Villard thus came to control the entire Northern Pacific system and, backed by the Deutsche Bank of Berlin and other German and Dutch interests, at once began an aggressive policy of expansion and development. The business of the system developed rapidly. The main line through to the Pacific coast was now in operation, and the entire system amounted to about 2300 miles of road. But Villard followed a financial policy which was not sound and paid dividends without justification. In a short time, the company consequently found itself financially embarrassed.
As a result of financial losses in 1884, Villard was obliged to retire from active control of the properties. But in 1887 he once more got possession of the Northern Pacific with German capital and succeeded in arranging a lease of the Oregon Short Line, which had been developed by the Union Pacific interests, embracing a cross-country road from its main lines in Wyoming northward into Oregon and Washington. At the same time, the interest of the Transcontinental Company in the Oregon Railway and Navigation Company was linked with the Oregon Short Line Company. These transactions, however, still left the Transcontinental Company in control of the situation, as it retained its majority ownership of Northern Pacific Railroad stock.
For the next few years, the Northern Pacific did not follow a policy of rapid expansion. Other trunk lines, such as the Union Pacific, Rock Island, Santa Fe, Burlington, and North Western, were all growing and keeping pace with the rapid settlement of the West; but the Northern Pacific in these years simply rested content with its position as a single track transcontinental route having but few branches. Its only important extension was made by acquiring the Wisconsin Central Railroad, which gave the company a line between St. Paul and Chicago and a valuable and important entrance into the latter city. It was expected that, with this accession, the affairs of the company would be permanently established on a sound basis, but the over-liberal policy of paying out practically all the surplus in dividends was continued in the face of large increases in fixed charges.
Early in 1892, it began to be rumored that the Northern Pacific was not in so easy a financial position as had been assumed. The stockholders took alarm, and the committee which was appointed to investigate the situation discovered a deplorable state of affairs. As a result of the severe criticism of Villard’s policy, steps were at once taken to oust him from control, but without success until June 1893. Two months later, receivers were appointed who discovered that the company was insolvent and had no funds to pay quickly maturing obligations. Receivers were appointed also for most of the branch lines, including the Wisconsin Central system. The Oregon Short Line, which was tied through guarantees with the Union Pacific although leased to the Northern Pacific, was involved in the general crash but was later separately reorganized.
To rehabilitate the Northern Pacific Railroad effectively was a difficult problem. Its debt was enormous; its roadbed and rolling stock had been neglected; and, as a result of the recent crash, its valuable feeders on east and west, the Wisconsin Central, and the Oregon properties were removed from its control. Besides these adverse conditions, competition of a serious nature was looming up. James J. Hill had for many years been quietly developing the Great Northern Railway. This great system he had financed in an extremely conservative manner; he had extended it through territory where construction costs were low, and he had secured control of branches and feeders which might have come under the sway of the Northern Pacific had that company been more farsighted. Hill had operated his road from the beginning at very low cost; he had kept its credit high, and even in the period of financial depression he had reported large profits and had paid substantial dividends on his stock. With such a competitor in the field, it really looked for a while as though the Northern Pacific could have no future whatever.
Finally, in May, 1895, a plan sponsored by Edward D. Adams, representing New York interests and those of the Deutsche Bank of Berlin, proposed a practical merger with the Great Northern Railroad Company: the old stock and bondholders were to make all the sacrifices and to supply all the new capital, and the Great Northern was then to be presented with half the stock of the new company, in consideration for which it was to guarantee the new Northern Pacific bonds.
The situation was somewhat similar to that which existed in New York State as early as 1868 when Commodore Vanderbilt had achieved his great reputation as a wizard at railroading by acquiring the Harlem and Hudson River railroads and by forcing the New York Central lines to terms. James J. Hill had become a modern wizard, and the only hope for the Northern Pacific seemed to be to lay the road at his feet and ask him to do with it what he had done with the Great Northern–make it a “gold mine.”
This plan, however, met with too much opposition and was abandoned. During the following year a new plan, backed by both the American and the German interests, secured the strong cooperation and endorsement of J. P. Morgan and Company. This was the first instance of Morgan’s entry into railroad reorganization in the West. During the previous few years he had been increasing his reputation as a reorganizer of Eastern railroad properties, and by this time he had successfully organized or was rehabilitating the Erie, the Reading, the Baltimore, and Ohio, the Southern, and the Hocking Valley systems. But he had kept clear of the far Western field and had definitely refused to reorganize the Union Pacific on the ground that its territory was too sparsely settled and that there was little hope for its future, especially as its partial control by the United States Government made any reorganization extremely difficult. The new plan for the
Northern Pacific was carried out with no regard to the Hill interests the old stockholders were heavily assessed; all bondholders were forced to make sacrifices; the Wisconsin Central lines were entirely eliminated and separately reorganized, and the Oregon lines were dissociated from the Northern Pacific and afterward returned to the control of the new Union Pacific.
While the new Northern Pacific as reorganized in 1898 came directly under Morgan’s control and was immediately classed as a Morgan property, it did not remain exclusively such for very long. In the promotion and development of the Great Northern system; Hill had hitherto maintained an independent position so far as banking alliances were concerned, but he now began to develop closer relations with the Morgans and became heavily interested in the First National Bank of New York, an institution which for many years had been more or less directly identified with the Morgan interests. On more than one occasion thereafter the banking firm of J. P. Morgan and Company acted as financial agent for the Great Northern.
Soon after the reorganization of the Northern Pacific, it became known that Hill had acquired an important interest in the property, and as time went on this interest was substantially increased. Within a year or two, the Northern Pacific began to be classed as one of the Hill lines. With a substantial Hill representation on the board of directors and a managerial policy which was clearly inspired by Hill, the company now entered upon a new stage in its career.