The National Dream: The Great Railway, 1871-1881 (52 page)

When Donald Smith passed through St. Paul again, early in 1874 (he was on his way to campaign in his constituency), both Hill and Kittson were ready with the information he needed: most of the bonds were now held by Dutch investors who had formed themselves into a committee of bondholders. There were various classes of bonds totalling almost eighteen million dollars, face value; some were being quoted on the market at five cents on the dollar. The bonds were secured by the land grant on the unfinished portion of the line and this land grant was worth, in total, between two and three million dollars. In addition there were some five hundred miles of more or less completed railroad. Hill figured it would take two or three millions to complete it. He had learned that the Dutch had no intention of taking on that task. Smith, as a last resort, indicated he would be prepared to form a company to do the job if the bonds could be bought at reasonable prices.

The strategy was clear: buy the bonds as cheaply as possible, form a new company, force a foreclosure, buy the bankrupt railroad, complete it to the border, cash in on the resultant land subsidy and reap the profits. But there were many obstacles. It was no use buying the railroad without being certain of getting the free land that was supposed to come with it. The Minnesota legislature, however, had passed a law (no doubt with the bitter memory of Russell Sage’s plundering) making the land grant non-transferable to any new company after foreclosure. A good deal of lobbying – and perhaps more than lobbying – would be needed to get that law revoked. There was also a variety of lawsuits pending against the railway lines. Then there were the stockholders, in addition to the bondholders, to be considered. Most of the stock was held by a speculator named Edwin Litchfield, a notoriously difficult man to deal with. Litchfield was trying to get control of the railway for himself through court action. The depression was at its height, money was hard to come by, plagues of grasshoppers were ravaging the land. For the moment nothing could be done.

“There was a time,” Hill later recalled, “that everybody waited. There seemed no way to get in.”

They bided their time for two full years – Smith and Hill, who was now deeply involved, and Kittson, who was reluctantly being pushed to the point of committal by his enthusiastic partner.

During that time, Hill studied the faltering railroad in all its economic ramifications – studied its finances, studied its operation, studied the quantities and values of the various bonds and where they were held; figured out the number of acres of land owned by the twin companies, the number of miles completed, half completed and still to be completed; worked out the value of the future land grants, the value of the terminals in St. Paul and in Minneapolis across the river, the value of the franchises that were granted before the state was admitted to the union; added up the number of locomotives, freight and passenger cars; kept up with all the law cases; made friends with the legislators and lobbied for changes in the law. Within two years, it was said, Jim Hill knew more about the railway than the men involved in running it. Two things he certainly knew that few others knew: it was worth far more than it appeared to be; and it could be made to show a profit.

He made no secret of his dream. Everybody in town knew that Jim Hill wanted the railroad and hoped to get the money from Donald A. Smith. His banker friend Henry Upham said that over a period of four years Hill must have talked to him on the subject several hundred times: “It was a favourite recreation with him.…”

Upham admitted that Hill “used to talk so much about this that people were a little tired of it.” In the old Minnesota Club, Hill would corner fellow members and, his finger waggling in a characteristic gesture, harangue them for hours on the subject of the railway. “It was quite noticeable and it was talked of some time afterward by the boys,” Upham recalled. He particularly remembered one evening early in May, 1874, coming across Hill in the club, gesticulating wildly, with Kittson who, having had two hours of the same thing late the night before, was almost numb with fatigue. The exhausted commodore sat totally immobile in the front of Hill, letting his young colleague rave on and on, his own face an absolute mask. As Upham came by he caught Kittson’s eye, which closed slowly and then opened again, while his face remained totally expressionless.

Hill lived and slept the railway. Another friend, Stanford Newel, remembered that no single day passed after February, 1874, that Hill did not talk about it. Newel, who admitted that he found the whole subject tedious, said that “it became from day to day an all-absorbing
subject with him. I used to tell him that he was getting it on the brain. He thought of nothing else.…” Indeed, he neglected his work because of it, as his partner Edward N. Saunders was to testify: “It seemed to occupy his mind to the exclusion of the coal business.” Saunders felt injured; when Hill did turn up on the job all he would talk about was acquiring the railway.

