E. H. Green, erratic financier whose influence upon the L & N extended far beyond his brief presidency, from December 1, 1880, to February 26, 1881.
The abrupt withdrawal of Victor Newcomb from the presidency portended an era of still greater change for the L & N. Even more, it unmasked a significant shift in the ownership and control of the company. During the 1870s the L & N remained firmly in the hands of essentially Louisville interests intent upon pursuing a territorial-developmental policy. The growth of the road into a sprawling system, however, profoundly altered this design. As the system’s influence extended ever deeper into the South, the number of interests identified with its activities multiplied rapidly. At the same time, the sheer size and weight of the system attracted the attention of capitalists far beyond the pale of L & N territory. The company was no longer a local road. It serviced an increasingly diversified clientele and thereby stirred the imaginations of numerous ambitious entrepreneurs.
For the most part the L & N’s expansion policies were responsible for this new situation. Expansion required capital, which in turn meant officers skilled at mobilizing large amounts of money. Since local resources were inadequate to meet the company’s spiralling needs, its management turned logically to the New York money market for sustenance. In this pattern Newcomb proved the transitional figure. A Wall Street manipulator, his contacts provided ready access to capital when the L & N most needed it. At the same time, his activities alerted a widening circle of energetic financiers to the L & N’s potential for transactional profit. In mobilizing capital for its expansion, the financiers gradually moved into the company’s management until they assumed complete control over its destiny.
By this process local control gave way to “foreign” domination, and the territorial policy metamorphosed into one of interterritorial expansion. The backgrounds, ambitions, and functions of the new policymakers differed markedly from the predecessors. They viewed their commitment as opportunistic rather than developmental, and possessed no regional or emotional ties to the enterprise. As financiers their primary function was to mobilize capital, but their very dedication to that task insured that expansion would continue whether or not the economic environment warranted it. Under their leadership the L & N discarded the territorial concept and accelerated its pace of expansion. Though easily rationalized in the short-term, such a course and its attendant financial policy proved disastrous in the long-term. Within three years it riddled the L & N with internal dissension and brought the company to the brink of bankruptcy.
The men who emerged as southern railroad leaders after 1880 represented a new breed of entrepreneurs. They were of course younger, had virtually no previous identification with the companies they captured, and derived most of their business experience from the immediate postwar era with its emerging industrialism, rampant individualism, and extreme emphasis upon material values. Most of them were financiers with no practical railroad experience, and their accession marked the beginning of a trend to separate the functions of financial and operational control. Some did not even become president but rather exercised their influence through control of the board. In these cases the president became merely the operational head. On those roads where the financier assumed the presidency, he tended to leave operations in the hands of a vice president especially appointed because of his practical railroad experience. A specialization of functions, wrought largely by expansion, had begun to appear.
The policies created by the financiers bore little resemblance to the old developmental tenets. The most striking difference lay in their distinct lack of local or regional ties and loyalties. It was no accident that most of the new leaders, soon after their acquisition of control, made their company’s stock more accessible by listing it on the New York Exchange. Lacking the provincialism of the old presidents, they conceived of their roads not as distinct entities serving specific territories but as mere components of much larger systems spanning the entire section and free from dependence upon any one commercial center as an outlet. Usually the railroad constituted but one of many diversified and often interdependent financial interests. None of them made the railroad his exclusive business, and none localized his outside investments nearly as much as the former presidents and their supporters had done. The new leaders were, in the parlance of the era, “men of large affairs.”
Nothing revealed the difference in policy so much as the expansion programs of the new leaders. Coming to power just at the return of national prosperity, they had no fear of expansion. Indeed their major concern was that growth proceed rapidly enough for them to capture waiting markets. Aggressive and confident, they transformed expansion into both an offensive and defensive weapon. Instead of backing reluctantly into expansion they embraced it willingly and on a hitherto unprecedented scale. Instead of fearing consolidation, they worked tirelessly to create gigantic systems capable of reaching beyond sectional limits for traffic and connections. Instead of sealing off a territory and defending it as their own, they aggressively penetrated every possible territory to compete with other lines organizing in like manner. The very scale of their consolidation efforts pushed competitors into similar policies and thus accelerated the process. Their impersonal approach and geographic indifference soon closed the era of individual territories and even the more recent development of individual through lines.
The most significant aspect of this change in strategic thinking was the rapid growth of interterritorial competition. It constituted the logical alternative to the territorial concept: if a monopolistic territory could not be protected from invaders, then the best hope for increased business lay in expanding the field of battle. The key to survival appeared to be a diversification of outlets for both through and local traffic. At the local level the old policy of developing local resources along the enlarged lines would provide the company with a reliable base for traffic growth. Participation in the struggle for through traffic on a larger scale, meanwhile, seemed to offer better opportunities for stabilizing overall earnings. The new strategy appeared to promise greater flexibility. It would take time for new local traffic to develop sufficiently to turn a profit, and only a system large enough to cover losses in one territory with gains in another seemed able to buy that time.
The desire to penetrate new territories provided the main impetus for the consolidation activities of the 1880s. So, too, did it spur new construction during the same period. Growing systems generally built new lines for one or more of three reasons: to open new territories or reach new markets; to form new through connections with other systems; and to parallel an existing rival enjoying monopoly status. The Norfolk & Western, though richly endowed with heavy local traffic in coal and other ores, nevertheless embarked upon the construction of additional through routes. It built a new line to the Ohio River, pushed for new western connections with the East Tennessee, and completed the Shenandoah Valley Railroad as a rival route to the Richmond & Danville’s Virginia Midland road. The East Tennessee in 1882 finished a line from Rome, Georgia, to Macon that paralleled both the Western & Atlantic and the Central of Georgia’s road between Macon and Atlanta. In one of the most daring projects, the Danville completed the 566-mile Georgia Pacific (a partial reincarnation of the Georgia Western) from Atlanta to Greenville, Mississippi, by 1889. Though the amount and type of construction varied, no system remained aloof lest it lose ground to competitors.
