Railroad History, Moody, 1919
Baltimore & Ohio Railroad
excerpt from:
THE RAILROAD BUILDERS,
A CHRONICLE OF THE WELDING OF THE STATES
BY JOHN MOODY
CHAPTER V. CROSSING THE APPALACHIAN RANGE
The story of the Baltimore and Ohio Railroad takes us back more
than ninety years. When the scheme for the construction of a
railroad from Baltimore to the waters of the Ohio River first
began to take form, the United States had barely emerged from the
Revolutionary period. Many of the famous men of that great day
were still living. John Adams and Thomas Jefferson had been dead
only a year; Madison and Monroe had recently retired from public
life; John Quincy Adams held the office of President, and the
"reign" of Andrew Jackson had not yet begun.
At this time steam navigation on the rivers was only in its
beginnings, but no one could doubt that it would come into
general use. Two decades had passed since the Clermont had been
launched on the Hudson by Robert Fulton, and steamboats were now
carrying cargoes successfully against the swift currents up the
Mississippi from New Orleans and were threatening the extinction
of the aggressive flatboat traffic. Great strides had also been
made in the construction of turnpike roads. The famous National
Pike from Cumberland to Vandalia, Illinois, had been in large
part completed and had done much for the opening up of the
Western territory.
Canal building was likewise an extensive development of this
period. The idea of connecting the waters of the Chesapeake with
those of the Ohio had been broached by George Washington before
the Revolution, and he had also prophesied the union of the
Hudson and Lake Erie by canal. He believed that a country of such
great geographical extent as the United States could not be held
together except by close commercial bonds.
The opening of the Erie Canal to New York in 1825 stimulated
other cities on the Atlantic seaboard to put themselves into
closer commercial touch with the West. This was especially true
of the city of Baltimore. A canal connecting Chesapeake Bay and
the Ohio River was advocated to protect the trade of Baltimore
and the South from the competition of New York and the East which
would inevitably result from the construction of the Erie Canal
and the Public Works of Pennsylvania. But discouragements in
plenty frustrated the plan. The cost was believed to be excessive
and the engineering difficulties were said to be almost
insuperable. George Bernard, a French engineer, was of the
opinion that the high elevations and scarcity of water along the
route would prevent such a canal from having much practical
value. For these reasons Baltimore believed that its position as
a center for the rapidly developing Western trade was slowly but
surely slipping away.
This was the situation that led to the building of the Baltimore
and Ohio Railroad. Two men--Philip E. Thomas and George
Brown--were the pioneers in this great undertaking. They spent
the year 1826 investigating railway enterprises in England, which
were at that time being tested in a comprehensive fashion as
commercial ventures. Their investigation completed, they held a
meeting on February 12, 1827, including about twenty-five
citizens, most of whom were Baltimore merchants or bankers, "to
take into consideration the best means of restoring to the city
of Baltimore that portion of the western trade which has lately
been diverted from it by the introduction of steam navigation and
by other causes." The outcome was an application to the Maryland
Legislature for a charter for a company to be known as "The
Baltimore and Ohio Railroad Company" having the right to build
and operate a railroad from the city of Baltimore to the Ohio
River. The formal organization took place on April 24, 1827, with
Philip E. Thomas as president and George Brown as treasurer. The
capital of the proposed company was fixed at five million
dollars.
The construction of the railroad began on July 4, 1828. The
venerable Charles Carroll of Carrollton, then more than ninety
years old and the only surviving signer of the Declaration of
Independence of fifty-two years before, said on this occasion, as
he laid the first stone: "I consider this among the most
important acts of my life, second only to my signing the
Declaration of Independence." His vision was indeed prophetic.
It was determined that the first section of road constructed
should extend to Ellicott's Mills, twelve miles distant, but,
owing to delays in obtaining capital, the actual laying of the
rails was not begun until the fall of 1829, and this first
section was not opened for traffic until May 22, 1830. At first,
experiments were made with sails for propelling the cars, but it
was soon found that a more effective source of power was supplied
by mules and horses. The Flying Dutchman, one of the cars devised
to furnish motive power, provided for the horse or mule a
treadmill which would revolve the wheels and make the distance of
twelve miles in about an hour and a quarter. Steam locomotives at
this time were in their infancy and, until the opening of the
Liverpool and Manchester Railroad in this same year, they had
attained a speed of only six miles an hour. Horses and mules, and
even sail cars, made more rapid progress than did the earliest
locomotive. In spite of these crude and primitive facilities for
transportation, however, the traffic on the new railroad was of
large volume from the beginning, and the company could not handle
the amount of merchandise offered for transport in the first
months.
