In a previous chapter there has been related the early history of the
great line that first joined the Atlantic and the Pacific Oceans--the
Union Pacific. But the history of this property in recent years is
almost as startling and romantic as its story in the sixties and
seventies. It was not until recent days that the golden dreams
entertained by these early builders came true. The man who really
reaped the harvest and who at the same time gave the Union Pacific that
position among American railroads which its founders foresaw was the
last, and some writers think, the greatest of all American railroad
leaders.
The Union Pacific, a bankrupt railroad in 1893, lay quiescent under the
stress of the hard times that lasted until 1898. The long story of its
tribulations hardly made it a tempting morsel for the men who were
then most active in the railroad field. In 1895 or 1896 the several
protective committees which had been appointed to look after the
interests of stockholders and defaulted bondholders had tried to induce
J. P. Morgan to undertake the reorganization, but he had refused.
To reorganize the Union Pacific meant that not far from one hundred
millions of new capital would sooner or later have to be supplied, and
there was no other banking-house in America at that time which seemed
strong enough for the task. Smaller concerns were all involved in the
Morgan syndicates or in other undertakings, and a combination of these
at the moment seemed out of the question.
About this time the German-Jewish bankinghouse of Kuhn, Loeb and Company
began looking into the situation. Kuhn, Loeb and Company were known as
a very conservative but very rich concern with close connections in
Frankfort and Berlin. Though it had been long established in New York
it had not been identified with the railroad reorganization movement nor
had it been prominent as an investing or underwriting institution.
But now the active partner of the business, Jacob H. Schiff, set
out seriously to persuade the various committees to adopt a plan of
reorganization which he had devised. Though he made some progress,
he soon found much secret opposition and thought that Morgan might be
quietly attempting to secure the property. Morgan, however, was not
interested. The mystery was still unsolved.
The fact was that Edward H. Harriman, who for some years past had been
a powerful influence in the affairs of the Illinois Central Railroad but
who was unknown to the average Wall Street promoter and totally unheard
of throughout the country, had made up his mind to reorganize the
Union Pacific Railroad. He therefore began to work quietly with various
interests in an attempt to tie up the property. But soon he, like
Schiff, encountered serious opposition. He also immediately jumped to
the conclusion that Morgan was secretly at work, and he called on Morgan
for the facts. Morgan replied, as he had replied to Schiff, that he was
not interested, but that he wished Harriman success.
As Schiff continued to meet with difficulty, he soon called on Morgan
again. Again Morgan replied that he was not interested. "But," he said,
"I think if you will go and see a chap named E. H. Harriman you may find
out something."
Who was Harriman? Schiff had hardly heard of him and had never met him.
How could a small man like Harriman, with no money, no powerful friends,
no big financial backing, reorganize a great system like the Union
Pacific Railroad? The idea seemed ridiculous. Nevertheless, as the
opposition continued, Schiff soon got in touch with Harriman. In the
course of a conference, he warned this daring interloper to keep his
hands off the Union Pacific. But Harriman was not moved by threats. On
the contrary, he insisted that Schiff should leave the Union Pacific
alone; that he himself had already worked out his plans to reorganize
it. Schiff laughed at this idea, termed it chimerical, and asserted that
Kuhn, Loeb and Company were easily able to obtain the needed one hundred
millions or more through their foreign connections on a basis of from
four to five per cent, and that in America no such sum of new capital
could at that time be raised through banking activities at better than
six or seven per cent.
Harriman then sprang his surprise on Schiff. For some years he had been
financially interested in the affairs of the Illinois Central. This
property had at that time higher credit than any other American
railroad; it had raised large sums of capital in Europe on as low a
basis as three per cent, and on most of its bonds paid only three and
one-half per cent interest. For nearly fifty years the property had been
paying dividends with hardly an interruption, and altogether it had
an enviable reputation as one of the soundest investments. Harriman's
influence in the affairs of the company had been increasing quietly for
years; the management had been left almost completely in his hands; and
the directors were in effect largely his puppets, and a majority would
do his bidding in almost anything he might propose.