The basic tactics of cooperation, construction, and consolidation, utilized by the earlier managers, continued to serve their successors. The difference lay in the scale of operations and in the desired goals. The first resulted from the shift in strategic thinking from territorial monopoly to interterritorial supremacy. The second concerned, among other things, a change in attitude toward sources of profit. The financiers who created the large systems derived little personal return from operations. Their profits came instead from such varied sources as construction of new lines, speculation in the securities associated with the company, transactions involved in the acquisition of other lines (in which they often held personal interests), and such external investments influenced by the railroad as real estate, mineral lands, express business, manufacturing, and industrial development.
Because the financiers tended to think in short-term rather than long-term profits, they evinced little concern for the swollen capitalization produced by their policies. The financial effect of interterritorial strategy was to burden every system with considerably enlarged fixed costs that required additional earnings to service. During the 1880s, when general prosperity seemed to bless every enterprise, a constant expansion of business seemed almost inevitable. Moreover, the centralization born of consolidation promised reduced administrative costs and increased operational efficiency. Many companies, in fact, rationalized the creation of large systems in terms of maximizing efficiency.
By the end of the decade, however, serious flaws in the interterritorial strategy began to appear. The assumption of expanding business proved correct, but steadily declining rates prevented earnings from increasing in like proportion. Nor did the tactic of absorbing rival roads entirely reduce competition. The large systems expected to contend with each other, especially for through traffic, but they faced additional rivalry for local business. Besides its positive effect upon inter territorial expansion, the prosperity of the 1880s stimulated construction of smaller local lines as well. As a result the giants confronted an invasion of gnats, each capable of making severe inroads into local traffic. With the cost of consolidation rising prohibitively, and with public sentiment growing steadily more shrill against the “monopolistic” railroads, the larger systems simply could not afford a policy of indefinite absorption. Thus, the attempt to stifle or at least centralize competition failed, and the strategy of penetrating every available territory created new weaknesses as well as new markets.
The pursuit of interterritorial strategy led nearly all southern roads into grave financial difficulties. Many of them toppled into receivership after 1893, but the old strategy did not die easily. The problems that had called it into existence still remained unsolved, and the decade of the 1890s witnessed still further consolidation and expansion. An 1893 journal report predicting control of the entire South by only two systems proved exaggerated in degree but not in kind. The change in strategic thinking that evolved around 1880 ensured that for better or worse southern railroads would proceed steadily down a course of further concentration and amalgamation. In that headlong flight the L & N typically took the lead until a quirk of financial speculation cost the company its long-cherished independence.
The growth of the L & N during the 1870s did not go unnoticed by the major northern roads, some of which coveted a southern connection. In the spring of 1879 rumor spread that the Baltimore & Ohio Railroad would lease the L & N system at 8 per cent. The story was serious enough for Standiford to denounce it as absurd. The following January witnessed an equally exciting report that the mighty Pennsylvania Railroad “would proceed to gobble up the Louisville & Nashville and all its tributaries.” The company’s officers squelched this account with the whimsical observation that the L & N was “itself in the position of a gobbler and not a GOBBLEE.”1
Nevertheless, the L & N’s activities awakened the interest of more than one member of the New York financial community, and Victor Newcomb did nothing to discourage that interest. Indeed he stimulated it, both by his quest for capital and by his own banking and speculative activities on Wall Street. His outflanking of “King” Cole had attracted the attention of Henry W. Grady, who followed the maneuvers closely and wrote extensively about them. Awed by Newcomb’s finesse and brilliance, Grady labeled him “the Napoleon of the railroad world—the easy and assured master of the situation” and later “the most notable young man in America.”2
Equally impressed by the young reporter, Newcomb offered Grady a position as his private secretary at a salary of $250 a month. Unwilling to give up newspaper work, Grady nevertheless travelled with Newcomb for a time. For several months he unearthed a string of exclusive stories on “Newcomb’s Octopus” for the Atlanta Constitution. His travels covered thirteen states and ended on Wall Street, where he fell spellbound to the frenzy of the market floor and Newcomb’s calm mastery of it. Operating in league with the brokerage office of Cyrus W. Field, Newcomb educated Grady on the perils of speculation and guided his investment in more than one instance. In the spring of 1880 he induced Field to lend Grady $20,000 to purchase a quarter-interest in the Constitution, assuring the reporter that his speculations would easily repay the debt. By this means Grady obtained a share of his beloved newspaper and Newcomb received a bonus of favorable publicity for himself and his railroad.
In effect Newcomb had become less a Louisvillian than a New Yorker. He had always been a financier rather than a railroad man, and neither of these developments pleased his Kentucky associates. For some time Louisville interests had been concerned about “foreign” interests creeping into L & N affairs. During the summer of 1879 rumors circulated that a group of New Yorkers had quietly entered the market to buy L & N stock. It seemed more than coincidence that the stock chose that usually sluggish season to shoot upward. Opening the year at 26, it climbed to 60 by June and, after a brief relapse, reached 86 by the year’s end. The city of Louisville added fuel to the fire in midsummer by announcing plans to sell its 18,463 shares of company stock.
At once local interests protested the move, crying that all the shares would fall into the hands of eastern buyers. On July 1 a group of Louisville merchants assembled informally to discuss the situation with Standiford and Newcomb. Unanimously they opposed any sale to outsiders and expressed a willingness to take all of the city’s holdings themselves to prevent its dispersal. To counteract their fears the Courier-Journal published a list showing that the L & N’s New York office held a total of 47,457 shares while Louisville citizens, the city, and various Kentucky and Tennessee counties owned 51,543 shares. And of the shares recorded in the New York office, “it is known that at least 12,000 shares belong to parties south of the Ohio River and 5,000 shares to English holders, leaving only some 30,000 shares which are owned by New Yorkers.”3 No immediate sale occurred because the city had not yet fully decided and because the state legislature had not given the necessary approval. Still the local merchants felt uneasy, and the L & N’s annual meeting in October did nothing to assuage their doubts. Standiford and Newcomb won reelection easily, but three new faces appeared on the board: E. H. Green, George C. Clark, and J. P. G. Foster, all of New York. Green, husband of Hetty Green, the formidable “Witch of Wall Street,” became second vice president in charge of the New York office.
