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November 1999 -- Objectivists too often reduce the life and achievement of James J. Hill to a single debating point: He built a transcontinental railroad without government subsidies, and it was the only transcontinental railroad that did not go bankrupt. It is a statement that completely fails to capture the magnitude of Hill’s efficacy and the complexity of his career. To give an accurate picture of those, one must look far more closely at his life, and, for that reason, this column will examine only Hill’s first great success: the Manitoba.
James Hill was born in 1838, near Guelph, Ontario. At 17, he left Canada and moved to the head of navigation on the Mississippi River: the bustling city of St. Paul, Minnesota. Says one biographer: “He took with him all the tools he would need to succeed in America; a quick intelligence, self-sufficiency, genuine courage, an engaging personality, a fierce ambition, and a remarkable work ethic” (Michael P. Malone, James J. Hill: Empire Builder of the Northwest, p. 10).
In his adopted city, Hill worked for a succession of employers, the last being the wholesaling firm of Borup and Champlain, where he labored during the Civil War. “He came to be regarded locally as the prime reason for Borup and Champlain’s reputation for efficiency” (Malone, 14). It was a reputation dearly bought. “He worked incredibly hard, sometimes laboring late into the night, falling asleep at the desk, then getting up for a swim in the river and a cup of black coffee, then going back to work” (Ibid.).
When Hill arrived in St. Paul, its leading business was the fur trade, and among its leading citizens was Norman Kittson, the local forwarding agent for the Hudson Bay Company. But Kittson also brokered furs for independents, and, when HBC complained, he simply set Hill up in the business and joined him as a partner. Then, in 1865, Hill became the St. Paul agent for the Northwest Packet Company, the leading steamboat company of the upper Mississippi, and a year later, he formed a partnership that became the exclusive forwarding agent for the St. Paul and Pacific Railroad. By 1866, Hill was moving goods both ways. Raw materials such as flour and furs were sent south and east, and finished goods-from tea to gin and pork to poetry-went north to the back country of Minnesota and Canada.
In 1869, while thoroughly involved in the shipping business, Hill and a man named Griggs formed a partnership to deal in fuel, first cordwood and later coal. The partners brought coal from the east both by rail and Great Lakes shipping, and they eventually commanded one-third of the coal that came by the latter means.
Meanwhile, in 1870, Hill and Griggs got involved in river shipping, using rafts to float goods up and down the Red River of the North. This river, which begins at Breckinridge, forms the Minnesota-North Dakota border, flowing north to St. Vincent on the Canadian border and then proceeding on to Winnipeg. In 1871, the year that the St. Paul railroad reached Breckinridge, Hill and Griggs launched a low-draft steamship to carry passengers and freight. As a result, Hill’s enterprises--some in St. Paul and some on the Red River—bracketed the St. Paul and Pacific Railroad, and he studied the company constantly.
Herein, one may surmise, lay the foundation of Hill’s future success. Of all America’s great railroad builders, he alone came to it as a merchant and shipper. The rest were financiers. Hill, in effect, had been a customer. He knew in his bones what railroads were for. He knew what they must be to perform their functions successfully. And what they must be was everything the St. Paul and Pacific Railroad was not.
First known as the Minnesota and Pacific Railroad, the line had been carted by the territorial legislature in 1857 as an east-west line to connect St. Paul with Breckinridge and St. Vincent. Like other lines, the Minnesota and Pacific could obtain large grants of land if it were built to schedule. During the ensuing three years, however, the only money made from the line was by self-dealing: The owners hired themselves as building contractors and paid themselves inflated sums to do little or no work. The state foreclosed in 1860, and the firm was reorganized in 1862 as the St. Paul and Pacific Railroad, then reorganized again as the First Division of the St. Paul and Pacific Railroad.
But as soon as the First Division was six months in arrears on interest payments, the New York financier John S. Kennedy, acting on behalf of a committee of Dutch bondholders, invoked a receivership clause. In 1872, Judge Dillion of the United States Circuit Court appointed as receiver one John Farley, a semi-literate, semi-senile man in his sixties whose plodding ways apparently suggested to the court that he would “conserve the assets” of the St. Paul.
Obviously the St. Paul and Pacific was in bad shape. But Hill understood its potential. Now that the railroad had reached the Red River, it could eliminate river traffic for the fertile Red River valley simply by sending an extension north, parallel to the river. In Hill’s reckoning, the St. Paul could be bought for $5.5 million and would be worth, in the near term, $19.3 million: two-thirds in track and equipment, one-third in land grants that would accrue if the railroad met the legislature’s construction schedule. Annual earnings thereafter, he put at $600,000 to $800,000.
In 1873, Hill, Kittson, and Kittson’s boss, Donald Smith (head of the Bay Company in Canada), evolved a strategy for taking over the St. Paul. From 1874 to 1876, the “associates” (as they were known) laid plans to buy the steeply discounted, Dutch-held bonds. But though the three were well-to-do, they did not command the resources required to seize control of the St. Paul, and they therefore brought in as a fourth Smith’s cousin, George Stephen, president of the Bank of Montreal.
