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JAMES J. HILL was the epitome of the self-made man of the late nineteenth century. Ten years Harriman’s senior, he was born in the Canadian community of Rockwood about forty miles west of Toronto into a farming family that had migrated from County Armagh, Ireland, on his father’s side and from Scotland, by way of Tipperary, on his mother’s. His father’s ambition had been for him to enter the medical profession, but at the age of nine a mishap with a handmade bow and arrow took out his right eye, ending that prospect.
At seventeen, Hill left home to seek his fortune. The following year, 1856, found him in St. Paul, Minnesota, then a riverfront trading settlement of fewer than five thousand souls that only recently had shaken off its original moniker of “Pig’s Eye,” which had been the nickname of its leading saloon-keeper. Like most well-sinewed young men in the community, he obtained his first employment on the levees of the Mississippi River waterfront, securing a job as a shipping clerk, a position that required him not only to manage the steamboat traffic that was St. Paul’s only communication with the outside world (a rail connection to Chicago would not arrive for eleven more years) but oversee the brawling workforce that handled the steamboats’ cargo. Hill was on hand when a locomotive named the William Crooks was offloaded from a Mississippi River barge one day in September 1861, joining the stevedores to haul the iron behemoth from the riverfront to the railroad tracks. It belonged to the St. Paul & Pacific, a puny road connecting the St. Paul steamboat landing with westward-reaching transportation at Breckenridge, on the Minnesota–North Dakota border, two hundred miles away. That could be taken as a foreshadowing of Hill’s career, for the St. Paul & Pacific would be the first railroad he acquired when launching the defining project of his life, the creation of the Great Northern, in 1889. The acquisition set a pattern, for Hill built up his system by cobbling together smaller railroads he bought on the cheap when they were struggling or the industry was being shunned by the financial markets.
The St. Paul & Pacific had soon failed and the Crooks placed in storage. By 1877 the road was operating again, albeit unprofitably, and Hill offered to take it off the hands of its mostly Dutch investors. He calculated that he and his partners would need slightly more than $5.5 million to buy up its outstanding bonds and foreclose on its mortgages. In return for that outlay, they would acquire track he estimated to be worth $11.4 million, $800,000 in equipment, and a government land grant of more than 2.6 million acres, which he valued at some $6.7 million, based on the government’s standard valuation of $2.50 per acre.
Hill’s optimism about the wisdom of this transaction was not widely shared. As he recalled for Great Northern stockholders upon his retirement in July 1912, at the time “no individual or financial house in Europe or America, outside of those associated with us, would have taken the bargain off our hands. By a few it was regarded as a doubtful venture, by most as a hopeless mistake.” But Hill was confident he could turn a profit from the growth in population and freight traffic destined to accompany the development of the Far Northwest. Immigrants already were flooding into the region, and the railroad would bring in even more settlers, whose crops it could bring to market. As for the government-granted land, ultimately it would bring the St. Paul $13 million, about twice Hill’s initial estimate.
One characteristic that set Hill apart from his contemporaries was his vision of the railroad as a force for the improvement of the countryside. In his valedictory recollections, he observed that his railroad had “carried to market the products of the country at rates which have greatly developed the territory served by its lines.” Had the Great Northern simply maintained its rates from 1881 through 1912, he said, it could have collected nearly $2 billion from shippers and passengers. But that would have sacrificed long-term growth for short-term profit. Instead, at its low rates it collected only about $700 million, but that endowed the territory served by the railroad with the economic fuel for “multiplying its wealth indefinitely” while “furnishing increasing and profitable tonnage for years to come” in a long-term symbiosis. “The Great Northern is now wrought so firmly into the economic as well as the corporate body of the land as to have fitted itself permanently into the natural frame of things,” he said. “So far as any creation of human effort can be made, it will be proof against the attacks of time.”
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The ferociously competitive James J. Hill, creator of the Great Northern and one of Harriman’s chief adversaries in the battle over the Northern Pacific.
