Chapter 4

Wednesday, August 20, 1890

Fergus Healy was still living in Fort Birney, where he was now an assistant dispatcher for the branch. He was also the elected chairman of the steering committee for the employees’ pension fund. The pension fund, maintained as an employee benefit, was controlled and administered by the railroad and was, in fact, exclusively invested in K&ASR private stock. As the railroad was not traded publicly, all stock was private stock.

Even though the fund was owned and administered by the road, the board of directors decided that, since the pension fund was invested heavily in K&ASR stock, and since it represented a benefit to all employees, there ought to be an advisory committee to oversee its management and use. They had the employees elect ten members to this steering committee, one from each division, including headquarters. That group, in turn, elected a chairman, and the chairman – at this time, Fergus Healy -- was given a voting seat on the K&ASR Board of Directors.

Castillo had sent a wire to Healy, asking him to attend that week’s executive committee meeting, but to arrive a day early to discuss topics that might affect employees.

Another breakfast was hosted at the Castillo house. Malik’s Wichita home was larger, but it was also the nursery for two infants and a toddler, hence more prone to interruption.

That August Wednesday morning, Fergus Healy joined Castillo, Malik, and Dixie Yeats. Pete Pottinger and Arnie Yeats were out on the road and would be returning late that day in anticipation of the executive committee meeting on the morrow.

Everyone assisted Rita in clearing the breakfast dishes, then she was, once again, off to prepare for the soon-to-begin school year. When the others had settled with their coffees, Malik opened the discussion.

“Fergus, on Monday, after breakfast, here, Raul and I had a wide ranging discussion about some significant changes we are recommending. The driving force behind our proposed changes is twofold. First, we expect a sharp and disastrous economic downturn within the next few years, certainly before five years have passed. We expect that financial crisis will cause severely adverse circumstances to commercial interests across the country, and especially to railroads. Second, though we expect some rough times for the Kanzona, we plan to weather that storm and come out of it in a position of relative strength. I don’t mean unaffected, mind you, just better off than most.”

Malik reached into his suit coat’s pocket and withdrew a half dozen Guardia Real cigars, which he placed in the center of the table. He took one, saying, “Help yourselves,” to the others. Both Healy and Castillo took advantage.

Malik said, “Raul, would you be good enough to review our discussion for these two?” At that point, Malik went to refill the coffee carafe from the large pot that was still on the stove. Castillo took the next twenty minutes to summarize Monday’s discussions.

“Essentially, Fergus,” he concluded, “we are looking at a repeat of the conditions prior to the Panic of Seventy-three, and the outcome will be much the same.”

Healy asked, “An’ why is it you’re thinkin’ the railroads will be so heavy hit?”

Castillo said, “For two basic reason. Foremost, because railroad commerce depends strictly on the commerce of others. Railroads, per se, do not manufacture, mine, or grow products; we provide services to those who do. If production is reduced, so is the need for our services. At the same time, one primary factor has allowed so many railroads to compete successfully: the continuous expansive growth of our population and commerce.

“And that cause is, itself, complicated by two developments: Railroads have been aggressively and recklessly expanding, even beyond the potential growth of most regional markets. Concurrently, many roads have entered into destructive competitive practices as they have outgrown their markets.

“Depending on how one defines our economy, one could be justified in saying that railroads are the biggest, fastest growing businesses in the country. At the same time, the railroads are the most financially extended and most vulnerable to failure, since much of their expansion has been financed by private investors, banks, and other trust institutions, purely on speculation.

Dixie Yeats said, “I can see that railroads, as an industry, are vulnerable. But what makes you so certain of an impending economic panic? Why wouldn’t the economy just remain at the expanded level?

Castillo and Malik exchanged glances, and Malik responded to Dixie’s question. “Because our nation’s economy has a history of expansions and contractions, usually somewhat sudden contractions. It’s a long-standing cycle. Overall, there is a gradual expansive trend, but it comes about at a sometimes disastrous, stumbling pace.”

