# Memoirs of Henry Villard/Volume 2/42

CHAPTER XLII
The Wheel of Fortune.—1883-1890
MR. VILLARD returned to New York, where his presence was urgently needed, after an absence of only six weeks. The decline in his stocks had continued, and worried him so much while away that he could only at times forget, during the festivities of the opening of the road, the dangers that threatened him. The Northern Pacific construction deficit had assumed still larger proportions. The Oregon & Transcontinental Company was carrying a very heavy debt, incurred partly by the assistance given the Northern Pacific and by further purchases in the preceding summer of the stocks of the companies he controlled, for which it expected to pay by means of another issue of its own stock. This had been rendered impracticable by its decline in the market. Some relief was obtained by the creation of a second mortgage on the Northern Pacific and the issue of twenty millions of bonds under it. The wisdom of inviting the foreign guests to the opening of the road was now demonstrated, the German bankers being so much impressed with the vast regions tributary to the road that they promptly undertook to market the greater part of the new Bonds in Germany. The financial connection of the Deutsche Bank with the company, which was of such great help to it in after years, dated from that negotiation. The sale of the second-mortgage bonds relieved both the Northern Pacific from the embarrassment of the construction deficit, and the Oregon & Transcontinental to some extent through the repayment of its advances. But the placing of another mortgage ahead of the stock inevitably depressed the Northern Pacific shares, and ​with their fall those of the proprietary company went still lower. Mr. Villard hoped for a counteracting effect from the expected large increase of earnings from through-business. But though he eagerly watched from day to day and week to week for better figures, the receipts showed, after a short spurt, not only no gain, but an actual loss, from the stoppage of the transportation of construction material.
With these unfavorable developments, the burden of carrying the great floating debt of the Oregon & Transcontinental grew heavier and more fraught with danger of a collapse during the latter part of the autumn. Mr. Villard learned then the lesson taught him so often in Wall Street, that the throng of people which follows with alacrity the man who leads them to profits, will desert him just as quickly when he ceases to be a money-maker for them. He soon found that many of his most trusted friends, who formerly visited his offices regularly, had sold out their holdings and stayed away. He even discovered downright treachery among his confidential advisers, two of the Oregon & Transcontinental directors using their private knowledge of the condition of the company for enormous "short" sales of its shares. The press, too, that had sung Mr. Villard's praises hitherto, contained criticism of his companies, became more and more hostile, and gradually even vented bitter attacks upon his management and his personal character. His unshaken faith in his enterprises and his naturally sanguine disposition led him to make the double mistake, in the first place, of assuring anxious stockholders that the downward movement in his securities was the result of bear operations, and that an upward reaction was bound to set in directly, and advising them to increase their holdings at the lower prices; and, secondly, of trying to sustain his shares by large purchases for his own account. He utterly failed to perceive that, besides the specific reasons for the fall of his stocks, the financial markets generally were already showing the first symptoms of that sweeping and wide-spread crisis which had been brought on ​by overspeculation during the preceding years, beginning in the fall of 1883 and extending all over the civilized world for many years. His personal embarrassment was much increased by the collapse of the West Shore (New York) Railroad enterprise, in which, to oblige friends, he had taken a large interest, the greater portion of which was lost.
Mr. Villard struggled on, using all his mental and pecuniary resources; but, in the latter part of November, he lost courage and became conscious that neither he himself nor the Oregon & Transcontinental could be saved. His physical powers of endurance were fast being exhausted, and sleeplessness threatened him with nervous prostration. The desertion of friends became more and more frequent, the abuse of the press more and more violent, and the pressure of his own and the Oregon & Transcontinental creditors harder to meet. He was finally in such desperate straits that he called a council of his most faithful and influential friends and disclosed to them his condition, with an appeal for advice and help, pledging himself in advance to accept any decision they might reach as to himself, no matter what consequences it might have for him personally.
