System-Building in the 1880s

As the decade of the 1880s opened, Jay Gould was embarked on a venture in railroad combination that dwarfed his attempt of more than a decade earlier to expand the Erie. This enterprise was the outcome of his success in 1874 in obtaining the Union Pacific, the road which, with the Central Pacific, formed the first transcontinental railroad. The depression that began in the fall of 1873 had weakened the Union Pacific’s financial condition. Its stock was selling at a very low price. Sniffing a speculation, Gould began to buy. By the spring of 1874 he had control. At first, Gould concentrated on reorganizing the Union Pacific’s finances and manage- ment.38 During this time he became increasingly dissatisfied with the three roads which carried the Union Pacific’s traffic eastward, and which at that time formed the Iowa Pool. To improve his eastern connections, he purchased stock in two of these three roads, the Northwestern and the Rock Island. Once on their boards, he attempted in March 1877 to work out with them and the Burlington, an agreement which included joint ownership of the Burlington and Missouri in Nebraska. Perkins made a strong stand against the proposal, causing its rejection. Perkins had Gould in mind when he urged on Forbes a change in strategy in 1878. Unable to assure himself of eastern connections, Gould then turned, as he had done in the east in 1869, and as Perkins had anticipated, to building a system of his own.

Moving swiftly and relying on his expert skill as a stock market trader, Gould soon put together a system that was for a short time far more extensive than the Pennsylvania.30 The details of Gould’s most intricate campaigns provide a fascinating inside view of speculative techniques. They were so complex that a biography of Gould devotes eleven chapters to the process. All that needs to be said here is that by 1881 Gould controlled the Kansas Pacific, the Missouri Pacific, the Missouri, Kansas & Texas, the Wabash, the Lackawanna, the Central of New Jersey, and the New York and New England, and once again the Erie. The railroad empire he controlled was the largest in the nation. It reached Boston, New York, Toledo, Chicago, St. Louis, Kansas City, Omaha, and Denver. Gould next began a quest for more connections to the southwest. By 1882 he had lines into Fort Worth, Dallas, El Paso, Laredo, Galveston, and New Orleans. He soon owned a total of 15,854 miles of roads, or 15 percent of the nation’s mileage.40

But his control proved tenuous and short-lived. He made no attempt to coordinate, integrate, or efficiently administer the activities of his various properties. Some of his roads actually did not connect with the others, so shipments of system-generated through freight were hampered. Nor did his system, particularly in the east, run over the more favorable transportation routes. His was a speculative not an operating business enterprise.

So the Gould empire fell as quickly as it rose.41 By 1882 he had pulled out of the Union Pacific, using the proceeds to build up the newly acquired network south and west of St. Louis. By 1884 the serious business recession and plummeting prices of securities forced him to dispose of most of his eastern lines. From the mid-i88os on, Gould concentrated on building a regional system in the southwest. There by 1890 the Gould system included the Missouri Pacific, the smaller Texas & Pacific, the St. Louis Southwestern, and the International and Great Northern.

Short-lived as his empire was, it had a lasting impact on American rail- road history. His rapid purchases, his moves into territorial domains of other lines, his delight in breaking rate or freight allocation agreements forced the directors of the major roads in the west and William Vanderbilt in the east to embark on a strategy of system-building.

Gould’s moves in the trunk line territory, in the anthracite coal region, and in New England, as well as his deliberate sabotage of Fink’s Eastern Trunk Line Association, finally goaded William Vanderbilt into taking the offensive. Vanderbilt now fully agreed with his career managers, Henry B. Ledyard of the Michigan Central, John Newall of the Lake Shore, and James H.Rutter of the New York Central, that they must have a self-sustaining system of their own. The Vanderbilt group turned first to the southwest, obtaining their own routes into Indianapolis, the Ohio River cities, and St. Louis. First they secretly obtained control of the Bee Line, hitherto an Erie connection from Cleveland to Columbus and Indianapolis. Since that road controlled only 50 percent of the dominant stock of the line connecting Indianapolis to St. Louis, Vanderbilt and his associates persuaded the Pennsylvania to sell him the remaining 50 percent. At the same time, to forestall Gould’s drive into the anthracite region, Vanderbilt secured a large though not controlling amount of stock in the Reading and built a costly connection between that road and the New York Central.

