With Drew out of the way, Fisk and Gould kept issuing more stock to keep Vanderbilt away, but of course that meant existing shareholders found the value of their stock being constantly diluted. In the first four months of Gould’s presidency of the company, the nominal value of shares in the company rose from $34 million to $58 million, entirely as a result of more shares being issued, leading Vanderbilt to complain ruefully that he could afford to buy the Erie, but not the printing press. For political leverage, they appointed to the board William “Boss” Tweed, a New York Democratic politician notorious for his corruption in “Tammany Hall” politics, and in return they obtained favorable legislation from the city administration.
The pair enjoyed themselves, too, at the Erie shareholders’ expense. With railroad company money, they bought the redundant Pike’s Opera House, a huge white marble building in the classical style on Manhattan’s Eighth Avenue, which they promptly leased back to the Erie at $75,000 per year. The Erie’s offices in the building, which they renamed the Grand Opera House— remember, this was a company that was for the most part bankrupt and barely ever paid a dividend in its history—were “reached by a grand carved staircase leading to a pair of huge doors with a tessellated marble hall beyond—all stained glass, Pompeian frescoes and glass chandeliers.” The offices themselves were decorated in a similar ostentatious style, and a company safe, extending from the basement to the roof, was installed. In the theater below, Fisk put on operatic productions, partly to please his mistress, Josie Mansfield, “a good-looking though heavily- jowelled gold-digger with theatrical aspirations but without the requisite talents.”34 Fisk was so enamored of Mansfield that he arranged for a special underground passageway to be built between her apartment and the Erie headquarters, but she was to prove his undoing, as, in 1872, he was murdered by another of her lovers.
Gould remained in control of the Erie Railroad until 1874, when he was ousted by British stockholders and reformers who wanted to put a stop to his constant raids on the company coffers. Gould, though, simply moved west, gaining control of various lines and building up a network amounting to more than ten thousand miles of railroad. His skill lay in knowing precisely when to move in on a railroad to buy stock cheaply and using his considerable managerial prowess to turn around the fortunes of ailing businesses. Indeed, unlike Drew or Durant of the Union Pacific, who were interested only in making money, Gould actually strove to improve the railroads he took over, making them more efficient and viable. At his height, in the 1880s, he controlled about one-seventh of the entire rail network of the United States, including all of the elevated system in New York. For the most part, he left his railroads in a better state than when he acquired them, despite purloining vast amounts of money from them in the process. The Erie was an exception to this generally positive picture: much of the money allocated for improvements such as new rails and cars ended up in Gould’s pockets, and after 1872, when he left it, the line did not pay a dividend until 1941, when the Second World War improved its fortunes.
Vanderbilt, though chastened by his defeat over the Erie, and already aged seventy-three by the time he had gained control of the New York Central, nevertheless continued to acquire railroad companies and expand his empire for the remaining decade of his life. He bought up the Lake Shore & Michigan, which ran from Buffalo in upstate New York through to Chicago, and later the Michigan Central and several other lines. He was also responsible for the construction of the Grand Central Depot in New York, to provide a terminal for his three New York railroads together in one large station. It was conceived as the grandest railroad station in the world— though it had several European competitors in that respect—and had a rather eccentric arrangement to prevent smoke from damaging the great room beyond the buffers with its huge chandeliers lit by gas jets. Rather than allowing locomotives to haul the trains into the platforms, the Central adopted the “flying switch” method of bringing its cars into the station. A short way from the end of the journey, the locomotive would be uncoupled from the coaches behind it, and routed onto a sidetrack that did not lead into the station. With a quick change of the switch rails, the rest of the train would be allowed to roll into the platform, brakemen controlling it to prevent the cars from smashing into the buffers. Amazingly, this remarkable and perilous system was used for many years without accident, leaving the chandeliers unsullied by smoke.
Vanderbilt was succeeded by one of his surviving children, William Henry Vanderbilt, who, unlike many sons of millionaires, had most of the skills of his father. PR was not one of them, however. Questioned about the scrapping of a popular train service, he notoriously responded, “The public be damned! . . . I don’t take any stock in this silly nonsense about working for anybody but our own.” The attribution of this quote is unclear,35 but even if the younger Vanderbilt never uttered these infamous words, they did untold damage to the image of the railroad millionaires. William Henry, despite not being held in high regard by his father, who frequently called him a “blockhead” or “blatherspike,” was actually extremely successful in continuing to build up the railroad empire. Already valued at a staggering $100 million at the Commodore’s death in January 1877, it had doubled in value by the time William Henry died a mere nine years later, aged sixty-four.
As the railroads consolidated in the postwar period, a new breed of barons emerged, even more powerful than their predecessors, as they ran vast networks of lines in what were now massive businesses. They were, though, different from the earlier barons, who had been focused purely on enriching themselves. Just as Gould seems to have changed from a man who sought only to make money to, in his later railroad dealings, one who realized the value of running a good railroad company, the later moguls, although not shy about enriching themselves, were also concerned with the viability of the businesses they controlled. However, although they were not such out-and-out rogues as their predecessors, that did not stop them from being equally disliked.
