5 Sources of Revelation
His consuming thirst for knowledge at first hand, his ceaseless study of the science of railroading, both the “practical” and the financial sides of it, his training in stock- gambling and stock-market methods and procedure, all made him a valuable man, a daring man, but one whom the most conservative financier would not call a dangerous speculator—he knew too much and thought too logically, too dispassionately.
—Edwin Lefevre, “Harriman”
Harriman in Chicago was a fish out of water, a stranger in a strange land where he could not monitor Wall Street directly. Although the family traveled extensively, this was the first time they had lived for any time outside New York. Chicago struck their eastern eyes as a crude cowtown despite the progress it had made as a city. To make matters worse, tragedy struck only a few months after their arrival in Chicago. Little Harry, not yet five years old, contracted diphtheria and died in February 1888.1
The sudden, wrenching loss of his only son devastated Harriman just as he was struggling to make the transition not only from Fifth Avenue to Michigan Avenue but also from broker to railroad official. Given his devotion to family and his passion for children, it was fortunate that the press of work left little time to grieve. That the loss lingered with him was obvious; on the first anniversary of Harry’s death he made a gift of $6,000 for “aiding and encouraging the boys” who worked in the Illinois Central shops.2
“My father always said that [Harry’s death] was the thing that made him feel he should make railroading his career,” recalled Averell Harriman decades later. “He felt his son had died because he was working on the railroad, and he wanted to justify the sacrifice of his son by dedicating himself to railroading.”3
It is a poignant tale but only partially true. Averell was born three years after his brother’s death and so never knew him. More likely, the loss of Harry reinforced a process already begun, the real catalyst for which was wrenching Harriman away from Wall Street. Why else would he have come to Chicago if not to immerse himself in the details of railroading? Harry’s death spurred Harriman to accomplish what he had already decided to do.4
Heartland: A map of the Illinois Central system. Unlike most major roads, it ran north-south instead of east-west. (Baker Library, Harvard Business School)
A curious paradox soon emerged. By being in Chicago, Harriman had less voice in the making of policy in New York. At the same time, his separation from Fish gave him a certain independence. He was on the scene, observing firsthand conditions he formerly knew only by hearsay, learning the complexities and subtleties behind the reports sent to New York. This new perspective had a predictable effect on Harriman: the more he learned, the more he grew and the more confident he became that his judgment on matters was superior to that of his friends in New York.
The problem was that Harriman did not yet know what he could do in Chicago. Great progress had been made toward expanding and integrating the system, but it still lacked an efficient organization. Fish's revolution had rendered the old structure obsolete. Past presidents had always resided in Chicago, which left no doubt about the chain of command in the West. Now the president was in New York and the vice-president in Chicago. The latter’s duties had never been defined; neither had those of the general manager, who ran the railroad. New relationships had to be worked out between the president and vice-president in one direction and the vice-president and general manager in the other.5
The board also wanted to overhaul procedures throughout the system. Like most railroads, the Illinois Central still conducted its business according to practices honed by custom. Although railroads were by far the largest and most complex business organizations in the world, few of them functioned on the basis of written rules. The keeper of custom was not the board or president but the chief operating officer, who oversaw every aspect of the road in the field. On the Illinois Central that man was Edward T. Jeffery.6
Harriman occupied a vacuum between Fish and Jeffery, and he was not a man to suffer a vacuum for very long. In April 1888 the board created a committee to consider three major issues, including “a new distribution of executive duties at Chicago, and along the railway.” It also asked Harriman, Fish, Jeffery, and general solicitor B. F. Ayer to report in writing on what duties the vice-president should have. At first, Harriman was distracted by Harry’s death and the illness of a daughter. That same month he took the family with him on a business trip south to escape one of the worst winters on record. They went first to Memphis and then to New Orleans, where Henry lingered, tending to company matters while his family basked in the warmth.7
Then Fish summoned him to New York for an important board meeting. Mary urged him to go, but Harriman hesitated. “I do not think it would be prudent to leave my family here alone at this time,” he protested. “Besides the nurse seems just now to have lost her head & I dont know what to expect from her.” He wanted the family safely back in Chicago, yet he also feared taking his daughter back to a cold climate. The tone of this exchange shows Harriman to be unusually anxious and high-strung. Nothing agitated him more than a threat to his family’s well-being, and Harry’s death inflamed this sensitivity. Reluctantly he went to New York.8
When he finally returned to Chicago, his uneasiness did not vanish so much as transfer itself into a feverish outburst of energy directed at reforming procedures in both the New York and Chicago offices. “It seems almost impossible to wire the New York office and receive an answer the same day,” he complained to Fish at one point. He also revamped the way statements were prepared by the auditor and cleaned up other routines that had grown inefficient or aimless.9
When it came time to submit the statement on the duties and powers of the vice-president, however, Harriman’suddenly turned coy. While he had no intention of limiting his scope by defining his powers too specifically, he could not bring himself to cry, “All power to the vice-president.” Instead, he mouthed some vague mush and hoped New York would let him fill the vacuum in his own way. But Fish refused the bait and pressed for a more definite statement. This time Harriman’seized on the major flaw. Under existing procedures, the general manager and department heads reported directly to the president, who had always been in Chicago. With Fish in New York, however, all business went directly there and then had to come back to the vice-president. This left Harriman out of the decision-making loop, and Fish compounded the problem by constantly yanking him back to New York to deal with financial matters instead of assigning him duties in Chicago and leaving him there.10
The obvious solution was to make the vice-president the chief officer in the West and channel all business through him to New York, but this presented Fish with a nice dilemma. There was in his nature an imperious streak that made him reluctant to delegate authority. To retain power in his own hands, he would have to move to Chicago—an idea repugnant to him. If he wished to stay in New York, he had no choice but to delegate authority to Harriman in Chicago and quit summoning him to New York.
