-Caveat Lector- from: http://cprr.org/Museum/Railroad_Builders/Railroad_Builders_11.html ----- CHAPTER XI. THE LIFE WORK OF EDWARD H. HARRIMAN
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. Courtesy The James J. 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