Chapters on the History of the Southern Pacific

by Stuart Daggett

Harriman System

This purchase by the Union Pacific of a controlling interest in the stock of the Southern Pacific, made the latter a partner in a railroad system of about 18,500 miles, stretching from Omaha, Kansas City, and New Orleans on the east, to Los Angeles, San Francisco, and Portland on the west, and, by means of the Morgan Steamship Line, reaching New York. In addition, the Union Pacific owned a majority of stock in the Pacific Mail Steamship Company, which carried freight and passengers from the Pacific Coast to the Orient and to Panama. Of the total mileage west of the Mississippi-Missouri River and south of the Northern Pacific Railroad, the Harriman management controlled 19 per cent. Finally, through stock ownership in the Illinois Central, the Chicago and Alton, and other lines, and by contract with the San Pedro, Los Angeles, and Salt Lake, it possessed in varying degree influence over connecting and competing roads.

Undoubtedly its association with the Union Pacific increased the prestige of the Southern Pacific Company at the time when the merger took place. The association involved, however, serious dangers, for it placed the credit and the earning power of the Southern Pacific at the disposal of Mr. Harriman for speculative projects in eastern fields, and also it ran counter to a national policy opposed to great accumulations of capital under single control which was presently to become clearly defined. It is true that public hostility toward big business seemed unimportant in 1901 when the Union Pacific and the Southern Pacific first combined, yet the attitude of the courts toward monopoly became a matter for serious consideration by the latter in 1911, ten years after the original merger had taken place, when the federal government attacked the Union Pacific-Southern Pacific consolidation as a combination in restraint of trade under the terms of the Sherman Anti-Trust Act of 1890. A brief discussion of the issues of this extremely important lawsuit is therefore necessary.

There was perhaps some ground for conflicting views with respect to the motive which had induced the Harriman interests to seek control of the Southern Pacific. The obvious explanation of the operation was that the Union Pacific desired to increase its power in the South West. It was stoutly maintained by Mr. Kahn, of Kuhn, Loeb and Company, however, that the desire to control the Southern Pacific line from San Francisco to El Paso was not a motive in the transaction. The necessity of buying the Sunset route, he said, was considered an obstacle and a deterring feature. If a way could have been found to secure the Central Pacific alone, it would have been preferred at the time. The possible reduction of competition was not even considered at any of the meetings of the executive committee at which the subject was brought up. Speaking of the Southern Pacific, Mr. Kahn declared:

We knew it would require a great deal of money to be spent on it, we knew it added thousands of miles to the burden of administration and management. We were very anxious that the Union Pacific should receive as much of the administrative ability and of the railroad genius of Mr. Harriman as it was possible for him to give it, and we were rather disinclined to put upon him any more burden than was necessary to the best development of the Union Pacific; and therefore we, individually, felt that if the Southern Pacific could be separated, keeping only the Central Pacific and the north and south lines in California, and getting rid of the southern part of the Southern Pacific, we would be getting rid of a nuisance.[592]

Arguments of Railroad Counsel

The contention of the Union Pacific Railroad in 1911 was that the consolidation of the Union Pacific and Southern Pacific properties was legal under the Sherman law irrespective of motive, because the two systems were not competing, and that the government was unable to interfere in any case because the consolidation took place through the means of a purchase of stock instead of by contract or agreement between the railroad corporations concerned. On this last point the railroad also argued that, as a matter of law, ownership by one railroad of another’s stock did not constitute control unless a clear majority was held. Control, said counsel, is a matter of power. A minority may direct the operation of a railroad because the majority has confidence in it, but this is lawful. The argument applied to the Southern Pacific case because it was known that the Union Pacific possessed only a minority interest in the first-named company.

Apart from this, counsel contended that a purchase of stock was a thing which the federal government could not control, for the reason that the acquisition or disposition of property was not commercial intercourse. “If any citizen should step into a broker’s office on Broadway, New York, buy some stock in the Pennsylvania Railroad, pay for it, put the certificates in his pocket, and walk out, would he, or the broker, or the broker’s principal, be engaged in commercial intercourse between nations and parts of nations?... Would a state corporation buying those certificates be in any different situation from an individual purchaser, if the State of its domicile had endowed it with corporate power to buy stock?”

Moreover, to continue the argument, though purchases of stock were subject to federal law, they would violate no provisions of the Sherman Act. A purchase or sale is not a contract in restraint of trade, for a contract is executory, implying something yet to be done; while a sale is executed, completed when made and because it is made. Nor is a contract in restraint of trade necessarily unlawful. It must be undue, that is, not entered into with the legitimate purpose of reasonably forwarding personal interest and developing trade. The same may be said of an attempt to monopolize. Every act of competition tends to drive competitors out of business, but competition is legal, in the absence of fraud or duress. It follows that an individual may buy out a competitor, and then another competitor, and so on, and a corporation may do the same thing. “It is evident,” said Mr. Dunne’s brief, “fraudulent, intimidating, coercive, and other like wrongful and unlawful methods apart—that here we touch a fundamental principle of the freedom to buy and sell, of the legal right of the individual in respect to his own property.”