GOULD AND THE WESTERN RAILWAY SYSTEMS.
After Mr. Gould was ousted from Erie, he entered into that career of
acquisition which made him the master of several of the most important
railroads in the United States, of the Yale system of telegraph and
of the chief line of transportation in New York city. In nearly all
his railroad operations he repeated, to a greater or less extent, his
career in Erie. His scheme was to buy up cheap and bankrupt roads,
reorganize them, issue new stock and bonds, unload on some other road,
or else, by the payment of dividends, get the public interested in the
property and sell at big profits. Or he would reverse the operation and
take a great property and squeeze it like a lemon. His career in Union
Pacific comes naturally first in order. For ten years he was master
of this great system which, with the Central Pacific, constitutes the
first and most important of the lines leading to the Pacific coast. His
record in this road has been a matter of official investigation, and
this part of Mr. Gould’s history, as well as that of the Erie and Black
Friday periods, is based on sworn testimony. But first, it is but fair
that Mr. Gould’s own account of his connection with Union Pacific, as
stated in his testimony before the Senate Committee on Labor and
Education, should be given. Having omitted all mention of Erie Mr.
Gould said:
[Illustration: GOULD BEFORE THE CONGRESSIONAL COMMITTEE.]
“I then went into the Union Pacific road. I met Horace Clark and
Augustus Schell out West, and they gave me so good an account of the
road that I concluded I would buy in it. I telegraphed to New York
an order to buy at a certain price. When Mr. Clark got home he was
taken ill, and as soon as his brokers learned that his illness was to
be fatal, they sold out his stock. That broke the market and filled
orders which I had sent at a price lower than I ever expected. When I
got home I found myself the owner of a large amount of this property,
and at once inquired into its condition. I learned that it was saddled
with a large floating debt, and that there were ten million dollars of
bonds coming due within a month. It was in rather a blue condition.
The directors were consulting who should be the receiver. I made up my
mind that I would carry it through, and I told them that if they would
furnish half of the money to pay the debt, I would furnish the other
half. The stock went down to 15. It was a large loss, but still I kept
right on buying, so when the turn came there did not seem to be any top
to it. It went up to 75, and I immediately went to work to bring the
road up. I went out over it, started coal mines, and to the surprise
of everybody it soon began to pay dividends and has never passed a
dividend since.
“Well,” continued Mr. Gould, “when this road began to be a financial
success and developed other ways there arose quite a clamor, and it
was said to be Jay Gould’s road, as though it were a dangerous thing
to have one man control a road. I thought that it was better to bow to
public opinion, so I took the opportunity when I could to place the
stock in the hands of investors. In the course of a very few months,
instead of owning control of the road I was entirely out of it, and
the stock was 20 per cent. higher than I had sold it for. Instead of
being thirty or forty stockholders, there were between six and seven
thousand, representing the savings of widows and orphans. There were
also a great many lady stockholders. That was about four years ago,
after Congress enacted very harsh legislation, after they had broken
the bargain they had made to get the road through in its early stages.”
“You refer to the Thurman act?” asked the chairman.
“Yes, and that closed my connection with the Union Pacific road.”
This is a very beautiful picture and it makes out Mr. Gould to be a
most public-spirited and generous man--one ready to sacrifice his own
interests in obedience to the demand of public opinion. But, having
looked on this picture, look upon that drawn by the Pacific Railroad
Commission, appointed by President Cleveland in 1887, and composed of
ex-Gov. Pattison, of Pennsylvania; E. Ellery Anderson, of New York, and
David Littler, of Illinois. The commission made two reports, agreeing
substantially, only that of ex-Gov. Pattison was more severe in its
conclusions.