The incursion of outsiders increased during 1880. When Newcomb succeeded Standiford in March, Green moved up to the first vice presidency and his former position was later filled by Alexander. Standiford, T. W. Hays, and W. M. Farrington, all local men, left the board and were replaced by C. C. Baldwin and Logan C. Murray of New York and Clarence H. Clark of Philadelphia. Farrington had served on the board since 1872, Standiford since 1874, and Hays since 1876. That left only B. F. Guthrie, George Washington of Nashville, and the venerable W. B. Caldwell to represent local interests, and in May Caldwell surrendered his seat to Alexander. Clearly the Louisville influence had dwindled almost to insignificance despite Newcomb’s presence. In fact the young Napoleon represented neither the local interests nor the new financiers. Alexander supported him unwaveringly as did Green and one or two others. But the local directors distrusted him, and Baldwin and his cohorts were already maneuvering for position behind the scenes.
It was this growing conflict that burst open at the annual meeting in 1880. Newcomb announced his desire to resign and expressed a preference for Green as his successor. James T. Woodward, president of the Hanover National Bank in New York, replaced Foster on the board. Then, inexplicably, Newcomb introduced a resolution to declare a 100 per cent stock dividend. This tactic, which amounted to an outright watering of the stock, might well have complicated the efforts of his enemies to corner a majority of L & N shares since Green was known to be the largest individual holder. It may also have reflected some private agreement between Newcomb, Green, and other parties. Whatever the case, the resolution carried, and its effect was to speed the flow of L & N stock into “foreign” hands.
Some minority holders understood this effect only too well. In November they filed suit to block the transfer of any new stock in excess of the $9,000,000 capital stock already in existence before the 100 per cent dividend. The dissenters also charged that the L & N had no legal right to run the Nashville, Chattanooga & St. Louis, and demanded that the company relinquish control of the line, but the court dismissed the suit. On December 1 Newcomb stepped down and was replaced by Green. Alexander moved up to the first vice presidency and Baldwin became second vice president. The growing reports of internal dissension, coupled with the stock dividend, played havoc with the price of L & N stock. After peaking at 174 in November it broke sharply, plummeting to 84 by the end of the month. The downward trend continued in December to a low of 77.
E. H. Green, erratic financier whose influence upon the L & N extended far beyond his brief presidency, from December 1, 1880, to February 26, 1881.
Most observers expected Green to continue Newcomb’s basic policies and hoped he would provide stability within the management. But stories of dissension within the board persisted stubbornly, and Green proved unequal to the task. At a board meeting on February 26, 1881, he resigned after less than three months in office and without any explanation for his decision. Upon Newcomb’s motion, seconded by Green, Baldwin was elected president and George Washington succeeded him as second vice president. Shortly afterward T. W. Evans of New York replaced Murray on the board, which now consisted of Green, Baldwin, Woodward, Evans, Newcomb, Clarence Clark, G. C. Clark, Guthrie, Washington, and Murrell. The triumph of the New York interests was complete. Although Baldwin was considered to be a southern man, his financial ties were with Wall Street. And no one doubted any longer that most of the L & N’s stock resided in New York.
A native of Maryland, Baldwin received his business training at a mercantile house in Baltimore. Thirty years old when the Civil War broke out, he saw no military service but worked instead for his brother’s firm, Woodward, Baldwin & Company. On two separate occasions he ran the Union blockade to collect debts owed the company by southerners. At the war’s end Woodward, Baldwin opened a branch in New York and Baldwin was made a full partner to take charge of it. Eventually he rose to the position of senior partner and continued the firm’s policy of concentrating upon the southern trade. In this way Baldwin retained the trappings of a southerner even though his business activities were rooted firmly in New York City. A pleasant, even a charming man, he lacked both the charisma and the burning energy of Victor Newcomb. He was competent but not brilliant, and could organize but not lead. And he lacked Newcomb’s gift for subtlety of manipulation.
As president Baldwin frankly accepted the L & N’s new role as an interterritorial system. Under his guidance the tempo of expansion lessened only slightly. Early in the spring of 1881 an unexpected opportunity to lease the Georgia Railroad materialized. That 641-mile system connected Atlanta with Augusta, included branches to Macon, Warrenton, Washington, and Athens, and owned a controlling interest in the Atlanta & West Point and the Rome railroads along with a partial interest in the Western Railroad of Alabama. Though still a prosperous line, the Georgia fully appreciated its precarious position of being surrounded by three ambitious giants: the Central, the Richmond & Danville, and the L & N. The road’s president, Charles Phinizy, reasoned that the simplest guarantee for his company’s future would be a lucrative lease to one of these competitors. Accordingly, he let it be known early in 1881 that the Georgia would consider leasing proposals.
All three systems snapped at the bait but Wadley quickly got the inside track. He proposed to Phinizy a 99-year lease to the Central at a guaranteed rate of 8 per cent a year on capital stock. Phinizy demurred, pleading that no definite action could be taken until the stockholders meeting in May, and opened his ear to other offers. When news of the proposal leaked out, Central stock rose from no to 121 and Georgia stock from 115 to 143. Then Wadley ran into some difficulties. For one thing, the Georgia constitution of 1877 flatly prohibited the Central from owning any other competing railroad. This proviso was annoying but could be evaded by some legal gerrymandering. More important, Wadley met with opposition from his own board, which refused to approve the offer. Infuriated at their short-sightedness and certain that control of the Georgia would solidify the Central’s position in Georgia, Wadley nursed the negotiations along on his own initiative.