Neither option appealed to Fish, and the matter was complicated by Jeffery’s demands. The general manager agreed that with the president in New York, the vice-president in Chicago should be the chief officer in the West. But Jeffery too was anxious to preserve his own autonomy and submitted a description of his duties that matched Harriman’s in vagueness. The subtext of his message was plain, however: he would serve as the vice-president’s subordinate provided the vice-president did not interfere with his work. Jeffery’s ploy to protect his power base disturbed general solicitor B. F. Ayer. “I do not see,” he despaired, “how any distribution of administrative functions can be made between the Vice President and General Manager, without causing dissatisfaction and perhaps considerable inconvenience and trouble.”11
In New York the astute Sidney Webster, sifting through the correspondence on the subject, was bothered by the inability of Harriman, Jeffery, and Ayer to specify the vice-president's duties. “Perhaps the three officers named … cannot define those matters,” he concluded. “If they cannot, how can the Committee?” After grappling with the issue for a year, the committee admitted defeat in May 1889 by declaring that either the president or vice-president should reside in Chicago and “exercise actual supervision.”12
This decision by default did nothing to clarify the chain of command, leaving a vacuum that controversy would soon fill. In April, however, the board had revised its own structure by replacing the executive committee with three new committees: finance, law, and rates, revenues, and expenditures (RRE). The press of business had grown too great for a single committee to handle, especially with the indefatigable Harriman absent from New York. Under the new arrangement, duties were shared among nine directors instead of only three or four.13
A sense of urgency underlay these efforts to find a structure that would enable the Illinois Central to run smoothly. During 1888 earnings continued to crumble beneath the pressures of rate wars and competitive overbuilding that were ushering American railroads into a new and dangerous era. No issue since the Civil War proved more politically explosive than railroad rates, partly because its complexities defied ordinary logic. There were two distinct kinds of rail rates. Local rates covered traffic moving along a company’s line that was not subject to competition from other roads. Through rates applied to traffic that started or ended beyond the company’s line and had to compete with other roads for all or part of the journey. Local rates were vulnerable to the charge of monopoly, through rates to cuts by rival lines seeking to attract more business.*
During its early stages the American rail system consisted mainly of independent connecting lines that lived off their local business and cooperated in moving through traffic along their combined routes. Gradually, however, strong roads absorbed their connections and integrated them into larger systems. As these systems expanded, they reached more towns in common and competed at more places for through traffic. The orgy of railroad construction after the Civil War intensified these struggles, multiplying competitive points and triggering rate wars that reached new heights of bitterness during the depression of the 1870s, when roads fought desperately for their share of a dwindling traffic.14
Rate wars among railroads were unlike any other form of industrial conflict. Every road had a published rate schedule divided into classifications based on the different value of diverse cargoes. (For obvious reasons, the rate was much higher on a pound of silk than a pound of lumber.) But traffic officers did not hesitate to offer special rates or rebates to large shippers or others whose business might go elsewhere. These lower rates were secret and fluctuating, which made them inviting targets for political attack.
Rebates infected the rail industry like a pernicious disease, undermining its health and defying all attempts at a cure. Since every line needed a steady flow of business to stay solvent, it made sense to fill empty cars with something, even at reduced rates, rather than have them run empty. If one line had a longer, more roundabout route between two points than another, it could compensate by offering lower rates. The return of prosperity after 1879 brought more traffic but also the greatest expansion of the rail system in history. As new lines appeared and old ones extended their tracks into new territory, the rate wars increased in scale and ferocity.
