The story of the Baltimore and Ohio Railroad takes us back more than
ninety years. When the scheme for the construction of a railroad from
Baltimore to the waters of the Ohio River first began to take form, the
United States had barely emerged from the Revolutionary period. Many
of the famous men of that great day were still living. John Adams and
Thomas Jefferson had been dead only a year; Madison and Monroe had
recently retired from public life; John Quincy Adams held the office of
President, and the "reign" of Andrew Jackson had not yet begun.
At this time steam navigation on the rivers was only in its beginnings,
but no one could doubt that it would come into general use. Two decades
had passed since the Clermont had been launched on the Hudson by Robert
Fulton, and steamboats were now carrying cargoes successfully against
the swift currents up the Mississippi from New Orleans and were
threatening the extinction of the aggressive flatboat traffic. Great
strides had also been made in the construction of turnpike roads. The
famous National Pike from Cumberland to Vandalia, Illinois, had been in
large part completed and had done much for the opening up of the Western
territory.
Canal building was likewise an extensive development of this period. The
idea of connecting the waters of the Chesapeake with those of the Ohio
had been broached by George Washington before the Revolution, and he
had also prophesied the union of the Hudson and Lake Erie by canal. He
believed that a country of such great geographical extent as the United
States could not be held together except by close commercial bonds.
The opening of the Erie Canal to New York in 1825 stimulated other
cities on the Atlantic seaboard to put themselves into closer commercial
touch with the West. This was especially true of the city of Baltimore.
A canal connecting Chesapeake Bay and the Ohio River was advocated to
protect the trade of Baltimore and the South from the competition of New
York and the East which would inevitably result from the construction of
the Erie Canal and the Public Works of Pennsylvania. But discouragements
in plenty frustrated the plan. The cost was believed to be excessive and
the engineering difficulties were said to be almost insuperable. George
Bernard, a French engineer, was of the opinion that the high elevations
and scarcity of water along the route would prevent such a canal from
having much practical value. For these reasons Baltimore believed that
its position as a center for the rapidly developing Western trade was
slowly but surely slipping away.
This was the situation that led to the building of the Baltimore and
Ohio Railroad. Two men--Philip E. Thomas and George Brown--were
the pioneers in this great undertaking. They spent the year 1826
investigating railway enterprises in England, which were at that time
being tested in a comprehensive fashion as commercial ventures. Their
investigation completed, they held a meeting on February 12, 1827,
including about twenty-five citizens, most of whom were Baltimore
merchants or bankers, "to take into consideration the best means of
restoring to the city of Baltimore that portion of the western trade
which has lately been diverted from it by the introduction of steam
navigation and by other causes." The outcome was an application to the
Maryland Legislature for a charter for a company to be known as "The
Baltimore and Ohio Railroad Company" having the right to build and
operate a railroad from the city of Baltimore to the Ohio River. The
formal organization took place on April 24, 1827, with Philip E. Thomas
as president and George Brown as treasurer. The capital of the proposed
company was fixed at five million dollars.
The construction of the railroad began on July 4, 1828. The venerable
Charles Carroll of Carrollton, then more than ninety years old and the
only surviving signer of the Declaration of Independence of fifty-two
years before, said on this occasion, as he laid the first stone: "I
consider this among the most important acts of my life, second only
to my signing the Declaration of Independence." His vision was indeed
prophetic.
It was determined that the first section of road constructed should
extend to Ellicott's Mills, twelve miles distant, but, owing to delays
in obtaining capital, the actual laying of the rails was not begun until
the fall of 1829, and this first section was not opened for traffic
until May 22, 1830. At first, experiments were made with sails for
propelling the cars, but it was soon found that a more effective source
of power was supplied by mules and horses. The Flying Dutchman, one of
the cars devised to furnish motive power, provided for the horse or
mule a treadmill which would revolve the wheels and make the distance of
twelve miles in about an hour and a quarter. Steam locomotives at this
time were in their infancy and, until the opening of the Liverpool and
Manchester Railroad in this same year, they had attained a speed of only
six miles an hour. Horses and mules, and even sail cars, made more rapid
progress than did the earliest locomotive. In spite of these crude and
primitive facilities for transportation, however, the traffic on the new
railroad was of large volume from the beginning, and the company could
not handle the amount of merchandise offered for transport in the first
months.
