The Lucin Cutoff was only one of several refurbishments Harriman dictated for his new acquisition, including a rebuilt approach into San Francisco from the south that also straightened, shortened, and leveled the tracks. This project required five tunnels to be bored on a stretch of only eleven miles.
On the whole, Harriman followed the practice that had raised the Union Pacific from decrepitude: Invest heavily to modernize and improve. In its last eight years in charge of the Southern Pacific, the Huntington regime had spent about $58 million on construction, equipment, and upgrades; in the first eight years of his ownership, Harriman spent $242 million. But he now had a massive, economically viable empire to show for it.
And that empire was still expanding. Having devoted just over $40 million to the biggest acquisition of his career, Harriman still had $60 million in reserve to spend on his most audacious move yet. His quarry would be one of the most troubled railroads in the nation: the Northern Pacific.
15
The Quest for the Burlington
ON OCTOBER 3, 1898—just as he was beginning to contemplate his journey to Alaska the following spring—Harriman quietly but decisively blew apart a peace treaty that had bound the Union Pacific and two other railroads together in a division of traffic in the Pacific Northwest. His comments at a meeting in New York with Schiff, representatives of the House of Morgan, and the other roads’ presidents would trigger a sequence of events leading to Harriman’s cataclysmic confrontation with Pierpont Morgan two and a half years later. But that could not be predicted at the time.
The underlying issue on that October day was the competitive alignment of the Northern Pacific and its rival, the Great Northern Railroad. The latter was a strong, well-managed road of the northern prairie that had expanded to the West Coast, putting enormous pressure on the Northern Pacific, which after the collapse of Jay Cooke & Co. in the 1873 panic had entered a long period of stagnation and decline.
Still unfinished, routed across the prairie from Bismarck to Tacoma via a string of mostly vacant towns in Minnesota, Dakota, and points west, and bereft of Cooke’s promotional vigor, the NP was derided as “a railroad from Nowhere, through No-Man’s-Land to No Place.” The extortionate 7.3 percent interest rate on its bonds had caused its red ink to rise by $2 million a year.
In 1874, the year after Cooke & Co.’s collapse, the Northern Pacific had been officially declared bankrupt. A reorganization effort was attempted, dependent on a proposal for Congress to bail out the line by guaranteeing its bonds in return for the surrender of its land grant. That effort failed. A subsequent attempt resulted in a dubious arrangement that largely exchanged the railroad’s old obligations for a pledge of future profits.
The recovery in the national economy helped, for a time. In 1875 the road consisted of 550 miles of track; by 1893 it would be 5,400, reaching from St. Paul and Minneapolis to the Washington coast. In 1880 the road’s president, Frederick Billings, had completed a traffic-sharing contract with the Oregon Railway & Navigation Company, which operated not only a rail line but a steamship fleet on the Columbia River. This secured for the Northern Pacific a connection to Pacific Ocean trade, via Portland.
The contract also brought the road into contact for the first time with Oregon Navigation’s owner, Henry Villard, who would lead the Northern Pacific into its next phase—and start a chain of events that would eventually place Oregon Navigation in Harriman’s hands. Villard was one of the most cultured, colorful, and imaginative railroad men of the era, though not an especially good manager and certainly not a successful one.
* * *
VILLARD WAS BORN Ferdinand Heinrich Gustav Hilgard in Bavaria in 1835 to a Lutheran judge and his Roman Catholic wife. His formative years coincided with a politically tumultuous period during which the French Revolution of 1848 spread to southern German duchies, including Bavaria, until finally extinguished by the Prussian army. At seventeen Heinrich Hilgard entered the University of Munich, complying with his father’s directive to obtain a technical education. Heinrich, who preferred studying arts and letters, found the course of study dictated by his father “positively repugnant.” Instead he fell among a fashionable set that spent its time in drunken carousing and saber dueling in the German student tradition.
Inevitably, Heinrich’s father ordered him home and placed him in law school. Heinrich decided instead to flee abroad and booked steamship passage to America. To hide his tracks, he took the name of a classmate, Henri Villard, anglicized it, and landed in New York as Henry Villard. By his own account he arrived “with but a scanty wardrobe and an empty purse, ignorant of the English language, and without a friend to turn to in the American metropolis.”
The presence of a family of distant relatives in Belleville, Illinois, lured him to the prairie, which railroad colonization campaigns were rapidly populating with middle-European immigrants. Soon he was editing a money-losing German-language newspaper, the Volksblatt, in Racine, Wisconsin, while perfecting his English. In 1858 he received an assignment from the Staats-Zeitung, the leading German newspaper in Chicago, to cover the debates between two candidates for the US Senate from Illinois, Democrat Stephen A. Douglas and Republican Abraham Lincoln.
With contracts in hand from several midwestern newspapers as well as Horace Greeley’s New York Tribune and the competing New York Herald, Villard found himself in Washington during the Confederate bombing of Fort Sumter, which marked the beginning of the Civil War. He spent the next three years embedded, so to speak, with Union forces, starting at the First Battle of Bull Run.
