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The Oregon Railroads.—1873–1879

THE Frankfort Committee had sent a delegation to Oregon, during the summer of 1873, for a thorough investigation of the railroad and the prospects of the State, and it was only after it had returned and made a report, and default had actually taken place in the payment of interest, that the labors of the committee began in October. There had been nearly eleven millions of the Oregon & California bonds sold at a little over 70 per cent. in Germany and England, of which the former country had absorbed by far the greater portion. The report of the delegates showed that only half of the nominal amount of the bonds had been received by the company in money; that, instead of 375 miles from Portland to the California State boundary, only 200 miles had been completed and were in operation, and that, owing to the small population and limited development of western Oregon, the road was producing only about one-third of the interest charge and could not well be expected to yield more for some time to come.

The first question before the committee was whether it should exercise the rights of the bondholders under the mortgage and take possession of the road by foreclosure proceedings, or compromise with the company, which was controlled by Ben Holladay, well known to the past generation as the owner of overland stage lines to California and of steamship lines on the Pacific coast. The latter course was decided upon after long deliberation. This necessitated the preparation of an agreement with the company for funding the interest and other purposes. As none of the other members of the committee knew English well, Mr. Villard soon found that the principal part of the work devolved upon him. All through the winter of 1873, he had to spend much time in Frankfort, and the outcome of it was that he was commissioned to go to the United States as the representative of the committee, in order to have the agreement put in form by American counsel, and to attend in person to its proper execution in Oregon. He sailed for this purpose for New York with his family in April, 1874.

He there met Ben Holladay, with whom and his lawyer, S. L. M. Barlow, and United States Senator Mitchell of Oregon, Mr. Villard, with his counsel, Professor James B. Thayer of the Harvard Law School, had a protracted tussle over the details of the compromise. Holladay proved a genuine specimen of the successful Western pioneer of former days, illiterate, coarse, pretentious, boastful, false, and cunning. Mr. Villard soon discovered also that Holladay's reputed great wealth was fictitious, and that he was, on the contrary, in financial extremities. That a man of such character should have found it so easy to command millions of foreign capital was quite a puzzle and shock to him. The explanation of this, he afterwards discovered, lay in the bad faith which the business men on the Pacific coast had shown to the European bankers who placed the bonds.

Mr. Villard set out for Oregon in May, accompanied by Richard Koehler, a German railroad engineer, who had been appointed resident financial agent of the bondholders at Portland under the articles of agreement, and who has remained there ever since and is now (1900) the general manager of the Southern Pacific Railroad Company for its Oregon lines. Mr. Villard spent some weeks in California, investigating the physical and financial condition of the California Pacific lines built independently of the Central Pacific with the proceeds of securities also marketed in England and Germany. He discovered that one of these lines, against which $3,000,000 seven per cent. bonds had been sold, had not been built at all, and that the same company's ten per cent. income bonds, which were held by bankers abroad as prime securities, were really worthless. The discovery of this fraud added much to his standing in financial circles in Europe.

Mr. Villard started with his companion from San Francisco about the middle of July for Oregon, via the overland route, which then involved several hundred miles of stage travel. He was met at Roseburg, the terminus of the Oregon & California, by Ben Holladay and staff. What he saw of the scenery of Oregon on the way to Portland in the California, Yoncalla, and Willamette valleys, filled him with great enthusiasm. He was much impressed also with the evidences of agricultural wealth along the route. The picturesque situation and surroundings of Portland were an agreeable surprise to him, as was the unusual number of large and solid business buildings and of handsome private residences, together with the commercial activity of the place. He remained only long enough for the completion of his business, and for some short excursions into the interior of western Oregon. He did not dream of what was in store for him, and thought he should never see the town again. Soon after his return to the Atlantic coast, he sailed for Germany, to report in person as to the success of his mission. His lengthy printed report to the committee contained favorable accounts of his impressions of western Oregon, and expressed his belief in the promising future of the country and consequently in the certain improvement in the prospects of the bondholders. The greatest assurance of this lay in increase of population, with reference to which he made a proposition to the committee for the establishment of a bureau in the Atlantic States for the promotion of immigration to Oregon. His plan was approved, and he was commissioned to carry it out.