Construction was now rapidly pushed ahead, and by 1832 the whole line
had been opened to Point of Rocks, with a branch to Frederick, Maryland,
making seventy-two miles in all. In 1831, steam locomotives were tested,
and one of them, the York, was found capable of conveying fifteen tons
at the rate of fifteen miles an hour on level portions of the road. This
achievement was regarded as a great triumph, and in 1832 the directors
of the road called attention to "the great increase in velocity" that
had been obtained in this way.
From this time forward the expansion of the railroad proceeded with a
certainty born of success. A branch was built to Washington and the main
line was extended to Harper's Ferry. Beyond this point construction was
slow because financial difficulties stood in the way, and it was not
until after the panic of 1837 that further aggressive building began.
But by 1842 the line was completed to Cumberland, Maryland, and by
1853, to Wheeling. Meanwhile, the branch from Cumberland to Parkersburg,
Virginia, was built. The road now comprised a total system of more than
five hundred miles and reached two points of importance on the Ohio
River, one northward near the Pennsylvania-Ohio state line and one
southward in the direction of Cincinnati. The Parkersburg extension was
of great importance because it opened a through route to St. Louis, by
means of the Cincinnati and Marietta Railroad--which was at this time
completed from Cincinnati to Belpre, Ohio, opposite Parkersburg--and the
Ohio and Mississippi, which extended more than three hundred miles from
St. Louis to Cincinnati.
Times were not the best, however, and, although much traffic was
developed, the immense cost of the extensions heavily burdened
the Baltimore and Ohio Company, while the panic of 1857 seriously
embarrassed its credit. Soon after this panic and before the company
had begun to recover from its effects, John W. Garrett, one of the large
stockholders in the road and son of a Baltimore banker, was elected to
its presidency, and a new chapter in the history of the Baltimore
and Ohio began. Almost immediately following Garrett's election, a
remarkable change became apparent. Losses were turned into gains;
deficits were converted into surpluses; and soon Garrett had gained the
reputation of being the most remarkable and efficient railroad manager
in the world. He seemed to be almost an Aladdin of railroad management
for, even when he could not show increases in amount of business done,
he reported greater profits by showing lower expenses. In those days
the railroads did not furnish detailed reports of business to the
stockholders or to the public. At the annual meetings it was customary
for a president or the directors simply to announce, either orally or in
a brief printed statement, the amount of gross business and profits
for the year. No such thing as a balance sheet or detailed financial
statement saw the light of day--practically everything was taken by
the stockholders on faith. And great was their faith. When, therefore,
Garrett announced large increases in profits in years when most
railroads were standing still or were incurring losses, he was
implicitly believed.
Under Garrett's management a new era of expansion almost immediately
began; work was started on the long delayed branch to Pittsburgh and
plans were laid for establishing a line of steamships from Baltimore to
the leading European ports. But the Civil War, which bore heavily on the
Baltimore and Ohio, interfered with these ambitious schemes. Early in
1861 the Confederates took possession of a large part of the line east
of Cumberland; in the next four years important sections of the road
were repeatedly destroyed and rebuilt, as they passed into the hands of
the Federal or Confederate troops. The company, however, managed to get
through without default in its securities, and, when peace was restored
in 1865, the Baltimore and Ohio resumed its policy of aggressive
expansion.
Before very long the road, with its connections constructed or
purchased, reached the cities of Pittsburgh, Sandusky, and Chicago, and
further strengthened its connections with Cincinnati and St. Louis. It
acquired steamboats, grain elevators, and docks; it constructed hotels
as mountain summer resorts; it built dry docks in Baltimore; and finally
it proceeded to organize and operate an express company, a telegraph
company, and a sleeping-car company. To carry out these ambitious plans
the capital stock and debt were of course increased again and again,
and in the course of these operations a large part of the new securities
issued was sold to English investors. Notwithstanding these great
increases in liabilities, the company continued to report large
surpluses and to pay large dividends, generally ten per cent annually.