After the war’s end, Henry was approached by a group of German investors with stakes in West Coast railways. They were seeking his help in determining what had happened to their money, which amounted to nearly $11 million. “Such was the beginning of his business career,” Villard wrote in his memoirs, in which he indulged the peculiar mannerism of referring to himself in the third person.
Villard went west to reconnoiter and made two discoveries. The first was that his countrymen indeed had been defrauded, for half their money had disappeared into the pockets of American promoters. A road that was to have stretched 375 miles from Portland to the California state line was still 200 miles short of its destination, and another line that was to have been financed with $3 million of the proceeds had not even been started. The second discovery was that Oregon Territory was ripe for development. All it needed to really thrive, he concluded, was a larger population. To that end Villard persuaded the investors to place him in charge of a bureau to lure German settlers to the territory.
What Villard possessed in abundance were charm and audacity, qualities he put to work in his new role. He also had absorbed some useful lessons from the railroad promoters who had cheated the German investors. One was how to load up an enterprise with liabilities far beyond its concrete assets—watering its stock, in other words. “As a stock-waterer he had, probably, no superior,” wrote Henry Clews, the Wall Street banker and memoirist. Clews’s judgment was based chiefly on Villard’s creation of the Oregon Railway & Navigation Company, which he formed in 1879 to consolidate a fleet of steamboats with coastal shipping lines and short-line railroads to exploit the potential of the Far Western territory.
Villard successfully pitched Oregon Navigation to a clutch of railroad insiders, including George Pullman. As Clews recalled, Villard then listed the stock on the New York Stock Exchange, issued a sham financial report “showing immense and unprecedented earnings,” and “had the stock bulled up to 200.” Clews thought the entire project a chimera. “There is probably no instance in the whole history of railroad manipulation,” he would write, “in which a man has presented to the public, and with such amazing success, such a specious appearance of possessing solid capital where so little existed in reality.”
The Oregon flotation “was but the beginning of a series of like successes,” Villard recounted. The most audacious of these was his “blind pool” of 1881, which he labeled a “unique financial
feat, without precedent or parallel.” Few on Wall Street could disagree.
The blind pool was designed to raise enough money to take over the Northern Pacific, which had emerged as a potentially ruinous competitor to Oregon Navigation. Villard would have to accumulate Northern Pacific stock quietly, for any hint of his interest would drive its price out of his reach. But he could hardly raise the capital to finance the purchases without divulging what the money was for . . . or could he? Villard issued a confidential prospectus to fifty backers, asking them to subscribe to a fund of $8 million for an enterprise “the exact nature of which he would disclose on or before May 15, 1881”—that is, ninety days hence.
The effect of this occult approach was electric. “The very novelty and mystery of the proposition proved to be an irresistible attraction,” Villard wrote. “A regular rush for the privilege of subscribing ensured, and within twenty-four hours of the issue of the circular, more than twice the amount offered was applied for. . . . All wanted more.” He easily raised enough to buy out the Northern Pacific, and then some.
Victory, achieved with truly Napoleonic bravado, brought Villard only pain, however. His great achievement on Wall Street merely proved to be the prelude to disaster in the field. Upon taking over the Northern Pacific, Villard found $34 million on its ledgers, the remains of a $40 million loan that had been made to its previous management by J. P. Morgan. But he also discovered the loan’s punishing terms—the money would be disbursed by the bankers only at the rate of $25,000 per mile in sections of twenty-five miles at a time, and only after the completed sections had been inspected and approved by government officials. This would be a painfully slow process in the best of times, but it was made worse by the ten weeks of governmental paralysis following the assassination attempt on President James A. Garfield on July 2 (the very event that had threatened to sink Harriman’s first purchase of Illinois Central bonds). Vice President Chester A. Arthur refused to take the reins of government as long as Garfield still clung to life, thus delaying the appointment of an inspection commission for the railroad. Before the wounded president’s agony ended with his death on September 19, Villard had been forced to spend some $6 million from his own bank accounts.
Yet somehow he carried on, maintaining the confidence of the public and his investors via the occasional act of Villardian theatricality, as when he embarked on a headlong twenty-one-hundred-mile dash by rail from Chicago to fulfill a pressing appointment in Portland. The trip took less than half as long as regular trains on the route, which Villard turned into a claim that he had made the fastest rail journey in history.
The completion of the Northern Pacific’s route to the coast in 1883 presented another opportunity for a public spectacle, this one designed as an “international celebration.” There would be two weeks of galas as Villard’s ceremonial train made its way across the continent from the East Coast. Its ultimate destination was Montana, where Villard would drive a ceremonial spike to mark the conclusion of work. The cars carried leaders of the Senate and House of Representatives, governors of the seven states crossed by the line, more than a hundred newspaper reporters, former president Grant, and “the whole diplomatic corps . . . as well as several score of prominent Englishmen and Germans”—the latter representing Villard’s foreign investors.
