But Russia was an exception. Outside Anglo-Saxon countries the business of railway construction depended too closely on the government to allow the development of the contracting breed. The French produced their own special type, the engineer-technocrats closely linked with successive governments and their policies, who had an even greater influence on railways in the rest of Europe than their British equivalents. In Germany, although railways were of crucial economic importance, no great political capital was made out of them, they were relatively uncontentious ventures, no permanent fortunes were made, no reputations made or ruined.
*
As we saw in the last chapter, the Canadians followed a path of their own, with the two Scottish cousins, George Stephen and Donald Smith, prepared to pledge all their personal assets to complete the CPR, which they were promoting. ‘If we fail,’ said Smith at a crucial moment, ‘you and I, Donald, must not be left with a dollar of personal fortune.’
More typical of the classic contracting breed were the pair of adventurers behind Canada’s second transcontinental railroad, William Mackenzie and Donald Mann. Nominally Mackenzie was a Tory, Mann a Liberal, but that was merely a ploy to get help from the Canadian government.* In fact they were pure railwaymen – Mackenzie refused to sell out to the much larger, British-controlled Grand Trunk ‘because I like building railroads.’4
They both started as contractors, first working together on a small branch line for the CPR. Their earlier major opportunity came when the provincial government of Manitoba, worried at the CPR’s monopoly, provided guarantees for a line from Duluth to Winnipeg – a railway starting in another country and ending in another province. Exploiting the gullibility and crookedness of Canadian politicians to the full, they managed to buy cheap land and get federal guarantees for a line between Saskatoon and Calgary, eventually transforming the Canadian Northern ‘from a series of disconnected and apparently unconnectable projections of steel hanging in suspense’ into a proper network, multiplying its length twenty-fold to over 2,640 miles in the first decade of the twentieth century.
In doing so they received nearly $100 million in bond guarantees from the state and federal governments. But official help was never going to suffice. In their first ten years as railway promoters they borrowed $130 million from investors inside and outside Canada. To do so they marketed twenty-nine bond and stock issues, creating some sort of record for variety and ingenuity with their ‘Mortgage Bonds, Gold Mortgage Bonds, Land Grant Bonds, Income Bonds, Prior Lien Bonds, Sinking Fund Gold Bonds, Consolidated Debenture Bonds, Mortgage Debenture Stock and Perpetual Debenture Stock.’5 It was not only the pure financiers who needed imagination to get their schemes off the ground.
In Canada Mackenzie and Mann had been tolerated as useful rogues: in Britain the contractors, after some delay, had been accepted into polite society; in France railway builders were almost heroic figures. Only in the United States did a tradition develop in which the whole class of capitalists associated with the financing and construction of the railroads were automatically assumed to be villains.
Their successors, the magnates who ran the railroads, were an equally tempting target, arrogantly aware of the power they enjoyed. To Lord Bryce, the British Ambassador, they were ‘amongst the greatest men, perhaps I may say the greatest men in America … they have power, more power – that is more opportunity for making their will prevail – than perhaps anyone in political life, except the President and the Speaker, who after all hold theirs only for four years and two years, while the railroad monarch may keep his for life.’
In reality, and with good reason, they did not feel as secure as Bryce makes them out to be. They clearly felt a compulsive need to assert their power, above all the ‘territorial imperatives’ of their railroads, providing an early example of that automatic, reflex aggressiveness which became the hallmark of the American brand of capitalism. The southern railroads, noted Maury Klein,6 continued to expand ‘because railroad managers perceived it as a necessity for survival … without it the railroad would die of atrophy.’ James A. Ward7 quotes J. Edgar Thomson of the mighty Pennsylvania Railroad, most secure of all, telling anyone who would listen that ‘we cannot stand still, for that means slipping back; we must constantly go forward’. Ward goes on to point to the military language habitually employed by Thomson and his rivals – although the battles between these giants, while they seemed bloody at the time, were relatively artificial eighteenth-century affairs which usually ended in a diplomatic gavotte and a cosy carve-up of the eternal enemy, the customers.
Thomson and his successors were not, however, in the front rank. This role was reserved for their predecessors, the first railway tycoons, assaulted by radicals known generically as ‘muckrakers’, writing a generation or more after the evil deeds they described, the Credit Mobilier affair and the Erie scandal, as well as the abuses which led to the success of the Grangers. While the tycoons were attacked in their lifetime, they were at least judged by contemporary standards. The muckrakers imposed later, stricter standards on their victims.
Fictional accounts like those in The Octopus about the grip of the ‘Big Four’ on California were matched by the whoopings of the exposers. In 1910 Gustavus Myers devoted two of the three volumes of The History of the Great American Fortunes, to the ‘railroad fortunes.’ In these he included those of Morgan and Vanderbilt, whose money came from a number of sources. But the railroad element was perceived, and not only by Myers, as being dominant. He did not spare his victims. ‘Through all of these weary pages’ he wrote, ‘have we searched afar with infinitesimal scrutiny for a fortune acquired by honest means. Nor have the methods been measured by the test of a code of advanced ethics, but solely by the laws as they stood in the respective times’ – a rather disingenuous disclaimer.
