The struggling road’s receivers had invited Harriman, who already possessed a reputation as someone who could manage a struggling railroad back to prosperity, to join the reorganization committee. He had accepted just before leaving for Alaska.
Strange doings went on in the Kansas City Southern while Harriman was away. After he returned, he discovered that Stilwell had sold a controlling interest in the railroad—or possibly his entire interest—to Gates. Several different versions exist of this transaction. From Harriman’s point of view, Stilwell’s sale to Gates behind his back was a “virtual breach of trust.” Otto Kahn wrote later that he assumed this discovery would end Harriman’s involvement with the line. Instead Harriman told him, “Not so fast! I am not through with this thing yet, by any means. I can’t be played fast and loose with like this . . . I am in it to stay.”
Stilwell’s recollection is more colorful, if less plausible. In his 1912 memoir, Cannibals of Finance, he claimed that Gates and Harriman had conspired to rook him out of his interest. “I sometimes have wondered,” he wrote, “if when Edward Harriman was dying it added one jot to his peace of mind to think that he had for years deprived me of my rightful place as the upbuilder of Port Arthur, of which I was the creator; or that he had for five years controlled the destinies of the Kansas City Southern Railroad, which he had helped seize from me and my stockholders just as the last spike was driven.” (Harriman died three years before the memoir’s publication.)
The reality is that Harriman tried to turn the Kansas City Southern into a going concern. According to Kahn, he refused to give up his position on the reorganization committee, and decided to wait for Gates and company to appeal to him for help. In time, they realized that as novices in the railroad business, their wisest course of action was to let Harriman run the line his own way—especially since the voting trust by which they all held power over the line would expire in April 1905.
The Kansas City Southern resembled the Union Pacific at the time of Harriman’s takeover: a promising enterprise in need of drastic refurbishment. Like the UP, it had been hastily built, was desperately in need of new rolling stock and engines, wider embankments, fewer curves and smaller grades, and modern shops and machinery. Harriman did what he could to accomplish these tasks, spending nearly $5.6 million, but the railroad never generated enough revenue to finish the job and eventually time ran out. When the voting trust expired, the majority shareholders took over and removed Harriman and Gates. Neither fought to stay.
* * *
HARRIMAN’S FINAL COMPLETED deal of the nineteenth century was the biggest of his career: the acquisition of the sprawling Southern Pacific. His initial target had been the Central Pacific branch, the remnant of the western portion of the original transcontinental railroad. Originally constructed to only marginally better standards than the Union Pacific, like the old UP it was now hampered by unnecessary curves and grades and equipped with outdated rolling stock. In sum, the Central had aged into a bottleneck that prevented Harriman’s UP from expanding its capacity to the full extent he desired.
The immovable obstacle to Harriman’s quest to complete his line to the coast was Collis P. Huntington. At seventy-eight, the obstreperous old lion was one of the nation’s last surviving railroad entrepreneurs from the era of transcontinental expansion. Huntington had outlived Mark Hopkins, Leland Stanford, and Charles Crocker, his three partners in the building of the Central Pacific. He had combined the Central Pacific with the Southern Pacific, which ran along the California coast before turning east along a southern route (known as the “Sunset Route”), creating the largest railroad line in the United States. Huntington’s holdings of more than four hundred thousand shares of Southern Pacific stock accounted for only 20 percent of the total outstanding, but the combination of that single block and the shares held by his allies Edwin Hawley and James Speyer gave him unassailable authority over the enterprise. Many coveted the Southern Pacific, but Huntington had rebuffed them all. Harriman had offered to buy him out on at least three occasions.
Then, on August 13, 1900, Huntington died unexpectedly at his lodge in New York’s Adirondack Mountains. His death removed the largest hurdle to the acquisition of the Central Pacific but erected another: To obtain the one railroad he wanted, Harriman would have to buy the entire enterprise—the Southern Pacific Company, which was valued at $100 million. The $40 to $50 million needed to acquire a controlling interest in the parent company seemed, superficially, well out of reach of the Union Pacific, which at the time had less than $4 million cash in its coffers.