In their desperate attempt to impose stability, railroad leaders everywhere formed pools among competing roads to maintain rates by sharing business. But pools were fragile alliances with no standing in law and were violated regularly despite strenuous efforts to maintain them. Then in 1887 the Interstate Commerce Act changed the game entirely by outlawing pools, thereby depriving carriers of their only vehicle for curbing rate wars. State railroad commissions also lowered rates, and competitive wars kept them low.
In 1888 the first symptoms of a financial epidemic that would later ravage railroads burst forth, aggravated by slumping business in the West, where a cycle of summer drought and winter blizzards shattered the cattle boom and ruined crops. As traffic and earnings declined, dividends were cut or omitted altogether. The value of rail securities plummeted, making capital harder to secure. Public hostility toward the carriers rose as steadily as rates fell. Frenzied efforts to curb the wars led to long, tortuous rounds of negotiation producing agreements that crumbled at the touch. The Illinois Central did better than most roads but in 1888 still suffered a drop of 10 percent in gross and 17 percent in net earnings. Fish could no longer protect the company’s dividend record, which had earlier been cut from 8 to 7 percent and faced a steeper drop that winter. Pressure mounted on Fish to the point that he lamented, “I am liable to be out of my present position at any time.”15
The rate question had begun to haunt Fish and Harriman. Repeated attempts to maintain them in Illinois and Iowa had failed miserably. During the summer of 1888 Jeffery ordered company agents to give no rebates without his direct approval. Fish did not learn about this edict until January 1889, when he asked Jeffery for an explanation of how special contracts were handled. He let Jeffery continue approving any deviation from set rates but instructed him to forward details of every case to New York. In pondering the difficulties facing him, Fish concluded that he had no choice but to assume direct authority over all rate decisions.16
The board shared this belief. In April 1889 it added a new clause to bylaw XI stating that no rate could be reduced without the approval of the president. The message sent to Jeffery could not have been plainer. The granting of special rates and rebates had always been the province of traffic agents and officers, with only occasional interference from their superiors. Now the amended bylaw XI forbade giving any such rate without advance approval from top management.17
Unfortunately, the board’s right hand took this swipe at virtue without consulting its left hand. Jeffery saw the flaw in the plan at once: the system could work only if an officer with the necessary power resided in Chicago. Harriman was there, but the board had yet to resolve who had what duties in which place. Within months this vacuum in the structure of management plunged Harriman into the first major crisis of his career as a rail officer.
The year following little Harry’s death was an ordeal for Harriman in many respects. Apart from the painful adjustment to a household without a small boy to enliven it, there was the constant struggle to rationalize the managerial and financial structure of the Illinois Central at a time of turbulence in the industry. Although he could not know it, Harriman was witness to the dawn of a momentous new era in railroading: the rise of giant systems spanning half the continent. Like the evolution of feudal Europe into nation-states, the transition was a jarring, inchoate experience as individual roads accustomed to fighting one another in their own backyards suddenly found themselves clashing at remote points all over the continent in wars that grew ever larger and more destructive in scale.
Harriman’s distracted eye caught only passing glimpses of this furor. Through the winter and spring of 1888 he ran a constant circuit between Chicago, New Orleans, and New York, trying to define his position while helping Fish nurse along some complicated bond negotiations. Their relationship continued to smack of master and protégé. For all his affability, Fish was a hard taskmaster who shifted abruptly from addressing Harriman as “My dear Ed” to reprimanding him for some error. “I sincerely trust the circular which you handed me late this afternoon will not be published,” he noted coldly on one occasion. “With a view to stating the facts with some degree of exactness, permit me to suggest substituting the enclosed.” Harriman bore these rebukes with clenched teeth because he had no choice. With the bond negotiations stalled, he fled gratefully to Arden in May and to Ogdensburg in July, never more than a telegraph key away from summons by Fish.18
After the bond sale was made in September, Harriman’still had to scramble for money, peddling bonds and seeking loans on good terms. Through the dreary winter of 1888-89 he kept at the hunt until the strain wore down even his relish for dickering. His patience finally snapped in one test of wills with a Jewish banker. “I am not much astonished at Goldsmith’s action as it is about what his class might be expected to do,” he growled. “I have had to struggle for the past three years against these shylocks 8c they dont feel at all friendly because of so many former defeats.”19
This outburst of anti-Semitism was typical of Wall Street but less so of Harriman. It was a prejudice that usually came out under duress, as it did here, but Harriman later grew close to several Jewish bankers, notably Jacob H. Schiff of Kuhn, Loeb. His real frustration was less with the Goldsmiths of the world than with Fish, who persisted in keeping him busy at his old financial duties without defining his position in Chicago. As long as Fish needed his financial expertise and was reluctant to grant him autonomy in other areas, Harriman could see no way out of his dilemma.
