20

The Boom Goes Bust

In the spring of 1893, America paused to celebrate a generation of wild expansion. All eyes focused on the World’s Columbian Exposition, which opened to the public on May 1 in Chicago. Over the course of the summer, millions of people visited the sprawling six-hundred-acre site to gawk at the latest wonders of industrial technology and social entertainment. Out of the exposition came such staples of American culture as Shredded Wheat cereal, Aunt Jemima syrup, Juicy Fruit gum, and the Ferris wheel.

Railroads throughout the country offered reduced fares and sponsored special excursions to Chicago to entice America’s middle class to take what for many was a journey of a lifetime. Those visitors returned home to tell of carbonated sodas and a piece of meat between two slices of bread that was being called a “hamburger.” But whether from San Francisco, St. Louis, and Pittsburgh or small towns such as Keokuk, Winslow, and Pierre, most completed their journey to the fair with a realization that America had grown both smaller and larger.

Geographically, thanks to America’s railroads, there were no longer major barriers to transcontinental travel. Demographically, a nation divided after the Civil War had picked itself up and followed the railroads west to swell the population of California and every whistle-stop, hamlet, and town in between. America’s next step would be that of a world leader.

But as the Chicago exposition wound down and closed that fall, all was not well. After a period of tremendous economic growth, the world’s economy was strangled by an overdue contraction. Business failures in the United States and abroad led to tightened credit and caused a run on gold deposits in banks. When this collapse of a worldwide boom fell on America’s railroads, it landed particularly hard because for a wild quarter of a century, they had led the boom with an insatiable building spree.

In the decade of the 1870s, the United States built 39,712 miles of new track, reaching an aggregate of 93,292 miles by 1880. In the next decade, that number almost doubled to 166,703 miles. This amazing increase of 73,000 miles of additional track during the 1880s was equivalent to the construction of four of the original Sacramento-to-Omaha transcontinental lines every year.¹

Build west, J. Edgar Thomson had said. Build west, William Barstow Strong had said. Build everywhere, Collis P. Huntington had said. But when the major transcontinental lines were completed, the railroads continued to lay tracks to every mining camp, grain silo, cattle pen, and crossroads on the map. America was overbuilt with railroads, and consequently, America’s railroads—even that paragon of corporate conservatism, the Atchison, Topeka and Santa Fe—were awash with debt.

Like America’s overall economic woes, the Atchison, Topeka and Santa Fe’s own crisis had been a long time in coming. Crop failures in the railroad’s financial breadbasket of the Midwest started the downslide. In Kansas alone, wheat production fell from 48 million bushels in 1884 to barely 10 million in 1887; the corn crop also plummeted, from 191 million bushels in 1884 to 76 million three years later. These declines drastically cut freight revenues outbound from Kansas; furthermore, the resulting downturn in local economies meant that fewer goods and building supplies were being shipped into the state.

What freight traffic remained came under increasing competition from the Santa Fe’s growing rivals across the plains, including Jay Gould’s Missouri Pacific. Previously, such rivalries frequently led to traffic pools that had the effect of fixing rates above a floor of profitability. But in 1887, a reform-minded Congress passed the Interstate Commerce Act.

This new law prohibited pooling agreements and regulated how rates were adjusted, requiring, among other things, formal notices of future changes. The general national result was lower freight rates, but any reduction of revenues impacted railroads already highly leveraged by the construction surge. From 1887 to 1888, the Santa Fe’s average freight rate per ton per mile fell from 1.347 to 1.258 cents, a significant 9 percent decrease.

Another national trend to impact the Santa Fe was the march of organized labor. In March 1888, the Brotherhood of Locomotive Engineers struck the Chicago, Burlington and Quincy over wages and working conditions. A ten-month struggle ensued that became particularly bitter when scabs operated trains under armed guards. While some Santa Fe engineers walked off in support for the brotherhood, the railroad avoided major interruptions because its record as an employer was relatively progressive. The Santa Fe negotiated major labor contracts in 1890 and 1892 and kept its trains running, but the resulting higher wages were yet another impact on the railroad’s bottom line.