Since the constitution forbade a direct lease to the Central, Wadley joined a New York syndicate in buying control of the South Carolina Railroad. On April I he closed an agreement with Phinizy to lease the Georgia to that road; later, on May 7, he assumed the lease personally. Phinizy won fast approval from his stockholders for the lease. Small wonder, considering the bargain he had struck. Wadley agreed to pay an annual rental of 8 per cent or $600,000, to pay all taxes except the charter tax on net income, to pay all interest on the Western of Alabama bonds, and to deposit $1,000,000 worth of bonds as security on the agreement. That would enable the Georgia to meet its remaining obligations, pay a 10 per cent dividend, and still have enough income to provide a sinking fund for the gradual extinction of all obligations.
In return Wadley acquired for ninety-nine years the entire Georgia system, including the Western and all its rolling stock. He could collect all income from the Georgia’s profitable stock holdings in the Atlanta & West Point, the Rome, and the considerably less lucrative Port Royal & Augusta. Despite the growth of new interterritorial systems, the Georgia system remained an important artery between the West and the south-eastern seaboard. As a frank competitor to the Central or the L & N it could wreak havoc, and Wadley well knew it. To force his recalcitrant board into line he now began to dicker with the L & N over the possibility of assigning that company a half interest in the lease. Baldwin responded eagerly and dispatched Alexander to work out the details.
Within ten days Alexander returned with an agreement. To the L & N board he tendered an enthusiastic endorsement and delivered a powerful argument in favor of the lease. In the first place, he thought it would yield a first-year profit of at least $100,000 despite the stiff terms. More important, it would give the L & N control of the territory beyond Montgomery and Atlanta and force the Central to ally itself with the L & N instead of the Cincinnati Southern. The Georgia’s equipment was in first-class condition, he added, and possession of the road’s holdings in the Atlanta & West Point and the Western of Alabama would be a valuable asset. Finally Alexander warned that the Georgia controlled a large amount of through traffic which would be lost to the L & N if the road fell into hostile hands. The board accepted his recommendation with little debate and ratified the agreement. On June 1 the Central’s board, duly alarmed, accepted the other half of the lease from Wadley.
Solidly entrenched in the Georgia market at last, the L & N extended its penetration into Florida. During the winter of 1881 Baldwin organized the Pensacola & Atlantic Railroad Company and obtained what he described coyly as a “liberal charter” from the Florida legislature. The terms provided a land grant of 25,000 acres per mile or 4,000,000 acres in all for construction of a 170-mile road from Pensacola to Chattahoochee, a small town east of the Apalachicola River. Once completed it could be linked to the L & N’s existing Florida subsidiaries. Work commenced at once and proceeded well despite the difficult terrain and periodic out-breaks of swamp fever. In April of 1883 the Apalachicola was bridged and the new road reached connection with existing lines in southern Georgia and eastern Florida.
Unlike many other L & N subsidiaries, the Pensacola & Atlantic penetrated genuinely virgin territory. The western end of the land grant was surprisingly fertile and supported a good cotton crop. The eastern end of the line, however, plunged into wild country inhabited mainly by deer, panthers, and wild turkey. For some years train and engine crews amused themselves by shooting game from the train and fetching the fresh meat for later use. During these early years there were only two developed towns on the line, Milton and Marianna.
Encouraged by the L & N’s new toehold in the deep South, Baldwin moved no less vigorously to extend his northern connections. In July of 1881 he purchased the entire capital stock of the Louisville, Cincinnati & Lexington which, combined with the Newport and Cincinnati bridge, put the L & N directly into Cincinnati. The old Short Line road, once a bitter bone of contention in Louisville, had fallen into receivership in 1874 and was reorganized three years later. The new company extended four miles to Newport to gain access to the bridge there. Since the road was built with standard gauge, it had been connected with the L & N in Louisville by the construction of what was called the Railway Transfer, a 3-rail track that extended four miles from East Louisville to South Louisville.
Acquisition of the Louisville, Cincinnati & Lexington put a subtle pressure upon the L & N to reconsider the whole gauge question. If access to Cincinnati promised an increase of through business from the Midwest, and if the company contemplated further expansion north of the Ohio River, then the gauge difference would become an obnoxious obstacle. Already the previous April a committee of officers headed by Alexander had met to study the problem. Though the shift to standard gauge would entail an enormous amount of work and expense, the officers regarded it as inevitable. The board was not yet ready to undertake such a project, however, and for the moment Alexander’s committee was content to study the costs and problems involved.
To the east the unfinished state of the Owensboro & Nashville remained a problem. Entirely isolated from the L & N system, the road needed considerable work if the grand through line originally envisioned by Cole was to be realized. Only thirty-six miles had been constructed south of Owensboro when the L & N acquired control. Baldwin elected to detach the road as a separate company and arranged to push construction southward to Springfield and Adairville, eighty-five miles from Owensboro. At the same time the L & N bought the entire stock of the Henderson Bridge Company to expedite the bridge that would complete the St. Louis through line. The existing transfer required a 12-mile trip by boat and shut down for a part of every winter when the ice thickened. This ambitious project would require four years to complete.
The long-neglected Lebanon extension also revived under Baldwin. For nearly a year a committee of L & N officers consisting of Alexander, Baldwin, George Clark, Green, and Woodward had met with R. T. Wilson of the East Tennessee to work out a satisfactory agreement. In September of 1881 a compromise was struck and work started immediately to extend the branch from Livingston to the state line. The L & N reached its goal in April of 1883, but further squabbling delayed final connection of the roads until June 4. On that date the through line advocated so insistently by Albert Fink in 1866 came into existence. Not surprisingly, the 17-year delay minimized its impact upon existing through traffic patterns.
The L & N’s renewed burst of expansion naturally spawned fresh rumors of its aggressive designs, and Baldwin did little publicly to dispel them. He assumed the presidency of the Louisville, New Albany & Chicago and expressed the hope that the L & N might eventually control the line. In 1882 he purchased for the company 4,000 shares of stock in the Chicago & Eastern Illinois Railroad at the inflated figure of 112½. It was known that he had rebuffed an attempt by Collis P. Huntington to share in the purchase of the Louisville, Cincinnati & Lexington, and that he had appointed committees to consider purchasing the Memphis & Charleston and even leasing the Cincinnati Southern.
