Part 27

This was not all. The same economy which resulted from the union of road and rolling-stock under one management was still further subserved by the consolidation of connecting lines. This change did not come about so suddenly as the other. Half a century had elapsed before it was fully carried out. At first there was no need of it. The early railroads were chiefly built for local traffic, and especially for the carriage of local passengers. They were like the horse railroads of the present day in the simplicity of their organization and the shortness of their lines. England in 1847 had chartered 700 companies, with an average authorized length of hardly fifteen miles each. The line from Albany to Buffalo and Niagara Falls was in the hands of a dozen independent concerns. These were but types of what existed all over the world. As through traffic, and especially through freight traffic, grew in importance, this state of things became intolerable. Frequent transshipment was at once an expense to the railroad and a burden to the public. Even when this could be avoided, there was a multiplication of offices and a loss of responsibility. The system of ownership and management had to adapt itself to the technical necessities of the business. The change was not the result of legislation; nor was it, except in a limited sense, the work of men like Vanderbilt or Scott. It occurred in all parts of the world at about the same time. It was the result of business necessity, strong enough to shape legislation, and to find administrative leaders who could meet its demands.

From the very first there were some men who felt the importance of the railroads as national lines of communication. The idea was present in the minds of the projectors of the Baltimore & Ohio, of the Erie, and of the Boston & Albany. But it was not until 1850 that it became a controlling one; nor was it universally accepted even then. As late as 1858 we find that there was a violent popular agitation in the State of New York to prohibit the New York Central from carrying freight in competition with the Erie Canal. It was gravely urged that the railroad had no business to compete with the canal; that the latter had a natural right to the through traffic from the West, with which the railroads must not interfere. It is less than thirty years since a convention at Syracuse, representing no small part of the public sentiment of New York, formally recommended "the passage of a law by the next Legislature which shall confine the railroads of this State to the business for which they were originally created."

But matters had gone too far for effective action of this kind. Besides the New York Central, the Erie and the Pennsylvania were in condition to handle the through traffic which Western connections were furnishing. These connections themselves were rapidly growing in importance. Prior to 1850 there were very few railroads west of the Alleghanies. In 1857 there were thousands of miles. The policy of land-grants acted as an artificial stimulus to the building of such roads; and a land-grant road, when once built, was almost necessarily dependent on through traffic for its support. It could not be operated locally; it was forced into close traffic arrangements which paved the way for actual consolidation.

The war brought this development to a stand-still for the time being; but it was afterward resumed with renewed vigor. It is probable that the final effect of the war was to hasten rather than to retard the growth of large systems. In the first place, it familiarized men's minds with national ideas instead of those limited to their own State. It is hard for us to realize that our business ideas were ever thus confined by artificial boundaries; but if we wish proof, we have only to look at the original location of the Erie Railway from Piermont to Dunkirk. Both were unnatural and undesirable terminal points; but people were willing to submit to inconvenience and to actual loss in order that the railroad might run as far as the New York State limits would allow, and not one whit farther. Similar instances can be found in other States. Hard as it is to understand, there seems to have been a positive jealousy of interstate traffic. The war did much to remove this by making the different sections of the country feel their common interest and their mutual dependence. It also had more direct effects. It produced special legislation for the Pacific railroads as a measure of military necessity; and this was but the beginning of a renewal of the land-grant policy, no longer through the medium of the States, but in the Territories and by the direct action of Congress. All the results in the way of extension or consolidation which had been noted in the first land-grant period were more intensely felt in the second. Never was there a time when business foresight and administrative power were more needed or more richly rewarded than in railroad management during the third quarter of the century.

In 1847 J. Edgar Thomson, an engineer of experience, entered the service of the Pennsylvania Railroad, of which he afterward became president. Three years later, a young man without experience in railroad business applied to him for a position as clerk in the station at Duncansville, and was, with some hesitation, accepted. Not long after--so runs the story--an influential shipper entered the station, and demanded that some transfers should be made in a manner contrary to the rules of the company. This the clerk refused to do; and when the influential shipper tried to attend to the matter himself, he was forcibly ejected from the premises. Indignant at this, he complained to the authorities, demanding that the obnoxious employee be removed from his position. He was--and was promoted to a much higher one. This is said to have been the beginning of the railroad career of Thomas Alexander Scott. Edgar Thomson was a sufficiently able man to appreciate Scott's talent at its full worth, and took every opportunity to make it useful in the service of the company. Both before and after the war the system was extended in every direction; and the man who in 1850 had need of all his nerve to defy a single influential shipper was a quarter of a century later at the head of 7,000 miles of the most valuable railroad in the country.