Finally, during this same time, construction activity on the Kansas City-to-Chicago extension as well as the push into California was at its peak. From January 1886 to October 1888, the Santa Fe laid 2,776 miles of track, and that didn’t include the purchase and new construction of the Gulf, Colorado and Santa Fe. This additional trackage meant a staggering increase in the railroad’s bonded indebtedness.²

Taken alone, any of these troubles—crop failures, rate regulation, labor strife, and construction costs—would likely not have been sufficient to cripple the Santa Fe, but taken together, they became a deathblow when played out against the backdrop of the panic of 1893.

Not surprisingly, the Santa Fe’s floating debt began to climb as an early indicator of brewing trouble. Never a good sign in any business, floating debt is the short-term, unsecured obligations of a company. If it spirals out of control, it quickly impacts a company’s ability to pay stock dividends and the interest on its bonds.

Shareholders squawked when dividends were cut—which the Santa Fe did in 1888 from 1.75 percent to 1.5 percent—but failure to pay bond interest usually made foreclosure by bondholders and a forced receivership inevitable. It was this slippery slope of finance that forced the resignation of President William Barstow Strong and led to the emergence of a New York–based circle of Santa Fe investors.

While the financial details were mind numbing, the Santa Fe embarked on a complicated plan of restructuring. The centerpiece was a $100 million second mortgage that was supposed to retire $80 million in income bonds and leave $20 million of ready cash both to harness the floating debt and to provide a cushion for future operations. (Mortgage bonds paid a fixed rate regardless of corporate circumstances; income bonds, while yielding higher, paid interest only if the company was making money.)

At the start of what would become the worst year, William Barstow Strong’s successor, Allen Manvel, died on February 24, 1893, in San Diego. Manvel would be remembered most for inaugurating the California Limited. In his place, the board of directors chose a young vice president, J. W. Reinhart, who enjoyed a growing reputation as the financial whiz behind the recent refinancing.

Many had assumed that the top job would go to A. A. Robinson, long Strong’s right-hand man and, since 1888, the Santa Fe’s general manager. But Robinson was passed over, and with some bitterness he resigned shortly afterward to become president of the Mexican Central. This was another signal that the influence of the old Boston crowd was waning and that the New Yorkers were ascendant.

Quite reassuringly, new president Reinhart announced in June 1893 that the floating debts of the railroads the Santa Fe had been acquiring had been consolidated on its balance sheet and that they were “amply and satisfactorily secured” and would be eliminated “when the financial atmosphere brightens.”

But the financial atmosphere did not brighten. Instead it got increasingly worse. By October 1893, the Santa Fe sought to defer payment on its 1888 6 percent mortgage bonds for five years, promising the holders that both principal and interest at 6 percent would then be payable in gold. But in a hint of panic, the railroad also promised a cash commission of 5 percent if holders would hurry up and assent to the extension by October 25.

Meanwhile, President Reinhart gave the entire situation the kiss of death by glibly announcing that the finances of the company “are in such condition that no uneasiness need be felt” and that “the earnings of the Santa Fe properties, notwithstanding the general depression, are largely in excess of fixed charges.” The bears smelled blood, and Atchison, Topeka and Santa Fe stock fell, further compounding the problem.

Reinhart scurried to Europe to find funds to meet the railroad’s January 1894 interest obligations, even though a tight credit market had spread across that continent as well. He returned proclaiming that his mission had been “a success in every respect,” but no foreign financing was forthcoming. A week later, on December 23, 1893, the Santa Fe and its Frisco subsidiary were forced into receivership upon the complaints of two New York banks.

Even then, Reinhart tried to put the best possible light on the situation. He acknowledged that the collapse of “pending negotiations for financial relief has caused temporary embarrassment to the companies” and would prevent the January payments of all obligations. But Reinhart also claimed that the Santa Fe system as a whole, which now accounted for 9,345 miles of railroad including the Frisco, “is amply able even under the present adverse condition to earn a safe balance above its fixed charges” if relieved from the albatross of its floating debt.³

This latter assertion was a testament to the powerhouse that the Santa Fe was on the verge of becoming, but things would get much worse before they got better. Six months into the Santa Fe’s receivership, an audit report claimed that the railroad had overstated its income by more than $7 million during the preceding four years. A major portion of the problem stemmed from rebates to shippers that had been booked into a suspense account as assets rather than being expensed against their related earnings.