Hard times revived old doubts about the direction Fish and Harriman had taken the company. Stockholders who had been uneasy over expansion policy seized on the dividend cut as evidence of poor management. Some newspapers picked up the dispute and gave Harriman an early taste of notoriety. The New York Sun compared the Fish-Harriman bookkeeping practices to those of a scoundrel currently in vogue, Henry S. Ives, and demanded to know the size and source of Harrimans fortune: “He was not accounted a wealthy man when he went into the Illinois Central management, but his fortune is now generally estimated at several million dollars. According to the reports current in Wall street, he and Fish stand to increase their respective piles materially or to diminish them, according to the course of the market Some of the foreign houses assert that there is not an arbitrage house in the street that has not sold Illinois Central stock for their account or upon orders from Harriman 8c Co.”20
Stockholder grumbling over the reduced dividend and growing financial obligations of the company erupted into controversy at the annual meeting in March 1889. Fish went to Chicago for the sessions and told Harriman to remain in New York. When a dissident stockholder named F. B. Cooley charged that Harriman had stayed home to avoid being questioned by his critics, the accusation got into all the morning papers in New York. Harriman was hopping mad when he read it and fired off a telegram to Fish. “Please state without fail at today's meeting,” he asked, “that I intended to be present but remained here at your request.”21
Fish did so, and after the meeting he assured Harriman that “Cooley is a mere trader and not a straightforward man of business.” But something else began to tick in Fish's mind. “Jealousy and personal dislike of Mr Harriman,” he confided to the Dutch bankers, “is at the bottom of a great deal of this abuse, which is most unmerited.” Harriman’seemed to have a knack for being a lightning rod of controversy even when serving in a capacity that normally attracted little attention. He was incapable of sitting still and wanted to poke into everything. That spring, for example, he decided the New York offices needed reorganizing and presented Fish with a plan for the work.22
Fish was tired of it all and anxious to get away for a long rest. He planned to sail for Europe on July 10, to be gone until October. This would leave Harriman in charge as acting president with no immediate restraint on his bent for constant action. The thought must have given Fish more than one shiver. Diligently he went about trying to put the house in order so that Harriman would have little to do.
The rate conundrum resisted every effort at finding a solution or even a truce. What it did create was a clash between Fish and Jeffery that caught Harriman in the middle. During the spring of 1889 rates deteriorated as one road after another withdrew from yet another agreement that was to end the wars among them. From Chicago Jeffery watched grimly as major lines launched a new round of cuts. To agents of other roads he protested that many rates being offered were so low that they amounted to self-inflicted wounds. But the struggles erupting on all sides shattered attempts to hold rates steady, and the unresolved power vacuum in the Illinois Central hampered efforts to match cuts given by competitors who did not have to lose time asking New York for approval.23
Fish offered Jeffery little comfort. As rates softened, he twice reminded the general manager of the amended bylaw XI requiring the president’s approval for any special rate. Early in May, while Fish was visiting Chicago, Jeffery collared him for long talks in which Fish promised that he would urge the board to restore bylaw XI to its original form. But nothing was done. A month later, he went west again and found Jeffery even more adamant. It was impossible to function without authority to make rates on his own, he insisted; the delay of obtaining approval from New York was intolerable to shippers, who took their business elsewhere.24
Fish replied that he had to abide by the bylaws. A few days later, Jeffery sent Fish his resignation. “The Company’s business cannot be satisfactorily managed under the eleventh By-Law, as it now reads,” he protested, “unless the President resides here and assumes direct charge.” The decision did not come easily to Jeffery, who had started work for the Illinois Central at the age of thirteen. But he had been unhappy since Clarke’s departure and had tried to quit a year earlier only to have Fish talk him into staying. Now he offered to remain until the year’s end, “exercising the same powers and performing the same functions as heretofore.”25
Fish received this letter only a few days before he was to sail for Europe and found himself in a quandary. The board had a proposal to revise bylaw XI as Jeffery wished, but it had not come from Fish and was referred to the RRE committee, which would not act on it for weeks. Fish did not have weeks; he had a boat to catch. He asked Jeffery to stay through December and quoted Jeffery’s own terms back to him. Unfortunately, this vague phrase meant something different to each man. In his haste Fish may have overlooked the potential for misunderstanding, or he may simply have left it for Harriman to thrash out with Jeffery. After scribbling off some instructions for Harriman on a variety of topics, Fish climbed gratefully aboard the City of Paris on July 10.26