As an enterprising and active railroad organizer, Scott was probably unrivalled--especially when aided by the soberer judgment of Thomson; nor has the operating department of any other railroad in the country reached the standard established on the Pennsylvania by Scott and Thomson and the men trained up under their eyes. But in business sagacity and those qualities which pertain to the financial management of property, Scott was surpassed by Vanderbilt. The work of the two men was so totally different in character that it is hard to compare them. Vanderbilt was not so distinctively a railroad man as Scott. He had already made his mark as a ship-owner before he went into railroads. But he was a man who was bound to take the lead in the business world; and he saw that the day for doing it with steamships was passing away, and that the day of railroads was come. He therefore presented his best steamship to the United States Government in a time when it was sorely needed, disposed of the others in whatever way he could, and turned his undivided attention to railroads.

In 1863 Vanderbilt began purchasing Harlem stock on a large scale. The road was unprofitable, but he at once improved its management and made it pay. Speculators on the other side of the market had not foreseen the possibility of this course of action, and were badly deceived in their calculations. Vanderbilt had begun buying at as low a figure as 3; within little more than a year he had forced some of its opponents to buy it of him at 285. He soon extended his operations to Hudson River, and somewhat later to New York Central. Defeated in an attempt to gain control of Erie, he turned his attention farther west; and was soon in virtual possession of a system which, in his hands at any rate, was fully a match for all competitors.

These systems did not long remain without rivals. The Baltimore & Ohio, whose development had been interrupted by the war, soon resumed, under the leadership of John W. Garrett, its old commanding position in the railroad world. Farther west, in the years succeeding, systems were developed and consolidated which surpassed their eastern connections in aggregate mileage. The combined Wabash and Missouri Pacific system in its best days included about 10,000 miles of line under what was virtually a single management. The Southern Pacific, the Atchison, the Northwestern, and the St. Paul systems control each of them in one way or another decidedly over 5,000 miles; and a half-dozen others might be named, scarcely inferior either in magnitude or in commercial power.

The result of all this was to place an enormous and almost irresponsible power in the hands of a few men. The directors of such a system stand for thousands of investors, tens of thousands of employees, and hundreds of thousands of shippers. They have the interests of all these parties in their hands for good or ill. If they are fit men for their places, they will work for the advantage of all. A man like Vanderbilt gave higher profits, larger employment, and lower rate as the result of his railroad work. But if the head of such a system is unfit for his trust intellectually or morally, the harm which he can do is almost boundless.

Of intellectual unfitness the chance is perhaps not great. The intense competition of the modern business world makes sure that any man, to maintain his position, must have at least some of the qualities of mind which it exacts. But of moral unfitness the danger is all the greater, because some of the present conditions of business competition directly tend to foster it. A German economist has said that the so-called survival of the fittest in modern industry is really a double survival, side by side, of the most talented on the one hand and the most unscrupulous on the other. The truth of this is already apparent in railroad business. A Vanderbilt on the Central meets a Fisk on the Erie. In spite of his superior power and resources he is virtually beaten in the contest--beaten, as was said at the time, because he could not afford to go so close to the door of State's prison as his rival.

The manager of a large railroad system has under his control a great deal of property besides his own--the property of railroad investors which has been placed in his charge. Two lines of action are open to him. He may make money _for_ the investors, and thereby secure the respect of the community; or he may make money _out_ of the investors, and thereby get rich enough to defy public opinion. The former course has the advantage of honesty, the latter of rapidity. It is a disgrace to the community that the latter way is made so easy, and so readily condoned. A man has only to give to charitable objects a little of the money obtained by violations of trust, and a large part of the world will extol him as a public benefactor. Nay, more; it seems as if some of our financial operators really mistook the _vox populi_ for the _vox Dei_, and believed that a hundred thousand dollars given to a theological seminary meant absolution for the past and plenary indulgence for the future. It is charged that one financier, when he undertook any large transaction which was more than usually questionable, made a covenant that if the Lord prospered him in his undertaking he would divide the proceeds on favorable terms. But--as Wamba said of the outlaws and "the fashion of their trade with Heaven"--"when they have struck an even balance, Heaven help them with whom they next open the account!"

