The Railroad Trust of the New South

By Hunter Wallace

The following excerpt comes from the section “The Colonial Economy” in C. Vann Woodward’s Origins of the New South, 1877-1913:

“Northeastern control over the vast, sprawling railway system of the South was virtually completed within the decade following the Panic of 1893 by a series of large-scale reorganizations. J. Pierpont Morgan, mightiest of the Northern empire builders, opened the era of reorganization and consolidation by creating the Southern Railway out of the ruins of the Richmond and West Point Terminal Company in 1894.

Plundered, mismanaged, and insolvent, the Terminal system was left in great confusion in 1893. Upon undertaking the reorganization, Morgan imposed terms which “virtually meant that the security holders accepted in advance any proposals he might make.” The New York banker took over 4,500 miles of railroad and 150 miles of water line formerly operated by more than thirty separate corporations. The new company owned all but 491 miles of the road, and Morgan retained control. Within a few months the Southern Railway swiftly expanded its holding to a total of 7.500 miles of rail. In the course of the organization “$120,000,000 of common stock was issued to persons who paid not a single dollar in actual value for it” – a transaction that has been called “the classic example” of stock jobbing and watering.

The New York Sun said of the reorganization “that the event is the most notable that has taken place in the history of American railroads, and that its bearing upon every Southern business is of vital importance.” The significance for Southern mining, manufacturing, and commerce is indicated by the facts that Morgan now dominated transportation in the two great coal fields of the region; that he tapped the iron industry from Knoxville to Birmingham, with thirty furnaces on the western division of the system; and that his lines laced the Piedmont cotton-mill country, and even dipped into the truck and fruit traffic of Florida. The Southern has been called “the basis of Morgan’s empire,” but that empire was to include several additional large provinces in the South before it was completed.

Within ten years after the formation of the Southern Railway two great systems of comparable size, the Atlantic Coastal Line and the Seaboard Air Line, were consolidated in the same region. In May, 1902, the Atlantic Coastal Line, which operated 1,676 miles, the result of the consolidation of several roads by a Connecticut holding company, took over completely the huge Plant System, stretching from Charleston to Tampa. The Plant System itself, the empire of the Connecticut Yankee Henry B. Plant, was the result of a process of consolidation of numerous small roads between 1879 and 1899, when Plant died.

The year it acquired the Plant System the Atlantic Coast Line purchased controlling stock in the Louisville and Nashville Railroad, one of the oldest and strongest systems in the South. In the spring of 1902 John W. Gates of Wall Street, by means of a quiet speculative spree, secured a corner on Louisville and Nashville stock, control of which was immediately taken over by J.P. Morgan and Company. The Company explained that it “consented solely to relieve the general financial condition” and added a rather over-emphatic denial: “The Southern Railway has no interest, direct or indirect, present or prospective, in the stock.” Morgan then obligingly strengthened his most important competitor, the Atlantic Coast Line, by financing its purchase of the Louisville and Nashville stock. With more than 10,000 miles of rail under its control, the Atlantic Coast Line now connected cities lying between Norfolk and Tampa on the east and New Orleans and Louisville on the west, linking the two areas at Chattahoochee, Montgomery, and Atlanta.

The youngest of the largest systems was the Seaboard Air Line, formed in July, 1900, to consolidate eighteen corporations originally owned and operated by three companies. Under the Seaboard these separate roads were united into a continuous system by the construction of some 200 miles of new line. When completed the new road paralleled the Atlantic Coast Line throughout its extent with a 2,600-mile system from Washington south along the coastal plain.

Smaller roads were raided, bankrupted, driven to the wall, or suffered to survive, at the pleasure of the giant systems. The giants divided the Southern colony at their leisure, according to mutual interest. During the heydey of conquest, Milton Hannibal Smith, president of the Louisville and Nashville, wrote Samuel Spencer, president of the Southern, to settle “the future of certain railroads that are, or may be tributary or competitive with roads controlled by the L & N RR or the Southern Ry.” Smith playfully opened his remarks with this colloquy between conquistadors:

Pizarro: How shall we divide the new world?

Cortez: I will take North America and you can have all of South America, except ___, and neither of us will do anything to the Isthmus without notice to and cooperation of the other.

Pizarro: While Patagonia is not a very large or important part of the world, yet, perhaps, it is as much as I can tote.

Spencer replied in kind:

Pizarro: Since our last conversation, the division of the New World between us had made some progress.

Cortez: Yes; you seem to have acquired Patagonia, and I have secured a considerable part of North America which touched my former territory, but it seems to me you have acquired a considerable neck of the Isthmus which is the connecting link between us.

Presidents Smith and Spencer could have posed more appropriately as corregidors than as conquistadors , for they acted as agents and not as principals. “In the South at the turn of the century,” concludes a scholarly account, “there were three large systems, the Southern, the Atlantic Coast Line and the Seaboard Air Line ___ and Morgan dominated all three to the exclusion of competition.” Smith and Spencer were not dividing the New World, but settling administrative boundaries between two provinces of a single empire.

If their title of conquistador stood in question, their methods and ideas were none the less suggestive of that genius. Smith operated the Louisville and Nashville for thirty-eight years on the theory that, in his words, “society, as created, was for the purpose of one man’s getting what the other fellow has, if he can, and keep out of the penitentiary.” His chief complaint lay against government interference with the game. He was once called upon by Joseph W. Folk, attorney for the Interstate Commerce Commission, to explain certain large expenditures for political purposes:

Smith: We try to get on good terms and cooperate with the State authorities … it is an exceedingly difficult matter to protect the property of a large corporation in 13 different States from confiscation by the people.

Folk: What people?

Smith: The people of the country … People having a democratic government, with a majority rule, create commissions and other forms of government with power to confiscate … All legislative bodies are a menace.