Healy said, “An’ might I be interruptin’ with another question?” Malik nodded and Healy asked, “An’ for sure, what exactly do you mean when you use that term, ‘economy’?”

“Raul?” Malik said.

Castillo, after a moment’s pause, said, slowly, as if choosing his terms in a deliberate manner, “For our purposes, I would define the economy as the ... the wealth and resources of the country ... especially when measured by the production and consumption of goods and services. That would include all investments, interest and dividends, labor performed and wages earned, in all areas: agriculture, manufacturing, mining, transportation, and production and services of every sort ... plus what we purchase to eat, wear, build, or use in every manner.” He paused a bit longer, then went on, “Wherever and whenever an exchange of goods, services, labor, or money occurs, it’s part of the economy. Couple that with the value of every last business, barn, button, and bolt and you have the economy in total.” He paused again, then nodded to himself.

Then he said, “Our railroad operates its own economy on a smaller scale. We own real estate, buildings, and equipment and we invest, provide services, work, and exchange value in various ways. In the same fashion, a family pursuing general ... existence operates an economy. The larger the economy, the more complex it is. The national economy has literally millions of points of influence. Railroads happen to be among the biggest and most influential, while they are also highly sensitive to large scale external influences.”

Malik said, “I think that brings us back to Dixie’s question about why we’re worried. I thought I could answer her, but you’re much better at describing these things, Raul.”

Castillo gave a small shrug. “Perhaps,” he said. He looked off into the middle distance for a minute, then looked at Dixie and said, “As Emil explained, our economy has a history of expansions and contractions. The contractions are usually painful, to a greater or lesser degree.

“There is a bank in Cleveland, Ohio, the Society Savings Bank, which has been recording various economic datum from throughout the country since the eighteen-thirties. Scholars have studied that information and some describe patterns of indicators that appear to anticipate these cycles in the economy. At present, those indicators are suggesting an approaching economic downturn. Perversely, one of the indicators of a possible downturn is rapid economic expansion.”

Dixie asked, “So, what does that mean? That good times mean bad times?”

Castillo and Malik both chuckled. Castillo said, “In a manner of speaking, yes. The United States has suffered a half dozen serious, as well as several lesser, economic downturns since the mid-’thirties, when the Society Bank’s records begin. Sometimes they are triggered by specific events, the end of the Civil War, for instance. Other times, financial conditions collapse under their own weight.”

Healy interrupted with, “An’ are you sayin’ then that the end of the war caused economic problems?”

“Well, yes,” Castillo replied. “The Civil War years, themselves, actually witnessed a booming economy, as governments and individuals manufactured, purchased, or delivered all manner of specific wartime goods and services. Afterwards, all the war spending slowed down. On top of that, hundreds of thousands of soldiers were discharged, many without jobs. The purchase of numerous expensive products used in the war came to an abrupt end.”

Malik, chuckling, asked, “Was that a pun, Raul?”

With a bewildered look at Malik, he said, “Pun? I do not recall -- Oh! ‘Booming economy’.” He shook his head. “No, that was unintentional.

Castillo turned his attention back to Yeats. “But we have eighteen seventy-three as the best example. It was called a ‘panic’ but some call it an economic depression. There are those with the opinion that we are still suffering from its effects.”

Healy, the oldest one in the room, had nodded at the mention of the year. “Aye, an’ it was rough times, it was.”

Castillo said, “As I have already mentioned, we are experiencing some very similar circumstances to those preceding the eighteen seventy-three event, much like those we described earlier. The railroads were heavily involved in that Panic, both as a cause and as victims. That is why we are concerned, today.”

Healy, brow wrinkled, asked, “An’ why ain’t nobody doin’ nothin’ about it, if it’ll be hurtin’ the whole country?”

Malik said, “Because business is surging, again, and everyone wants a part of it. And no politician who expects to get re-elected dares take action to slow things down. It’s a runaway train, but there’s free food and drink in the dining car, so no one wants to get off.”

Healy, with a one-sided shrug, said, “Aye, an’ I can see that.”

