The Great Railroad Revolution (46 page)

With Drew out of the way, Fisk and Gould kept issuing more stock to keep Vanderbilt away, but of course that meant existing shareholders found the value of their stock being constantly diluted. In the first four months of Gould's presidency of the company, the nominal value of shares in the company rose from $34 million to $58 million, entirely as a result of more shares being issued, leading Vanderbilt to complain ruefully that he could afford to buy the Erie, but not the printing press. For political leverage, they appointed to the board William “Boss” Tweed, a New York Democratic politician notorious for his corruption in “Tammany Hall” politics, and in return they obtained favorable legislation from the city administration.

The pair enjoyed themselves, too, at the Erie shareholders' expense. With railroad company money, they bought the redundant Pike's Opera House, a huge white marble building in the classical style on Manhattan's Eighth Avenue, which they promptly leased back to the Erie at $75,000 per year. The
Erie's offices in the building, which they renamed the Grand Opera House— remember, this was a company that was for the most part bankrupt and barely ever paid a dividend in its history—were “reached by a grand carved staircase leading to a pair of huge doors with a tessellated marble hall beyond—all stained glass, Pompeian frescoes and glass chandeliers.” The offices themselves were decorated in a similar ostentatious style, and a company safe, extending from the basement to the roof, was installed. In the theater below, Fisk put on operatic productions, partly to please his mistress, Josie Mansfield, “a good-looking though heavily- jowelled gold-digger with theatrical aspirations but without the requisite talents.”
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Fisk was so enamored of Mansfield that he arranged for a special underground passageway to be built between her apartment and the Erie headquarters, but she was to prove his undoing, as, in 1872, he was murdered by another of her lovers.

Gould remained in control of the Erie Railroad until 1874, when he was ousted by British stockholders and reformers who wanted to put a stop to his constant raids on the company coffers. Gould, though, simply moved west, gaining control of various lines and building up a network amounting to more than ten thousand miles of railroad. His skill lay in knowing precisely when to move in on a railroad to buy stock cheaply and using his considerable managerial prowess to turn around the fortunes of ailing businesses. Indeed, unlike Drew or Durant of the Union Pacific, who were interested only in making money, Gould actually strove to improve the railroads he took over, making them more efficient and viable. At his height, in the 1880s, he controlled about one-seventh of the entire rail network of the United States, including all of the elevated system in New York. For the most part, he left his railroads in a better state than when he acquired them, despite purloining vast amounts of money from them in the process. The Erie was an exception to this generally positive picture: much of the money allocated for improvements such as new rails and cars ended up in Gould's pockets, and after 1872, when he left it, the line did not pay a dividend until 1941, when the Second World War improved its fortunes.

Vanderbilt, though chastened by his defeat over the Erie, and already aged seventy-three by the time he had gained control of the New York Central, nevertheless continued to acquire railroad companies and expand his empire for the remaining decade of his life. He bought up the Lake Shore &
Michigan, which ran from Buffalo in upstate New York through to Chicago, and later the Michigan Central and several other lines. He was also responsible for the construction of the Grand Central Depot in New York, to provide a terminal for his three New York railroads together in one large station. It was conceived as the grandest railroad station in the world— though it had several European competitors in that respect—and had a rather eccentric arrangement to prevent smoke from damaging the great room beyond the buffers with its huge chandeliers lit by gas jets. Rather than allowing locomotives to haul the trains into the platforms, the Central adopted the “flying switch” method of bringing its cars into the station. A short way from the end of the journey, the locomotive would be uncoupled from the coaches behind it, and routed onto a sidetrack that did not lead into the station. With a quick change of the switch rails, the rest of the train would be allowed to roll into the platform, brakemen controlling it to prevent the cars from smashing into the buffers. Amazingly, this remarkable and perilous system was used for many years without accident, leaving the chandeliers unsullied by smoke.

Vanderbilt was succeeded by one of his surviving children, William Henry Vanderbilt, who, unlike many sons of millionaires, had most of the skills of his father. PR was not one of them, however. Questioned about the scrapping of a popular train service, he notoriously responded, “The public be damned! . . . I don't take any stock in this silly nonsense about working for anybody but our own.” The attribution of this quote is unclear,
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but even if the younger Vanderbilt never uttered these infamous words, they did untold damage to the image of the railroad millionaires. William Henry, despite not being held in high regard by his father, who frequently called him a “blockhead” or “blatherspike,” was actually extremely successful in continuing to build up the railroad empire. Already valued at a staggering $100 million at the Commodore's death in January 1877, it had doubled in value by the time William Henry died a mere nine years later, aged sixty-four.

As the railroads consolidated in the postwar period, a new breed of barons emerged, even more powerful than their predecessors, as they ran vast networks of lines in what were now massive businesses. They were, though, different from the earlier barons, who had been focused purely on
enriching themselves. Just as Gould seems to have changed from a man who sought only to make money to, in his later railroad dealings, one who realized the value of running a good railroad company, the later moguls, although not shy about enriching themselves, were also concerned with the viability of the businesses they controlled. However, although they were not such out-and-out rogues as their predecessors, that did not stop them from being equally disliked.