In the majority report, by Messrs. Anderson and Littler, the purchase
of a controlling interest by Jay Gould in 1873, the subsequent increase
in the capital stock to 200,000 shares, the inauguration of the policy
of constructing branch lines in 1877 and the commencement of the
action by the United States against the directors of the Union Pacific
for misappropriating the assets of the company were detailed and the
report went on to say: “It appears from the minutes of the company that
while this litigation was pending certain proceedings were taken by
the directors, whereby by their own acts and votes they undertook to
release themselves from any obligations or liabilities to the company.”
The Kansas Pacific’s financial operations from 1864 to 1880 were also
taken up and the circumstances leading up to its consolidation in the
Union Pacific system were detailed at great length. The acquisition
by Jay Gould in 1877, at nominal figures, of several millions of
securities of the Kansas Pacific was spoken of, and the reorganization
of that company under the control of Gould was detailed and the methods
severely condemned. The effect of the consolidation was to increase the
stock of the Union Pacific from $38,000,000 to $50,000,000, and the
bonded indebtedness from $88,000,000 to $126,000,000, and the other
indebtedness from $4,000,000 to nearly $10,000,000. It was declared
that “the three years following the consolidation were years of great
business activity, and the receipts of the Union Pacific for 1880,
1881, 1882 and 1883 were largely increased,” but “in the face of a very
large and apparently profitable business” the company found itself
early in 1884 on the verge of bankruptcy.” Competition, the burden
of its fixed charges, the extravagant sums paid for branch railroads
of little or no earning power bought by Mr. Gould, and the “lavish
and reckless distribution of the assets of the company in dividends,
all combined to produce this result.” After stating that Gould’s
connection with the road ceased in 1883, the report says: “It is with
a sense of great relief that the commission turns from the history of
this company from 1873 to 1883 [the period of Gould’s control--Ed.]
to the conservative, energetic and intelligent management that has
characterized the management from the opening of 1884 to the present
time.”
Ex-Gov. Pattison, in his report, said:
“The Union Pacific company has received $176,294,793.53 in surplus
earnings and land sales during eighteen years, and if its stock had
been fully paid, as Congress required that it should be and as its
officers certified under oath that it was, nearly all of that money
would be applicable to-day to the payment of the government debt. The
company has paid out $28,650,770 in dividends, and $82,742,850 in
interest on bonds, nearly all of which were distributed to shareholders
without consideration. It has sunk over $10,000,000 in Denver, South
Park and Pacific; it paid out $10,000,000 to Jay Gould and his
associates for branch lines and other investments which were worthless,
and which were unloaded upon the Union Pacific because of the
faithlessness of the management of the company. The gross mismanagement
of the Union Pacific and the other Pacific railroads has injured the
credit of foreign investors to such an extent that hundreds of millions
of dollars, which otherwise would have been sent here for investment
and aided in the development of the country, have been locked up
abroad.”
Every line of this indictment is directed at Gould. Yet Charles Francis
Adams, the author of “A Chapter in Erie,” and who became president of
the Union Pacific about the time Gould retired, told the commission
that he believed from careful scrutiny that Mr. Gould had always been
more than fair to the company. But the commission, with all the facts
before it, rejected his view of the case.
When Mr. Gould secured possession of the Union Pacific, Sidney Dillon
was president of it, and they with other large stockholders agreed upon
a plan to fund the floating debt in bonds, of which Mr. Gould took
$1,000,000. Mr. Gould remained in practical control of the property
until about 1880, when public opinion clamored for a change, and as
Mr. Gould said to one of the numerous investigating committees before
which he was called upon during his busy life to testify: “I bowed to
public opinion. I let outside parties in and soon, instead of thirty
or forty stockholders, there were 6,000 or 7,000.” Mr. Charles Francis
Adams succeeded Sidney Dillon as president, and in a short time an
astonished public beheld the spectacle of the author of the scathing
“Chapter of Erie” standing sponsor for the man he had denounced. Mr.
Gould managed to persuade Mr. Adams to view the future of Union Pacific
through his (Gould’s) eyes, and in consequence Mr. Adams unconsciously
assisted Mr. Gould in disposing of large blocks of the stock to good
advantage. In 1891 Mr. Gould again got control of the Union Pacific
road, owing to peculiar Wall street conditions, and he calmly turned
Mr. Adams out of the presidency and put Sidney Dillon back there.