Construction was now rapidly pushed ahead, and by 1832 the whole
line had been opened to Point of Rocks, with a branch to
Frederick, Maryland, making seventy-two miles in all. In 1831,
steam locomotives were tested, and one of them, the York, was
found capable of conveying fifteen tons at the rate of fifteen
miles an hour on level portions of the road. This achievement was
regarded as a great triumph, and in 1832 the directors of the
road called attention to "the great increase in velocity" that
had been obtained in this way.
From this time forward the expansion of the railroad proceeded
with a certainty born of success. A branch was built to
Washington and the main line was extended to Harper's Ferry.
Beyond this point construction was slow because financial
difficulties stood in the way, and it was not until after the
panic of 1837 that further aggressive building began. But by 1842
the line was completed to Cumberland, Maryland, and by 1853, to
Wheeling. Meanwhile, the branch from Cumberland to Parkersburg,
Virginia, was built. The road now comprised a total system of
more than five hundred miles and reached two points of importance
on the Ohio River, one northward near the Pennsylvania-Ohio state
line and one southward in the direction of Cincinnati. The
Parkersburg extension was of great importance because it opened a
through route to St. Louis, by means of the Cincinnati and
Marietta Railroad--which was at this time completed from
Cincinnati to Belpre, Ohio, opposite Parkersburg--and the Ohio
and Mississippi, which extended more than three hundred miles
from St. Louis to Cincinnati.
Times were not the best, however, and, although much traffic was
developed, the immense cost of the extensions heavily burdened
the Baltimore and Ohio Company, while the panic of 1857 seriously
embarrassed its credit. Soon after this panic and before the
company had begun to recover from its effects, John W. Garrett,
one of the large stockholders in the road and son of a Baltimore
banker, was elected to its presidency, and a new chapter in the
history of the Baltimore and Ohio began. Almost immediately
following Garrett's election, a remarkable change became
apparent. Losses were turned into gains; deficits were converted
into surpluses; and soon Garrett had gained the reputation of
being the most remarkable and efficient railroad manager in the
world. He seemed to be almost an Aladdin of railroad management
for, even when he could not show increases in amount of business
done, he reported greater profits by showing lower expenses. In
those days the railroads did not furnish detailed reports of
business to the stockholders or to the public. At the annual
meetings it was customary for a president or the directors simply
to announce, either orally or in a brief printed statement, the
amount of gross business and profits for the year. No such thing
as a balance sheet or detailed financial statement saw the light
of day--practically everything was taken by the stockholders on
faith. And great was their faith. When, therefore, Garrett
announced large increases in profits in years when most railroads
were standing still or were incurring losses, he was implicitly
believed.
Under Garrett's management a new era of expansion almost
immediately began; work was started on the long delayed branch to
Pittsburgh and plans were laid for establishing a line of
steamships from Baltimore to the leading European ports. But the
Civil War, which bore heavily on the Baltimore and Ohio,
interfered with these ambitious schemes. Early in 1861 the
Confederates took possession of a large part of the line east of
Cumberland; in the next four years important sections of the road
were repeatedly destroyed and rebuilt, as they passed into the
hands of the Federal or Confederate troops. The company, however,
managed to get through without default in its securities, and,
when peace was restored in 1865, the Baltimore and Ohio resumed
its policy of aggressive expansion.
Before very long the road, with its connections constructed or
purchased, reached the cities of Pittsburgh, Sandusky, and
Chicago, and further strengthened its connections with Cincinnati
and St. Louis. It acquired steamboats, grain elevators, and
docks; it constructed hotels as mountain summer resorts; it built
dry docks in Baltimore; and finally it proceeded to organize and
operate an express company, a telegraph company, and a
sleeping-car company. To carry out these ambitious plans the
capital stock and debt were of course increased again and again,
and in the course of these operations a large part of the new
securities issued was sold to English investors. Notwithstanding
these great increases in liabilities, the company continued to
report large surpluses and to pay large dividends, generally ten
per cent annually. In fact, this liberal rate was, with brief
exceptions, paid right through the Civil War period, in spite of
the fact that large parts of the line were frequently destroyed
and traffic was often at a standstill. With such prosperity under
such conditions Garrett's reputation as a railroad manager
naturally suffered no eclipse.