All these activities certainly supported the image of the L & N as a restless colossus, but they were exaggerated. Like Newcomb, Baldwin early sensed the limitations of his power. Never inclined to be cautious about incurring debts for expansion, he still recognized the danger of out-running his resources by too great a margin. Thus he agreed that the Memphis & Charleston was not worth having and the Cincinnati Southern too expensive to lease. In 1882 he actually sold the 34-mile Richmond branch to Huntington’s Kentucky Central Railroad. A year earlier he had sold the Georgia Western franchise, in which the L & N no longer had any interest, to General John B. Gordon for $50,000 and free use of the line when completed. To maintain peace with the East Tennessee, Baldwin concluded an agreement in October of 1881 whereby the two systems promised to exchange and prorate business on their Alabama lines. As part of the arrangement the East Tennessee agreed not to build any line to Montgomery for the duration of the ten-year contract.
The East Tennessee agreement reflected one possible response to the instability implicit in interterritorial strategy. By 1882 most southern roads were at last free from bankruptcy and reorganized. The awesome expansion of the L & N had helped generate a growth race among the major roads. By the mid-1880s a handful of burgeoning systems were already beginning to dominate the region’s transportation. As each system grew larger and therefore potentially more dangerous to its rivals, a lethal situation arose: expansion and consolidation threatened not to eliminate competition but actually to intensify it.
This perverse irony arose from the fact that a small group of powerful systems, heavily armed with financial, political, and legal resources, could wage an infinitely more destructive competition for business than a large number of small lines. The stakes were higher, the losses greater, and the resources for sustaining a war more abundant. Moreover, unlike the earlier era of territorial competition, every action in the interterritorial arena posed a potential threat to every other system and invited a retaliatory measure. The smaller, independent roads, trapped in the footprints of the giants, had to scramble desperately to survive. They would be forced to shift allegiances or sympathies quickly or else sell out to one of the competing systems, and their defection in turn could further intensify the conflict. An aroused public, torn between the image of monopolistic systems on one hand and the debris of intensified competition on the other, might well respond by demanding increased regulation of the railroads.
That was, of course, anathema to all the systems. In time the managers would perceive their central dilemma: that consolidation and construction did not eliminate their need for cooperation but on the contrary increased it. At that point the existing agencies for self-regulation, notably the Southern Railway and Steamship Association, would become more important than ever. In fact, the Association’s board of arbitration in 1884 settled the long and bitter controversy over cotton shipped between Montgomery and Selma. The following year it managed to bring the L & N and the East Tennessee to a stable agreement on the apportioning of business between Nashville and Memphis. For the period 1878–87, when most of the interterritorial systems emerged, the Association held virtually unquestioned authority over southern freight rates. The continued growth of the systems constantly threatened that authority, however, and the enactment of the Interstate Commerce Act in 1887 posed a grave challenge to stability.
L & N system map, 1884.
In addition to the L & N, at least seven major systems were making their weight felt by the mid-1880s. The most powerful of this group, the Richmond Terminal, centered around the Richmond & Danville and would eventually include the East Tennessee and Central of Georgia systems. The Atlantic Coast Line Company was busily welding together a discreet chain of roads along the seaboard. The Savannah, Florida & Western, though still a weak infant, possessed capable leadership and was struggling to capture Florida and the deep South. The Norfolk & Western, though largely a local system, contemplated expansion toward the Ohio River. The Chicago, St. Louis & New Orleans still held sway over north-south traffic along the Mississippi River. In the interior, nearest the L & N, two young systems were coalescing under energetic leadership: the Chesapeake & Ohio, envisioned as part of a transcontinental system by Collis P. Huntington, and the Erlanger roads, a combination of lines dominated by a London syndicate.
Directly or indirectly, all these systems posed threats to the L & N’s leadership. They would require careful watching, considered policy, and prompt responses. Unfortunately, Baldwin was ill-equipped to provide any of these qualities. His breadth of vision was never matched by clarity of judgment or decisive action. And these were largely long-term threats for which he had little time or patience. During his tenure he faced far more immediate dangers from within the ranks of his own administration. For a time politics and policy became hopelessly entangled in L & N affairs.
In October of 1881 Baldwin assembled a glowing report for the stockholders meeting. In that document he slid casually over a funded debt that now totalled a staggering $46,991,840. He depicted the year past as a trial period, the results of which promised accelerating prosperity for the coming years. He lingered fondly over the manifest signs of national prosperity, dwelled poetically upon thriving crops and burgeoning mineral resources. He pointed proudly to the growing flow of capital into the South and boasted that “the relations between the company and the communities whose channel of trade it is are characterized by increasing evidence of intelligent co-operation and mutual confidence and support.”4 He concluded that the proliferating L & N system could not help but reflect this pyramiding affluence by increased traffic and revenues.
Baldwin won speedy reelection along with the incumbent slate of directors. But he proved a better poet than economic forecaster. The billowing prosperity he had forecast proved a treacherous mirage. Business conditions grew not stronger but more erratic. The financial structure of the nation had again overextended itself, and during the coming months symptoms of weakness bobbed to the surface led by deteriorating stock prices. On the L & N board the seeds of dissension, dormant but never dead, sprouted once more. The dissenting faction, centered around E. H. Green, had never been entirely comfortable with Baldwin’s frenetic expansion; now they grew alarmed at the company’s bloated mortgage debt. Never had they trusted Baldwin personally. To what extent he speculated (some said he did so on company funds) remained unknown, though a taint of suspicion seemed to cloak his every dealing. But as long as he kept the road solvent and paid regular dividends, he could not easily be assailed. And promptly in January he declared a 3 per cent dividend.