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Hill’s leadership of the Great Northern as it expanded across the northern plains to Puget Sound set a rare standard for conservative finance in the railroad industry. In addition to the seed capital provided by the federal land grant, the railroad’s growth was funded by sales of shares and bonds carefully calibrated to the underlying value of the enterprise, without the torrents of water that rendered other railroads hopelessly overcapitalized. As a result, the Great Northern “never failed, never passed a dividend, never was financially insecure in any time of panic,” he boasted in 1912. “The success and prosperity that attend the Company today have not been purchased either by any doubtful transactions in the stock market. . . . No emergency can surprise it.”
Few of Hill’s rival railroad presidents could match his knowledge of how best to build a road, where to build it, and how to operate what he built. “What we want,” he remarked in 1890, “is the best possible line, shortest distance, lowest grades, and least curvature that we can build. We do not care enough for Rocky Mountain scenery to spend a large sum of money developing it.”
In all these particulars, Hill sounded very much like Edward Harriman, who showed the same eye for efficiency and the recognition that plunder could never be more than a short-term strategy. With two such strong-willed tycoons building systems destined to compete with each other, a clash between them seemed preordained.
As an experienced railroad operator, Hill carefully routed his Great Northern and its branches from Minnesota to the West Coast through productive and populated territory capable of generating robust freight traffic. Villard, by contrast, heedlessly “threw lines across an inhospitable country, part of which was almost devoid of population,” observed Julius Grodinsky, an astute chronicler of the railway expansions of the late nineteenth century. “While Hill was building carefully and checking his costs minutely Villard built in ignorance of costs.” When the first bills arrived in 1883, Villard had been shocked to discover that the cost of building the Northern Pacific was twice what he expected. Nevertheless, he repeated the error nearly a decade later.
Hill’s attention to costs gave him the latitude to undercut competitors’ rates ruthlessly without sacrificing profits, while rivals with higher fixed costs were driven into the ground. He was able to wait out his competitors, secure in the knowledge that in financial terms they were built on sand, while his roads rested on firm ballast. Other railroads in the Pacific Northwest might fear the Northern Pacific and its ambitious plans for expansion. “But it had no terrors for Mr. Hill,” reported his biographer Joseph Gilpin Pyle. “He knew its financial condition. . . . He was in no hurry or fret, because he knew that every day reduced the power of the Northern Pacific to carry its own burdens, and hence minimized the danger of it as a competitor.”
And once Hill knew that a competitor was on the ropes, he was ruthless in delivering the coup de grâce. He refused to join the pools or informal arrangements his fellow railroad men organized to fix rates, instead forging ahead with relentless rate-cutting on his own. “Mr. Hill is a law unto himself,” a director of the Chicago, Burlington & Quincy, which was soon destined to fall within Hill’s gravitational field, wrote to its president, Charles Perkins. Hill had waited out the Northern Pacific, and now he was poised to collect it as a prize. He did not know it yet, but his victory would only set the stage for another battle.
In the late 1890s, the railroad situation in the Midwest resembled the geopolitical landscape
in place near the end of the Napoleonic period, with duchies and great powers scrambling to make alliances crucial to their survival. The railroad war would be fought with stocks, bonds, and capital, not bullets and bombs, but it was ferocious enough for all that.
Four major systems were in play: the Great Northern, which ran from St. Paul, Minnesota, to Seattle; the Northern Pacific, which ran roughly along the same route; the Union Pacific, which ran from Omaha to San Francisco and down the coast (after Harriman joined it with the Southern Pacific); and the Chicago, Burlington & Quincy, which was known familiarly as the Burlington or the “Q.” The first two were controlled by Pierpont Morgan and James J. Hill; the third by Harriman; and the last by the aging Charles E. Perkins, who had made the Burlington a road of enviable quality, stability, and profitability.
Perkins’s 7,911-mile railroad stretched lucratively west across the plains from Chicago to Denver and Cheyenne, and from there north to Billings, Montana, including the reach along the Mississippi River between Quincy, Illinois, and Burlington, Iowa, from which it drew its name. The Burlington carried produce from Illinois, Iowa, and Nebraska, coal from Illinois and Iowa, and mineral ores from Colorado and the Black Hills of South Dakota and Wyoming. Thanks to its unbroken string of dividend payouts it was revered as a quintessential “widows and orphans” stock, widely held by some fifteen thousand small investors in blocks of twenty or thirty shares each.
