They lined the track on both sides at every station, the men dressed in their snuff-colored jeans, and the women with gaudy-colored calicoes, check-aprons, and big sun-bonnets. They stood dumb with amazement. Many of them looked as though they had come out ‘between the shakes’ of fever and ague.
The IC became the state’s biggest industrial enterprise. Among its employees in the mid-1850s was a lanky lawyer transplanted from Kentucky named Abraham Lincoln, who possessed an annual pass for travel over its route; scarcely a decade later, the Illinois Central would carry his body part of the way from Chicago to Springfield, on the final leg of the slain president’s funeral journey.
European money flowed into the railroad’s shares and bonds. By 1854, half of the IC’s shares were held by English investors, more than a fourth by the Dutch. Over time, trade in IC paper would enrich not only those overseas investors but their American agents—including Pierpont Morgan and Edward Harriman.
* * *
IN 1883, THE year before he sold the refurbished Sodus Bay & Southern Railway to the Pennsylvania Railroad, Harriman had joined the Illinois Central as a director. While he had dabbled in railroads before, this was his introduction to the industry on a major scale and his first experience as an operating executive. And he owed this lucky break to his old friend Stuyvesant Fish.
Fish’s history with the Illinois had begun in 1871, when through family connections he secured a job as secretary to the line’s president in Chicago. He left the railroad a year later to take a Wall Street job, but returned as a director in 1877. From that perch he was well positioned to throw business Harriman’s way.
The first big deal landed in 1881, with a large issue of IC bonds to finance its extension south to New Orleans. At the urging of Fish, whose job included overseeing the railroad’s securities, Harriman bought a $2.5 million block of the bonds. The transaction turned into a riskier venture than Harriman anticipated, for on July 2, just after the sale closed, President James A. Garfield was shot by a mentally unbalanced drifter named Charles Guiteau. The assassination attempt threw the American capital markets into a swoon that lasted until Garfield’s death on September 19, eighty days later, and the inauguration of his vice president, Chester A. Arthur. Harriman had no choice but to hold on to the bonds in a weak market—his firm kept afloat, it was said, by “the assistance of rich friends”—until eventually he was able to unload the securities at a profit.
The Illinois Central was an ideal training ground for Harriman, and Fish the ideal partner, for Fish was pushing the line’s cautious management toward more energetic expansion south and west. Needing an ally on the board, Fish orchestrated Harriman’s election as a director in 1883, knowing that his friend—if not many others on Wall Street—endorsed his goal. With IC shares in a slump thanks to investors’ misgivings about Fish’s plans, Harriman became an aggressive buyer. “It’s the best line in the country,” Harriman assured his Wall Street contacts. “It won’t cost us a cent to carry; the ‘shorts’ will carry it for us.” He was right; when the investors who had bet on the continued decline in the stock’s price threw in the towel, the shares coasted higher.
Fish understood that the key to the IC’s success prior to the Civil War had been its breakout beyond the Illinois state line. Before the war, the IC had begun racing its Chicago-based rivals into Iowa and soon reached clear across that state to the Missouri River. After the war, the South beckoned even more urgently. Dixie’s entire transport system lay in ruins—“twisted rails, burned ties, gutted depots, destroyed bridges, and lost or dilapidated rolling stock scattered from Louisiana to Virginia.” The journalist Whitelaw Reid, who accompanied Chief Justice Salmon P. Chase on a reconnaissance mission across the blasted landscape in May 1865, reported landing in the harbor of Beaufort, North Carolina, and searching in vain for transport off the waterfront. Finally a commander of the Union occupation force provided the party with “a train composed of a wheezy little locomotive and an old mail agent’s car, with all the windows smashed out and half the seats gone.”