He could ill afford it. Already Baldwin had begun to reap the harvest of the expansion program. Many of his purchases, like those of Newcomb, proved to be poorly constructed and inadequately equipped. Few of the new roads paid their way, and some displayed an utterly inadequate traffic to offset their obligations. Even the coveted Georgia Railroad failed to earn its keep, netting only $449,521 the first year of its lease. New construction projects consumed their share of earnings, notably the Henderson Bridge, the Lebanon extension, and some badly needed improvements, including a new depot at Nashville.
Even worse, the main system itself was in need of basic improvements. The decision to allocate most of the company’s resources for expansion could result only in the neglect of betterments and the purchase of new equipment. The newest member of the administration, Milton H. Smith, outlined this problem with painful clarity in September of 1883. A former general freight agent for the L & N, Smith had left the company in 1878 and returned in December, 1882, in the newly created post of third vice president. Gruff, arbitrary, and short-tempered, he was, in Alexander’s words, “known as the best man in his line in the U.S.”5 In a letter to Baldwin which he declared “has not been written with a view to publication or distribution among the stockholders but for the information of yourself and others directly connected with the present management,” Smith evaluated the state of the L & N system in terms that were anything but encouraging.6
In examining the road’s physical condition, Smith disclosed some startling facts. On the roadbed itself in 1883 there still remained 789 miles laid in iron and only 1,276 in steel. Of the iron rails, 442 miles were on roads classified as main lines. The conversion of the 185-mile main stem to steel, which began in 1871, was not completed until 1880. Clearly past managements had tried to economize on improvements expenditures by buying the cheaper iron rails despite their much shorter life. Smith discovered that between 1875 and 1883 the L & N purchased and laid 32,154 tons of iron. Of this practice he declared bluntly,
There has been no time during the past six or eight years when the management was justified in placing a single iron rail in any of the Company’s main lines. In my opinion, the action of the past management in doing this can not be satisfactorily explained or defended.
To make matters worse, the earlier administrations had resorted to the financial practice of charging a proportion of the cost of new rails onto the expenses of the following year. This device rendered actual expenditures for new rails difficult to determine for a given year, and once started it could only be terminated by throwing a disproportional expense onto some one year. Mincing no words, Smith asserted that “The practice of charging expenditures of one year to the accounts of the succeeding year is reprehensible, and can not be defended. The assigned reasons are puerile and disingenuous.” He noted, too, a blatant discrepancy in the annual reports of the past years concerning the condition of the roadbed: only a fraction of the mileage reported as being fully ballasted was actually so treated. Even so, given the shortage of funds, Smith recommended that expenditures on ballasting remain minimal until all main-line mileage had been converted to steel rails.
The bridges on nearly all the L & N’s lines also posed a problem of near scandalous proportions. The tremendous growth in total volume of traffic had led the L & N to purchase bigger and heavier locomotives. The new 2–6–0 Mogul (80,000 pounds) and 2–8–0 Consolidation (99,000 pounds) engines, together with heavier rolling stock carrying larger loads, were putting tremendous strains upon bridges never built to carry such a weight. Smith warned that the situation was fast reaching the point of courting disaster. One span on the Knoxville line had recently collapsed, killing one employee and seriously injuring two others. The heavier engines had already been withdrawn from the South & North Alabama and part of the Knoxville line and were operating only at great risk on the main stem, the Memphis branch, and several other main lines.
To meet this crisis Smith advocated first that the bridges be replaced as rapidly as possible and that some smaller engines be pressed into service temporarily. “The fact is,” he added tersely, “the heavier class of engines should not have been put in service until the bridges had been reconstructed.” He recommended that the bridges be redesigned to carry engines weighing up to 120,000 pounds and cars with loads of 40,000 pounds. The work could be done over a three-year period at an annual cost of approximately $200,000.
Company facilities, too, needed heavy expenditures to put them in decent order. Many depots and stations required extensive repairs, and some divisions lacked any tool houses or section houses. Yet the amount of money spent on these improvements had actually declined in recent years, and the current administration continued the prevailing instructions to hold these repairs to a minimum. To an extent Smith shared this sentiment, feeling that the roadbed should receive top priority. But rolling stock was another matter. The funds available for refurbishing the existing stock were so inadequate that the L & N’s total equipment actually declined from 1882 to 1883. Construction of new rolling stock in the company shops barely kept pace with losses, and the present supply could not meet the growing volume of traffic. Anticipating a further increase in demand, Smith argued forcibly for “an immediate increase in the rolling-stock, especially of motive power.”
Here, as elsewhere, Smith uncovered shoddy financial practices. The cost of constructing new rolling stock, as revealed in the company’s books, contained unexplainable variations and deviations. More important, expenditures that properly belonged to operating expenses were being charged to the construction account, thus distorting both the actual cost of operations and the amount of new construction undertaken. The misplaced charge for the fiscal year 1882–83 amounted to $141,015. In addition, the practice had developed of crediting the construction account with overrun in stocks from the previous fiscal year. By such improper accounting practices, Smith complained, the construction account was falsified to the point where no true assessment of it could be made. He noted as an example that:
It is difficult to arrive at anything like an accurate statement of the amount of these improper charges during the year 1881–82. The Comptroller has made two estimates of this amount, which do not agree with each other. The reason for this has been a lack of definite instructions as to what should be charged to that account.
Having delineated these deficiencies, Smith went on to consider their effect upon the broader issues of policy. The point of intersection between strategy and operations was the problem of efficiency. In an environment characterized by increased traffic, rising expenses, and declining rates, the L & N could maintain its competitive position only by systematically improving its efficiency of operation. Mere expansion alone would not do; in fact it tended to lower efficiency in two ways. First, it consumed funds needed for improvement expenditures, and secondly, it usually resulted in the acquisition of roads so run-down that they lowered the performance ability of the overall system.