The discussion proceeded along the lines of Monday’s breakfast meeting. Both Malik and Castillo considered it good practice for the executive committee meeting, scheduled for the next day. That meeting, in turn, would serve as a dress rehearsal for the following month’s board meeting.

As the conversation drew toward an end, Healy, after a resigned sigh, said, “Aye, an’ much as I hate to say it, mayhap Gerald MacNish ought to be brought into these matters, an’ sooner rather than later.”

That brought winces and audible groans from both Malik and Yeats. Castillo only aimed an expressionless gaze toward Healy. Gerald MacNish, a handsome, thirty-seven-year-old attorney, was the executive director of the K&ASR employees’ Associated Railroad Workers Mutual Investment Fund.

Yeats said, “It doesn’t matter what is proposed, the man will be against it.”

MacNish had gained an uncertain reputation as the would-be champion of the K&ASR employees. He boosted that image by fighting practically every management action that did not represent a raise of employee wages or an increase in other direct benefits. This might have been more effective if the employees had any real grievances against management, but their lot was generally better than they would have found elsewhere, and they knew it.

Still, nearly half of the full-time employees were invested with the association. Moreover, some seventy percent of their investment fund was capitalized in K&ASR voting stock, comprising seven percent of the total voting stock. That made the Associated Railroad Workers Mutual Investment Fund the largest stockholder, after Malik’s own holdings and that of the two surviving founders, Arnie Yeats and Pete Pottinger. Malik, due to Chen Ming-teh’s bequest as well as his own prior investments, held twenty-six percent, while the other two each held twenty-one percent.

MacNish and four other elected members from the investment group managed the fund. In practice, the other committee members typically rubber-stamped MacNish’s decisions. Despite his brashness, even Castillo admitted that MacNish was a skillful investor and had built the fund in a dependable manner.

According to the corporation bylaws, any stockholder could attend the K&ASR’s quarterly board meetings and MacNish made it his habit. Any shareholder could speak for up to two minutes on any issue brought by motion to the board. MacNish also made that a habit, as well as making certain that his scoldings of the K&ASR Board were published in the Fund group’s quarterly newsletter.

“Its not even that, so much, that I mind,” Malik responded to Dixie’s complaint. “It’s that he never has anything better to contribute than a demand to give the money to the employees. He’d sell the entire road, I think, if the employees could be assigned the payout. If he owned a goose that laid golden eggs, he’d serve it for Christmas dinner.”

Castillo snorted. “Exactly right. Already our employees are among the highest paid railroad workers in the country, and even better, considering the end-of-year bonus we started this year.” He paused briefly, then added, “Which, by the way, we might want to reign in for the next couple of years. But that would tie into all these other measures we have been discussing.”

“Aye, but what about Mister MacNish?” Healy insisted.

That brought a round of silence to the table.

Finally, Malik said, “We could always go into executive sessions.” The board could exclude others from an executive session. It was a seldom-utilized action.

“Wouldn’t matter,” Yeats said. “The bylaws permit any stockholder owning five percent or more of the stock to attend any and all quorum board meetings. The employee fund holds seven percent. The only way to exclude him would be a meeting without enough directors to form a quorum. But you could take no official action nor conduct any business. All you could do would be to talk and drink coffee.” She finished by raising her cup of coffee to her lips.

Silence again reigned.

After a minute, Yeats asked, “Is MacNish bonded?”

Healy said, “He is bonded up to the amount in the investment fund.”

Yeats went on. “Then we get him to sign a security agreement, assuring us that he will keep the information confidential.”

Castillo asked, “Why should he do that, when he can come to the board meeting in any case?”

Malik suddenly sat upright, with a knowing expression. “Because we invite him to the executive committee meeting, tomorrow.”

“Quite,” Dixie agreed. “Knowing him, he won’t be able to resist the privilege.”

Healy was nodding. Castillo said, “I suppose. Is he in town?”

“That he is,” Healy said. “An’ him an me is to have lunch, today.”

“Okay,” Malik said. “Tell him you were called to a special meeting this morning and that, while you can’t talk about it, he had better be sure to attend the board meeting next month.”

