The Myth of the Robber Barons
Page 4
In case Congress needed another lesson, the story of the Northern Pacific again featured government subsidies. Congressmen chartered the Northern Pacific in 1864 as a transcontinental running through the Northwest. They gave it no loans, but granted it forty sections of land per mile, which was twice what the UP received. Various owners floundered and even bankrupted the NP, until Henry Villard took control in 1881. Villard had come to America at age eighteen from Bavaria in 1853. Shortly after he arrived, he showed a flair for journalism; he won recognition for his writing during the Civil War. In his writing and in his speaking, Villard developed the ability to persuade others to follow him. He first became interested in the Northwest in 1874; he was hired as an agent for German bondholders in America and went to Oregon to analyze their investments. He liked what he saw and began to have grandiose visions about a transportation empire in the Northwest. He soon began buying NP stock and took charge of the stagnant railroad in 1881. 12
Villard had many of the traits of his fellow transcontinental operators. First, like Jay Gould, he manipulated stock; in fact, he bought his NP shares on margin and used overcapitalized stock as collateral for his margin account. Second, like the Big Four on the CP, Villard liked monopolies. He even bought railroads and steamships along the Pacific coast, not for their value, but to remove them as competitors. Finally, like the leaders of the UP, Villard eagerly sought the 44,000,000 acres the government had promised him for building a railroad.
Villard's strategy, then, resembled that of the other builders. He had an added plus, though, in his skills in promoting and coaxing funds from wealthy investors. "I feel absolutely confident," he wrote, "that we shall be able to work results.. .that will astonish every participant." Hundreds of German investors, and others too, heeded the call for funds and sent Villard $8,000,000 to bring the NP to the west coast. Businessmen everywhere were amazed at Villard's persuasive ways. "This is the greatest feat of strategy I ever performed," Villard proclaimed, "and I am constantly being congratulated ...upon...the achievement." So with his friends' $8,000,000, and with the government's free land, Villard pushed the NP westward and arrived in Seattle, Washington, in 1883. His celebration, however, was short-lived because that same year the NP almost declared bankruptcy and Villard was ousted.13
If we look at Villard's actions, we can see why he failed. First, like the other transcontinental builders, he rushed into the wilderness to collect his subsidies. Villard knew that the absence of settlement meant the absence of traffic, but his solution was to promote tourism as well as immigration. He thought tourists would pay to enjoy the beauty of the Northwest, so he built some of the line along a scenic route. This hiked Villard's costs because he had to increase the grade, the curvature, and the length of the railroad to accommodate the Rocky Mountain view. Villard also created some expensive health spas around the hot springs at Bozeman and in Broadwater County, Montana. He also put glass domes around the hot springs and built plush hotels near them to accommodate the throng of tourists he predicted would come. Despite lavish advertising in the east, though, the tourists went elsewhere and Villard went broke.14
The federal aid and the foreign investors had given Villard some room for error. But he made other mistakes, too. He was so anxious to rush to the coast that he built when construction costs were high. They were much lower three years before and three years after he built. High costs meant high rates, and this deterred freight and immigrants from traveling along the NP. Villard could have cut some of these costs, but as Julius Grodinsky has observed of Villard, "What was asked, he paid." He didn't bother to learn much about railroads; in fact, during 1883 he seems to have been more interested in leveling six houses in New York City to build a glamorous mansion, in which to entertain the city's elite. With the NP he thought he could promote immigration, tourism, scenic routes, health spas, and use the free land and foreign cash to cover the costs. When his bubble burst, the NP went bankrupt and the German investors were ruined. But not so Villard—from his mansion in New York City, he raised more money and took control of the NP again five years later. The smooth-talking Villard, however, still could not overcome his earlier errors. The poorly constructed Northern Pacific was so inefficient that even the Villard charm could not make it turn a profit. In 1893, the NP went bankrupt again and the Villard era was over.15
Villard's failure was pathetic but in some ways understandable. The American Northwest was a tough section for building a railroad. It had a sparse population and a rugged terrain. Oddly enough, though, one man did come along and did build a transcontinental through the Northwest. In fact, he built it north of the NP, almost touching the Canadian border. And he did it with no federal aid. That man was James J. Hill, and his story tells us a lot about the larger problem of federal aid to railroads.