One of the men he talked to, long and intimately, was Jesse P. Farley, an old railroad man from Dubuque, Iowa, who had been appointed receiver of the bankrupt St. Paul railroad. The twin to the bankrupt company was under trusteeship and the trustees made Farley general manager of it, so that he was actually in charge of the entire St. Paul and Pacific line and its branches. As such he was supposed to keep the railroad profitable, try to get it out of trouble and build more track. He was singularly unsuccessful in doing this, spending in three years only about one hundred thousand dollars on construction and repair. It is clear from subsequent sworn testimony that he and his assistant were on intimate terms with both Hill and Kittson, whom they saw almost daily, and that they were pleased, on occasion, to do Hill’s bidding. The question, which was the subject of a prolonged series of legal battles, was whether or not the two were simply pumping Farley for information or whether Farley was in collusion with them to keep the railway in a rundown condition so that it could be bought cheaply. That is a mystery that has never been conclusively unravelled.

But then, there are several mysteries connected with the complicated finances and eventual disposition of the St. Paul and Pacific. Another has to do with the role played by John S. Kennedy, a New York banker, and his partner, Capt. John S. Barnes. Kennedy and his company were the agents of the Dutch committee that held almost all the bonds of the bankrupt railroad. Kennedy recommended Farley as trustee. Farley was a generally ignorant and almost illiterate man and “his cupidity was well known,” according to Gustavus Myers the muckraking business historian (who was not entirely unbiased). Farley, previous to his appointment, had worked for Kennedy on a small Iowa railroad and generally did what the banker told him. What was Kennedy’s real role? He was officially the man charged with looking after the bondholders’ interests but he himself was to become a multimillionaire as a result of his association with Jim Hill and associates – the men who finally bought the Dutch bonds.

The bondholders in Holland appointed one of their number, Johan
Carp, to visit St. Paul and look over the railway, which had cost them so many headaches and so much financial loss. Carp later testified under oath that in 1876, and again in 1877, he discussed the future of the railway with Farley and that Farley was pessimistic: “He related to me the various difficulties we were to meet from competing railroads and opposite parties.” Farley urged Carp to get the bondholders to put up more money to finish the road, but it was quite clear that this was not financially possible. “I was induced to believe that it would last many years before all these troubles should come to an end,” Carp recalled. Persuaded of this, he decided it was time to sell the bonds; when Farley asked him if the committee was willing to sell, Carp replied that he thought so, if a reasonable bid could be obtained. Meanwhile Farley had introduced Carp to Hill and Kittson.

The time for waiting was over. While Farley was telling Carp that the railway would be tied up for years, Hill realized that solutions to many of the problems were at hand. Chief of these was the new legislation his political friends were pushing through the Minnesota legislature. Until that time, bankrupt railroad companies stood to lose their land grant. Under the new law companies could be sold under foreclosure and reorganized with the grant intact. Hill had always known that the real value of the railway lay in its capacity to claim free land.

The new legislation was passed on March 6, 1876. With this huge obstacle removed Hill left, on March 17, for Ottawa. At Smith’s invitation the two men breakfasted in the cottage belonging to the Bank of Montreal where Smith made his headquarters while in the capital. Hill told Smith that it was now or never, and explained why: matters were moving swiftly with the railway. Edwin Litchfield, the chief stockholder, was trying to reach a compromise with the Dutch bondholders which would leave him in effective control of the property and prevent foreclosure. Hill’s whole scheme rested on the certainty of foreclosure. Whoever owned the bonds could foreclose if mortgage payments were in default. Then the railroad would go on the block and the new bondholders could buy it for a song. But how much did the Dutch want for their bonds? If the price was right, Smith told Hill over breakfast, it was probable that the money could be raised in England. He mentioned Sir John Rose, long the government’s unofficial representative in London and a partner in the financial house of Morton, Rose and Company.

“I wish you and Mr. Kittson would go on now and see at what
price, if you can determine or find out, these bonds can be bought,” Smith said.

Hill departed for St. Paul in a state of jubilation. On the train out of Chicago he ran into his old friend Stanford Newel. “Donald Smith is ready to take hold,” Hill exulted. Newel was impressed. Could it be that Hill, the voluble dreamer, had something after all?

