0.2 miles (320 m) by 10 miles (16 km). These grants were later doubled to 20 square miles (52 km2) per mile of grade by the 1864 Act.

Although the Pacific Railroad eventually benefited the Bay Area, the City and County of San Francisco obstructed financing it during the early years of 1863-1865. When Stanford was Governor of California, the Legislature passed on April 22, 1863, "An Act to Authorize the Board of Supervisors of the City and County of San Francisco to take and subscribe One Million Dollars to the Capital Stock of the Western Pacific Rail Road Company and the Central Pacific Rail Road Company of California and to provide for the payment of the same and other matters relating thereto" (which was later amended by Section Five of the "Compromise Act" of April 4, 1864). On May 19, 1863, the electors of the City and County of San Francisco passed this bond by a vote of 6,329 to 3,116, in a highly controversial Special Election.

The City and County's financing of the investment through the issuance and delivery of Bonds was delayed for two years, when Mayor Henry P. Coon, and the County Clerk, Wilhelm Loewy, each refused to countersign the Bonds. It took legal actions to force them to do so: in 1864 the Supreme Court of the State of California ordered them under Writs of Mandamus (The People of the State of California ex rel the Central Pacific Railroad Company vs. Henry P. Coon, Mayor; Henry M. Hale, Auditor; and Joseph S. Paxson, Treasurer, of the City and County of San Francisco. 25 Cal. 635) and in 1865, a legal judgment against Loewy (The People ex rel The Central Pacific Railroad Company of California vs. The Board of Supervisors of the City and County of San Francisco, and Wilhelm Lowey, Clerk 27 Cal. 655) directing that the Bonds be countersigned and delivered. In 1863 the legislature's forcing of City and County action became known as the "Dutch Flat Swindle". Critics claimed the CPRR intended to build a railroad only as far as Dutch Flat, to connect to the Dutch Flat Wagon Road which they already controlled.