Reinhart sought to defend the overall numbers, but closer scrutiny showed that certain entries had been forwarded to company bookkeepers in Topeka from his East Coast office that either had “no foundation in fact” or were related to off-balance-sheet transactions or valuations. A day after his reply to the auditor, J. W. Reinhart tendered his resignations as president of the Santa Fe system and one of its court-appointed receivers. He was later indicted on charges of having given rebates to shippers that were in violation of the Interstate Commerce Act in the first place.

By the time the final audit report was issued in November 1894, the overstatement of the Santa Fe’s income had grown to more than $10 million. But the thorough examination of the books validated Reinhart’s bravado about its future earnings capacity. The Santa Fe had become top-heavy by assuming the floating debt of a round of acquisitions, but for the year ending June 30, 1894, it had generated $6 million in earnings. This suggested that if a reorganization could be accomplished, there was a sufficient income stream to secure long-term debt.⁴

In order to satisfy both secured bondholders and stockholders, any reorganization had “to rid the company of its floating debt,” reduce fixed charges, and “provide fresh capital for needed improvements.” It was a tall order, and various schemes were put forth by different constituencies during 1894 and early 1895.

The final plan adopted by the receivers called for the foreclosure of the general mortgage placed on the road in 1888 and its subsequent sale to representatives of the new lenders. They would in turn organize a new company. In the process, the railroad’s floating debt was rolled into long-term debt or securities, and enough capital was left to fund needed repairs and improvements.

On December 12, 1895, a new corporation was formed with the nearly identical name of the Atchison, Topeka and Santa Fe Railway Company. Cyrus K. Holliday became a member of its board of directors, just as he had been for the old company since 1860. He was also given the rather perfunctory title of president of the original Atchison, Topeka and Santa Fe Railroad Company as it wound up its affairs. ⁵

Such receiverships and reorganizations were certainly not unique to the Santa Fe. Sixty-five American railroads went into receivership during 1893 alone. This made a total of 123 roads then under court control and represented about 19 percent of the railroad mileage in the country. Among them were the Union Pacific and the Northern Pacific.⁶

But as new energy slowly returned to America’s railroads, there was one titanic name missing. Jay Gould was dead. His last few years were a debilitating struggle with tuberculosis, and he died on December 2, 1892, at fifty-six. Among the many mourners at his funeral was Collis P. Huntington, himself beginning to show signs of declining health.

The mantle of the Gould empire fell upon Jay’s oldest son, George, not quite twenty-nine. George would never share his father’s innate sense of business strategy, but he had studied dutifully at his side for more than a decade and had taken an increasingly central role as Jay’s health failed.

Charged with preserving the Gould empire, George set out to accomplish what for all of Jay’s thrusts and parries the elder Gould had never been able to complete: a transcontinental railroad system under his own control. As George Gould looked to his cornerstone property of the Missouri Pacific to spearhead this effort, the Atchison, Topeka and Santa Fe cast about for a new leader not only to counter this threat but also to take the road into the next century.

In the Santa Fe’s first fifty years, four men stood out: Cyrus K. Holliday, the progenitor of the dream and a member of its board for forty years; William Barstow Strong, who overcame all obstacles to make the Santa Fe a transcontinental system; A. A. Robinson, the steady engineer who turned Holliday’s vision and Strong’s strategic moves into track on the ground; and Edward Payson Ripley, the man who led the road out of the panic of 1893. During a quarter century at the helm of the Santa Fe, Ripley was to rely less on flash and more on substance to make the road an operational model of speed, comfort, and reliability.

Edward Payson Ripley was born in Dorchester, Massachusetts, in 1845. His father was a merchant, and young Ripley’s first work was in a wholesale dry goods store in Boston. In 1868 he went to work for J. Edgar Thomson’s Pennsylvania Railroad as part of its specialty fast freight line. Two years later, he entered into a long career with the Chicago, Burlington and Quincy Railroad. Ripley worked his way up from clerk to New England agent for the line and then in 1878 became general freight agent for the road out of the company’s headquarters in Chicago.