When Johan Carp, the Dutch representative, first met Hill and Kittson in St. Paul in December, 1876, and learned that they might be interested in buying eighteen million dollars worth of bonds at a discount, he refused to take them seriously. An aging steamboat man and a garrulous coal merchant! Why, said Carp, there simply wasn’t that kind of money in St. Paul. It took some convincing to explain that the money could be raised through Canadian and British capitalists. When Carp learned who Donald A. Smith was he began to pay attention.

It was now Hill’s task to figure out the price at which the Dutch were prepared to sell their bonds. The partners had determined to buy them as cheaply as possible. But how cheap was cheap? Hill worked night after night, making detailed estimates of costs and assets. He figured the value of the railway property alone at $12,216,718. Then he went to work on the land grant and he figured that, right down to the last dollar, at $6,585,205. He figured net earnings at seven hundred thousand dollars a year and he listed every fraction of debt and every detail of assets. Meanwhile Farley was warning Carp of the complications that lay ahead and urging him to sell the line.

In January, 1877, Hill was ready to deal, or at least he pretended he was. Actually his plan was to write a letter to the Dutch committee that would sound like an offer so that he might get some idea of the actual price they would sell for. He had two other purposes. He wanted to keep Carp interested and in a good humour, and he wanted to word the letter in such a way as to convince the Dutch bondholders that the railway was practically worthless. Faced with an apparently
bona fide
offer, Hill rightly believed, the bondholders would grasp at any straw to sell the white elephant. He and Kittson “puzzled over the thing a good deal.” They spent an entire evening working out the delicate wording and then a full morning with their lawyer rephrasing it. Since they had no cash they did not dare at that moment to risk outright acceptance. The letter contemplated buying the railroad property for three and a half million dollars in cash and letting the land grant go to the Dutch. But the cash was not to be paid over until
the property was unencumbered, and that happy day seemed a long time distant. “We did not consider we were running much risk in making that offer,” Hill was to recall.

The Dutch rejected the offer, as Hill had forecast they would; but their reply contained enough information to give him a clue to the kind of deal they would accept. The time had finally come to stop dreaming dreams and playing games. The time had come to put some money on the line. The time had come to broach the subject to George Stephen, the President of the Bank of Montreal, one of the keenest financial minds in Canada and a first cousin of Donald A. Smith.

3
Enter George Stephen

Ever since 1874, Donald Smith had been boring his cousin with talk about the St. Paul railway, in the same way that Hill had been boring his friends. George Stephen saw Smith several times a year in Monttreal and listened politely to his enthusiastic accounts of the future of the North West. Stephen, like most Montreal businessmen, had a confused and inaccurate picture of the country west of the lakes: “He thought of Minnesota … that it was at the North Pole somewhere,” Smith later recalled.

Stephen cheerfully concurred in this assessment: “This Minnesota railway matter was constantly coming up. He [Smith] was very hot upon the matter and I was lukewarm.” Stephen thought the railway scheme “an impossible thing for us to accomplish.” Nevertheless he agreed to meet Hill and Smith early in 1877 to discuss the matter. Hill, armed with facts and figures, papers and documents, talking his usual blue streak, gesturing with that insistent finger, never letting up for an instant in his infectious enthusiasm, changed Stephen’s attitude from one of “languid attention” to whole-hearted interest; and Stephen’s interests were never idle ones.

Stephen is a shadowy figure in Canadian history. The immense granite peak that overshadows Field, B.C., and bears his name is better known than he. His official
CPR
portrait, painted when the ordeal of railway building was at an end and his hair had gone white, is reasonably familiar: it shows a slender, graceful man, impeccably attired, with a long, grave Scottish face and a neatly trimmed beard.
That is about all most school children know of George Stephen. In Canada’s Centennial year, a group of distinguished historians was invited to name the twenty-five greatest Canadians of the century, apart from politicians. Sandford Fleming, Donald Smith and William Van Home all made the list but George Stephen was not even considered. Yet, apart from the politicians, he, more than any single man, was responsible for the shape and direction of the new Canada that sprang up west of Toronto after 1881.