Early in 1876, Hill crossed the Rubicon, withdrawing from his existing businesses to such an extent that, if he did not get the St. Paul, he would be set far back in his affairs. The following January, Hill and Kittson made a formal offer of $3.5 million, sure to be rejected but something to get the process started. In the spring, Stephen came aboard for good but failed to raise the needed funds on a trip to England. That was not all bad news, however. For the Dutch, who followed Stephen’s expedition, now knew how little interest their enterprise generated. On January 5, 1878, Kennedy mailed another proposal to the Dutchmen, and on March 13 a final agreement was signed.
Once the associates held the St. Paul’s bonds, they were eager to get to work. The legislature re-set the construction deadlines, giving a hard-charging contractor a chance of meeting them. But Farley was still in control, and he balked at turning construction over to the associates. As it became obvious Farley would not meet the land-grant
Farley became furious (and later vindictive), but he finally stepped aside. In the months that followed,
Hill seemed to be everywhere…Autumn came early in 1878, bringing with it both
snow and floods, which delayed construction, and equipment failures such as wind-
mills that locked and deprived locomotives of water for motive power. Keeping
work crews in the field, not to mention keeping them working at capacity, proved
especially difficult. Hill alternatively cajoled and coerced them.
He learned many of the men’s names and would walk along the grades calling out to
them familiarly, even spelling them at their picks and shovels while they retired for a
cup of hot coffee, a gesture he would employ for the rest of his career. On the other
hand, he routinely fired shift bosses when they failed to perform to satisfaction.
The deadlines were met.
On May 23, 1879, the St. Paul, Minneapolis, and Manitoba Railway Company was created, with Hill serving as general manager of the executive committee. Not only did the company receive its millions of acres, when two splendid harvests followed completion of the line, the firm was able to sell homesteads at $5.00 an acre rather than the $2.50 Hill had originally projected.
The foregoing account of Hill’s early career raises some interesting lines of thought.
1) After Hill had built the Manitoba into a thriving regional railroad, reaching westward to Minot, North Dakota, he built two westward extensions: One of 400 miles to the copper-mining country of Montana, and a second of 500 miles that finally reached Seattle. And it is true that he built these extensions without federal land grants.
But the regional carrier from which the transcontinental extensions proceeded had depended fundamentally on land grants. Thus, to say Hill built without government help sets one up for the following rebuttal:
One of the hoariest, and most mischievous, of all the many legends surrounding
Hill is the story, still widely repeated today, that rhapsodizes about how he built
a great trans continental line without the benefit of a federal land grant. This is
considerably less a half-truth. In fact, the Minnesota and Pacific received an
initial grant of 2.46 million acres from the legislature, lands that the legislature
had received from Congress…[And] unlike the lands bestowed on the transcon-
tinental roads, lands that consisted heavily of far-off and arid stretches, this grant
lay near at hand, mostly in the humid and fertile Red River Valley. Thus did the
roots of the great Hill fortune sprout, like those of so many other “self-made men”
who “built the West,” from the rich seedbed of federal subsidy (Malone 32-33).
Instead of damning the role of land grants in American railroading, would it not be better to ask whether they were deserved? After all, they are “subsidies” only if one believes the state owns all land not belonging to private citizens, a view Ayn Rand rejected. In Lockean terms, the men who sent railroads shooting through empty lands can be seen as people who made those lands valuable—not to the same extent as homesteaders, but to the extent that they made homesteading possible. Should they not have received some means of collecting on the value they created?
A major problem here is that the value created by a rail line spreads out like a force field, diminishing with distance. Another is the degree to which the value depends on having branch lines and connecting lines. The problem, then, would be to create a structure of rights that recognized what the railroad men did and did not do.
This is speculation, of course. But by tackling the problem in this fashion, one can rebut the charge that Hill’s fortune sprouted from “the rich seedbed of federal subsidy.” One can also view the financial collapse of transcontinentals as a consequence not of “federal subsidy” but of misdefining the railroads’ rights and thus creating incentives for those malinvestments that were corrected during recessions and depressions.
2) A second thought-provoking aspect in young Jim Hill’s career involves ethics. When the four associates divided up their rights to future stock, they gave each man a one-fifth portion, with the last fifth going to George Stephen as the lure by which he might bring aboard another partner. This “fifth fifth” as it became, went to non other than John S. Kennedy, the Dutchmen’s agent. On the face of it, that created a blatant conflict of interest, and even the offer of such an inducement might be considered ethically wrong.
Evidently, the participants did not see it that way. Kennedy was being paid by the Dutchmen to get the best available deal, and he did that. But since the Hill group also benefited, why should they not pay him as well? Kennedy may have seen his role more as a mediator than as an agent, being paid by both sides to do the reasonable thing.
Objectivists can learn a lesson in ethical empiricism from these two aspects of young Jim Hill’s career. To an extent, it is possible to deduce the proper actions of government from individual rights. But when our deductions contradict the judgments of an age’s individualists, we owe it to them to check our premises. Likewise, we can deduce the leading virtues, but when our ideas of proper business behavior are not those of an age’s great achievers, we owe it to them to ask, in Aristotelian fashion, whether theirs is perhaps the judgment of the best and wisest.
This article was originally published in the November 1999 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.
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