Railroads: The First Big Business
An increase in railroad construction between 1860 and 1900 changed the United States, helping make it the industrial nation it is today. As the chief system of transportation of goods and people, railroads were essential to American industry. Where railroads went, towns and cities with bustling new commerce arose, all dependent on the railways for shipments of food and goods. The construction of the railroads spawned huge new industries in steel, iron, and coal. No other business so dramatically stimulated and embodied the industrialization process. In The Rise of Industrial America: A People's History of the Post-Reconstruction Era author Page Smith comments: "In retrospect it appeared it had been the lack of adequate transportation, above all else, that had kept civilization moving at a mere camel's pace, or a mule's or ox's pace, prior to the railroad era … the railroads accelerated the process to a degree that the mind could hardly comprehend."
The race to build railroads in the last four decades of the nineteenth century was dramatic but not graceful. Early railroad magnates (powerful and influential people in the Page 69
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Page 70 | Top of Articleindustry) found many opportunities to get very rich. Some methods were legitimate, others questionable, and many were downright illegal. The railroad tycoons engaged in destructive competition with each other and exploited their laborers. Still, even though the government did offer some help, the tremendous expansion of the railroads in the second half of the nineteenth century was accomplished mainly through the active private enterprise of the railroad magnates.
The transcontinental railroad
By the 1850s most Americans recognized that westward expansion and industrial growth depended on a transcontinental railroad—one that spanned the continent from the East Coast to the West Coast. Many thought building such a railroad was impossible because of the great distance to be covered and the engineering obstacles to be overcome, especially the tremendous amount of money required for the project. The transcontinental railroad was clearly going to cost more than any previous American businesses, and by 1850 most people agreed that the federal government should provide aid to railroad companies to start the process. That year Congress Page 71 | Top of Articleauthorized its first federal grant (a transfer or property by deed or writing), which consisted of public land to help promote and finance railroad construction. More land grants to the railroads occurred throughout the decade, but the greatest land grants were the result of the Pacific Railroad acts of 1862 and 1864.
Pacific Railroad Act
The Pacific Railroad Act of 1862 called for building a transcontinental railroad from Omaha, Nebraska, to Sacramento, California. Under the act, two companies, the Central Pacific and the Union Pacific, were to build the railroad. Construction on the Central Pacific lines was to begin in Sacramento and work its way east. The Central Pacific Company had been organized in California by railroad engineer Theodore Dehone Judah (1826–1863), who had long dreamed of building a railroad that would cross California's Sierra Nevada Mountains and travel eastward. To handle the business end of the Central Pacific, he brought together a group of California men who came to be known as the Big Four: store owner Collis P. Huntington (1821–1900), one-term California governor Leland Stanford (1824–1893), businessman Mark Hopkins (1813–1878), and store owner Charles Crocker (1822–1888). Judah died before the work was fully underway, but the Big Four went on to oversee the building of the Central Pacific Railroad.
The other railroad created by the 1862 act was the Union Pacific Railroad Company. It was to build its tracks from Nebraska west to meet the ongoing construction of the Central Pacific. Investor Thomas C. Durant (1820–1885), the railroad's vice president, was largely in control of Union Pacific from the start.
The Pacific Railroad Act granted public land to the railroads in alternating 200-foot and 10-mile sections along the lines. The railroads used the extra land surrounding the railways as backing for loans or sold it to raise money for construction. The government agreed to loan the railroad companies $16,000 a mile for construction in level country, $32,000 in the foothills (low hills at the base of a mountain), and $48,000 in the mountains. To expand the amount of public land available to the railway companies, the act also authorized the United States to Page 72 | Top of Articlerenege on (fail to carry out) government treaties it had signed with Native Americans granting the same land for their use.
The government gave railroad companies a total of about 130 million acres of land, with the states adding another 50 million acres of land grants. Though the government aid stimulated railroad construction, only 18,738 miles of railroad line—8 percent of the total railroad mileage built in the United States between 1860 and 1920—were built as a direct result of federal land grants and loans. Most of the railroads were funded through private enterprise.
Building the first transcontinental railroad
The Union Pacific and the Central Pacific Railroads began construction in 1863. From the start both companies viewed the project as a race, each trying to obtain as much land and money from the government as possible before the two lines met.
Construction of the Union Pacific
The construction of the Union Pacific began in Omaha in December 1863 with great fanfare, but enthusiasm died quickly when work slowed due to a lack of laborers. With most healthy males fighting in the American Civil War (1861–65; a war between the Union [the North], who were opposed to slavery, and the Confederacy [the South], who were in favor of slavery), the Union Pacific could build only forty miles of line between 1864 and 1865. When the war ended, returning soldiers turned to the railroads for work, and the Union Pacific also recruited large numbers of recently arrived Irish immigrants from the eastern cities.
