Rival Rails: The Race to Build America's Greatest Transcontinental Railroad

by Walter R. Borneman

  Faced with the death penalty, the trio quickly agreed to a plea bargain whereby they would plead guilty to a robbery charge in exchange for dropping the train robbery indictment. This they did, and by the end of July, they began serving twenty-five-year sentences at the territorial prison in Yuma—from which they could hear the daily whistles of the nearby Southern Pacific locomotives.

  But what about J. J. Smith? He had been indicted along with the others but was not captured until some weeks later in Texas after an exchange of gunfire that left him with a bullet in his left thigh. O’Neill arrived on the scene, and Smith was extradited back to Prescott in time for the October court term.

  Common sense suggested that Smith would simply follow his partners and avoid the noose by pleading guilty to the lesser charge and hoping that the judge would overlook his escape. Instead Smith chose to plead not guilty to everything and stand trial. Robert Brown, the defense attorney who had engineered the original plea bargain, became his aggressive representative.

  After some procedural smoke screens, Brown attempted to create doubt as to whether the Wells Fargo agent on the night of the robbery had seen three men or four. And even if there had been four, could the agent be certain that under their masks one of them was Smith? For a time, it looked as if Smith’s imprisoned friends might be transported from Yuma to testify. Brown first objected that their testimony for the prosecution might be biased in exchange for a reduction of their sentences, but then the prosecution itself decided not to put them on the stand after they appeared ready to swear that Smith had not been involved with the robbery. Despite attorney Brown’s efforts, Smith was found guilty of the simple robbery charge and sentenced to join his cohorts in Yuma for a thirty-year sentence. But that is not quite the end of the story.

  Four years later, suffering from consumption, like a majority of his Yuma cellmates, Smith petitioned the territorial governor for clemency. He claimed to have fallen innocently in with the other three near Lees Ferry and escaped at Raton out of fear for his life. His role in two gun battles and evidence of Wells Fargo money on him when he was captured were quietly ignored. These facts aside, Smith’s petition was granted, and he was released from Yuma, having served less than four years of his sentence. 9

  Bucky O’Neill’s dogged pursuit of these train robbers made him a celebrity in Arizona. He served three terms as sheriff and was elected mayor of Prescott. But his enduring fame came with Theodore Roosevelt and his Rough Riders in Cuba during the Spanish-American War. Ignoring the pleas of his men that he seek cover, O’Neill strolled the lines in front of Kettle Hill. The Spanish bullet had not been made that could kill him, O’Neill boasted. A moment later, he fell dead with one through his head.

  After the affair at Cañon Diablo, train robberies in Arizona decreased—perhaps in part because of the threat of capital punishment. But that did not stop two rough-cut characters from attempting to wreck a Santa Fe passenger train near the Johnson Canyon tunnel in 1893. An alert watchman thwarted their plans, and a posse from Flagstaff shot them dead on the banks of the Verde River several days later.

  Four years later, three robbers held up a westbound passenger train at Peach Springs and ransacked the express car. Express agents shot one robber dead on the rear vestibule of the car, but the other two led lawmen on a wild chase that ended deep in the Grand Canyon near the mouth of Diamond Creek. When the ringleader, Jim Parker, was finally hung in June 1898, his last words—sincere or not—were reportedly, “All this hullabaloo has sure taught me a lesson.”10

  There would be a few more train robberies in the Southwest—one of the last occurred on Marshall Pass in 1902—but they would be seen as rather fleeting and transitional events. Nothing else had stopped the railroads from their headlong expansion across half a continent, and a few outlaws with six-shooters could not do so. But just as the panic of 1873 had stalled most construction in the early years, there was to be an event that would bring all railroads to their knees. The boom could not last forever.

