Mechanical inventions and improvements had no small part in the development of the transportation system. The early tracks, constructed of wood beams on which were fastened iron strips, and sometimes described as barrel-hoops tacked to laths, were replaced by iron, and still later by heavy steel rails. By 1890 about eighty per cent. of the mileage was composed of steel. Heavy rails were accompanied by improved roadbeds, heavier equipment and greater speed. A simple improvement was the gradual adoption of a standard gauge—four feet eight and a half inches—which replaced the earlier lack of uniformity. The process was substantially completed by the middle eighties, when many thousands of miles in the South were standardized. On the Louisville and Nashville, for example, a force of 8,763 men made the change on 1,806 miles of track in a single day. The inauguration of "standard" time also took place during the eighties. Hitherto there had been a wide variety of time standards and different roads even in the same city despatched their trains on different systems. In 1883 the country was divided into five vertical zones each approximately fifteen degrees or, in sun-time, an hour wide. Both the roads and the public then conformed to the standard time of the zone in which they were.
[Illustration:
Map of the United States showing railroads in 1870]
Of greater importance was the consolidation of large numbers of small lines into the extensive systems which are now familiar. The first roads covered such short distances that numerous bothersome transfers of passengers, freight and baggage from the end of one line to the beginning of the next were necessary on every considerable journey. No fewer than five companies, for example, divided the three hundred miles between Albany and Buffalo, no one of them operating more than seventy-six miles. In 1853, these five with five others were consolidated into the New York Central Railroad. Sixteen years later, in 1869, the Central combined with the Hudson River, and soon afterwards procured substantial control of the Lake Shore and Michigan Southern, the Rock Island, and the Chicago and Northwestern. As the result of this process a single group of men directed the interests of a system of railroads from New York through Chicago to Omaha. The Pennsylvania Railroad began with a short line from Philadelphia to the Susquehanna River, picked up smaller roads here and there—eventually one hundred and thirty-eight of them, representing two hundred and fifty-six separate corporations—reached out through the Middle West to Cincinnati, Chicago and St. Louis, and in 1871 controlled over three thousand miles of track, with an annual income of over forty million dollars. In the eighties a railroad war in northern New England started the consolidation of the Boston and Maine system.
The beneficial results of the growth of the transportation facilities of the nation were immediate and revolutionary. The fact that average freight rates were cut in halves between 1867 and 1890 helped make possible the economic readjustments after the Civil War to a degree that is not likely to be overestimated. Not only did railway construction supply work for large numbers of laborers and help bring about an ever greater westward migration, but it opened a market for the huge agricultural surplus of the Middle West. Without the market in the cities of the populous Atlantic Coast and Europe, the expansion of the West would have been impossible. Moreover, the railways brought coal, ore, cotton, wool and other raw materials to the Northeast, and thus enabled that section to develop its manufacturing interests.
[Illustration:
Map of the United States showing railroads in 1890]
Despite the admittedly great benefits resulting from the railroad system, there was a rising tide of complaint on the part of the public in regard to some aspects of its construction and management. It was objected, for example, that many of the western roads especially were purely speculative undertakings. Lines were sometimes built into new territory where competition did not exist and where, consequently, the rates could be kept at a high point. The Chicago, Burlington and Quincy presented such a case in 1856. Profits were so great as to embarrass the company, since the payment of large dividends was sure to arouse the hostility of the farmers who paid the freight rates. "This, indeed," declared the biographer of one of the presidents of the road, "was the time of glad, confident morning, never again to occur in the history of railroad-building in the United States." Sometimes lines were driven into territory which was already sufficiently supplied with transportation facilities, in order to compel the company already on the ground to buy out the new road. If, as time went on, traffic enough for both roads did not appear, they had to be kept alive through the imposition of high rates; otherwise, one of them failed and the investors suffered a loss. The opportunities for profit, however, were so numerous that the amount of capital reported invested in railways increased by $3,200,000,000 during the five years preceding 1885.