“In 1876 Mr. Gould began buying Kansas Pacific stock because it was
cheap. At that time stock speculators did not regard the stock as
being worth anything. Mr. Gould, however, was looking away ahead, and
he bought largely of Denver Pacific securities and stock and bonds of
the St. Joe and Western, the Kansas Central, and Central Branch roads.
All of these securities he got at a very low price, and he realized an
enormous profit when they were all turned in under the famous Union
Pacific consolidation scheme in 1880. For his Central Branch stock
alone he received $239 per share. Mr. Gould was one of the first to
suggest the consolidation of the Kansas Pacific and its subsidiary
roads with the Union Pacific. He employed Solon Humphreys and Gen.
Dodge to go West, look over the situation, and make a report on the
practicability of the consolidation.
In 1879 a consolidated mortgage was issued by the Kansas Pacific
to wipe out the innumerable securities bearing different rates of
interest which were then burdening the road. Jay Gould and Russel Sage
were then directors of both the Union and the Kansas Pacific roads, and
they were made trustees of this mortgage. Among the assets covered by
this mortgage were 30,000 shares of the Denver Pacific railroad, then
of little value, but which, under the plan of consolidation which Gould
was then maturing, would become of great value. Sidney Dillon, who
was associated with Gould and Sage in all three roads, asked them to
release these stocks from the lien of the mortgage. Gould and Sage sat
down at the same desk at which Dillon had written this modest request,
and wrote suggesting that an action should be brought against them in
the courts for the release of the stock. The action was immediately
brought before Judge Donohue, to which Gould and Sage made no defense.
Dillon testified that the stock was worth only $200,000 or $300,000.
The order was given, the stock released, and the day after the
consolidation was effected which made the stock worth its face value,
or $3,000,000.
Stoop & Rens, of Amsterdam, claiming to be holders of the bonds,
brought the charge against Mr. Gould and Mr. Sage that they had,
without consulting with the other bondholders, appropriated to
themselves the trust asset of $3,000,000.
This revelation was made October 17, 1877, and an effort was made to
secure the indictment of Messrs. Sage and Gould. It was a matter which
at once attracted the widest interest. District Attorney Martine was
asked to send the complaints before the Grand Jury, but pending any
action on his part, Mr. Gould started on a trip abroad on his yacht
Atalanta. Then followed probably the longest rest and only complete
rest Jay Gould ever enjoyed from the time he took up and pushed through
the abandoned survey of Ulster county in 1852.
He went first to Gibraltar, then to Marseilles, cruised along the
Mediterranean, going to Egypt and Italy. While he was absent the legal
war against him at home continued. His enemies in the Kansas Pacific
still clamored for his indictment; the commissioners appointed by
President Cleveland to investigate the affairs of the Pacific railroads
made a thundering report against the management of those corporations,
showing that they had received in aid from the government the sum of
$447,000,000. Congressman Anderson offered a resolution in the House of
Representatives recommending that suit be begun against Mr. Gould and
others to enforce the Thurman act.
In March, 1888, the Grand Jury failed to indict, and on that very day
Mr. Gould was complacently strolling about the streets of Algiers.
Three weeks later Mr. Gould landed from his yacht at Jacksonville,
Fla., and in a very short time he was at his desk looking after his
great financial interests and manipulating the stock market.
On his return he attacked his prosecutors with a virulence which he had
never displayed before, and filled the columns of the newspapers with
interviews. In one of these he declared that the attack upon him was
the result of a conspiracy and blackmail, and that the powers behind
the criminal proceedings were “a newspaper” (meaning the _Herald_), “a
cable company” (referring to the Mackey-Bennet Company), “and a woman.”
The latter was understood to be the wife of an officer of one of Mr.