In 1887 the Burlington made Ripley its traffic manager and soon thereafter its general manager. By this time, he was married with four children and happily ensconced in Chicago’s Riverside area, being a member of the elite Chicago Club. But in August 1890, Ripley resigned from the Burlington and took a job with the Chicago, Milwaukee and St. Paul Railway as a vice president in charge of traffic operations. Here he stayed until tapped by the Santa Fe’s board of directors to lead the reorganized company out of the wilderness.

Central to Ripley’s success would be his understanding of the operating side of the railroad business and his belief that railroads could be run for the public good and still make a profit. He firmly “believed in the good old doctrine that railroads are common carriers, and he would devote his entire energies and those of his subordinates strictly to the railroad business. Convinced that the only business of a railroad is to sell transportation, he would make the Atchison a great and efficient transportation company.…”⁷

Following the drive of the company westward, the Santa Fe’s board had already decided to close its venerable Boston headquarters and relocate to Chicago, leaving only a financial staff in New York. This suited Ripley perfectly, as he could maintain his family’s status in Chicago and be just that much closer to the operations of his railroad. Indeed, Los Angeles was now only two and one-half days from Dearborn Station on the California Limited.

Upon assuming the Santa Fe presidency on December 12, 1895, Ripley immediately faced many challenges. Some were related to the dismal national economy; others were more internal to the Santa Fe’s own operations. Two issues weighed particularly heavy on his mind. The first was the Atlantic and Pacific line from Albuquerque to Needles. Despite its strategic importance, this segment had never been a paying concern. Several growth spurts notwithstanding, through traffic between the heartland and California did not generate reliable revenues. The general condition of the line was poor, and in many places it needed to be rebuilt with heavier rails and lesser grades.

The Needles-to-Mojave extension of this route that was leased from the Southern Pacific was not in any better shape. Financially, it cost $436,266 a year in lease payments alone. Some of Ripley’s critics suggested that the entire Albuquerque-to-Mojave line should be abandoned and that the Santa Fe should retrench its core system across the plains. This move would leave the hard-won routes in Southern California as orphans, but perhaps they could be sold to the Southern Pacific.

Ripley’s other albatross was the Santa Fe’s Sonora Railway, linking its trackage rights over the Southern Pacific at Benson, Arizona, with Guaymas, Mexico. The road’s construction had seemed like a good idea in the early 1880s, but it developed neither as an effective end-around competition to the Southern Pacific nor as a promising transcontinental link. Northern Mexico was too economically depressed and likely to remain so.

Ripley looked at the map of the Santa Fe system and pondered a solution. Others could attend to the myriad of financial and legal matters. What Ripley cared about most was operating trains. He simply could not fathom severing the Atlantic and Pacific connection to California. Stubbornly, he remained adamant that in time California would boom far beyond the recent spurts and that the 35th parallel corridor would resound with transcontinental traffic.

Ripley contemplated a plan to save the Santa Fe’s link to California, while at the same time trim costs and eliminate liabilities. To bring this about, he went to the Southern Pacific and proposed a handshake far different from the one Collis P. Huntington had extended to William Barstow Strong at Deming years before.

The Southern Pacific was now irrevocably ensconced along the 32nd parallel from Yuma to New Orleans. South of that line, the Sonora Railway was a liability to the Santa Fe and clearly belonged in the Southern Pacific’s orbit. On the other hand, the Mojave–Needles leg of the Southern Pacific had become a 240-mile stub that led nowhere except to the Santa Fe’s lease payments. By handy coincidence, the value of both lines and their relative condition was about the same.

Ripley proposed a trade, and the Southern Pacific agreed. The attorneys would not get done clearing titles and completing the transaction for some years, but beginning in 1897, the Southern Pacific took over operations on the Sonora Railway, and the Santa Fe assumed full responsibility for the Mojave–Needles leg. This meant that Ripley could throw all his corporate energies into what was now clearly the Santa Fe’s main line.

