The National Dream: The Great Railway, 1871-1881 (55 page)

“Why don’t you destroy the damned thing?” His Majesty asked.

5
The Syndicate is born

The four partners had possession of the bonds but they were by no means out of the woods. A whole series of complicated problems now faced them simultaneously. Any one of these could wreck the enterprise and ruin them.

First of all, there was more money to be raised. The line owed $280,000 in debts, which had to be paid immediately. Then there was the one hundred thousand dollar deposit to the bondholders. There was also the half-yearly dividend of $140,000 which could not be passed. The stock, if it could be purchased from Litchfield, would cost around half a million dollars. Finally, the railroad itself must be finished swiftly if the land grant was to be earned.

There was only one conceivable place to get this kind of financing and that was from the Bank of Montreal. Stephen was president and

could probably be lured away from the bank only on the promise of a sizable interest; and Kennedy’s subsequent involvement makes it clear that he was a substantial shareholder. It is reasonably certain that Kennedy was brought into the syndicate by Stephen at the time he convinced the Dutch committee to accept the offer.

Smith was a director and they were now proposing to borrow money personally from an institution under their care.

It did not look well; there would certainly be stockholders’ questions and newspaper comment, but there was no help for it.

Stephen wrote to Hill on February 10, 1878, that he and Kittson must pledge everything they owned – and he meant
everything –
in order to get a line of credit from the bank. He and Smith had already handed over “every transferable security of every kind we have got” in order to get the initial $280,000 to pay off the debts. Now it was all or nothing.

“The risks were very great,” Hill later recalled, “and in case of failure so great as to entirely ruin the entire party – financially; wipe out every dollar we owned in the world and leave us with an enormous debt if the enterprise failed.”

Kittson was almost sick with worry. To him, the scheme had always seemed wild; he had gone into it solely because he trusted Jim Hill. Now, if at any stage of the sensitive manoeuvres that were required something went wrong, he faced the poorhouse. He kept his participation a secret, lest his friends should talk him out of it. “An enormous risk at my time of life,” he told his friend ex-governor Sibley of Minnesota after it was over. “I did not dare tell you of it.” But in his old age, Norman Kittson, the one-time border trader, wealthy beyond his wildest visions, would be able to purchase and maintain one of the largest and finest racing stables on the continent.

Stephen’s next move was to go straight to Ottawa and negotiate with Mackenzie for a ten-year lease of the Pembina Branch so that the St. Paul road, when it reached the border, would have a connection to Winnipeg. This, too, was fraught with uncertainty. Smith’s name was already being mentioned as a major shareholder in the company and it was impossible for him in Parliament to maintain the fiction that he was disinterested. So unpopular was he with the Conservative opposition that Mackenzie, as we have seen, was flatly denying any meeting at all with the Stephen group.

Almost simultaneously a new problem arose. The Minnesota legislature passed a new law setting a series of deadlines for the construction of the railway. Two sections had to be completed by the end of the year, otherwise the land grants, franchises – everything – would be forfeited. Now it became doubly important to push the foreclosure suits. Hill was fearful that one of the twin companies might actually start making money. If that happened the new trustees
would be forced to give up their control over it, since it could pay the defaulted mortgage interest with the increased revenue; and then the St. Paul terminus, among other assets, would be lost and the value of the second company’s property would be reduced.

The partners were juggling several problems at once: they must lobby in Ottawa for the Canadian lease; they must raise funds to build the rest of the railway before the rapidly approaching deadline; they must haggle with Litchfield to try to get his stock in order to press foreclosure. Finally, they must fight off the rival Northern Pacific, which was now threatening to move in with its own line to the border and launch a railway war. It seemed an impossible task, especially in view of the precarious state of their finances. If either Litchfield or the rival railway knew how badly off they were, the game would be over. This is where Stephen’s control of the bank became so valuable: there would be no leaks from that source.

