The Bee Line Railroad Financing Dilemma: Loss of Local Control

Indianapolis and Bellefontaine Railroad 1853 advertisement-schedule
Indianapolis & Bellefontaine RR train schedule, printed in Calvin Fletcher’s diary, courtesy of the Indiana Historical Society.

See Part I to learn about the origins of the Bee Line and the men who brought it to life.

The Bee Line Railroad almost never was. At the dawn of the Midwest railroad era Hoosiers were slow to embrace what became the technological marvel of the 19th century. Dependent on state funds or newly emerging Wall Street for cash, initial railroad financing prospects looked dim. Instead, canals were the preferred method of transportation in the mind of the public.

The State of Indiana began planning for a litany of “internal improvements” from its inception in 1816.  In his 1827 message to the General Assembly, Governor James B. Ray (1825-1831) admonished the legislators, noting that railways could convey “equal burdens to any that can be transported on a Canal . . . and with double the velocity.” However, at the time, the legislature was not moved by his argument.

Indiana Governor James B Ray and Wall Street financier James F. D. Lanier
(L) Governor James B. Ray, courtesy of the Indiana Historical Society (R) James F. D. Lanier, Sketch of the Life of J. F. D. Lanier (self-published, 1877).

Finally, as interest in railroads began to percolate by 1832, legislators approved charters for eight – including the Madison, Indianapolis and Lafayette Rail-Road Company. Prominent among its board members was Madison banker James F. D. Lanier, destined to become the leading Wall Street financier of virtually all Midwest railroad era lines during the mania of the 1850s, including the Bee Line.

More than thirty Indiana railroads were chartered between 1832 and 1838. Nonetheless, attempts to lure private capital via stock subscriptions fizzled. Only a mile and a quarter of experimental track had been laid near Shelbyville by the end of the decade.

Madison and Indianapolis Rail Road 1850 Annual Report Cover
Annual Report Cover, Madison and Indianapolis Rail Road Company, 1850, courtesy of the Indiana State Library.

Indiana’s infatuation with canals was reflected in the Mammoth Internal Improvements Act of 1836, which appropriated one-sixth of the state’s wealth for the effort. Of eight state projects funded, only one was for a railroad – what became Indiana’s first: the Madison and Indianapolis Railroad [M&I].

Much of the debt to fund these efforts was taken up by the financial barons and financiers of Europe. Rolling mills and metal fabricators in the United Kingdom (UK) were then seeking new markets for their locomotive and rolled rail products. American manufacturers capable of producing such articles were only just beginning, as the Industrial Revolution reached its peak in Europe a full generation before doing so in the U.S. It became a mutually dependent relationship through the 1850s: English products for American dollars.

By the early 1840s Indiana’s failed internal improvements push had become obvious. The state called on Lanier to extricate it from near financial ruin. Before Lanier sailed to Europe in 1847 to negotiate Indiana’s financial exit plan, it had already jettisoned its canal and railroad holdings.

Beyond his success ensuring the state’s survival, Lanier returned from Europe with the confidence of the barons of Continental and English finance. Since the UK was America’s primary source for finished iron rails until the Civil War, the importance of such developed trust was pivotal. These relationships became the cornerstone of Lanier’s success as the Midwest’s preeminent member of Wall Street’s new financial sector: investment banking.

Wall Street Investment House floor circa 1865
Wall Street Investment House, circa 1865.

As part of its privatizing move in 1842, the Indiana legislature had authorized the M&I to borrow money and issue bonds to complete the line to Indianapolis not later than 1848. In his role on the M&I’s reconstituted board, Lanier orchestrated placement of $50,000 (in 1845) and $100,000 (in 1846) of private bonds through the Wall Street firm which would soon bear his name: Winslow, Perkins & Co.

With funds in hand, the M&I finished the final fifty-six miles of track to Indianapolis by October 1847, at a cost of $628,000. Daniel Yandes, subsequently the Indianapolis and Bellefontaine Railroad’s primary stockholder, had won a bid to construct ten miles of the road. The whole task was finished nearly a year before its targeted completion date. In comparison, as a state-run company, it had taken seven years and over $1.5 million to lay the line’s first twenty-eight miles.

