Of the hundreds of millions of dollars that Morgan cited as the investment-banking community’s capital contribution to American industrial progress, only a small fraction was applied to improvements of the enterprises and the rest to the trading of securities, Brandeis charged. The financings “served, substantially, no purpose save to transfer the ownership of railroad stocks from one set of persons to another.” In the process, competition was extinguished and a goodly portion of the wealth siphoned into the coffers of firms such as Morgan & Co.
Brandeis questioned this system not merely because it gave so much power to such a small circle of individuals, but because it also burdened those individuals with more responsibility than they could handle. His Exhibit A was Edward Harriman, who had “succeeded in becoming director in 27 railroads with 39,354 miles of line [extending] from the Atlantic to the Pacific; from the Great Lakes to the Gulf of Mexico.” The legacy of this concentration, Brandeis argued, was equivocal at best, for the global reputation Harriman had earned as rescuer of the Union Pacific was frittered away by the shortcomings of his subsequent performance. “It was not death only that set a limit to [Harriman’s] achievements,” he wrote, but “the multiplicity of his interests.”
As if to prove Brandeis’s point, in 1910 a major scandal erupted at the Illinois Central, which Harriman had served as chairman until his death. As recently as 1908 Harriman had exercised paramount control over the Illinois, forcing his old friend Stuyvesant Fish out of his posts as president and director over allegations of financial improprieties (and amid countercharges from the Fish camp that Harriman was plotting to make the IC subservient to the Union Pacific). Harriman’s handpicked successors in management were accused of a scheme in which repair bills on IC cars were padded by a contracting firm in which several of them held stock. Meanwhile, Harriman’s ever-controversial restructuring of the Alton & Chicago came under renewed scrutiny; as Brandeis observed, the road “never regained the prosperity it enjoyed before [Harriman] and his associates acquired control” in 1899. Due to blunders like these, Harriman’s iron empire began to show signs of corrosion. But its ultimate collapse would result from the handiwork of his most determined enemy, Theodore Roosevelt.
* * *
ROOSEVELT WAS MORE than three years out of office—and Harriman more than three years in the grave—when his attack on Harriman’s empire finally bore fruit. On December 2, 1912, the Supreme Court decided that the Union Pacific’s acquisition of the Southern Pacific some eleven years earlier had violated the Sherman Antitrust Act, and ordered the merger unwound.
Business experts have debated ever since whether the two roads truly had been competitors and therefore whether their combination truly restrained interstate trade. But the court, for its part, explicitly rejected the railroads’ defense—that the roads had engaged in negligible competition at most. “It is urged that this competitive traffic was infinitesimal when compared with the gross amount of the business transacted by both roads, and so small as only to amount to that incidental restraint of trade which ought not to be held to be within the law,” Justice William Rufus Day—a Roosevelt appointee—wrote for a nearly unanimous court. (Justice Willis Van Devanter, who had been a member of the lower court majority that had approved the merger, recused himself.) Although the competitive business was only a small part of the total traffic of the combined roads, Day observed, “nevertheless such competing traffic was large in volume, amounting to many millions of dollars. . . . It was by no means a negligible part, but a large and valuable part, of interstate commerce.”
The court-ordered breakup of the Union Pacific proved to be as messy as the breakup of Northern Securities nine years earlier. It soon became evident that, for all his domineering authority, Harriman had failed to construct an integrated empire out of his disparate acquisitions. Although many top executives of Harriman’s imperial Union Pacific had come from the Southern Pacific, resentments seethed between the two camps; in the course of the corporate divorce, many chose to return to the Southern Pacific, among them Julius Kruttschnitt, Harriman’s skilled and trusted right-hand man, who would be named chairman of the newly independent Southern Pacific.
The Union Pacific attempted to return to the original merger plan plotted out by Harriman and Otto Kahn—keep the Central Pacific and shed as much of the Southern Pacific as they could. But they ran into resistance from the newly independent Southern Pacific, whose managers knew that losing the Central Pacific would subordinate it like a slave to a UP holding a virtual stranglehold over traffic into and out of California. They mustered local shippers and state officials to agitate in favor of their keeping the Central Pacific, and after nearly a decade of further litigation and regulatory proceedings, finally won approval from the ICC.
But even that was not a permanent condition, and eventually the two systems would return to the mold Harriman had laid. Faced with new challenges in a competitive world, the Union Pacific and Southern Pacific would merge again in 1996. This time, the merger stood.
Epilogue:The End of an Epoch
IN THE FIRST years of the twentieth century, the direct influence of E. H. Harriman and J. Pierpont Morgan over the railroad industry waned. In part this was because the industry had achieved a maturity that absorbed and then outpaced Harriman’s and Morgan’s reforms. But even more it was because their role in the American economy came under penetrating public scrutiny. The power of the tycoons begat suspicion, and that suspicion was manifested in Theodore Roosevelt’s campaigns to dismantle the trust structures created by these “malefactors of great wealth”—first by breaking up the Northern Securities trust, and then by severing the Union Pacific from the Southern Pacific.