In the course of the Civil War, as already noted, through traffic
routes from New York to Chicago had been established, and in the
succeeding years the consolidations of the great competing
systems into trunk lines had taken place. The struggle of the
Baltimore and Ohio for its share of Western business led to
fierce rivalry with the Pennsylvania. This competition became so
severe and intense that, in 1874, the Pennsylvania road refused
to carry the Baltimore and Ohio cars over its line to New York on
any terms whatever. Since this was the only way in which the
Baltimore and Ohio could reach New York, the situation was a
serious one. Garrett retaliated by making destructive reductions
in passenger rates from Washington and Baltimore to Western
points. The cuts were soon made on other roads and affected both
freight and passengers. All the lines became involved. Passenger
fares from Chicago to Baltimore and Washington were reduced from
nineteen dollars to nine dollars, and those to New York and
Boston from twenty-two to fifteen dollars. Still the fight
continued, and before the end of 1875 it was possible to travel
from Chicago to New York first class for twelve dollars and to
ship grain to New York for as low a rate as twelve cents.
Despite the fact that competition had cut earnings almost to the
point of extinction, the Baltimore and Ohio continued to report
surprisingly good profits. The company borrowed additional funds
from time to time but continued to pay the liberal ten per cent
dividend until 1877, when it somewhat reduced the rate. These
dividend payments indicated, however, a prosperity that was only
apparent, and they did not greatly deceive the bankers, for the
credit of the Baltimore and Ohio weakened from day to day. The
fact is that the reports of operations inspired little public
confidence; to the farseeing, there were danger signals ahead.
Nevertheless the ten per cent dividends were resumed in 1879 and
continued at this rate without interruption until 1886.
On the death of John W. Garrett in 1884, his son Robert, who
succeeded him as president, continued the same policy of
competition and aggression. With the object of gaining an
entrance into Philadelphia and through that gateway of reaching
New York, he started work on a branch from Baltimore to
Philadelphia to meet, at the northern boundary of Maryland, the
Baltimore and Philadelphia Railroad--a line which independent
interests were then building through Delaware with the intention
of obtaining an entrance into Philadelphia. The Pennsylvania
interests strongly opposed Garrett's new project and many years
before had gone so far, in their determination to block the
Baltimore and Ohio from acquiring control of the Philadelphia,
Wilmington and Baltimore Railroad, as to purchase that road
themselves. Despite this opposition the Baltimore and Ohio went
forward with their plans and secured an entry into Philadelphia
by acquiring control of the Schuylkill East Side Railway, which
was a short terminal road of great strategic value. North of
Philadelphia the company arranged a traffic contract with the
Philadelphia and Reading, whose lines extended to Bound Brook,
New Jersey, and also with the Central Railroad of New Jersey
beyond Bound Brook to Jersey City. Afterward, by purchasing the
Staten Island Rapid Transit Company the Baltimore and Ohio
acquired extensive terminals at tidewater on Staten Island and
constructed a connection in New Jersey with the New Jersey
Central. Thus, after many years of struggle and at heavy cost,
the Baltimore and Ohio finally secured an entry into the New York
district independently of the Pennsylvania Railroad.
Both freight and passenger charges, however, were still
maintained at an unprofitable rate, and, after the death of John
W. Garrett, the credit of the Baltimore and Ohio continued to
decline. Dividends were gradually reduced and by 1888 were
omitted entirely. As is usually the case, the cessation of
dividends awakened the sleeping stockholders. They began an
investigation to ascertain the whereabouts of that remarkable
surplus which had been reported from year to year and which,
according to official report, had shown a constant growth.
This investigation disclosed a startling state of affairs.
Instead of a surplus, the company had been piling up deficits
year after year, had been borrowing money right and left on
onerous terms, had been charging up millions of dollars of
expenses to capital accounts--and as a matter of fact, instead of
making money, it had for the most part been losing it. Now the
company urgently needed cash, and the only way it could obtain
that essential commodity was by selling its express, telegraph,
and sleeping-car business.