Healy, nodding, said, “An’ that’s primin’ the pump, ‘tis.”

Malik went on, “Then I’ll telephone him this afternoon and offer to let him attend the executive committee meeting, tomorrow, if he can provide a surety bond holding him to keep confidential anything he hears in our offices, tomorrow.”

“Aye, an’ I think you’ll have ‘im.”

(Wednesday, August 20, 1890)

Thursday, August 21, 1890

The executive committee meeting normally began at nine o’clock. However, on the third Thursday of August, eighteen hundred and ninety, it was postponed until noon so that Malik could meet with Gerald MacNish.

MacNish appeared at nine, expecting to attend the executive committee meeting. Malik invited him into his office on the pretext of reviewing the additional surety bond he was to obtain to guarantee his keeping the information confidential.

“Please have a seat, Mister MacNish,” Malik said, pushing a sheet of paper across the desk. “These are the terms of your assurance of confidentiality for today. Please read it and sign it, and we’ll file it with a copy of your surety bond.”

“What is this, Malik?” MacNish sneered, barely glancing at the page before pushing it back at Malik. “You wanted a surety bond, I got one.” He patted his frock coat, over the interior breast pocket.

Malik sat back in his chair, and rested his tented fingers under his lips. After a moment, he said, “You brought a copy of the bond?”

“Of course.” MacNish drew some folded papers from the inside coat pocket and slid them aggressively toward Malik, who caught them just befor they slid off the edge of the desk. Malik made no gesture or look in reaction to MacNish’s petty display of pique. He merely opened the papers and quickly scanned them, then closely reviewed a section of printed text.

He looked up at his guest. “Mister MacNish, this makes no mention of what performance is being guaranteed. This is simply a general fiduciary bond. This won’t do. Without a signed guarantee from you concerning the required confidentiality, this bond is, for our purposes, meaningless. Not only will you not be privy to today’s discussions, but the board may go into executive session at their regular meeting next month, further excluding you from the deliberations.” The latter threat was not enforceable. Malik took the gamble that MacNish would not realize it, after Healy had earlier agreed that MacNish seemed unlikely to have familiarized himself with the procedural rules detailed in the bylaws.

In the end, MacNish, who made sputtering protests as if Malik was asking him to hand over his firstborn son, sighed heavily and said, “Fine. Let me see that paper.”

“One moment, sir. I’ll want both the assignment of the bond and your signature notarized. Our secretary is so commissioned. I’ll get him.” Malik rose, walked to the door, and stepped into the outer office.

Moments later, the paperwork was done, and Malik had re-seated himself. He asked, “Would you like some coffee, or some chilled water?”

“No. Shouldn’t we be getting to that executive committee meeting?”

Malik shook his head. “It hasn’t started yet. They will wait for us, until I’ve had a chance to provide you with some background regarding the topics under discussion.”

“Then let’s get to it.”

“First, I need to clarify a point with you.”

“Quit stalling, Malik.”

“This is important, Mister MacNish.”

With a dramatic sigh and a roll of his eyes, MacNish mockingly said, “Then by all means, please proceed, Mister Molasses-in-January.”

“The confidentiality agreement you signed covers all topics that you may hear mentioned or discussed today here in our headquarters.”

“Yes, yes, of course, Malik. I know what a confidentiality agreement means.”

“However, this agreement requires you not speak or otherwise reveal any such topic, ever, unless we provide a written release.”

MacNish looked uncertain. “What exactly does that mean?”

“It means that you will not be able to discuss the issue we deal with, today, even if they become general knowledge. If a front-page article in the Wichita Eagle describes these topics in detail, you must still avoid talking about any part of them that you learn today, not even so much as an, ‘Oh, yeah, I heard that back in August,’ or any oblique reference whatsoever.”

MacNish sat and stared at Malik for several long moments. Then, shaking his head as if giving in to the unreasonable demands of a child, he again sighed and said, “Fine, I acknowledge that. Can we, at last, get to the topic at hand?”

