It was therefore in the years immediately after 1893 that the investment bankers came to play their most influential role in American railroading. During the 1880s, 75,000 miles of track had been laid down in the United States, by far the greatest amount of railroad mileage ever built in any decade in any part of the world.61 And between 1894 and 1898 foreclosure sales alone aggregated over 40,000 miles of track, with a capitalization of over $2.5 billion, the most massive set of receiverships in American history. Only the leading American investment bankers had the financial resources to reorganize bankrupt or otherwise weakened roads. J. P. Morgan had already reorganized the Reading in 1886, the Baltimore & Ohio and the Chesapeake & Ohio in 1888. After 1893 his firm refinanced the Santa Fe, the Erie, the Northern Pacific, the Richmond Terminal (which became the Southern), and once again the Reading.62 Other leading investment bankers accomplished similar reorganizations, though on a smaller scale than did the colossus of 23 Wall Street.
For a short period before 1893 Morgan and other bankers hoped, as had investors and financiers before them, that a policy of cooperation might prevent the continuing high costs of system-building. They looked for help from the provisions of the new Interstate Commerce Act that called for “just and reasonable rates” and prohibited temporary, shortlived rate changes.68 The Eastern Trunk Line and the Southern Railway and Steamship Association drew up new agreements to use these provisions to assist in the enforcement of rates and even to allocate traffic.64 When the Southwestern Association failed to do the same, Morgan brought the presidents or general managers of the leading western roads and representatives of leading banks to a series of meetings in New York. At these meetings a new Western Association was formed; this association agreed to follow the lead of the other associations. At that same time Mor- gan emphasized his determination to discipline competitive construction as well as competitive ratemaking. He told the group that his firm and the other banking houses represented at the meetings were “prepared to say that they will not negotiate, and will do all in their power to prevent negotiation of any securities for the construction of parallel lines, or the extension of lines not unanimously approved by the Executive Committee [of the association].”65
But Morgan’s hopes were in vain. Strong systems such as the Burlington and Illinois Central failed to join the new Western association and the Southern Pacific soon moved out.66 So too did the largest of the Gould roads—the Missouri Pacific and the Wabash. In the east, the Trunk Line Association helped to maintain rates briefly from 1891 to the onslaught of the 1893 depression. Then they were sharply cut in all parts of the country. The cartels once again disintegrated.67 At the same time, court decisions weakened the Interstate Commerce Commission’s authority and so made it less useful in maintaining rates. Then in March 1897 the Supreme Court found the Trans-Missouri Freight Rate Association (a constituent part of the Western Traffic Association) in violation of the Sherman Act for attempted rate fixing.68 With this decision the regional associations still in operation quietly went out of existence. The Court’s ruling thus brought to a final and complete end the great interfirm federations set up by Albert Fink more than twenty years earlier.
Well before the announcement of the decision, Morgan and the other bankers had become fully convinced of the futility of relying on cooper- ation to control competition, even with government support. By 1893 they accepted the logic of consolidation. Their role in the reorganizations of the depression years gave them the opportunity to rationalize the boundaries, as well as the financial and administrative organizations, of many existing systems. Then as the country pulled out of the depression, the bankers encouraged still further consolidation. The Interstate Commerce Commission reported that between July 1899 and December 1900 over 25,000 miles of track, equivalent to one-eighth of the total mileage of the United States, were “brought in one way and another under control of other lines.”69 A few new but relatively small systems appeared including the Seaboard Air Line, the Cincinnati, Hamilton & Dayton, and the Colorado & Southern, but the great majority of the mileage was added to long-established “core” enterprises.
The final railroad merger movement, therefore, did little to alter the structure of the industry. The number of railroads in the United States with capitalization of over $100 million remained almost the same as in 1893. The thirty-two roads, however, now operated close to 80 percent of the nation’s railroad mileage (see table 4). Except for a few midwestern roads, all these systems connected the seaboard and the interior. And most of those that did not had firm alliances with those that did. After 1900 the major changes in the boundaries of American railroad systems came when those interior systems moved to get their own outlets to the seaboard. The later unhappy, often speculative, financial histories of the Rock Island, the Alton, the Cincinnati, Hamilton & Dayton, the Wabash, the St. Paul, and Missouri Pacific were closely tied to their efforts to obtain coastal connections, for these moves exposed them to exploitation by prominent Wall Street speculators.
To tighten control over rate-cutting and competitive construction, the bankers and managers in the top management of the leading systems de- veloped in the years immediately following the depression what they de- scribed as “community of interests” between systems operating in the same areas. This they accomplished by having one system buy stock in neighboring ones, much as the earlier roads had cemented alliances with their major connecting lines.70 In the east one of the first and certainly the most important of such arrangements was a secret contract negotiated at the end of 1899 between the Pennsylvania and the New York Central systems. By this agreement the Pennsylvania made “substantial invest- ments” in the Baltimore & Ohio, the Chesapeake & Ohio, and the Norfolk & Western. The Baltimore & Ohio then bought into the Reading. At the same time, the New York Central purchased stock of the Lehigh Valley, the Erie, the Lackawanna, as well as the Reading, and through the Reading obtained an interest in the Central of New Jersey. These moves were guided in part by the house of Morgan, which was still the dominant influence on the Central’s board and the reorganizer of several of the companies involved in these stock transfers. In the south, too, Morgan used his influence to have the Atlantic Coastline purchase 51 percent of the Louisville & Nashville, which in turn jointly owned the Georgia and a road from Louisville to Chicago. In the west, the speculator William H. Moore and his brother James arranged for the interlocking stock purchases of the Rock Island, the Alton, the St. Louis, the Santa Fe, and some smaller roads.