Nevertheless, Harriman set his strategy in motion by starting to buy up SP shares soon after Huntington’s death. The key to his acquisition plan was an audacious Union Pacific bond issue of $100 million paying 4 percent annual interest, secured by 1,135 miles of improved track and by the value of securities held by the Oregon Short Line and Oregon Railroad & Navigation Company—branches of the UP that had been foreclosed by creditors during its financial crisis, but which Harriman had bought back. The UP board had approved the bond issue that February. The borrowing overleveraged the railroad, but with a provision allowing the bonds’ conversion into UP stock at par (that is, $100 per share) for five years, it was snapped up by investors when it went on the market in May.
Harriman approached Huntington’s heirs with this immense war chest in hand, and promptly acquired their 475,000 shares. Schiff’s firm acquired another 275,000 on the open market. Together, these purchases amounted to 38 percent of the outstanding stock of the Southern Pacific, which Harriman judged to be enough to discourage any competing bidders; later he would add 150,000 more shares of the common and 180,000 shares of preferred. (Preferred shares typically offer fixed dividends that must be paid before dividends on common shares, but have lesser ownership rights, usually not including shareholder votes.) Ultimately, the acquisition of the Southern Pacific cost about $40 million.
At the outset, Harriman’s desire for the Central Pacific was widely assumed to be the driver of the huge transaction. The US Industrial Commission, examining the purchase later in 1901, parroted the standard version that “the Union Pacific purchased control of the Southern Pacific not because it needed the additional mileage, but rather that it might indirectly acquire the Central Pacific and a direct outlet to the Pacific Coast.”
This indicates that the Southern Pacific was not generally seen in the financial community as an unalloyed treasure; while the Central Pacific offered access to the coast, the parent company was weighed down by the Sunset Route. A pet project of Huntington’s, it had extended the Southern Pacific east to New Orleans, contributing negligible profit to the system while presenting a huge administrative burden. Otto Kahn would comment later that if the Southern Pacific could be broken up so that the UP could acquire the Central Pacific and leave the Sunset Route aside, “we would be getting rid of a nuisance.”
* * *
* * *
The truth is, however, that while some parts of the Southern Pacific may have been more burdensome than others, bringing together the Union Pacific and the entirety of the Southern Pacific created a uniquely powerful combination that plainly fed Harriman’s ambitions. With the Sunset Route included, the Southern Pacific owned the main line running between Portland, Oregon, and New Orleans via San Francisco, Los Angeles, Yuma, Arizona, and El Paso; numerous other lines in Texas and Louisiana; a monopoly road between Sacramento and Portland; a fleet of steamers operating between New Orleans and New York; and the Pacific Mail Steamship Company, which ran steamers from San Francisco to Asia and Panama. What the Union Pacific brought to the marriage were the Oregon Railroad, a steamship line between Portland and Asia, and a half interest in the Occidental and Oriental Steamship Company, which ran between San Francisco and Asia. The only major railroads in California were the Southern Pacific and the Atchison, Topeka & Santa Fe, but as UP historian Nelson Trottman observed, the latter railroad “lacked an extensive system of branch lines and feeders, while the
Southern Pacific had built into almost every part of California.”
The scale of the enterprise impressed even railroad veterans jaded by thirty years of daring ventures launched by courageous men. Having pulled these two companies together, Harriman’s properties seemed to span the globe. As the Interstate Commerce Commission described Harriman’s empire in 1907:
Mr. Harriman may journey by steamship from New York to New Orleans, thence by rail to San Francisco, across the Pacific Ocean to China, and, returning by another route to the United States, may go to Ogden by any one of the three rail lines, and thence to Kansas City or Omaha, without leaving the deck or platform of a carrier which he controls, and without duplicating any part of his journey.
The ICC was less than thrilled with Harriman’s acquisitiveness. “It is only the law which prevents the concentration into Mr. Harriman’s hands of every railroad line lying between Canada and Mexico,” the commission observed, referring to the Sherman Antitrust Act, which had been enacted in 1890. On the other side, General Grenville Dodge, who had led the Union Pacific to Promontory, Utah, in 1869, labeled the Southern Pacific purchase “a master stroke.”