The M&I’s Wall Street firm of Winslow, Perkins & Co. began to weigh in on the railroad’s managerial approach after suffusing it with cash. It foretold the more active role financiers would take in operational decision-making of businesses they were funding. To that end, a new president arrived at the M&I in August 1848: John Brough of Ohio, whose life would revolve around the Bee Line railroad.

John Brough image
John Brough. Courtesy of the Ohio History Connection.

Brough had been a youthful and powerful member of Ohio’s legislature. As a freshman legislator at the age of 26, he chaired the Committee on Banks and Currency. Subsequently he was chosen the state’s auditor, a position he held until 1845. Brough had come to Madison, Indiana from Cincinnati, after a three year stint with his brother running the emerging Cincinnati Enquirer newspaper.

By the time Brough issued his first report to shareholders in January 1849, the newly christened Wall Street financial firm of Winslow, Lanier & Co. held more than $92,000 of M&I cash equivalents. Both Merssrs. Winslow and Lanier held positions on the board of directors.

Wall Street was fast becoming the financial clearinghouse for matching Eastern Seaboard and European investors with Midwest railroad securities. A new class of private bankers arose, backed by European firms, which began to serve as investment middlemen. These newly coined “investment bankers” evaluated the quality of securities, served as investment advisers to individuals with surplus capital, acted as financial agents for the railroads, and frequently took investment positions themselves. They also allocated investment capital among the many railroads seeking cash infusions.

Map of Midwest Railroads, with Madison and Indianapolis, Indianapolis and Bellefontaine, Bellefontaine and Indiana, and Cleveland, Columbus and Cincinnati railroads annotated in color
Map of Midwest Railroads, with the Madison and Indianapolis [M&I], and Bee Line component lines: Indianapolis and Bellefontaine [I&B], Bellefontaine and Indiana [B&I], and Cleveland, Columbus and Cincinnati [CC&C] annotated in color. Courtesy of Erin Greb Cartography.
Initially, Brough developed a strategy to build, invest in, or otherwise secure favorable operating agreements with a planned web of railroads radiating from Indianapolis. And invest he did. The M&I, Brough reasoned, would gather agricultural goods from the southern two-thirds of Indiana and funnel them via Indianapolis to Madison for transport on the Ohio River.

To assure its dominant position, Brough used his politically powerful board to block a railroad charter for a rail line headed from Indianapolis toward Cincinnati (Lawrenceburg). He also rejiggered timetables to prevent convenient connections over a newly chartered branch line extending toward Louisville (Jeffersonville) from Columbus, Indiana.

David Kilgore image
David Kilgore, from the author’s personal collection.

David Kilgore, director of the 1848-chartered Indianapolis and Bellefontaine Railroad [I&B] – first leg of the Bee Line extending from Indianapolis to the Ohio state line – noted Brough’s aggressive, anti-competitive tactics: “now they would put their feet upon the neck of competition . . . And why? . . . Rival interests are springing up at other points, and if they can be crippled, so much the better for this city [Indianapolis] and Madison.” It would not be long, however, before Brough would prove unable to stem the tide of competition.

Brough’s involvement planning Indianapolis’ Union Station in the early 1850s, with M&I’s investment in the Indianapolis Union Railway Company, yielded insights about the financial health and intentions of other lines terminating there. Unfortunately for him, in 1851 Indiana’s new constitution was adopted, including a mandate to craft general incorporation laws. No longer would special charters be required to form new railroads. It signaled the end of the M&I’s political agility to stifle competition.

Indianapolis Union Station image circa 1906
Indianapolis Union Station, circa 1906, courtesy of the Indiana Historical Society.

As a result, Brough shifted strategies. He now sought to make two of the newborn and financially anemic lines dependent on the M&I. Brough would set his sights on the Indianapolis and Bellefontaine, building northeast from Indianapolis. It was already making plans to connect with roads angling to another key center of economic growth: Cleveland. And with the help of Lanier and his Wall Street firm, the lure would prove to be almost irresistible.

