The National Dream: The Great Railway, 1871-1881 (54 page)

“Tomorrow I begin my sixty-first year, and looking back ten years I am far from being the free man I then was.… When I think of the misery I have suffered in these ten years I cannot help thinking what a fool I was not to end my work and enjoy the leisure which I had earned by forty years hard work. I began to earn my own living at the age of ten. ‘But what maun be maun be.’ It was not so ordained.…”

He could not resist the adventure. He sat down and began to figure, with Hill and Smith, at what price the bonds should be purchased. They worked it out together at a little more than four million dollars. If the Dutch bondholders indicated that price was acceptable, Stephen said, he thought he could raise the money in London that fall. He still had to see the railway for himself – he was nothing if not thorough – but from that day on George Stephen was, for all practical purposes, totally captivated, body and soul, to the exclusion of everything else.

4
A railway at bargain rates

The new associates – they were not yet even partners and had signed no formal agreement – had a great deal of delicate negotiating ahead of them. Before Stephen could leave for Europe it would be necessary to make a firm and final deal with the bondholders. Then, in order to forestall a legal battle, an attempt must also be made to corner the stock. After that Stephen would have to raise enough money to buy both the bonds and the stock.

Hill left Montreal for New York to see Litchfield, the man who owned almost all of the stock. He drew a blank. “The old rat,” as Stephen called him, would not even name a price. Then, on May 26, Hill fired off a carefully worded letter to the Dutch committee, proposing various discounts on the different classes of bonds ranging from eleven cents to eighty cents on the dollar, but adding up to the price the associates had agreed upon in Montreal. Hill, the master
letter-writer, had worked at this one all night. It was so ambiguously worded that, although it looked like an offer, it was actually only an option. Lengthy negotiations followed. The Dutch tried to bargain. In July, Hill began to get tough. The value of the bonds was actually decreasing, he suggested: the grasshopper plague had caused land values to plunge and the Northern Pacific was threatening to build a competitive line, which would reduce the value of the property still further.

Just before he left for Europe, on September 1, 1877, Stephen found an opportunity to see the property for himself. He was in Chicago on business with R. B. Angus, the bank’s general manager – another bearded, self-made Scot – and the two decided to spend the weekend in St. Paul. Smith immediately came down from Winnipeg and on Sunday the four associates together with Angus and Farley, the receiver and manager, took the pay car out along the completed portion of one of the lines.

Stephen was dismayed at what he saw when the train chugged past the last hamlet of Litchfield and out onto the sere prairie. This was the worst year of the great depression of the seventies. The economic panic had been followed by drought years, which drove settlers from the land, and-worse-by a grasshopper plague of truly terrible proportions. The hoppers came by the millions, covering the roads and fences so thickly that they obscured them. They ate everything that grew. James Trow, the
M.P
. who visited the Red River country at the time of the plague, left a graphic description:

“In looking toward the sun the sight resembled a heavy snowstorm of large flakes, passing through the air with great rapidity. They were upon the ground piled one upon the other so that we crushed thousands with every revolution of the carriage wheels. For the novelty of the thing, we would occasionally alight, walk ahead of the horses, when millions would rise out of our path.”

It was through such ravaged country that Stephen was now passing, shaking his head ominously: it looked for all the world like the top of a rusty stove. The others watched in growing alarm. Would he back out now? Stephen began to ask some pointed questions: where would the business come from in this tenantless desert? When, if ever, would there be settlers here on the parched and plundered grasslands? Then suddenly the little station of De Graff was reached, named, ironically, for a contractor who was suing the company for
unpaid bills. Here there was “a rude but good sized structure” with crowds around it. There were several trails leading into the community and these were speckled with carts loaded with people.

“What is all this?” Stephen wanted to know.

Somebody, probably Hill, made a reply which Smith was later to remember:

“Why, this is but an instance of what is to occur along the whole line of the railroad. This is a colony opened by Bishop Ireland one single year ago. Already the settlers brought in by the Bishop are counted by the hundreds, and hundreds of others are coming to join them from different parts of America and Europe. This is Sunday morning and the settlers are going to Mass.”