Bereft of resources by war and Reconstruction, the South was slow to rebuild its rail system. Ten years after the war’s end, there was still no rail link between Cairo and New Orleans. The nearly six-hundred-mile gap tormented shippers and growers. As long as it remained unfilled, goods from Louisiana were “shipped by steamboats to St. Louis, trans-shipped up the Illinois River by smaller steamboats, trans-shipped again to canal-boats, and reached Chicago by the Michigan Canal,” as William H. Osborn, a former president of the IC, informed his board after touring the region. This meant delays of a month or six weeks, he reported. Worse, the cost of packing and repacking the cargo was immense and “the waste and shrinkage [i.e., theft] was serious.” In 1872 the IC decided to invest $5 million in an extension beyond Cairo, a move considered unimaginably risky at the time. Instead, Osborn would boast in 1882, the extension turned the Illinois Central into “the most important north and south trunk line in the world.”
But Stuyvesant Fish was convinced there was more to do. With Harriman, he represented the new management style of a line that had been the “bluest of blue chips in a region where the ledgers of many roads bled a steady stream of red.” Older investors cherished the road’s traditionally conservative approach, which it maintained even in its expansion into Iowa, and the policies of these two easterners with even more ambitious expansion plans unnerved them. Samuel Sloan, an upstate New York railroad man who earlier had helped bring Pierpont Morgan into the Albany & Susquehanna fray against Gould and Fisk, had no more taste for the new man than he had had for those buccaneers. “I don’t like that Harriman,” he confided to a friend. “He and ‘Stuyv’ Fish are going to get Osborne in trouble with the Illinois Central, if he don’t look out.”
This uneasiness was widespread on Wall Street, where bankers and investors were accustomed to the IC’s penny-pinching tradition of plowing surplus profits into healthy dividends for shareholders. They struggled to accept Harriman’s aggressive borrowing to finance expansionary investments, and feared that profits might be harder to come by just as interest obligations rose. Harriman shrouded the IC balance sheet in mystery—its declared assets seemed to have nearly quintupled in his first year as a director, without explanation. Examining an entry labeled “cash and other assets,” the Commercial and Financial Chronicle, then the weekly bible of Wall Street, asked, “How much of it is cash, and how much something else? . . . In all these facts, is there not evidence of some lack of the conservative spirit so long dominant in the company’s affairs?”
From 1883 through 1889, Fish and Harriman increased the Illinois Central’s mileage by about a thousand miles. Its physical condition was better than ever before in its history. While millions were spent on this expansion and improvement, the railroad’s financial health actually improved. “Somehow or other,” recounted Otto Kahn, “it never had bonds for sale except in times when bonds were in great demand; it never borrowed money except when money was cheap and abundant; periods of storm and stress ever found it amply prepared and fortified; its credit was of the highest.” This was evidence of Harriman’s instinctive handle on the financial markets.
As part of their expansion program, Fish and Harriman brought the venerable Wabash, St. Louis & Pacific into the Illinois Central after the Wabash failed in 1884, and then added the Mississippi & Tennessee, which fed traffic into the IC from Memphis. They founded the Chicago, Madison & Northern Railroad to give the Illinois its first wholly owned connection into Chicago, relieving it of the $200,000 a year it had been paying to lease a right-of-way into the city. Harriman emerged as a master strategist, exploiting the collapse of Jay Gould’s rail empire to claim the Champaign, Havana & Western from the wreckage of receivership in 1886.
The crowning achievement of the IC’s new management came on October 29, 1889. To the citizens of Illinois, it was the moment that cemented the state’s position as the keystone of the national railroad grid. The place was a crossin
g over the Ohio River near Cairo, at the very southern tip of the state.
Presidents of the Illinois Central had dreamed of building a fixed span across the Ohio for two decades. Rival lines had managed to bridge the river at Louisville and Cincinnati as early as 1870, but the IC’s passengers were still required to disembark from their trains and shippers to offload their freight before crossing between Illinois and Kentucky; all then transferred to ferries for the trip to the opposite shore. This placed the Illinois Central in a hopelessly uncompetitive position for traffic with the South. Economic slumps, political disagreements, and internal squabbling had stood in the bridge project’s path, but finally Stuyvesant Fish and Edward Harriman had cleared the obstacles away. Now the project was ready for service. Twelve boxlike steel trusses resting on ten stone piers stretched more than ten thousand feet across the river, forming the longest steel bridge in the world.