A case in point is James J. Hill, who constructed the Great Northern between St. Paul and Seattle without benefit of any government subsidy and is often perceived, with some justification, as America's “greatest railroad builder.” Hill did indeed become immensely rich thanks to the railroad and lived in great opulence. Although without a doubt as ruthless and aggressive as the likes of Gould, he was a railroad builder rather than a stock manipulator. However, he was not averse to making the profits of his operation seem lower than they were in reality, with the aim of using the money to continue constructing the railroad. This practice lay behind the one incident in Hill's career that sullied his copybook and made him appear in the same bad light as the barons. In 1893, Hill's company issued $50 million worth of bonds that were then sold cheaply, at 10 cents per dollar, to the main stockholders in what appeared to be a classic case of stock watering. Hill claimed that this was a way of ensuring continued investment, as it meant that money that would have been paid otherwise in dividends was used to increase the capitalization of the company. However, as David Mountfield, the author of a history of the railroad barons, puts it, “his argument did not cut much ice with the increasingly vociferous opponents of big business.” Mountfield goes on, however, to support Hill, saying that the railroad mogul and his partners “made their railroad a blue-chip concern. Dividends were regularly maintained, and the value of the stock remained constantly above par [that is, higher than the original offer price].” Hill also attracted criticism because one of the ways he kept his company solvent was by cutting his employees' wages several times following the panic of 1893, but in fact he restored them after negotiations with Eugene V. Debs and the American Railway Union. Hill later gained control of the Chicago, Burlington & Quincy Railroad in partnership with J. P. Morgan, who, though mostly famous for his banking interests, cut his teeth on building
up a railroad empire. He was quite the opposite of Hill, not at all a railroad man, but rather the money man, controlling investment money that went into “his” railroads: “He came to choose their managers, dictate their policies, and shape them to his principles. . . . His methods included reducing wasteful competition, consolidating competing companies, and reorganizing shaky operations.”
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In effect, he “Morganized” his railroads, turning companies that had overstretched themselves or faced too much competition into profitable entities.

Morgan's first foray into railroads was a successful battle with Gould over the Albany & Susquehanna, a line of just 143 miles but potentially lucrative because it provided a useful connection between four larger railroads and several Pennsylvania coal mines. The struggle for control of this small railroad was one of those epic fights that brought disrepute on the industry. In 1868, our old friends Gould and Fisk began buying up shares, intent on using the connection with the Erie, but were opposed by the company's president, Joseph Ramsey, who not only started issuing thousands of shares to his supporters but actually took away the company's books and buried them in a cemetery. Both sides adopted a twin approach of resorting to the courts whenever possible but not shrinking from hiring thugs to do battle with their rival. Indeed, at one point, the two ends of the line, at Albany and Binghamton, were under the control of the opposing factions. In a situation that would not have been out of place in a Broadway farce, sheriffs from the two towns, armed with conflicting injunctions from local judges, boarded trains at either end to impose control on one group or the other. A train was derailed, and the two parties attacked each other until the state militia was called in as peacemaker.

At this point, Morgan, who had loaned a half-million dollars to the Albany & Susquehanna, bought a chunk of shares and became a director of the company in support of Ramsey. He managed to see off Gould and Fisk, and when the matter came to the New York Supreme Court in 1869, Ramsey and Morgan triumphed and were able to retain control of the line. Morgan would later be often called upon to sort out similar disputes, always managing to protect his own interests as he did so.

Reorganizing and refinancing railroads was Morgan's forte. A decade after the Albany & Susquehanna coup, he was involved in a much bigger
operation when William Henry Vanderbilt enlisted him to help sell half of his vast stock of New York Central shares without the market realizing what was happening, as this would have sent their value plummeting. Morgan achieved this quietly and slowly, ensuring the market did not panic at the availability of a huge number of shares, and as a reward was made the railroad's principal banker. In the mid-1880s, his troubleshooting skills were employed on, among others, the New York, West Shore & Buffalo Railroad, the Philadelphia & Reading (twice), and the Chesapeake & Ohio. In the 1890s he brought order to the railroads of the Southeast, creating for the first time in the region a reasonably coherent network with his Southern Railroad, which operated forty-four hundred miles as its centerpiece. Morgan was forever trying to consolidate and integrate railroad systems, knowing that this was likely to make them more profitable. Twice, in 1889 and 1890, he organized conferences of railroad presidents in order to help the companies respond to the creation of the Interstate Commerce Commission and to negotiate agreements that would help stabilize freight rates. These conferences were a catalyst for the process of consolidation that by the middle of the first decade of the new century would see the emergence of seven dominant systems, accounting for the greater part of the nation's railroad network (see next chapter).

The largest of these systems would be controlled by the other big railroad magnate of the late nineteenth century, Edward Harriman, who is “generally recognized as the greatest rail baron in American history, not only for the extent of his empire but for the revolutionary and enduring nature of his accomplishments in operations, business practices and safety.” His background, in common with most of the barons, was modest, as he started as a messenger boy on Wall Street at the age of fourteen, but within a few years he had made enough money to purchase a seat on the New York Stock Exchange. His interest in railroads was initiated by his marriage to Mary Averell, whose father was president of a branch line, the rather romantic-sounding Ogdensburg & Lake Champlain in upstate New York. His first direct venture into the industry, however, came in 1881 with his purchase, helped by the Averell family, of the Sodus Bay & Southern Railroad, which ran inland from the best harbor on the shore of Lake Ontario. Harriman judged, correctly, that he would be able to sell it to one of the
larger local railroad companies, stimulating a bidding war between the Northern Central and the Erie. The former won out, but Harriman pocketed a tidy profit from his three-year tenure of the railroad, and as a result caught the railroad bug. Harriman, like many of his contemporaries—and unlike the earlier barons—made his money through an attention to detail and a clear idea of how to run railroads at a profit rather than by financial manipulation. In fact, he used the little railroad as a testing ground for his ideas, renovating the track, investing in new rolling stock, and simplifying the management structure. Harriman's philosophy could not have been more different from the likes of Drew, encompassed in his assertion that “the only way to make a good property valuable is to put it in the best possible condition to do business.”
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He realized that the age of speculation was over and that the key to making money was having a sound railroad business, rather than manipulating stock or, as he had done himself in his early days, constructing clever deals. Indeed, Harriman left every railroad that he controlled in a better state than when he bought it.