In the period between the end of the Civil War and the Panic of 1873, the stock market had undergone a historic transition. The market’s leaders were determined to give it an image of professional respectability, despite the private immorality of syndicate operators squeezing profits out of public investors gripped by enthusiasms that followed one upon the other—for gold, for iron, for railroad stocks. After the end of the Civil War, a torrent of capital flowed into Wall Street from Europe. This created fortunes for families like the Morgans and firms like Kuhn, Loeb, but required that they project impeccable integrity to secure the trusting patronage of British and German investors.
Yet Wall Street did not relinquish its unsavory reputation so easily. Just before Ned Harriman opened his office as a member of the New York Stock Exchange in 1870, Jay Gould and Jim Fisk had staged their scheme to corner gold—an enterprise that, once thwarted, produced a recession. The downturn, albeit brief, might have been bad enough to suffocate Harriman’s young firm in its cradle had not his natural conservatism kept a solid financial foundation under his feet. All around him, less prudent brokerages failed, taking their customers’ nest eggs with them and prompting Walt Whitman to curse “the depravity of the business classes of our country,” which he felt had infected all levels of American government with “corruption, bribery, falsehood, maladministration.” Whitman’s moralistic soul was repelled: “In business, the one sole object is, by any means, pecuniary gain. . . . The best class we show, is but a mob of fashionably dress’d speculators and vulgarians.”
Whitman’s jeremiad was a reminder that the activities of Gould, Fisk, Drew, and Vanderbilt were still the bedrock of much of Wall Street’s wealth. To many people inside the markets or observing from outside, the “integrity” of the new breed was simply a veneer hiding the venery beneath. Drew, after all, had cloaked his unscrupulousness in the garb of prayer and piety. The success he gained from such duplicity taught his followers a lesson not easily forgotten.
Efforts to erase Wall Street’s image as a casino in which only insiders could win had stumbled over its recurrent scandals: the gold scheme, followed three years later by the Crédit Mobilier exposé, which had redefined the first transcontinental railroad not as a great enterprise deserving of national pride but as a shameful epic of greed, graft, and fraud.
For many denizens of Wall Street at the time, the measure of a man was not his honor or the value of his word, or even his net worth; it was the audacity of his scheming, regardless of whether the securities he was trading were legitimate, fabricated, or even his to sell. Typical was the career résumé delivered to reporters by Alden Stockwell, a cheerily corrupt manager of a steamship pool who deployed generous bribes to obtain government contracts, only to be bested in the end by the even more unscrupulous Jay Gould:
When I first came to Wall Street I had $10,000, and the brokers called me “Stockwell.” I scooped some profits, and it was “Mr. Stockwell.” I got to dealing in a thousand shares at a time, and they hailed me as “Captain Stockwell.” I went heavily into Pacific Mail, and folks lifted their hats to “Commodore Stockwell.” Then one day Jay Gould came along, smash went Pacific Mail, and I went with it. They did not call me “Commodore Stockwell” after that, but “that red-headed son of a bitch from Ohio.”
Harriman knew he was launching his career without the advantages enjoyed by his wellborn and well-capitalized competitors. A friend recalled years later that at the very birth of his career as a stockbroker, Harriman had pulled a hundred-dollar bill from his pocket. “I can’t lose much, anyhow,” he remarked; “that’s all I’ve got.” But he proved adept at attracting influential customers, if not through personal charm then through his intellect and determination to serve them as a broker. Among his first major clients was a noted speculator and partner of Cornelius Vanderbilt’s named Dick Schell, an obese man who hated to climb stairs. Schell offered to send Harriman enough business to cover his rent if he would only move his office to the ground floor. Harriman did so, earning the patronage of Schell as well as his three brothers, who were the presidents of two banks and the New York Central Railroad.