A final uncertainty was removed about the same time when Atlantic and Pacific bondholders foreclosed. Ripley cobbled together a plan whereby the Santa Fe purchased the bonds in default for a combination of new Santa Fe bonds and preferred stock. The result was that the Atchison, Topeka and Santa Fe owned the 564 miles of Atlantic and Pacific line between Needles and Albuquerque outright and was finally the sole owner of its entire length of track between Los Angeles and Chicago.⁸

Edward Payson Ripley’s shareholders were impressed but not quite ready to cheer. What he had to do next was produce a winning revenue stream. Ripley firmly believed that the best way for the Atchison, Topeka and Santa Fe to regain profitability was to invest aggressively in its existing infrastructure. Consequently, he directed a massive program to upgrade, replace, or rebuild the Santa Fe’s main arteries, rolling stock, and maintenance facilities.

In 1898 alone, 11.25 miles of wooden bridges were replaced with steel or earthen fills, 489 miles of track were ballasted, and 767 miles of heavier rails were laid. New machine shops, depots, and roundhouses were built or expanded, and almost every station between Chicago and El Paso was given a fresh coat of paint.

Most significant for the future, the expensive and laborious process of double tracking—adding a second set of tracks to the right-of-way to facilitate trains running in both directions at once—began in earnest. Twenty-five miles of double track was added between Florence and Emporia, Kansas. Thousands of miles remained to be done between Los Angeles and Chicago, but this was the start toward a double-tracked transcontinental speedway.

Meanwhile, operating revenues climbed from $28.8 million in 1895 to $46.2 million in 1900. A roster of 1,136 locomotives shuttled almost 30,000 passenger, freight, and service cars around a Santa Fe network of almost 7,500 miles of lines owned, controlled, or allied by the company. Ripley’s emphasis on operating efficiencies and debt consolidation converted an annual $4.4 million deficit in 1895 to a $9.7 million surplus for shareholders in 1900. Perhaps the most impressive fact is that Ripley engineered this rebuilding turnaround without incurring additional long-term debt or resorting to floating debt; he did it all out of current earnings. ⁹

During this time of rebuilding, Ripley undertook one major expansion to complete Cyrus K. Holliday’s transcontinental vision. It had taken the Santa Fe the better part of two decades to break the grip that Huntington’s Southern Pacific held over Southern California—from San Diego’s vote against Tom Scott and the Texas and Pacific in 1872, until the Santa Fe secured its own independent tracks into downtown Los Angeles in 1887. In 1898 Ripley took the final step and announced that the Santa Fe would acquire its own independent tracks from Mojave into San Francisco.

As in the case of the California Southern, the Santa Fe received considerable assistance in this endeavor from an existing road that had begun to challenge the Southern Pacific’s Bay Area market share. As early as 1893, the San Francisco Traffic Association—composed of merchants, farmers, and local shippers—determined not to remain at the mercy of Southern Pacific rates, and it made plans to build an independent line from San Francisco Bay to a connection with the Santa Fe at Mojave.

The year 1893 was not a good one for new railroad construction, and in order to save money, an initial plan was devised to employ ferries between the San Francisco–Oakland waterfront and Stockton and to build only 230 miles of railroad from there to Bakersfield, California. But even this effort proved daunting.

Despite widespread motivation to challenge the Southern Pacific, the economic hangover from the panic of 1893 and a fear that the Southern Pacific would simply bull its way into the ownership of any competing venture stalled early progress. Then a major player appeared in the person of Claus Spreckels, a sugar-refining tycoon with substantial interests in the San Joaquin Valley.

When a meeting of the San Francisco Chamber of Commerce reported only half of the venture’s $350,000 initial goal had been subscribed—not enough for even 10 miles of track—Spreckels challenged the group to dream bigger. Within two weeks, fueled by Spreckels’s personal pledge of $500,000, subscriptions had grown to $2 million. Among the supporters were Spreckels’s two sons, Adolph and John, who pledged $100,000 each. (John’s own railroad interests would later include the San Diego and Arizona Railway leading directly east from San Diego to Yuma.)