Harriman now announced to Schiff that he intended to have the Union
Pacific reorganized as an appendage of the Illinois Central. The
necessary one hundred millions would be raised by a first mortgage on
the entire Union Pacific lines at three per cent, and the mortgage would
be guaranteed by the Illinois Central, while the latter company would
receive a majority of the new Union Pacific stock in consideration for
giving its guarantee.
Here was a poser for Schiff, who saw at once that if Harriman could use
the Illinois Central credit in this way, he certainly could carry out
his plan. Schiff soon found that Harriman would have no difficulty in
using Illinois Central credit. The upshot of the matter was that the two
men got together and jointly reorganized the Union Pacific. Harriman
was made chairman of the Board of Directors, and Kuhn, Loeb and Company
became the permanent bankers for the new railroad system.
Thus with one bound Harriman had leaped to the forefront in American
railroad finance and by a bold act which was characteristic of the man.
For Edward H. Harriman was not only a hardheaded, practical business
builder who like Morgan thought in big figures, but he was also a bold
plunger, which Morgan was not. Possessing a vivid imagination, he not
only saw far into the future but he also planned far into that same
future. Morgan was also a man of vision, but his vision did not carry
him far beyond the present. The things Morgan saw best were those
immediately before him, while the things that Harriman saw best were at
a distance. Morgan's big plans of procedure were based on what he saw in
a business way in the near future; he reorganized his railroads with the
idea of making them pay their way as soon as possible and of showing a
good return on the capital invested. He thought little of what might be
the outcome a decade or two hence or of what combinations might later
be worked on the chessboard as a result of his immediate moves. Morgan's
mind was not philosophical; it was intensely practical.
While Morgan declined the proffered control of the Union Pacific on the
theory that it was only a "streak of rust" running through a sparsely
settled country and across an arid desert, Harriman dreamed of the great
undeveloped West filling up with people during the following generation,
of the empty plains being everywhere put under cultivation, and of
the arid desert responding to the effects of irrigation on a large and
comprehensive scale. He foresaw the wonderful future of the Pacific
States--the opening up of natural resources in the mountains, the steady
stream of men and women who would ultimately emigrate to this vast
section from the East and from foreign lands and who would build up
towns and great cities. At the same time, with that practical mind of
his, Harriman calculated that the Union Pacific Railroad--situated in
the heart of this huge area, having the most direct and shortest line to
the Pacific, and with all traffic from the East converging over half a
dozen feeder lines to Omaha and Kansas City--would haul enormous
amounts of tonnage just as soon as the Western country revived from the
depression under which it had been struggling for half a dozen years.
When Harriman took hold of the Union Pacific he had already determined
to absorb the Oregon lines, with their tributaries running up into the
Puget Sound country and to the Butte mining district; to get hold of the
Southern Pacific properties at the earliest possible moment; and to link
the Illinois Central in some way to the Union Pacific so that the latter
would have its own independent outlets to Chicago and St. Louis. All
these plans he ultimately accomplished, as well as many others, some of
which his farseeing imagination may have conceived then.
While Harriman was able very promptly to carry through his first scheme
and recapture the Oregon lines, which had been separately reorganized as
a result of the receivership, he found it a far more difficult matter to
secure a dominating interest in the great system of railroads controlled
by Collis P. Huntington. Huntington was a hard man to deal with. Himself
one of the practical railroad magnates of his time, he also had the gift
of vision and undoubtedly foresaw that the ultimate result must be a
consolidation of the properties; but he fully expected that his company
would absorb the Union Pacific. Had it not been that during the panic
period the Southern Pacific had heavy loads of its own to carry and that
its credit was none too high, Huntington might then have attempted to
gain control of the Union Pacific.
Events finally worked to the benefit of Harriman. When Collis P.
Huntington died in 1900, it was in most people's minds only a question
of time as to when the powerful Harriman interests would take over the
Southern Pacific properties. Consequently there was no surprise when
in 1901 announcement was made that the Union Pacific had purchased the
holdings of the Huntington estate in the Southern Pacific Company and
was therefore in virtual control.
By a master stroke the railroad situation in the West had been radically
changed. The Huntington system comprehended many properties of large
and growing value, which were now feeling the full benefit of the
agricultural prosperity at that time spreading throughout the great
Southwest. Aside from this prize, the Union Pacific acquired the main
line to the Pacific coast which it had always coveted and thus added to
its system over nine thousand miles of railroad and over four thousand
miles of water lines, besides obtaining a grip on the railroad empire
of this entire portion of the continent not to be readily loosened by
competitors.
