Iron Empires

by Michael Hiltzik

  Beef and mutton from the prairies, gold and silver from western mines, and tea and silk from the Far East were filling the railroad’s cars to the rafters. In 1873 California farmers reaped a record grain harvest, further stoking the Union Pacific’s freight traffic. The railroad’s books reflected the bounty, with profits rising from about $2 million in 1869 to $6.5 million in 1875. And why not? In this region the Union Pacific held an unregulated monopoly in which it could set rates wherever it wished.

  These circumstances allowed Gould to declare a 6 percent dividend in the spring of 1875, raised three months later to an annual rate of 8 percent. Was this wise? Later analysts would find the strategy dubious, and the railroad’s fate after Gould’s departure suggests they were right.

  In the early 1880s it was possible to overlook headwinds gathering against the UP. The economy was booming, and where economic growth fell short, the climate of feverish speculation took up the slack. This was the boom that followed the long depression triggered by the Panic of 1873. In the euphoria of recovery, the role played in that earlier disaster by railroad overcapitalization and mismanagement was quickly forgotten. Land speculation spread across the West like a prairie fire, abetted by railroad advertisements depicting Kansas and Nebraska as Gardens of Eden in the making; a few years of abundant rainfall in that climatologically unstable region bolstered the impression that its agricultural potential was rich. Revenues and profits soared at the Union Pacific, as did its spending on new branch line construction, which doubled between 1880 and 1883 to $8 million. Over that period the railroad’s shares gained 30 percent in value.

  Gould’s prominence among railroad tycoons during this period was partially an artifact of his having outlasted almost all his most important compatriots and rivals. Jim Fisk had been the first to go. On January 6, 1872, having crammed a full life into his thirty-six years, Fisk was shot in the gut by one Edward Stokes, a rich dandy who had become Josie Mansfield’s lover and been publicly accused by Fisk of blackmail. Jubilee Jim expired the next morning, allowing his gambling cronies to settle their hundred-dollar wagers over how long he would survive the bullet.

  Daniel Drew died penniless at the age of eighty-two in 1879, leaving behind a quarter-million dollars in unpaid commitments to the theological seminary that bore his name. His erstwhile partner and sometime foe Cornelius Vanderbilt had already passed on, also at eighty-two, on January 4, 1877. He died with his reputation intact as the richest man in America, his medical condition closely followed by newspapers chronicling every turn for the worse during his final days. (“Commodore Vanderbilt Very Low,” the New York Times reported on New Year’s Day, noting that Vanderbilt had suffered several fainting spells the day before and “his death may be expected at any hour.”) The Commodore would leave most of his fortune, estimated at $100 million, to his son William.

  But Gould also had the survivor’s skill of knowing when to double down on his bets and when to turn in his chips. He was canny enough to detect the turn of the wheel from boom to bust with near perfect precision. And he was not above stabbing his erstwhile partners in the back, especially if it could confer him an advantage at such a critical moment.

  * * *

  AS IS TYPICALLY the case during boom times, economic naysayers were scarce in the early 1880s, though not nonexistent. One was the businessman and financier Cyrus Field. In June 1881, in a conversation with the New York Evening Mail, Field foresaw another depression.

  Can any sane person believe that this condition of things can continue when stocks are seen rising in the market several per cent daily? . . . I have hardly seen a sane person since my return from Europe. Speculation is making people crazy. Why, when I went to Delmonico’s for lunch this afternoon, I saw a throng of pale and anxious men congregated about a stock indicator, watching it as if it had been the pulse of a dying friend. It was a melancholy sight . . . sheer madness.

  Over the next few years, concerns like Field’s would be heard more often, as the possible consequences of an economic slump for America’s overcapitalized railroads began to give pause to the savviest investors. Gould was among them. With the Union Pacific facing what he believed to be its moment of truth, he quietly voted with his feet, unloading almost all his stock by 1883, though not before seizing one last opportunity for plunder. Indeed, few maneuvers demonstrated Gould’s habit of enriching himself at the expense of his own partners as did his takeover of the Kansas Pacific Railroad and development of the unprofitable line into a weapon against the Union Pacific.

