the railroad: no one went anywhere, or shipped anything, more than a few miles, without using the railroad. The leading Granger roads were the Milwaukee, the Burlington, the Rock Island, and the North Western. It is vital to note that of these roads, one is defunct (the Rock Island); one (the North Western) has been "sold" to its employees and will sooner or later be a problem for policymakers unless the benefits of deregulation are speeded up; one (the Milwaukee) is in bankruptcy and withering away at its western extremities; and one (the Burlington) is the heart and bulwark of one of the most successful and progressive integrated railroad systems in the country. It is no accident that only the Burlington made a timely decision as to a transcontinental connection before the inflation of the pre-World War I decades removed the possibility. The Era of System Integration, 1880-1901. Beginning with the return of prosperity in 1879 (there was a serious depression in 1873-1878), the character of midwestern railroading began to change, at first slowly and then with increasing speed. By 1885 there were five completed transcontinental railroads, depending on how you define transcontinental: the Union Pacific-Central Pacific or "overland route," the first transcontinental; C. P. Huntington's Southern Pacific, with its terminal at New Orleans; the Union Pacific's branch, the Oregon Short Line, that made it a through route from Omaha to Portland, Oregon; the Santa Fe; and the Northern Pacific. In 1893 the Great Northern was opened and George Gould, having inherited his father's southwestern lines, was expected eventually to extend the Missouri Pacific and Rio Grande roads to San Francisco. As a result of this hectic railroad development, which in the 1880s added several times as much route mileage to American railroads as had existed in total at the time of the Civil War, long-haul or through business began to dominate traffic. Since only the Santa Fe had its own rails all the way into Chicago, the Granger roads had the opportunity to carry most of this freight for several hundred miles on the eastern end. Transcontinental traffic was made feasible by low through rates. question was, how were these through rates (which worked out to a fraction The great of short-haul rates on a per-mile basis) to be divided between carriers? Where several carriers formed an end-to-end "alliance" of independent roads, the "divisions" were the result of sheer bargaining strength, and rates fluctuated violently without notice. It was no basis for orderly business operations. Accordingly, one of the Granger lines swallowed its pride of independence and tied up with its partners, on the theory that in business, as in life, a legal marriage is better than a common law arrangement. I am referring, of course, to the Burlington, which through the sagacity of its president, Charles Perkins, and the Boston capitalists who had built it up in the 19th century, had formed a cozy relationship with James J. Hill's Manitoba road in the upper midwest even before Hill had made the decision to build to the coast. After Hill opened his carefully surveyed, economically built, and efficiently operated extension to Puget Sound, it was only a question of time before the obvious advantages of tying the Burlington and Great Northern knot tighter would be irresistible. In the depression of 1893-1898, when every transcontinental except the Southern Pacific and the Great Northern slid into receivership, Hill took control of the Northern Pacific and the die was cast. In 1901, Hill rejected J. P. Morgan's plea that he take over the Milwaukee, which Morgan feared would sooner or later grievously upset the railroad world as a result of its failure to formulate a grand strategy. Instead, Hill acquired the Burlington. Ever since, in spite of Congress, the Supreme Court, and public opinion, all of whom were mollified by the rather meaningless decision in the Northern Securities case of 1904, the three railroads have been operated as an integrated railroad system, and the people of the United States have been the beneficiary of Hill's remarkable vision. Prosperity of the Progressive Era. The period from 1898 to 1920 was one of great prosperity and rapid economic growth for the United States. The farmer benelitted handsomely from bumper crops, sold at record prices, and the oldline Granger railroads wallowed in prosperity. Their affluence is almost tragic, in retrospect, for it masked the grave dangers into which the North Western, the Rock Island, and the Milwaukee were heading. By the end of World War 1, intermodal competition was ending the railroads' monopoly forever, and the handsome profitability of the Granger roads would evaporate, slowly during the 1920s, and then precipitately during the depression. The tragedy was compounded when the operating executives of the Milwaukee road, who had always felt keenly the lack of a transcontinental connection, persuaded the board of directors of the road to build to the Pacific. James J. Hill had extended the Great Northern at bargain prices, enjoying the lowest costs for supplies, equipment, and labor in the entire post-Civil War period. The Milwaukee made its decision only in 1905, and by that time prices were roughly 25% higher than at their depression lows. What was worse, the Panama Canal was finally making progress across the Isthmus. Piling bad decision upon bad decision, the Milwaukee heeded the rosy predictions about the future of electrification that were being made by leaders of the copper industry, one of whom was a member of the Milwaukee board. In territory that never