“I am now in harness,” the new acting president chortled to an officer, but he lingered in New York only a week before taking his family off to Bar Harbor for a vacation. Five days after Fish left, another tragic blow struck Harriman: his mother died suddenly. Neither Harriman nor his biographers even mention the loss of this strong woman to whom he was so close, but there is no doubt it had a profound effect on him. The mainstay of his youth, the woman who had instilled in him the values he held so strongly, was gone. It is revealing that he did not inform Fish of her passing until September 2, when he was caught up in his first crisis.27
While mourning his loss, the matter most on his mind was a charge from the board to revamp the organization. In May a committee headed by Fish and Harriman had been created to prepare a new scheme of departments for the company. Fish did not expect anything to be done until his return, but Harriman was eager to get started. It was, he told general solicitor James Fentress the day after Fish departed, “one of the most important matters we have had before us for some time.” He did not yet have a specific plan in mind, but he was insistent on one point. “We should first adopt a plan 8c then make our officers fit into it as best we can,” he argued, “8c not make a plan to fit our officers.”28
This observation offers a glimpse at the germ of an idea Harriman would later implement on a colossal scale. It was the product of a mind that searched relentlessly for the most efficient way to put something together without concern for how personal dynamics affected its operation. It recognized frankly that any change in organization would weaken the autocratic hold of the general manager. The object was to find a plan that suited the board, not Jeffery.
Meanwhile, in Chicago Jeffery reverted to his old practice of deciding special rates on his own. Harriman discovered this when he asked Jeffery for some examples of special rates. Although Harriman noticed that Jeffery was not obeying bylaw XI, he did nothing more than ask for details, probably because he saw the futility of challenging Jeffery from afar. Nevertheless, Jeffery sensed that something was brewing. A proud, stubborn man, he let pride lead him into a rash act. Late in July he told several friends that he had resigned before Fish’s departure. Within days the story leaked to the newspapers, leaving Harriman with an awkward public relations problem.29
The last thing Harriman wanted was a crisis suggesting that he could not mind the store in Fish’s absence. Uneasily he reported the incident to Fish almost as an afterthought, adding, “I don’t anticipate much inconvenience from that cause.” Fish's reaction was anything but casual. Amid the sunny, serene surroundings of Interlaken he exploded at “this piece of egotism, not to speak of it as a breach of discipline and of confidence. … It is astounding that so intelligent a man should be guilty of such a stupid impertinence.” Before Harriman even received this outburst, however, the affair boiled into the crisis he had so dreaded.30
Once Jeffery went public, Harriman handled him gingerly and even took pains to compliment his work in a difficult negotiation with another road. But he also saw in Jeffery’s stand a streak of arrogance that needed curbing. On a sultry day late in August Harriman boarded a train for Chicago to face Jeffery in a confrontation that could no longer be avoided. Early on the morning of September 2, Jeffery stopped by Harriman’s office to discuss the purchase of some locomotives. After that topic was exhausted, Harriman’said abruptly that while he was in Chicago he expected Jeffery to refer all special rates to him in accordance with bylaw XI.31
Jeffery stiffened in his chair. He glared at Harriman for half a minute, then jumped up and said, “If that’s your decision, I quit, and will turn the road over to you at twelve o’clock to-day.” A startled Harriman urged him not to act hastily. “Well,” Jeffery countered, “I quit at five o’clock, and turn the road over to you.” He told Harriman of the arrangement with Fish, which in his view had given him authority to handle rates in the old way. Without that power, Jeffery emphasized, he would not remain in office for even one day. Harriman’shrugged and said he could see no alternative to enforcing bylaw XI. “All right then, I quit,” Jeffery repeated, and stormed out of the office. “He was very much excited,” Harriman reported to Fish, neglecting to add that he was no sea of tranquillity himself. This was his first crisis as a railroad officer, and on the surface it put him in a bad light. He was a mere caretaker, a novice at the game, who had just driven from the company one of the most respected operating men in the country. Jeffery lost no time giving news of his abrupt departure to the papers along with copies of the relevant correspondence, which sounded as if he had been pushed out. Predictably, most editors showered him with praise and sympathy.32