After the slow start, former Union army Brigadier General Jack Casement (1829–1909) was hired to oversee the Union Pacific work crews. Casement carefully divided the construction work into specialized tasks, creating a simple, repetitive routine. One group brought in the rail tracks on horse-drawn carts. Another group unloaded the carts and laid out the rails. The next, called gaugers, measured the rails to make sure they were the right gauge, or distance, apart. The rails were then joined together by the bolters. Finally a group of workers hammered spikes (very large nails) into the railroad ties to secure Page 73 | Top of Articlethe rail to the bed, the surface of the earth prepared with gravel or broken stones to serve as the foundation for the rail. The process was repeated over and over and the tracks grew about two miles a day. The workers lived in a mobile tent city. As the railroad expanded from one location to the next, the whole town was transported on flat cars to the point where new railway construction ended.
Construction of the Central Pacific
When Leland Stanford, one of the associates of the Central Pacific, was elected governor of California in 1862, anti-Asian sentiments were strong due to prejudice. The Chinese who had immigrated to California looked different than other settlers there, with their long queues, or braids, and different style of clothing. They spoke a different language and practiced a different religion. Many Californians viewed them as immoral slaves and drug users. Leland promised to "protect" the state from Chinese immigrants. But as the construction of the Central Pacific got underway, Leland's partner, Charles Crocker, could not find enough laborers willing to do the difficult and dangerous work. He tried using Chinese workers and they proved so satisfactory that more than twelve thousand Chinese laborers were employed to build the Central Pacific, making up about 80 percent of its workforce. They were disciplined workers whose customs differed greatly from European American workers. They did not drink alcohol, they ate fresh vegetables and drank boiled tea, and they bathed regularly. Consequently, they remained far healthier than their European American counterparts. They were also willing to work for less money. The Central Pacific paid Irish workers $35 a day, with meals; they paid Chinese laborers $27 a day, without meals.
Central Pacific laborers faced nearly impossible obstacles: brutal mountain winters, desert heat, and the prospect of blasting tunnels through the steep, 7,000-foot-high peaks of the Sierra Nevada Mountains. The Chinese workers were first organized into gangs of twenty men under a supervisor, but later, as the work became more difficult, the gangs grew larger. The work of these crews was intense and physically demanding. They cut through solid rock, mainly using pickaxes, and often while perched in precarious positions on the mountain peaks. Then the heavy loads of rock and dirt had to be carried away on Page 74 | Top of Articlethe workers' backs. Powerful snowstorms and multiple accidents killed several laborers. Gradually, the crews fulfilled Judah's vision by laying track through the nearly impassible canyons and peaks of the Sierra Nevadas.
In the spring of 1869 Union Pacific and Central Pacific construction crews came within sight of each other. Promontory Point in Utah was chosen as the junction of the two lines. The Union Pacific had laid 1,086 miles of track and the Central Pacific had laid 689 miles. When the new 1,775 miles of tracks running from the Missouri River to the West Coast was added to existing railway starting from the East Coast, the nation was connected by 3,500 miles of transcontinental railroad from New York to California. Traveling across the American continent had previously taken several months, but with the transcontinental railroad it took about six days. At the ceremony celebrating the connection of the rails, Thomas Durant and Leland Stanford hammered the last spike, made of gold for the occasion, into the railroad tie. Then the engines of the two railroads met nose to nose on the track as whistles blew, bells rang, and the crowd cheered. People throughout the nation celebrated this milestone in history.
The Erie War
The opportunities offered by the new transportation systems of the nineteenth century attracted daring pioneers, ruthless businessmen, and greedy crooks, and sometimes they fought bitter feuds, each trying to take property and profits from their competitors. Daniel Drew (1797–1879), Jay Gould (1836–1892), and James Fisk (1834–1872) were among the most notorious criminals of the day. Drew began his business career buying cattle and sheep in New England and the Midwest and selling them to butchers in New York City. While his cattle were on the way to market he often deprived them of water and then gave them salt and let them drink heavily just prior to their sale. His cattle, swollen with water to a higher weight and a beefier appearance, brought in more money than they were worth. This practice was the origin of the term "watered-down stock," which would soon be applied to company stocks that were overvalued by dishonest executives like Drew.
