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The Barons, the Empire Builder and the Czar

by DoDo Fri Oct 3rd, 2014 at 02:12:25 PM EST

When the expanding transcontinental railroads completed the conquest of Native American lands in the Western USA from the 1860s, the owners of these exclusively private companies weren't exactly popular. The public's view was that they are selfish money-men seeking to cash out fast while they provide a crap service on shoddily-built infrastructure, seek monopolistic power and blackmail farmers, and buy politicians: the perfect example of the excesses of unfettered capitalism. The public backlash against the railroad Robber Barons led to anti-trust laws (Sherman Act, 1890).

More than half a century later, philosopher and cult leader Ayn Rand sought to re-interpret the Robber Baron era of US railroads by blaming those excesses of capitalism on state meddling, in the form of land grants. Her counter-example was one of the most successful railroad barons in the West: James J. Hill, nicknamed "The Empire Builder", who built his empire without directly receiving any land grants.

Reading up on the history of the transcontinental railroads another half a century after, I drew the conclusion that neither of the two views was entirely correct, and see the importance of a different key factor: a general shortage of capital of these private companies. In this respect, the railroad baron I see as most noteworthy and significant is one of the last: E. H. Harriman, nicknamed the "The Railroad Czar", whose legacy lasts to this day.



The Railroad Robber Barons

In both Europe and the USA, rail construction started out as a private capitalist affair, but the state got itself involved for strategic interests. While European states moved from concessions and direct subsidies to nationalisation, in the USA, Northern liberals (the Whigs, later the Republicans, most prominently Abraham Lincoln) cooked up land grants. For lines to be built across thinly settled areas recently robbed from Native Americans, private railroad companies would get to sell land around their rail line to settlers.

The idea behind land grants was to lessen the risk prospective investors had to take: the profitability of the rail lines to be built depended on the future arrival of a large number of settlers, a huge bet. However, while the land grants did simultaneously boost rail construction and settlement as intended, there was a fundamental problem: the real estate business provided for by the land grants offered much higher profits than the core transport business of running the railways. Thus, land grants were a fuel for get-rich-quick schemes, highest-level corruption, speculative booms and bankruptcy waves.

However, in spite of trains having a bumpy ride on shoddily-built lines with tight curves and fast-decaying wooden trestles, the common picture that the railroad Robber Barons spent almost nothing and ran away with taxpayer money is quite wrong:

  • The two companies building the first transcontinental line both encountered (for their time) extremely difficult geology as they crossed the mountains – above all the hard rocks around Donner Pass from the west and in Echo Canyon from the east –, which consumed a lot of capital. Later, for example the Northern Pacific had to construct major tunnels on three of its four major mountain crossings. They simply didn't have enough capital for doing things properly along the entire line.
  • Much of the real estate the railways got with the land grants in the Rockies was steep mountains and desert and thus worthless for farmers. Only in the Mississippi Basin could they make a real killing.
  • Bankruptcies notwithstanding, the state did profit in the end: in addition to the desired-for development (and the resulting tax revenue boost), the large government bonds the railroad Robber Barons received were eventually repaid with interest.

But, were there better ways to achieve the same goals?


The Empire Builder

Investor James J. Hill started his own push for the Pacific in vengefulness: he was a partner in Canadian Pacific but stormed off when that company changed the original route plan. He then built a system little-by-little (eventually merging several companies into the Great Northern) which loosely paralleled Northern Pacific and also sought to take any potential cross-border US business from Canadian Pacific. While Hill was no different from other capitalists in having nasty fights with unions over horrible labour conditions, his success was also due to micro-management, exemplified by an anecdote about him personally joining the shovelling gang in a snowstorm. Hill kept his finances in such a good shape that he bought the bankrupt Northern Pacific a few years after completing Great Northern, and continued his expansion southward. Today's Burlington Northern Santa Fe (BNSF), one of the just two major US railroad companies remaining in the Western USA, is the direct successor of Hill's empire, and his nickname, "The Empire Builder", is still the name of a Seattle–Chicago passenger train.