These friends, Messrs. Fabbri, Endicott, and Rolston, at once began their investigation, and worked day and night in examining his books and accounts, as well as those of the Oregon & Transcontinental Company. On December 16–17, Mr. Villard was aroused by one of the number after midnight at his hotel, and then informed of their findings and conclusions. He was told that he was practically insolvent, and that the Oregon & Transcontinental Company was on the verge of bankruptcy. A syndicate had been formed ready to advance to him, on pledge of all his real and personal property, a sufficient amount to meet all his individual liabilities, and to take care of the indebtedness of the Oregon & Transcontinental Company, provided he resigned the presidency of it and of the Oregon Railway & Navigation Company, Although he had often thought of ​his possible retirement from the management of his companies, this sudden declaration was, nevertheless, a terrible shock to him, for he saw at once that his deposal as president of the former company meant also his loss of the Northern Pacific presidency. Knowing his own helplessness, remembering his pledge, and deeming no personal sacrifice too great for the salvation of his companies, Mr. Villard immediately accepted the terms proposed to him. The next day (December 17) the afternoon papers announced his resignation from the two companies founded by him; and the news of his downfall, like that of his triumph, went everywhere.
His fate was certainly tragic. Within a few years, he had risen from entire obscurity to the enviable position of one of the leaders of the material progress of our age. But a few months before, he had reached the pinnacle of contemporaneous fame, and received on his transcontinental journey such homage as few men have ever received in this country. But his fall from might to helplessness, from wealth to poverty, from public admiration to wide condemnation, was far more rapid than his rise, and his brief career was everywhere used to point a moral. At first, journalistic vituperation of him continued more vehemently than before. Hostility towards him was fanned by the untoward circumstance that, shortly after his resignation, he had moved with his family into his large private residence behind the cathedral on Madison Avenue, which he had begun to build a year before, when his fortune warranted its erection. He was loath now to occupy it, but he did so for reasons of economy, as the house was furnished and the family had no other city home. The house formed part of an imposing block, the whole of which he had built, and which presented the appearance of a palace, though it really consisted of six residences. Mr. Villard was attacked by a portion of the press for occupying a princely edifice in defiance of public sentiment and in mockery of the many who had suffered losses in his stocks, ​and was charged with having saved his own fortune while sacrificing that of his followers. When, however, the committee of investigation announced that he had turned over all he possessed for the benefit of his creditors, and that nothing had been found to throw a doubt on his honesty of purpose in the management of the companies, a reaction quickly set in. Defence of him appeared in the press under the signatures of leading men, many expressions of sympathy and praise from public bodies in the West and from prominent individuals all over the country reached him, and many persons of high standing called to express their admiration of his conduct. Some offers of financial aid were also made to him, but were not accepted.
The fearful strain to which he had been subjected for months ended in nervous prostration. His physical condition would not have permitted him to discharge his executive duties any longer. For months he had had but little sleep, and was in such a state of exhaustion that he could not perform any mental work. His retirement from the presidency of the Northern Pacific followed by the end of the year. He continued to hold that of the Oregon & California, however, in accordance with the wishes of his London friends, but he was not expected to do any work in connection with it until he had recovered his health. What he needed, and secured, was relief from all responsibilities and complete rest. As freedom from disturbance could not be had in the city, the family removed to their country home on the Hudson early in the spring of 1884. They bade farewell to their grand city abode without regret, and they never returned to it.
After Mr. Villard had recovered sufficient strength, he considered it due to himself, to his family and friends, in view of the wide misrepresentation to which he had been subjected, to prepare an authentic record of his administration of the Northern Pacific. To this he devoted himself in the country, and his statement was published in pamphlet form in English and in German, ​It was apparent that Mr. Villard's complete restoration to health could not be brought about as long as he remained near the scene of his rise and fall. The sense of the falseness of friends and the outrageous vilification he had undergone remained in his mind, and the family concluded that he could recuperate better in different surroundings. Accordingly, he sailed for Europe on June 4, 1884, accompanied by one of his brothers-in-law, in order to select a temporary place of residence for the family in Germany. On his way there, he was presented in London by his English guests with a rich testimonial of their appreciation of the good care he had taken of them on the overland excursion, in the shape of a gold loving-cup.