In the 1860s Drew, Fisk, and Gould started buying great quantities of Erie Railroad stock and thus became controlling directors of the New York railroad. The three soon ran into a tough opponent, Cornelius Vanderbilt (1794–1877), and the resulting business feud became known as the "Erie War." Vanderbilt had made his vast fortune in steamboat services. He was known to be a ruthless businessman who drove his competition off the playing field. At the age of seventy, Vanderbilt decided railroads were the wave of the future. In 1857 he purchased a controlling interest in the Harlem Railroad, followed by the Hudson River Railroad in 1865 and the New York Central in 1867. He then merged his holdings into one system that extended from New York City to Buffalo, New York.
In 1867 Vanderbilt faced one last competitor in the region, the Erie Railroad. In his usual pattern, he lowered the rates on his railroad services drastically to take away the Erie's business. Rather than lowering Erie rates in response, Fisk bought a herd of cattle and shipped it at the reduced rate on Vanderbilt's railroad, costing Vanderbilt dearly. A disgusted Vanderbilt then decided to buy out the Erie altogether and proceeded to purchase all available shares of the railroad company. Drew, Gould, and Fisk promptly issued one hundred thousand worthless stock certificates for the Erie. Vanderbilt bought the worthless certificates and then realized he had been cheated. He called for the arrest of Fisk, Gould, and Drew, but they had fled to New Jersey to escape New York law. They were able to bribe several New York legislators to pass a law that made their dealings legal and got away with their swindle, keeping possession of the Erie Railroad, which they then drove into bankruptcy. Though Vanderbilt lost the Erie Railroad, he went on to extend his railway service to Chicago, Illinois. He was reportedly the richest man in the United States when he died.
Jay Cooke and the panic of 1873
After the completion of the first transcontinental railroad, construction continued at a feverish pace. Between 1865 and 1873 railroad mileage doubled, increasing by some thirty thousand miles. This increase was well beyond the immediate needs of the country. In the West, where the sparse population did not justify the operation of so many trains, the returns on railroad investment were very poor.
In 1869 Jay Cooke (1821–1905), owner of a large private bank and promoter of government bonds during the Civil War (see Chapter 5), became the banker and agent for the Northern Pacific Railway Company. The line was projected to link Lake Superior in Minnesota with the Puget Sound on the coast of Washington, which made it the largest railroad construction project in American history. Though the land it covered was sparsely populated, many believed that with railroad service Minnesota and the Pacific Northwest would soon become booming territories. The anticipated new traffic of the region was expected to pay for construction and operations. This plan proved too optimistic, however. There was no new traffic and Cooke could not raise sufficient funds from the investors to Page 77 | Top of Articlecomplete the construction. Therefore, in 1871 Cooke decided to sell $100 million in Northern Pacific bonds to the public. Bonds are certificates of debt issued by a government or corporation that guarantees repayment of the original investment with interest by a specified date. Cooke sent his sales agents all over the nation and spent hundreds of thousands of dollars advertising the bonds. Still, the public was not buying.
The Northern Pacific was struggling while Cooke pursued the bond sales. The railroad repeatedly overdrew its account at Cooke's bank. The overextension became so large that in 1873 Cooke's entire banking company collapsed. The failure of the leading private bank in the United States caused a national panic. Stocks fell so severely that on September 20, 1873, the New York Stock Exchange closed for ten days. Throughout the nation banks were forced to close. Businesses failed. The panic of 1873 was the worst depression the nation had experienced to that point. It was not until 1879 that there was any sign of a business revival.
Railroad company management
Railroads were too big to be run effectively by existing business practices. The day-to-day management of these corporations was highly complex. By 1890 there were an estimated 749,000 American railroad workers nationwide, and the railroads were the largest employer in the United States. Managing a nationwide workforce, keeping the accounts, setting the fares, making the schedules, incorporating new inventions, maintaining machines, and accomplishing the thousands of other complicated tasks needed coordination. In an 1874 Harper's Monthly article, Lyman Abbott described the complex operations of the Erie Railroad, noting that it employed fifteen thousand people and that its operations were continual. Abbott said, "The administration of such a force of men, the management of such a system of railroad trains, without clashing or collision, requires executive ability of the very highest order."
After the panic of 1873, railroad executives tried to minimize waste and tighten up their operations. Strong hierarchies (ranks) of management developed, often imitating the ranks of the military. Railroads were usually run by a board of Page 78 | Top of Articledirectors. The top managers were hired, promoted, and fired based on their performance, which hinged on the success of the railroad they managed. Specialized lower-level managers carried out their instructions. Due largely to the efforts of the managers, railroad companies were leaders in business innovation.