Hill undoubtedly stood out among the Railroad Barons as a manager, but to evaluate the effect of land grants, some other facts should be considered:

  1. Hill could start his expansion in the North when Northern Pacific already boosted settlement.
  2. Hill was quite lucky with geography: Great Northern found one of the lowest crossings of the Continental Divide and could follow easy river valleys on almost its entire route to the Pacific.
  3. While Hill didn't charter land grant railroads himself, he acquired quite substantial land grants by buying bankrupt railroads, and was also the beneficiary of government loans. [Added point; see comments!]
  4. The Great Northern wasn't the only major railroad in the western USA built without direct land grants. As for the others, they weren't any less resistant to bankruptcy than those built with land grants, indicating that Hill's managerial style was personal rather than just a deterministic consequence of placing a rational actor under the 'right' circumstances.

To expand on the last point, here is the cautionary tale of a rival.


The best-engineered transcontinental

The Chicago, Milwaukee, St. Paul & Pacific Railroad (short Milwaukee) was a geographically small railroad that grew big in dollars on the once very strong market between the three big cities in its name. This is the company that would later build the locos most deserving of the title of fastest steam locomotive in the word, and built tracks that had the quality necessary. In the early 20th century, the Milwaukee decided to build the last transcontinental line in the USA. This line was like none of the previous in several respects:

  • large masonry and concrete bridges built for longevity,
  • a track alignment set out for even loads on mountain sections, and
  • two long electrified sections (including all five mountain crossings).

The company rightfully boasted about the best-engineered railroad line across the Rockies. However, let's look at this map cut-out:

1956 map of the surroundings of Wallace, Idaho from USGS

What you see above must have been a railfans' El Dorado, with two mountain pass lines with several horseshoe loops, within a dozen miles from each other. However, first, if this had been built in say Italy, those curves would have been bypassed by not exceptionally long tunnels. Second, none of this exists any more. To see how that came to be, for the more southern of those two lines on the map, let's first take a closer look at one of Milwaukee's specialities, the electrification:

A Milwaukee "Little Joe" electric locomotive with a freight train. Photo from transpress nz

As you can see, the catenary (overhead line) hangs on crumbling wooden poles bending all over the pace. Obviously, even pre-WWI Milwaukee didn't find the money to build everything for longevity. Much less later. From an operational viewpoint, after the phasing-out of steam engines (which required a depot visit every few hundred miles or so), it would have made sense to electrify the Milwaukee's transcontinental line throughout, so that the same locomotives could have gone the full distance (eliminating four locomotive changes). This never happened. A renewal of the existing catenary didn't happen, either. Instead, when the catenary reached the end of its useful age, Milwaukee managers already saving on track maintenance decided to switch to diesels – in 1974, just when the first oil crisis hit. This only ensured permanent lack of profitability, and the entire line across the Rockies was abandoned three years later. (The remaining company survived only until 1986 when a Canadian Pacific subsidiary swallowed it.)


The Railroad Czar

Now let's look at the second of two Western US survivors of the merger and bankruptcy waves of the last century: Union Pacific (UP), the company that built the eastern half of the first transcontinental. This company only gained a strong footing around the turn of the 20th century, under the leadership of E. H. Harriman. Harriman wasn't any more popular in his age than the other Railroad Barons: in terms of seeking a monopolistic position and political influence, he was more voracious than any other, at a time controlling about half of all railroad tracks in the western USA, until the Sherman Act was used against him. (It is an irony of history that most of his empire ended up in a single hand again, under UP, by the end of the last merger wave in the 1990s.)

1907 cartoon from Wikimedia

However, in another aspect, Harriman bucked the trend: in contrast to the penny-pinching approach of his rivals, he was a firm believer in the necessity of massive long-term spending on infrastructure. On all railroads he acquired control of, he initiated the re-alignment of every single mountain crossing with easier grades and curves, the construction of important cut-offs, and the double-tracking of the first transcontinental (which meant a practical new construction on a new alignment on hundreds of miles). His reign lasted only a dozen years, and some of the gigantic work he initiated wasn't completed until decades after his death in 1909, but Harriman's successors have been living off his investments to this day.

