The World the Railways Made

by Nicholas Faith

  Paris housed the most powerful branch of the Rothschild clan, a veritable one-firm international Jewish conspiracy, with family members in five countries, giving an enormous advantage over even the Barings, outgunned in both Spain and Russia. In Northern Italy the Rothschilds controlled the Lombardy–Venetian line, the only profitable major route in the country, and their dominance extended into Austria, including the crucial line over the Semmering pass from Vienna to Trieste on the Adriatic. Indeed, until the opening of the Saint Gotthard tunnel in 1882, the Rothschilds controlled the only two direct routes between Italy and Germany.

  The degree to which trade followed the financial flag varied. In the last half of the century the British financial flow became increasingly detached from the British exports which had provided the initial spark. In France engineers and equipment continued to flow with the money. But the link was much more direct with the Germans. In 1914 the Austro-Hungarian Empire accounted for nearly a third of the $6 billion (five times the 1883 figure) they had invested abroad, a clear case of politically-inspired investment.

  As the sums involved grew bankers and financiers had to cast their net ever wider. This in itself produced major changes in the banking world. In the last decades before 1914 bankers without national branch networks could not mobilise the vast sums required. As a result even the most powerful investment bankers like the Rothschilds could not compete with broader-based commercial banks like the Crédit Lyonnais and the Société Générale, which could distribute endless issues of Russian bonds through their thousands of branches.

  Fortunately for the banks, railway investments offered something for every temperament. Most were in bonds, but enough were in stocks of individual railways to appeal to the more adventurous – like those dreaming of the wonders of the American West in the two decades after the Civil War. As always the promoters were selling dreams, dreams in which they often believed themselves. ‘What George Bliss called a “young American spirit” conditioned his firm’s investment criteria,’ wrote Dolores Greenberg in Financiers & Railroads 1869–1889.

  Bliss, working in a ‘mid-Atlantic’ environment, was one of the few participants who understood the considerable culture gap between the two sides of the ocean. Following the Granger agitation against the railroad companies he wrote how ‘throughout Europe the opinion prevailed that capital invested in American railroads – in new western railroads especially – was at the mercy of a reckless and unprincipled democracy.’ But the investors soon returned, and with them their dreams and their nightmares; the bankers all knew that dewy-eyed foreigners could be attracted to stocks rather shunned by the locals. By 1891 they owned almost as many shares in the perpetually-troubled Union Pacific as did investment institutions based in New York, while they had only small stakes in such solid lines as the New York Central and the Pennsylvania Railroad.

  But these idealistic ‘punters’ were often joined by more conservative investors. In E. M. Forster’s Howards End Margaret Schlegel showed her independence by putting her money into ‘Foreign Things which always smash’ as against the supposedly safer home rails like the Nottingham & Derby. Irritatingly ‘the Foreign Things’ did admirably and the Nottingham & Derby declined with the steady dignity of which only Home rails are capable. As so often, reality confirms the novelist’s insight, at least into the composition of the investing class, if not into its choice of investment. In an analysis of the 411 original shareholders in the Central Argentine ‘83 were gentlemen, 14 were widows or spinsters, 40 were professional men, civil servants, officers of the armed forces, and members of parliament, and the rest were merchants, tailors, farmers, upholsterers, glass manufacturers, and so on.’15

  Nevertheless as soon as money was invested the shareholders needed protection. By the 1850s Barings were involved with the Illinois Central. They didn’t want to be; for the state, if not the railroad, was already in default, but their clients were in the securities anyway. The greater the flow of funds, the more reputable the institutions involved had to be.

