The Railroad Builders Part 6

It would be a great advantage to Smith to have a good railroad from St.

Paul to Winnipeg as the Red River boats were frozen up in the winter and the service on the St. Paul and Pacific, under the receiver, was impossible. So Smith listened with favor to Hill's project of getting hold of the St. Paul and Pacific and making a real railroad out of it.

And whenever Smith went to Montreal he talked the matter over with his cousin George Stephen--later Lord Mount Stephen--who was the head of the Bank of Montreal. In 1877 Stephen and Richard B. Angus, the general manager of the Bank, went to Chicago on business. While there, they had two weeks' time on their hands, and tossed a penny to decide whether to run down to St. Louis or up to St. Paul. The penny sent them to St.

Paul. "I am glad of that," said Stephen; "it will give us a chance to see the prairies and look over that St. Paul and Pacific road that Donald Smith is always talking about."

When they arrived in St. Paul, James J. Hill took them over the line to Breckenridge. The country had been scoured by the gra.s.shoppers and looked like the top of an old rusty stove. But Stephen was a broadminded man, wise enough to know that the pest of gra.s.shoppers could not last forever. He was greatly impressed with the ultimate possibilities of the soil and, under the hypnotic influence of Hill's eloquence, became quite enthusiastic over the scheme for getting hold of the railroad; but, as it would evidently involve millions, he didn't see how it could be done.

The road had originally been financed by bonds sold largely in Holland, and to do anything at all it was necessary to get in touch with these Dutch bondholders. In 1877 Stephen went over to Amsterdam and secured an option on the bonds at thirty cents on the dollar--less than the accrued interest which was due and unpaid on them. He then came back to America, conferred with John S. Kennedy at New York, who represented both Dutch and American bondholders, and brought Kennedy into the combination.

In the spring of 1878 the St. Paul and Pacific was taken over. People still smiled at Hill and wondered how he had induced a hard-headed bank president like Stephen to put up the money. n.o.body in St. Paul believed in the future of the road. Even the syndicate's attorneys, when offered a choice between taking $25,000 in cash or $500,000 of the new road's stock for their services, preferred the cash. Had they taken the stock and held it for thirty years, they would have had, in princ.i.p.al and interest, some $30,000,000.

To the surprise of everybody, including Hill and his friends, the gra.s.shoppers suddenly disappeared in the early summer of 1877 and never came back. That summer saw the biggest wheat crop that had ever been harvested in Minnesota. "Hill's Folly," as it was afterwards called, with its thirty locomotives and few hundred cars, was feverish with success. Hill worked every possible source to get extra cars and went all the way to New York to buy a lot of discarded pa.s.senger coaches from the Harlem Railroad. By the end of the season it was evident to everybody that the St. Paul and Pacific was going to have a career and that "Jim" Hill's dream was coming true.

Immediately the fortunate owners began to plan for the future. They had acquired the road at an initial cost of only $280,000 in cash. In the following year they advanced money for the completion of the unfinished section, as necessary to obtain the benefit of a generous grant of land from the State. Then, in 1879, having acquired full possession of the property, and having several millions of dollars in profits, they issued bonds for further developments. This gave them sufficient basis to enlarge their scheme greatly, and in the formation of the St. Paul, Minneapolis and Manitoba Railroad, they created $15,000,000 of stock, which was divided equitably among Hill, Stephen, Angus, Smith, Kennedy, and Kittson. This stock was all "water," but the railroad prospered so extraordinarily in the succeeding few years that by 1882 the stock was worth $140 a share. And in 1883 they issued to themselves $10,000,000 of six per cent bonds for $1,000,000--a further division of $9,000,000, coming out of nothing but good will, earning power, and future prospects.

The decade from 1880 to 1890 witnessed a steady growth of the system formed in 1879 under the name of the St. Paul, Minneapolis and Manitoba.