In response to pressing invitations, he also visited his native province. It was the first time he had been there since his public benefactions to it. These embraced foundations for the support of the libraries and poor students of the two Latin schools (gymnasia) at Zweibriicken and Speyer, followed by two other gifts, one for scholarships to promising graduates from these two institutions to provide for their university education, and another for the support, at the Academy of Fine Arts in Munich, of young men of pronounced artistic talents from his native province. He had presented Zweibriicken with a fund for small loans to deserving mechanics, and built an American workingman's home there to serve as a model for others, which it has done; had helped the Provincial Industrial School and Museum at Kaiserslautern out of pecuniary difficulties; and had given freely to the Improvement and Historical Societies of Rhenish Bavaria for their respective purposes. When the Eastern Palatinate was devastated by a flood of the Rhine, he collected in this country by his personal efforts a large sum for the relief of the sufferers. At the instance of a schoolmate, Pastor Scherer, he gave the money for the erection of a hospital and training-school for nurses (deaconesses) in his native town, which has since grown into one of the largest institutions of the kind in Germany, ​with over two hundred nurses, who nurse the sick all over Rhenish Bavaria. He had responded further to a great many minor appeals for charitable and other purposes. Escorted by the Governor and a reception committee, on a special train, Mr. Villard was honored like a king in the three principal towns of the Palatinate. The streets were decorated, the authorities received him formally, and banquets, serenades, and torchlight processions awaited him. Speyer and Zweibriicken each presented him with the freedom of the city. These ovations were entirely unexpected by him, and formed a most soothing and flattering compensation for the bitter trials he had passed through.
Having decided to make his new home in Berlin, he returned to America in August, embarking again with his family two weeks later. By October, they were fully installed in commodious apartments. He had purposely selected lodgings near the home of his old friend Friedrich Kapp (who played a prominent part in the United States between 1850 and 1870), in order to enjoy his company as much as possible. To his great disappointment and sorrow, Mr. Kapp died suddenly after Mr. Villard had seen him only once. With this exception, the two years in Berlin proved to be most gratifying to the family in every respect. Mr. Villard's sister and brother-in-law had lived there for years, and they, together with other relatives and his German guests of 1883, made him acquainted with official society and with the leaders in science, art, literature, and finance, and their families. It seemed as if his misfortunes excited real sympathy, and that people were glad to have an opportunity to manifest it.
The family spent the winters in Berlin and the summers in southern Germany and Switzerland. Mr. Villard's presidency of the Oregon & California Railroad made frequent journeys to London necessary during the year 1885, and the consequent long separations from his family led him to resign the position at the end of that year. In the winter of 1885–6, two singular propositions to resume ​railroad work were made to him. One was contained in a letter from Oscar Straus, then United States Minister to Turkey under President Cleveland, conveying an invitation from the Sultan to go to Constantinople and take charge of the proposed construction of a system of railroads through Anatolia in Asia Minor. To one who had thrown open a vast wild region in the New World to civilization, there was something tempting in the opportunity to instil new life into the ancient regions of Asia Minor. However, the thought of settling with his family for years in the Orient was utterly repulsive to him, and he declined the proposal. He called the attention of the Deutsche Bank to the scheme, and found that the institution was already working for a concession to build roads in Anatolia, which it eventually obtained and under which a main line and branches, representing a large aggregate mileage, have since been constructed. The other offer was of an even stranger kind, it being nothing less than a proposition to take in hand the financiering and building of a long narrow-gauge line from the coast of German East Africa to the interior. He felt, of course, even less inclination to enter upon that venture than upon the other.
His stay in Berlin really led, however, to his return to business life, not in foreign parts, but in his former American field. He was frequently consulted by the managers of the Deutsche Bank regarding American affairs generally and their own transactions with their correspondents in New York. The close relations thereby established gave rise to the consideration of the advantages of a regular representation of the Bank in New York City, for the purpose of enlarging its American business. After due consideration of the matter, it was agreed that he should undertake that duty for the Deutsche Bank and another powerful banking-firm at Frankfort-on-the-Main. Not being a trained banker, Mr. Villard was not to do general business for them, but to confine himself to transactions in good public and corporate securities chiefly, indeed, to ​can railroad securities. As his reappearance in the financial sphere of New York under such auspices would be tantamount to his complete rehabilitation, he hailed such a prospect with profound satisfaction.