During the entire administration of John W. Garrett, extending
over more than two decades, current expenditures of enormous
amounts which should have been deducted from the income had been
credited to the surplus; many millions which would never be
returned had been advanced to subsidiary lines, or had been
spent, and therefore should have been put down in the books as
losses. When these facts became public, the capital stock of the
Baltimore and Ohio, which for generations had been looked upon as
one of the most secure of railroad investments, dropped to almost
nothing, and the most strenuous financial efforts were required
to keep the company out of bankruptcy.
These disclosures, towards the end of 1887, ended the first
period of active Garrett management in the Baltimore and Ohio.
The directors then turned to New York bankers for the cash that
was needed to put the affairs of the company on a sound basis.
Samuel Spencer, who afterward became a partner in the banking
house of J. P. Morgan and Company, was elected president and
active manager. He introduced radical reforms, entirely
revolutionized the organization, and adopted modern methods. He
wrote off the books a large amount of the much vaunted "surplus"
and he took important steps toward the general improvement of the
property.
Had the new interests been allowed to continue their efforts
unmolested, the history of the Baltimore and Ohio in the next
decade might have been very different. But the original
controlling interests, the Garrett family, still held the balance
of power. As the bad bookkeeping and other irregularities of the
past naturally reflected on the Garretts, it was their interest
to suppress further investigation as far as possible; and their
antagonistic attitude toward the policy adopted by the new
Spencer management was seen in the annual election of directors
in November, 1888. Only five of the members of the board were
reelected, President Spencer was ousted, and Charles J. Mayer was
elected in his place.
This second change in management sidetracked the plans for
radical reform, and little improvement resulted either in earning
power or in financial condition. The company had fallen upon evil
days. The net profits did not increase, and eight years after
1888 they were smaller than in that year, while the debt and
interest charges constantly grew. Despite these ominous facts,
dividends were paid regularly on the preferred stock and in 1891
they were resumed on the common stock. In the latter year a
twenty per cent dividend was declared "to compensate shareholders
for expenditures in betterments and improvements in the physical
condition of the property," while at the same time the directors
decided to raise five million dollars of new capital for
expenditures which would be necessary to handle the increased
traffic created by the World's Fair at Chicago.
The traffic problem continued to be a thorn in the flesh and
until 1893 freight rates were constantly being cut. The opening
of the Baltimore and Ohio connection to New York had brought
keener competition from the Pennsylvania Railroad and had made
deep inroads into the Baltimore and Ohio revenues. Such
conditions made even the Garrett interests feel that something
should be done, and in 1890 a "community of interest" scheme was
proposed. To control the stock of the Baltimore and Ohio
Railroad, Edward R. Bacon in New York, acting harmoniously with
the Garrett family, formed a syndicate of capitalists
representing the Richmond Terminal system, the Philadelphia and
Reading Railroad, the Northern Pacific Railroad, and other
properties. The ultimate plan, which proved too visionary, was to
consolidate under one control a vast network of lines extending
all over the continent.
The syndicate had made little progress toward rehabilitation when
the panic of 1893 occurred. In this year and the next the
earnings of the Baltimore and Ohio fell off rapidly and the
dividend was reduced. Nevertheless, as late as January, 1895, the
directors insisted that financially the company was in better
condition than for several years and that on the whole it was in
a stronger position than at any time since 1880. But in this same
year it became necessary to stop all dividend payments; the
company began to have difficulties in securing ready money; and
before the close of the year the situation seemed hopeless. Early
in 1896 Mayer tendered his resignation, and John K. Cowan
succeeded him. The new president did his utmost to obtain money
to meet the current needs, but he was unsuccessful. A
receivership and reorganization seemed absolutely necessary, and
in February, 1896, the receivership was announced.