The 600 odd miles which it embraced when Hill and his coterie made their big stock division had grown in 1890 to 2775 miles. It then consisted of a main line reaching from St. Paul and Minneapolis across Minnesota and the northern part of North Dakota, far into Montana, with a second main line from Duluth across Minnesota to a junction with the St. Paul line in North Dakota, besides numerous branches reaching points of importance in both these States.

But the development of the Hill properties had by no means reached its limit at this time. Hill's dream had been to construct a through line across the northern tier of States and Territories to the Pacific, and this plan had been constantly in his mind while he was building up the system in Manitoba. The original line running up into Manitoba and reaching Winnipeg was all very well as a start. It had paid so well that the original group of men had become millionaires almost overnight. But Hill meant to show the public that, after all, the early success was only an incident and merely a stepping-stone to the really great thing.

Practical railroad men everywhere ridiculed the idea of a railroad running across the far northern country, climbing mountain ranges, traversing hundreds of streams and extending for great stretches through absolutely wild and uninhabited regions. Especially did they deem it absurd to attempt such an undertaking without government aid, subsidies, or grants of land, pointing to the experience of such roads as the Union Pacific, Northern Pacific, and Santa Fe. All these had received financial a.s.sistance and large land grants, and yet all had gone through long periods of financial vicissitude before they had become profitable and stable enterprises.

But Hill was more fa.r.s.eeing than his critics. In 1889, the name of the company was changed to the Great Northern Railway, and under this t.i.tle the extension to the coast was rapidly carried forward and was opened in the panic year of 1893. When all the other transcontinental lines went into bankruptcy, Hill's road not only kept out of the courts but actually earned and paid annual dividends of five per cent on its stock.

The five years from 1896 to 1901 were years of uninterrupted prosperity for the Great Northern Railroad. Each year its credit rose; each year it grew to be more of a force in the Western railway situation. In these years the control of the property had somewhat changed and a few of the original promoters had died or had withdrawn. But Hill, Lord Strathcona, Lord Mount Stephen, and John S. Kennedy of the original group, all held their large interests, and Hill in particular had added to his holdings as the years had gone by.

The secret of Hill's striking success with his Western extension was the method by which the line was constructed. Hill had a theory that it was far better to go around mountains and avoid grades than to climb them or to bore through them; it was always better to find the route which would make long hauls easy and economical. He thus built his road with the idea of keeping down the operating costs and of showing a larger margin of profit than the others. From the very start the Great Northern was noted for its low ratio of operating expenses and its comparatively long trains and heavy trainloads. It was by this method that it really made its money.

By the year 1901 the Great Northern Railway absolutely controlled its own territory. But it was still handicapped by lack of an independent entrance into Chicago, as its eastern lines terminated at Duluth and St. Paul. At the western end also, the situation was unsatisfactory.

It seemed important for the Great Northern to control a line of its own into Portland, Oregon, because the Northern Pacific Railroad, which, as we have seen, had been reorganized several years before by the Morgan interests, had been rapidly extending its lines in Oregon and Washington. Hill and his a.s.sociates, therefore, had been quietly buying a substantial interest in the Northern Pacific property and thus, in the course of time, had come into closer relations with the Morgan group in New York. Soon afterward, under Hill's influence, the Northern Pacific began the construction of further extensions in Oregon and reached into territory that the Harriman interests in the Union Pacific Railroad had regarded as their own. This move created much friction between the Harriman and Hill groups, and in order to forestall danger Harriman in turn began quietly acc.u.mulating an interest in the Northern Pacific property by purchases in the open market.

The story of the battle royal between the Hill and Harriman interests will be told in a subsequent chapter. It is not necessary to repeat the history of the famous corner of 1901 nor of the compromise effected by the formation of the Northern Securities Company. The final result of this contest was the complete harmonizing of the Western railroad situation, so far as the Hill and the Harriman interests were concerned.