Folk: So, as I understand you, Mr. Smith, you consider government by the people as dangerous, and you conceive it to be your patriotic duty to counteract it?

Smith: No. What are we going to substitute? We do not want chaos. We do not want anarchy …

Folk: The anarchist, Mr. Smith, says all legislative bodies are a menace; in action they are a calamity.

Smith: That is my opinion.

Folk: You say all legislative bodies are a menace, and in action they are a calamity. Will you explain the difference between your theory and the theory of the anarchist?

Smith: I don’t know about the anarchist. I can not explain the difference.

President Smith had outlined his views to the Commission twenty years earlier and he saw no reason to change them:

Commissioner: You say that the Government ought to leave you and the shipper who resides at those places free to contract. Now, that shipper is obliged to pay whatever you charge?

Smith: No.

Commissioner: What could he do?

Smith: He could walk.

Morgan called his main road the Southern and named as its president a Southerner. Graduate of the University of Georgia and the University of Virginia and a Confederate veteran, President Spencer took personal charge of a large publicity organization that card-indexed newspaper editors according to their usefulness. Money, social pressure, sentiment, and tradition were brought to bear to protect Morgan’s interests from legislative action. “Born and reared in the South, and identified by my life’s work with Southern interests, I feel that I have a right to speak to you as one of your own people.” Spencer told an Alabama audience in 1906. The burden of his message was that “the interests of the railroad and its patrons are identical.”

Of the two Yankee empire builders who divided Florida – Plant and Flagler – the mightier proved to be Flagler. Taking the east coast as his half, he started operations in the late eighties after he had accumulated a fortune as a Rockefeller associate in Standard Oil. Flagler opened his first luxury hotel at St. Augustine in 1888. Pushing southward through 300 miles of untamed scrub and hammock with his railroad and hotel chain, the pioneer Flagler flung back the last American frontier – to establish pleasure palaces and playgrounds for the idle rich. The first locomotive pulled into West Palm Beach in 1894, and his Royal Poinciana opened its doors the same year. By 1896 the palace cars from Bay Harbor and Newport could roll unimpeded through the poverty-littered Carolinas and all the way to Miami and its Royal Palm Hotel. Flagler had invested $30,000,000 in Florida to reach Miami. In his next leap he took to sea with his railroad, and with a labor force of 4,000 men and an expenditure of $20,000,000 he spanned the Florida Keys and entered Key West in 1912. Like his contemporary empire builder James J. Hill, who operated at the opposite corner of the continent, Flagler founded cities and colonies, fostered agriculture, and encouraged immigration. At his death in 1913 his empire included 765 miles of track, hotels to accommodate 40,000 guests, and numerous land companies, newspapers, and utilities.”

After 1900, J.P. Morgan dominated virtually the entire Southern railroad network, except in Florida which was partitioned between two other Yankees, Henry Flagler and Henry Plant.

The most interesting aspect of this development though is how the Northern-owned railroad system was used to effectively create an internal tariff between the North and South:

“One set of barriers was the freight-rate differential. The Interstate Commerce Commission recognized the connection between industrial development and freight-rate differentials as early as 1889. In an opinion concerning a case from the South, the Commission held freight-rate inequalities “in a very great degree responsible for the lack of local development in that region, except at favored localities.”

Justifying their policy on the grounds of low population density, seasonal fluctuations, low-grade cargo, and the predominance of one-way and local traffic, the Southern carriers had from the beginning charged higher rates per mile than Northern carriers. The distinctive Southern freight rates and classifications were institutionalized on a regional basis in the seventies and eighties by railway associations and pools that established “boundaries more tangible than the Confederacy ever achieved,” with a capital in Atlanta and a rate sovereignty extending from the Chesapeake to the Gulf. After 1887, the Interstate Commerce Commission gave legal sanction to the railway-association rates and classifications and recognized a “Southern Territory” with boundaries running along the Ohio and Potomoc and dipping into Virginia on the north and following the Mississippi on the west. Similarly, an “Official Territory” north of the Ohio and east of the Mississippi, and a “Southwestern Territory” including Arkansas, Louisiana, Texas, and a slice of New Mexico, as well as two other western rate territories were evolved and recognized.

The disparity of rates between territories, the resulting economic discrimination, and the advantages of shippers in Official Territory were acknowledged by the beginning of the twentieth century, but no scientific comparison of rates was made in the period. The spread between regional level has been reduced since 1913, but a careful study made twenty-five years later revealed that, on the average, shippers of classified goods still had to pay rates which were 39 percent higher in the Southern Territory and 75 percent higher in the Southwestern Territory than shippers in the favored Official Territory paid for the same services. These differentials were to an extent evaded for a time by arrangements with smaller independent lines in Official Territory that enabled some Southern producers to compete in the Northern market. Railroads in Official Territory, however, began quite early to use rate differentials to bar competition from Southern producers and monopolize the big markets for their own shippers. “It was done at the request of the Pennsylvania iron men,” replied the general freight agent of the Pennsylvania Railroad when asked why rates on Southern iron were advanced in 1890.

Certain trade advantages accrued from these rate differentials. Since a little over half of the population and considerably more than half of the wealth and buying power of the country was located in Official Territory, that region became a powerful magnet for goods. It was a market in which all manufacturers of a national scale had to compete. Manufacturers within the favored region moved their products much greater distances for an equal amount of money than could those in outlying territories. Nor did the barriers operate reciprocally, for Official Territory shippers could penetrate into the Southern market at a somewhat lower rate, mile for mile, than their competitors in the South had to pay for shipping similar articles wholly within their own territory. “Thus, one has here something remarkably similar to the working of a protective tariff, to the extent that certain favored interests effectively strive to protect themselves at home while retaining privileges elsewhere.”