As befits a nineteenth century institution, the railroad dates
from 1801. In that year Benjamin Outram built in the suburbs of
London a short line of horse railroad--or tramroad, as it was
named in honor of the inventor. Other works of the same kind
followed in almost every succeeding year. They were recognized as
a decided convenience, but nothing more. It was hard to imagine
that a revolution in the world's transportation methods could
grow out of this beginning. Least of all could such a result be
foreseen in England, whose admirable canal system seemed likely
to defy competition for centuries to come. And yet, curiously
enough, it was a man wholly identified with canal business who
first foresaw the future importance of the railroad. The Duke of
Bridgewater had built canals when they were regarded as a hazardous
speculation; but they proved a success, and in the early years
of the century he was reaping a rich reward for his foresight.
One of his fellow-shareholders took occasion to congratulate the
Duke on the fact that their property was now the surest monopoly
in the land, and was startled by the reply, "I see mischief in
these--tramroads." The prophecy is all the more striking as coming
from an enemy. Like Balaam, the Duke of Bridgewater had a pecuniary
interest in cursing, but was so good a prophet that he had to tell
the truth in spite of himself, even though his curse was thereby
turned into a blessing.
It is hardly necessary to tell in detail how this prediction
was realized. Thanks to the skill and perseverance of George
Stephenson, the difficulties in the use of steam as a mode of
propulsion were rapidly overcome. What was a doubtful experiment
as late as 1815 had become an accomplished fact in 1830. The
successful working of the Liverpool & Manchester Railway gave an
impulse to similar enterprises all over the world. In 1835 there
were 1,600 miles of railroad in operation--more than half of it in
the United States. In 1845 the length of the world's railroads had
increased to more than 10,000 miles; in 1855 it was 41,000 miles;
in 1865, 90,000; in 1875, 185,000; in 1885, over 300,000.
There were perhaps a few men who foresaw this growth; there were
almost none who foresaw the changes in organization and business
methods with which it was attended. People at first thought of the
railroad as merely an improved highway, which should charge tolls
like a turnpike or canal, and on which the public should run cars
of its own, independent of the railroad company itself. In many
cases, especially in England, long sheets of tolls were published,
based on the model of canal charters, and naming rates under which
the use of the road-bed should be free to all. This plan soon
proved impracticable. If independent owners tried to run trains
over the same line, it involved a danger of collision and a loss
of economy. The former evil could perhaps be avoided; the latter
could not. The advantages of unity of management were so great that
a road running its own trains could do a much larger business at
lower rates than if ownership and carriage were kept separate. The
old plan was as impracticable as it would be for a manufacturing
company to own the buildings and engines, while each workman owned
the particular piece of machinery which he handled. Almost all the
technical advantages of the new methods would be lost for lack of
system. The railroad company, to serve the public well, could not
remain in the position of a turnpike or canal company, but must
itself do the work of carriage.
This was not all. The same economy which resulted from the union
of road and rolling-stock under one management was still further
subserved by the consolidation of connecting lines. This change
did not come about so suddenly as the other. Half a century had
elapsed before it was fully carried out. At first there was no need
of it. The early railroads were chiefly built for local traffic,
and especially for the carriage of local passengers. They were
like the horse railroads of the present day in the simplicity
of their organization and the shortness of their lines. England
in 1847 had chartered 700 companies, with an average authorized
length of hardly fifteen miles each. The line from Albany to
Buffalo and Niagara Falls was in the hands of a dozen independent
concerns. These were but types of what existed all over the world.
As through traffic, and especially through freight traffic, grew
in importance, this state of things became intolerable. Frequent
transshipment was at once an expense to the railroad and a burden
to the public. Even when this could be avoided, there was a
multiplication of offices and a loss of responsibility. The system
of ownership and management had to adapt itself to the technical
necessities of the business. The change was not the result of
legislation; nor was it, except in a limited sense, the work of men
like Vanderbilt or Scott. It occurred in all parts of the world
at about the same time. It was the result of business necessity,
strong enough to shape legislation, and to find administrative
leaders who could meet its demands.
From the very first there were some men who felt the importance
of the railroads as national lines of communication. The idea was
present in the minds of the projectors of the Baltimore & Ohio, of
the Erie, and of the Boston & Albany. But it was not until 1850
that it became a controlling one; nor was it universally accepted
even then. As late as 1858 we find that there was a violent popular
agitation in the State of New York to prohibit the New York Central
from carrying freight in competition with the Erie Canal. It was
gravely urged that the railroad had no business to compete with the
canal; that the latter had a natural right to the through traffic
from the West, with which the railroads must not interfere. It is
less than thirty years since a convention at Syracuse, representing
no small part of the public sentiment of New York, formally
recommended "the passage of a law by the next Legislature which
shall confine the railroads of this State to the business for which
they were originally created."