To see this, one just has to look at the railways across the Sierra Nevada. The before-last-built transcontinental, the Western Pacific, parallels the first transcontinental, but crosses the Sierra Nevada almost 2,000 feet (c. 600 m) lower, with much less steep and less curvy ramps. Now both are part of UP, so why is it that most freight trains roll across Donner Pass on the first transcontinental? The answer is that the successive owners of the Western Pacific never found the money to double-track its Sierra Nevada crossing (now called the Feather River Route).

A westbound (descending) UP freight train on the Feather River Route completely looped back on itself on the Williams Loop, a 360-degree curve. Photo from the El Dorado Western Railway blog

To expand on my point, the other non-Harriman transcontinental lines that survived to this day as part of UP or BNSF did so because of some major long-term investment several decades ago, although in more piecemeal fashion:

  • The one-time Atchinson, Topeka & Santa Fe (the SF in BNSF) had a similar program of double-tracking, re-alignments and cut-offs, although completion was drawn out until 1960.
  • The modern (presently UP-owned) Denver–Salt Lake City route is a consolidation of earlier haphazard networks, completed in 1934 (at the price of severe financial instability for the companies involved). The new sections included the bypassing of North America's highest railroad pass route with the 6.2-mile (10.0 km) Moffat Tunnel (for which the bonds weren't fully repaid until the end of 1983).
  • Although I wrote Hill had it easy with geography for the most part, even his Great Northern had to scale one major geographical obstacle – the Cascades mountains near its Seattle end – which was done at first on a sub-optimal alignment. Here the line was re-routed in 1929 into the 7.8-mile (12.5 km) New Cascade Tunnel.


The present

The present UP and BNSF are in rather good shape financially (as are their eastern US counterparts). However, they complain at every possible forum about a major investment the government forced them into: the train control system PTC, which Congress deemed necessary to reduce the risk of collisions involving trains transporting hazardous goods. As a counter to this regulation, UP, BNSF & co also claim at every turn that the rise in their transport volumes and profits in recent years was the direct result of the Staggers Rail Act, a deregulation in 1980 that did away with rate controls originally implemented against the Robber Barons. I always find this claim hilarious, for blatantly overlooking some much stronger factors:

  • the rise of outsourcing and consumer spending on credit, which gave a massive boost to the import of goods and thus big-volume long-distance port traffic (ideal for railroads),
  • the spread of intermodal transport, especially in shipping (which brings all those import goods into the ports),
  • the rise of coal mining in the Powder River Basin,
  • the end of the oil crises.

Still, to be fair, in spite of all the public moaning, UP is now using the good times for some major investment on its own: four years ago it re-launched the previously stalled double-tracking of its (geographically less difficult) southern transcontinental line (which used to be the Southern Pacific). But double-tracking the Feather River Route, or a longer tunnel under Donner Pass, or electrification? Forget it.

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Check the Train Blogging index page for a (hopefully) complete list of ET diaries and stories related to railways and trains.

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I must admit this diary was less thoroughly researched than it is my standard, so any corrections or additions are welcome.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Sep 30th, 2014 at 08:21:54 AM EST
I think this would look very good in green.

Now where are we going and what's with the handbasket?
by budr on Tue Sep 30th, 2014 at 12:20:25 PM EST
OK, I'll post it there tomorrow, after some changes for a US audience.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Sep 30th, 2014 at 05:29:59 PM EST
[ Parent ]
Thanks DoDo. We took the route across the Sierra Nevada from Sacto to Chicago last December. Even in this modern era when Amtrak goes through the Moffat tunnel the conductor asks everyone to stay in their seats and not move between cars. The cars themselves are sealed but the space between cars is not. When you open the doors there's a blast of outside air. In the tunnel the diesel smoke can enter the cars so they don't want passengers moving between cars.

This December we're taking the southern route from LA.

