Sunday, August 29, 2010

Hell of a Way to Build a Railroad

As a young(er) lawyer in my first brush with corporate law, I complained about the (as it seemed to me) mindless constraints of silly rules.  My mentor consoled me: you ought, he said, to have seen what life was like before there were any rules..

Had he wanted to drive home the point, he might have compelled me to read David Haward Bain's Empire Express, about (as the subtitle says) the "building of the first transcontinental railroad."  Although he wouldn't have wanted me doing it on company time: at 711 pages, not counting footnotes, it's nothing if not roomy and relaxed.  But as an account of raw, unconstrained capital formation, it's hard to imagine a better.  One can pick and choose so many different themes that run through the whole of the capital(ist) market place.

For example, engineers versus money men.  Just about the firsts person to work seriously at the idea of building a transcontinental railroad was one Theodore D. Judah, a self-taught engineer who believed he could build a rail roadway from the Sacramento Valley over the Sierra.  He held meetings where he tried to get investors to stump up small sums of cash for a building fund.  At one such meeting, he was taken aside by a hardware storekeeper who told him he was going about it the wrong way: that instead of trying to democratize the project, he should look for a small number of serious men who could part with some serious cash.

The hardware man was--perhaps you knew--Collis P. Huntington, first of what came to be known as the "big four" California merchants who formed the core of what became the Central Pacific Railroad.  Judah listened to Huntington, and worked with the quartet and undertook his project--and quickly came to perceive that the money men were trying to squeeze him out of his own idea.

Was he correct?  In truth, we'll never know.  Judah died early-of yellow fever in 1863, back east on a business errand.  But his relationship with the investors was already clouded with distrust.

There is a more general issue here of who gets the credit.  We speak of "the big four;" actually, there were five: Huntington, Mark Hopkins, Leland Stanford and two Crocker brothers--Charles and E.B.  The Crockers were the hands-on operations managers.  Huntington spent almost all his time back east, beguiling, wheedling, lying--whatever it took to raise the money and provide the supplies.    Hopkins was the bookkeeper.  Stanford--actually, just what Stanford did is far from clear from Bain's account, and perhaps not so clear to his partners.  They seem to have taken him in because of his political connections--he became governor shortly after the inception of the project--but he seems to have spent a good deal of the rest of his career offering unsolicited and unwelcome advice as to how his colleagues might behave.

And in fact, so far we are dealing with only half the story.  The "transcontinental railroad" was in fact two roads: the Central Pacific from Sacramento, and the Union Pacific from Omaha.  As any fan of .Joel McCrea knows, they raced across the landscape to their final connection (in 1869) at Promontory Point near Ogden, Utah.  Bain finds the story of the UP harder to tell, perhaps because the records are less adequate (for the CP, Huntington left a  mountain of correspondence).  But more generally, the story of the UP is dominated by some more impenetrable characters--chiefly the mysterious loner, Thomas C. ("Doctor") Durant, who seems at times not to have cared whether the railroad got built at all, so long as he was able to siphon off a lot of money.

Which brings us to a more general theme: so damn much money.  Not at the start, of course, when Judah was hustling smalltime shopkeepers for nickels and dimes.  But in 1862, Congress got into the game and started to authorize the infusion of money.  Meanwhile the promoters--notably Huntington--were scratching every corner of the chicken patch to try to find enough to keep the project going.  My friend Dave says that it is a general rule of commercial law that if one person has money in his pocket, then someone else is trying to get it out: by the late 1860s, the railway project had become such a battle for position over the money pot that the actual railroad seems at times to be almost forgotten.

All of which introduces a more narrow legal issue: limited liability --specifically, the rule providing that the person who invests in a corporation stands to lose only his investment, not all his wealth.  Limited liability is pretty much a creature of the 1830s--it came into being alongside bankruptcy law, and for more or less the same reasons.

But it seems to have been only in the 1860s--specifically, as a part of the rail building project--that people grasped the full implications of the  limited liability idea.  It was Durant and his cronies who (in 1864) created something called "Crédit Mobilier of America," a limited liability company.  The name itself was something of a fraud: there was a French" Crédit Mobilier," with visibility and some prestige.  Durant's outfit had nothing to do with the French lot: they just ripped off the name.

 They nominal business of the Crédit Mobilier of America was railway construction.  As such, it was a grand mechanism for siphoning money out of the coffers of the railroad and into the pockets of Durant and his crew.  Crédit Mobilie also developed a brisk trade in the bribery of Congressmen--a fact that permanently sullied the reputation of Ulysses S. Grant as President of the U.S. (perhaps unfairly, but that is another story).  So much money again.

Oddly enough, one figure entirely missing from this story: J. P. Morgan, probably the greatest single figure in American railroad finance.  Morgan was an  important player by the 1860s, though not nearly as important as he would become later.  But his principal role seems in retrospect to have involved not so much in organizing railroads, but in reorganizing them: cracking together the heads of competing investors to make them share the pain when there wasn't enough to go around.  That phase comes later: the original transcontinental project subsists as a creature of the industry's rough, raw and raucous infancy.

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