But matters had gone too far for effective action of this kind.
Besides the New York Central, the Erie and the Pennsylvania were in
condition to handle the through traffic which Western connections
were furnishing. These connections themselves were rapidly growing
in importance. Prior to 1850 there were very few railroads west of
the Alleghanies. In 1857 there were thousands of miles. The policy
of land-grants acted as an artificial stimulus to the building of
such roads; and a land-grant road, when once built, was almost
necessarily dependent on through traffic for its support. It
could not be operated locally; it was forced into close traffic
arrangements which paved the way for actual consolidation.
The war brought this development to a stand-still for the time
being; but it was afterward resumed with renewed vigor. It is
probable that the final effect of the war was to hasten rather
than to retard the growth of large systems. In the first place,
it familiarized men's minds with national ideas instead of those
limited to their own State. It is hard for us to realize that our
business ideas were ever thus confined by artificial boundaries;
but if we wish proof, we have only to look at the original location
of the Erie Railway from Piermont to Dunkirk. Both were unnatural
and undesirable terminal points; but people were willing to submit
to inconvenience and to actual loss in order that the railroad
might run as far as the New York State limits would allow, and not
one whit farther. Similar instances can be found in other States.
Hard as it is to understand, there seems to have been a positive
jealousy of interstate traffic. The war did much to remove this
by making the different sections of the country feel their common
interest and their mutual dependence. It also had more direct
effects. It produced special legislation for the Pacific railroads
as a measure of military necessity; and this was but the beginning
of a renewal of the land-grant policy, no longer through the medium
of the States, but in the Territories and by the direct action of
Congress. All the results in the way of extension or consolidation
which had been noted in the first land-grant period were more
intensely felt in the second. Never was there a time when business
foresight and administrative power were more needed or more richly
rewarded than in railroad management during the third quarter of
the century.
[Illustration: J. Edgar Thomson.]
In 1847 J. Edgar Thomson, an engineer of experience, entered the
service of the Pennsylvania Railroad, of which he afterward became
president. Three years later, a young man without experience in
railroad business applied to him for a position as clerk in the
station at Duncansville, and was, with some hesitation, accepted.
Not long after--so runs the story--an influential shipper entered
the station, and demanded that some transfers should be made in
a manner contrary to the rules of the company. This the clerk
refused to do; and when the influential shipper tried to attend
to the matter himself, he was forcibly ejected from the premises.
Indignant at this, he complained to the authorities, demanding that
the obnoxious employee be removed from his position. He was--and
was promoted to a much higher one. This is said to have been the
beginning of the railroad career of Thomas Alexander Scott. Edgar
Thomson was a sufficiently able man to appreciate Scott's talent at
its full worth, and took every opportunity to make it useful in the
service of the company. Both before and after the war the system
was extended in every direction; and the man who in 1850 had need
of all his nerve to defy a single influential shipper was a quarter
of a century later at the head of 7,000 miles of the most valuable
railroad in the country.
[Illustration: Thomas A. Scott.]
As an enterprising and active railroad organizer, Scott was
probably unrivalled--especially when aided by the soberer judgment
of Thomson; nor has the operating department of any other railroad
in the country reached the standard established on the Pennsylvania
by Scott and Thomson and the men trained up under their eyes.
But in business sagacity and those qualities which pertain to
the financial management of property, Scott was surpassed by
Vanderbilt. The work of the two men was so totally different in
character that it is hard to compare them. Vanderbilt was not so
distinctively a railroad man as Scott. He had already made his mark
as a ship-owner before he went into railroads. But he was a man
who was bound to take the lead in the business world; and he saw
that the day for doing it with steamships was passing away, and
that the day of railroads was come. He therefore presented his best
steamship to the United States Government in a time when it was
sorely needed, disposed of the others in whatever way he could, and
turned his undivided attention to railroads.
In 1863 Vanderbilt began purchasing Harlem stock on a large scale.
The road was unprofitable, but he at once improved its management
and made it pay. Speculators on the other side of the market had
not foreseen the possibility of this course of action, and were
badly deceived in their calculations. Vanderbilt had begun buying
at as low a figure as 3; within little more than a year he had
forced some of its opponents to buy it of him at 285. He soon
extended his operations to Hudson River, and somewhat later to
New York Central. Defeated in an attempt to gain control of Erie,
he turned his attention farther west; and was soon in virtual
possession of a system which, in his hands at any rate, was fully a
match for all competitors.