  20

  The Boom Goes Bust

  In the spring of 1893, America paused to celebrate a generation of wild expansion. All eyes focused on the World’s Columbian Exposition, which opened to the public on May 1 in Chicago. Over the course of the summer, millions of people visited the sprawling six-hundred-acre site to gawk at the latest wonders of industrial technology and social entertainment. Out of the exposition came such staples of American culture as Shredded Wheat cereal, Aunt Jemima syrup, Juicy Fruit gum, and the Ferris wheel.

  Railroads throughout the country offered reduced fares and sponsored special excursions to Chicago to entice America’s middle class to take what for many was a journey of a lifetime. Those visitors returned home to tell of carbonated sodas and a piece of meat between two slices of bread that was being called a “hamburger.” But whether from San Francisco, St. Louis, and Pittsburgh or small towns such as Keokuk, Winslow, and Pierre, most completed their journey to the fair with a realization that America had grown both smaller and larger.

  Geographically, thanks to America’s railroads, there were no longer major barriers to transcontinental travel. Demographically, a nation divided after the Civil War had picked itself up and followed the railroads west to swell the population of California and every whistle-stop, hamlet, and town in between. America’s next step would be that of a world leader.

  But as the Chicago exposition wound down and closed that fall, all was not well. After a period of tremendous economic growth, the world’s economy was strangled by an overdue contraction. Business failures in the United States and abroad led to tightened credit and caused a run on gold deposits in banks. When this collapse of a worldwide boom fell on America’s railroads, it landed particularly hard because for a wild quarter of a century, they had led the boom with an insatiable building spree.

  In the decade of the 1870s, the United States built 39,712 miles of new track, reaching an aggregate of 93,292 miles by 1880. In the next decade, that number almost doubled to 166,703 miles. This amazing increase of 73,000 miles of additional track during the 1880s was equivalent to the construction of four of the original Sacramento-to-Omaha transcontinental lines every year.1

  Build west, J. Edgar Thomson had said. Build west, William Barstow Strong had said. Build everywhere, Collis P. Huntington had said. But when the major transcontinental lines were completed, the railroads continued to lay tracks to every mining camp, grain silo, cattle pen, and crossroads on the map. America was overbuilt with railroads, and consequently, America’s railroads—even that paragon of corporate conservatism, the Atchison, Topeka and Santa Fe—were awash with debt.

  Like America’s overall economic woes, the Atchison, Topeka and Santa Fe’s own crisis had been a long time in coming. Crop failures in the railroad’s financial breadbasket of the Midwest started the downslide. In Kansas alone, wheat production fell from 48 million bushels in 1884 to barely 10 million in 1887; the corn crop also plummeted, from 191 million bushels in 1884 to 76 million three years later. These declines drastically cut freight revenues outbound from Kansas; furthermore, the resulting downturn in local economies meant that fewer goods and building supplies were being shipped into the state.

  What freight traffic remained came under increasing competition from the Santa Fe’s growing rivals across the plains, including Jay Gould’s Missouri Pacific. Previously, such rivalries frequently led to traffic pools that had the effect of fixing rates above a floor of profitability. But in 1887, a reform-minded Congress passed the Interstate Commerce Act.

  This new law prohibited pooling agreements and regulated how rates were adjusted, requiring, among other things, formal notices of future changes. The general national result was lower freight rates, but any reduction of revenues impacted railroads already highly leveraged by the construction surge. From 1887 to 1888, the Santa Fe’s average freight rate per ton per mile fell from 1.347 to 1.258 cents, a significant 9 percent decrease.

  Another national trend to impact
the Santa Fe was the march of organized labor. In March 1888, the Brotherhood of Locomotive Engineers struck the Chicago, Burlington and Quincy over wages and working conditions. A ten-month struggle ensued that became particularly bitter when scabs operated trains under armed guards. While some Santa Fe engineers walked off in support for the brotherhood, the railroad avoided major interruptions because its record as an employer was relatively progressive. The Santa Fe negotiated major labor contracts in 1890 and 1892 and kept its trains running, but the resulting higher wages were yet another impact on the railroad’s bottom line.