Cleveland Railway Station and Docks 1854
Cleveland Railway Station and Docks, 1854 (James Harrison Kennedy, A History of the City of Cleveland: Its Settlement, Rise and Progress 1796-1896. Cleveland: Imperial Press, 1896).

To the surprise of investors, as well as the Indianapolis and Bellefontaine’s board, costs of funding construction and operation of the new railroad had been grossly underestimated. Without access to substantial credit facilities, motive power equipment, rolling stock, iron rails and operating personnel, the I&B was going nowhere. There to “help” was Brough and Winslow, Lanier & Co.

The M&I, as orchestrated by Brough, guaranteed newly issued I&B bonds that Lanier had floated.  Now, it could purchase the M&I’s surplus iron rails, and lease its motive power and rolling stock equipment. The basis of the bargain was a lucrative five-year operating agreement, which commenced in 1850. The M&I would not only supply all personnel, but also collect and distribute ticket and freight receipts, paying itself from the proceeds it handled.

Whose railroad was it anyway? By the time the I&B started partial service between Indianapolis and Pendleton in 1851, the railroad was the Indianapolis and Bellefontaine in name only. It was all as Brough had planned.

image of Henry B Payne, president of Cleveland, Columbus and Cincinnati Railroad 1851-1854
Henry B Payne, courtesy of the Library of Congress.

There was another important aspect of the new line’s financial health. By 1853, when the I&B commenced service all the way to Union, the dominant regional player – the Cleveland, Columbus and Cincinnati Railroad [CC&C] through its president Henry B. Payne – had loaned the I&B and its sister Bellefontaine and Indiana line in Ohio a combined sum of over $100,000.

Thus, no sooner had the smaller combined Bellefontaine lines, now known collectively as the Bee Line, begun full service than they began to lose a grasp on their own destiny. Pulling the financial strings were John Brough, James F. D. Lanier, and a Cleveland Clique of businessmen and bankers headed by Henry B. Payne, then at the controls of the CC&C. The resulting tug of war between the Cleveland Clique and Hoosier Partisans for control of the Bee Line would continue throughout the 1850s.

Map of the Madison and Indianapolis, Indianapolis and Bellefontaine, Mississippi and Atlantic, Terre Haute and Richmond railroads annotated
Map of the Madison and Indianapolis [M&I] and involved lines: Indianapolis and Bellefonatine [I&B] and Mississippi and Atlantic [M&A] annotated in color, as well as the Terre Haute and Richmond [TH&R]. Courtesy of Erin Greb Cartography.
But Henry Payne and the Cleveland Clique had other aspirations as well. Controlling rail lines all the way to St. Louis would cement its dominant role among Midwest railroads. And John Brough, recognizing the need for the M&I to control other railroads heading to more viable destinations, had – with the help of James Lanier – already turned his gaze to St. Louis.

Check back for Part III to learn more about John Brough and the Cleveland Clique’s pivotal play to reach St. Louis, as well as the resulting impact on the Bee Line and its Hoosier Partisans.

Continue reading “The Bee Line Railroad Financing Dilemma: Loss of Local Control”

The Bee Line Railroad: At the Dawn of the Midwest Railroad Era

Bee Line Train, Bellefontaine Railway 1864
A Bee Line Train; Bellefontaine Railway 1864 Annual Report Cover. Courtesy of the Indiana State Library.

On May 11, 1848, as the Midwest railroad era dawned, Connersville-based former Indiana Congressman and Senator Oliver H. Smith took to the podium in Indianapolis: “The time has now come when central Indiana has to decide whether the immense travel, emigration, and business of the west should pass round or go through central Indiana…and not force them round by either Cincinnati on the east, or Chicago on the north.”

Smith, who had also sponsored a bill to extend the National Road through Indiana during his Congressional term in 1828, foresaw the potential economic synergies in linking Midwest railroads from the heartland with East Coast markets. Now, its citizens would need to make the financial investment to make it happen. And the mechanism to ignite this explosive rush was not a rutted path or canal, but a new form of transportation in the Midwest: a railroad. It would be among Indiana’s first.