These systems did not long remain without rivals. The Baltimore
& Ohio, whose development had been interrupted by the war,
soon resumed, under the leadership of John W. Garrett, its old
commanding position in the railroad world. Farther west, in the
years succeeding, systems were developed and consolidated which
surpassed their eastern connections in aggregate mileage. The
combined Wabash and Missouri Pacific system in its best days
included about 10,000 miles of line under what was virtually
a single management. The Southern Pacific, the Atchison, the
Northwestern, and the St. Paul systems control each of them in
one way or another decidedly over 5,000 miles; and a half-dozen
others might be named, scarcely inferior either in magnitude or in
commercial power.
The result of all this was to place an enormous and almost
irresponsible power in the hands of a few men. The directors of
such a system stand for thousands of investors, tens of thousands
of employees, and hundreds of thousands of shippers. They have
the interests of all these parties in their hands for good or
ill. If they are fit men for their places, they will work for the
advantage of all. A man like Vanderbilt gave higher profits, larger
employment, and lower rate as the result of his railroad work. But
if the head of such a system is unfit for his trust intellectually
or morally, the harm which he can do is almost boundless.
[Illustration: Cornelius Vanderbilt.]
Of intellectual unfitness the chance is perhaps not great. The
intense competition of the modern business world makes sure that
any man, to maintain his position, must have at least some of the
qualities of mind which it exacts. But of moral unfitness the
danger is all the greater, because some of the present conditions
of business competition directly tend to foster it. A German
economist has said that the so-called survival of the fittest in
modern industry is really a double survival, side by side, of the
most talented on the one hand and the most unscrupulous on the
other. The truth of this is already apparent in railroad business.
A Vanderbilt on the Central meets a Fisk on the Erie. In spite of
his superior power and resources he is virtually beaten in the
contest--beaten, as was said at the time, because he could not
afford to go so close to the door of State's prison as his rival.
The manager of a large railroad system has under his control a
great deal of property besides his own--the property of railroad
investors which has been placed in his charge. Two lines of action
are open to him. He may make money _for_ the investors, and thereby
secure the respect of the community; or he may make money _out_ of
the investors, and thereby get rich enough to defy public opinion.
The former course has the advantage of honesty, the latter of
rapidity. It is a disgrace to the community that the latter way is
made so easy, and so readily condoned. A man has only to give to
charitable objects a little of the money obtained by violations of
trust, and a large part of the world will extol him as a public
benefactor. Nay, more; it seems as if some of our financial
operators really mistook the _vox populi_ for the _vox Dei_, and
believed that a hundred thousand dollars given to a theological
seminary meant absolution for the past and plenary indulgence for
the future. It is charged that one financier, when he undertook any
large transaction which was more than usually questionable, made a
covenant that if the Lord prospered him in his undertaking he would
divide the proceeds on favorable terms. But--as Wamba said of the
outlaws and "the fashion of their trade with Heaven"--"when they
have struck an even balance, Heaven help them with whom they next
open the account!"
A word or two as to the methods by which such operations are
carried on, and the system which makes them possible. From the very
first, railroads have been built and operated by corporations.
A number of investors, too large to attend personally to the
management of the enterprise, took shares of stock and elected
officers to represent them. These officers had almost absolute
power; but while matters were in this simple stage, there was no
great opportunity for its abuse. The losses of investors were
due to _bona fide_ errors of judgment rather than to misuse of
power. But soon the corporations found it convenient to borrow
money by mortgaging their property. We then had two classes of
investors--stockholders and bondholders, the former taking the
risks and having the full control of the property, the latter
receiving a relatively sure though perhaps smaller return, but
having no control over the management as long as their interest was
regularly paid.
Of course there is always some danger when the men who furnish
the money do not have much control of the enterprise; but as long
as the relations of stock and bonds were in practice what they
pretended to be in theory, the resulting evils were not very
great. Matters soon reached another stage. The amount of money
furnished by the bondholders increased out of all proportion to
that furnished by the stockholders. Sometimes the nominal amount of
stock was unduly small; more commonly only a very small part of the
nominal value was ever paid in.[28] The stock was nearly all water,
simply issued by the directors as a means of keeping control of the
property. After the crisis of 1857, people had become shy of buying
railroad stock; but they bought railroad bonds because they thought
they were safe. This was the case only when there was an actual
investment of stockholders behind them; without this assurance,
bonds were more unsafe than stock had been, because the bondholders
had still less immediate control over the directors and officials.
If there was money to be made at the time, the directors made it;
if there was loss in the end, it fell upon the bondholders.