Harriman’s fellow railroad tycoons viewed the purchase with suspicion and skepticism. “Some people also say that Harriman is posing as the Napoleon of Railways in New York,” banker John S. Kennedy told his client James J. Hill of St. Paul, “but they think he has at last bitten off more than he can chew and that he ought to be checked.”
Kennedy was unclear who should “check” Harriman or how, but his characterization of Harriman was not far wide of the mark. Contemplating his new possession, Harriman commented to a friend: “We have bought not only a railroad, but an empire.”
Critics would never cease to see that empire as one devoted to crushing its rivals and profiteering from its customers. As it happens, long before Harriman acquired the Southern Pacific, indeed, it had earned Californians’ antipathy. Still fresh in their minds was the Mussel Slough Tragedy of May 1880, when a simmering dispute with homesteaders convinced they had been defrauded by the Southern Pacific in sales of the railroad’s government land grants erupted into a gun battle, resulting in seven deaths. Huntington and Stanford, not Harriman, were the Southern Pacific’s bosses at the time, but that would be forgotten by 1901 when the muckraking novelist Frank Norris published his book The Octopus, a fictionalized account of the episode, whose title echoed what had already become a popular epithet for the Southern Pacific.
As a diversified transportation system, the Southern Pacific was well positioned to exploit all the freight traffic generated along the West Coast and between East and West—timber, grain, cotton, fruits and vegetables, and manufactured goods. By comparison, the Union Pacific on its own was a mere trunk line carrying through traffic along the transcontinental route—but, given Harriman’s efforts, a glittering trunk line fully prepared for a doubling in its traffic. What was needed was to bring the old Central Pacific up to UP standards. The line was not exactly decrepit—it was in better shape than most other western railroads outside the Southern Pacific system—but still needed to be straightened, leveled, and rebuilt with heavier rails and steel bridges.
* * *
By 1901, when Harriman acquired the Southern Pacific, the railroad had become known as “the Octopus.” This 1882 cartoon from the Wasp, a San Francisco magazine, refers to its monopoly grasp on farming, mining, and finance, and to the 1880 Mussel Slough Tragedy in which a dispute between homesteaders and the railroad resulted in seven deaths. The figures in the eyes of the creature are Leland Stanford (left) and Charles Crocker (right), two of the Southern Pacific’s original controlling shareholders.
* * *
To handle that task, Harriman tapped Julius Kruttschnitt, then serving as the Central Pacific’s general manager. The portly, derby-hatted Kruttschnitt had met Harriman only once before, when he had hosted a reception in San Francisco for Harriman during the latter’s grand tour in 1897. Now it was his turn to be dazzled by his new boss’s preternatural intelligence and decisiveness.
* * *
SUMMONED TO NEW YORK, Kruttschnitt discovered that Harriman had already ridden the Central Pacific several times and had gained a working grasp of its inadequacies. Relying on Kruttschnitt’s sixteen-year association with the railroad, Harriman assigned him to supervise the reconstruction.
After dinner one night at Harriman’s home, the new boss “called for blue-prints, maps, and statistics covering the contemplated reconstruction work in Nevada and Utah,” Kruttschnitt recalled. “He asked innumerable questions with great rapidity, always touching the crucial points.” They covered the reconstruction needs of the entire road from Ogden to Sacramento in less than two hours. Harriman then dismissed Kruttschnitt with instructions to be on hand at Union Pacific headquarters the next morning for a meeting of the board.
“The plans called for an expenditure of $18,000,000, and I supposed that there would be no end of arguing and talking, which would result in the approval of only a part of the work,” Kruttschnitt recalled. He was about to discover that Harriman could be as brusque with his board as with his engineers. Harriman outlined the general plan in a few words, outlining its cost and its rationale. The board gave its approval without a single dissenting vote. As Kruttschnitt wrote later,
As I left for the West, I wondered what manner of man it was who in a few hours’ talk could digest the details of an $18,000,000 reconstruction work along a thousand miles of railroad through a mountainous country, expound the general principles of the plan to his executive associates in the course of a few minutes, and obtain the seal of financial approval.
Before departing, he met with Harriman one last time to ask how he should disburse his bounty of capital.
