The Great Railroad Revolution (25 page)

With promises of access to that wealth, Judah was able to sell the idea of a railroad to a key group of local businessmen. Judah's breakthrough in his search for investors had come at a seminal meeting in Sacramento in November 1860, probably the most famous gathering ever to take place above a hardware store, though many of the later accounts have undoubtedly been embellished through the rose-tinted glass of hindsight. Judah had been touring the state, seeking to sell the idea of his railroad to any local notables with a few hundred dollars to spare, but he found few of the richer members of the state were forthcoming. At the meeting in the hardware store, however, a quartet in Judah's audience famously responded to his entreaties, a decision that they would never regret. Four rather unprepossessing local merchants—Leland Stanford, Charles Crocker, Mark Hopkins, and Collis P. Huntington—came forward to invest in what would become the Central Pacific, and by doing so would join the ranks of the richest men in the United States. They were to become the Big Four—or Associates, as they called themselves—of the Central Pacific, turning themselves from humble small-town businessmen into directors of one of the two biggest companies in the land. Stanford was a wholesale grocer (though, more usefully, he was soon to become governor of California), Charles Crocker dealt in dry goods, while Hopkins and Huntington were the proprietors of the hardware store in which the meeting took place. A 1930s biographer of the Big Four wrote with brutal candor of the meeting, “In later life, four of his [Judah's] listeners accepted easily the roles of men of vision, who had perceived a matchless opportunity and grasped it with courage. It was a role none of them deserved.” Indeed, at the meeting Judah had sold the line not on the basis of a great project that would transform America but, rather, as a short-term opportunity to make a quick buck by tapping into the silver and other mineral wealth of the mountains. He had told the merchants what they wanted to hear: “how to sell more of their goods, how to make their property more valuable, how to expand their businesses and stifle competition.”
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Therefore, immediately on Judah's return to California following the passage of the 1862 act, the Central Pacific was formally constituted with Stanford as president, Huntington as vice president, Hopkins as treasurer, and Crocker as the construction supervisor—and, crucially, president of the construction company that was a subsidiary of the Central and bore his name. That company was to be the mechanism through which the illicit
part of their fortunes would be made and eventually led to Judah's falling out with the Big Four and, as an indirect consequence, to his premature death.

Despite the war still raging in the East, the passage of the act and the prospect of government subsidies meant there was nothing to stop work from beginning in California. Judah had brought much useful equipment with him, and the first sections of the line, on the eastern side of California's great Central Valley, were relatively easy to construct. Too easy, though, for the money-grabbing Associates, who fell out with Judah over the question of precisely where the rise into the Sierra Nevada began. This was an important and potentially lucrative matter. The cash-strapped Central Pacific was desperate to get its hands on the cheap loans it would obtain by starting construction. And, as we have seen, for each mile of track built in the mountains, the company stood to receive three times the amount it received per mile of track built in the plains. So Stanford and Crocker decided that the rise began at a place called Arcade Creek, despite the fact that the mountains, a good fifteen miles away, were barely visible from there. It would have been all too easy to pull the wool over the eyes of the bureaucracy, three thousand miles away in Washington, but Judah was having none of it. As he had personally undertaken the survey, he knew that the true beginning of the gradient was some twenty miles farther east, a difference of some $640,000 to the company.

This was the point at which the visionary, as Judah saw himself, came up against the hard-nosed “gang of corner-cutting merchants he saw the Associates to be.”
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There were other sources of friction between the Associates and Judah, notably over his survey fee and his suspicions that some of the money being spent on the first section of line was actually being diverted to a road project that was one of the Associates' other commercial ventures. These swindles had not gone entirely unnoticed in the press, thanks to the machinations of a pair of equally corrupt brothers, John and Lester Robinson, who had worked on the Sacramento Valley Railroad and leaked the story, since they were eager to obtain the contract on the Central Pacific themselves. Judah wanted nothing to do with the Associates' sharp practices.

Work on the Central Pacific had started on January 8, 1863, after the ceremony of turning the first shovelful of earth. Heavy rains had turned
the streets into mud, onto which the prominent lady guests of the town refused to venture, as they sought refuge on the balcony of a local hotel. The main speakers were Crocker, styling himself as the “general superintendent” of the railroad, and Stanford, now both president of the Central Pacific and governor of California. The straw laid out to absorb the mud made the ritual of turning the first sod rather more difficult than usual. It was somehow apt, given the fraud and deception that would attend every stage of the building of the line, that even the groundbreaking ceremony was an act of deceit, with a wagonload of earth dumped expressly for the purpose.

The inaugural part of the Central was built by Charles Crocker's eponymous company and illustrates precisely the sort of financial shenanigans that became routine on both railroads. On this first section stretching eighteen miles out of Sacramento, costs soon exceeded estimates, and Crocker's cash ran out. No matter. The extra money required, $150,000 on a contract originally estimated at $275,000, was made up from Central Pacific's coffers, a clear breach of normal accounting rules that amounted to “a polite form of embezzlement,” but since the other three were all silent partners in Crocker's outfit, they benefited personally, too.
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It was through this type of contracting arrangement that the promoters of both the Central and the Union railroads would make most of their money. There was in fact plenty of straight money to be made, given the generous terms of the legislation, but as historian John F. Stover suggests, “none of the participants wished to be satisfied with a modest profit.” Crocker's company had the contract to build the railroad only as far as the state line, at which point another contractor, the Contract & Finance Company, took over. The move away from using Crocker's company was prompted by a realization on the part of the Associates that such a patently dubious arrangement—between Crocker of the Central Pacific and Crocker & Company as the contractor—would not stand up to any scrutiny. Crocker, who incidentally had no previous contracting experience but ultimately did see the project through, later cheerfully admitted that there was no “& Company” in his organization, as he had sole charge of it. The new arrangement was no less dishonest. It was merely a subterfuge, since the Contract & Finance Company was owned by the Associates, who “managed to get their accounts into such a shape that no outsider had a chance of understanding
them.”
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They were able to use the contracting company as a cash cow, given it was responsible for acquiring all the material and building the line at prices that could easily be inflated, to the detriment of the Central and its shareholders, as there was no external scrutiny of what were internal transactions.