The Burlington’s misfortune, however, was that it possessed qualities that other big railroads wanted, and little financial capacity to hold them off. The Great Northern and Northern Pacific each coveted its access to Chicago, and the Union Pacific its branches in Kansas, Nebraska, and Colorado. In short, the Burlington’s strategic position among these other railroads was not a strength but a weakness. “There can be no doubt about the value of C.B. & Q to any scheme for combining roads west of Chicago,” Perkins wrote to a fellow director of his line as the nineteenth century was drawing to a close. For some reason he thought this was a guarantee of its survival, when in fact it presaged its eradication.
The threat to the Burlington’s independence increased when Morgan brought the Great Northern and the Northern Pacific together under Hill’s management in 1896. The consolidation was the consequence of Henry Villard’s mismanagement of the Northern Pacific, which had culminated in its third bankruptcy. With failure staring its investors and bankers in the face, many perceived that the road’s only hope of survival lay in turning it over to Hill. Among them was Jacob Schiff, who represented German investors in Northern Pacific bonds and was a director of Hill’s Great Northern. The correct play, he wrote his friend Ernest Cassel, a well-connected British banker, was to bring the two lines under “close relationship” via joint management by Hill, in order to end their debilitating competition. Indeed, a bankrupt Northern Pacific would pose a threat to Hill’s Great Northern; once a bankruptcy judge relieved it of the fixed expenses of bond interest and share dividends, it could cut rates to the nub.
Hill long had viewed the Northern Pacific with a contempt that only intensified in the aftermath of the Villard regime. The road “has not been run as a railway for years, but as a device for creating bonds to be sold,” he wrote his friend Lord Mount Stephen, a Canadian railroad magnate. The chief goal of the Great Northern’s acquisition of the Northern Pacific, Hill wrote, echoing Schiff, would be “mainly the freedom from competition.”
In April 1895 the Great Northern agreed to acquire the Northern Pacific. The merger did not proceed smoothly. The deal was unpopular in Minnesota, where farmers contemplated unhappily the prospect of paying monopoly freight rates to send their produce to market. The state government sued to block the merger, citing a Minnesota law that barred railroads from taking control of any lines they paralleled within the state. Hill’s elite lawyers at the New York firm of Simpson and Thatcher were confident that the law could not be applied retroactively to a railroad chartered in 1856. They were wrong. The Minnesota Supreme Court blocked the merger in a decision later upheld by the US Supreme Court. Searching for a new option, Hill and the Northern Pacific shareholders placed the matter in the hands of Hill’s banker, Pierpont Morgan.
Morgan reorganized the Northern Pacific in what was seen at the time as an outstanding example of Morganization, involving the issuance of some $345 million in new shares and bonds. On all of this Morgan collected a commission of 10 percent. Morgan also established a voting trust to control the railroad that would remain in effect for five years, or until November 1, 1901, with himself as its chairman.
Morgan placed Hill in the indispensable role of the joint enterprise’s operator, via an agreement reached quietly at Mount Stephens’s London home and known accordingly as the “London memorandum.” The document certified that the two railroads would “form a permanent alliance . . . with a view of avoiding competition.” The Minnesota law was neatly circumvented by selling a controlling stake in the Northern Pacific to Hill personally, with the funds put up by Morgan—as the law prohibiting the sale of one railroad to another posed no obstacle to joint ownership by an individual.
Under Hill’s supervision, the Great Northern and Northern Pacific prospered together. The likelihood that they would become even more powerful in the western United States concerned not only the Burlington’s Charles Perkins. The threat they now posed to the Union Pacific also made Edward Harriman uneasy.
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AS HARRIMAN AND Hill moved into the front ranks of the railroad industry during the 1890s, they had circled each other warily, probing for one another’s weaknesses like lions maneuvering to become king of the pride. Jacob Schiff, who served as a banker to both, struggled to mediate. He tried to develop their areas of mutual interest, as when he placed them together on the board of the Baltimore & Ohio. But it rapidly became clear that their areas of rivalry outweighed those of shared advantage, and that eventually he would have to throw in his lot with one or the other. Hill grew closer to Morgan and began to view Harriman as an obstacle to his own goal of building the premier railroad linking the Midwest and the Pacific; Schiff came to understand that his future as a railroad financier lay with Edward Harriman.