  Gould had first interested himself in the Kansas Pacific in 1877. The 745-mile line ran from Kansas City west to Denver and thence north to Cheyenne, paralleling the Union Pacific much of the way. It was a paragon of overcapitalization and mismanagement; the German-born Henry Villard, who had not yet launched his career as a railroad and newspaper magnate but was serving as a receiver of the Kansas line on behalf of its German creditors, deemed it to be “in wretched condition” and “utterly out of repair.” Its books, reported the accountants of the Pacific Railway Commission, “reflect the chaotic character of the management,” leaving it impossible to glean “an accurate and faithful statement of the actual condition of the corporation.” The few facts that were known about its financial condition were dismal indeed: The Kansas Pacific turned a profit only twice from 1867 through 1879, while accumulating a deficit totaling more than $11 million. In that era, when shares of stock were issued at $100, or “par,” Kansas Pacific was quoted as low as $9, or nine cents on the dollar.

  Gould, however, viewed the Kansas Pacific as “an immensely valuable property intrinsically.” He acknowledged that its “general condition was bad; it had been badly financed . . . [and] so badly managed that it got clear down in the rut.” What he liked about it, however, was its potential to torment the Union Pacific. As Grodinsky would observe, “while the Kansas Pacific was not financially strong, as a threat to its competitor it had the strength of Samson.”

  The complacent UP board had long regarded the Kansas Pacific chiefly as a nuisance. As a parallel line running west past Denver, the railroad had been able to erode the UP’s profits in Colorado through rate cutting. But the board assumed that as long as it was dependent on the UP for freight to and from the West, there were limits to how aggressive its owners could be. That subservience would disappear only if the Kansas line were extended from Cheyenne to Ogden, Utah, where it could bypass the UP. But since the Kansas was mired in poverty, its ability to build such an extension was dubious.

  Then Gould suddenly remade the landscape. He had acquired control of the Kansas while quietly reducing his holdings in the Union Pacific from two hundred thousand shares to twenty-seven thousand (even as he retained his seat on the UP board). He was now prepared to reposition the Union Pacific from his ward to his victim. In November 1879 he summoned his fellow directors to New York to propose a merger of the Union Pacific, the Kansas, and another Gould holding, the Denver Pacific, all at par—that is, valuing each equally.

  The meeting went badly, for “the Union Pacific had reported an annual surplus, the other two roads an annual deficit; the Union Pacific had not defaulted, the Kansas and Denver Pacific had done little else,” the historian Stuart Daggett would observe. A reasonable arrangement would have valued the Kansas and Denver at no more than 30 percent of the Union Pacific, but Gould refused to accept such a valuation and the UP directors refused to offer any more. Gould responded truculently. “Gentlemen, you are making a great mistake,” he snapped, stalking out of the room. Recalled F. Gordon Dexter, one of the board members on the scene: “He had his war paint on.”

  With the Kansas Pacific now in the hands of a speculator with ready access to capital and nothing resembling scruples, the UP directors realized their position had become desperate. After the meeting Oliver Ames, the son of Oakes Ames, encountered three UP directors—Sidney Dillon, Dexter, and his cousin Fred Ames—and described them “as gloomy and unhappy a set of men as I ever saw. . . . If y
ou had seen them, as I did . . . you would have pitied them.”

  Gould soon fulfilled their fears, announcing a plan to extend the Kansas all the way to Ogden. Asked later for his own assessment of what would have happened to the Union Pacific if he had followed through, he answered bluntly: “It would have destroyed it.” The UP directors knew he was right. They were ready to capitulate.

  In January 1880 Gould resigned his directorship of the UP and summoned his former colleagues from Boston back to his office in New York, this time to demand their signatures on a consolidation that was essentially identical to the deal they had rejected as absurd only a few weeks earlier. Gould was no longer angry and irritated but amiable and “chipper,” magnanimous in victory but still not willing to yield an inch. Dexter, remarking on the terms, observed that the only real change from November was that “every one of us felt at that time that we could not accept them, and every one of us felt at this time that we were very glad to get the offer.”