In the succeeding years the Great Northern system penetrated to the heart of Manitoba and constructed lines through British Columbia to Nelson and Vancouver. It built other branches to Spokane, Washington, and Helena and b.u.t.te, Montana. Moreover by the discovery of extensive ore deposits on the lines of the company in northern Minnesota and by subsequent purchases of other mines, the Great Northern acquired control of about sixty-five thousand acres and hundreds of millions of tons of iron ore. All the properties so controlled were leased on a very profitable basis to the United States Steel Corporation. The Great Northern Railroad itself did not retain control of the ore lands but, through a trusteeship, gave a beneficial interest in them to its stockholders in the shape of a special dividend.

The profits under this lease promised to be very large in the course of time, but the Steel Corporation had the option to cancel after a five-year period, and in 1912, as the result of a United States Government suit for the dissolution of the Steel Corporation, the lease was canceled. Since that time the trustees of the ore lands have executed other leases, and the Great Northern ore certificates are bringing in a substantial return to their owners.

The three Hill lines--the Great Northern, the Northern Pacific, and the Chicago, Burlington and Quincy--have been unusually profitable.

The Great Northern and the Northern Pacific have steadily paid liberal dividends to their stockholders on increasing amounts of capital stock; and the Burlington, whose whole stock is owned by these two roads, has also handed over liberal profits year by year, at the same time acc.u.mulating an earned surplus of more than one hundred million dollars and spending an almost equal amount of profits on the improvement and maintenance of the property. The Burlington today controls the Colorado Southern, which extends southward from the Burlington lines in Wyoming, pa.s.sing through Denver, Pueblo, Fort Worth, and other points southward to the Gulf.

CHAPTER X. THE RAILROAD SYSTEM OF THE SOUTH

In the year 1856 a small single-track railroad was opened from Richmond to Danville, Virginia. This enterprise, like many others in ante-bellum days, was carried out largely with funds supplied by the State. As long afterwards as 1867, three-fifths of the stock was owned by the State of Virginia, but soon after this time the State disposed of its investment to a railroad company operating a line in North Carolina from Goldsboro westward to Greensboro, and projected southward to Charlotte. In modern times, this little road, like the Richmond and Danville, has become an integral part of the Southern Railway system, but in those days it was controlled, curiously enough, by the Pennsylvania Railroad Company.

After 1867 the new owners of the Richmond and Danville began aggressively to extend their lines. By leasing the North Carolina Railroad, a small property forming a link with the Greensboro line, they created a through route from Richmond to Charlotte. By 1874 they had built the road southward to Atlanta, Georgia, and had thus formed the first continuous route from Richmond to that city. Because of the extreme disorder and depression in the South during the years after the Civil War the line did not prosper and was sold under foreclosure about 1875. But the company was reorganized in 1878 and acquired the Charlotte, Columbia and Augusta, thus extending its lines into the heart of South Carolina and tapping a rich territory. During these early years the Pennsylvania Railroad interests, which still held control, supplied the funds necessary for making improvements.

At the same time that the Richmond and Danville was linking up the commercial centers of the southern Atlantic seaboard, another system--known as the East Tennessee, Virginia and Georgia--was being built up in the Appalachian Mountains to the west. This property and its predecessors had to some extent been state-owned enterprises at first, but in 1870 the Pennsylvania Railroad interests acquired control. A holding company called the Southern Railway Securities Company was now formed for the purpose of controlling all the Pennsylvania Railroad interests south of Washington. Besides the properties mentioned, this Securities Company soon obtained several other Atlantic seaboard properties extending from Richmond to Charleston, and also the Memphis and Charleston Railroad, running from Memphis to Chattanooga.

Thus at this early day a considerable railroad system had been welded together in the South, reaching many points of importance and forming direct connection at Washington with the northern properties of the Pennsylvania system. Had this experiment been successful, we would perhaps today reckon the great Southern Railway system as part of the Pennsylvania group. But the outcome was disappointing; the roads did not prosper; and soon the poorer sections began to default. The Pennsylvania then disposed of its interests and left the roads to shift for themselves.