  The need for protection had some odd results. Henry Villard, the father of the Northern Pacific, the second railroad across the western United States, first became involved with railways on a visit to his native Germany for the sake of his health when he was approached by an unhappy investor anxious for his advice. Villard found himself on a committee set up in Frankfurt to help such investors, and found that one line in Oregon, saddled with $3 million in 7 per cent bonds, had never been built. According to his autobiography his subsequent battles on both sides of the Atlantic generated a passionate belief in the future of Western Oregon. His vision was shared by sober German bankers, including the mighty Deutsche Bank, and enabled him to promote the Northern Pacific, the second railroad to the West Coast of the United States. This had considerable financial problems, but Villard had once been a journalist, and he retained a flair for publicity which enabled him to cover them up, not least with spectacular special visits. Guests on one such jaunt included an ex-Lord Chief Justice of England, a handful of peers, ex-President Grant as well as Dr Georg Siemens of the Deutsche Bank.

  As investment soared protection became institutionalised. By the 1880s there were regular London committees designed to protect bondholders in individual stocks and bonds. Otherwise unscrupulous promoters would, for instance, offer repayment of bonds within fifteen days, a period deliberately chosen as too short to enable foreign holders to take the opportunity. In 1884 the English Association of American Stock and Bondholders was formed to act as proxy, to insist that it get ‘full statements, clean balance-sheets and ordinary honesty’ from railroads and ‘Proportional Representation of Investors in the Control of the various Roads’. The association did have some success in its difficult task, it even managed to force the Chicago, Milwaukee and St Paul Railroad to stop its financially reckless pricing policy.

  Scottish investors, basically more interested in ranching, became fearfully entangled in the affairs of Oregon’s railroads. The ensuing law-suit went to the US Supreme Court, which ruled in favour of the Scots’ rivals, a bankrupt line in the Villard sphere of influence. This cost the Scots $1¼ million, a loss for which they never forgave William Reid, previously the uncrowned King of the Scottish investment community. Yet – and this applies to tens of thousands of foreign investors of every nationality – the Scots did not lose their appetite for railroad stocks, a final proof of the universal spell they cast throughout the century.

  Don Enrique – and his Dynasty

  The story of imperial railway-building is epitomised in the life-stories of Henry Meiggs and his nephew, C. Minor Keith. Meiggs, the ‘Yankee Pizarro’16, was a handsome, charming, larger-than-life character, universally known in Chile and Peru as ‘Don Enrique’, so popular that at his death he was accorded the grandest funeral ever seen in Peru. He lived and died a gambler: indeed he arrived in Chile in 1854 as a fugitive after the failure of a property deal in San Francisco, where he had been a town councillor. (Meiggs later repaid his debts, largely by buying up the paper at a discount, thus enabling him, rather disingenuously, to claim that he had settled all his accounts.)

  Henry Meiggs, conquerer of the Andes

  In Chile he swiftly found his true vocation. Like all great contractors he had only to travel once over a projected route to compute the real costs of building a railway over it. After completing two relatively small, if troublesome, contracts he bid successfully for the crucial route from Santiago to Valparaiso. The contract made his fortune and his reputation, not only as a railway builder but also as a liberal influence because he treated his workers, the Chilean rotos, as men rather than slaves.

  But his greatest fame came from his work in Peru, a country suddenly rich, thanks to its rich deposits of guano, the bird droppings which were then essential fertiliser the world over. The Peruvians believed they could use their new-found wealth to create a new national unity through a network of railways. The people welcomed Meiggs with open arms; their rulers with outstre
tched palms – so much so that he had to build the necessary massive bribes into his costs. The first line was to run from the coast to Arequipa, birthplace of most of the politicians then in power in Peru. The cost was reckoned at 10 million soles. The government was told the line could not be built for less than 15 million. Meiggs completed the contract, early, for 12 million.

  Unfortunately in 1868 the Peruvians elected as President Colonel Jose Balta, a typically unbalanced military revolutionary. In the next three years he and Meiggs agreed six contracts to build just over a thousand miles of railways, on terms highly favourable to Meiggs. The railways, especially the Central Peruvian, were amongst the wonders of the world, but they were built against a background of a steadily deteriorating financial situation for Peru, as the guano started to run out, and thus for Meiggs himself: he was even forced to use his own bills of exchange, the so-called ‘Billetes de Meiggs’. In a last desperate effort he offered to build a railway to the fabled mines of Cerro de Pasco but died in 1877 at the age of 66 before it was completed.