With the initial logjam broken, stock subscriptions poured in from the rank and file of the San Joaquin Valley. The San Francisco Examiner reported that these amounts were evidence that the new road would be “largely built and owned by people of modest circumstances” and not controlled by the monopolistic railroad powers that Frank Norris would soon write about in his novel The Octopus.

Promptly dubbed “the People’s Railroad,” the San Francisco and San Joaquin Valley was chartered on February 25, 1895, and began laying track south from Stockton that summer. By October of the following year, the line was complete between Stockton and Fresno, and a special excursion train named “the Emancipator” ran to inaugurate the service that many valley residents hoped would emancipate them from the yoke of the Southern Pacific.¹⁰

Over the next two years, the railroad built another 110 miles from Fresno to Bakersfield and completed an eastern loop to Visalia. But while revenues were promising, it could not hope to meet operating expenses and retire the construction debt. Up ahead, a 68-mile gap over Tehachapi Pass remained between Bakersfield and the Santa Fe terminus at Mojave.

Claus Spreckels convinced the San Joaquin Valley’s board of directors that the time had come to make a deal with the Santa Fe for an outright purchase of the existing line. Fortunately for them, Edward Payson Ripley agreed. The Santa Fe board of directors authorized the purchase of the San Francisco and San Joaquin Valley for $2,462,300 in December 1898 and got the local investors off the hook. But this still did not close the Bakersfield-Mojave gap or solve the inefficiencies of the Stockton-to-Bay Area ferryboats.

The first bottleneck was Tehachapi Pass. Even if Ripley had wanted to challenge the Southern Pacific there, his engineers soon confirmed that there was simply no room to build a second line—loop or no loop. The end result was that the Santa Fe negotiated a lease from the Southern Pacific of the Tehachapi Pass segment that allowed it to operate its own trains on equal priority over the line. A century later, this agreement is still in place, and the Tehachapi Loop is among the busiest single-track sections of railroad in the United States.

The second bottleneck—ferry service between Stockton and San Francisco—was no easier, but much of it would eventually be eliminated with independent tracks. After the Santa Fe’s purchase of the San Francisco and San Joaquin Valley, Ripley retained its principal engineer, William Benson Storey, to work in that direction. Despite Storey’s gloomy report on the physical obstacles along the 77-mile Stockton-to-Point Richmond route—“the coast range would be pierced by a long tunnel near Martinez, the tule swamps would require considerable dredging and three drawbridges, and the land at Point Richmond needed massive earth and rock fills before port facilities could be built”—the work went forward.

It was difficult construction with water everywhere, from saturated hillsides that made tunneling and cuts problematic, to swamps and tidelands that required long viaducts and high fills. And once the terminal facilities were complete in Point Richmond, there was still the crossing of the bay and construction of similar port facilities in San Francisco just south of the present-day Oakland Bay Bridge.

The flagship of the Santa Fe’s fleet of ferries was the double-ended side-wheeler San Pablo. With the Santa Fe’s cross logo emblazoned on her single smokestack, the San Pablo was a common sight on the bay for some thirty years. Fred Harvey meals were served on the crossing, just as they were on any other Santa Fe Railway conveyance.

On July 6, 1900, Santa Fe passengers departed San Francisco, crossed the bay, boarded a train at Point Richmond, and rode cross-country all the way to Chicago on Atchison, Topeka and Santa Fe rails. This was the final realization of Cyrus K. Holliday’s transcontinental dream. The colonel almost lived to see it.

Over the years, he had never been shy about demanding credit for the birth of the railroad. Recently, when an obituary of a Kansas pioneer mentioned the deceased’s founding role in the Santa Fe, Holliday had been quick to tell William Barstow Strong, “the same thing has occurred for the last fifteen or twenty years, whenever any prominent citizen of Atchison has died. They were all founders of the Santa Fe Railroad, wrote or inspired its charter, etc. [but] it was the ‘inspiration’ of an hour, and of my own, and … I wrote every word and every syllable.…”¹¹

Now, as of March 29, Holliday himself was also dead. But in many respects, not only had the Santa Fe fulfilled his transcontinental dream but it had also made good the boast that young William Jackson Palmer had made to the Big Four back in 1867: They alone would not control the West’s transcontinental destinies.