There was another reason for Mr. Villard's return to America before the close of 1874. Early in the preceding winter, he had joined, upon urgent invitation, another committee, formed for the protection of the bondholders of the Kansas Pacific Railroad Company, which had been obliged by the severe crisis of that year to ask for the funding of two years interest on three classes of bonds, representing a total of $12,000,000, most of which were held in Germany. He was chosen the delegate of this committee to conclude the funding arrangement with the company in the United States. On reaching New York, he found a despatch from the financial agent, Koehler, at Portland, reporting that an open conflict had already broken out between him and Ben Holladay about the execution of the compromise contract. It turned out that the latter, both because of bad faith and because of inability from want of means to make certain cash payments for which he had personally obligated himself, had violated the contract in several respects, and, moreover, that he was unwilling and unable to carry it out at all. It was discouraging to Mr. Villard thus to have a whole year's hard work so quickly brought to naught, but he resolutely exerted himself to find a way out of the complicated situation that had been created. It being out of the question to conduct litigation for the enforcement of the bond holders' rights at a distance of 7000 miles from Germany, on account of the great inconvenience and expense and long delay, he devised another compromise plan, under which Holladay would, for a certain consideration involving but a small sacrifice on the part of Mr. Villard's employers, peacefully surrender the control not only of the Oregon & California Railroad, but of two other transportation companies. One of these was an unproductive railroad, the Oregon Central, running fifty miles south-westerly from Portland, and the other a line of steamers of the Oregon Steamship Company, running between Portland and San Francisco, which formed the only regular connection that Oregon had with the rest of the world. Holladay had obtained from the same syndicate of foreign bankers that took the Oregon & California bonds an advance of a million dollars against Oregon Central bonds, with which money the unproductive mileage had been built, and also a large loan of $800,000 against the properties of the Steamship Company, not worth a quarter of the amount loaned. As in the Oregon & California case, Holladay accomplished all this through the dishonest collusion of the San Francisco agent of the German syndicate.

Holladay came East for the winter, as was his wont, and agreed to the proposition, holding out for a time for better terms than offered. As not only the consent of the Oregon & California, but of the two sets of creditors mentioned, was necessary for the new compromise, Mr. Villard went to Europe once more, in the spring of 1875, to procure it. He had to labor strenuously all summer and most of the fall, and journeyed repeatedly between Frankfort and London before the approval of all parties in interest could be secured. According to the agreement as finally formulated, Holladay was to retire entirely from the management of the three corporations, and surrender all his interest in their share capital to the bondholders and the two classes of creditors respectively. There was to be friendly cooperation in the management of the companies between the former and the latter. Though the Steamship Company showed fine earnings, its wooden vessels were old, small, slow, expensive to run, and fast wearing out, and it was evident that, in order to preserve its business, the line would have to be re-stocked with modern steamers. To this end, the plan provided that the bondholders should furnish the necessary new steamers, in consideration of which they were to become the owners of the entire steamship stock upon the extinction of the creditors claim, out of the earnings with which a considerable part of the debt had already been paid off. The bondholders also obtained an option to acquire the creditors claim against the Oregon Central for one-quarter of the amount of their loan. The combination was based on the theory that the three transportation interests could, by working together, by increasing their earning capacity by new outlays of capital for improvements and extensions, and gradually coming under the single ownership of Mr. Villard's employers, be so developed as to make good the greater part of their losses. The ways which he proposed to follow in order to reach this result were to attract immigration to Oregon, to extend the Oregon & California to a connection with the Central Pacific system, to add to the mileage of the Oregon Central sufficiently to make it a paying investment, and to equip the steamer line with larger, faster, and more economical vessels.

His faith in the future of western Oregon was so great—greater, as it turned out, than its resources warranted—that he fully believed in the possibility of the satisfactory solution of the difficult problem he had set for himself. In pushing his scheme, he found a general disposition, both in England and in Germany, to condition its acceptance upon his consent to make himself responsible for its execution by assuming the management of the companies. There was no escape for him from this, and he expected to have to remove to Portland with his family and to reside there for a number of years; but it happened otherwise. He was back in New York by November, 1875, and immediately began to carry out the new programme. Having already opened an Eastern immigration bureau for the Oregon & California in the preceding spring, and from it carried on a vigorous agitation for immigration to Oregon by advertisements in the press and the wide circulation of pamphlets descriptive of the State, written by himself, he began to look about for the purchase of a new steamer, and, early in the spring, bought the George W. Elder from the Old Dominion Steamship Company, and started her for San Francisco. Holladay had come East again to close the deal with him, but various informalities caused delays, so that Mr. Villard could not leave for the Pacific coast before the end of April, 1876. He arrived at Portland two weeks later, and was at once elected president of the Oregon & California and Oregon Steamship companies, and assumed charge of them and, indirectly, of the Oregon Central. He remained several months in Oregon, making himself thoroughly acquainted with the business of the companies, and gaining the confidence of the community at Portland and of the public of the State at large by a number of reforms in the management of the railroads, and especially by proclaiming his determination that they should no longer be used, as they had been under the Holladay régime, as instruments for political party purposes. He devoted all his spare time to seeing as much as possible both of the western and eastern parts of the State, and came away confirmed in his conviction of the great future of Oregon, and inspired by the fine opportunities his new position seemed to open to him.