Hill's life could have made good copy for Horatio Alger. He was born in a log cabin in Ontario, Canada, in 1838. His father died when the boy was young, and he supported his mother by working in a grocery for $4.00 per month. He lost use of his right eye in an accident, so his opportunities seemed limited. But Hill was a risk-taker and a doer. At age seventeen he aimed for adventure in the Orient, but settled for a steamer to St. Paul. There he clerked for a shipping company and learned the transportation business. He was good at it and became intrigued with the future of the Northwest.16
The American Northwest was America's last frontier. The states from Minnesota to Washington made up one-sixth of the nation, but remained undeveloped for years. The climate was harsh and the terrain was imposing. There were obvious possibilities with the trees, coal, and copper in the region; but crossing it and connecting it with the rest of the nation was formidable. The Rocky Mountains divided the area into distinct parts: to the east were Montana, North Dakota, and Minnesota, which were dry, cold, flat, and, predictably, empty. It was part of what pioneers called "The Great American Desert." Once the Rockies were crossed, the land in Idaho and Washington turned green with forests and plentiful rain. But the road to the coast was broken by the almost uncrossable canyons and jagged peaks of the Cascade Mountains. Since the Northwest was fragmented in geography, remote in location, and harsh in climate, most settlers stopped in the lower Great Plains or went on to California.
To most, the Northwest was, in the words of General William T. Sherman, "as bad [a piece of land] as God ever made." To others, like Villard, the Northwest was a chance to grab some subsidies and create a railroad monopoly. But to Hill the Northwest was an opportunity to develop America's last frontier. Where some saw deserts and mountains, Hill had a vision of farms and cities. Villard might build a few swanky hotels and health spas, but Hill wanted to settle the land and develop the resources. Villard preferred to approach the Northwest from his mansion in New York City. Hill learned the Northwest firsthand, working on the docks in St. Paul, piloting a steamboat on the Red River, and travelling on snowshoes in North Dakota. Villard was attracted to the Northern Pacific because of its monopoly potential; Hill wanted to build a railroad to develop the region, and then to prosper with it.17
Hill's years of maturing in St. Paul followed a logical course; from investing in shipping, he switched to steamships, then to railroads. In 1878, he and a group of Canadian friends bought the bankrupt St. Paul and Pacific Railroad from a group of Dutch bondholders.We don't know whether or not he then had the vision to turn it into a privately financed transcontinental. The St. Paul and Pacific story, like that of the other transcontinentals, had been one of federal subsidies, stock manipulation, profit-taking on construction, and bankruptcy. Its ten miles of track were sometimes unconnected and were made of fifteen separate patterns of iron. Bridge material, ties, and equipment were scattered along the right-of-way. When Hill and his friends bought this railroad and announced their intention to complete it, critics dubbed it "Hill's Folly." Yet he did complete it, ran it profitably, and soon decided to expand it into North Dakota. It was not yet a transcontinental, but it was in the process of becoming one.18
/> As Hill built his railroad across the Northwest, he followed a consistent strategy. First, he always built slowly and developed the export of the area before he moved farther west. In the Great Plains this export was wheat, and Hill promoted dry-farming to increase wheat yields. He advocated diversifying crops and imported 7,000 cattle from England and elsewhere, handing them over free of charge to settlers near his line. Hill was a pump-primer. He knew that if farmers prospered, their freight would give him steady returns every year. The key was to get people to come to the Northwest. To attract immigrants, Hill offered to bring them out to the Northwest for a mere $10.00 each if they would farm near his railroad. "You are now our children," Hill would tell immigrants, "but we are in the same boat with you, and we have got to prosper with you or we have got to be poor with you." To make sure they prospered, he even set up his own experimental farms to test new seed, livestock, and equipment. He promoted crop rotation, mixed farming, and the use of fertilizers. Finally, he sponsored contests and awarded prizes to those who raised meaty livestock or grew abundant wheat.19
Unlike Villard, Hill built his railroad for durability and efficiency, not for scenery. "What we want," Hill said, "is the best possible line, shortest distance, lowest grades and least curvature that we can build. We do not care enough for Rocky Mountain scenery to spend a large sum of money developing it." That meant that Hill personally supervised the surveying and the construction. "I find that it pays to be where the money is being spent," noted Hill, but he didn't skimp on quality materials. He believed that building a functional and durable product saved money in the long run. For example, he usually imported high quality Bessemer rails, even though