Gould’s railroads who had brought suit for divorce. This bringing of a
woman into the case created a great sensation. A few days later Gould
made a bitter personal attack on James Gordon Bennet, of the _Herald_,
calling in question his personal and social character, and reciting
incidents unfit for publication. This was the first time in his life
that Gould appeared to be thoroughly “rattled;” the first time that
he let down the curtain of mystery with which he had so long covered
himself, and the first time that he broke that silence which was his
best weapon.
This is a good place to quote from Gould’s testimony before the Pacific
Railroad Commission, as it gives an insight into his theory of railroad
operations.
“I consider,” he said, “the past a good thing to judge a road by, but
the future more. I have been all my life dealing in railroads; that is,
since before I came of age. I always bought on the future; that’s how
I made my money. The bonds on the first road I bought were down to ten
cents. I built up the road and sold them for $125. That’s the reason
I went into the Kansas Pacific and the Union Pacific. But I saw the
Kansas Pacific was going to develop faster than the Union Pacific.”
Mr. Gould’s railroad operations were entirely too numerous to be
followed in all their details, especially as enough has already been
given to indicate the character of his enterprises. But no life of
Mr. Gould would be complete without an account of his connection with
Wabash. On this road, however, he simply repeated, though to a less
degree, his tactics in Erie, and the result is a corporation almost
hopelessly burdened with enormous obligations.
In the _North American Review_ of February, 1888, will be found a
full history of this unfortunate road. The writer says that “Mr.
Gould remains the leading figure in the chapter of Wabash as he was
of Erie.” There is, he says, a “relative disappearance of the special
forms of judicial usurpation and misconduct which lent such a lurid
aspect to Mr. Adams’ story, and in their place will be noted one
sweeping judicial act followed by two or three supplementary acts which
accomplished the designs of the actors with complete effectiveness.”
Gould gained control of the road in 1879 and became president in 1881.
The writer of the _Review_ article sums up the history of Wabash as
follows:
“The Wabash system arose from the absorption and consolidation of
sixty-eight separate original corporations; when thus consolidated
the system owned and controlled in 1883 about 4,814 miles of railroad
in the six states of Ohio, Michigan, Indiana, Illinois, Missouri
and Iowa; its capital stock was increased between 1877 and 1883
from $40,000,000 to $50,174,700; its funded or mortgaged debt was
increased during the same period from $20,311,570.60 to $76,394,075;
three quarterly ‘dividends’ were paid on the entire preferred
stock in 1881--the year after the issue of the general mortgage in
1880--amounting to $1,036,529; within two years and a half after
these ‘dividends’ the company made default on the interest of all
its mortgaged debt; in May, 1884, the entire property was, on the
application of the debtor company alone, secretly placed in the hands
of Humphreys and Tutt, two of its former directors and officers,
men without any special qualifications for railroad management, and
who had been part of the directorate which had brought the system
to bankruptcy; immediately after the appointment of Humphreys and
Tutt, the Circuit Court of the eastern district of Missouri directed
the issue of $2,300,000 of receiver’s obligations to ‘protect’ the
indorsements of Wabash notes by Gould, Dillon, Sage and Humphreys; the
same court, six days later, directed the further issue of $2,000,000
of receivers’ certificates--made a first lien on all the Wabash
property--to pay so-called Wabash indebtedness, which by the terms of
its lease to the Iron Mountain, which had been, in turn, leased to the
Missouri Pacific, was the indebtedness of the Missouri Pacific; as the
result of two years and a half of this receivership, there was paid out
of the receivers’ earnings, on account of liabilities incurred prior
to the receivership, $3,260,519.23, leaving $500,000 still due; as
the grand result of the receivership of Humphreys and Tutt, interest
has accrued to the amount of $4,390,000, all due and unpaid, and of
receivers’ obligations, $3,200,000, a total during two years and a half
of $7,590,000, with $290,000 of cash in hand. The property being sold
to a purchasing committee, of which the chairman, Joy, was a former
Wabash director, and another member, Ashley, was the secretary of the
receivers, a demand was made of the prior mortgage bondholders to
fund into new Wabash bonds their past due interest and to reduce the
interest on their bonds for the future from 6 and 7 per cent. to 5 per
cent. Upon application of prior mortgage bondholders the United States
Circuit Court at Chicago removed Humphreys and Tutt for misconduct as
receivers and appointed a new and separate receiver for the Wabash
lines east of the Mississippi river.”