Edward C. Harriman, with the aid of the banking house of Kuhn, Loeb, and James J. Hill, with the backing of J. P. Morgan, were the major architects of the intersystem alliances in transcontinental territory.71 Harriman, who had long held a large block of stock in the Illinois Central, became in 1898 chairman of the executive committee of the Union Pacific’s Board after that road’s financial reorganization by his banking house and that of Kuhn, Loeb & Company. In 1901, after Huntington’s death, Harriman bought 46 percent of the stock of the Southern Pacific. A few months earlier he tried to convince Perkins and the board of the Burlington to sell him control of that road. In May 1901, however, Hill, who had built the Great Northern and refinanced the Northern Pacific, purchased the Burlington. Half its stock was turned over to the Great Northern, the other half to the Northern Pacific. Then Harriman made a concerted effort to get control of the Northern Pacific and with it half the stock of the Burlington. The result of this conflict was the formation of the Northern Securities Company, which held the stock of Great Northern and the Northern Pacific, whose stock was in turn held by both Harri- man and Hill. When the Supreme Court ruled in 1904 that that holding company violated the Sherman Act, the company was dissolved. The Hill interests continued to control the Burlington as well as the Great Northern and Northern Pacific and the Harriman interests the Union Pacific, Southern Pacific and Illinois Central.
The purposes of these stock deals was not to create supersystems. Only Harriman built any sort of organization apparatus to supervise his two major systems, the Southern Pacific and the Union Pacific. Rather, they were meant to help control rate-cutting and to prevent further competitive construction. As a result of the consolidations and the development of these community interests, two-thirds of the nation’s mileage was operated in 1906 under the surveillance of seven groups: the Vanderbilt roads including the Chicago & Northwestern (22,000 miles); the Pennsylvania group including the B. & o. and the c. & o. (20,000 miles); the Morgan roads including the Erie, as well as the Southern and the Atlantic Coast Lines, but not as yet the New Haven (25,000 miles); the Gould roads including the Wabash, the Missouri & Pacific, the Denver & Rio Grande, and others in the southwest (17,000 miles); Moore’s Rock Island group which also included the Santa Fe (25,000 miles); the Hill roads (22,000 miles); and the Harriman lines (25,000 miles) The systems not included in these groups were the two in New England and several, largely in the midwest, which remained quite dependent on others for through traffic. Well before the passage of the Hepburn Act strengthened the powers of the Interstate Commerce Commission, consolidation of administrative and financial control had practically eliminated rate and building competition between major railroads.
Since the bankers and managers had found a solution to such competi- tion through financial and administrative arrangements, they no longer pressed as they had in the 1880s to legalize pooling and to have the gov- ernment help in maintaining agreed-upon rate structures. However, they still felt the pressure from large shippers who demanded special rate re- ductions. So the railroad men supported the campaign of Robert M. La Follette and other Progressives to eliminate rebates as enacted in the Elkins Act of 1903.7:1 On the other hand, railroad men had little enthusiasm for increasing the power of the Interstate Commerce Commission. In 1905 they mounted a massive publicity campaign against regulation. At the hearings in that same year on a bill to give the commission power to fix rates, twenty-one representatives of major systems and four other spokesmen for the railroads testified.74 Of these twenty-four, only one, A. B. Stickney of the Chicago & Northwestern, favored the proposal.
None of the others saw any advantages in the bill to their roads in particular or to the railroad network in general. Nor were they much more enthusiastic for the more moderate Hepburn Act that Theodore Roosevelt pushed through Congress in the following session. Indeed Roosevelt had to use his great political skill to steer the bill past the opposition of a large block of senators who had the support of much of the American business community as well as its railroad leaders.75
The completion of the consolidated systems, the building of communi-ties of interest, and the passage of the Hepburn Act, marked the end of an era. Construction and purchases continued, but largely to fill out existing systems, or to provide those without them connections to the seaboard. Ratemaking became as much a political process as an economic one. It involved increasingly routinized negotiations between the roads, two or more sets of shippers, and the commission. Once the boundaries of the systems became defined and their operations became relatively routine, the need for formulating grand strategy disappeared. Railroad managers concentrated on maintaining their systems and coordinating the ever- increasing flow of traffic across their lines.
For American railroad executives the answer to competition for through traffic between a small number of large, heavily capitalized enterprises was thus the building of self-sustaining systems. It was the response to competition and not the needs or opportunities to reduce costs through administrative coordination that led to the internalizing of activities and transactions of the already large, bureaucratic enterprises within a single giant megacorp. If the federal government had sanctioned pooling, the response might have been different. Although railroad men had lobbied for such legislation in the 1870s and 1880s, they and the investment bankers as well had, by the 1890s, come to agree on the futility of controlling competition through cartels even if those associations were supported and regulated by a government commission. After 1893 very few railroad men considered government regulation a more practical method than system- building for controlling competition.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.