But there was not a million dollars available for the additional railway construction to the border. The only way to raise money was for the receiver, Farley, to get a court order permitting him to issue receiver’s debentures. Thirty-five miles of railway had to be built by August, 1878, from Melrose to Sauk Centre and another thirty-three by December (to Alexandria) in order to hold the land grant. Farley was persuaded by Hill to go to court, but the courts were dubious. There had been a great deal of profiteering in St. Paul railroad bonds. Once before Farley had been charged with raising money in this manner and had failed. There were two court hearings and a commission. The sessions were maddeningly slow. Every day counted but the hearings dragged on and on. The judge refused to issue the order. Hill himself went to see him and, using every persuasive power, managed to change his mind. The judge was impressed by Hill but even as he signed the order, he had his doubts: he said candidly that if the associates failed to carry it out, it would destroy them and ruin him.

From this point on the financing of the railway was left to Stephen while Hill moved in to build the line. It was almost a rehearsal for the future and grander project of the
CPR
, when again it was Stephen’s task to keep the money flowing while Hill’s protégé, Van Horne (who later became his deadly enemy), would drive the steel.

Hill had two months in which to lay track from Melrose to Sauk Centre. Though Farley was still technically general manager, it was Hill who took charge of construction. He had to find rails, ties, rolling stock and labourers in a hurry. The task took all his waking hours. At 10.30 p.m. his wife Mary would come to his office where he worked long after dark to take him home, but Hill would keep on working away and she would sit in a chair by the window and doze until he was ready to leave, rarely before 1 a.m. By the time the men and equipment were assembled, Hill realized that he would have to lay at least a mile of track a day to make the deadline. He took charge himself, fighting mosquitoes, sunstroke, rattlesnakes and dysentery, firing bosses on the spot if they could not maintain the mileage. When one crew rebelled at Hill’s methods and quit, he wired St. Paul for replacements, taking the precaution of paying the fares in advance and hiring the toughest navvies he could find to guard each car door to prevent the new workers from skipping out before they reached the end of track.

In the midst of this another crisis arose. The rejuvenated Northern Pacific, which for a brief time before its collapse in 1873 had controlled part of the St. Paul road, decided to move in, force it into bankruptcy and buy it cheap. The rival company still held some St. Paul stock, which meant it could harass and delay the foreclosure proceedings. But worse, it was threatening to build a line to the Canadian border parallelling the St. Paul line. That would be disastrous.

In the American midwest there is a particularly stubborn and obnoxious weed to which the early settlers gave the name of Jim Hill Mustard. It fitted. In his battle with the Northern Pacific, Hill showed his mettle. He met the rival company head-on – the first of a series of bold encounters which would, one day, see him best a Vanderbilt. Hill was convinced that the Northern Pacific was bluffing. It was his tactic to convince his rivals that he himself was not. The Northern Pacific was at the time using St. Paul tracks. Hill threatened to cancel the agreement immediately, raise the fees for running rights and boost the rent on the St. Paul terminal. More, he would start at once, he declared, to survey a line all the way to the Yellowstone River and would ask Congress for half of the land grant that had been promised the Northern Pacific as far west as the Rockies. In the face of this bluff – it could be nothing else – the rival railway knuckled under and an agreement was reached in November, the chief articles of which were that the Northern Pacific would withdraw from competition with the St. Paul and Pacific in return for certain running rights and terminal space in the Twin Cities. Hill had won his first corporate dogfight handily.

He met his first construction deadline with just twenty-four hours to spare and secured the vital land grant. He did not slacken his pace, for he had to finish the second stretch before December 1. The enemy was no longer the dysentery and sunstroke of the summer but the bone-chilling cold of the Minnesota prairies. Hill walked the line himself, stopping here and there to counsel one or other of the navvies – he knew them all by their first names – on the way to treat frostbite. On one memorable occasion he leaped from his private car, seized a shovel and began attacking the snow, spelling the workmen off one after another while they went inside for a dipper of hot coffee. He made his deadline well ahead of time and kept on going, for he wanted to get the full railway operating as swiftly as possible. The line would be useless until he completed the gap between Crookston and St. Vincent – across from Pembina at the Canadian border. On November 11, Hill had the satisfaction of seeing his first through locomotive arrive at Emerson, Manitoba.