Harriman maintained strict silence in public and ordered other officials to do likewise, but privately he was quick to justify his action. He offered the board a muted defense, saying, “I regret very much that it fell to my lot to perform this trying duty, as it was very much against my inclination.” To Fish, however, he admitted being surprised that Jeffery “took the position he did as I had always understood that he did not object to the Bylaw if the Prest or Acting Prest was in Chicago.” Then he added a revealing disavowal: “You must know that I would not, if I were able, undertake to manage the affairs of this Company, but I will hold everything in good shape until your return or the Board makes some change; so you need not feel at all uneasy.”33
These words suggest how insecure Harriman felt in his position and how dependent that place was on Fish. Obviously he feared Fish would think he was overreaching his power, a suspicion that later events would confirm. They also show how well Harriman understood that Fish regarded his presidency with a fierce possessiveness and brooked no rivals. For the moment, however, he need not worry. Fish issued a strong defense of Harriman’s action. This was hardly surprising; he was, after all, actually defending himself from Jeffery’s charge that he had gone back on his word. “You did right to let him go,” Fish cabled from Paris. He denied vehemently that he had ever promised to amend or suspend bylaw XI. “Pride and incapacity to submit to control,” he concluded, “were the real sources of [Jeffery’s] trouble.”34
A few weeks after Jeffery’s departure, Harriman quietly authorized traffic manager T. J. Hudson to use his discretion in arranging coal rates, but he personally approved other reductions under bylaw XI. The real issue had never been bylaw XI but rather the lines of power. By letting Jeffery go, Harriman’signaled that the Illinois Central was no longer a fief for the general manager to rule in the old absolute way. If the message was not yet plain, he aimed to deliver it anew with his plan for shuffling the organization.35
This first crisis affected Harriman more deeply than he knew. While Jeffery’s departure alarmed him, it also liberated him in an unexpected way. On any matter dealing with the railroad he could not help deferring to Jeffery’s formidable knowledge and long familiarity with the road. Jeffery had become an institution on the Illinois Central who, like most practical railroad men, embraced the folklore of experience as the canon for how things should be done. With Jeffery gone, Harriman was free to act without the weight of tradition peering over his shoulder. C. A. Beck, the acting general manager, was also an old railroad man but lacked Jeffery’s prestige. New to his post and hoping to keep it, Beck was eager to please.36
John G. Mann, the superintendent of southern lines, waited only a few days before tossing back at Harriman one of his own suggestions. The system was too centralized, Mann observed, because every action had to await approval from the general manager in Chicago. Why not give the superintendents on the northern, southern, and Iowa lines the authority to act on most matters while still holding them accountable to the general manager in Chicago?37
In effect, Mann was proposing an organization based on divisions rather than departments. As one railroad man described the difference, the departmental approach “spread the working organization … over the entire system; the other makes a number of different working organizations, or units.” The Pennsylvania Railroad had pioneered the divisional system, and debate was then raging among railroad men over which one was superior. Harriman liked the divisional idea, which, as Mann pointed out, had another virtue. If a new general manager was needed on short notice, the divisions groomed superintendents for the place.38
Harriman’s enthusiasm for fresh ideas quickly became contagious. Traffic manager T. J. Hudson checked in with a blueprint for revamping his organization, as did the freight agents, passenger agent, and other superintendents. In New York the Organization Board, chaired by Harriman in Fish’s absence, spent a full day discussing and revising a new plan it had drawn up to reform the operating system and close the power vacuum between New York and Chicago. From its labors emerged a new “Code of Rules for Conducting the Business of the Illinois Central Railroad Company.”39
A sense of revelation and exhilaration flooded through Harriman during these last weeks before Fish’s return. As he worked feverishly on the new plan, it dawned on him that the much respected Illinois Central was still in many ways a stodgy, conservative company. The new board had accomplished much, but much more remained to be done. The social register that constituted its membership were all good fellows but hardly the sort to be inspired by a vision and the desire to fulfill it. Harriman was inspired, not only by the tasks before him but also by a growing confidence in his own ability, and he rushed after his vision with a ferocious burst of energy.