Roosevelt’s efforts, and those of the US Congress and the courts, launched a period of decline for what had been a towering industry. The 1880s and 1890s, when Harriman and Morgan rose to preeminence in the railroad world, were the high-water mark of American railroad building. In those two decades more than 107,000 miles of track were added to the national network. Never again would America’s railroad builders come close to that pace. Only 62,000 miles would be added from 1901 through 1920; after that, construction continued to fall off.
The mistrust generated by the great railroad combinations at the turn of the twentieth century would cast a shadow over the industry for decades. Government regulators refused to allow the railroads to charge rates that later scholars judged not only warranted but essential to promote maintenance and upkeep. The consequences became inescapably clear after the United States entered World War I in 1917. The government had effectively nationalized the railroads in order to muster troops and equipment for transport to Europe, only to discover that the roads were so derelict and disorganized that chaos ensued at the docks. After the war, there was reason to hope that the experience would prompt the industry to reorganize and regulators to treat their rate requests more responsibly, if not indulgently. But by then the railroads were facing a new crisis: competition from a resurgence of shipping over water and the growth of air transport and highway trucking.
After further decades of deterioration, the only apparent option for preserving this crucial mode of transport was to reconsolidate systems that had been broken up by judges and regulators. In 1970 the federal government allowed the Great Northern, Northern Pacific, and the Chicago, Burlington & Quincy to merge into what was dubbed the Burlington Northern; in 1996 the Burlington Northern acquired the Atchison, Topeka & Santa Fe and was eventually renamed BNSF Railway. (As of this writing BNSF is owned by Warren Buffett’s Berkshire Hathaway Inc.) In 1996 the government permitted the Union Pacific and Southern Pacific to re-create the merger between them that had been broken apart in 1912. At the time of the new merger, railroad historians Robert E. Gallamore and John F. Meyer observed, “much was made of the historical antecedents and how these mergers were just putting things back the way they might have been all along.”
That was cold comfort, for the railroad industry had irreversibly changed in the
intervening years. By the end of the twentieth century the mileage of America’s railroads had shrunk by a third compared to their length in 1900. Once the prime employers of American labor, in 2000 they accounted for more than ten times the freight ton-miles (that is, a ton of freight carried one mile) as they had in 1900, but with a workforce only 16.5 percent of its size one hundred years earlier. The almost despotic role the railroads had played in American life in the last half of the nineteenth century, driving the nation westward, creating and then serving towns and cities, fostering agricultural and industrial development from the Atlantic to the Pacific, had become little more than a cultural memory, consigned to history books and museum exhibitions.
As the new century wore on, the consequences of underfunded maintenance and slipshod operational standards grew exponentially, along with unrelenting pressure from the new transport competitors in the air and on land and water. The pattern of consolidation continued from the nineteenth century into the twentieth, but often the mergers were prompted and managed by government in a desperate effort to keep the railroads relevant in America’s multimodal transportation grid. They were still important, even crucial, for moving goods and produce, but as Gallamore and Meyer observed in 2014, in the twentieth century the railroad industry “survived more than it prospered.”
* * *
YET THE HANDIWORK of the pioneering iron imperialists of the nineteenth century is still visible, if sometimes in skeletal form. It can be seen in the crosshatching of rail across the American continent, much of which still follows the routes laid down during their dominion. The remnants of the great railroads of their time still traverse America’s prairies, span its canyons, climb its mountains or burrow beneath them. Passengers on the nation’s remaining transcontinental trunk lines or its short lines or its commuter networks today can still thrill to the sensation of the landscape rushing past their windows at close range, an experience that cannot be replicated by air travel.
In the second decade of the twenty-first century, the nation’s railroads still recorded more than 527 million passenger trips (about the same figure as in 1890). The railroads carried some 1.7 trillion tons of freight in 2017, far outstripping the 79 billion tons they were carrying annually at the close of the nineteenth century, but that accounted for only about one-third of America’s freight, overtaken by highway and water shipping.
No political or economic history of the United States can fail to come to grips with the role of the railroads in the late nineteenth and early twentieth centuries, or the complex and sometimes contradictory role that the railway kings played in their story.
“The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself,” George Bernard Shaw wrote in Maxims for Revolutionists. “Therefore all progress depends on the unreasonable man.”
The leading figures in this book were “unreasonable” men determined to shape the world into which they were born. For all their faults and flaws, they succeeded in doing so.
Their railroads defined the American economy of the period. Almost every business cycle “turned on the roads and was either created or conditioned by them, and large-scale financing found its main object in them,” political economist Joseph Schumpeter wrote in the 1920s.
The railroads were the physical embodiment of the march of modern technology—and also of “the unexampled ruthlessness of economic power,” the historian Alan Trachtenberg has written. “In railroad monopolies, combinations, conspiracies to set rates and control traffic, lobbies to bribe public officials and buy legislators, the nation had its first taste of robber barons on a grand scale.”