In 1882 Vanderbilt made another move which was also instigated by the actions of competitors. This was the purchase of the New York, Chicago and St. Louis, a new road which had just opened, paralleling the Lake Shore from Buffalo to Chicago.42 The experienced speculators— Calvin Brice, George I. Seney, and Samuel Thomas—had built the road, which went by the name of the Nickel Plate, to sell either to Vanderbilt or to Gould. Again, Vanderbilt felt forced to buy before Gould did, in order to maintain railroad peace. In that same year he bought out minority stockholders of the Canada Southern and integrated that road into the Michigan Central’s administrative structure.

Then in May 1883 Vanderbilt retired. His operating managers became presidents of their roads and his two sons, Cornelius and William K., divided the chairmanship of the several boards between them.43 The elder Vanderbilt, however, kept a close watch on the affairs of his companies until his death in December 1885. After 1883, the expansion of the Van- derbilt system continued on an ad hoc basis as its managers and financiers responded to changing competitive conditions in 1885.44 In 1885 the Vanderbilts agreed, at the urging of J. p. Morgan, to buy the West Shore, a road that had been built to parallel the New York Central. The purchase was part of the peace treaty Morgan had engineered between the Central and the Pennsylvania by which the Pennsylvania in its turn purchased the partially built South Pennsylvania. At the end of the decade, the Vanderbilt group, aided by Morgan, obtained a large block of stock in the Cleveland, Cincinnati, Chicago & St. Louis, the road known as the Big Four. They then incorporated the Bee Line legally and administratively into the Big Four. During the 1890s the Vanderbilts increased their stock ownership in the Big Four and in the Chicago and Northwestern. However, they did not acquire complete control of the Boston & Albany until the 1900s or of the Big Four until the 1930s, while the Chicago and Northwestern never became more than a loyal ally.

Even after Gould had convinced Vanderbilt of the need for a self-sustaining system, neither William H., his sons, or their managers ever outlined a precise strategy of expansion comparable to that of Thomson’s for the Pennsylvania in 1869. Expansion continued to be more of an ad hoc response to current competitive pressures than the result of specific long- term planning. Nor was the completion of the Erie’s system—the fourth eastern trunk line—more carefully planned.45 On the other hand, the heads of western roads moved more deliberately. In nearly all cases the more aggressive young professional managers became their presidents. They defined and implemented the strategic expansion of their roads. Only on the Chicago & Alton did the restraining hands of financiers, particularly its president, T. B. Blackstone, effectively limit expansion. In carrying out their strategies, these career managers were soon responding to each other’s moves more than those of Gould or other speculators.

On the Burlington, Perkins, who had written Forbes that “Gould moves so rapidly that it is impossible to keep up with him with Boards of Directors,” was given a relatively free hand.46 Perkins first merged the Burlington and Missouri in Nebraska with the parent line. He then pur- chased control of an essential, if indirect, connection with Council Bluffs and Kansas City at a cost that must have shocked many a Boston stock- holder.47 In 1882, in retaliation for Gould’s move into Iowa, Perkins built his own line to Denver, paralleling that of the Union Pacific (and also that of the Rock Island). In the next year he regained full control of the Hannibal and St. Joseph and, during this time, continued to build into Wyoming, Montana, Colorado, and Nebraska. Finally, in 1885 he financed and had built a road into St. Paul. The Burlington, which operated a little over 600 miles in 1870 and was administering 2,772 miles by early 1881, operated close to 5,000 miles by 1887.

The Burlington’s experience was repeated on the other major roads operating to the north and west of Chicago.48 The president of the Chicago, Milwaukee & St. Paul, who was a local Milwaukeean, tended to be sympathetic to the plans of the general manager, Shelburne s. Merrill, and the assistant general manager, Roswell Miller, who defined and pushed through the strategy of expansion. The Milwaukee, for example, reacted to Perkins’ decision to build into St. Paul by constructing its own line through Burlington territory to Kansas City. Even before Miller, who became president in 1887, completed that expansion, the road had become an interterritorial system operating more than 5,000 miles of track. After 1882, when the general manager Ransom R. Cable replaced Riddle as the Rock Island president, that road grew rapidly to become a large integrated system that ranged from Chicago to Kansas City, Denver, and Fort Worth.49 At the Chicago & Northwestern, Marvin Hughett, the senior career manager, was able to convince conservative president Henry Keep of the necessity to expand.50 Although more cautious than his rival, Hughett, who soon became the road’s president, expanded its mileage from under 1,000 miles in 1880 to close to 5,000 miles in 1885. Once Gould had begun to build his western railroad empire, in the words of Gould’s biographer, “each road suddenly realized that a policy of aggressive invasion was the only safe defense.”51

In precisely the same short stretch of years, similar strategies led to the formation of similar systems in the sparsely settled far west, the more populous old south and urban New England. Everywhere, railroad men gave up their faith in informal alliances, lost hope in the effectiveness of more formal federations, and turned to winning their own “self-sustaining,” interterritorial systems. The managers, assisted by the speculators, had won the day. Regional variations, reflecting economic and historical differences, had relatively little effect on the overall pattern of systembuilding.