A case in point is James J. Hill, who constructed the Great Northern between St. Paul and Seattle without benefit of any government subsidy and is often perceived, with some justification, as America’s “greatest railroad builder.” Hill did indeed become immensely rich thanks to the railroad and lived in great opulence. Although without a doubt as ruthless and aggressive as the likes of Gould, he was a railroad builder rather than a stock manipulator. However, he was not averse to making the profits of his operation seem lower than they were in reality, with the aim of using the money to continue constructing the railroad. This practice lay behind the one incident in Hill’s career that sullied his copybook and made him appear in the same bad light as the barons. In 1893, Hill’s company issued $50 million worth of bonds that were then sold cheaply, at 10 cents per dollar, to the main stockholders in what appeared to be a classic case of stock watering. Hill claimed that this was a way of ensuring continued investment, as it meant that money that would have been paid otherwise in dividends was used to increase the capitalization of the company. However, as David Mountfield, the author of a history of the railroad barons, puts it, “his argument did not cut much ice with the increasingly vociferous opponents of big business.” Mountfield goes on, however, to support Hill, saying that the railroad mogul and his partners “made their railroad a blue-chip concern. Dividends were regularly maintained, and the value of the stock remained constantly above par [that is, higher than the original offer price].” Hill also attracted criticism because one of the ways he kept his company solvent was by cutting his employees’ wages several times following the panic of 1893, but in fact he restored them after negotiations with Eugene V. Debs and the American Railway Union. Hill later gained control of the Chicago, Burlington & Quincy Railroad in partnership with J. P. Morgan, who, though mostly famous for his banking interests, cut his teeth on building up a railroad empire. He was quite the opposite of Hill, not at all a railroad man, but rather the money man, controlling investment money that went into “his” railroads: “He came
to choose their managers, dictate their policies, and shape them to his principles. . . . His methods included reducing wasteful competition, consolidating competing companies, and reorganizing shaky operations.”36 In effect, he “Morganized” his railroads, turning companies that had overstretched themselves or faced too much competition into profitable entities.
Morgan’s first foray into railroads was a successful battle with Gould over the Albany & Susquehanna, a line of just 143 miles but potentially lucrative because it provided a useful connection between four larger railroads and several Pennsylvania coal mines. The struggle for control of this small railroad was one of those epic fights that brought disrepute on the industry. In 1868, our old friends Gould and Fisk began buying up shares, intent on using the connection with the Erie, but were opposed by the company’s president, Joseph Ramsey, who not only started issuing thousands of shares to his supporters but actually took away the company’s books and buried them in a cemetery. Both sides adopted a twin approach of resorting to the courts whenever possible but not shrinking from hiring thugs to do battle with their rival. Indeed, at one point, the two ends of the line, at Albany and Binghamton, were under the control of the opposing factions. In a situation that would not have been out of place in a Broadway farce, sheriffs from the two towns, armed with conflicting injunctions from local judges, boarded trains at either end to impose control on one group or the other. A train was derailed, and the two parties attacked each other until the state militia was called in as peacemaker.
At this point, Morgan, who had loaned a half-million dollars to the Albany & Susquehanna, bought a chunk of shares and became a director of the company in support of Ramsey. He managed to see off Gould and Fisk, and when the matter came to the New York Supreme Court in 1869, Ramsey and Morgan triumphed and were able to retain control of the line. Morgan would later be often called upon to sort out similar disputes, always managing to protect his own interests as he did so.
Reorganizing and refinancing railroads was Morgan’s forte. A decade after the Albany & Susquehanna coup, he was involved in a much bigger operation when William Henry Vanderbilt enlisted him to help sell half of his vast stock of New York Central shares without the market realizing what was happening, as this would have sent their value plummeting. Morgan achieved this quietly and slowly, ensuring the market did not panic at the availability of a huge number of shares, and as a reward was made the railroad’s principal banker. In the mid-1880s, his troubleshooting skills were employed on, among others, the New York, West Shore & Buffalo Railroad, the Philadelphia & Reading (twice), and the Chesapeake & Ohio. In the 1890s he brought order to the railroads of the Southeast, creating for the first time in the region a reasonably coherent network with his Southern Railroad, which operated forty-four hundred miles as its centerpiece. Morgan was forever trying to consolidate and integrate railroad systems, knowing that this was likely to make them more profitable. Twice, in 1889 and 1890, he organized conferences of railroad presidents in order to help the companies respond to the creation of the Interstate Commerce Commission and to negotiate agreements that would help stabilize freight rates. These conferences were a catalyst for the process of consolidation that by the middle of the first decade of the new century would see the emergence of seven dominant systems, accounting for the greater part of the nation’s railroad network (see next chapter).