Yet the story is more complex, for the railroads also gave the nation a glimmer of the limitations of the robber barons’ power. The railroads were the dominant businesses in boom years, but also the first to collapse during the great busts of the 1870s and 1890s: “During the 1880s more miles of track were built than in any other decade in American history,” Alfred Chandler observed, “and in the 1890s more mileage was in bankruptcy than in any decade before or since.”
These factors help explain why the legacy of America’s nineteenth-century railroad titans is mixed. That is perhaps inevitable, for in the forty-eight years between the driving of the golden spike and America’s entry into World War I, the railroads and American capitalism grew and matured together—and rose and fell together.
American capitalism and its railroads were born together, reached adolescence together, and attained maturity together. They both went through a long period of what Schumpeter called “creative destruction.” In some respects the financiers at the center of this story were agents of this process, destroying the railroad industry as it existed when they arrived on the scene, but turning it in the long run into what it had to become. Schumpeter saw this process as “the essential fact about capitalism,” the process of “industrial mutation . . . that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
The business leaders whose careers are traced in this book came into the industry with divergent goals and skills. Daniel Drew and Jim Fisk were speculators to their bones, preoccupied with the trading of investment securities with little concern about the commerce underlying the paper they were buying and selling. Cornelius Vanderbilt and Jay Gould married their speculative impulses to their empire-building ambitions, but those ambitions were aimed fundamentally at creating personal fortunes. It fell to Edward H. Harriman and J. Pierpont Morgan to yoke the vision of railroad empires devoted to the public good to their quests for personal wealth and influence. In the process, they bequeathed us new methods of managing enormously complex businesses that inform management practices to this day. Harriman and Morgan were not the first to conceive of the necessity of sophisticated corporate management for railroads—the credit often is given to Albert Fink, a German-born engineer for the Baltimore & Ohio and later the Louisville & Nashville road, who developed systems of information sharing that, as Chandler observed, “made possible the ‘control through statistics’ that has become an essential hallmark of modern corporate administration.” But they applied those systems to even larger systems than Fink had, making them efficient, profitable, and, as Chandler wrote, modern.
Whether Harriman and Morgan were motivated chiefly by public or personal interest can be endlessly debated. The question certainly was raised during their lifetimes and in the years immediately following their deaths. Their careers motivated Louis Brandeis’s critical assessment of the role of capitalists in the railroad industry. His judgment that American capitalists’ “financiering” amounted chiefly to moving paper securities from one hand to the other, taking a commission for each step, was not entirely unfair, if perhaps too one-sided. The drawbacks of Morgan’s and Harriman’s systems of anticompetitive consolidation were manifest, as Brandeis outlined them. But their contributions were unique and important.
Whatever the motivations of these tycoons, efforts like theirs are necessary for the development of any innovative and disruptive technology. Pioneers of new technology contribute their inspiration, but they tend to be better at inventing than managing; they are often incapable of making the transition from creator to industrial leader. In the late 1800s the railroads were in unmistakable need of discipline, rationalization, and modernization. In that respect they were no different from steam power, the wireless, the telegraph, and in our own time personal computing and the internet.
Even Brandeis acknowledged that the great bankers stepped into the railroad business only after “the funds of the hardy pioneers . . . were exhausted.” He did not hold that those who contributed the capital and business management that created thriving industries out of disorganized businesses were wholly undeserving of the public’s gratitude, only that they did not deserve all the credit—they were “entitled to share, equally with inventors, in our gratitude,” he wrote. His disagreement was with the
ir profiteering from a process he agreed was, in truth, indispensable.
It is unlikely that the railroads could have survived the transition from the nineteenth century to the twentieth without the transformation that Vanderbilt and Gould helped to launch and Harriman and Morgan completed.
The differences between the railroad empires of J. P. Morgan and E. H. Harriman reflected their leaders’ particular strengths and proclivities. Morgan was a pioneer in financial modernization whose perception that “the scrambled disorder of the railroad business in the unregulated and financially profligate eighteen-seventies and -eighties,” in the words of Frederick Lewis Allen, would stand as an insurmountable obstacle to growth unless it could be made to yield to organization. Morgan brought about order by tying operating companies together with investment companies through interlocking corporate directorships and stockholder syndicates, with his own firm and banks he controlled at the center and railroads (and other industrial companies) orbiting them, like moons held in their thrall by gravity and by what Morgan biographer Lewis Corey called “the personal dictatorship of J. Pierpont Morgan.”
Frederick Allen noted that the influence Morgan and his partners exercised was “pretty much limited to finances,” for “they knew little about practical railroad operation and didn’t need or want to know more.”
The man who did know about practical railroad operation, for he had taught himself the science, was Edward H. Harriman. That is what made him as necessary a figure as Morgan in the evolution of the railroad industry. Harriman was unique in his ability to straddle the worlds of finance and operations. Morgan imposed order on the railroads from the outside; Harriman imposed it on his roads from the inside, learning the intricacies of his roads’ operations with a granularity that Morgan could never hope—nor did he wish—to achieve.
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