It was this arrangement that led to Judah's disillusionment. Judah had not even been at the opening ceremony, and after a couple of difficult board meetings he understood clearly that the Associates were trying to push him out. They paid him off with $100,000, and Judah decided to try to obtain alternative financing, possibly with the intention of buying out the Associates. He headed back east in the autumn, but the journey proved fatal, as he contracted yellow fever in the tropical climate of Panama and died in New York a few days after his return, aged just thirty-seven. His death left the Associates completely free to use the railroad company to plunder the government's coffers and, through the medium of the contractor, to cheat the unwitting investors. Indeed, they were so intent on enriching themselves first that initial progress on the line was painfully slow, despite the expenditure of considerable sums of money. It was so slow, in fact, that the Union Pacific, despite starting two years later, had soon built as much mileage as the Central.

Work on the Union Pacific had been delayed not only by the proximity of the war, which sapped both men and materials, but also by its more diffuse structure. The Union Pacific did not have an obvious set of champions like Judah and the Big Four. In an attempt to ensure that ownership of the railroad was widely spread, the first Pacific Railway Act had created a group of nearly a hundred “commissioners” who were supposed to first create, and then fund, the company.

Enter Dr. Thomas Durant, the man who would become Mr. Union Pacific. A measure of the fellow can be gleaned from the fact that he had originally qualified as a doctor but had never practiced because he had become bored with medicine and turned, instead, to speculating in stocks. He had railroad experience also, as he had promoted and built the Mississippi & Missouri, the line that connected with the Rock Island Railroad through the ill-fated bridge over the Mississippi. Although many of the other characters involved in the Union Pacific, which has been aptly described as “a curious mixture of the noble and the ignoble,” were every bit as corrupt as Durant, most at least demonstrated a genuine and commendable interest
in pushing the project through and believed it would transform America. Not so Durant. He was the complete opposite of Judah, seeing the making of money as the only reason to involve himself in railroad construction: “Pride of accomplishment, the excitement of opening up new frontiers, and fulfilling society's need for transportation meant nothing to him.”
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Durant, who was not named as a commissioner under the act but had quickly set out to gain control of the transcontinental project, had previous experience in manipulating stock and cheating investors in the Mississippi & Missouri. It was, therefore, with practiced ease that he managed to scheme his way into obtaining a controlling interest in the Union Pacific, despite the legislation specifically designed to prevent such control. He spent considerable time in 1863 arranging the purchase of stock through nominees whom he controlled and in October that year, thanks to his control of the votes, ensured that an old colleague, a corrupt politician by the name of John Dix, was elected as president of the company, while Durant became vice president. As Dee Brown puts it, “Durant knew that Dix would never bother him.”
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With the Union Pacific safely under his control, Durant was keen to demonstrate progress on the scheme, but it was not easy with war waging close by and a shortage of materials, as the company was further hamstrung by a clause in the legislation that required all iron to be American rather than British. However, the need to demonstrate at least some activity was made more urgent because a rival railroad, the Atchison, Topeka & Santa Fe, had just been awarded a large land grant by Lincoln, and there were fears it might win support for a transcontinental route from a Congress easily persuaded with the right inducements. A meaningless ground breaking ceremony was held at Omaha, Nebraska, in December 1863, but after the flag waving and earth turning, everyone had simply gone home, though Durant did use the opportunity to pick up some cheap real estate, which soon became worth millions because of its proximity to the new railroad.

Durant then turned his attention to ensuring that the already supportive legislation was made even more generous to the companies building the line and that he would be able to reap much of the benefit. As Dee Brown explains, “During 1864, Durant successfully accomplished two major maneuvers that made it possible for him and his close associates to enter upon a colossal looting of the people's treasure and plundering of national land
resources.” First, he established the equivalent of the Central's contracting company, an organization called Crédit Mobilier that would achieve notoriety and forever be remembered for a scandal that became the nineteenth century's equivalent of Enron. The way to set up this structure was explained to Durant by the much-traveled George Train, another of the Union Pacific's early promoters. Train was a “character”: a true eccentric and impassioned orator, a supporter of women's rights and builder of tramways, and apparently the man who inspired the portrayal of Phileas Fogg, the hero of Jules Verne's
Around the World in 80 Days.
Train advised Durant of a company in France called the Société Générale de Crédit Mobilier, which was involved in several major infrastructure projects and was, in modern parlance, a way of outsourcing construction to protect the parent company from risk and, incidentally, creating a mech anism through which profits, largely obtained from government subsidies and shareholders, could be purloined without scrutiny. To establish the company, a moribund little corporation, the Pennsylvania Fiscal Agency, was acquired by Train and, as a kind of ironic tribute to the original French concept, given the pretentious name of Crédit Mobilier of America. By controlling Crédit Mobilier, Durant was effectively able to make contracts with himself at any price per mile he chose. The government subsidies were paid to Union Pacific, but since Crédit Mobilier overcharged for everything it did, the beneficiaries were its shareholders, a small coterie of Durant's friends rather than the far bigger group of Union Pacific investors. There was nothing subtle about the fraud, least of all the size of the dividends that Crédit Mobilier would soon be paying.