This removal was upon order of Judge Gresham, who has made such a
high reputation as a judge who can be depended upon not to be easily
influenced in favor of corporations. This order was called at the time
“one of the bravest acts in the history of justice.” On rendering
decision he spoke in terms of great severity of the managers and the
Gould receivers, and appointed in place of the latter Judge Cooley,
who was afterward made railroad commissioner by President Cleveland.
In commenting on this decision, Gould defended himself by attacking
Gresham, who he declared was suffering from a severe attack of “the
presidential fever.”
The Gould purchase of the Missouri Pacific railway has a refreshing
novelty in it on account of the manner in which it was bought. The road
was owned in 1880 by Commodore Garrison, who was not friendly to Mr.
Gould. The latter sent Russell Sage to find out how much the commodore
would take for his interest in the Missouri Pacific. The commodore
said that $2,000,000 would be about right. Sage offered $1,500,000
and Garrison shook his head brusquely. The next day Sage returned and
offered to close the bargain at $2,000,000. “No,” said the commodore,
“the price has advanced to $2,800,000.”
“Pooh, pooh!” said Sage, and he went back and reported to Mr. Gould.
The next day Gould went himself and told Garrison that he would
take his stock at $2,800,000. The commodore replied that the stock
had advanced in price to $3,800,000, and it would continue to go up
$1,000,000 a day. Gould closed the bargain on the spot, giving Garrison
his check for $3,800,000. The Missouri Pacific stock subsequently
became very much depressed in the stock market, and a great many
weak stockholders were obliged to let go. Gould was always ready to
buy. After a while he consolidated the Missouri Pacific with the
Iron Mountain and the International and Great Northern, and Missouri
Pacific stock went up rapidly. The Iron Mountain was a first-class
money-earning road. This consolidation gave Mr. Gould a southwestern
railroad system of more than 5,000 miles, which he subsequently
extended largely.
Gould’s testimony in regard to this portion of his career, before the
Senate committee, was as follows:
“The next great enterprise, if I may call it great, that I engaged in
was the Missouri Pacific. I bought it one day of Commodore Garrison, or
rather the control of it. I had a very short negotiation with him; he
gave me his price, just as we are talking here, and I said: ‘All right;
I will take it,’ and I gave him a check for it that day. At that time I
did not care about the money made; it was a mere plaything to see what
I could do. I had passed the point where I cared about the mere making
of money. It was more to show that I could make a combination and make
it a success. I took this road and began developing it, bringing in
other lines which should be tributary to it. I developed new parts of
the country--opened up coal mines, etc., and continued until, I think,
we have now 10,000 miles of road.
“When I took the property it was earning $70,000 a week. I have
just got the gross earnings for the last month, and they amount to
$5,100,000, and we have accomplished that result by developing the
country; and while we have been doing this we have made the country
rich, developing coal mines and cattle-raising, as well as the
production of cotton. We have created this earning power by developing
the system. All this 10,000 miles is fully built. The roads pass
through the states of Ohio, Illinois, Michigan, Iowa, Missouri, Kansas,
Nebraska, Arkansas, Texas, Louisiana and the Indian Territory, and we
go into Mexico.”
“Are there other railroad enterprises that you are connected with?”
“I am director in various roads, but I put my whole strength into this
system. I don’t like to scatter around.”
“What you do you do well, or try to?”
“I certainly try to do all things well.”
“What other business enterprises of the country have you now or
formerly had connection with?”