A word or two as to the methods by which such operations are carried on, and the system which makes them possible. From the very first, railroads have been built and operated by corporations. A number of investors, too large to attend personally to the management of the enterprise, took shares of stock and elected officers to represent them. These officers had almost absolute power; but while matters were in this simple stage, there was no great opportunity for its abuse. The losses of investors were due to _bona fide_ errors of judgment rather than to misuse of power. But soon the corporations found it convenient to borrow money by mortgaging their property. We then had two classes of investors--stockholders and bondholders, the former taking the risks and having the full control of the property, the latter receiving a relatively sure though perhaps smaller return, but having no control over the management as long as their interest was regularly paid.

Of course there is always some danger when the men who furnish the money do not have much control of the enterprise; but as long as the relations of stock and bonds were in practice what they pretended to be in theory, the resulting evils were not very great. Matters soon reached another stage. The amount of money furnished by the bondholders increased out of all proportion to that furnished by the stockholders. Sometimes the nominal amount of stock was unduly small; more commonly only a very small part of the nominal value was ever paid in.[28] The stock was nearly all water, simply issued by the directors as a means of keeping control of the property. After the crisis of 1857, people had become shy of buying railroad stock; but they bought railroad bonds because they thought they were safe. This was the case only when there was an actual investment of stockholders behind them; without this assurance, bonds were more unsafe than stock had been, because the bondholders had still less immediate control over the directors and officials. If there was money to be made at the time, the directors made it; if there was loss in the end, it fell upon the bondholders.

Let us take a specific case. An inside ring issues stock certificates to the value of a million dollars, on which perhaps a hundred thousand is paid in. They then publish their prospectus and place on the market two million of bonds with which the road is to be built. They sell the bonds at 80, reimburse themselves for the $100,000 advanced by charging the moderate commission of 5 per cent. for services in placing the loan, and have at their disposal $1,500,000 cash. These same directors now appear as a construction company, and award themselves a contract to pay $1,500,000 for work which is worth $1,200,000 only. The road is finished, and probably does not pay interest on its bonds. It passes into the hands of a receiver. Possibly the old management may have an influence in his appointment. At the worst, they have got back all the money they put in, _plus_ the profits of the construction company; in the case supposed, 300 per cent. The bondholders, on the other hand, have paid $1,600,000 for a $1,200,000 road.

But the troubles of the bondholders and the advantages of the old directors by no means end here. When the receiver takes possession he discovers that valuable terminals, necessary for the successful working of the road, are not the property of the company, but of the old directors. He finds that the road owns a very inadequate supply of rolling-stock, and that the deficiency has been made up by a car-trust--also under the control of the old directors. Each of these things, and perhaps others, must be made the subject of a fight or of a compromise. The latter is often the only practicable alternative, and almost always the cheaper one; by its terms the ring perhaps secures hundreds of thousands more, at the expense of the actual investors.

These are but a few of the many ways in which a few years' control of property may be made profitable to the officials at the expense of legitimate interests. In a case like this, all depends upon the possibility of selling bonds. It is usually impossible to place the whole loan before construction; and if the market-price falls below the cost of the work undertaken, as was the case with the West Shore, the loss falls upon the construction company. Such accidents were for a long time rare. It took the public nearly twenty years to learn the true character of imperfectly secured railroad bonds. Within the past five years it seems to have become a trifle wiser. The crisis of 1873 was insufficient to teach the lesson; but that of 1885 has been at least partially successful in this respect.

In cases like the one just described the bondholders are largely to blame for their own folly. But sometimes the loss falls on those who are in no way responsible for it. A railroad may be built as a blackmailing job. If a company is sound and prosperous, speculators may be tempted to build a parallel road, not with the idea of making it pay, but because they can so damage the business of the old road as to force it to buy them out. They build the road to sell.

It is but fair to say that operations as bad as those just described are the exception rather than the rule. But the fact that they can exist at all is by no means creditable to our financial methods. The whole system by which directors can use their positions of trust to make contracts in which they are personally interested puts a premium on dishonesty. Such contracts are forbidden in England. It may be true, as is urged by many railroad officials of undoubted honesty, that it would be inconvenient to apply the same law here; but on the whole, the gain would far outweigh the loss.