By July, Smith had tallied the necessary stock purchase commitments or “subscriptions” to incorporate the railroad destined to link Indianapolis to Cleveland on one end, and to St. Louis on the other. In legal terms, it was called The Indianapolis and Bellefontaine Railroad [I&B], extending 83 miles northeast from Indianapolis to an undefined location in the wilderness along the Ohio state line.

Soon, it connected with two others Ohio railroads to reach Cleveland – one with a confusingly similar name: The Bellefontaine and Indiana Railroad [B&I]. The other was already the regional powerhouse that soon financed, controlled and finally swallowed the other two: The Cleveland, Columbus and Cincinnati Railroad [CC&C]. But to the traveling public the complete or partial string of railroads linking these economic centers became known as the Bee Line – like a bumblebee’s nearly straight-line path between these two cities.

Bee Line Railroad, circa 1860
Route of the Bee Line Railroad, circa 1860. Courtesy of Erin Greb Cartography.

The pedigree of Smith’s first board of directors read like a Who’s Who of eastern Indiana politicians and business leaders. Because the bulk of initial stock subscriptions came from county boards through which the line would pass, representatives from Marion, Hancock, Madison, Delaware and Randolph counties populated the first board.  Many were closely affiliated with Oliver Smith in terms of shared political and legal careers – such as Jeremiah Smith of Randolph County and David Kilgore of Delaware County.

Indianapolis & Bellefontaine Railroad route, circa 1855
Route of the Indianapolis & Bellefontaine Railroad, circa 1855. Reprinted from Map of Indiana. New York: J. H. Colton & Co., 1855. Courtesy of Ball State University Libraries, GIS Research and Map Collection (annotated by Erin Greb Cartography).

The two Smiths had met in the mid 1820s when both served as state and county prosecuting attorneys. Oliver appointed Jeremiah to chair the Indianapolis and Bellefontaine’s committee to locate its eastern terminus somewhere along the Ohio state line. Once determined, the Smiths moved quickly to capitalize on their insider information. They purchased the land and platted what shortly became known as Union – today’s Union City. Jeremiah in particular would profit handsomely, as Union became a key Midwest railroad junction town by the mid 1850s.

And because early railroad companies did not allow locomotives or rail cars to travel beyond their geographic/corporate boundaries, Union bustled with activity. Oliver Smith rationalized that the avoidance of potential accidents and repairs to cars sent out of state “would more than counter balance any inconvenience growing out of transfers at the State Line, from one line to another.” One can only guess the passengers’ reaction to this rationale, as they were often forced to stay overnight at Union’s Branham House hotel awaiting an onward train.

Oliver and Jeremiah Smith
(L) Oliver H. Smith. Courtesy of the Indiana Historical Society. (R) Jeremiah Smith. Courtesy of the Preservation Society of Union City.

David Kilgore, on the other hand, had been active with Oliver Smith in Indiana Whig politics. They often served as lawyers on the same case, and grew close as Smith purchased the land and platted Kilgore’s Yorktown hometown in 1837. Kilgore owned a parcel adjacent to Yorktown as well as a sizeable farm on the Indianapolis Road between Yorktown and Daleville. Conveniently, the Bee Line would slice through both parcels of Kilgore’s land – not to mention curving through Smith’s Yorktown.

David Kilgore
David Kilgore. From the author’s personal collection.

As prominent editor Henry V. Poor of the nationally renowned American Railroad Journal spouted about the route of the Bee Line: “the road undoubtedly should have been constructed on a direct line between Indianapolis and Union…why did he not take this line for the Bellefontaine road? Because he owned some property at Yorktown or Muncietown and curved the road to promote his private interests.” Railroading was about more than just railroading.

Daniel Yandes
Daniel Yandes. Courtesy of the Indiana Historical Society.

The opportunities for personal gain abounded in building the railroad as well. Nearly all of the directors gained lucrative contracts to supply ties for long stretches of the route, for building depots, and representing the Bee Line in right-of-way disputes. Then, as funding grew thin, Indianapolis entrepreneur Daniel Yandes and banker Alfred Harrison teamed up to finance and complete construction of the route from Chesterfield to Union – essentially taking stock and board control of Smith’s railroad even before the first train reached Union in 1853.