  Gould maintained to the last that the deal was a very good one for the UP, on the grounds that the road would have had to confront competition from a resurgent Kansas Pacific sooner or later. A railway commissioner astonished at his intriguing against a firm that he served as a board member put it to him directly: “According to the ethics of Wall Street,” he asked, “do you consider that it is absolutely within the limits of your duty as a director in a great corporation to purchase, while such director, another property which . . . would absolutely ruin the property in which you were a director?”

  No, Gould replied indulgently; that was why he followed through with the merger of the railroads instead of building the extension. In any case, he observed, he was no longer a UP director on January 14, when the deal was signed. The other directors maintained that they had entered into the consolidation of their own free will and not at all under pressure from Jay Gould, but this was a show of independence transparently designed for public consumption.

  Villard would estimate Gould’s profit from the episode at more than $10 million. Later analysis suggests this may be an exaggeration by about twofold. But there is no question that it reestablished Gould as an important force in the railroad industry—and crippled the Union Pacific for years to come.

  * * *

  THE BLOATED AND unsteady entity that emerged from the merger of the Denver, Kansas, and Union Pacific lines—rechristened the Union Pacific Railway Company—began life in immeasurably worse condition than its predecessor. The Union Pacific Railway inherited all the problems facing the original UP, including years of underinvestment in physical plant, the looming deadline for repayment of its government loan, and an overall capitalization overflowing with water. Now it assumed the added burden of the extravagantly overpriced and insolvent branch lines purchased from Gould and financed by more watered stock.

  The UP directors could congratulate themselves on having eliminated the Kansas Pacific and the other Gould holdings as sources of competition. But the cost was crippling, as was soon shown by the railroad’s inability to shoulder a new economic downturn looming on the horizon. Until 1883 the company had actually been expanding, thanks to a nationwide economic boom and, especially, a mining boom in Colorado, which prompted it to expand its network of branch lines. But it would eventually be discovered that the boom rested upon a foundation of quicksand, as most do. In 1883 Gould severed his connection with the Union Pacific, having sold all his stock and decided, as Daggett would write, that he “had obtained from the Union Pacific all that he thought possible”—for the moment.

  After Gould’s departure, management of the road was left in the hands of the sixty-nine-year-old Sidney Dillon, who had once been Gould’s vigorous front man but was now “old, and had lost his nerve,” in the judgment of Charles Francis Adams. Dillon resigned soon after his patron exited the railroad. In his place, the board named as president Adams himself. Adams thereby inherited not only the legacy of the Crédit Mobilier, but of Jay Gould, which was almost as weighty a burden. The Union Pacific was about to enter its most desperate period.

  It would be a cleansing crisis that set the stage for a brighter chapter, and the railroad’s revival under a new owner, Edward H. Harriman. Gould, meanwhile, was left to work his dark magic on the remaining railroads in his empire. It would not be a peaceful experience—neither for his rivals, nor for Gould himself.

  7

  Year of Upheaval

  MASTER MECHANIC Leroy Bartlett, head of the St. Louis shops of the Missouri Pacific, walked onto the shop floor at the 10 A.M. bell on March 6, 1886, only to be confronted by an extraordinary sight. The men were all shedding their work clothes and lining up in street clothes in double file. Then they marched out of the shop, three hundred strong. “In the space of half an hour,” he would recall, “they were all gone.”

  The Great Southwest Railroad Strike of 1886 had begun.

  The walkout spread rapidly across Jay Gould’s rail network that day—indeed, almost instantaneously: 700 men in Sedalia, 340 in De Soto, 300 in Little Rock. “The organization of the strikers was perfect,” the historian Frank Taussig would observe. “At every important point, the roads were bared in an instant of men indispensable for the movement of trains.” Within two days local newspapers were running headlines such as this one in the St. Louis Post-Dispatch: “Traffic Throttled: The Gould System at the Mercy of the Knights of Labor.”