At the very best, a railroad president is subject to temptations to misuse his financial powers, all the more dangerous because it is impossible to draw the line between right and wrong. He knows the probable value of his railroad and of the property affected by its action a great deal better than any outsider possibly can. The published figures of earnings of the road are the result of estimates by himself and his subordinates. Out of the current earnings he pays current expenses, and probably charges permanent expenditures to capital account. But what expenditures are current and what are permanent? This division is itself the result of an estimate, and a very doubtful one at that. There are some well-established general principles, but none which will apply themselves automatically. With the best will in the world he cannot make his annual reports give a thoroughly clear idea of what has been done. Is he to be forbidden to buy stock when it seems too low, or sell it when it is high? Shall we refuse him the right to invest in other property which he sees will advance in value? Apparently not; and yet, if we allow this, we open the door for some of the worst abuses of power which have occurred in railroad history. The line between good faith and bad faith in these matters is a narrow one, and the average conscience cannot be trusted to locate it with accuracy.

But the relations to the investors cover but a small part either of the work or of the responsibility of the railroad authorities. They are managing not merely a piece of property, but a vast and complicated organization of men, and an instrument of public service. In all these capacities their cares are equally great. The operating and the traffic departments are not less important than the financial department. The relations of the railroad to its employees, and to the business community at large, are even more perplexing than its relations to the investors.

Of the questions arising between the railroad and its employees we are just beginning to realize the full importance. They are not matters to be settled by private agreement or private war. If they involve a serious interruption of the business of the community they concern public interests most vitally. The community cannot afford to have its business interrupted by railroad strikes. On the other hand, it cannot allow the men to make this public duty of the railroads a means of enforcing their own will on every occasion, to the detriment of all discipline and responsibility, or in disregard of investors' rights. How to compromise between these two conflicting requirements is one of the most serious problems of the immediate future.[29] Little progress in this direction has as yet been made, or even systematically attempted.

The questions arising from the relations of the railroads to those who use them are wider and older. From the very outset attempts were made to regulate railroad charges by law in various ways. The fear at that time was that they might be made unreasonably high. This fear proved groundless. From the outset the rates were rather lower than had been expected, and much lower than by many of the means of transportation which railroads superseded. These low rates caused a great development in business; and this, in turn, gave a chance for such economy in handling it that rates went still lower. Each new invention rendered it easier to do a large business at cheap rates. The substitution of steel rails for iron, which began shortly after the close of the war, had an enormous influence in this respect. This was not merely due to the direct saving in repairs, which, though appreciable, was moderate in amount. It was due still more to improvements in transportation which followed. It was found that steel rails would bear heavier rolling-stock. Instead of building ten-ton cars to carry ten tons of cargo, companies built twelve-ton cars to carry twenty tons of cargo, or fourteen-ton cars to carry thirty tons; and they made the locomotives heavy enough to handle correspondingly larger trains. A given amount of fuel was made to haul more weight; and of the weight thus hauled, the freight formed a constantly increasing proportion as compared with the rolling-stock itself. The system of rates was adopted to meet the new requirements. Charges were made incredibly low in order to fill cars that would otherwise go empty, or to use the road as nearly as possible to its full capacity. In the twenty years following the introduction of steel rails the traffic of the New York Central increased from less than 400,000,000 ton-miles to decidedly over 2,000,000,000; while the average rates fell from 3.09 cents per ton per mile in 1866 to 0.76 cent in 1886. This is but a single instance of a process which has gone on all over the country. The average freight charge on all railroads of the country to-day is a little over one cent per ton a mile: less than half what would have been deemed possible on any railroad a few years ago.

The progress of railroad consolidation contributed greatly to this economy. It saved multiplication of offices; it saved re-handling of freight; it enabled long-distance business to be done systematically. So great were its advantages that co-operation between connecting lines was carried far beyond the limits of actual consolidation. Through traffic was handled without transshipment, sometimes by regularly incorporated express companies or freight companies on the same plan, but more commonly by what are known as fast-freight lines.[30] These are little more than combinations for keeping account of through business; they are by no means ideal in their working, but they have the advantage of few expenses and no income, so that the temptation to steal, which is the bane of such organizations, is here reduced to a minimum.