The history of the transcontinentals is instructive. Except for the Northern Pacific, no road was initially planned to be managed by a single enterprise operating between the Mississippi Valley and the Pacific Coast. During the decade of the 1880s, however, these roads decided, usually against the better judgment of their major investors, to have their own lines from the interior to the ocean. Under Gould, the Union Pacific had added nearly 1,250 miles of new lines. His successor, Charles Francis Adams, Jr., a conservative representative of Boston investors, was soon convinced by his managers that there was no alternative to responding to Gould’s continuing activities in the southwest, and those of Perkins and the other roads in the midwest, except to build a system of his own. Adams purchased and constructed almost twice as much mileage as had his predecessors to protect his eastern flank from Perkins and his southwest flank first from Gould and then from Collis P. Huntington’s Southern Pacific.52 Unable to obtain control of the Central Pacific, his company’s original outlet to the Pacific Coast, Adams felt forced to build the Oregon Short Line to the northeast to connect with Henry Villard’s Oregon Railway and Navigation Company. (Its construction, in turn, caused the Burlington to build a line to Billings, Montana.) The resulting through trackage and traffic agreements gave Adams an alternative outlet to the coast. Nevertheless, the Union Pacific quickly found these agreements uncertain and unsatisfactory. So in 1889 Adams, working with Greenville M. Dodge, obtained control of the Oregon Railway and Navigation Company by a skillful Wall Street maneuver that assured his system its own tracks to the Pacific.

To the south the Santa Fe, through a series of defensive moves, became by 1887 the largest railroad system in the world.53 In 1880, the Santa Fe had reached its original goal by completing its line to Albuquerque, New Mexico. It then built an extension from Albuquerque to the Southern Pacific at Deming, New Mexico. At that time, Huntington’s Southern Pacific had no ambitions outside of California. Huntington’s strategy was still a territorial one. “Its two objectives were to secure and maintain its control of California business,” Robert Riegel has noted, “and to monopo- lize the transcontinental entrances to the state.”54

But neither Huntington nor William B. Strong, the new president of the Santa Fe, was satisfied to rely wholly on one another for connections. Strong, who had worked up the managerial ladder on the Burlington before going to the Santa Fe as vice president and general manager in 1877, was able to convince his Boston-based directors that their road must have an alternative route west. They agreed to purchase a half interest in a second road planned to connect Albuquerque to the coast. Early in 1882 Huntington joined forces with Gould to buy most of the other half of the stock in this second road. The Santa Fe temporarily retreated by agreeing that its new road west from Albuquerque would go no further than the Colorado River, where it could connect with the Southern Pacific. Meanwhile Huntington, even more reluctant to rely on Gould for connections to the Gulf, started to construct and purchase his own lines to the growing Texas cities and to New Orleans. At the same time, he obtained steamship lines operating out of the Gulf ports. In 1884 Huntington and his associates combined all these rail and steamship lines into a single system headed by a holding and operating concern, the Southern Pacific Company of Kentucky.

In that same year, Strong persuaded the directors of the Santa Fe that they must have their own line to the Pacific coast. After obtaining full control of the road from Albuquerque to the Colorado River, Strong purchased lines from the Southern Pacific which, after some additional building, provided the Santa Fe its own route into Los Angeles and San Diego. Next, Strong decided that he could not rely on Huntington or Gould for connections to the southwest, so in 1886 he purchased a route into Fort Worth and Galveston. Finally, in 1886, the Santa Fe’s president decided to build his own road from Kansas City to Chicago.55 By 1888 the Santa Fe was operating a system of over 8,000 miles and was on the brink of financial bankruptcy.