  The year 1886 would become known as “the great upheaval” in American labor history, especially for the railroads; some 610,000 workers joined in an estimated fourteen hundred strikes, more than twice the number of the previous year. The Great Southwest strike would be a special case, “extreme in its magnitude, extreme in the methods and the temper of the strikers,” in Taussig’s words. The strike would trigger a lasting change in the perception of the railroads among its workers and the communities they served; it would lead to the end of the Gould era and usher in the era of J. Pierpont Morgan and of “Morganization,” aimed at stabilizing the industry by rigorous management of individual railroads and the competition among them. The strike was at least partially prompted by the recognition that the roads were no longer mere businesses. Instead they had become economic forces capable of total domination of their environments, their owners bent on using their wealth to beget more wealth.

  The railroad strike’s immediate trigger was the firing of a union official named Charles Hall from his job as a carpenter on the Texas & Pacific line, ostensibly for having left work to attend a meeting of his union, the Knights of Labor. (Hall maintained that his foreman had given him permission to attend, then fired him for absenteeism.) But the strike was a long time coming. Behind it was a year of unkept promises by Jay Gould, progressively steeper pay cuts, and rising workplace discrimination. And behind that lay an even longer record of labor mistreatment. The expansion of the railroads from the Eastern Seaboard across the Mississippi and into the Far West had opened vast new opportunities for skilled workers to ply their trades and for unskilled workers to earn decent pay in the rapidly industrializing economy. But during downturns, when railroad managers looked for a way to reduce expenses, they would see eliminating jobs and cutting wages as their only options. Tensions between labor and management were bound to come to a head.

  * * *

  THE NOBLE AND Holy Order of the Knights of Labor was founded in 1869, amid convulsive changes being wrought across the United States’ industrializing economy. The order was destined to become “the most imposing labor organization this country has ever known” up to that time, but the description was short-lived, for the organization would reach its apogee in 1885 and become almost extinct after 1886. In the process, however, it would leave a historic mark as the nation’s first truly national industrial union.

  The Knights’ founder, Uriah Stephens, was a Philadelphia garment cutter with intellectual pretensions. His years of membership in the Masons and the Odd Fellows may have inspired the order’s ritualistic habits, which in its earliest phas
e included secrecy oaths—members were not permitted to divulge its name or even acknowledge its existence—and titles for officers such as “venerable sage” and “grand master workman.”

  The Knights did not resemble the worker organizations that preceded it or the labor unions of later decades. In the 1860s the only national labor organizations had been fraternal mutual-aid societies serving trades such as printers, stone cutters, and hat finishers, without any idea of engaging in the sort of collective bargaining that would become the hallmark of the labor movement generations later. Indeed, the Knights sprang from a garment-cutters union of which Stephens had been a member.

  But Stephens’s ambitions were greater. He aimed to reform the relationship between capital and labor by educating workers in the virtues of solidarity and urging them to reach their goals by means of legislation, rather than through direct confrontation with management. The order was broadly inclusive, welcoming men and women, blacks and whites, unskilled laborers and skilled workers alike. Its credo held that to “defend [labor] from degradation; to divest it of the evils to body, mind, and estate which ignorance and greed have imposed; to rescue the toiler from the grasp of the selfish—is a work worthy of the noblest and best of our race.”

  Stephens’s successor as grand master workman was Terence V. Powderly, a former mayor of Scranton who took over in 1879. Less complaisant than Stephens in outlook, though not by much, Powderly was described by a reporter for the New York Sun as “short and slight, with soft blue eyes half concealed by gold-rimmed spectacles.” The writer added that when Powderly spoke, “he seemed like an invalid sitting up when he should have been in bed, but he talked like a level-headed, clear-minded man.” Powderly consistently opposed direct job actions such as strikes. Under his leadership, the Knights’ main goal was the institution of an eight-hour day for all workers.