With the property now in the hands of the courts, the opportunity
at last came to make real the reforms which had been proposed and
begun nearly a decade earlier under the wise but quickly
terminated administration of Samuel Spencer. A thorough
housecleaning was now carried through without interference or
interruption. A reorganization committee was formed, with whom
were deposited the Garrett shares as well as those of the Morgan
and New York and Philadelphia interests. A full investigation of
past management disclosed that the records for the interim
extending from the brief Morgan control under Spencer to the
receivership contained the same kind of irregularities and errors
of policy that had prevailed under the earlier Garrett
management. Statements of profits had been swelled by arbitrary
entries in the books and nearly six million dollars which had not
been earned had been paid out in dividends. Furthermore the
company had endorsed the notes of certain subsidiary roads to the
extent of over five million dollars, and had made no record
whatever of this action for the stockholders.
As in the case of numerous other railroads, the financial
breakdown of the Baltimore and Ohio Railroad was primarily due to
a bad or reckless financial policy, for there was nothing
inherently insecure in the railroad property itself. During all
the years of the Garrett regime, the company had shared in the
general growth and expansion of industry, wealth, and population
within its territory. It had been progressive in matters of
expansion and had built up its system to meet the needs of modern
times. Its trackage and equipment compared favorably with similar
systems, and most of its extensions and branches had been wisely
planned and had proved profitable. The operating management of
the railroad was generally good and it usually secured its
proportion of what business was to be obtained. But the steady
increase in its debts over a number of years, its extravagance in
dividend payments, and its painful efforts to keep down its
operating expenses had so weakened the property that, when the
hard times of 1893 to 1896 arrived, it was in no position to
weather the storm. The only wonder is that the management
succeeded in keeping the system intact and apparently solvent so
long as it did.
The receivership at once adopted a vigorous policy of
improvement. The rolling stock had run down until it could not
handle even ordinary business. While the company had been
depleting its credit and paying out all its cash in dividends,
the equipment had been going into the scrap heap. For two years
the receivers made large expenditures on equipment and roadbed,
borrowing money for this purpose; the result was that when, in
1898, the courts surrendered the property, it was in splendid
condition to take advantage of the tide of commercial and
industrial prosperity which was just then beginning to flow
throughout the United States.
While the reorganization of the Baltimore and Ohio was not so
drastic as that of many other systems which went through the
courts during this period, it was thorough enough to meet the
situation. The fixed charges were cut down radically and the
stockholders were assessed in large amounts. In all, more than
thirty-six million dollars was raised by assessments and the sale
of new securities; the liabilities of the Company were greatly
reduced; and its credit was promptly restored. Formerly the
Baltimore and Ohio had been struggling under a burden of floating
indebtedness, with so little money in its treasury that it could
not even put a new coat of paint on the passenger cars and had to
continue to use oil lamps to light some of its best trains. But
now the floating debt was replaced by a large available cash
capital, and as a result of the liberal policy followed by the
receivers, the equipment and roadbed were brought fully up to the
standards required for handling the traffic of the road both
economically and effectively.
With the reorganization of 1898 finished, the Baltimore and Ohio
Railroad entered a new period in its history. The strong,
progressive interests which now took control concentrated their
energies on developing traffic, increasing earnings, and rounding
out the general system. They adopted careful measures for
unifying the system by adding other lines and connections of
value; they paid much attention to the improvement and
development of terminals; and they spent many millions in
acquiring and expanding the terminal properties of the company at
Chicago, St. Louis, Philadelphia, and Baltimore.
The financial history of the Baltimore and Ohio since the close of the nineteenth century is interesting chiefly in connection
with changes in the control of the property. After the
reorganization a group of prominent financiers, including
Marshall Field, Philip D. Armour, Norman B. Ream, and James J.
Hill jointly purchased a large interest in the stock. But this
purchase, while perhaps representing a dominating interest, did
not involve actual control. Soon afterward, interests identified
with the Pennsylvania Railroad began to appear in the Baltimore
and Ohio, and before long the Pennsylvania had a strong
representation on the board. As a consequence, the Baltimore and
Ohio almost lost its individuality and for a time was popularly
regarded practically as a subsidiary of its old rival line.
The purpose of the Pennsylvania in obtaining this ascendency over
the Baltimore and Ohio was to regulate the soft coal traffic.