The scene made an enormous impression on Stephen: the vision of a railway tied to colonization – bringing in the very settlers who would then provide it with its future business – was limned in his mind. His old mentor, James Morrison, had always advised him: “Hold to your first impression of a bargain.” Stephen’s doubts evaporated and, in Smith’s words, “from that moment he was won over to the new enterprise.” As for Bishop Ireland, he benefited hugely from the incident. A grateful Jim Hill saw to it that his church got all the land it needed for next to nothing.

Hill had by this time made a detailed inventory of the railroad’s assets and liabilities, listing every fraction of debt and describing the securities in detail. His supple mind had grasped a point that eluded everyone else: though the net earnings of the First Division Company seemed to have dropped, they had in reality almost doubled because almost two hundred thousand dollars had been charged to operating expenses instead of to construction and equipment. This meant that the railroad was doing much better than the books seemed to indicate.

Hill knew something more: although he figured that the total cost of the bonds plus the cost of completing the remainder of the line would require some five and a half million dollars, he was able, by close reckoning, to estimate the total value of the railway, with its equipment, track, townsites and land grants, at almost twenty millions. In short, Hill realized that, if the bondholders accepted the offer, he and his associates would get the railway for about a quarter of its real value.

In mid-September, Kennedy’s partner, Captain Barnes, representing the Dutch committee, met Stephen in Montreal. The Dutch were
ready to deal and, though there was some internal shuffling, the over-all asking price remained the same. If Stephen could raise the money, the partners could buy themselves almost eighteen million dollars worth of bonds for slightly more than four million. It was a fantastic bargain.

The four partners agreed to share the risks and the profits equally, each taking a one-fifth share in the enterprise. “We are all in the same boat to sink or swim together,” was the way Stephen put it. The remaining one-fifth went to Stephen to use at his discretion in raising a loan. Indeed, Stephen was given a wide latitude in negotiating terms. At the end of September he set off for England, full of optimism.

But in London, the bankers were gun shy. The panic of 1873 had made American railway securities a bad risk. And among all the bad risks, the St. Paul and Pacific was held to be the worst. Canada’s unofficial ambassador in London, Sir John Rose, might pave the way, through his firm of Morton, Rose and Company, but Stephen was not able to raise a shilling. As he described it: “After considerable negotiation I utterly failed. Nobody believed – or at least I failed to induce anybody to believe – that the property was good for anything.”

In Montreal, on Stephen’s return, four bitterly disappointed men met on Christmas Day, in no mood for Yuletide merriment. The grand scheme on which Hill and Smith had been pinning their hopes for four years lay shattered. Stephen, however, had no intention of giving up. The tumblers of his precise mind were already clicking over, forming new patterns. An unconventional plan was taking shape which, if accepted, would be far better than the original. Stephen decided to take the negotiations into his own hands and deal directly with the Dutch committee’s New York agent.

Early in January, Stephen met John S. Kennedy for the first time. Kennedy was yet another self-made Scot and the two swiftly became friends and, not long afterward, business associates. Stephen’s plan was as bold as it was simple. He offered to buy the bonds on credit, depositing a mere one hundred thousand dollars on account and paying the balance
after
foreclosure. The payment could be made either in cash or in the new bonds of the reorganized company. The Dutch were encouraged to accept the paper rather than the money by the offer of a bonus of $250 in preferred stock for every thousand-dollar bond they took. The partners, in turn, agreed to finish the railway and put it into working order.

They were, in short, proposing to get control of eighteen million dollars worth of bonds for a cash outlay of only one hundred thousand dollars. The Dutch bondholders were psychologically in the position of horse traders who, having had various offers dangled before them and then withdrawn, had worked themselves into a frame of mind to deal at any price. Under Kennedy’s prodding they accepted. The purchase was concluded on February 24, 1878, and the partners took control of the railway on March 13.

One of the mysteries surrounding this remarkable transaction is the disposition of the extra one-fifth share that Stephen was given to negotiate with. What happened to it? Did Stephen keep it for himself? If not, to whom did he give it? That it was not divided among the four partners seems clear from their subsequent court testimony, in which they appeared remarkably casual, unconcerned and even evasive about a slice of stock that came to be worth many millions.