Paul Gipe

by pgipe (pgipe(at)igc.org) on Thu Oct 2nd, 2014 at 09:50:56 AM EST
Another problem is that the land was given to the railroads before it was surveyed. From George, Our Land and Land Policy
It is true that the companies do not get all of the land included in these reservations, nor even half of it; but for the present, at least, they might as well get it all. The greater part of the land is unsurveyed, or having been once surveyed, the vagueros, who share in the prejudices of their employers against settlers, have pulled up the stakes, and the settler cannot tell whether he gets on Government or on railroad land. If on Government land, he is all right, and can get 80 acres for $22, as a homestead; or 160 acres for $140 by preemption. Bu it is an even chance that he is on railroad land, and if so, he is at the mercy of a corporation which will make with him no terms, in advance.
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Oct 2nd, 2014 at 02:33:28 PM EST
While it's true that Great Northern never received any land grants directly, many of the railroads it took over sure did, such as Northern Pacific and St. Paul and Pacific, and that was the main reason Hill bought them.  That free land gave him the start-up he needed to build and operate the railroad and to buy more land from the government that he flipped to the immigrants he was recruiting in Germany and Scandinavia.  Without that initial boost, he never would have had the capital to get over Stevens Pass, and the Empire Builder would have been just another busted railroad tycoon.

As for the Milwaukee, what really killed it was that the world changed.  It was a granger line, hauling agricultural products from scattered farming communities in the Upper Midwest.  Maintaining that kind of track mileage in that kind of weather is an expensive proposition.  After WWII the highways came, and it was more economical to truck products directly to central locations than to take products to the nearest town for the granger line to pick up.  In a very real sense, the Milwaukee lost its reason to exist.

by rifek on Mon Oct 6th, 2014 at 12:06:10 AM EST
Thanks for this very substantial addition! Reading up on this, I found a good summary on land grants, in which these points are particularly relevant:

Railroad Land Grant Chronology by George Draffan

1879 St. Paul & Pacific's Dutch bonds are bought by JJ Hill, Hudson Bay, et al. The bankrupt railroad is renamed the St. Paul, Minneapolis, & Manitoba. Purchased for $6,780,000, Hill sold the grant land alone for $13 million (Holbrook, 1953, p.192). The "Manitoba" came in when Hill built a connection with the Canadian Pacific to get 2.6 million acres further grant lands (Minn. Gov. signed Jan 9, 1879).

...

1889 Minneapolis & St. Cloud was renamed the Great Northern Railway. In 1890, Great Northern took over the St. Paul, Minneapolis & Manitoba (Yenne, 1991, p.62ff). The prevalent claim that GN was the only transcontinental built without federal aid is not true. Most of the lines that went into the GN system got State and/or federal grants: the Minneapolis & St. Cloud; the St. Paul & Pacific (1862 grant of 3.3 million acres); and the St. Paul, Minnesota & Manitoba (1879 grant of 2.6 million acres). See John B. Rae's "The Great Northern's Land Grant" in the Journal of Economic History, 12 (Spring 1952), p. 140-145; Paul Gates (1968, p.362); Mercer (1982, p.56), and the Great Northern entry in our Profiles section.

On the other hand, based on the timeline in the link, Hill didn't get any part in Northern Pacific until a year after the 1893 completion of the Great Northern, and he gained substantial control again only a year after the 1900 old Cascade Tunnel replaced the original switchback route across Stevens Pass.

Connecting this to my points, I think we can also say that the land grants show Hill to be a better manager than his peers (as opposed to a Randian free-market rational actor): he could actually turn those grant lands into money as opposed to the more inept or crooked previous owners of the StP&P & co. Furthermore, it still stands that he had less capital to gather for the routes across Stevens Pass and the easier sections further east than Northern Pacific ten years earlier with Stampede Pass, Evaro Hill, Mullan Pass and Bozeman Pass.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 6th, 2014 at 09:51:38 AM EST
[ Parent ]
The Milwaukee wasn't special in its dependence on agrarian transports and its operation of several branchlines to gather it: that applied to all its competitors in the North, too, including Hill's railways (later merged into Burlington Northern (BN)), and the even more northern Canadian Pacific (CP) and Canadian National (CN). And those rivals showed how to survive in changing times.