The family started for England at the end of September, 1886, on their way to America. While in London, Mr. Villard received, a few days before sailing from Liverpool, a cable offer from Whitelaw Reid for his residence on Madison Avenue, which had been vainly offered for sale during the intervening years. After the exchange of some despatches, a sale was effected. This was a great relief to the owner, as the price received discharged his last obligations resulting from the breakdown of 1883, and left him with sufficient capital for a new start in business. On his arrival in New York during the following month, he at once opened offices at his old place in the Mills Building. With the letters from his new constituents accrediting him as their representative, he was sure of the respectful reception he afterwards met from the leading houses in Wall Street, and he found them very glad to do business with him. The press, as a rule, announced his return to financial activity in a kindly tone. The welcome which the family received in private circles, too, left nothing to be desired.
Mr. Villard resolved not to engage at once in active work, but to content himself for some time with a careful observation of the general investment field, and a thorough study of the railroad and other enterprises with which it might be desirable to do business. He was inactive for so long a time that his German friends began to show signs of disappointment. The first opportunity that commended itself to Mr. Villard's judgment came only in the following spring of 1887, when he bought the entire issue of several millions of prime mortgage bonds of a Western road, and resold them within a few days at a handsome profit. In the course of the summer, a marvellous turn of affairs, almost stranger than fiction, occurred, which, with all but ​magic suddenness, raised him once more to his former position before the public. The Oregon & Transcontinental Company had remained inactive, though holding its own, after the crisis of 1883; but its management, although it represented so large an interest in Northern Pacific shares, had not been able to come to a satisfactory settlement of its former financial relations with the Northern Pacific. The board of directors of the railroad company also refused to recognize its legitimate demand for a representation in that body. The parties in control of the Oregon & Transcontinental Company thereupon formed a combination to change the directory of the Northern Pacific at the next annual election in the fall. For this purpose, they largely increased the company's holdings of Northern Pacific shares and thereby its floating liabilities. The Oregon Railway & Navigation Company, in which the Oregon & Transcontinental Company still held a controlling amount of stock, had created after 1883 $5,000,000 seven per cent. debentures, due April 1, 1887. To provide for their payment, the company issued $5,000,000 five per cent, consolidated mortgage bonds. The firm of Chase & Higginson, of New York, had purchased in November, 1886, on time, $4,000,000 of them at 102 plus accrued interest, which Mr. Villard had vainly tried to secure for his German supporters. The firm named made a public issue, but failed to dispose of more than $700,000. Chase & Higginson not calling for more bonds before the maturity of the debentures, the Oregon Railway & Navigation Company borrowed $3,300,000 on the remainder of the bonds from the Oregon & Transcontinental Company, which in turn negotiated loans on them. The tight-money spell which set in in the latter part of August made it impossible for the latter company to renew its loans then maturing. Its failure was imminent, and would have involved that of Chase & Higginson, as they were liable for the remainder of the purchase price of the bonds, and would have embarrassed the Oregon Railway & Navigation Company as a ​borrower from the Oregon & Transcontinental Company. Mr. Villard was called on for help on August 27, 1887, by Elijah Smith, president of the Oregon & Transcontinental and of the Oregon Railway & Navigation Companies, and a representative of the imperilled firm. After explaining the threatening situation, they asked him for immediate assistance to the extent of not less than $5,000,000, for which they offered the Oregon Railway & Navigation bonds not taken by Chase & Higginson at 94, and twenty thousand shares of Oregon Railway & Navigation stock at 85 less 4¼ commission. They appealed strongly to his loyalty to save the two companies created by himself, and coupled with their terms an offer not only to turn over to him the management of both the Oregon & Transcontinental and Oregon Railway & Navigation Companies, but to place in his hands, unconditionally, sufficient proxies for the next Northern Pacific election of directors to put it in his power to elect to the board of that company any one he liked.