they cost more than those made in America. He was thinking about the future, and quality building cut costs in the long run. When Hill constructed the solid granite Stone Arch Bridge—2100 feet long, 28 feet wide, and 82 feet high—across the Mississippi River it became the Minneapolis landmark for decades.20
Hill's quest for short routes, low grades, and few curvatures was an obsession. In 1889, Hill conquered the Rocky Mountains by finding the legendary Marias Pass. Lewis and Clark had described a low pass through the Rockies back in 1805; but later no one seemed to know whether it really existed or, if it did, where it was. Hill wanted the best gradient so much that he hired a man to spend months searching western Montana for this legendary pass. He did in fact find it, and the ecstatic Hill shortened his route almost one hundred miles.21
As Hill pushed westward, slowly but surely, the Northern Pacific was there to challenge him. Villard had had first choice of routes, lavish financing from Germany, and 44,000,000 acres of free federal land. Yet it was Hill who was producing the superior product at a competitive cost. His investments in quality rails, low gradients, and short routes saved him costs in repairs and fuel every trip across the Northwest. Hill, for example, was able to outrun the Northern Pacific from coast to coast at least partly because his Great Northern line was 115 miles shorter than Villard's NP.
More than this, though, Hill bested Villard in the day-to-day matters of running a railroad. For example, Villard got his coal from Indiana, but Hill got his from Iowa and saved $2.00 per ton. In the volatile leasing game, Hill outmaneuvered Villard and got a lower cost to the Chicago market. As Hill said, "A railroad is successful in the proportion that its affairs are vigilantly looked after."22
Villard may have realized he was outclassed, so he countered with obstructionism, not improved efficiency. One of Hill's partners alerted him to Villard's "egotistic stamp" and concluded that "Villard's vanity will be apt to lead him to reject any treaty of peace that does not seem to gratify his vain desire to obtain a triumph." Before Hill could move out of Minnesota, for example, the NP refused him permission to cross its line at Moorhead, along the Minnesota-North Dakota border. Local citizens apparently wanted Hill's line; and he wrote, "I had a letter from a leading Moorhead merchant today offering 500 good citizen tracklayers to help us at the crossing." Each move west that Hill made threatened Villard's monopoly. Ironically, Hill sometimes had to use the NP to deliver rails; when he did Villard sometimes raised rates so high that Hill used the Canadian Pacific when he could.23
Villard found that manipulating politics was the best way to thwart Hill. For example, the gaining of right-of-way through Indian reservations was a thorny political issue. Legally, no railroad had the right to pass through Indian land. The NP, as a federally funded transcontinental, had a special dispensation. Hill, however, didn't, so the NP and UP tried to block Congress from granting Hill right-of-way through four Indian reservations in North Dakota and Montana. Hill gladly offered to pay the willing Indians fair market value for their land, but Congress stalled, and Hill said, "All our contracts [are] in abeyance until [this] question can be settled." Hill had to fight the NP and UP several times on this issue before getting Congress to grant him his right-of-way. "It really seems hard," Hill later wrote, "when we look back at what we have done in opening the country and carrying at the lowest rates, that we should be compelled to fight political adventurers who have never done anything but pose and draw a salary."24
In the depression year of 1893, all the transcontinental owners but Hill were lobbying in Congress for more government loans. To one of them. Hill wrote, "The government should not furnish capital to these companies, in addition to their enormous land subsidies, to enable them to conduct their business in competition with enterprises that have received no aid from the public treasury." He proudly concluded, "Our own line in the North. . .was built without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash."25
Shortly after Hill wrote this, the Union Pacific, the Northern Pacific, and the Santa Fe all went bankrupt and had to be reorganized. This didn't surprise Hill; he gloated, "You will recall how often it has been said that when the Nor Pac, Union Pac and other competitors failed, our company would not be able to stand. . . . Now we have them all in bankruptcy. . .while we have gone along and met their competition." In fact, the efficient Hill cut his costs 13 percent from 1894 to 1895.