At the same time that Harriman was strengthening his position on the
west and south, the Great Northern and Northern Pacific properties, both
now operated under the definite control of James J. Hill, were following
a policy of expansion fully as gigantic as that of the Union Pacific.
The Great Northern lines operating from Duluth to the Pacific coast had
become powerful elements in the Western railroad situation, and Hill had
devised many plans for diverting to the north the through traffic coming
from the central section of the continent. He had established on the
Great Lakes a line of steamships running from Duluth to Buffalo, and
was also operating on the Pacific Ocean steamship lines which gave him a
connection with Japan, China, and other oriental countries.
After the reorganization of the Northern Pacific Railroad, which fell
under the domination of Morgan, the affiliations of the Hill and Morgan
interests became very close, and in a short time Hill had as secure a
grip on the Northern Pacific as he had always had on the Great Northern.
This powerful combination looked like a menace to the Harriman-Kuhn-Loeb
interests which controlled the territory to the south and radiated
throughout the State of Oregon. When, therefore, the Northern Pacific
began a little later to build into territory in Oregon and Washington
which the Union Pacific regarded as a part of its own preserves, much
bad feeling was engendered between the two interests. Matters were
brought to a climax in the spring of 1901 when the Harriman people
suddenly made the discovery that the Hill-Morgan combination had been
quietly buying control of the valuable Chicago, Burlington and Quincy
Railroad, which operated a vast system west and northwest of Chicago,
penetrated as far into the Union Pacific main-line territory as Denver,
and connected at the north with the eastern terminals of both the Great
Northern and Northern Pacific systems. This move meant but one thing to
Harriman: the Hill-Morgan interests were trying to surround the
Union Pacific and make it powerless, just as the Southern Pacific had
attempted to do many years before.
Harriman now played one of his bold strokes. He immediately began to
purchase Northern Pacific stock in the open market in order to secure
control of that property. It was well known that while the Hill-Morgan
alliance dominated the Northern Pacific, it did not actually own a
majority of the stock, and to secure this majority was Harriman's
purpose. This move would effectually check the invasion of the Union
Pacific territory by giving the Harriman interests a voice in the
control of the Chicago, Burlington and Quincy.
The price of Northern Pacific common stock soared day after day until on
May 9, 1901, it sold at $1000 a share, and a momentary panic ensued. At
the time Morgan was on the ocean and could not be reached. His partners
were apparently not equal to the emergency. But Harriman was. When the
panic reached its height, both interests had purchased far more than a
majority of Northern Pacific stock--in contracts for future delivery.
It was seen that to insist on the delivery of shares which did not exist
would not only bankrupt every "short" speculator, large and small, but
would undoubtedly bring all Wall Street tumbling down like a house of
cards. So, in the midst of the excitement, the two interests reached a
compromise.
The outcome was the formation of the Northern Securities Company with a
capital of $400,000,000, nearly all of which was issued to acquire the
capital stocks of the Northern Pacific and Great Northern railroads.
All the properties, including the Burlington, thus came under the joint
control of the Harriman and Hill groups. The division of territory on
both the east and the west was worked out amicably: the Northern Pacific
abandoned some of its plans for extensions in Oregon, and the Burlington
system remained as it was, with the understanding that no extensions
should be built to the Pacific coast. Later the Burlington acquired
control of a cross-country system, the Colorado Southern, extending
south to the Gulf, but to this day has made no attempt to build beyond
the lines it owned to Wyoming in 1901.
As is well known, the Northern Securities Company was subsequently
declared to exist in violation of the Sherman Anti-Trust Act, and on a
decision of the United States Supreme Court in 1904 it was practically
dissolved and all its securities were returned to the original holders.
This dissolution left the Hill-Morgan interests in undisputed control of
the Burlington properties, but harmonious relations had in the meantime
been established among the contestants, assuring an equitable division
of territory and traffic. The final outcome was that the Union Pacific
Railroad Company, which had purchased with its large surplus and by the
use of its high credit many million dollars' worth of the capital stocks
of the Great Northern and Northern Pacific railroads, received these
stocks back after several years of great prosperity and after
the appreciation in the market values of the stocks had exceeded
$60,000,000. There was no further necessity for holding them and most
of the stocks were sold at the high prices of 1905 and 1906, with actual
net profit for the Union Pacific Railroad in excess of $50,000,000. No
such gigantic financial transaction as this had ever before been carried
through by an American railroad corporation.