“I am a director in the Chicago and Northwestern road, Chicago and Rock
Island, Delaware, Lackawanna and Western, New York and New England and
a good many other small roads.”
Mr. Gould’s Southwestern system, of which he speaks in terms so
glowing, was composed of the Missouri Pacific, that was the main
stem, and grafted onto it was the Wabash, of which an account has
already been given; the Missouri, Kansas and Texas; the St. Louis and
Iron Mountain, and the Texas Pacific. The directors of all the roads
were substantially the same, Mr. Gould being the president, and his
son George, Russell Sage, A. L. Hopkins and others of his intimate
associates being the directors. The most striking feature about the
management of these roads is that while all the others were driven
into bankruptcy, or to the verge of it, the Missouri Pacific was made
a big dividend-paying property. Mr. Gould attributed this to the
comparatively small indebtedness of the Missouri Pacific, making
it, in his own language, “the snuggest property on the continent;”
but his enemies attributed the fact to another reason, namely, Mr.
Gould’s own management, by which he was alleged to have starved the
other properties to feed the Missouri Pacific. His holdings of the
latter’s stock were immense, while his pecuniary interest in the others
was comparatively small; indeed, he held but a few hundred shares of
Missouri, Kansas and Texas, though its president. His purpose was
evidently to swell the earnings of the Missouri Pacific to such an
extent that he could declare big dividends and sell his stock at high
figures. He succeeded in pushing the price up to 112 in May, 1887,
but it subsequently fell to 70¼ in March, 1888. The lack of public
confidence in Gould’s railroad methods is strikingly exhibited in
the fact that though Missouri Pacific paid 6 to 7 per cent. annual
dividends, Gould found it almost impossible to keep the price at par
except by the pegging process, while other equal dividend-payers
brought from 110 to 130 in the market without manipulation. The same
fact was also strikingly exhibited in Western Union, which paid
dividends, but sold at from 70 to 80.
Finally the stockholders of the Missouri, Kansas and Texas became
indignant at the destruction of their property. Much of the stock
was held abroad and was only worth $13 to $15 per share of $100.
They engaged E. Ellery Anderson, the same who had been a member of
the Pacific Railroad Commission, and Simon Sterne, who had been
the counsel for the Hepburn Committee, to represent them, and in
connection with such Wall street men as W. L. Bull, shortly after
elected president of the Stock Exchange, they hurled the Gould
management from power. They publicly charged Mr. Gould with having
used the road simply as a feeder to the Missouri Pacific. Mr. Gould
succeeded, at least in part, with his plans in regard to Missouri
Pacific, and is understood to have marketed a large block of his
holdings in 1888. Shortly after that the road reduced its dividend and
had to borrow money to pay it.
One of the most memorable events connected with Gould’s management of
the Missouri Pacific was the great Knights of Labor strike in 1885,
which disabled the road for a long time. An interesting feature of the
strike was a Sunday conference at Mr. Gould’s house between him and
General Master Workman Powderly, at which negotiations for a settlement
were entered into. The foremost representatives of capital and labor
thus met to settle vital questions at issue affecting the wealth of the
capitalists and the livelihood of the workingmen. Mr. Gould said to the
Senate Committee on Labor and Education:
“I have been all my life a laborer or an employer of laborers. Strikes
come from various causes, but are principally brought about by the
poorest and, therefore, the dissatisfied element. The best workers
generally look forward to advancement in the ranks or save money enough
to go into business on their own account. Though there may be few
advanced positions to be filled, there is a large number of men trying
to get them. They get better pay here than in any other country, and
that is why they come here. My idea is that if capital and labor are
let alone they will mutually regulate each other. People who think
they can regulate all mankind and get wrong ideas which they believe
to be panaceas for every ill, cause much trouble to both employers and
employes by their interference.”
To the Congressional Committee which investigated the Missouri Pacific
strike he said: “I am in favor of arbitration as an easy way of
settling differences between corporations and their employes.”