What a revolution of the wheel of fortune! But his first duty was to his foreign clients, and, after obtaining the best possible conditions, he cabled them the details of the proposed transaction, laying particular stress on the necessity of an immediate decision which meant nothing less than the cable transfer of the full amount of $5,000,000, He did not himself believe that this sudden large call would be responded to, but, to his great surprise, his friends accepted, and the entire sum was at his disposal in New York within thirty-six hours. So sudden a transaction had never before taken place in the financial dealings between Europe and the United States. Its direct effect in Wall Street was to completely upset the exchange market. The press proclaimed the event with sensational comments, ​and with positive inference that it meant nothing less than Mr. Villard's immediate resumption of the control of the three companies. He was hailed as the railroad king restored to his reign. Congratulations by telegraph and mail at once poured in upon him.
Seductive and overpowering as this sudden reelevation was, it left him sober and with a clear perception of what the acceptance of his old position would signify to himself. He had received too severe a lesson as to the fleeting character of quickly-acquired wealth and the fickleness of public favor to be very eager to expose himself again to a like fate. After several days reflection, he concluded not to accept any of the positions offered to him, but to remain entirely independent, and not even to allow himself to be reflected a director in any of the three companies, but to continue to act simply as a financier. But when he made his decision known, a great pressure was brought to bear on him from all sides to induce him to change it. His nearest friends argued with him that it was his duty to himself and to the corporations not to shrink from resuming his post, and that it would be to his lasting discredit if he failed to do so. Some of the Northern Pacific directors, who had before not been friendly to Mr. Villard, sought him and urged him to at least allow himself to be reflected a director, so that the company, which was in a bad way financially, could get the benefit of his advice and help. He finally yielded so far as to agree to reenter the Northern Pacific board, but only after he had submitted the case to his German friends and received their consent. He had the satisfaction of voting at the annual meeting of the company nearly one-half of the share capital, (365,799 out of 754,193), although he did not himself own a single share of it. Mr. Villard's own judgment never approved the step, and he always looked upon it as the greatest mistake he ever made to burden himself again with corporate responsibilities. Subsequent events showed that he was right, and made him rue it bitterly. ​He found the Northern Pacific in serious financial embarrassment, mainly owing to the excess, over estimates, of the cost of building the extension of the main line over the Cascade range to Puget Sound, as well as to the approaching maturity of the preferred-stock dividend scrip issued in 1882, and to the adoption of a badly conceived plan for the construction of a number of branch lines to mining camps in Montana. From these causes a large floating debt had accrued, measures for the funding of which were urgent. Against his advice, the board voted to issue, for this purpose and the current requirements, twelve millions of bonds under a third general mortgage. He considered this issue altogether too small, and advocated the creation of a large consolidated mortgage for present and future wants, but was outvoted. He took, however, most of the new bonds for his German friends, who placed them in their home market. Next, he thought out a scheme for the formation of a new company that would absorb all the Montana branches and issue uniform bonds at a fixed rate against them all. It was approved by the board and carried out in the following summer. Mr. Villard took all the branch bonds that could be issued for Germany, but resold them at a large advance in this country.
Mr. Villard took a strong interest in electric lighting from its earliest stages. He was one of the first stockholders and a director of the original Edison Light Company, which had acquired the patents for the incandescent lamp. His faith in the incalculable value of the invention was, like that of most of his fellow-stockholders, so great that he did not dispose of his holdings even when the shares, on the par value of one hundred dollars of which only thirty per cent. had been paid in, rose to four thousand. In Berlin he had become acquainted with Werner Siemens, the eminent German discoverer and inventor in the electrical field, and head of the great firm of Siemens & Halske, and also with the parties managing and controlling the General Electricity Company of Berlin, which has since ​grown into the principal electrical manufacturing and contracting company in Germany. He proposed to them and to his syndicate, before his return to New York, that they should join with him and enter the electrical business in the United States by an alliance with existing American interests. In conjunction with leading New York firms, and helped by the invaluable counsel of the late C. H. Coster, he matured a scheme for the absorption of all the Edison Light and Manufacturing Companies into a new corporation, with sufficient fresh capital for manufacturing electrical apparatus on a large scale. Out of this grew the Edison General Electric Company, organized in April, 1889, with a capital of $12,000,000, of which he and the German parties named held over one half. He became president of it, and remained such until the summer of 1892. In that time, the capital of the company was increased to $15,000,000. The German friends made a handsome profit by the sale of their holdings before his retirement from the presidency owing to the consolidation of the Edison General Electric Company with the Thomson-Houston Electric Company as the General Electric Company, of which he disapproved. His judgment against uniting with the Thomson-Houston Electric Company was fully borne out by the collapse of the General Electric Company within a year and a half.