Along with devising the new code and supporting Mann’s plan for a divisional organization, Harriman launched intensive investigations of the traffic, operating, and machinery departments. Everywhere he saw the need for more and better facilities. “I could write a book full on what might have been done 8c lost opportunities,” he enthused to Fish, who was then in London, “but will keep it until you return 8c lay it all before you 8c see if we cannot make better provision for the future.”40
This explosion of activity must have puzzled Fish. Why was the man who had disavowed any desire to run the company suddenly pushing for action on every front? Having lost touch with affairs, Fish found it hard to get back into the flow when he returned on October 24. His sense of displacement was not helped by Harriman’s irrepressible enthusiasm. While Fish struggled to get back in harness, Harriman raced ahead at full speed, dragging his friend along with him.41
“The whole machine has now got a fresh start,” Harriman exulted, “and we should not allow it to stand still or again to get in such a rut as it has been for some years past.” Breathlessly he poured out a torrent of suggestions for more changes, oblivious to the implication that the entire system had been moribund until he had taken hold of it. Fish buried whatever resentment he felt; instead, he supported the proposed reforms and gradually made them his own by differing with Harriman on details or timing. For his part Harriman found it difficult to settle back into his role as second fiddle, a position in which he was never again comfortable.42
In December 1889 the board approved the new code after lengthy debate. The Jeffery affair left one major legacy: under the new setup, the president’s office moved back to Chicago. Fish cringed at the prospect and at the thought of leaving Harriman to handle matters in New York, but he saw little choice. Before Fish could move, however, Harriman fell ill with the grippe and was confined to his house for a month. This was nothing new; he was forever honking or rasping with a cold or the flu. While he languished this time, events took a surprising turn.43
During the summer the RRE committee had been asked to study the company’s long-term needs and resources. That same December Fish and Harriman joined in asking the board to increase outlays for improvements over the next three years. The board in turn asked them how much would be needed, and the RRE committee wanted the same figures before submitting its report. All this work had to be done while Harriman lay ill, which forced Fish to remain in New York and throw something together on his own.44
A year earlier Fish had asked Jeffery for an improvements wish list only to have him come up empty. In Jeffery’s opinion, the road needed no new ballast or heavier rails, no sidings, double tracks, grade reductions or new alignments, no major buildings or terminal facilities. Fish was appalled at this lack of vision on future needs. Now, with Harriman hors de combat, he had to formulate a list with little help from the sources he needed most.45
Despite this handicap, Fish devised an impressive statement. The company had in his view reached a turning point in improvements policy. Since 1883 it had financed more than $3 million in betterments from current income, but the gap between needs and available income kept widening. It was clear to Fish that the scale of improvements had outgrown this method of financing. The time had come for the board to choose between leaving the road in its present state or making improvements “to put the railway in a condition to compete successfully … [for] all the traffic possible.”46
Fish estimated the price tag for the second alternative at $7.8 million. This sum could not be paid from earnings; most of it would have to be financed from the sale of stock or bonds. The company, argued Fish, had reached a crossroads and must decide whether to meet the challenge of new competitive conditions by modernizing its physical plant on a grand scale. Following this course meant increasing its financial obligations, but Fish thought the investment vital to protect the road’s future business.
The RRE committee agreed. After three days of meetings it endorsed a policy of “improving the physical condition of the property… with a view of making the Illinois Central one of the most thoroughly equipped and constructed railroads in the country.” The committee wanted the work extended over a period of more than three years and asked Fish for more detailed information on what was needed.47
Harriman received both the Fish and RRE committee reports while still sick in bed, but he summoned the strength to pen a response. He ducked Fish’s statement by pleading, “I have been too ill to go over the President’s report as carefully as I would like,” but he did not hesitate to dispute the committee’s conclusion. “I… think it would be unwise at this time to pass any resolution adopting a policy for large expenditures of money,” he said flatly. “Our organization is not prepared for it, we haven’t sufficient information. It might lead to extravagance. Our whole force should be directed towards making and saving money.” Lest anyone miss his point, Harriman added, “If I were present to-day I would vote against any resolution for the adoption of a policy as recommended by the Committee.”48
Only five directors attended the meeting that Friday, but the others got copies of the letter. All were baffled by this abrupt change of front by one who had always supported the improvements policy. But Harriman had not changed position; his point was that the timing was wrong to declare such a policy. Rates were falling, the competitive wars were heating up again, and the bond market was glutted with offerings. The Illinois Central’s new organization was just coming on line and not yet ready to handle so ambitious a program.
This episode evolved into a cornerstone of the Harriman legend, especially after Kennan credited Harriman with uncanny foresight in anticipating the depression that struck three years later. Rather than revealing Harriman as a prophet, the incident has an ironic twist that eluded Kennan entirely. Fish was proposing in 1890 the very policy for which Harriman would become famous eight years later while rebuilding the Union Pacific, yet on this occasion Harriman vigorously opposed it.49
It is a fallacy to assume, as Kennan and many later writers do, that because the Illinois Central pursued policies later used by Harriman, he was instrumental in developing them. In many cases he learned them from his experience with the Illinois Central, sometimes from opposing them only to find that he was wrong. Like most bright people, he was capable of profiting from his mistakes as well as his triumphs. He did not invent the notion that the proper policy for the newly emerging era of railroads was to put a road in the best physical condition to haul the largest possible traffic at the lowest possible cost. What he did was gauge with remarkable accuracy the point in time when that policy would pay handsome returns.