Ned Harriman also inherited his father’s talent for marrying up. In 1879 his Wall Street friend George Clark had introduced him to his wife’s cousin, who was visiting New York from her home in Ogdensburg, a city hard by the Saint Lawrence River in the farthest reaches of upstate New York. Mary Williamson Averell was three years Harriman’s junior. She was not a notable beauty, with heavy-lidded eyes and a firm, even severe, mouth. But almost immediately she and Ned formed a deep bond that would last for life. Like her mother-in-law, she brought her family a stability and moral tone that her husband deeply cherished. “Any biography of Mr. Harriman which omits his family life misses the point and loses the light of the whole story,” reported one of Harriman’s business associates after Mary died in 1932. “It was not unusual for him, in the midst of transactions of such importance as to make men dizzy from concentration, to stop in order to speak a word on the telephone or send a message to Mrs. Harriman. . . . His attitude toward her was more than devotion. It was profound admiration, respect, and unfailing attention and courtesy.”
The Averell family influenced the direction of Harriman’s life in another way, by introducing him into the railroad business. The connection was first made at the couple’s wedding on September 10, 1879. Arriving at the Ogdensburg station for their honeymoon trip, they came upon a special train ordered by the bride’s father, with E. H. HARRIMAN painted on the engine’s side. But that was just the beginning.
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HARRIMAN’S FATHER-IN-LAW, William H. Averell, had been appointed a director and receiver of a decrepit 118-mile railroad hugging the New York side of the Canadian border. The Ogdensburg & Lake Champlain had been chartered in 1845 to carry coal and goods east to Boston in competition with railroads running from New York City. This was a hopeless dream. The line had declared bankruptcy three times by 1879 and was deeply in the red when Averell named Harriman to the board and asked him to scare up new financing.
Over the next year, Harriman and his Wall Street friend Stuyvesant Fish achieved a near-miraculous resuscitation by restructuring the debt to reduce its interest rate to 6 percent from 8 percent and folding the crushing arrears on the road’s preferred share dividends into the 6 percent bond. An improvement in the upstate economy did the rest, and by 1880 the line had swung from a loss of about $150,000 to a profit of $61,000. It was Harriman’s first experience of rescuing a railroad, but it would not be his last.
Fish was the most highborn of all Harriman’s young friends, and his closest companion during these years. His grandfather Nicholas Fish had been a mainstay of the Federalist camp during the Revolutionary War and a close friend of Alexander Hamilton’s; his grandmother a descendant of Peter Stuyvesant, the last Dutch governor of what was known as New Netherland before that colony was ceded to the British and its largest city, New Amsterdam, was rechristened as New York. Stuyvesant Fish’s father, Hamilton, had been a governor of New York and United States senator, and had served in the Grant administration until 1877, when he handed in his portfolio with the inauguration of Rutherford B. Hayes.
Harriman and Fish made almost as unlikely a pair as Jay Gould and Jim Fisk; where Harriman was thin, short, and dark, sporting his unruly black mustache, Stuyvesant Fish was “tall, blond, leonine,” with a luxuriant set of handlebar whiskers. Their family lifestyles could not have been more different: “Mrs. Harriman was busy having babies, Mrs. Fish busier grooming herself to succeed Mrs. William Waldorf Astor as social Empress of New York.” A “big-hearted, hand-shaking chap whom nobody feared much but whom everybody loved,” Fish provided the polish and charisma that Harriman lacked. The New York Times, stalking Fish as he strolled down Wall Street one day in 1906, reported, “It is a common thing to hear men say, ‘See that tall man there with the broad shoulders? That’s Stuyvesant Fish.’ E. H. Harriman, too, is a frequent stroller afoot through the downtow
n crowds, but he goes unrecognized. He is too close to the average type to be marked.”
The Ogdensburg refinancing cemented the early friendship of Harriman and Fish. Their next exploit concerned an even more decrepit specimen of railroad.