  Finally, during this same time, construction activity on the Kansas City-to-Chicago extension as well as the push into California was at its peak. From January 1886 to October 1888, the Santa Fe laid 2,776 miles of track, and that didn’t include the purchase and new construction of the Gulf, Colorado and Santa Fe. This additional trackage meant a staggering increase in the railroad’s bonded indebtedness.2

  Taken alone, any of these troubles—crop failures, rate regulation, labor strife, and construction costs—would likely not have been sufficient to cripple the Santa Fe, but taken together, they became a deathblow when played out against the backdrop of the panic of 1893.

  Not surprisingly, the Santa Fe’s floating debt began to climb as an early indicator of brewing trouble. Never a good sign in any business, floating debt is the short-term, unsecured obligations of a company. If it spirals out of control, it quickly impacts a company’s ability to pay stock dividends and the interest on its bonds.

  Shareholders squawked when dividends were cut—which the Santa Fe did in 1888 from 1.75 percent to 1.5 percent—but failure to pay bond interest usually made foreclosure by bondholders and a forced receivership inevitable. It was this slippery slope of finance that forced the resignation of President William Barstow Strong and led to the emergence of a New York–based circle of Santa Fe investors.

  While the financial details were mind numbing, the Santa Fe embarked on a complicated plan of restructuring. The centerpiece was a $100 million second mortgage that was supposed to retire $80 million in income bonds and leave $20 million of ready cash both to harness the floating debt and to provide a cushion for future operations. (Mortgage bonds paid a fixed rate regardless of corporate circumstances; income bonds, while yielding higher, paid interest only if the company was making money.)

  At the start of what would become the worst year, William Barstow Strong’s successor, Allen Manvel, died on February 24, 1893, in San Diego. Manvel would be remembered most for inaugurating the California Limited. In his place, the board of directors chose a young vice president, J. W. Reinhart, who enjoyed a growing reputation as the financial whiz behind the recent refinancing.

  Many had assumed that the top job would go to A. A. Robinson, long Strong’s right-hand man and, since 1888, the Santa Fe’s general manager. But Robinson was passed over, and with some bitterness he resigned shortly afterward to become president of the Mexican Central. This was another signal that the influence of the old Boston crowd was waning and that the New Yorkers were ascendant.

  Quite reassuringly, new president Reinhart announced in June 1893 that the floating debts of the railroads the Santa Fe had been acquiring had been consolidated on its balance sheet and that they were “amply and satisfactorily secured” and would be eliminated “when the financial atmosphere brightens.”

  But the financial atmosphere did not brighten. Instead it got increasingly worse. By October 1893, the Santa Fe sought to defer payment on its 1888 6 percent mortgage bonds for five years, promising the holders that both principal and interest at 6 percent would then be payable in gold. But in a hint of panic, the railroad also promised a cash commission of 5 percent if holders would hurry up and assent to the extension by October 25.

  Meanwhile, President Reinhart gave the entire situation the kiss of death by glibly announcing that the finances of the company “are in such condition that no uneasiness need be felt” and that “the earnings of the Santa Fe properties, notwithstanding the general depression, are largely in excess of fixed charges.” The bears smelled blood, and Atchison, Topeka and Santa Fe stock fell, further compounding the problem.

  Reinhart scurried to Europe to find funds to meet the railroad’s January 1894 interest obligations, even though a tight credit market had spread across that continent as well. He returned proclaiming that his mission had been “a success in every respect,” but no foreign financing was forthcoming. A week later, on December 23, 1893, the Santa Fe and its Frisco subsidiary were forced into receivership upon the complaints of two New York banks.

  Even then, Reinhart tried to put the best possible light on the situation. He acknowledged that the collapse of “pending negotiations for financial relief has caused temporary embarrassment to the companies” and would prevent the January payments of all obligations. But Reinhart also claimed that the Santa Fe system as a whole, which now accounted for 9,345 miles of railroad including the Frisco, “is amply able even under the present adverse condition to earn a safe balance above its fixed charges” if relieved from the albatross of its floating debt.3

  This latter assertion was a testament to the powerhouse that the Santa Fe was on the verge of becoming, but things would get much worse before they got better. Six months into the Santa Fe’s receivership, an audit report claimed that the railroad had overstated its income by more than $7 million during the preceding four years. A major portion of the problem stemmed from rebates to shippers that had been booked into a suspense account as assets rather than being expensed against their related earnings.