Hill criticized the grab for subsidies, but here is the ironic twist: those who got federal aid ended up being hung by the strings that were attached to it. In other words, there is some cause and effect between Hill's having no subsidy and prospering and the other transcontinentals' getting aid and going bankrupt. First, the subsidies, whether in loans or land, were always given on the basis of each mile completed. In this arrangement, as we have seen, the incentive was not to build a quality line, as Hill did, but to build quickly to get the aid. This resulted not only in poorly built lines but in poorly surveyed lines as well. Steep gradients meant increased fuel costs; poor building meant costly repairs and accidents along the line. Hill had no subsidy, so he built slowly and methodically. "During the past two years," Hill said in 1884, "we have spent a great deal of money for steel rails, ballasting track, transfer yards, terminal facilities, new equipment, new shops, and in fact we have put the road in better condition than any railway similarly situated that I know of. ..." Hill, then, had lower fixed costs than did his subsidized competitors.26
By building the Great Northern without government interference, Hill enjoyed other advantages as well. He could build his line as he saw fit. Until Carnegie's triumph in the 1890s, American rails were inferior to some foreign rails, so Hill bought English and German rails for the Great Northern. The subsidized transcontinentals were required in their charters to buy American-made steel, so they were stuck with the lesser product. Their charters also required them to carry government mail at a discount, and this cut into their earnings. Finally, without Congressional approval, the subsidized railroads could not build spur lines off the main line. Hill's Great Northern, in contrast, looked like an octopus, and he credited spur lines as critical to his success.
In debating the Pacific Railway Bill in the 1860s, some Congressmen argued that even if the federally funded transcontinent
als proved to be inefficient, they should still be aided because they would increase the social rate of return to the United States. Some historians and economists, led by Robert Fogel, have picked up this argument, and it goes like this: the UP made little profit and was poorly built, but it increased the value of the land along the road and promoted farms and cities in areas that could not have supported them without cheap transportation. Fogel claims that the value of land along a forty-mile strip on each side of the UP was worth $4.3 million in 1860 and $158.5 million by 1880. Without the UP, this land would have remained unsettled and the U. S. would not have had the national benefits of productive farms, new industries, and growing cities in the West. To the nation, then, the high social rate of return justified the building of the UP, CP, NP, and Santa Fe railroads.27
What this argument overlooks is the negative social, economic, and political return to the United States that came with using federal subsidies to build railroads. The first thing to recognize is that the gain in social return that Fogel describes is temporary. If the government had not subsidized a transcontinental, then private investors like Hill would have built them sooner and would have built them better. Subsidy promoters tried to deny this argument at the time, but Hill's achievement shows that it would have been done, only at a slower (but more efficient) pace. We can dismiss the widely promoted view expressed in Congress by Rep. James H. Campbell: "This [Union Pacific] road never could be constructed on terms applicable to ordinary roads. ... It is to be constructed through almost impassable mountains, deep ravines, canyons, gorges, and over arid and sandy plains. The Government must come forward with a liberal hand, or the enterprise must be abandoned forever." The increase in social rate of return, then, would only be present until some private investor did what the government did first.28