To the north of the Union Pacific the story was much the same. At first James J. Hill’s Manitoba Railroad had no transcontinental ambitions. Until 1883 it was satisfied to serve the wheat region of the Red River Valley of the north and to rely on the government-subsidized Canadian Pacific to carry its traffic westward. It began to build across the Rockies to the Pacific only after the Canadian Pacific began to move eastward to become an all-Canada transcontinental.56 That same year, financier Henry Villard completed the Northern Pacific. Villard had obtained control of the Northern Pacific in 1881 in order to assure that his Oregon Railway and Navigation Company had an outlet to the east. From that time until the rounding-out of the two systems, the location and timing of construction and purchases reflected the interaction of the strategy and tactics of Hill, the experienced railroad entrepreneur and manager, and Villard, the able financier. When the systems neared completion in the early 1890s Hill had by far the superior system.

System-building in the south followed the pattern of that in the west. Light local traffic intensified the pressure to maintain through traffic by building and buying. Although maintaining territorial strategies, the southern roads were more aggressive than those in the north and even the midwest in assuring control over their feeders and connections. And those roads headed by career managers were the most aggressive. By 1880 con- temporaries were already able to identify seven leading roads in the south—the Danville, the East Tennessee, the Central of Georgia, the Norfolk & Western, the Louisville & Nashville, the Savannah, the Florida and Western (which was controlled and operated by Henry Plant), and the southern extension of the Illinois Central.57 Of these seven roads five had career men for presidents. These included the Louisville & Nashville, which grew first under the guidance of Albert Fink and then under that of his protégé Homer Smith; the Plant road, which would become the Atlantic Coast Line; the Central of Georgia, under William Wadley; the Norfolk & Western, under Frederick J. Kimball; and the Illinois Central, under William K. Ackerman and then James C. Clarke. Except for the Central of Georgia these roads became by 1900 major southern systems.

In the south a group of speculators including Calvin Brice, George O. Seney, John Inman, and William P. Clyde played the same role that Gould had played in the west. Working together, but sometimes at cross purposes, they used the Richmond and West Point Terminal and Warehouse Company in the mid-1880s to combine the Danville, the East Tennessee, and then the Central of Georgia into a single system. The Richmond Terminal ended in a spectacular bankruptcy, but its formation spurred its neighbors to build their interterritorial systems, connecting major cities in the south. After a thoroughgoing legal, financial, and administrative reorganization by J. P. Morgan & Company, the Richmond Terminal emerged as the Southern Railroad Company. The other systems, by developing close connections with the leading investment bankers, including Kuhn, Loeb; E. W. Clark; August Belmont; and Morton, Bliss remained financially sound. Of the new southern systems the Norfolk & Western was the least affected by the actions of the Richmond Terminal.

In building its empire, its president was responding more to the actions and counteractions of other coal carrying roads, particularly the road’s chief  rival, Collis P. Huntington’s Chesapeake & Ohio. System-building in New England during the 1880s differed from that in the south in that heavy local traffic made through freight less important for financial solvency and so lessened the pressure to expand by buying and building. By the end of the 1870s the four centrally located lines— the Boston & Albany, the Boston & Maine, the New York, New Haven & Hartford, and the New York & New England—were carrying more traffic but still not operating much more mileage than the Vermont Central, the Fitchburg and its ally, the Boston, Hoosac Tunnel & Western, the Eastern, the Old Colony, the New York, Providence & Boston, and other major roads. By 1893, however, two roads, the New Haven and the Boston & Maine, had come to dominate completely the New England railroad network.

Consolidation came in the following manner.50 In central New England the Boston & Albany was formed in 1869 as a consolidation with the Boston & Worcester and the Western. It remained closely allied to the New York Central, but was not formally leased by the Central until 1900. In northern New England the Boston & Maine fell into the hands of speculators who, by the end of the decade, had legally and financially consolidated but not administratively unified most of the roads in that area. To the south the speculative New York & New England controlled first by Gould, Sage, and Sidney Dillon, and later by Jabez A. Bostwick., a former Standard Oil partner, constantly threatened the traffic of the New Haven. This challenge permitted a career manager, Charles P. Clark, to convince his directors to make the New Haven into the leading road between New York and Boston.

System-building in New England came to a climax in the early 1890s when A. A. McLeod of the Reading decided to make his coal road into a major interterritorial system. He purchased both the Boston & Maine in the north and the New York & New England in the south at prices which delighted the speculators who then controlled them. These purchases, however, helped to bankrupt the Reading which was then reorganized by J.P.Morgan. Morgan, in March of 1893, brought together Clark of the New Haven and the financial men who had obtained control of the Boston & Maine. As Edward C. Kirkland has pointed out, they “divided New England between them; the route of the Boston and Albany became a sort of Mason and Dixon Line.”60

This briefest of reviews of system-building by American railroads cannot possibly suggest the vast complexities or the constant drama involved.

