The American Railway: Its Construction, Development, Management, and Appliances

by Thomas Curtis Clarke

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.

Cornelius Vanderbilt.

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.