Harriman finally returned to work on February 11, still weak but eager to get back in harness. Eight days later the board debated the improvements question at length, then tabled the RRE committee report until Fish and Harriman could submit the report requested of them earlier. Instead of conferring on the matter, however, Fish sent Harriman to attend the meeting of a subsidiary company in New Orleans, where trouble from some minority stockholders was expected.50
When their signals got crossed on this business, Fish fell into a snit and delivered one of his scoldings. Harriman retorted that he didn’t like the way Fish was handling him. “It will be a very long time before a definite report can be made on all the matters you have requested me to handle at New Orleans,” he grumbled. And why should he handle it personally? “I think I can give material aid in bettering the Company’s position by working through others, even better than if I attempted to do the actual work myself.”51
It especially annoyed Harriman that Fish had sent him to New Orleans instead of conferring on the improvements report. Uneasy that Fish might be ignoring him, Harriman reminded him, “We have at last gotten our finances in almost perfect shape, & I hope now we will go very slow about expending any excessive amount of money.” But when they finally got together to work on the report, Fish ignored this advice and urged improvements totaling nearly $2.5 million for 1890 alone. Harriman fought to curtail the list and signed the report only after itemizing one specific dissent over how much to spend on ballast.52
A confused board studied the report, then authorized Fish to determine the outlay for ballast. After some wrangling, however, it dumped the RRE committee’s policy recommendation and approved only $612,500 of the requests plus the ballast. This setback proved the last straw in Fish’s running battle with Harriman. The president was furious that both his policy statement and many of his specific requests had been rejected. He was even more irate with Harriman for opposing what Fish expected him to support. On any critical policy issue the top officers were supposed to march in unison.53
Fish was still struggling to regain the reins of leadership that had in subtle ways slipped from his hands since the trip to Europe. Things had gone much smoother when Harriman took care of financial matters and Fish ran the railroad. Once Harriman had become vice-president, however, he had made steady inroads into Fish’s turf and showed no sign of slowing down. Harriman had changed in ways Fish did not understand. He was no longer as deferential and did not give ground as easily when their views disagreed. It never occurred to Fish to see in this behavior symptoms of growth. On the contrary, he concluded that illness and overwork were driving Harriman toward a nervous breakdown.54
Aware that rumors of discord within the Illinois Central were already circulating, Fish saw what must be done to rectify the mistake he had made. Harriman was simply not capable of working under the direction of others; he must be put back in his old sphere, where his strengths would shine and friction between the two friends would be minimized. The price of such a change, Fish realized gloomily, would be that his own move to Chicago could be delayed no longer.
The showdown took place a few days after the board meeting on improvements policy. It could not have come as a surprise to Harriman, but that did not make the confrontation any less tense or uncomfortable. Exactly what passed between them is not known, but Harriman accepted the outcome quietly even though it must have bitterly disappointed him. Afterward Fish breathed a sigh of relief and hurried to confide the news to his most powerful backer, William Boissevain of the Dutch banking house.
Since his return from Europe, he wrote Boissevain, “very decided differences of opinion” between Harriman and himself had reached a point where “an open rupture was imminent 8c it was deemed best to avoid this by his applying for temporary relief from duty on the score of his health, which has been precarious for several weeks past. It is now understood that he is, at a suitable time, to withdraw from the Vice Presidency.” Everything had been done “very quietly and in a dignified and decorous manner and so to admit of his dropping out with credit, all of which can now be done with good feeling 8c respect on both sides.” Their differences, Fish emphasized, were not personal but concerned “the general policy and administration of the Company.” No one knew about the problem except the directors, and only a few of them realized how serious the breach had grown. Fish was pleased at how well a delicate situation had been resolved and (though he did not tell this to Boissevain) even more pleased at how favorable the resolution had come out for himself.55
Harriman's feelings were another matter. His first attempt at railroad management had ended in a humiliating retreat. The clash did not rupture his friendship with Fish even though it left the latter solidly in control of the Illinois Central. It does demolish the myth that Harriman’s foresight saved the Illinois Central from possible ruin during the depression, for the simple reason that his views went unheeded. Fish pushed hard for the improvements program and got most of what he wanted. Between 1890 and 1892 the Illinois Central spent $7.3 million on improvements, and it kept spending right through the depression. During the next five years the company sank another $11.4 million into capital outlays.56
The Illinois Central sailed through the depression unscathed not because Harriman was a prophet but because he had returned to the role that best suited him: the deft handler of finance in difficult times. On that front Fish sorely needed his help, and their mutual desire to keep the company strong did much to heal old wounds and restore the partnership to good working order.
*A large amount of traffic paid a mixed rate—that is, a combination of the local rate for the distance moved on the road’s line and the through rate for the distance beyond it.