 | Banking fueled railroading. John Stewart Kennedy's legendary partnership with James J. Hill achieved its heights with the construction of the Canadian Pacific. Kennedy had established a reputation for being able to save troubled railroads.
Kennedy's trajectory began a generation earlier. His star rose as a commission agent, buying supplies for railroads under construction in the early 1850s. He became an independent financier and private banker, brokering the sales and purchases of bonds and stocks. Professional fees were the foundations of his personal wealth. At times he represented both sides of huge transactions. He also profited from initial public offerings of the lines he both represented and provided to because he built a wide network of personal contacts in New York and Glasgow.
As the St. Paul, Minneapolis and Manitoba was being reorganized yet again, Kennedy served as agent for the railroad and also for groups of investors from The Netherlands who bought heavily into this high-yield, high-risk venture. Inevitably, he was sued.
For he was the principal target, with the Associates second. As a trustee, he was legally and morally obligated to protect the bondholders' interests by securing the maximum price for their bonds. The outstanders alleged that he had compromised this trust by colluding with the Associates to artificially depress the price.
Kennedy was deeply upset, suffering from painful headaches that no mere legal vindication could assuage. A trustee, a fiduciary for the beneficiaries of the trust, was held to a higher standard of morality than that of commerce. And his success as a private banker rested on his reputation for honesty; to inpugn that was to strike at the very heart of his career. (page 70)
If you know Alan Greenspan's essay on integrity in Capitalism: the Unknown Ideal, then you can appreciate Kennedy's life as the subtext of Atlas Shrugged: the construction of transcontinental railroads by debentures, coupons, and the risk of borrowing short to lend long.
No one would settle an area without rails, but no railroad could run without people to provide freight. Railroads have to go someplace and often lines only went to the next town. The key to growth in the 1850s in the Ohio Valley was to connect those many small lines into longer ones: the Cincinnati & Lafayette becoming the Indianapolis, Lafayette and Cincinnati. Eventually, unified lines connected points so distant that time zones were invented.
In addition to being a trustee for several railroad mortgages, at the time of the Panic of 1873, Kennedy served as a director or officer on four railroads. He had already done so -- and would again. His interests ranged from Texas to Canada.
This brief book -- barely 200 pages; heavily footnoted -- is dense and thematic. Often, the narrative skips years, and on solid conceptual motives.
Having bought heavily in the trough of the 1873 depression and gained spectacularly from the rising market of the late 1870s, Scottish American disposed selectively of various securities in 1880, fearing another market downturn was due.
John Stewart Kennedy was no raider. His patience spanned years easily. He bought wisely and sold well. He took the long view, avoided risk and haste. He managed multiple complex projects simultaneously. The decade 1880-1890 was the epitome of railroad construction. Kennedy's insight, perseverence, communication skills, and personal wealth were paradigmatic of that great railroading age.
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The Man Who Found the Money: John Stewart Kennedy and the Financing of the Western Railroads by Saul Engelbourg