The East Tennessee was the best of these minor lines, and in 1877 it began to acquire others extending through the South. Soon it had penetrated the heart of Alabama, reaching what is today known as the Birmingham district. Additional extensions were made to Macon and Rome, Georgia, and on the north an alliance was arranged with the Norfolk and Western, while with a view to securing some of the business of the West, a connection was constructed at Kentucky-Tennessee state line. Such was the condition of the East Tennessee property by the end of 1881. In the meantime the Richmond and Danville had practically stood still.

About this time a definite revival set in throughout the South as the long-drawn-out period of depression following the war came to an end.

Railroad activity revived, and both the East Tennessee, Virginia and Georgia and the Richmond and Danville roads pa.s.sed into the hands of new and more aggressive interests. The new owners constructed the Georgia Pacific, which ultimately stretched across Alabama and Mississippi.

To finance this enterprise and to consolidate their interests, a new holding company--the Richmond and West Point Terminal Railway and Warehouse Company--was formed in 1881 with large powers and authority to acquire the stocks and bonds of railroad properties in many Southern States. In addition to the properties already named, the Virginia Midland Railway was now acquired, and by 1883 the entire system had been merged under this organization. The company also secured the control of a line of steamboats running from West Point, Virginia, to Baltimore, and made close traffic arrangements with the Clyde line of steamers running between New York and Philadelphia and all important Southern points.

The personality at the head of the Richmond and West Point Terminal Railway and Warehouse Company was Calvin S. Brice, a man who had become increasingly prominent in railway affairs in the Southern States. Brice was something of a genius at combination and by 1883 had linked together and solidified the various properties in a very efficient manner.

Nevertheless the compet.i.tive conditions of the time, combined with the necessarily more or less crude and hazardous methods adopted in financing and capitalizing the enterprise, prevented the credit of the organization from reaching a sound and secure level. The Tennessee properties especially proved an enc.u.mbrance, and they were almost immediately threatened with bankruptcy. Brice therefore decided to reorganize these subsidiary lines, and a new company called the East Tennessee, Virginia and Georgia Railway took over this section of the system in 1886.

In the meanwhile the Richmond and Danville properties, which were themselves becoming burdened with an ever growing debt, gave the Brice interests constant trouble. A large amount of the stock of the Richmond and Danville, as well as most of its bond issues, remained still outstanding in the hands of the public. Consequently the only way in which Brice and his friends could save the Richmond and Danville property from completely breaking up was to merge it more closely with the holding company in some way. But the credit and standing of the holding company itself were anything but high, for in addition to paying no dividends it had piled up a heavy floating debt of its own and had a poor reputation in Wall Street.

The situation thus becoming acute, the management carried through a remarkable stock-juggling plan. Instead of merging the Richmond and Danville directly into the West Point Terminal Company, the directors secretly decided to turn the Terminal Company a.s.sets over to the Richmond and Danville without apprising the stockholders of the Terminal Company. In conformity with this plan, early in 1886 the Richmond and Danville leased the Virginia Midland, the Western North Carolina, and the Charlotte, Columbia and Augusta railroads, and later in the year the Columbia and Greenville and certain other small lines. At about the same time the Richmond and Danville obtained in some unknown way large amounts of the Terminal Company stock, a portion of which it now issued in exchange for stocks and bonds of certain of these subsidiary companies which it had leased. Having carried through these transfers, the Richmond and Danville then threw the remainder of its Terminal Company stock on the market, where it was bought by investors who knew nothing about these secret transactions.

The Terminal Company was now left high and dry so far as the Richmond and Danville was concerned. But at this juncture a surprising thing happened. The management of the Terminal Company, in its turn, began to buy shares of Richmond and Danville stock and in a short time regained its former control. This shifting of power exactly reversed the situation which had previously existed, when the Terminal Company itself had been controlled by the Danville Company. These changes were followed by a further move on the part of the Brice and Thomas interests, which now formed a syndicate and turned over to the Terminal Company a majority of the stock of the East Tennessee Company for $4,000,000 in cash and a large amount of new Terminal Company stock.