Railroads faced some major problems as they modernized their operations. In order to coordinate schedules and employees and to avoid collisions, the railroads were first in the nation to adopt a system of standard time. (Previously the country had run on a system of solar time, in which the local time was Page 79 | Top of Articledetermined by the position of the Sun. When the Sun was directly overhead, the clocks were set at noon. However, noon in one town was several minutes apart from noon in a town miles away.) They also set up a system of railroad telegraphers to relay information about train arrivals or delays to distant stations. Prior to the widespread use of telegraphs in railroads, tight scheduling was nearly impossible and railroad collisions were frequent and deadly.
The railroad strike of 1877
After the panic of 1873, many railroads were nearly bankrupt. Bankruptcy is a state of financial ruin in which an individual or corporation cannot pay its debts. In 1877, in order to improve their finances, the Pennsylvania, New York Central, and Baltimore and Ohio Railroads began reducing wages. When they announced another 10 percent reduction, the railroad firemen (the men who feed the train's fires) of the Baltimore and Ohio line at Martinsburg, West Virginia, walked off the job in protest, preventing some six hundred trains from moving. The governor of the state called out the state militia, or army, but the militiamen had friends and relatives among the strikers and would not take strong action. About four hundred federal troops finally dispersed the protesters and put an end to the strike in Martinsburg.
Within a week railroad workers in Pittsburgh went on strike and prevented the movement of all trains. Fires broke out, destroying five hundred freight cars, one hundred locomotives, and thirty-nine buildings. The state militia was again sympathetic to the strikers, so federal troops were called in. The strike spread to New York City, St. Louis, Missouri, Chicago, Illinois, and as far west as San Francisco, California. The workers were not organized, and thus within a couple of weeks the strike had been broken and train traffic was back to normal.
In those few weeks, about ten thousand railroad workers had gone on strike. More than one hundred were killed by federal troops and about one thousand were jailed. Afterward, railroad owners and managers began to fear the potential power of the labor movement. In many large cities, state national guards were given special arms Page 80
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and training to combat labor violence. Railroads and other corporations began to make use of Pinkerton detectives (security agents for hire) as private armies to protect their property. Companies also attempted to discover, and fire, all union members.
Competition in the railroad business
The cost of running railroads was high. Between track and engine maintenance and salaries for thousands of workers, it cost nearly as much money to run empty trains as it did to run full ones. No railroad could afford to halt operations. Therefore when a railroad faced competition for traffic, it was usually forced to cut its rates, either directly or by offering large shippers rebates (return of part of the payment) to keep its business. This competition had destructive results for the railroad industry.
Throughout the 1880s, new railroad construction occurred at a frantic pace. Approximately 71,000 miles of track were laid during the decade. The railroad network became overbuilt. Competing lines were racing to put down track in order to lay claim to the best sites, whether railroad service was needed there or not. Many of the powerful businessmen were out for personal profit and did not care how long or well their company operated. The reckless expansion of the railroad companies set off a financial panic in 1893 in which hundreds of railroads collapsed. By 1895 one-third of the nation's railroad mileage was in bankruptcy.
By 1890 wealthy financier J. P. Morgan (1837–1913) began to consolidate and reorganize the nation's railroads, adopting a strategy that became known as "Morganization." Morgan acquired bankrupted railroads, infused them with enough new capital (accumulated wealth or goods devoted to the production of other goods) to survive, implemented strict cost cuts, and oversaw agreements with competing lines to reduce unnecessary competition. By the turn of the twentieth century, he owned some five thousand miles of railroad. Although he made a great fortune, his intention was to benefit the troubled industry. His reorganization of the railroads created a more stable environment, bringing the rocky era of warring railroad magnates to a close.
For More Information
Brogan, Hugh. The Penguin History of the USA. 2nd ed. New York and London: Penguin Books, 1999.
Cashman, Sean Dennis. America in the Gilded Age. New York and London: New York University Press, 1984.
Smith, Page. The Rise of Industrial America. Vol. 6. New York: McGraw-Hill, 1984.
Abbott, Lyman. "The American Railroad." Harper's New Monthly Magazine, 1874. Cornell University Library. http://cdl.library.cornell.edu/cgi-bin/moa/moa-cgi?notisid=ABK4014-0049-48 (accessed on June 30, 2005).
Dunbar, Willis F. "Railroad History Story: RR Operations before the Telegraph." RRHX: Internet Railroad History Museum of Michigan. Page 83 | Top of Articlehttp://www.michiganrailroads.com/RRHX/Stories/OperationsBeforeTheTelegraph.htm (accessed on June 30, 2005).
"The Pullman Era." Chicago Historical Society. http://www.chicagohs.org/history/pullman.html (accessed on June 30, 2005).
"Transcontinental Railroad." American Experience: PBS. http://www.pbs.org/wgbh/amex/tcrr/peopleevents/index.html (accessed on June 30, 2005).