Already it had acquired dominating interests in the Chesapeake
and Ohio, the Norfolk and Western, and other soft coal
properties. These purchases were merely manifestations of that
"community of interest" policy which at this time led several
large systems to acquire interests in competing lines. Several of
the railroad leaders of that time, notably James J. Hill and
Edward H. Harriman, believed that if these great systems actually
owned large blocks of stock in each other's properties, this
common association would ipso facto end the competition that, if
continued, would ultimately ruin them all. The Supreme Court had
decided that the "pooling" arrangements which had so long
prevailed among great competing roads violated the Sherman
AntiTrust Act; and the American public, which now was cultivating
a new interest in railroad problems, believed that the "community
of interest" plan was merely a scheme to defeat the Interstate
Commerce Act and the Sherman Act and to maintain secretly all the
old railroad abuses. These inter-railroad purchases therefore
became so unpopular that the Pennsylvania sold its Baltimore and
Ohio stock. At this time Edward H. Harriman of the Union Pacific,
who had at his disposal vast funds of the latter property which
he had obtained by the settlement of the Great Northern and
Northern Pacific deal, decided to acquire control of a system of
roads in the East in order to establish a complete
transcontinental line in the interest of the Union Pacific. It
was the theory that such a purchase by the Union Pacific would
not defy the law or outrage the popular conscience because the
Union Pacific, unlike the Pennsylvania, did not compete with the
Baltimore and Ohio, but was only a western extension of that
system. Harriman in August, 1906, therefore purchased nearly all
the Pennsylvania holdings in the old Garrett property and thus
obtained virtual control.
At this same time the Baltimore and Ohio had been developing a
"community of interest" plan on its own account. In the year
1908, it acquired a substantial stock interest in the newly
reorganized Reading Company, which controlled the Philadelphia
and Reading Railroad and the Philadelphia and Reading Coal and
Iron Company. It did not obtain a majority interest but, with the
Lake Shore and Michigan Southern Railroad of the New York Central
system, it now controlled the Reading system. The Reading Company
meanwhile had secured control of the Central Railroad of New
Jersey, over the lines of which the Baltimore and Ohio reached
New York City.
In the following years the Baltimore and Ohio property was still
further rounded out by purchasing the Cincinnati, Hamilton and
Dayton, a small system of doubtful value radiating through the
State of Ohio and, by additional extensions, into the soft coal
fields of West Virginia. New energy was put into the expansion
and improvement of the southwestern lines to St. Louis, while the
eastern terminal properties were still further improved.
The practical control of the Baltimore and Ohio remained in the
hands of the Union Pacific interests until 1913. In that year,
however, the Union Pacific liquidated its holdings by
distributing them to its own individual stockholders in the shape
of a special dividend. The Baltimore and Ohio thus became once
more an independent property.
The story of the Baltimore and Ohio for the past decade has been
mainly a record of a growing, well-managed, and efficient
business. It is closely identified with the personality of its
notable and efficient president, Daniel Willard, a conspicuous
example of the modern type of railroad manager. In the earlier
days of railroading, and especially in the long period which came
to an end with the death of Harriman, the typical railroad
president was usually a man of great wealth who had secured his
position by owning a large financial interest in the property.
The country was full of "Wall Street Railroad Generals." But in
recent years the efficient railroad head has come more and more
to be the practical railroad man who has risen from the ranks,
who has no important personal financial interest in the property
but who is paid an adequate salary to operate a system in a
purely businesslike way. Notable examples of this modern type of
railroad president are, besides Daniel Willard, Edward P. Ripley
of the Atchison, Topeka and Santa, Fe, Benjamin F. Bush of the
Missouri Pacific, and Fairfax Harrison of the Southern.
The efficient management of today is abundantly shown in the
recent record of the Baltimore and Ohio. President Willard has
been unmolested by financial interests and has been continuously
backed up in his policies by the owners of the road. As a result
the Baltimore and Ohio of the present decade has reached an
enviable position as one of the great Eastern trunk lines,
comparing well with other progressive properties like the
Pennsylvania, the New York Central, the Southern, the Illinois
Central, and the Louisville and Nashville. Millions have been
poured into the property in the past fifteen years; its main
lines have been largely rebuilt; its rolling stock is chiefly of
the most modern types; and its terminals and structures are such
as modern conditions demand.
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Source document: Moody, John. "The Railroad Builders, A Chronicle of the Welding of the States" New Haven: Yale University Press Toronto: Glasgow, Brook & Co., London: Humprhey Milford, Oxford University Press, 1919