The Lake Ontario Southern was another artifact of the dashed ambitions of that overoptimistic railroad-building era. Conceived as a 155-mile connection linking the bituminous coal region of western Pennsylvania and Canadian grain growers on the northern shore of Lake Ontario, by 1881 the line extended only 34 miles south from Sodus Bay, a harbor on the south shore of the lake, to Stanley, in New York’s Finger Lakes region. Its sole virtue was that it intersected both the Pennsylvania and New York Central railroads, which made it an appropriate target for acquisition by one or the other. But it was “badly managed and unprofitable,” and so unprepossessing —with little more than “two crippled locomotives, two passenger cars, and seven freight cars” to its name—that it had been ignored by both.
The Lake Ontario Southern would teach Harriman, at the outset of his railroad career, two related lessons. One was that the greatest profits were to be made in promising yet undervalued properties; the Lake Ontario Southern, Harriman would recall later, “had great strategic value which nobody seemed to recognize.” The other was that investments in the capacity and capabilities of a property would yield exponential returns.
Harriman and Fish bought into the line with Silvanus J. Macy, the scion of a family of New York oil traders who owned properties in the Sodus Bay region. What brought the obscure line to their attention is unknown, although Harriman’s brother-in-law William Averell, who lived in nearby Rochester, was an investor. Harriman, Fish, and Macy promptly connived to buy out the handful of existing shareholders by naming a price at which they would either sell their own shares or buy up the others. After Macy delivered a discouraging report on the road’s earnings and prospects at a board of directors meeting in October 1883, the shareholders duly bailed out. The new owners improved the line’s physical condition, built a grain elevator at Sodus Bay to encourage more cross-lake shipping from Canadian farmers, and renamed the railroad the Sodus Bay & Southern. In truth, their aim was not so much to turn the railroad into a profitable concern—a goal they failed to accomplish in their nine months of full ownership—but to dress it up for sale to the Pennsylvania or New York Central.
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Wellborn Stuyvesant Fish brought Harriman into the railroad business and gave their partnership the polished image that Harriman lacked, but eventually faded into his partner’s shadow.
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Harriman ruthlessly played each of the potential buyers against the other, bringing them both to the table in 1884. To the Pennsylvania, he talked up the virtue of extending its Northern Central line to Sodus Bay, which he promoted as “the best harbor on the lake” and therefore a prime outlet for Pennsylvania coal headed for Canada. Meanwhile, he warned William Vanderbilt and his New York Central partners of the Pennsylvania’s interest. “I knew that if I put it in good physical condition,” Harriman recalled, “the Pennsylvania Railroad would jump at a chance to buy it, in order to get an outlet on the lake; and that the New York Central would be equally anxious to buy it, in order to keep its rival out.”
Vanderbilt moved first, buying a one-month option expiring on July 1, with the right of renewal. The Pennsylvania bid higher for the road a few days later, but now had to wait for its rival’s option to expire. Vanderbilt unwisely delayed until the last moment to signal his intention to renew the option, and when that day arrived, Harriman strategically arranged to be out of his office. This enabled him to let the Vanderbilt option lapse so he could close the deal with the Pennsylvania, at a large profit.
Harriman had established himself as a resourceful railroad financier and a nimble negotiator with an instinctive understanding that investing in a railroad infrastructure was necessary for turning a profit. The “importance of proper physical condition in a transportation property,” he would recall, “was a lesson . . . I have never forgotten.”
But he was still a small player in a burgeoning industry. Thanks to his friendship with Stuyvesant Fish, that was about to change.
9
The First Skirmish
THE ILLINOIS CENTRAL had been a storied railroad for nearly three decades before Stuyvesant Fish brought Ned Harriman into the company.
The IC owed its existence to Stephen A. Douglas. The so-called Little Giant of Illinois politics would secure for himself a permanent place in the history books years later as Abraham Lincoln’s adversary in a landmark series of debates during a contest for the US Senate. But as a congressman in the early 1840s and a senator after 1847, he was better known as the proponent of a plan to fund the construction of railroads in Illinois and other prairie states through grants of federal lands along the rights of way. The Illinois Central was the first railroad financed by a method that would reach its culmination, financially and geographically, with the meeting of the Union Pacific and Central Pacific at Promontory in 1869.