Smith warned that the competitive situation was not sufficiently stabilized to tolerate a high margin of inefficiency. Rates had remained reasonably stable during 1882 largely because of an agreement reached in April of that year between the lines competing for traffic between the Ohio River and points south. Such arrangements were secured and maintained with great difficulty, however, and were continually threatened with disruption. So many roads were involved that precipitous action by any one of them could provoke a costly war, and the construction of new lines posed a constant threat to this uneasy equilibrium. The whole question of maintaining rates, he lamented, remained more an art than a science:
There is at present no known or fixed rules or laws governing the matter, and success usually depends upon the skill, energy, and knowledge brought to bear by one or two of the parties representing the various conflicting interests.… From what has just been said, it will be inferred that the maintenance of reasonable rates on competitive traffic can not be assured.
The position of the L & N in this scramble for business could no longer be considered one of clear superiority. Smith observed that the company’s operating ratio (proportion of operating expenses to earnings) stood slightly above 60 per cent. The explanation for this somewhat high figure involved not a heavy outlay for improvements but rather the large number of ill-equipped branch roads that dragged the system’s overall efficiency down seriously. An increased demand for traffic would improve this figure but at the same time require large sums for improvements and additional equipment. In time these expenditures would result in a significant lowering of operating costs, however, and for that reason they should be forthcoming as soon as possible.
In this context Smith touched upon a growing problem that involved serious repercussions for public relations: the issuing of free passes. The practice of issuing passes to persons holding judicial, legislative, and municipal positions had long been widespread. While the direct return from such favors was unmeasurable, it had fostered a kind of reverse demand. Officials at every level of public office came to expect the passes as a right not only for themselves but for their families and friends as well. If given a pass they might not have occasion to perform a service for the railroad, but if denied a pass they might well retaliate by exerting their influence on public policy against the company. Like the frustrated office seeker, they could translate their personal rebuff into moral indignation. For this reason, Smith reluctantly endorsed continuation of the practice:
I have, at times … been of the opinion that the practice of issuing free passes on account of influence should be discontinued at any cost; and I still think that, if all of the railroad companies would cooperate, and adopt and adhere to uniform action in this regard, it should be done. But I fear this is not now practicable, and probably in view of the present attitude of the juries, courts, legislative bodies, etc., toward railroad corporations, it is not prudent to undertake radical reforms at this juncture.
That conclusion reflected Smith’s dark suspicion of and frank hostility toward increasing public regulation of railroads. In his analysis he observed that, of the states in which the L & N operated, Illinois alone possessed a commission empowered to fix rates. Tennessee and Alabama both had commissions with similar authority, but the former had not yet exercised its power. The latter, however, in Smith’s eye, was headed by “a shrewd, unscrupulous politician … who exercises the authority given him by the State for his self-aggrandizement.” Mississippi and Louisiana did not yet have commissions, and Smith curiously made no mention of the active and controversial Georgia commission. Noting also the tendency of the states “to unjustly tax the property of railroads,” he concluded bitterly that:
I can not but look upon the tendency of the State to assume control of the railroads as dangerous to their interests, and I believe that railroad companies should do all in their power to prevent and repeal such legislation.
But, apart from exerting every possible influence and pressure, Smith offered no viable tactics for resisting the growth of state power. In terms of general strategy, however, he made several recommendations for coping with the changing environment. Foremost among these was a plea to change the entire system to standard gauge. At that moment only 430 of the L & N’s 2,065 miles of road were laid in standard gauge. This situation seriously handicapped the company’s quest for through traffic. Since most northern and western roads were of standard gauge, the L & N had to transfer the car bodies from the trucks of one gauge to those of the other. To do this work it maintained, at great expense, seven hoists and some 200 extra passenger and freight-car trucks, and more of both were needed to meet increasing business.
The transfer process caused both added expense and added confusion. Smith estimated that at least $100,000 could be saved annually by a change of gauge, to say nothing of the business lost to competing lines that already possessed standard gauge and so could interchange traffic freely. Moreover, the placing of one company’s car bodies upon another’s trucks often caused delays and mixups in identifying and sorting out property. And it seriously hindered efficient use of the L & N’s own rolling stock. Smith admitted that the company had a severe shortage of freight cars on its 5-foot gauge roads but a surplus of cars on the lines with standard gauge. For all these reasons he urged a prompt change, to begin preferably around June 1, 1884, when traffic was lightest.
In considering the strategic situation Smith assumed that the demand for railroad facilities was still growing. Accordingly he suggested a policy of selective expansion, with emphasis upon aid to communities and firms seeking to build branch roads. This should be done only where there was prospect of a reasonable return on investment, and Smith carefully refrained from advocating a continued policy of swallowing rival systems. Still, he admitted that “in some instances it may be desirable to extend aid where there is little prospect of a return, in order to keep other lines out of the territory now tributary to the Company’s lines, and thus prevent the diversion of traffic theretofore had.” He referred to Huntington’s budding system as an explicit example and pointed to northern Alabama, middle Tennessee, and Kentucky as prime territory for defensive expansion.
As part of his expansion calculus, Smith evaluated the company’s current projects. He regarded completion of the Henderson Bridge as vitally important along with the truncated Owensboro & Nashville. Construction of the latter extension had gone slowly, in his opinion, not only because of unforeseen difficulties but because the engineer in charge, T. H. McMichael, had managed poorly. The same McMichael had supervised the completion of the Lebanon extension at a cost considered excessive. Despite his “lack of force and executive capacity,” Smith had, for various reasons, assigned McMichael to the Owensboro project. Now he acknowledged his mistake and announced his intention to relieve McMichael in order to push the work along.
A new project, the Nashville & Florence Railroad, also received Smith’s close scrutiny. Originally chartered in 1879 build a road from Columbia, Tennessee, to Florence, Alabama, the company had obtained its capital from individual and county subscriptions. In December of 1879 the L & N contracted to supply the Florence road with considerable equipment and $1,000 per mile for construction in exchange for a majority of its stock and $300,000 in first mortgage bonds at 90. The contract also stipulated that the L & N’s stock was to have voting power only, and that it would be delivered as an irrevocable proxy to a representative of the Florence company. Under this agreement the company completed fifteen miles of road by July 1, 1882.