The largest of these systems would be controlled by the other big railroad magnate of the late nineteenth century, Edward Harriman, who is “generally recognized as the greatest rail baron in American history, not only for the extent of his empire but for the revolutionary and enduring nature of his accomplishments in operations, business practices and safety.” His background, in common with most of the barons, was modest, as he started as a messenger boy on Wall Street at the age of fourteen, but within a few years he had made enough money to purchase a seat on the New York Stock Exchange. His interest in railroads was initiated by his marriage to Mary Averell, whose father was president of a branch line, the rather romantic-sounding Ogdensburg & Lake Champlain in upstate New York. His first direct venture into the industry, however, came in 1881 with his purchase, helped by the Averell family, of the Sodus Bay & Southern Railroad, which ran inland from the best harbor on the shore of Lake Ontario. Harriman judged, correctly, that he would be able to sell it to one of the larger local railroad companies, stimulating a bidding war between the Northern Central and the Erie. The former won out, but Harriman pocketed a tidy profit from his three-year tenure of the railroad, and as a result caught the railroad bug. Harriman, like many of his contemporaries—and unlike the earlier barons—made his money through an attention to detail and a clear idea of how to run railroads at a profit rather than by financial manipulation. In fact, he used the little railroad as a testing ground for his ideas, renovating the track, investing in new rolling stock, and simplifying the management structure. Harriman’s philosophy could not have been more different from the likes of Drew, encompassed in his assertion that “the only way to make a good property valuable is to put it in the best possible condition to do business.”37 He realized that the age of speculation was over and that the key to making money was having a sound railroad business, rather than manipulating stock or, as he had done himself in his early days, constructing clever deals. Indeed, Harriman left every railroad that he controlled in a better state than when he bought it.
His first venture into major railroads was with the Illinois Central, joining the board in 1883 with the help of a director of the railroad, Stuyvesant Fish, and becoming a vice president four years later when Fish assumed the presidency. It was Harriman, though, who transformed the railroad, and brought about its expansion. The Illinois Central had long harbored ambitions of becoming a major north-south artery, but had failed to do so until Harriman oversaw the completion of the line all the way through to New Orleans. Harriman created such an efficient railroad that it survived the panic of 1893 without a blip in profitability.
However, other railroads suffered even worse than during the previous depression twenty years before. Of America’s 364 railroads, 89 went bankrupt, representing forty thousand route miles, around a quarter of the total. As with America’s major airlines, which have frequently sought protection under Chapter 11 of the US Bankruptcy Code that allows them to keep flying despite being technically bankrupt, most of these railroads continued running, as they could be operated profitably provided their debt burden was ignored. The multiple bankruptcies resulting from the panic of 1893 enabled Harriman to move to even bigger pastures, the massive Union Pacific. Like all the transcontinentals except the Great Northern (fittingly, the only one not to have received government aid), it had gone under following the panic, and by 1898 Harriman managed to assume control. And he transformed it. He saw that the potential to make it a money spinner was by hauling freight long distances at lower rates than the other guys. The Union Pacific still suffered from the economies made during its construction, and so Harriman straightened curves, reduced gradients, and installed signaling that allowed greater frequencies. As a result, it could carry more trains, which were both heavier and faster, making the railroad highly profitable. Harriman then used this money to expand. He did battle briefly with old Collis Huntington, the sole survivor of the four Central Pacific pioneers, who controlled the Southern Pacific and resisted its takeover. However, the timing of Huntington’s death, in 1900, proved opportune for Harriman, who then assumed control of the railroad and improved it in the same way. By the early 1900s, Harriman controlled the greatest-ever mileage of railroads of any individual in the history of the American railroads. The dream of many railroad entrepreneurs was to control a coast-to-coast network of lines, and none really achieved it. Harriman came closest, as for a while he owned the Baltimore & Ohio and the Chicago & Alton as well as the Union Pacific, but he never managed to consolidate these holdings into a unified railroad. He nearly became the only person to own two transcontinentals when he fought with
James Hill over the Northern Pacific, but at the last minute the two men reached a compromise, resulting in joint ownership through a holding company mostly controlled by Hill. Like the other barons, Harriman attracted widespread opprobrium, mostly because he was not only very rich, but also pugnacious and ruthless. As an example, he got rid of Fish, who had previously been his mentor from the Illinois Central board, because the latter cooperated with the investigation of an insurance company in which Harriman was involved. Yet now, as his biographer in the Encyclopedia of North American Railroads suggests, “with a century’s perspective, his reputation has rebounded, and he is now considered on balance to have been a positive force.”38
The image of the robber barons was nevertheless long lasting, as it was in railroads, more than any other industry, that these men made their fortunes. It was highly damaging to the railroads, whose image suffered from the barons’ infamy. The later barons, who included the reformed Gould, may have been somewhat different in their aims and methods from their predecessors, who were out-and-out rogues, but the damage had been done. As rail historian Keith Bryant Jr. comments, “Journalists created the image of the ‘robber baron’ who displayed no interest in operating a railroad for profit or in improving the property, but simply used the carrier’s stock and bonds as vehicles for personal gain. . . . [This image] never dissipated and was used again and again by the detractors of the industry as representative of all railroad executives.”39
But there was more to the growing antipathy to the railroads than merely a dislike of the corrupt moguls. As we have seen, labor had started organizing, and although the series of workers’ strikes beginning in the 1870s ended in defeat, they attracted considerable support from the wider population. Moreover, the railroads in general and the barons in particular seemed to show a particular disregard for the safety of their workforces, always blaming the workers themselves for any accidents.
The Great Railroad Revolution Page 33