Construction of the IC began in 1851 and proceeded at a breakneck pace. The road was an unusual venture in many ways. For one thing, it covered a part of the country that was as yet largely untracked: When the first rails of the Illinois were being laid, nearly two-thirds of the nation’s nine thousand miles of track were still located in the nine New England and mid-Atlantic states. Also, instead of following the expansion trajectory of American commerce from east to west, like most other trunk lines, the IC ran north-south. Its route bisected Illinois like a spine of iron reaching from Chicago all the way south to Cairo, at the confluence of the Mississippi and Ohio Rivers. A second trunk line split off at Centralia and ran like the left arm of a Y to the northwestern corner of the state, terminating at a point just across the Mississippi from Dubuque, Iowa.
From its inception, the IC was a source of statewide pride and anticipation. Newspaper editorials expected the road to liberate Illinois from the troublesome uncertainties of riverborne commerce: “The road will be a commercial avenue which will never freeze over or dry up . . . There will be no shoals, sand bars, or snags,” stated the Tri-Weekly Advance of Shawneetown, on the Ohio River about a hundred miles upstream from Cairo, in an article reflecting the seasonal complaints of local barge operators.
Drumming up public support was important for the project, but its promoters’ main challenges were scarcities of capital and labor. The first was especially acute at the start of construction, when American securities were facing one of their periodic bear markets in Europe and skepticism about the new road’s management was rife among European investors.
Then there was the shortage of manpower. As the railroad industry extended its reach beyond the Mississippi, the bidding for experienced construction hands became increasingly ferocious. Fewer than one-fourth of the necessary crews for the IC could be found in Illinois, so recruiters were dispatched to eastern ports with promises of as much as a dollar in commission for every worker they could grab fresh off the boats, luring brawny Scandinavian, German, Polish, and Irish immigrants into the Midwest. Advertisements placed in East Coast newspapers offered wages of $1.25 per twelve-hour day to willing workers, supplemented by a one-way fare into the hinterland by rail and steamboat, a passage valued at $475. Two years of steady work were guaranteed in “a healthy climate,” a promise that glossed over the cholera epidemics that periodically swept across the prairie.
The IC’s advertisements offered laborers a new life after the railroad work was completed, in a region “where land can be bought cheap, and for fertility is not surpassed in any part of the Union.” They declared a preference for “men with families”—for two reasons. First, the road was fearful of the brawling that regularly erupted in all-male construction camps, interfering with the smooth progress of the work. Second, the Illinois Central, like the transcontinental lines reaching across the prairie, knew that to grow the crops and generate the trading demand that produced
profits for the railroad, the region’s vacant parcels of arable land had to be tilled by productive settlers—and spouses and children all represented sources of free labor.
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Under Edward Harriman and Stuyvesant Fish, the Illinois Central expanded from its home state across Iowa and upgraded its southern link to New Orleans.
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And so the Illinois Central became another employer of the growing army of boomers, those itinerant professional track-layers and engineers who built the midwestern railroads with their brawn and brains. Its initial wage offer of $1.25 a day proved insufficient to keep its employees from jumping to better-paying roads. By 1853 the going rate was more than $1.37, and by 1855 ordinary laborers were earning $1.50, skilled hands even more.
Despite these obstacles, the main line of the IC was completed in only five years. In 1856, when its original charter was fulfilled, the system extended 705 miles, making it the longest railroad in the world—far longer than the 483-mile Erie, which upon its completion had been dubbed “the work of the age” and hailed by none other than Charles Francis Adams, its harshest critic, as “a monument . . . of engineering skill.”
The Illinois Central met all the expectations of the citizens it was built to serve. William K. Ackerman, who had joined the line as a clerk shortly after its charter was issued, recalled riding in November 1854 on the first train to pass through southern Illinois (a region known even now as “Little Egypt”). He wrote of the throngs in which “the ‘Egyptians’ turned out to witness the novel sight, to them, of a locomotive engine and train of cars.”
Iron Empires Page 17