By that time the L & N was having second thoughts about the contract. The Florence road had virtually no resources beyond those furnished by the L & N, and owed the latter company $188,816. No settlement had been made between the companies, but all the first-mortgage bonds had been deposited as security for the debt. The stock had been delivered to the L & N but, upon advice of its counsel, returned to the Florence as invalid. When heavy construction work was encountered, the Florence’s president appealed to the L & N for more money. Smith investigated the road’s situation and found its management nearly leaderless. The president was ineffective and his son was “filling the positions of Superintendent, Secretary, and Treasurer, for which he was totally incompetent. He had not the slightest knowledge of accounts, and the result was that no accounts were being kept.” To pacify creditors the company was resorting to all kinds of dubious devices.
To Smith’s orderly mind the situation was impossible. The L & N was footing all the bills and had no control over the property. In September of 1882 he suspended all further payments and negotiated a new contract cancelling the agreement of 1879. Under the new terms the L & N received $105,000 of the Florence’s $200,000 capital stock, $100,000 of the mortgage bonds at 37½, the remainder of the same bonds as payment on debts at 90, and $50,000 in Lawrence County bonds to be sold as part-payment on construction work. Smith then pushed the work forward at a more vigorous pace and, under his supervision, anticipated early completion. He admitted that the total cost would be much greater than expected but added wryly that “a large portion of the amount advanced by this Company was in material from which it derived a large profit.” In time the road would become a valuable link in the L & N’s Alabama system.
The Western & Atlantic posed another thorny problem. The 1870 lease of that road consisted of twenty-three equal shares with the stipulation in law that a majority of the shares had to be held by Georgians. During the 1870s the Nashville, Chattanooga & St. Louis acquired 7½ shares of the lease while the L & N purchased from William Wadley another 7⅝ shares. The combined holding of 15⅛ shares in effect gave the L & N control of the road after 1880 (when Newcomb acquired the Nashville system), and the L & N used that control to discriminate against rival roads like the Cincinnati Southern and the East Tennessee.
But the control was precarious and uncertain. To meet the letter of the law the L & N transferred 11⅝ of its shares to “friends” in Georgia, along with a small interest on the proceeds, in exchange for their notes using the shares as collateral. In recent years the State of Georgia had grown increasingly dissatisfied with the terms of the lease. The $300,000 rental took but a small part of the road’s earnings and allowed the shareholders a lucrative return on their investment. The bond of the lessees was considered insufficient, and some state officials thought that the road was not being kept up physically as the lease required. Thus, rumors that actual control of the road had passed outside the state merely added fuel to an already roaring fire. Furthermore, the East Tennessee was now building a parallel road that threatened to reduce the value of the Western & Atlantic drastically. In 1882 the state attorney-general demanded that the lease be forfeited and instituted a suit to void it on grounds that a majority of the actual holders were not citizens of Georgia.
Into this sticky conflict stepped the crafty Joe Brown. President of the Western & Atlantic since its organization, Brown knew exactly where the shares had gone and who exercised real ownership. When the furor arose, however, he took the stand that the shares conveyed only a claim upon earnings while voting power and control of the road remained in the hands of the lessees. This position denied the L & N any voice in policy and gave Brown absolute control of the property. Since he and Wadley were already emerging as spokesman for the protection of Georgia railroads from “outside” influence, his stand received popular support. The state won the lengthy litigation that ensued only to have the legislature, at the prodding of the railroads, try to enact a bill withdrawing the suit.
Smith regarded the situation as potentially dangerous. “The Governor is an astute politician,” he observed sourly, “fully competent to wield this property in a manner to promote his own personal interests, and does not hesitate to do so. It adds greatly to his political power in the State and, in various ways, adds to his fortune.” He added that Edwin “King” Cole was drawing salary as vice president of the Western without rendering any service for it, and suggested that Brown was bestowing similar largesse upon certain members of his family. But the L & N could not interfere with these practices. It received from Brown no report upon the Western’s earnings, expenses, or any other data. In previous years a dividend of $5,000 per share was paid; in 1882 the amount was reduced to $2,500 with no explanation. Brown was reported to be spending large sums for additions to the property, but no information or figures were available. Frustrated and outraged, Smith nevertheless concluded that “Nothing, however, can be done as long as Gov. Brown has absolute control of the property.”
The Georgia Railroad was a different story. There Smith knew the details all too well. During the first eighteen months of the lease the lessees found it necessary to make large advances of their rental payments for betterments. When these expenditures resulted in growing annual deficits, Smith ordered the curtailment of improvements expenditures but allowed an advance to enable the Georgia to complete the Gainesville, Jefferson & Southern Railroad. He assumed the Georgia would soon be self-sustaining and able to repay the advances, but he took a position quite different from most of the L & N officers. Despite the Georgia’s strategic location, he argued that the road’s prospective profits were not “sufficient to justify the risks of management, and [I] still favor disposal of the Company’s interest in the lease, if it can be done without loss.”
In his analysis of the L & N’s internal condition and external competitive situation, Smith itemized a long list of critical problems that demanded immediate attention. Taken as a whole they might well lead to the conclusion that the company faced serious trouble and a disquieting future unless it responded swiftly and decisively. He may have thought exactly that, but even his renowned candor had its limits. Having dissected the parts, he refrained from drawing the logical conclusions explicitly. Instead he concluded, somewhat disingenuously, that “I believe that a prudent, honest administration of the Company’s affairs for four years will give, thereafter, net earnings sufficient to pay interest on its present indebtedness, and a six-per-cent dividend on a capital stock of $50,000,000.”
Smith’s letter must surely have given Baldwin pause for thought. Yet little action was taken on it, for already events were passing out of Baldwin’s control. Smith had clarified the L & N’s desperate need for effective leadership just at the point when management was about to undergo its most severe internecine struggle. Apart from Baldwin’s lack of executive ability, there existed the persisting question of power. While events moved rapidly in the outside world, the hapless president found himself engulfed in a losing battle to maintain his position. Within a few short months, in the spring of 1884, these two forces, the changing economic environment and the internal power struggle, would intersect with disastrous consequences.