In fact, this liberal rate was, with brief exceptions, paid right
through the Civil War period, in spite of the fact that large parts
of the line were frequently destroyed and traffic was often at a
standstill. With such prosperity under such conditions Garrett's
reputation as a railroad manager naturally suffered no eclipse.
In the course of the Civil War, as already noted, through traffic routes
from New York to Chicago had been established, and in the succeeding
years the consolidations of the great competing systems into trunk lines
had taken place. The struggle of the Baltimore and Ohio for its share
of Western business led to fierce rivalry with the Pennsylvania. This
competition became so severe and intense that, in 1874, the Pennsylvania
road refused to carry the Baltimore and Ohio cars over its line to New
York on any terms whatever. Since this was the only way in which the
Baltimore and Ohio could reach New York, the situation was a serious
one. Garrett retaliated by making destructive reductions in passenger
rates from Washington and Baltimore to Western points. The cuts were
soon made on other roads and affected both freight and passengers. All
the lines became involved. Passenger fares from Chicago to Baltimore and
Washington were reduced from nineteen dollars to nine dollars, and those
to New York and Boston from twenty-two to fifteen dollars. Still the
fight continued, and before the end of 1875 it was possible to travel
from Chicago to New York first class for twelve dollars and to ship
grain to New York for as low a rate as twelve cents.
Despite the fact that competition had cut earnings almost to the point
of extinction, the Baltimore and Ohio continued to report surprisingly
good profits. The company borrowed additional funds from time to time
but continued to pay the liberal ten per cent dividend until 1877,
when it somewhat reduced the rate. These dividend payments indicated,
however, a prosperity that was only apparent, and they did not greatly
deceive the bankers, for the credit of the Baltimore and Ohio weakened
from day to day. The fact is that the reports of operations inspired
little public confidence; to the farseeing, there were danger signals
ahead. Nevertheless the ten per cent dividends were resumed in 1879 and
continued at this rate without interruption until 1886.
On the death of John W. Garrett in 1884, his son Robert, who succeeded
him as president, continued the same policy of competition and
aggression. With the object of gaining an entrance into Philadelphia and
through that gateway of reaching New York, he started work on a branch
from Baltimore to Philadelphia to meet, at the northern boundary
of Maryland, the Baltimore and Philadelphia Railroad--a line which
independent interests were then building through Delaware with the
intention of obtaining an entrance into Philadelphia. The Pennsylvania
interests strongly opposed Garrett's new project and many years before
had gone so far, in their determination to block the Baltimore and Ohio
from acquiring control of the Philadelphia, Wilmington and Baltimore
Railroad, as to purchase that road themselves. Despite this opposition
the Baltimore and Ohio went forward with their plans and secured an
entry into Philadelphia by acquiring control of the Schuylkill East Side
Railway, which was a short terminal road of great strategic value.
North of Philadelphia the company arranged a traffic contract with
the Philadelphia and Reading, whose lines extended to Bound Brook, New
Jersey, and also with the Central Railroad of New Jersey beyond Bound
Brook to Jersey City. Afterward, by purchasing the Staten Island Rapid
Transit Company the Baltimore and Ohio acquired extensive terminals at
tidewater on Staten Island and constructed a connection in New Jersey
with the New Jersey Central. Thus, after many years of struggle and at
heavy cost, the Baltimore and Ohio finally secured an entry into the New
York district independently of the Pennsylvania Railroad.
Both freight and passenger charges, however, were still maintained at an
unprofitable rate, and, after the death of John W. Garrett, the credit
of the Baltimore and Ohio continued to decline. Dividends were gradually
reduced and by 1888 were omitted entirely. As is usually the case, the
cessation of dividends awakened the sleeping stockholders. They began
an investigation to ascertain the whereabouts of that remarkable surplus
which had been reported from year to year and which, according to
official report, had shown a constant growth.
This investigation disclosed a startling state of affairs. Instead of
a surplus, the company had been piling up deficits year after year, had
been borrowing money right and left on onerous terms, had been charging
up millions of dollars of expenses to capital accounts--and as a matter
of fact, instead of making money, it had for the most part been losing
it. Now the company urgently needed cash, and the only way it could
obtain that essential commodity was by selling its express, telegraph,
and sleeping-car business.