When these transactions had been accomplished, the Terminal Company found itself once more securely in control of the entire system, and the Brice and Thomas interests had incidentally very considerably increased their fortunes and also their hold on the general situation. From this time, the Terminal Company went aggressively forward in an ambitious plan for further expansion. By acquiring control of the Central Railroad and Banking Company of Georgia, the Terminal management was involved with new financial interests which immediately sought to control the system and to eliminate the Brice and Thomas group. The consequent internal contest was adjusted, however, in May, 1888, by electing as president John H. Inman, a man who had been identified with the Central Railroad of Georgia system.

The Richmond Terminal system now put in motion further plans for expansion. In 1890 it acquired a system of lines extending south from Cincinnati to Vicksburg and Shreveport, known as the Queen and Crescent route, and in the meantime made a close alliance with the Atlantic Coast Line system. By the end of 1891 the Richmond Terminal system embraced over 8500 miles of railroad, while the Louisville and Nashville, the next largest system in the Southern States, had only about 2400 miles.

But as 1891 opened, the vast Richmond Terminal system was perilously near financial collapse. Notwithstanding the great value of many of the lines, its physical condition was poor; the liabilities and capitalization were enormous; and much of the mileage was distinctly unprofitable. About this time many disquieting facts began to leak out: during the previous year the Richmond and Danville had been operated at a large loss, and this fact had been concealed by deceptive entries on the books; the dividends, paid on the Central Railroad of Georgia stock had not been earned for some years; and the East Tennessee properties were hardly paying their way.

Various investigating committees were now appointed, and finally a committee headed by Frederic P. Olcott of New York took charge and worked out a complete plan of reorganization. The scheme, however, met with strenuous opposition, and thus matters dragged on into the panic period of 1893, when the entire system went into bankruptcy and into the hands of receivers. The various sections were operated separately or jointly by receivers during this unsettled period, and it looked for some time as though an effective reorganization which would prevent the properties from entirely disintegrating could not be successfully accomplished.

In the dark days of 1893, after Olcott and the Central Trust Company had failed to effect a reorganization of the Richmond Terminal system, a new interest came to the rescue, represented by the firm of J. P. Morgan and Company, whose growing reputation was due to the unusual personality of J. P. Morgan himself. He was essentially an organizer. The railroad properties which had become more or less identified with the Morgan interests had for the most part prospered. It was felt that Morgan's banking-house was the only one in Wall Street which might be equal to the task. The proposal was made to him; he did not invite it. In fact, it is said that for some time he was much opposed to taking hold of this disintegrated and broken-down system of railroads operating largely in poor and unprogressive sections, populated for the most part by negroes.

Said Morgan, "n.i.g.g.e.rs are lazy, ignorant, and unprogressive; railroad traffic is created only by industrious, intelligent, and ambitious people."

After months of discussion, however, Morgan finally agreed to undertake the task, and out of the previous chaos there emerged the Southern Railway Company, which has been closely identified with Morgan's name ever since. Probably of the many railroad systems which Morgan reorganized from 1894 down to the time of his death, no system has become more distinctly a Morgan property than the Southern Railway Company.

The plan of reorganization whereby this great aggregation of loosely controlled and poorly managed Southern railroads was welded together into an efficient whole was a very drastic one in its effect on the old security holders. Debts were slashed down everywhere, a.s.sessments were levied, and old worthless stock issues were wiped out. Valueless sections of mileage were lopped off, and an effort was immediately made to strengthen those of real or promising value. Millions of dollars of new capital were spent in rebuilding the main lines; terminals of adequate scope were constructed in all centers of population; and alliances were made with connecting links with a view to building up through traffic from the North and the West.