Indeed, as time went on, Schiff recognized that his business interests and personality aligned more closely with Harriman than with Hill. In his social relationships, Hill was bluff, breezy, and excessively familiar. Invited to dine at Schiff’s home at 932 Fifth Avenue, Hill tended to overstay his welcome, chatting volubly, oblivious to his host’s waning patience. Schiff’s servant Joseph would materialize at 10 P.M. sharp with his employer’s nightcap of orange juice, a signal Hill invariably overlooked. “Mr. Hill, your taxi is waiting,” Joseph would whisper, to which Hill would command in reply, “Send it away!” Hill was accustomed to fidget noisily with a little bag of uncut precious stones as he talked; one evening, when he noticed Therese Schiff admiring one of the stones, he presented it to her. Jacob Schiff examined the gift disapprovingly. “Only I give jewels to my wife,” he stated, telling Therese, “Give it back.” Harriman, by contrast, was a chilly and taciturn companion, except within his immediate family circle. Otherwise, his conversation focused on business matters. That suited Schiff just fine.
The tension between Hill and Harriman revealed itself in a disagreement over the Oregon Short Line and the Oregon Railway & Navigation Company. These two roads had been controlled by the Union Pacific before its bankruptcy—Villard had lost control of the latter in 1883, and it was sold to the Union Pacific in 1889. The roads had been stripped from the UP by receivers, and then were reacquired by Harriman. Since they provided access to Portland, Oregon, via Wyoming and Idaho, they were crucial branch lines simultaneously for the Union Pacific, Hill’s Great Northern, and the Northern Pacific.
Prior to the Union Pacific receivership, those three roads had negotiated shared access to Oregon Navigation, which was treated as a neutral connecting line. Schiff subsequently worked out a tentative deal with Morgan partner Cha
rles Coster, a personal friend, in which the Northern Pacific and Great Northern each would own one-fourth of Oregon Navigation, with the other half held in joint trust by J. P. Morgan and Co. and Kuhn, Loeb. The banks would transfer their interests to the Union Pacific and the Oregon Short Line as soon as an agreement had been reached to secure “the permanent independence” of Oregon Navigation and the appointment of management committed to “the maintenance of rates, traffic at all times.”
This proposed division of the spoils was the arrangement that Harriman torpedoed during that meeting on October 3, 1898. After listening to Coster and Schiff describe a plan for the Northern Pacific and Great Northern to share the traffic between the Twin Cities and the Pacific Coast, he interjected abruptly that he was no longer willing to cede rights to the ownership of Oregon Navigation to anyone else under any conditions. He knew that exclusive ownership of Oregon Navigation, with its access to Portland and points north, would effectively give the Union Pacific control of the northern transcontinental route, checking the expansion plans of both the Great Northern and Northern Pacific. Harriman’s reading of the old contracts by which the Union Pacific had acquired Oregon Navigation stock was that the UP held sole ownership. “Nothing was said about any territorial division,” he observed. Harriman was thereby unilaterally terminating a truce of long standing.
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Hill was furious about what was effectively Harriman’s declaration of war. To settle the disagreement, however, he offered to award Harriman joint ownership of Oregon Navigation by the Union Pacific, Northern Pacific, and Great Northern in return for his promise to give the Union Pacific the right to carry traffic between Seattle and Portland over Northern Pacific tracks. Hill also observed, in a letter to Harriman delivered via Schiff about six weeks after Harriman’s return from Alaska, that the Great Northern could bring to Oregon Navigation “the valuable traffic of about 5,500 miles of railway in a new country which is very rapidly growing, and most of which the Navigation Company could not secure in any other way.” Slipping the iron hand into the velvet glove, Hill warned that if Harriman refused to come to terms, he was prepared to build his own line to the coast in direct competition with Oregon Navigation. “I know that country fairly well,” he wrote, “and I think that with five million dollars I could build a much better line from our road into Portland; and with, say, two million more, reach the most productive sections of the Navigation Company.” The venture would cost a mere $300,000 a year in debt service, which he reckoned would be “much less than we would pay the Navigation Company for doing our business under such a plan as I have outlined.”
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