A gala atmosphere reigned that Tuesday morning in Cairo, where the hotels had filled up with railroad officials, journalists, engineers, and spectators. The Illinois Central tracks were jammed with the Pullman cars and carriages that had brought dignitaries to the celebration. At 9 A.M., nine connected Mogul locomotives, each weighing seventy-five tons, began inching their way across the span. Harriman and Fish stood shoulder to shoulder with the crew in the cab of the lead engine, as the throngs watched expectantly to see if the span would hold fast under more than seven hundred tons of rolling iron. It did so with ease. A cacophony of steam whistles greeted the engines when they reached the Kentucky shore, and pandemonium erupted in town.
Fish, as the senior executive on hand, received most of the credit for the railroad’s achievement. But Harriman, then the road’s vice president, was its mastermind. His achievement was made even more notable by the low expectations onlookers had for him. “When Harriman had first joined the official family of the Illinois Central many had considered him little more than a rather ruthless junior-sized copy of Jay Gould, the notorious wrecker of railroads,” observed the IC’s historian, John F. Stover. “But soon he was showing a remarkable grasp of the problems involved in the operation and fiscal management of a major midwestern line.” What Harriman learned at the Illinois Central he would use to great effect when faced with the more daunting challenges ahead.
* * *
THE OPENING OF the Ohio River bridge in 1889 was Harriman’s most notable accomplishment as a member of the road’s management in the 1880s. But in terms of his early career as a railroad tycoon, his greatest triumph had been notched two years earlier, five hundred miles from Cairo, when he outmaneuvered Pierpont Morgan in what became known in Illinois Central lore as the battle of Dubuque.
The conflict originated in a deal that looked good at the time it was made, but had long since outlived its usefulness. During the Illinois Central’s expansion into Iowa, it had leased the 143-mile Dubuque & Sioux City Railroad in 1867 for a rent equal to 36 percent of the Dubuque’s annual gross revenues. The lease remained profitable for more than a decade. Immigrants were pouring into Iowa and points west, Sioux City was the main transfer point for supplies crossing the Missouri River, and no other railways existed in the northern half of the state. Freight and passenger rates were gratifyingly high and seemed to be on a permanent trajectory higher.
By 1885, however, traffic had stagnated. Railroad mileage in Iowa had more than quintupled to 7,509 miles, most of it belonging to sixteen railroads competing with the Illinois Central. Many of these rivals offered shorter routes to Chicago and the East, and rates were plummeting. The IC was losing about $200,000 a year on the Dubuque lease, not including the thousands more it was obligated to spend on upkeep. The IC felt that the Dubuque could be made vastly more efficient and profitable if it expanded its branch network. But the Dubuque’s shareholders were disinclined to spend the money themselves on new branches and the IC was unwilling to make the expenditure, given that its investment would yield a handsome return chiefly for the Dubuque’s owners. A decision point loomed just over the horizon in 1887, when the original twenty-year lease expired and the Illinois would have to decide whether to abandon the lease or renew it for another two decades.
To Harriman the solution was clear: The IC must buy the Dubuque outright. It took him two years to bring his fellow directors around to the notion, but once they did so, placing the negotiations in Harriman’s hands, he faced another obstacle: The Dubuque’s shareholders had sensed a windfall in the offing. Their agent was J. Pierpont Morgan, who offered the Illinois Central the straightforward choice between renewing the lease at a sharply higher rent or buying out the Dubuque shares at par, or $100. That was a huge premium for shares that then hovered in the low $60s.
Morgan may have thought he had cornered the Illinois Central into capitulating to the lease renewal on his terms, but in Harriman he suddenly found himself confronting a Wall Street type he was unaccustomed to meeting as an equal. Morgan looked down on Harriman as someone not of his milieu, or indeed of his class, as his son-in-law Herbert L. Satterlee recalled years later. Pierpont knew Harriman only as someone “who had previously been a broker in New York City and now was in the investment business executing orders for the Illinois Central people and others.” This judgment amply conveyed the condescension of the elite financier, who made decisions in the name of his rich clientele, for the menials who shuffled paper on orders from their betters. Morgan at this stage of his career already commanded an army of bankers poised to do his bidding; Harriman, sniffed Satterlee, “did everything himself . . . He was not a ‘clubman’ and had very few friends.”