  Typically, he, not Peru’s rulers, was blamed for Peru’s troubles: ‘the ruin of Peru’, wrote a local opponent just after his death, ‘is the monument of Henry Meiggs’. His legacy included: some wonderful railways and an ambitious, and financially more successful nephew, C. Minor Keith, who carried the particular Meiggs brand of swashbuckling piracy through Central America.

  Keith arrived in Central America in 1871 to help his uncle on a contract Don Enrique had taken on and left to his nephew to complete. Minor Keith soon realised that bananas, heavy, much in demand, and the major cash crop for the countries concerned, formed ideal freight traffic. And in Central America only railways could carry them to the coast: the roads were terrible, the topography difficult and the climate worse (254 inches of rain were recorded one year on the Caribbean coast of Costa Rica).

  His eventual success was built on a notorious agreement he signed with President Soto of Costa Rica in 1884. This enabled the country to refund its foreign debt, and allowed Keith to build fifty-two miles of railway in which the government would have a one-third interest. In return he received a grant of 800,000 acres and freedom from tax for twenty years.

  By 1899 Keith had built seventy-one miles of line inland from the Caribbean coast at a cost of nearly 8 million (and 4,000 lives) and 61,000 acres of banana trees were in production. That year Keith’s desire for an integrated monopoly (combined with the failure of the firm handling his bananas in New Orleans) led to the formation of the United Fruit Company, its position based not so much on its vast banana plantations – for anyone could buy land and plant trees – but on its position as owner of the crucial railways, in Honduras and Guatemala as well as in Costa Rica.

  This archetypal ‘indirect imperialist’, ‘the E. H. Harriman and J. Pierpont Morgan of Central America’,17 was in many ways a sympathetic figure, described by even an unsympathetic observer (Henry Stimson) as ‘the perfect type of Anglo-Saxon man’. Notably unlike later imperialists, he integrated into the local society, marrying the daughter of a former President of Costa Rica, and formed a valuable collection of local antiquities which he later presented to the American Museum of Natural History. Keith himself survived until the 1920s, while his creation remained the prime symbol of American imperialism for a further half-century.

  ‘Without our railway, there is no Szechuan left’

  Szechuan, deep in the heart of China, is one of the country’s most enclosed, least westernised provinces, with a fierce local patriotism. It was naturally determined to have its own railway, parallel to the Great (Yellow) River from the capital, Chengtu, through Chungking to Ichang. In 1903 the locals set up the Szechuan Provincial Railway Company, modelled on the old salt and iron monopolies, as a private concern under the aegis of the provincial government, although such was the opposition of the central government that it was officially recognised only four years later. The shares were issued in two denominations, 100 and ten silver ounces – much later one of Han Suyin’s uncles showed her some of them, ‘a small trunk full of useless printed paper. He kept them as a souvenir’.*

  The company determined to start on the most difficult, eastern, section to make it easier to ferry supplies later to the rather easier western section. But progress was slow, by 1911 a mere fifty miles, less than a thirtieth of the total, had been built. The locals were confronted by a plot by the evil Sheng Hsinsun, the director of railway building and chief broker in dealing with Europeans. On May 9th 1911 he promulgated a nationalisation decree which removed the rights previously granted to provincial companies to finance and build their own railways. As the locals rightly suspected at the time, the decree was the result of a deal to hand the railway over to the foreigners.

  As Hsinsun knew full well, the decree put the board in a difficult position because so many of them had been involved in defrauding the shareholders. But no one was prepared for the spontaneous uprising which brought together over a thousand shareholders in a ‘Save the Railway League’, an organisation which included every class, not just the natural revolutionary leaders, the students who had returned from studying abroad, but also many officials – including those from the railway itself who simply didn’t want anyone to inspect the accounts.