“Spend it all in a week if you can,” Harriman replied.
It was a tall order, but at least Kruttschnitt knew where to begin. The weakest portion of the Central Pacific were the tracks between Ogden, Utah, and Reno, Nevada, a nearly 600-mile stretch of difficult topography that showed most vividly the haste of the original builders as they bulled their way through to the meeting with the Union Pacific at Promontory. Of that portion, the most demanding reconstruction involved 147 miles of track skirting the northern shore of the Great Salt Lake. The route crossed two mountain ranges and rugged country that forced the tracks into sharp curves and grades as steep as ninety feet of elevation in a mile. There seemed no alternative alignments that could appreciably straighten or level the track, so Harriman dusted off an old idea: Instead of going around the lake, he would cross it. The product of this decision would be the legendary Lucin Cutoff.
The cutoff had been a pet project of Collis Huntington, who had mapped out a causeway running almost on a straight line over the water and connecting Ogden and Lucin, a desert outpost located a few miles east of the Nevada state line. Huntington had delayed the project for years, doubting that his staff was up to the project’s demanding engineering and uncertain that the railroad carried enough traffic to make the expenditure pay. Ultimately he approved the work, but died before construction could get underway.
To Harriman, the logic of shaving some forty miles off the railroad’s route and circumventing the steep grades and tight curves of the original route was compelling. Engineering knowledge, he reckoned, had advanced sufficiently to overcome the challenges that had concerned Huntington, and given the growth in the transcontinental line’s traffic he envisioned it was certain that rerouting the railroad would pay off. He ordered Kruttschnitt to build the cutoff without delay.
* * *
Bisecting the Great Salt Lake, the Lucin Cutoff, built as part of Harriman’s massive reconstruction of the transcontinental railroad, shaved forty miles off the railroad’s route and eliminated the steep grades and tight curves necessitated by its crossing of the Promontory Mountains.
* * *
Harriman may have underestimated the obstacles facing the project, which ultimately would cost $9 million and ta
ke three years. The main problem was the lake itself. Huntington’s construction engineers had warned of the frequently severe storms that lent demonic force to waves of the lake’s heavy brine, endangering trestles and fills designed to conventional specifications. Local residents told stories of boats that had been “hammered to the bottom, . . . covered with soda by the spray until they sank under its weight.” Some predicted that the winds sweeping across the surface would blow trains clear off the rails and into the water.
A major difficulty was the lake bottom. Although the maximum depth of the Great Salt Lake was thirty-two feet, the bottom itself was shifty and insubstantial, consisting of silt layered over a salt and mineral crust that would shatter like a pane of glass under the weight of railroad fill. Many times the builders would watch helplessly as an embankment painstakingly built up with rocks and gravel suddenly sank out of sight, often stranding a work train in open water. “The day on which there was not a sink somewhere along the job [was] crossed and starred and bordered with red on the calendars of the engineers in charge,” wrote a participant. One stretch required the labors of twenty-five hundred men working day and night for more than a year before the embankment finally became stable enough to stay permanently dry.
The length of the cutoff would have made for a daunting construction job even under the best conditions. At thirty-two miles from shore to shore, it was longer than any span of causeway and trestle that had ever been built for a railroad. The work required a stupendous amount of equipment and supplies—twenty-five thousand piles each 125 feet long, pounded into the lakebed in search of a firm bottom by twenty-five pile drivers specially constructed in San Francisco and delivered to the work site in sections. To transport fill and deposit it in the lake, four hundred steel dump-cars were built, hauled by eighty locomotives in trains of twenty-five cars at a time. Workers were sequestered from the many temptations of camp life that might foment brawls or cause injuries that could only delay the project. No liquor was permitted in the work camp; all stores and packages for the workers were inspected and contraband alcohol confiscated. Occasionally an entrepreneur would set up a “groggery” on property outside the camp perimeters. Railroad guards had little trouble chasing most of them away; one established at Hogup, a few miles from the western shore of the lake, seemed dug in—until railroad engineers bored holes under the shanty and filled them with blasting powder, prompting the owner to flee ahead of the threatened blast.
Iron Empires Page 28