Stephen meanwhile was having his own problems – a whole irritating series of them. The Senate had thrown out Mackenzie’s bill, making a straight lease of the Pembina Branch impossible. Mackenzie had, however, in August given the St. Paul line running rights on the Canadian road. Then the Government changed and, to add to the complications, the contractors still had legal possession of the line and were not about to give it up. Their rates were so exorbitant that they amounted to an embargo on all through rail traffic from St. Paul. In the House, Tupper used the difficulties with the contractors as an excuse to frustrate Mackenzie’s arrangement and make a new contract with Stephen. The St. Paul group could use the line only until the completion of the Canadian Pacific Railway. It was, at least, something. To speed up the transaction, Hill had one of his own men buy into the Pembina contract; but it was late spring, 1879, before the Canadian government finally got control of its own road.

Stephen’s second problem was the recalcitrant Litchfield. As long as he held the stock he could hamper the foreclosure proceedings and prevent the reorganization of the railroad company. To push matters along, the partners decided upon a squeeze play. They launched a legal suit against Litchfield to attach some of his property and that of his brother in Minnesota to recover money that had been furnished to complete the main line and that he had converted to his own use. “The more he is worried and annoyed the sooner are we likely to bring them to terms,” Stephen advised Hill. The financier remained stubborn. “We shall not be at peace or comfortable until we settle
with Litchfield,” Stephen said. In mid-January Stephen personally went to see “the old rat” in New York and managed to secure all the stock for a half million dollars. It was a considerable piece of negotiation. Stephen warned Hill to say nothing to anybody, not even to Litchfield’s lawyers, since “it is the old rascal’s idea to bring [them] to New York to
make
an
agree
^t
. They must not know or have an idea that we have made one already or all the fat would be in the fire. Old L. wants to cheat both of them and it is not our policy to interfere.” Stephen added that he had had “a terribly worrisome 4 or 5 days with the old fellow.”

But it was done; there could be no conflicts now between stockholders and bondholders since they were one and the same. The partners got their half million from the Bank of Montreal and moved for foreclosure. It was granted in March. In May, they formed a new company, the St. Paul, Minneapolis and Manitoba Railroad Company. In June, the new firm bought up all the property at the foreclosure sale. It is said that they paid $6,780,000 for it, not in cash but in receiver’s debentures and bonds. They floated a sixteen-million-dollar bond issue at once, some of which was used to pay back the Dutch. Immediately after the foreclosure sale they sold the greater part of the land grant for $13,068,887. Already they had realized an incredible profit. It was only a matter of deciding how much stock to create and that took some time and care. Years later, Smith remembered that Hill’s ideas were so big in this direction “as to cause me, a man of moderation, considerable perturbation.”

Hill wanted to create fifteen million dollars worth of stock.

“Aren’t you afraid that the capitalization will startle the public?” Smith ventured. “Isn’t there some danger that we will be charged with watering the stock?”

“Well,” Hill replied, “we have let the whole lake in already.”

When the stock was issued, each of the original partners received 57,646 shares. Within three years, each share was worth $140, which meant that each partner had made a clear capital gain of more than eight millions. At that point – 1882 – the partners issued another two million dollars worth of stock to themselves and then, in 1883, they issued to themselves ten million dollars worth of six per cent bonds for one million dollars – an additional profit of nine millions. Yet at the time the railroad was still sneered at as “Hill’s Folly.” The attorneys who worked out the corporate structure were offered a fee of twenty-five thousand dollars in cash or half a million in stock. If
they had taken the stock and held it for thirty years, they would have had in principal and interest something close to thirty millions.