During the entire administration of John W. Garrett, extending over more
than two decades, current expenditures of enormous amounts which should
have been deducted from the income had been credited to the surplus;
many millions which would never be returned had been advanced to
subsidiary lines, or had been spent, and therefore should have been put
down in the books as losses. When these facts became public, the capital
stock of the Baltimore and Ohio, which for generations had been looked
upon as one of the most secure of railroad investments, dropped to
almost nothing, and the most strenuous financial efforts were required
to keep the company out of bankruptcy.
These disclosures, towards the end of 1887, ended the first period of
active Garrett management in the Baltimore and Ohio. The directors
then turned to New York bankers for the cash that was needed to put the
affairs of the company on a sound basis. Samuel Spencer, who afterward
became a partner in the banking house of J. P. Morgan and Company, was
elected president and active manager. He introduced radical reforms,
entirely revolutionized the organization, and adopted modern methods. He
wrote off the books a large amount of the much vaunted "surplus" and he
took important steps toward the general improvement of the property.
Had the new interests been allowed to continue their efforts unmolested,
the history of the Baltimore and Ohio in the next decade might have
been very different. But the original controlling interests, the Garrett
family, still held the balance of power. As the bad bookkeeping and
other irregularities of the past naturally reflected on the Garretts, it
was their interest to suppress further investigation as far as possible;
and their antagonistic attitude toward the policy adopted by the new
Spencer management was seen in the annual election of directors in
November, 1888. Only five of the members of the board were reelected,
President Spencer was ousted, and Charles J. Mayer was elected in his
place.
This second change in management sidetracked the plans for radical
reform, and little improvement resulted either in earning power or in
financial condition. The company had fallen upon evil days. The net
profits did not increase, and eight years after 1888 they were smaller
than in that year, while the debt and interest charges constantly
grew. Despite these ominous facts, dividends were paid regularly on the
preferred stock and in 1891 they were resumed on the common stock. In
the latter year a twenty per cent dividend was declared "to compensate
shareholders for expenditures in betterments and improvements in
the physical condition of the property," while at the same time the
directors decided to raise five million dollars of new capital for
expenditures which would be necessary to handle the increased traffic
created by the World's Fair at Chicago.
The traffic problem continued to be a thorn in the flesh and until 1893
freight rates were constantly being cut. The opening of the Baltimore
and Ohio connection to New York had brought keener competition from the
Pennsylvania Railroad and had made deep inroads into the Baltimore and
Ohio revenues. Such conditions made even the Garrett interests feel that
something should be done, and in 1890 a "community of interest" scheme
was proposed. To control the stock of the Baltimore and Ohio Railroad,
Edward R. Bacon in New York, acting harmoniously with the Garrett
family, formed a syndicate of capitalists representing the Richmond
Terminal system, the Philadelphia and Reading Railroad, the Northern
Pacific Railroad, and other properties. The ultimate plan, which proved
too visionary, was to consolidate under one control a vast network of
lines extending all over the continent.
The syndicate had made little progress toward rehabilitation when the
panic of 1893 occurred. In this year and the next the earnings of
the Baltimore and Ohio fell off rapidly and the dividend was reduced.
Nevertheless, as late as January, 1895, the directors insisted that
financially the company was in better condition than for several years
and that on the whole it was in a stronger position than at any time
since 1880. But in this same year it became necessary to stop all
dividend payments; the company began to have difficulties in securing
ready money; and before the close of the year the situation seemed
hopeless. Early in 1896 Mayer tendered his resignation, and John K.
Cowan succeeded him. The new president did his utmost to obtain money
to meet the current needs, but he was unsuccessful. A receivership and
reorganization seemed absolutely necessary, and in February, 1896, the
receivership was announced.
With the property now in the hands of the courts, the opportunity at
last came to make real the reforms which had been proposed and
begun nearly a decade earlier under the wise but quickly terminated
administration of Samuel Spencer. A thorough housecleaning was now
carried through without interference or interruption. A reorganization
committee was formed, with whom were deposited the Garrett shares as
well as those of the Morgan and New York and Philadelphia interests. A
full investigation of past management disclosed that the records for
the interim extending from the brief Morgan control under Spencer to
the receivership contained the same kind of irregularities and errors
of policy that had prevailed under the earlier Garrett management.