Morgan and Harriman both embarked on buying sprees in the Dubuque. Morgan’s firm, Drexel, Morgan & Co., ended up with proxies for 32,680 shares, a clear majority. Harriman directly owned about 15,000. As 1886 drew to a close, no more shares could be acquired by either side, for with aggressive buying having pushed the Dubuque’s price all the way to $100, the remaining shareholders were hanging on to their stock in anticipation of a lush payday. By mid-December the trading was so meager that the Dubuque’s shares were no longer even quoted on the stock exchange.
This was the situation as the date of the Dubuque’s annual meeting, February 14, approached. But a few days in advance, Harriman unveiled the fruits of his painstaking work ethic: He had discovered a provision in Iowa law that prohibited voting shares by proxy. The rule would invalidate all Morgan’s votes at a stroke. When Harriman appeared in person at the annual meeting, his shares were the only ones that could legally be voted. The meeting accordingly elected a slate of directors composed of Harriman and three confederates. Morgan’s agents marched out in high dudgeon and elected their own slate, comprising Morgan himself, James A. Roosevelt (an uncle of the future president Theodore Roosevelt), and three other associates. The fate of the Dubuque seemed to be up in the air. “There is no doubt,” observed the Commercial and Financial Chronicle, “but that the final adjudication of the matter will be made by the courts.”
That was true, up to a point. The litigation dragged on for two months, but it was obvious from the outset that in legal terms Harriman held much the stronger hand. The pressure to settle became inexorable in late March, after the Illinois Central announced it would terminate the Dubuque lease, thus leaving that railroad bereft of any source of traffic to its east. The truth was that the IC and the Dubuque needed each other, but the Dubuque’s need was the greater. Harriman’s offer to buy the Morgan shares at $80, delivered as an ultimatum on April 2, looked almost magnanimous; it was below the $100 that Morgan had demanded, but well above the $60 that seemed to be the natural value of the shares. The Dubuque accepted the deal on April 7, and the railroad passed into the hands of the Illinois Central.
Morgan’s acolytes would depict the battle of Dubuque as an assault by the giant Illinois Central on the defenseless shareholders of a small railroad, with Pierpont himself serving merely as the agent of those abused investors. But the ramifications were more personal than philosophical or financial, for
Harriman’s spectacular victory was one of the very few counted against Morgan even at that early point in his financial career. As such it left Morgan with a bitter taste that would not be easily cleansed.
To Morgan, Harriman’s maneuverings were not the acts of a Wall Street gentleman. The incident “made Pierpont very angry,” Satterlee recalled. “His own way of doing business and the method to which he was accustomed in others had been for competitors to bid against each other,” as though on a level playing field in which price was the only metric. Instead, the battle of Dubuque struck Pierpont as “a recurrence of the Jay Gould method of resorting to lawyers and to technicalities.” The ground was shifting beneath his feet. The episode, Satterlee judged, gave Morgan “a prejudice against Harriman that kept him in later years from cooperating with him when it might have been better had he done so.”
This was a wise judgment by Satterlee, and it would be proven true again and again. Pierpont’s next encounter with Harriman would be even more irksome than the first, for it would strike at the heart of his ambition to be the “Bismarck” of the railroads. Just as the ironfisted Prussian minister had completed his plan to create a unified Germany out of a patchwork of duchies in 1871, Morgan envisioned himself as the only man in America with the stature and trustworthiness to turn a collection of squabbling companies permanently on the edge of insolvency into a cohesive and thriving industry. That ambition gave rise to Morgan’s creation of a concept known as the “community of interests” and the tactics that became known as Morganization.
Iron Empires Page 18