It can only indicate what systems were built in the 1880s and the men who built them. An appreciation of the conflicting personalities, goals, and strategies that determined precisely where and when a system grew can only come from a reading of the works of Grodinsky, Overton, Riegel, Stover, Klein, Lambie, Kirkland, Martin, and others. Yet from a careful review of these works, a number of important generalizations can be drawn. First, and most significant, the large enterprises that were to operate the American railroad network throughout the twentieth century took their modern form in the 1880s. They appeared after the senior executives of railroads in all parts of the country shifted almost simultaneously from a territorial or regional strategy to an interterritorial one in order to obtain self-sustaining systems. By the coming of the depression of the 1890s, the railroad map of the United States had taken the form that would remain relatively unchanged until the railroads began to become technologically obsolete in the years after World War II. The largest systems in 1893 were practically the same as those in 1906 and 1917 (See tables 3 and 4 and Appendix B). Later attempts to build or even to redefine systems were few and rarely successful.

Second, the roads that built the new systems were in nearly all cases the first large roads to be constructed in their regions. Their managerial hierarchies became the “core” to which other large operating enterprises were added through purchase, lease, or construction. By 1893 the managers of these new megacorps had become responsible for the management of most of the American railroad network. By that date the thirty-three railroad corporations with a capitalization of $100 million or more operated 69 percent of the railroad mileage in the United States. In addition, their managers coordinated and scheduled the flows of smaller connecting systems.

Third, salaried career executives played a critical role in the system- building of the 1880s. The managers, far more than the speculators and investors, defined strategic plans and directed tactical maneuvers. The strongest of the American railroad systems were those created by such managers as Thomson, Perkins, Cable, Miller, Merrill, Hughett, Ackerman, James Clarke, Strong, Fink, Smith, Plant, Kimball, Charles Clark, and the career presidents of the Vanderbilt roads—Ledyard, Newell, Rutter, and Depew. And the large capitalists or their representatives who helped to create successful systems, such men as William Vanderbilt, Garrett, Hutington, Hill, and Charles Francis Adams, were experienced railroaders. Among such financiers only Villard had no training in railroad operations. On the other hand, those lines controlled largely by  speculators—such as the Erie, the Wabash, the Missouri Pacific, the Richmond Terminal, and the Boston & Maine—suffered financially and managerially from their early exploitation.

In building their systems the successful managers used the speculators to obtain the support of reluctant investors to spend the funds needed for system-building. To complete their systems they soon developed alliances with investment banking firms like J. P. Morgan-, Kuhn, Loeb; August Belmont; and Speyer & Company in New York; Kidder, Peabody & Com- pany and Lee, Higginson & Company in Boston; and Drexel & Company and E. W. Clark in Philadelphia. Only those specialized banking enterprises had the facilities and the connections to attract the huge sums of capital needed. By the early 1890s the local investors and even individual capitalists rarely had a say in railroad affairs. The Vanderbilts and Villard, for example, turned over investment decisions on their roads to J. P. Morgan & Company. It was the local investors and more distant capitalists who had initially financed the roads who paid a substantial part of the cost of the overbuilding in the 1880s. In subsequent reorganizations the value of their shares was usually greatly reduced and too often completely obliterated.

The managers overcame the opposition of the investors to expansion partly because they were on the spot. They had the time, the information, and, above all, the long-term commitment to the road in a way that was often not true of the investors and their representatives on the board. They had much more to gain by expansion. They were willing to risk bankruptcy to assure the continuing, long- run flow of traffic across their tracks. Even if the investors lost their investment, the managers had their system. Once the moves of the speculators helped to emphasize the futility of depending on cooperation to assure continuing traffic and dividends, and once the pools had demonstrably failed, the investors had little choice but to delegate the making of strategy and its execution to their managers.

In building their systems the managers based their strategic planning far more on the moves of their rivals than on any careful estimate of the de- mand for transportation. In short-term pricing, as well as long-term in- vestment decisions, the railroad managers were the first to face the realities of modern oligopolistic competition. For them the actions of a small number of competitors were of more concern than market demand. When the managers were unable to control oligopolistic pricing through means of formal associations, they decided to become as self-sufficient as possible. This new strategy, in turn, led to an even more costly competition in building and buying capital facilities. For many roads the drive to self- sufficiency led to bankruptcy. However, except for one or two at the top, the managers did not lose out. Their organizations remained intact.

The major difference was that they now had to share their most critical decisions with the investment bankers who supplied the funds necessary to build the systems.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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