E

XXII

THE DECISION ON THE UNION PACIFIC

MERGER 1

VER since the decision in the Northern Securities case dissolving the merger of the Hill lines, it has seemed probable that an attempt would be made to break up the equally powerful Harriman system in the Southwest. It is true that the facts in the two instances were not altogether the same. The component parts of the Harriman lines were not competitors before their union in any such obvious way as the Great Northern and Northern Pacific had been, while the combination of the Union and Southern Pacific was not accomplished through a holding company formed for the purpose, but came about through a stock purchase by a genuine operating company. Doubtless for these reasons prosecution was postponed until less equivocal cases had been disposed of. The delay had the advantage, as matters turned out, of allowing a prior investigation by the Interstate Commerce Commission; so that the Government was enabled to incorporate in its record a large amount of evidence presented in January and February, 1907, without the expense of taking the testimony itself.2

The suit for dissolution under the Sherman law was finally brought by the United States before the Circuit Court for the District of Utah. The Government named as defendants the Union Pacific and its subsidiary companies, the Southern Pacific, the Santa Fé, the San Pedro, Los Angeles, and Salt Lake, the

1 From the Quarterly Journal of Economics, Vol. XXVII, 1913, pp. 295–328. The legal aspects of combination and the financial history of the Harriman system will be outlined in Ripley's Railroads: Finance and Organization. (In preparation.)

2 References, unless otherwise stated, are to the record submitted to the Supreme Court. The testimony and exhibits in the Merger case fill thirteen volumes and constitute an important addition to the source material on railroad transportation.

Northern Pacific, the Great Northern; certain individuals, Edward H. Harriman, Jacob H. Schiff, Otto H. Kahn, James Stillman, Henry H. Rogers, Henry C. Frick, and William A. Clark; and the Farmers' Loan and Trust Company, the depositary of the San Pedro shares under the trust agreement of 1902. It asked decrees forbidding the Union Pacific, Oregon Short Line, and Oregon Railroad and Navigation Companies from voting shares of the other companies named in the petition, and also decrees enjoining these other companies from recognizing any shares which the Union Pacific and its subsidiaries might happen. to hold. Briefs were filed by P. F. Dunne and N. H. Loomis for the Union Pacific and its subsidiaries and for the Southern Pacific. A separate brief was submitted for Mr. Frick, and a memorandum in behalf of Messrs. Stillman, Schiff, and Kahn. The Government's case was directed by Frank B. Kellogg and Cordenio A. Severance, with the Attorney General's assistance in the preparation of the brief. All of these gentlemen had been employed before in prosecutions under the Sherman law, and Messrs. Kellogg and Severance had tried the case against the Southern Pacific in the Circuit Court. Mr. Severance, however, bore the burden of examining and cross-examining witnesses in the case at bar, and was the best informed, as he was perhaps the ablest, of the Government counsel.

The original report of the Interstate Commerce Commission had dealt with the Harriman lines as a great combination of competing railroads.1 The Circuit Court rendered its decision on June 24, 1911, and contrary to general expectation this proved unqualifiedly adverse to the Government's contentions. The case turned on the question of competition. Two judges ruled that the Union Pacific and the Southern Pacific were connecting and only incidentally competing lines.2 Judge Hook filed a dissenting opinion. Appeal was taken to the Supreme Court in October of the same year.

The facts in the case seem reasonably clear. The so-called Harriman group of railroads in 1912 comprised a mileage of

1 12 I. C. C. Rep. 277.

2 188 Fed. Rep. 102.

about 18,500 miles. It stretched from Omaha, Kansas City, and New Orleans on the east to Los Angeles, San Francisco, and Portland on the west, and by means of the Morgan Steamship Line it reached New York. In addition it owned a majority of stock in the Pacific Mail Steamship Company, which carries freight and passengers from the Pacific coast to the Orient and to Panama. Of the total mileage west of the Mississippi-Missouri river and south of the Northern Pacific Railroad the Harriman management controlled 19 per cent. Finally, through stock ownership in the Illinois Central, the Chicago and Alton, and other lines, and by contract with the San Pedro, Los Angeles, and Salt Lake, it possessed in varying degree influence over connecting and competing roads.

The different parts of the system were held together by a rather complex system of intercorporate stockholdings. The keystone of the structure was the Union Pacific Railroad, which held in its treasury all the stock of the Oregon Short Line, most of the stock of the St. Joseph and Grand Island, and considerable quantities of the shares of the Illinois Central and of the Chicago and Alton. The Oregon Short Line in its turn owned half of the stock of the San Pedro, Los Angeles, and Salt Lake, substantially all of the stock of the Oregon-Washington Railroad and Navigation Company, 46 per cent of the shares of the Southern Pacific Company, and interests in the Baltimore and Ohio, New York Central, Chicago and Northwestern, and other lines. The Southern Pacific Company, most important of all the Union Pacific subsidiaries, was a holding company, which owned substantially all the stock of the Central Pacific, the Southern Pacific Railroad, the Galveston, Harrisburg, and San Antonio and other roads in the Southwest, the Southern Pacific Railroad Company of Mexico, the Oregon and California, and other less important companies. The Southern Pacific Company also leased and operated the Central Pacific, the Southern Pacific Railroad, the Oregon and California, and the Southern Pacific Coast Railway. Including the Illinois Central the securities of the Harriman companies outstanding aggregated some $2,600,000,000, of which $1,650,000,000 were in the hands of the public.

Three periods may be segregated in the growth of the system.

The shares which the Union Pacific possessed in the capital of the Oregon Short Line, the holdings of the Short Line in the Oregon-Washington Railroad and Navigation Company, and the holdings of the Southern Pacific Company in the railroads of the Southwest and in the Central Pacific represented the normal growth of the Pacific railways which had been chartered in 1862 and 1864. The construction of the Short Line was undertaken by Union Pacific interests in order to secure a connection with the Pacific coast, and was financed in return for the stock of the company and a portion of its bonds. The Oregon Railway and Navigation Company 1 was purchased for the same reason, under the very nose of the Northern Pacific. In like manner, the parties which originally built the Central Pacific constructed additional track southward along the Californian coast, and then east through Arizona, New Mexico, and Texas. As a pure matter of convenience they organized different companies as they went along, and finally welded all together by means of stock control. It was in the second period that the control of the Salt Lake Company by the Union Pacific and Oregon Short Line was secured, and then also that the Union Pacific bought its holdings in the Southern Pacific. About the same time shares were purchased in the Northern Pacific which were later sold again. The third period began with the dissolution of the Northern Securities Company and represents the result of reinvestment of the sums secured from the sale of Northern Pacific and Great Northern stock. Among other securities certain shares in the Santa Fé were obtained. For the purposes in hand we have to deal mainly with the second group of purchases, as these, with the addition of the Santa Fé operation, were the basis of the Government suit. The characteristic feature of the earlier and later development was the acquisition of connecting lines; only in the middle period, if at all, was competition suppressed.

It is a matter of common knowledge that as late as 1901 the Union and Southern Pacific companies were entirely independent. Of the original builders of the Southern Pacific, Hopkins had

1 Later expanded into the Oregon-Washington Railroad and Navigation Company.