  The Leaguers pleaded to the central government that they were not rebels but merely opposing a treacherous minister who was betraying his country’s interests. Peking’s reply was to cut off Szechuan and send in a hard man to restore order, Chao Erfang, warlord of the borders, who had showed his mettle by ousting the British and the Russians from Lhasa. He was opposed by a general strike. Many of the official leaders wanted to surrender but, as the student leader Lung Mingchien put it, ‘without our own railway there is no Szechuan left’.

  On 7th September, the Chinese All Souls day, the two assembly-men representing the railway company were arrested, and several people were killed in the subsequent riots. Their crucial allies were the Kelao Brotherhood, an anti-Manchu Mafia, in the original sense of that much-abused term, a group of people banding together to defend their local interests against a centrally-imposed despotism. The Brotherhood organised key groups like the manure collectors, the boatmen, the water carriers and the small shopkeepers. Although the leaders of the rebellion felt they had to accept any help on offer, there were natural culture clashes between the students and their hardened Kelao allies.

  The three Changs, or leaders of the Brotherhood, were tough, practical men who would fight only if they were sure of winning. The improbable alliance mobilised the whole province into a mass movement, with massive arms smuggling. Chao Erfang kept winning battles but ‘it was like cutting water with a sword’, for in the five months between the nationalisation decree and the official start of the 1911 revolution on 10th October, ‘the people of Szechuan in one way or another fought nearly every day’.

  Three weeks before the revolution the Kelao Brotherhood, ‘their gangster methods under control’ took Junghsien, and on 22nd December a young officer beheaded Chao Erfang and held up the severed head by its pigtail in front of a delighted crowd. But that was not the end of the story. In 1952 one of the old engineers, blind with age, was told that the dream had come true, that the railway had been completed under Chinese ownership. He ‘bent down to stroke and kiss the rails, not only because it was a railway, but because it was built by the Chinese, for the Chinese’.

  Hirsch: Railway King Extraordinaire

  Baron Maurice de Hirsch was the single most startling example of the small band of cosmopolitan Jewish financiers who dominated the popular imagination at the turn of the century. He was the third generation of a family of Munich bankers, distinguished enough to have acquired a title. But before his death in 1896 at the age of 65 Hirsch had acquired an enormous fortune of something between £14m and £30m – and that after giving much the same amount to charity. In today’s terms he was a billionaire.

  Hirsch had grasped the fortunes to be made from the kilometric guarantee, the sums
given for constructing a given length of railway line. These did not necessarily have to join two towns, the lines could be built through the easiest countryside. Hirsch’s nick-name ‘Turkenhirsch’ explains how the bulk of his fortune was made through exploiting the desire of the Turkish Empire to acquire a proper network. During the 1840s and 1850s a number of promoters had sketched a line from Belgrade to Constantinople. Progress was slow and in 1869 Hirsch got his first opportunity because the Turkish government wanted to demonstrate its independence from French financiers, the Rothschilds and the Pereires.

  All Hirsch’s many and varied sources of profits depended on his crucial role as an individual middleman between great institutional powers: the Sultan, the bankers like Rothschild and Pereire, who wanted to finance or operate railways, and banks prepared to sell the bonds he had acquired. His first deal was over an issue of three per cent lottery bonds with a nominal value of 792 million francs. They were credited to him at a price of 32 per cent: he promptly sold them to a syndicate led by the Société Générale at a profit of 40 million francs. They were then resold to the general public at 45 per cent – giving the bank a further profit of 50 million francs.

  Hirsch never wanted to run the railways he financed, and in 1869 nearly got the Rothschilds to take on the obligation – with an advance which would prevent Hirsch from having to use his own money to build the line. After some misunderstandings Hirsch had to create his own operating company,18 but was able to use external funds, often from individual Turks, to avoid investing any of his own money. After ten years of wars (and the onset of the great slump in 1873) he had built only two thirds of the desired tracks, some 1,275 kilometres, in seven separate sections, and these were so badly constructed that they needed an extra 27,000 francs per kilometre to be usable. Not surprisingly his chief engineer, the Prussian genius Wilhelm von Pressel, died cursing Hirsch’s name.