Let us take a specific case. An inside ring issues stock
certificates to the value of a million dollars, on which perhaps
a hundred thousand is paid in. They then publish their prospectus
and place on the market two million of bonds with which the road is
to be built. They sell the bonds at 80, reimburse themselves for
the $100,000 advanced by charging the moderate commission of 5 per
cent. for services in placing the loan, and have at their disposal
$1,500,000 cash. These same directors now appear as a construction
company, and award themselves a contract to pay $1,500,000 for work
which is worth $1,200,000 only. The road is finished, and probably
does not pay interest on its bonds. It passes into the hands of a
receiver. Possibly the old management may have an influence in his
appointment. At the worst, they have got back all the money they
put in, _plus_ the profits of the construction company; in the case
supposed, 300 per cent. The bondholders, on the other hand, have
paid $1,600,000 for a $1,200,000 road.
[Illustration: John W. Garrett.]
But the troubles of the bondholders and the advantages of the old
directors by no means end here. When the receiver takes possession
he discovers that valuable terminals, necessary for the successful
working of the road, are not the property of the company, but of
the old directors. He finds that the road owns a very inadequate
supply of rolling-stock, and that the deficiency has been made up
by a car-trust--also under the control of the old directors. Each
of these things, and perhaps others, must be made the subject of a
fight or of a compromise. The latter is often the only practicable
alternative, and almost always the cheaper one; by its terms the
ring perhaps secures hundreds of thousands more, at the expense of
the actual investors.
These are but a few of the many ways in which a few years' control
of property may be made profitable to the officials at the expense
of legitimate interests. In a case like this, all depends upon the
possibility of selling bonds. It is usually impossible to place the
whole loan before construction; and if the market-price falls below
the cost of the work undertaken, as was the case with the West
Shore, the loss falls upon the construction company. Such accidents
were for a long time rare. It took the public nearly twenty years
to learn the true character of imperfectly secured railroad bonds.
Within the past five years it seems to have become a trifle wiser.
The crisis of 1873 was insufficient to teach the lesson; but that
of 1885 has been at least partially successful in this respect.
In cases like the one just described the bondholders are largely to
blame for their own folly. But sometimes the loss falls on those
who are in no way responsible for it. A railroad may be built as a
blackmailing job. If a company is sound and prosperous, speculators
may be tempted to build a parallel road, not with the idea of
making it pay, but because they can so damage the business of the
old road as to force it to buy them out. They build the road to
sell.
It is but fair to say that operations as bad as those just
described are the exception rather than the rule. But the fact that
they can exist at all is by no means creditable to our financial
methods. The whole system by which directors can use their
positions of trust to make contracts in which they are personally
interested puts a premium on dishonesty. Such contracts are
forbidden in England. It may be true, as is urged by many railroad
officials of undoubted honesty, that it would be inconvenient to
apply the same law here; but on the whole, the gain would far
outweigh the loss.
At the very best, a railroad president is subject to temptations
to misuse his financial powers, all the more dangerous because it
is impossible to draw the line between right and wrong. He knows
the probable value of his railroad and of the property affected
by its action a great deal better than any outsider possibly can.
The published figures of earnings of the road are the result of
estimates by himself and his subordinates. Out of the current
earnings he pays current expenses, and probably charges permanent
expenditures to capital account. But what expenditures are current
and what are permanent? This division is itself the result of
an estimate, and a very doubtful one at that. There are some
well-established general principles, but none which will apply
themselves automatically. With the best will in the world he cannot
make his annual reports give a thoroughly clear idea of what has
been done. Is he to be forbidden to buy stock when it seems too
low, or sell it when it is high? Shall we refuse him the right
to invest in other property which he sees will advance in value?
Apparently not; and yet, if we allow this, we open the door for
some of the worst abuses of power which have occurred in railroad
history. The line between good faith and bad faith in these matters
is a narrow one, and the average conscience cannot be trusted to
locate it with accuracy.
But the relations to the investors cover but a small part either
of the work or of the responsibility of the railroad authorities.
They are managing not merely a piece of property, but a vast and
complicated organization of men, and an instrument of public
service. In all these capacities their cares are equally great.
The operating and the traffic departments are not less important
than the financial department. The relations of the railroad to its
employees, and to the business community at large, are even more
perplexing than its relations to the investors.
Of the questions arising between the railroad and its employees we
are just beginning to realize the full importance. They are not
matters to be settled by private agreement or private war. If they
involve a serious interruption of the business of the community
they concern public interests most vitally. The community cannot
afford to have its business interrupted by railroad strikes. On
the other hand, it cannot allow the men to make this public duty
of the railroads a means of enforcing their own will on every
occasion, to the detriment of all discipline and responsibility, or
in disregard of investors' rights. How to compromise between these
two conflicting requirements is one of the most serious problems of
the immediate future.[29] Little progress in this direction has as
yet been made, or even systematically attempted.