“Very well,” Malik said, nodding slowly. “Here is the essence of it: we expect the executive committee to recommend to the board that the railroad enter into a stringent austerity program in anticipation of a severe fall-off in the nation’s economy.”

“What?” MacNish squawked. “What the hell’s that supposed to mean?”

Malik appraised the man’s reaction momentarily, then said, “I’m going to ask Mister Castillo to come in and explain the basis for our concern,” Malik replied, rising from his desk chair. He walked across his office and through the door leading to the board conference room. That conference room was situated between his office and Castillo’s. Skirting the long table and its chairs, he crossed the length of the room, and tapped lightly on the door at the opposite end. MacNish heard Malik say, “Will you please join us?”

Malik returned with Castillo in tow.

“Good afternoon, Mister MacNish,” the General Superintendent said. “I trust you are well.”

“Yeah, trust whatever you want,” MacNish said, remaining in his seat and making no effort to hide his annoyance and disdain. He added, “I’ve had enough of your drama, Malik. Do you have something to say, or have you been wasting my time, as usual?”

Castillo seated himself in the other guest chair while Malik returned to his chair behind the desk. Castillo said, “I am quite certain we are not wasting your time, Mister MacNish. We have information that we believe will be vital to the health of your association’s investments. If you will allow, I will explain our concern and what we intend to do about it.”

“So let’s get to it, already.”

And so, they did.

Forty minutes later, an argument was in full sway, with MacNish insisting, “You cannot simply hand off twenty percent of your labor force to other railroads.”

Castillo replied, “Actually, the divisions and their parts which we hope to sell employ just over thirteen percent of the road’s labor force. I suspect you may have not included the headquarters staff in your calculations, though we are also planning some reductions here, hopefully through attrition.” In fact, Malik and Castillo were both aware that most of the employee investment association’s membership came from workers on the branch lines. MacNish had failed to make inroads with the Wichita office workers. While many there were invested in the K&ASR, most headquarters employees had done so individually, though there was also an informal club, centered in the bookkeeping section. Castillo added, “Even considering only those employed in the Transportation Department, the number would be closer to fifteen percent.” The Transportation Department included all of the branch line divisions and a few directly-related management and clerical position at the headquarters office.

Malik said, “Keep in mind that their jobs and salaries will be guaranteed for a year and that they will receive a bonus equal to two month’s pay from us if they remain with the purchaser for that year.”

“Even more, Mister MacNish,” Castillo continued, “our efforts are to preserve seventy-seven percent of the positions the K and ASR currently employs. It is part of a broad-reaching plan to preserve the railroad through the trying financial times looming in our future.”

“That’s another thing I’m not buying,” MacNish said, dismissively. “The association’s investments are growing, across the board. That includes the Kanzona stock, which, I’ll remind you, represents the majority of our investment fund and seven percent of total voting shares. The railroad’s stock value has risen eighteen percent in the last twelve months. That does not sound like a looming financial crisis ... I just don’t see a problem.”

Castillo said, “You cannot depend on the K and ASR stock as an indicator, since it is not traded on any exchange. I have itemized those indicators which are of concern.”

“Well, our other stocks are doing nearly as well, some better. What I’m concerned about is the price of the stock that we do hold.” MacNish paused and, with a crafty look, he said, “On the other hand, this whole austerity plan of yours makes me think it might be a good time to sell our Kanzona shares.”

“You could,” Castillo replied, “and we would be glad to buy them from you, for two dollars per share above your best legitimate offer.”

Malik turned quickly toward Castillo. “We would?” he asked, his surprise evident.

“Most assuredly,” Castillo replied, glancing toward Malik. “Our austerity measures, especially the reduction in our labor costs and the sale of less-profitable assets, along with an increase in our cash reserve, will only make our stock more attractive to investors.” He looked at MacNish. “Are you interested in selling, Mister MacNish?”

“To the railroad? No. I wouldn’t give you the satisfaction.”

“So you would take less than the best price? How would you explain that to your investment group?” Castillo asked.