With an overflowing treasury in the Union Pacific, Harriman immediately
turned his face toward the East. It had for years been one of his
dreams to control a continuous line of railroad from the Atlantic to the
Pacific. As early as 1902 he had all but completed negotiations for the
acquisition of the New York Central lines in the interest of the Union
Pacific; but this plan had met with opposition from the Vanderbilts
and Morgan and had been dropped. Harriman now took advantage of an
opportunity which presented itself to acquire for the Union Pacific what
was practically a dominating interest in the Baltimore and Ohio, a
large block of whose stock was disposed of by the Pennsylvania Railroad.
Harriman had already largely added to the Union Pacific's holdings in
the Illinois Central. Jointly with the Lake Shore of the Vanderbilt
system, the Baltimore and Ohio had, as already described, acquired a
dominating interest in the Reading Company, including all the latter
company's interests and affiliations as well as its entry into the New
York district through control of the Central Railroad of New Jersey.
Harriman, therefore, by a single stroke, now found himself in practical
possession of a coast-to-coast system of railroads extending all the way
from New York to San Francisco, Portland, and Los Angeles, and passing
through all the important cities of the country. The Illinois Central
system, operating nearly five thousand miles of road southward from
Chicago to New Orleans, passing through St. Louis, with an arm reaching
out to Sioux City on the west and a network of branches covering the
Middle States, had thus become the great link welding together the
eastern and western Harriman systems.
Later the Union Pacific acquired large interests in other properties and
purchased substantial amounts of stock in the Atchison, Topeka and
Santa Fe, the New York Central, the St. Paul, and the Chicago and North
Western railroads. It also acquired a dominating interest in the Chicago
and Alton property, operating from Chicago to St. Louis, with Western
branches. In the panic period of 1907, Harriman personally purchased
from Charles W. Morse, who had acquired the property from Morgan a short
time before, the entire capital stock of the Central of Georgia Railway,
which he later turned over to the Illinois Central. The Central of
Georgia lines connect at several points with the Illinois Central and
have given the system various outlets on the South Atlantic seaboard.
Harriman died in September of 1909, and with his death the wizard touch
was clearly gone. What would have been the later history of the Union
Pacific had he lived can be only conjectured. The new management, with
Judge Robert S. Lovett at its head, continued the broad and efficient
operation which had characterized Mr. Harriman's regime, but it soon
abandoned the policy of further growth and expansion. This alteration in
policy, however, was perhaps more the result of changing conditions than
of relinquishment of Harriman's aims. Many new laws for the regulation
of the railways had been passed, and in 1906 the powers of the
Interstate Commerce Commission were greatly augmented. A period
of reform had now begun, and after 1909 a wave of "progressivism"
overspread the country. New interpretations were given to the Sherman
Act, and suits were soon under way against all the railroads and
industrial combinations which appeared to be infringing that statute.
The great Standard Oil and Tobacco trusts were dissolved in this period,
and a suit which was brought to divorce the Union Pacific and the
Southern Pacific Company was finally decided against the Union Pacific,
with the result that the two big properties were separated. The Union
Pacific turned a large amount of its Southern Pacific stock holdings
over to the Pennsylvania Railroad, in exchange for which it received
from the Pennsylvania the remainder of the Baltimore and Ohio stock
which the Pennsylvania interests had retained after the sale to the
Union Pacific in 1906. Immediately after this, the Union Pacific
management, seeing no particular advantage in retaining an interest in
the Baltimore and Ohio, gave the shares to its own stockholders in a
special dividend.
Thus, since Harriman's death, the Union Pacific Railroad has once more
returned to very much its original condition prior to its acquisition
of the Southern Pacific. It still controls the Illinois Central and
the Chicago and Alton and has investment interests in a large number of
other railroads. It is still the premier system of the West and promises
to remain so indefinitely; but the bold Harriman touch is gone and will
never return.