In the hungry 1930s, when capitalists of any description were fair game, Matthew Josephson naturally found a receptive audience for his enormously influential The Robber Barons, in which he quotes freely from ‘the historian Myers’. By then the words ‘railroad fortunes’ had become synonymous with all that was evil in American capitalism.
Myers, Josephson, and their colleagues were unable to explain how the men they portray as criminals left the country the legacy of a railway system which stood it in good stead for a hundred years. They cannot even point to any major mistakes in the routing of the major lines – they can only harp on a single deviation, insisted on by that undoubted rogue, Dr Durant, which led the Union Pacific a dozen or so miles astray in a line which ran for over a thousand miles. Unfortunately ‘the devil has the best tunes’; they often wrote well, they were impelled by a genuine moral fervour, and their pen-portraits remain unforgettable even if cold reason says that they were invariably exaggerated and usually distorted.
The muckrakers’ victims deserve to be judged according to their contemporaries’ lights (this was not necessarily flattering). Nor were they a single group. There were the men who financed the original major lines, the organisers (who came a generation later) and the pure speculators. The latter, who manipulated railroad stocks because they were the biggest game in town, were no better and no worse than their modern equivalents, the Boeskys, the Milkens and their like, except – a crucial distinction – that they were operating at a time when ethical standards were far laxer than those prevailing, at least in theory, on Wall Street today. The best comparison, perhaps, is with another country which combined enormous economic growth with dubious political-financial ethics – post-war Japan. The sheer size of the financiers’ operations, like the result of the Cosmos–Recruit affair in Japan,* led to a transformation in public perceptions, and thus in the behaviour of financiers – and the politicians they helped financially.
Daniel Drew, one of the most notorious speculators.
The speculators most closely associated with the Erie and the other scandals were a lot more fun than their grey, hard-working modern equivalents. There was Daniel Drew who, allegedly invented the practice
of watering stock.† But the king of speculators was Jim Fisk. Even Josephson had a soft spot for his:
verve, his ready jests, his strings of charity – like a Robin Hood – he diverted attention from his monumental unscrupulousness … Fisk rejoiced, wrangled and drank while engaged with unequalled zest in the multitudinous details of his office. At the railroad headquarters of Taylor’s Castle he installed his buxom mistress, Josie Mansfield, whose dazzling white skin, whose thick black hair and gray eyes enthralled him so long and fatally, for whom he had forsaken his lawful spouse, and upon whom he lavished vast sums of money in his mad infatuation.
Fisk redeemed himself in many people’s eyes (including those of the New Yorkers, always ready to applaud a gaudy show, whatever the morals of the impresario) when he was shot by a ‘jealous swain’ of the lovely Josie.
The costs of railroad construction, in the United States as every-where else in the world, were systematically underestimated – even if the true, usually frighteningly large, figures, had been grasped by the builders, which wasn’t usually the case, they would have scared off potential investors. So even the real visionaries could never be entirely honest. Moreover the builders of the original network included a fair selection of straightforward swindlers, like G. C. Chapman. When he had completed the Kansas Midland he ‘cashed in his bonds, left many material bills unpaid and lit out for Ohio. Here he built a line from Chilicothe to Columbus and cleaned up again. Last heard he was living high in Venice, Italy.’8
The pin-up of the Railway Kings.
But the best sample can be gained from the building of the three great transcontinental railroads. The first was divided into two sections. The Union Pacific had a chequered history with a fair amount of financial trickery, including the Credit Mobilier affair; but the western half, the Central Pacific, was honestly built. The Big Four, like their equivalents on the CPR, were visionaries who pledged their last penny to build the line at a time when no one else in California would support their apparently hopeless venture. Unfortunately their success left them with the feeling afterwards that their courage entitled them to act as dictators of the state.
The Northern Pacific was a classic example of initial underfunding and the tricks required to combat the problems it created, while the Great Northern, last and in theory least economic of the three, was a triumphant success thanks to a railroad genius, Jim Hill, whom even Josephson called ‘sounder’ and ‘more efficient’ than the usual run of villains – though he uses quotation marks to indicate how grudging was his approval. Josephson had to admit that Hill ‘became something of an engineer … an undoubtedly able administrator, augmented by shrewd buying and selling and ruthless “hiring and firing”, brought fundamental economies year after year, and cleared the way for tremendous expansion.’
How the cartoonists saw the great Erie scandal.
Within a generation after they were built most of the railways needed a fair amount of reconstruction. To the muckrakers this was proof that the original builders were crooked. In fact the economics of railway construction in virgin territory everywhere demanded quick and thus shoddy work, whether the line was being constructed by American speculators or the Tsar of All the Russias. Even William Van Home of the CPR felt it was vital to ‘get a workable line going which would stand up for six years, make it pay and then begin improving it’. An American financier promoting a railway in Mexico put it more cynically. ‘No railroad,’ he said, ‘has ever been placed on a paying basis until it has been through a receivership.’