CP and CN invested enough in streamlining business to be still strong in the grain business, with grain making up 22% of CP's 2013 freight revenue, for example (in fact their problem now is insufficient grain car capacity). Meanwhile both CP and BN/BNSF found a big new cash cow in intermodal (chiefly container) transport from the Pacific ports. Access to the Powder River Basin was a definite advantage for BN relative to the Milwaukee, but that became really significant only by the time the Milwaukee was already sold, and CP didn't have Powder River Basin tracks, either.

So what was different? The Milwaukee had a transcontinental line with five major mountain sections (more than all competitors), each with long sections with grades steeper than 2% (again more than on most mountain sections of the rivals). This means that when they switched to diesel-only traction, their fuel consumption and thus fuel costs per ton of freight transported was much higher than rivals, and they had to make a greater use of helper locomotives (adding to the personnel and maintenance costs). In addition, due to lack of maintenance, by the seventies, most of the Milwaukee's track on non-mountain sections was in a desolate state, subject to speed restrictions. Taken together this meant that the Milwaukee wasn't competitive against BN or CP, much less trucks.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 6th, 2014 at 10:23:21 AM EST
[ Parent ]
As further support for my claim regarding the investment difficulty of the US railroads, here is another story. The key event in the last merger wave in the Western USA was the purchase of the Chicago, Rock Island & Pacific (short Rock Island) by the Southern Pacific (SP). For the SP, the main benefit was the Rock Island's long mainline from Chicago to Texas. However, already by the 1970s, the Rock Island was even worse than the Milwaukee in terms of saving on maintenance, and they practically stopped maintenance entirely during the years when the takeover was held up by federal courts.

When the takeover could finally go ahead, SP found that the Rock Island's Chicago to Texas line was in a ridiculously bad state, with trains derailing even at slow speed, so they started what became a practical total reconstruction. This was even more expensive than originally foreseen, enough to break SP's financial backbone, leading to its takeover by the mother company of the Rio Grande (which nevertheless decided to keep the SP name for the merged company), and only a few years later by UP.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Oct 6th, 2014 at 10:27:56 AM EST
[ Parent ]
The son of the Railroad Czar has an interesting biography:
William Averell Harriman (November 15, 1891 - July 26, 1986) was an American Democratic Party politician, businessman, and diplomat. He was the son of railroad baron E. H. Harriman. He served as Secretary of Commerce under President Harry S. Truman and later as the 48th Governor of New York. He was a candidate for the Democratic presidential nomination in 1952, and again in 1956 when he was endorsed by President Truman but lost to Adlai Stevenson both times. Harriman served President Franklin D. Roosevelt as special envoy to Europe and served as the U.S. Ambassador to the Soviet Union and U.S. Ambassador to Britain. He served in numerous U.S. diplomatic assignments in the Kennedy and Johnson administrations. He was a core member of the group of foreign policy elders known as "The Wise Men".
War seizures controversy

Harriman served as Senior Partner of Brown Brothers Harriman & Co. and Harriman Bank was the main Wall Street connection for German companies and the varied U.S. financial interests of Fritz Thyssen; the latter an early financial backer of the Nazi party until 1938 when in 1939 he had fled Germany and was bitterly denouncing Adolf Hitler. The Trading With the Enemy Act (enacted October 6, 1917) classified any business transactions for profit with enemy nations illegal and subject to the seizure by the U.S. government. The declaration of war on the U.S. by Hitler led to the U.S. government order on October 20, 1942 to seize German interests in the U.S. which involved Harriman operations in New York City.

The Harriman business interests seized under the act in October and November 1942 included:

    Union Banking Corporation (UBC) (from Thyssen and Brown Brothers Harriman)
    Holland-American Trading Corporation (from Harriman)
    Seamless Steel Equipment Corporation (from Harriman)
    Silesian-American Corporation (this company was partially owned by a German entity [...])

The assets were held by the government for the duration of the war, then returned afterward; UBC was dissolved in 1951.

The "grandpa" Prescott Bush was involved in the UBC as one of its directors.

by das monde on Mon Oct 6th, 2014 at 10:01:03 AM EST


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