  Reinhart sought to defend the overall numbers, but closer scrutiny showed that certain entries had been forwarded to company bookkeepers in Topeka from his East Coast office that either had “no foundation in fact” or were related to off-balance-sheet transactions or valuations. A day after his reply to the auditor, J. W. Reinhart tendered his resignations as president of the Santa Fe system and one of its court-appointed receivers. He was later indicted on charges of having given rebates to shippers that were in violation of the Interstate Commerce Act in the first place.

  By the time the final audit report was issued in November 1894, the overstatement of the Santa Fe’s income had grown to more than $10 million. But the thorough examination of the books validated Reinhart’s bravado about its future earnings capacity. The Santa Fe had become top-heavy by assuming the floating debt of a round of acquisitions, but for the year ending June 30, 1894, it had generated $6 million in earnings. This suggested that if a reorganization could be accomplished, there was a sufficient income stream to secure long-term debt.4

  In order to satisfy both secured bondholders and stockholders, any reorganization had “to rid the company of its floating debt,” reduce fixed charges, and “provide fresh capital for needed improvements.” It was a tall order, and various schemes were put forth by different constituencies during 1894 and early 1895.

  The final plan adopted by the receivers called for the foreclosure of the general mortgage placed on the road in 1888 and its subsequent sale to representatives of the new lenders. They would in turn organize a new company. In the process, the railroad’s floating debt was rolled into long-term debt or securities, and enough capital was left to fund needed repairs and improvements.

  On December 12, 1895, a new corporation was formed with the nearly identical name of the Atchison, Topeka and Santa Fe Railway Company. Cyrus K. Holliday became a member of its board of directors, just as he had been for the old company since 1860. He was also given the rather perfunctory title of president of the original Atchison, Topeka and Santa Fe Railroad Company as it wound up its affairs. 5

  Such receiverships and reorganizations were certainly not unique to the Santa Fe. Sixty-five American railroads went into receivership during 1893 alone. This made a total of 123 roads then under court control and represented about 19 percent of the railroad mileage in the country. Among them were the Union Pacific and the Northern Pacific.
6

  But as new energy slowly returned to America’s railroads, there was one titanic name missing. Jay Gould was dead. His last few years were a debilitating struggle with tuberculosis, and he died on December 2, 1892, at fifty-six. Among the many mourners at his funeral was Collis P. Huntington, himself beginning to show signs of declining health.

  The mantle of the Gould empire fell upon Jay’s oldest son, George, not quite twenty-nine. George would never share his father’s innate sense of business strategy, but he had studied dutifully at his side for more than a decade and had taken an increasingly central role as Jay’s health failed.

  Charged with preserving the Gould empire, George set out to accomplish what for all of Jay’s thrusts and parries the elder Gould had never been able to complete: a transcontinental railroad system under his own control. As George Gould looked to his cornerstone property of the Missouri Pacific to spearhead this effort, the Atchison, Topeka and Santa Fe cast about for a new leader not only to counter this threat but also to take the road into the next century.

  In the Santa Fe’s first fifty years, four men stood out: Cyrus K. Holliday, the progenitor of the dream and a member of its board for forty years; William Barstow Strong, who overcame all obstacles to make the Santa Fe a transcontinental system; A. A. Robinson, the steady engineer who turned Holliday’s vision and Strong’s strategic moves into track on the ground; and Edward Payson Ripley, the man who led the road out of the panic of 1893. During a quarter century at the helm of the Santa Fe, Ripley was to rely less on flash and more on substance to make the road an operational model of speed, comfort, and reliability.