“We showed our satisfaction and contentment in the whole matter by each of us releasing Mr. Stephen. There, with us, was the end of it,” Smith said airily. “We did not ask Mr. Stephen to account for it.” The agreement, as Smith recalled it under oath, was that Stephen would use the extra one-fifth “as might be necessary in getting the aid of friends or in getting the money.” But what friends? Smith did not say; Stephen was not asked.

One man Stephen did
not
give the one-fifth interest to was Jesse P. Farley, the receiver in bankruptcy of one of the twin St. Paul companies and the general manager of both. Farley later sued Kittson, Hill and the newly organized company, charging that in 1876, before the meeting with Stephen, both Kittson and Hill had promised him a one-fifth share in the enterprise in exchange for his help, co-operation and special knowledge. It was clear that that help consisted in deceiving the courts, which had put him in charge of the property on Kennedy’s advice. What Farley was saying, in effect, was that he had devised a plan and arrived at a secret agreement with Hill and Kittson to keep the line in such condition that it could be bought cheaply. The circuit court judge who heard the case in 1882 tended to believe Farley. “The plaintiff,” he said, “conceived a scheme to wreck the vast interests which it was his duty to protect”; but he threw the case out because “courts will not and ought not to be made the agencies whereby frauds are to be in any respect recognized or aided.” Farley appealed and a trial was ordered. It took place in 1887, when Kittson was dead. This time the judge did not believe Farley. He said, with some sarcasm, that in his opinion Farley did not
fail in his official duty “and although such conclusion carries an imputation upon his recollection or veracity as a witness, it sustains his integrity as an officer.”

Farley persisted in the courts for a total of thirteen years. By the time the final judgement was read against him in the Supreme Court in 1893, he, too, was dead and the matter was closed. From all this testimony – two thousand pages of it in one case alone – several puzzling pieces of information emerge which do not quite fit together. It is reasonably clear that Farley
thought
he had a secret deal with Hill and Kittson. It is equally clear that Hill emphatically did not think so. It is also reasonably clear that Hill, Kittson and Farley did a good deal of talking together about the railway and that at a time when Farley knew that Hill wanted to buy it, he, Farley, did his best to disparage the line to the Dutch representative.

There is also the puzzling question of Kennedy’s role. Farley was Kennedy’s man. At a time when the bondholders were in their final negotiations with Stephen-on Kennedy’s advice-Kennedy was also writing to Farley, urging him to get in on a good thing. “We think it will pay you to take an interest with K. & H. and we are glad to hear that they have offered it to you,” he wrote on February 25, 1878, in a reply to a letter from Farley soliciting his advice.

All of this can be subject to innocent interpretation but the question continues to rankle: who got the extra one-fifth? After the St. Paul line grew into the Great Northern it was revealed that John S. Kennedy held an enormous quantity of its stock. He, Hill and Stephen all became close friends and when the
CPR
board was formed Kennedy was a director. When he died he left an estate estimated at between thirty and sixty million dollars, depending on the book value of the immense mass of railway stock he had acquired. Did Kennedy simply buy into the railway that he had urged his Dutch clients to sell so cheaply? Or was it he who was promised George Stephen’s extra one-fifth during those delicate negotiations, which allowed the sale of eighteen millions in bonds for almost no cash at all.
^*

Perhaps Stephen himself kept the extra one-fifth, though that is hardly in character. If he did, no one could say he had not earned it. As for the Dutch, they seemed perfectly satisfied: most of them preferred to take more bonds in the new company rather than cash, a wise decision as it turned out. It was true that they had sold the railway cheaply; it was also true that the line was worth eighteen million dollars only if and when it could be put into working order. If Hill and his associates had not come along, it is doubtful whether the bondholders would have realized anything on their original investment. As it developed, they were so well pleased that they made a gift to Stephen of a valuable bowl commemorating a great victory in which a Dutch admiral, in 1666, burned the best of the British fleet. Years later, when Stephen was entertaining George V of England, that old sailor’s eye caught sight of the trophy. The monarch was not amused at this symbol of naval humiliation.