The first ten years of the Southern Railway system under the Morgan control were practically years of rebuilding and construction. While after ten years of work the main system still radiated through most of the territory already occupied in a crude way in 1894, yet it had acquired a large number of feeders and smaller railroads in other sections. The Mobile and Ohio, operating with its branches about one thousand miles from Mobile to St. Louis, Missouri; the Georgia Southern and Florida, furnishing an important connection from the main system to various points in the State of Florida; the Alabama Great Southern, operating in and near the Birmingham district of Alabama--all these properties were molded into the system during these years. The system was then rounded out toward the North and consolidated through joint control, with the Louisville and Nashville, of the Chicago, Indianapolis and Louisville Railroad, which operated lines northward into Ohio and Illinois and on to Chicago. Thus, with the lines of the Queen and Crescent route running southward from Cincinnati to New Orleans, the system secured a direct through line from its various southern points to the sh.o.r.es of the Great Lakes.

In addition to these developments, the management of the Southern Railway system arranged direct connection with Washington through the joint acquisition with other lines of the Richmond, Fredericksburg and Potomac; it made traffic arrangements with the Pennsylvania and the Baltimore and Ohio systems to Baltimore, Philadelphia, and New York; and it also developed close alliances with the coastwise steamships plying northward from various Southern points.

In the reorganization of 1894 the Central of Georgia Railway system was cut off and separately reorganized, although it remained under the control of Morgan for a number of years. Finally in 1907 Morgan sold his Georgia properties to Charles W. Morse. They subsequently pa.s.sed to Edward H. Harriman, who afterwards merged them into the Illinois Central system, under which control they have since remained.

As compared with the old Richmond Terminal aggregation with its broken-down rails and roadbed, poor equipment, and miserable service, the modern Southern Railway system shows startling changes. The Southern States have grown enormously in population and wealth during the last generation; the industrial activities of the South at the present time are elements of large importance to the country as a whole. Cities have vastly increased in population; new towns and manufacturing districts have been built up; and at the present there is scarcely a mile of unprofitable railroad in the entire 9000 miles under operation. In recent years large soft coal deposits have been discovered and developed on many of the branch lines, and today the coal tonnage of the Southern Railway is exceeding the relatively unstable lumber tonnage of two or three decades ago.

CHAPTER XI. THE LIFE WORK OF EDWARD H. HARRIMAN

In a previous chapter there has been related the early history of the great line that first joined the Atlantic and the Pacific Oceans--the Union Pacific. But the history of this property in recent years is almost as startling and romantic as its story in the sixties and seventies. It was not until recent days that the golden dreams entertained by these early builders came true. The man who really reaped the harvest and who at the same time gave the Union Pacific that position among American railroads which its founders foresaw was the last, and some writers think, the greatest of all American railroad leaders.

The Union Pacific, a bankrupt railroad in 1893, lay quiescent under the stress of the hard times that lasted until 1898. The long story of its tribulations hardly made it a tempting morsel for the men who were then most active in the railroad field. In 1895 or 1896 the several protective committees which had been appointed to look after the interests of stockholders and defaulted bondholders had tried to induce J. P. Morgan to undertake the reorganization, but he had refused.

To reorganize the Union Pacific meant that not far from one hundred millions of new capital would sooner or later have to be supplied, and there was no other banking-house in America at that time which seemed strong enough for the task. Smaller concerns were all involved in the Morgan syndicates or in other undertakings, and a combination of these at the moment seemed out of the question.

About this time the German-Jewish bankinghouse of Kuhn, Loeb and Company began looking into the situation. Kuhn, Loeb and Company were known as a very conservative but very rich concern with close connections in Frankfort and Berlin. Though it had been long established in New York it had not been identified with the railroad reorganization movement nor had it been prominent as an investing or underwriting inst.i.tution.

But now the active partner of the business, Jacob H. Schiff, set out seriously to persuade the various committees to adopt a plan of reorganization which he had devised. Though he made some progress, he soon found much secret opposition and thought that Morgan might be quietly attempting to secure the property. Morgan, however, was not interested. The mystery was still unsolved.