Oliver Smith’s eagerness to cut lucrative side business deals connected to the Bee Line ultimately proved to be his undoing. In 1853, Indianapolis led the country by constructing the nation’s first “Union Station“. Remarkably, until then, different railroads terminating in the same metropolitan center did not share a common station or depot. They would often be miles apart from each other. While good for local transportation companies, warehouses and hotels, it made little long-term business sense. Although the Indianapolis and Bellefontaine’s depot in the northeast corner of Indianapolis was the outlier among all others, Smith refused to place a machine or repair shop facility closer to Union Station.

Indianapolis Depots map, 1852
Indianapolis Depots Map, from SD King Map of Indiana, 1852. Courtesy of the Library of Congress (annotated by Erin Greb Cartography).

Calvin Fletcher, the highly-regarded Indianapolis civic leader and banker through whose land the Bee Line passed – and who assumed a board position in mid 1852 – took note of Smith’s rationale for resistance. Recounting the board issue in his diary, Fletcher observed: “The subject of removal of the Depo [sic] now built on the North East part of the town would be adjitated [sic]. This I knew would be extremely offensive to Mr. O.H. Smith…as he was, as I supposed, connected with Billy Young in the property in its vicinity.”

Calvin Fletcher
Calvin Fletcher. Courtesy of the Indiana Historical Society.

Smith was still laboring under the misimpression that his authority was all but absolute. He had clearly dismissed the board power shift that occurred the year before when Daniel Yandes and Alfred Harrison struck a stock payout deal to complete building the road to Union. The emerging Hoosier Partisans power group which grew to include Calvin Fletcher – whose board election they orchestrated – and David Kilgore, however, relegated Smith to the sidelines.  By the Spring of 1853 they accepted his resignation from the board of the railroad he had toiled to bring to life.

As was typical of early Midwest railroad boards, the Bee Line far underestimated the amount of capital required to bring such a massive undertaking to life. For early Midwest businessmen, financing and operating such large corporate organizations were matters of first impression. And with hard cash virtually non-existent, individuals could commit to purchase stock by pledging labor, materials or land. Such arrangements often left the railroad cash poor and unable to meet its obligations. County governments, with pushback from both its citizens and Indiana’s governor, had reached their limit as well.

Bee Line, Indianapolis, Madison, Railroad
Map of the Indiana portion of the Bee Line, and the Madison and Indianapolis Railroad circa 1860. Courtesy of Erin Greb Cartogarphy.

Fortunately for the Indianapolis and Bellefontaine and Indiana’s first railroad, the Madison and Indianapolis Railroad [M&I] (completed in 1847), their pressing mutual financial problems would be the solution for each. The M&I had a supply of unused rails, underutilized equipment, and a solid credit position – courtesy of its earlier birth as a state-run and funded railroad. But it was slowly diminishing in importance as its route to Indiana’s Ohio River port city of Madison could not rival the well establish and larger commercial cities just up and down river – Cincinnati and Louisville. And the situation became more acute when Indiana’s legislature allowed any group of individuals able to raise $50,000 to build a railroad to anywhere in the state without a special charter. Those headed toward Cincinnati and Louisville were at the top of the list.

On the other hand, the I&B possessed an enviable route pointed toward Cleveland and ultimately the East Coast. However, it needed the credit to which the M&I had access – not to mention rails to finish its construction, and equipment and operating personnel to actually run the line. It appeared to be a ‘win-win’ for both. M&I’s President, John Brough, saw this opportunity and capitalized on the situation.

By the time the Bee Line’s first segment, the I&B, opened between Indianapolis and Pendleton in 1851, Brough’s M&I would be supplying rolling stock and operating personnel as well as financial backing. It would not come without a cost. The balance of his life and career would be closely tied to the Bee Line. However, this new relationship also signaled the beginning of a love-hate affair between Brough and the Hoosier Partisans.

Check back for Part II to learn more about John Brough’s career and relationship with the Bee Line, and the financier behind the growth of Midwest railroads: Indiana’s James F. D. Lanier.

Continue reading “The Bee Line Railroad: At the Dawn of the Midwest Railroad Era”