A practice which was productive of much wrong-doing and which was suggestive of more dishonesty than could be proved, related to the letting of contracts for the construction of new lines. The directors of a road frequently formed part or all of the board of directors of a construction company. In their capacity as railroad directors they voted advantageous contracts to themselves in their other capacity, giving no opportunity to independent construction companies who might agree to build at a lower cost. As the cost of construction was part of the debt of the road, the directors were adding generously to their own wealth, while the company was being saddled with an increased burden. It cost only $58,000,000, for example, to build the Central Pacific, but a construction company was paid $120,000,000 for its services. When John Murray Forbes was investigating the Chicago, Burlington and Quincy he found that the president of the road was paying himself a salary as president of a construction company, out of the railroad's funds, without the supervision of the treasurer or any one else, and without any auditing of his accounts. Moreover, six of the twelve members of the board of directors were also members of the construction company. Such an attempt to "run with the hare and hunt with the hounds" was suggestive, to say the least, of great possibilities of profit to the directors and a constant invitation to unnecessary construction.
Another grievance against the railways was the reckless, irresponsible and arrogant management under which some of them operated. An eminent expert testified before an investigating commission in 1885 that Jay Gould once sold $40,000,000 of Erie Railway stock and pocketed the proceeds himself. Most of the energy of the officers of some roads was expended in deceiving and cheating competitors. "Railroad financiering" became a "by-word for whatever is financially loose, corrupt and dishonest." If certain roads demonstrated by successful operation that honest methods were better in the long run, their probity received scant advertisement in comparison with the unscrupulous practices of their less respectable neighbors. It is to be remembered, also, that the growth of the railway system had been so rapid and so huge that it was impossible to meet the demand for trained administrators. Naturally, men possessed of little or no technical understanding of transportation problems could not provide highly responsible management.
The dishonest manipulation of the issues and sales of railroad stocks is a practice that was not confined solely to the twenty-five years after the Civil War, but the numerous examples of it which occurred during that period aggravated the exasperation which has already been mentioned. Daniel Drew, the treasurer of the Erie Railway in 1866, furnished an excellent illustration of this type of activity. Drew had in his possession a large amount of Erie stock which had been secretly issued to him in return for a loan to the company. The stock in the market was selling near par and still rising. Drew instructed his agents to make contracts for the future delivery of stock at prices current at the time when the contracts were made. When the time came for fulfilling his contracts, Drew suddenly threw the secret stock on the market, drove general market prices on Erie stock down from ninety-five to fifty, bought at the low figure, and sold at the high price which was called for in the contracts made by his agents. The effect of such sharp dealing on investors, the railroad or the public seems not to have entered into the calculation. Indeed, the Erie and many another road was looked upon by its owners merely as a convenient piece of machinery for producing fortunes.
Gould, Drew and other railroad men of their time were also expert in the practice of "stock-watering." This consists in expanding the nominal capitalization of an enterprise without an equivalent addition to the actual capital. The rates which the railway has to charge the public tend to increase by approximately whatever dividends are paid on the water.[1] Then, as later, when a road was prospering greatly it would sometimes declare a "stock dividend," that is, give its stockholders additional stock in proportion to what they already owned. The addition would frequently be water. Its purpose might be to cover up the great profits made by the company. If, on a million dollars' worth of stock, it was paying ten per cent. dividends, the public might demand lower freight and passenger rates; but if the stock were doubled and earnings remained stationary, then the dividends would appear as five per cent.—an amount to which there could be no objection. H.V. Poor, the railroad expert, declared before a commission of investigation in 1885 that the New York Central Railroad was carrying $48,000,000 of water, on which it had paid eight per cent. dividends for fifteen years. He also estimated that of the seven and a half billions of indebtedness which the roads of the country were carrying in 1883, two billions represented water. Others thought that the proportion of water was greater. In any case the unnecessary burden upon business to provide dividends for the watered stock was an item of some magnitude. The investor, however, looked upon stock-watering with other eyes. The building of a new road was a speculation; the profits might be large, to be sure, but there might in many cases be a loss. In order to tempt money into railroad enterprises, therefore, inducements in the form of generous stock bonuses were necessary.