Mr. Villard intended to settle in Portland with his family in the fall of the same year, but was detained at the East by unexpected complications in the affairs of the Kansas Pacific Company. Owing to the utter failure of the crops in Kansas for several successive years, there had been a further decline, instead of an improvement, in that railroad's earnings, so that the company was unable to comply with the terms of the funding agreement. With the consent of the Frankfort committee of bondholders, it was decided to place the property under a receivership. As the representative in America of the bondholders, Mr. Villard was proposed as one of the two receivers to be appointed. He was reluctant to accept in view of his newly assumed responsibilities in Oregon, but, as it was mainly through his influence that the temporary funding of interest had been conceded in Germany, he could not well decline, and, accordingly, his appointment as receiver was made by the United States District Court for eastern Kansas on November 3, 1876. One of his first duties was an inspection of the main line and branches in company with the officers of the railroad, which took him to Denver, as the western terminus of the road, for the first time since he had left the place in 1859. It was a strange turn of fortune that he who, only seventeen years before, had started from a town of perhaps a hundred frame shanties and log-houses containing not over one thousand inhabitants, to cross the Plains in a very humble way with an ordinary team, should now return riding on a special train behind a steam locomotive to a fine city of between thirty and forty thousand inhabitants. Another striking evidence of the wonderful change in that short span of time which he noticed on this trip was that, whereas in the summer of 1859 he had passed enormous herds of live buffaloes on his way to the Rocky Mountains, he now found that they were entirely extinct, and that their bones were being hauled eastward by the train-load for manufacturing purposes.

The proper care of the Oregon and Kansas Pacific interests kept him hard at work in the East during the following winter and the spring of 1877. In pursuance of his Oregon programme, he continued the propaganda for immigration, and kept pressing his European employers for capital for more new steamers and for extending the Oregon Central. But, notwithstanding all his arguments, based on the rapidly increasing ocean traffic and the growing unseaworthiness of the ships in service, he succeeded only in securing two additional steamers, one by purchase and another by construction the latter only by contract ing individually for it. He failed to obtain anything for railroad construction. As for Kansas Pacific matters, owing to the continued bad earnings, nothing could be done beyond organizing a strong American committee of bondholders to support him, and for cooperation with the German committee in formulating a plan of reorganization later on.

Early in the summer of 1877, he started with his family for a stay in Colorado, to be followed by one in Oregon. After passing some weeks in the former State, the party continued on to San Francisco. On arriving there, Mr. Villard found a despatch from the War Department advising him that a regiment of infantry was being hurried overland by fast trains on account of the outbreak of the Modoc war, and that his Steamship Company was desired to hold a ship ready for the immediate shipment of the regiment to Portland on its arrival on the coast. Mr. Villard himself superintended the necessary preparations, and crossed the bay to Oakland to receive the regiment, in one of the cold fogs peculiar to the California coast in the summer. He had caught a severe cold while in Colorado, which the exposure at Oakland developed the same day into pneumonia. He was able to dine with his family in the evening, but was unconscious before midnight. (Shortly after, there were fearful nights, in which Kearney's "sand-lot" anarchists tried to fire the city.) The disease attacked both lungs, and in a week his life was despaired of, and his wife had finally to telegraph her relations that the physicians gave no hope and did not expect her husband to live an hour. Skilful treatment and his strong constitution saved him, but he was so reduced by the long illness that the contemplated sojourn in Oregon had to be given up, and the family returned to New York.

While he was struggling for life, an opposition steamer was put on the line to Portland, with the result that there was a great falling off in the earnings of the Steamship Company, which greatly discouraged his foreign supporters, and made his task of obtaining additional capital from them much more difficult. His principals at first approved of the vigorous policy he adopted in meeting the competition, but, after the struggle had lasted six months, they required him to make a compromise with the opposition, which went into force in the spring of 1878. This clouding of the prospects of the Steamship Company led to friction between the Oregon & California bondholders committee and the foreign Steamship creditors over the payments for the new steamers, which culminated in the termination of the union of interests under the second Holladay arrangement of 1876. A dissolution of the relations established at that date was effected by mutual consent, the Steamship creditors assuming exclusive control of the line. The bondholders, however, exercised their option for the Oregon Central and raised money for its extension for fifty miles. Mr. Villard remained president both of the Oregon & California and of the Steamship Company, but it was clear to him from the beginning that these new relations would not long be maintained.