The procession was especially notable for a speech delivered on September 5 at Bismarck, North Dakota, by the Sioux chief Sitting Bull, only seven years after his tribe’s victory over George Armstrong Custer at the Little Bighorn. The occasion was the laying of the cornerstone for the capitol of the Dakota Territory. Sitting Bull had been brought there “from his place of captivity,” Villard recalled, to make an address “in the presence of a great multitude.”
The event ranks as one of the most subtle acts of defiance in American history. The speech had been prepared jointly by Sitting Bull and a young US Army officer who understood the Sioux language, to be delivered by the chief in his native tongue while the officer offered a simultaneous translation. To the officer’s horror, the words uttered by Sitting Bull bore no resemblance to the gracious message of amity they had written together. Instead, Sitting Bull declared, “I hate all white people.” He paused for applause from the uncomprehending crowd, bowed and smiled at President Grant and the other dignitaries, and proceeded: “You are thieves and liars. You have taken away our land and made us outcasts.” The officer continued to read out the original speech in English, resulting in a standing ovation for the Sioux chief. The impression that he had spoken up for friendship between whites and Indians gave Sitting Bull such popular standing that he was invited to join the Wild West show of William F. “Buffalo Bill” Cody, in which he soon became the lead attraction.
Yet even at the triumphal moment of completion, the Northern Pacific was in a state of financial collapse, staggered by a vast load of debt; Villard and his closest associates knew that his “last spike” ceremony was mere window-dressing to conceal the dismal condition of the railroad’s books. “I cannot quite make up my mind,” one of his investors had written Villard while the event was still being planned, “whether it is you or Barnum that has ‘the greatest show on earth.’”
Villard had been counting on a surge of business on the NP now that it was a through line all the way to the coast, but the traffic failed to appear. The press, which had followed with such enthusiasm his breakneck trip to the coast and the lavish completion ceremonies, now turned hostile, not least because just as his railroad empire was collapsing he was erecting, on Madison Avenue in New York, “a princely edifice” of brownstone in Italian Renaissance style, designed by the premier architectural firm McKim, Mead & White. On the night of December 16 he was awakened there by a delegation of investors and auditors and informed that he was bankrupt. A syndicate had been formed to rescue the Northern Pacific, but only on condition that he resign its presidency.
Villard and his family vacated their sumptuous Madison Avenue palace, which encompassed six residences. (The building was sold to Whitelaw Reid, who had succeeded Horace Greeley as editor and owner of the New York Tribune, but it was known forever after as the “Villard Houses.”)
There would be one more turn of the wheel of fate for Henry Villard. Only three years after his eviction from the Northern Pacific he was approached by a delegation from the Northern Pacific and Oregon & Transcontinental, the holding company he had created for his railroad interests. The visitors appealed to him for a $5 million loan, which he raised through his European connections. But he refused to pay the money over unless he was again granted control of the Northern Pacific. “He was hailed as the railroad king restored to his reign,” Villard wrote in his memoirs. “Congratulations by telegraph and mail at once poured in.”
Villard’s Northern Pacific joined in a new surge of overbuilding that swept through the railroad industry in the late 1880s, and which once again would bring the industry grief from rate cutting and overleveraging. As before, Villard turned out to have greater skills as a visionary than as a manager, but this time he was also guilty of loading down his railroad with loans to himself at extortionate interest rates.
In August 1893 the Northern Pacific was placed in receivership for the third time. Villard would write that he fully anticipated that the company’s second collapse on his watch “would again mean for himself discredit, calumny, and abuse.” He was correct. When the railroad board marked Villard’s resignation with a pro forma letter of gratitude for his leadership, the New York Times erupted in fury, saying that the letter “seemed like a ghastly sarcasm. . . A more shameless disregard of the duties of Trustees and Directors have not been seen in the history of American railroads.”
* * *
Railroad tycoon Henry Villard completed the so-called Villard Houses on New York’s Madison Avenue, encompassing six sumptuous residences, in 1884, just as his financial empire was collapsing. Investors placed his Northern Pacific Railroad into receivership and evicted him from the mansion, which has sinc
e become incorporated into a high-rise hotel.
* * *
Given the history of rapine and plunder of the railroads over the previous forty years, this was surely too harsh. Like his fellow transportation tycoons, Villard aimed to become rich, but his chief fault was lack of managerial ability rather than a thirst for plunder. The former quality was what most strikingly distinguished him from his chief rival in the northern territory, James J. Hill.
Hill, like Villard, was cognizant of the traffic potential of the resource-rich northern prairie and the Pacific Northwest. But he had moved cautiously, focusing on laying track for his Great Northern Railroad from St. Paul into the agriculturally rich Red River Valley of northern Dakota and southern Manitoba. By 1886, however, Hill had decided that the future of his enterprise lay in expanding it from a regional road into a transcontinental, encroaching on the territory crossed by the Northern Pacific. Hill’s railroad and Villard’s were now in open conflict.
Iron Empires Page 29