developed the kind of traffic density that such a large investment as electric traction requires, the Milwaukee electrified hundreds of miles. Evidences of Poor Management The Milwaukee board accepted the verbal estimate of the cost of building the Pacific extension, as presented by operating management, without demanding anything like the exhaustive engineering studies that would be standard procedure today. The $60 million estimate, which was based apparently on nothing but the president's opinion, was exceeded four times over, producing a cost overrun that would draw gasps even in our modern era of cost overruns. Meanwhile, several costly acquisitions of useless branch lines had been foolishly made. The Milwaukee in the Era of Intermodal Competition, 1920-Present. Whether the Milwaukee would have recovered from its long-term downward slide after 1920 if no new factors had entered the picture, is a useless question, for the simple reason that in business new factors are always entering the picture. The extension might have been carried at a manageable loss if the basic profitability of the old Granger lines had not been destroyed. But it was destroyed, and very largely by Detroit and Washington, for what the coming of the motor truck did not do to destroy the profitable traffic of most American railroads, regulation as carried out by the Interstate Commerce Commission all but finished it. By the early 1920s, the "smart money" was being pulled out of the Milwaukee. World War II and the liquidity that it engendered for the railroads, gave them a reprieve, but by 1950 the long-term trends had reasserted themselves. By the mid-1950s nobody in the know believed that the Milwaukee, or the North Western, or the Rock Island had any future. The ICC, in its role as judge of whether mergers are in the public interest, procrastinated so scandalously as to justify its abolishment, and the merger route was effectively shut off for most of the old Granger roads. Whether one chooses 1890, or 1905, or 1928, or 1932, or 1950 as the date by which the ultimate fate of the Milwaukee had been sealed, it seems clear that restructuring the corporation within a holding company after 1970 can have had very little to do with the outcome. Why was the Milwaukee Mismanaged? Superb entrepreneurial leadership is far rarer than is generally supposed. Talent to steer an enterprise on a selected course is fairly common, but vision and courage, a thorough and intimate knowledge of the business and where it is headed, and a fierce identification of one's own welfare and reputation with the success of the business--such qualities, in combination, seldom occur. Unfortunately, this distinction between real entrepreneurship and mere "business administration" is not widely understood. Only two western railroads were led by talented entrepreneurs in the confused period from 1879 to 1895: the Southern Pacific, in Collis P. Huntington, and the Great Northern, in James J. Hill. The Milwaukee had the misfortune to be controlled from the early 1880s on by two very rich men whose main interests lay elsewhere. These men seem to have valued their railroad connection--apart from its undeniable value as an investment--primarily because it qualified them as "tycoons" while they risked only a fraction of their huge fortunes and others did all the work. These men were William Rockefeller, younger brother of John D., and Philip D. Armour, the Chicago meatpacker. Armour died in 1901 but Rockefeller remained influential in the Even Milwaukee until his death in 1922. Some years before, his place on the board had been taken by his son, Percy, who himself left the board in 1921. William had at least a sentimental interest in "his" railroad, but Percy, who went right on attending board meetings after 1921, seems to have brought nothing to its management whatever. In fact, his ignorance of the road's affairs, as brought to light on the ICC's witness stand, was shocking. more shocking was the revelation that the Rockefellers had sold their holdings in the Milwaukee several years before, without even confiding in the Harkness family, also large investors in the Milwaukee, and associates of the Rockefellers in the petroleum business for many years. Rockefeller and Armour made their major contribution to the Milwaukee's financial "image." With them in the picture, financing, both long- and short-term, was always easy to get. Various New York and Chicago bankers also served, notably members of the firm of Kuhn, Loeb & Co. None of these men had any firsthand knowledge of the railroad and could not have contributed much to strategic planning, the time for that having long since passed in any event. A minority of the board were operating executives, but they were not strategists, and in any case seem to have been rather like estate managers who had graciously been invited to sit at the lord of the manor's table and who knew that they were expected to speak only when spoken to. How Can We Best Provide for the Well-being of Western Railroads? The best guarantee that the people will continue to receive excellent transportation services, and that anticipated growth in traffic can be carried, lies in freeing the leaders of enterprises like Burlington Northern to pursue their profit opportunities as they see them, within established environmental criteria. Should we fear that holding companies will "dump" hopeless railroad subsidiaries? Of course not. Who wants a dying railroad? On the contrary, the Penn Central bankruptcy taught railroad leaders a valuable lesson: if a railroad property declines in operating efficiency below a certain |