Statements of profits had been swelled by arbitrary entries in the books
and nearly six million dollars which had not been earned had been paid
out in dividends. Furthermore the company had endorsed the notes of
certain subsidiary roads to the extent of over five million dollars, and
had made no record whatever of this action for the stockholders.
As in the case of numerous other railroads, the financial breakdown of
the Baltimore and Ohio Railroad was primarily due to a bad or reckless
financial policy, for there was nothing inherently insecure in the
railroad property itself. During all the years of the Garrett regime,
the company had shared in the general growth and expansion of industry,
wealth, and population within its territory. It had been progressive in
matters of expansion and had built up its system to meet the needs of
modern times. Its trackage and equipment compared favorably with similar
systems, and most of its extensions and branches had been wisely planned
and had proved profitable. The operating management of the railroad was
generally good and it usually secured its proportion of what business
was to be obtained. But the steady increase in its debts over a number
of years, its extravagance in dividend payments, and its painful efforts
to keep down its operating expenses had so weakened the property that,
when the hard times of 1893 to 1896 arrived, it was in no position to
weather the storm. The only wonder is that the management succeeded in
keeping the system intact and apparently solvent so long as it did.
The receivership at once adopted a vigorous policy of improvement.
The rolling stock had run down until it could not handle even ordinary
business. While the company had been depleting its credit and paying out
all its cash in dividends, the equipment had been going into the scrap
heap. For two years the receivers made large expenditures on equipment
and roadbed, borrowing money for this purpose; the result was that
when, in 1898, the courts surrendered the property, it was in splendid
condition to take advantage of the tide of commercial and industrial
prosperity which was just then beginning to flow throughout the United
States.
While the reorganization of the Baltimore and Ohio was not so drastic
as that of many other systems which went through the courts during this
period, it was thorough enough to meet the situation. The fixed charges
were cut down radically and the stockholders were assessed in large
amounts. In all, more than thirty-six million dollars was raised by
assessments and the sale of new securities; the liabilities of the
Company were greatly reduced; and its credit was promptly restored.
Formerly the Baltimore and Ohio had been struggling under a burden of
floating indebtedness, with so little money in its treasury that it
could not even put a new coat of paint on the passenger cars and had to
continue to use oil lamps to light some of its best trains. But now the
floating debt was replaced by a large available cash capital, and as a
result of the liberal policy followed by the receivers, the equipment
and roadbed were brought fully up to the standards required for handling
the traffic of the road both economically and effectively.
With the reorganization of 1898 finished, the Baltimore and Ohio
Railroad entered a new period in its history. The strong, progressive
interests which now took control concentrated their energies on
developing traffic, increasing earnings, and rounding out the general
system. They adopted careful measures for unifying the system by adding
other lines and connections of value; they paid much attention to the
improvement and development of terminals; and they spent many millions
in acquiring and expanding the terminal properties of the company at
Chicago, St. Louis, Philadelphia, and Baltimore.
The financial history of the Baltimore and Ohio since the close of the
nineteenth century is interesting chiefly in connection with changes
in the control of the property. After the reorganization a group of
prominent financiers, including Marshall Field, Philip D. Armour, Norman
B. Ream, and James J. Hill jointly purchased a large interest in the
stock. But this purchase, while perhaps representing a dominating
interest, did not involve actual control. Soon afterward, interests
identified with the Pennsylvania Railroad began to appear in the
Baltimore and Ohio, and before long the Pennsylvania had a strong
representation on the board. As a consequence, the Baltimore and Ohio
almost lost its individuality and for a time was popularly regarded
practically as a subsidiary of its old rival line.
The purpose of the Pennsylvania in obtaining this ascendency over the
Baltimore and Ohio was to regulate the soft coal traffic. Already it had
acquired dominating interests in the Chesapeake and Ohio, the Norfolk
and Western, and other soft coal properties. These purchases were merely
manifestations of that "community of interest" policy which at this
time led several large systems to acquire interests in competing lines.
