This past Sunday was the 174th anniversary (February 20, 1848) of the birth of Edward Henry Harriman.
Early career and start in railroading
Born on Long Island, New York, Harriman was the son of a minister. Although he was a very good student, he left school in 1861 at the age of 13 to work on Wall Street. Harriman began as an office boy, but worked his way up to be the managing clerk of an investment firm. Thanks to a loan from his uncle, Harriman purchased a seat on the New York Stock Exchange in the summer of 1870. At the age of 22 he established the firm of E. H. Harriman & Company and became a successful investor.
Harriman began investing his own money in railway stocks, and even married into a railroad family. In the late 1870s, he met Mary Averell (whose father, William J. Averell, was president of the Ogdensburg & Lake Champlain Railroad Company). Harriman and Mary Averell married in 1879. He joined the board of directors of his father-in-law’s railroad and in 1881 (at the age of 33) he bought a controlling interest in the Lake Ontario Southern Railroad, which consisted of 34 miles of track in upstate New York. The railroad was in poor condition, but he reorganized it and renamed it the Sodus Bay & Southern Railroad.
He then offered to sell his strategically important railroad to the competing Pennsylvania and New York Central railroads. He played them against each other and when the bid was high enough he sold the line to the Pennsylvania Railroad at a significant profit. This was the start of Harriman’s career as a rebuilder of bankrupt railroads.
Beginning with the Sodus Bay & Southern Railroad, Harriman became an investor in, and manager of, railroads. In the media of the day, his name became synonymous with “railroads.” He developed several principles to maximize his profits and those of the railroads he invested in. In Harriman’s view, a railroad had to have “excellent rolling stock and a well-maintained right-of-way.”
His principles, ways of conducting business and his ability to generate profits led to Harriman’s election to the board of the Illinois Central Railroad in 1883. In 1888 he developed a very centralized management structure for the railroad, a structure that he duplicated at other railroads over the years.
The Union Pacific
The (financial) Panic of 1893 negatively impacted most U.S. businesses for several years. Harriman was nearly 50 years old in 1897 when he became a director of the Union Pacific Railroad, which was then in receivership. In 1898, with the financial assistance of Kuhn, Loeb & Co., Harriman and a syndicate acquired the Union Pacific.
Harriman’s key business achievement was the reorganization and rebuilding of the Union Pacific. By May 1898, he was chairman of the railroad’s executive committee, and from that time until his death, “his word was the law on the Union Pacific system.” Following his railroading principles, Harriman made a strenuous, daylight-hours-only trip from the Missouri River to the Pacific on the railroad in 1898. It was said that he inspected “every mile, every station, every flatcar and engine.” One railroad superintendent stated that “he saw every poor tie, blistered rail and loose bolt.”
Under Harriman’s leadership every problem on the railroad was catalogued and fixed, and within months he had the ailing railroad in excellent health. Harriman reduced the company’s debt and upgraded its equipment, investing nearly $50 million by 1904.
Investments in other railroads
Having successfully rebuilt the Union Pacific as well as bringing it out of bankruptcy and into prosperity, Harriman utilized his position to control other railroads. He joined several investment syndicates that sought to purchase, improve and sell railroads at a profit. In 1899 he and others acquired the Chicago & Alton Railroad. Harriman’s principles were employed to increase the railroad’s profitability, attracting additional passenger and freight traffic and improving employee productivity. He then became a member of a group that reorganized the Kansas City, Pittsburgh & Gulf Railroad, again increasing its earnings and productivity. Also in 1899, Harriman attempted to merge the Chicago, Burlington and Quincy Railroad into the Union Pacific.
Although the attempt failed, Harriman was successful in purchasing a majority interest in a competing railroad (the Northern Pacific Railway). However, the unsuccessful fight with James J. Hill over the Burlington and to control the Northern Pacific led to “one of the most serious financial crises ever known on Wall Street.”
Hill was president of the rival Great Northern Railway and one of the key figures in railroading at that time. Despite their fight to control the Burlington, Hill gave Harriman a seat on the board of the Northern Securities Company, a holding company for stocks of the Great Northern, Northern Pacific and Burlington railroads. (To read a two-part article on Hill, follow this link and then this one.)
Harriman gained control of the Central Pacific Railroad in 1900-01. It was the western end of the transcontinental railroad that linked the Union Pacific with the West Coast. He became president of the Central Pacific in 1903.
From 1901-09, Harriman was also the president of the Southern Pacific Railroad, a southwestern transcontinental. In 1904 he invested more than $22 million in the Central Pacific and $70 million in the Southern Pacific to improve the railroads.
Legal issues and a presidential rebuke
The U.S. Supreme Court found Hill’s Northern Securities Company guilty of monopoly in 1904. It was ordered to divest its Great Northern and Northern Pacific stock. However, the sale of Harriman’s interest earned the Union Pacific a profit of nearly $70 million.
Harriman’s business methods had generated bitter criticism from the media and others over the decades. However, in 1907 the criticism may have reached its zenith when he was denounced by President Theodore Roosevelt.
A recession threatened the U.S. economy in 1908. A number of railroads faced bankruptcy, including the Erie Railroad. The Erie was an important, but underperforming Northeastern railroad. However, Harriman invested $5.5 million in the Erie and kept it out of bankruptcy, which also generated a stock market rally on Wall Street. (To read a FreightWaves Classics profile of the Erie Railroad, follow this link.)
Death and legacy
In 1909 Harriman traveled to Europe. He was seriously ill, and returned the day before his thirtieth wedding anniversary. He died at the age of 62 on September 9, 1909; the likely cause of death was stomach cancer.
When he died, Harriman’s influence was estimated to extend over 60,000 miles of track. He controlled the Union Pacific, the Southern Pacific, the Saint Joseph and Grand Island, the Illinois Central, the Central of Georgia, the Pacific Mail Steamship Company, and the Wells Fargo Express Company.
Although a very controversial figure (as most railroad magnates were in the last quarter of the 19th century and the first quarter of the 20th century), Edward H. Harriman was also one of the leading builders and organizers “in the era of great railroad expansion and development of the West during the late 19th century.”
A financier and railroad leader, Harriman certainly made money for himself and his associates. But he also improved all the railroads he invested in and led. Some of his peers had done the opposite – siphoning money from the railroads they controlled to increase their personal fortunes while weakening the railroads.
Prior to his death, the Interstate Commerce Commission had attacked Harriman’s control of the Southern Pacific. In 1913, a Supreme Court ruling forced the Union Pacific to sell its Southern Pacific stock. (However, the two railroads were reunited decades later – on September 11, 1996 – after the Surface Transportation Board approved their merger.)