To rebuild and reorganise a railroad (let alone combine two or more) demanded the flair of the financier and the organising ability of a Jim Hill. The great E. H. Harriman was generally recognised to have both qualities, to the great benefit of the Union Pacific and his other systems: even Josephson admitted that ‘thanks to his great mental agility he did learn much about managing railroad systems’.
Much more controversial is the role played by Jay Gould, the most-hated, most misunderstood figure of all. To Myers he ‘became invested with a sinister distinction as the most cold-blooded corruptionist, spoliator and financial pirate of his time, and so thoroughly did he earn his reputation that to the end of his days it confronted him at every step, and survived to become the standing reproach and terror of his descendants. For nearly half a century the very name of Jay Gould was a persisting jeer and byword, an object of popular contumely and hatred, the signification of every foul and base crime by which greed triumphs.’
The truth was more complicated and more interesting. Gould – a sick man for the whole thirty years he was involved in the railroad business – was an intellectual. In the words of Maury Klein, ‘there was something of the mathematician in all Gould did, something of the theorist striving to impose his models on a stubborn reality.’ He was also breathtakingly ambitious, dreaming of his own transcontinental railroad. He actually loved railroads. When asked by reporters why he had recaptured the Union Pacific he replied simply: ‘There is nothing strange or mysterious about it. I knew it intimately when it was a child and I have merely returned to my first love.’ Gould did a great deal towards rebuilding the Union Pacific’s tracks and business, attracting traffic from coal and sulphur mines, and encouraging the stockmen on whom the UP depended for much of its income.
Jay Gould, the most unfairly maligned railroad tycoon.
His reputation suffered because he was indifferent to his public reputation. As the Atlanta Constitution put it: ‘The trouble with Mr Gould was that he did not make arrangements with the newspapers to herald his deeds of benevolence, and the result was that no-one outside of his small circle of intimates and familiars knew the extent of them.’ He was a man of ‘domestic inclinations … they are not calculated to make me particularly popular in Wall Street, and I cannot help that.’
Jay Gould bowls Wall Street over.
Gould suffered for his indifference. Klein points to ‘the extraordinary extent to which the Gould of legend was a creation of the press … twentieth-century biographers relied heavily on the hack biographies that appeared shortly after Gould’s death. Without exception these works were compilations of material lifted, often verbatim, from the newspapers.’
Inevitably Gould was involved up to the hilt in all the dubious financial wheeling and dealing which surrounded railroad stocks. But to gauge his real stature you have only to compare him with the gang of well-placed, highly-respected financiers who raped the Penn Central of its assets at the end of the 1960s, leaving the railroad itself crippled. They were pure speculators, whereas Gould left the railroads he ran in better shape than he found them.
His vision made him bolder than his contemporaries. In Klein’s words, when Gould took over the Missouri Pacific he assumed ‘that profits could be had by developing untapped territory where competition was minimal, and that Saint Louis could be developed into a transportation entrepot rivalling Chicago’ – even though the Missouri Pacific was not a major trunk line, and it was assumed that one was needed as the centre of any system. But the best witness to Gould’s real stature was General Grenville Dodge, the chief engineer to the Union Pacific. Gould, he said, would ‘stand in history as having risked and planted his millions in developing a new country while others merely risked and planted their millions in a country … where there was no risk as to returns.’
The Goulds and the Harrimans were exceptions. ‘Reorganisation’ in the United States usually meant the final triumph of the bankers, rather than individual railwaymen. During the heroic era the bankers had remained in the background. The first local lines had usually been built with capital provided by locals anxious to boost their towns – and to increase the value of their land holdings along the tracks. But longer lines involved external capital. First raised in regional centres, as the demands grew greater it was provided by a handful of national, indeed international financial markets, notably New York and Boston, able to attract foreign capital and to provide integrated financial services.
At the outbreak of the Civil War capitalism in the United States, apart from railroads, was so small-scale that it did not require the services of pure investment banking houses. But in Vincent Carosso’s words in Investment Banking in America:
Financing the railroad construction boom of the last two decades of the nineteenth century resulted in the extension and institutionalization of several investment banking practices that previously had been provided informally. The banker’s relationship as the financial adviser and fiscal or transfer agent of the railroads he sponsored dated back to the late 1840s and early 1850s; the rise of railroad-banking alliances occurred in the 1860s, if not earlier; and the use of the syndicate to introduce and distribute railroad bonds was introduced in the 1870s.
Bank representation on railroad directorates and finance committees after 1880 was an institutionalization of the close personal ties that commonly had existed between bankers and railroad officials before that date.
A banker’s presence on the board of a railroad gave investors a feeling of security, for they could rely on the bankers to move in when things went wrong. When the Santa Fe got into difficulties in 1887, for instance, Kidder Peabody imposed stringent financial disciplines, sharpened accounting systems, and imposed close controls over expenditure and capital investment. The great J. P. Morgan spent fifteen years reorganising unprofitable railroads – although even he could not induce the quarrelling Western railroads to cooperate until they were all nearly (or totally) bankrupted in the panic of 1893.
The World the Railways Made Page 12