Several of the railroad leaders of that time, notably James J. Hill and
Edward H. Harriman, believed that if these great systems actually
owned large blocks of stock in each other's properties, this common
association would ipso facto end the competition that, if continued,
would ultimately ruin them all. The Supreme Court had decided that the
"pooling" arrangements which had so long prevailed among great competing
roads violated the Sherman Anti-Trust Act; and the American public, which
now was cultivating a new interest in railroad problems, believed that
the "community of interest" plan was merely a scheme to defeat the
Interstate Commerce Act and the Sherman Act and to maintain secretly all
the old railroad abuses. These inter-railroad purchases therefore became
so unpopular that the Pennsylvania sold its Baltimore and Ohio stock.
At this time Edward H. Harriman of the Union Pacific, who had at his
disposal vast funds of the latter property which he had obtained by the
settlement of the Great Northern and Northern Pacific deal, decided to
acquire control of a system of roads in the East in order to establish a
complete transcontinental line in the interest of the Union Pacific. It
was the theory that such a purchase by the Union Pacific would not defy
the law or outrage the popular conscience because the Union Pacific,
unlike the Pennsylvania, did not compete with the Baltimore and Ohio,
but was only a western extension of that system. Harriman in August,
1906, therefore purchased nearly all the Pennsylvania holdings in the
old Garrett property and thus obtained virtual control.
At this same time the Baltimore and Ohio had been developing a
"community of interest" plan on its own account. In the year 1903, it
acquired a substantial stock interest in the newly reorganized Reading
Company, which controlled the Philadelphia and Reading Railroad and
the Philadelphia and Reading Coal and Iron Company. It did not obtain
a majority interest but, with the Lake Shore and Michigan Southern
Railroad of the New York Central system, it now controlled the Reading
system. The Reading Company meanwhile had secured control of the Central
Railroad of New Jersey, over the lines of which the Baltimore and Ohio
reached New York City.
In the following years the Baltimore and Ohio property was still further
rounded out by purchasing the Cincinnati, Hamilton and Dayton, a small
system of doubtful value radiating through the State of Ohio and, by
additional extensions, into the soft coal fields of West Virginia. New
energy was put into the expansion and improvement of the southwestern
lines to St. Louis, while the eastern terminal properties were still
further improved.
The practical control of the Baltimore and Ohio remained in the hands of
the Union Pacific interests until 1913. In that year, however, the
Union Pacific liquidated its holdings by distributing them to its
own individual stockholders in the shape of a special dividend. The
Baltimore and Ohio thus became once more an independent property.
The story of the Baltimore and Ohio for the past decade has been mainly
a record of a growing, well-managed, and efficient business. It is
closely identified with the personality of its notable and efficient
president, Daniel Willard, a conspicuous example of the modern type of
railroad manager. In the earlier days of railroading, and especially
in the long period which came to an end with the death of Harriman, the
typical railroad president was usually a man of great wealth who
had secured his position by owning a large financial interest in the
property. The country was full of "Wall Street Railroad Generals." But
in recent years the efficient railroad head has come more and more to
be the practical railroad man who has risen from the ranks, who has no
important personal financial interest in the property but who is paid
an adequate salary to operate a system in a purely businesslike way.
Notable examples of this modern type of railroad president are, besides
Daniel Willard, Edward P. Ripley of the Atchison, Topeka and Santa, Fe,
Benjamin F. Bush of the Missouri Pacific, and Fairfax Harrison of the
Southern.
The efficient management of today is abundantly shown in the recent
record of the Baltimore and Ohio. President Willard has been unmolested
by financial interests and has been continuously backed up in his
policies by the owners of the road. As a result the Baltimore and Ohio
of the present decade has reached an enviable position as one of
the great Eastern trunk lines, comparing well with other progressive
properties like the Pennsylvania, the New York Central, the Southern,
the Illinois Central, and the Louisville and Nashville. Millions have
been poured into the property in the past fifteen years; its main lines
have been largely rebuilt; its rolling stock is chiefly of the most
modern types; and its terminals and structures are such as modern
conditions demand.