Unexpected complications also arose from his connection with the Kansas Pacific. This company had been trying for years, ever since its junction with the Union Pacific by its branch line from Denver to Cheyenne, to get a share of the Utah, Nevada, and California business, to which it asserted a title under the Act of Congress subsidizing both roads; but the Union Pacific had steadily refused to pro-rate with it. The Kansas Pacific then sought relief both in Congress and in the courts, and made such a strong fight that the stockholding interests controlling the Union Pacific, of which Jay Gould held by far the largest part, adopted the plan which he had conceived of getting control of the rival company. Jay Gould and Sidney Dillon, the Union Pacific president, commenced negotiations to that end with the group of St. Louis men who owned a majority of the Kansas Pacific stock, and with Mr. Villard as representative of the bondholders, but proposed such a reduction of the principal and interest of the bonds that their offer was rejected by the committee. Gould vainly tried to win Mr. Villard over by the guarantee of a profitable participation in the syndicate to be formed for the reorganization of the Kansas Pacific. After a pause, Gould reopened negotiations, and, after many conferences, formally accepted the terms agreed on by Mr. Villard and the New York committee of bondholders. He even went so far as to form a reorganizing pool for the securities of the company other than the first-mortgage bonds, including, most of the stock, and, as a pledge of good faith, made Mr. Villard custodian of the deposited values, worth, according to the market quotations, over ten millions of dollars. Notwithstanding this, Gould changed his mind, went back on the bargain, and tried to force the bondholders to submit to his former terms by opening an offensive campaign, in which the St. Louis directors, who had at first stood by the bondholders, now joined him.

In order to frighten the bondholders, he caused the construction of a new line from Cheyenne to Denver, by which he could compel the Kansas Pacific to share its mainstay, the Denver traffic, with the Union Pacific. He made the company apply for the removal of Mr. Villard as receiver, on the ground that he acted partially as the representative of the mortgage-bond interest, and he was successful in this move, as Mr. Villard could not and would not deny that he had favored the bondholders in every possible way, having been appointed their representative. Gould also got the portion of the press which he influenced to heap slander and abuse upon Mr. Villard and the New York committee. But they and the German committees stood firmly together and ordered foreclosure proceedings to be commenced. Gould's ulterior object was, as he had repeatedly avowed to Mr. Villard when he tried to win him over, the consolidation of the Kansas Pacific with the Union Pacific by exchanging stock for stock, and issuing consolidated Kansas Pacific mortgage bonds against the other securities in the pool. As he had bought many millions of Kansas Pacific stock from the St. Louis directors and in the market below 12%, and the Union Pacific stock then ranged in the market between 60 and 70, and as the issue of the new bonds would also yield him a large profit, he played really for a harvest of millions. Upon the setting in of the great boom in Wall Street in 1879 with the approaching resumption of specie payments, Gould saw the great opportunity it offered for floating new securities, and, loath to lose it, made up his mind to come to terms with the bondholders.

One day, early in 1879, he appeared in Mr. Villard's office and told him that he was tired of fighting, and that he was ready to accept the committee's conditions. This time he was true to his word, and the result was, as he had anticipated, an extraordinarily rapid rise in Kansas Pacific securities. Under the terms of the settlement, two of the three first-mortgages were recognized in full, and of the third only the interest was reduced from seven to six per cent. When the receivers were appointed, the bonds under the former were selling at 50, and those under the latter below 30. They bounded up in jumps to above par; the last-mentioned bonds, with nearly six years unpaid back interest, rose even to 140. Gould having purposely let his intention to consolidate the Kansas Pacific with the Union Pacific be known, the stock of the former, which had sold as low as 3 less than four years before, was quickly quoted as high as the latter and followed it far above par. Gould, not long after the consolidation, sold all his stock. He was understood to have cleared more than ten millions of dollars by the operation, which was one of the principal episodes in that speculative time. The triumphant issue of Mr. Villard's contest with that most unscrupulous and most dreaded machinator, and his fidelity to his employers, raised him to a position of influence in American financial circles, while it added greatly to his reputation abroad.

Map from the Memoirs of Henry Villard, Volume 2 (retouched version).png