It is in place to mention here that Mr. Villard was a firm believer from the outset in the availability of electricity as a motive power for transportation. Just as he was the first to introduce an electric light plant on an ocean steamer, it was under his presidency that electric street and other railroads obtained considerable development. He was also convinced that the certain progress in the art of using the electric current for power and traction purposes would, sooner or later, lead to its substitution for steam even in factories and on standard railroads, and, as early as January, 1892, he convened a conference of electrical and railroad experts in New York to consider the ​problem of operating the Northern Pacific terminal lines in Chicago, as well as some of the branches of the main line, by electricity. The practicability of this at that time was negatived, but the growth of electric traction in the meantime has certainly rather confirmed than gainsaid his theory of the ulterior prevalence of current over steam. One of his transactions was the acquisition of all the street railway lines in Milwaukee, their change from animal to electric power, and their consolidation with the local electric lighting interests into one corporation, resulting, for the first time in the United States, in the distribution of electrical energy for light, power, and traction purposes from one central station. This combination has since grown into one of the largest and most successful light, traction, and power companies in this country.
Some very serious and complicated questions pending before the Northern Pacific board at the time of his reelection were its traffic relations with the Union Pacific, and the competition arising from the extension of the Montana Central system, now known as the Great Northern, into Montana. By means of the Utah & Northern line, the Union Pacific had enjoyed a monopoly of the Montana business until the completion of the Northern Pacific main line, and naturally opposed any encroachment upon its territory. The building of a Northern Pacific branch to Butte, where the bulk of the Utah & Northern's traffic originated, led to hostilities between the two roads in that quarter. Another bone of contention between them was the eastern Oregon and eastern Washington business. The managers of the Oregon & Transcontinental Company who succeeded Mr. Villard had abandoned his purpose of making the Oregon Railway & Navigation Company the outlet to the Pacific Ocean of the two transcontinental lines, and leased its system to one of them, the Union Pacific. This produced great friction; and actual hostilities, such as the building of new branch lines into each other's territory north and south of the Snake River, resulted. As to the ​Montana Central, Mr. Villard looked upon it as a grave danger, especially in view of the openly announced intention of James J. Hill to build on to Spokane Falls and Puget Sound. But the executive officers not only made light of the effect of the completion of the Montana Central to Helena, but even contended that the loss from it would be made up by its furtherance of the growth of northern Montana. Their contention was borne out by the earnings at the time, but Mr. Villard, upon a close investigation of the case, became convinced that it was most important to prevent the completion of the rival line to the Pacific coast, or, if this could not be done, to forestall possible harm to the Northern Pacific in some other decisive way. It will appear hereafter what he did in this direction.
At his instance, in pursuance of his purpose to utilize the transaction with Chase & Higginson to bring about permanent peace between the Northern Pacific and Union Pacific, committees were appointed by the two boards to find a basis for a settlement of all the differences, but the negotiations were conducted mainly by Charles Francis Adams, then president of the Union Pacific, and by Mr. Villard. They extended from the fall of 1887 to the following spring, during which time many personal conferences were held and a voluminous correspondence was conducted by the chief negotiators. After considering a number of propositions from both sides, a formal agreement was finally reached which was to be submitted to the boards for ratification.
Mr. Villard went to Germany for the double purpose of trying the cure at Karlsbad for his gout, and of having personal consultations with his financial backers. The principal subject discussed with the latter was his relation to the Oregon & Transcontinental Company. While he had declined a reelection to the presidency or even to the board, he was being steadily urged to reconsider his declination and to again take charge of the company. He deemed it incumbent upon him to submit the question to ​his principals, as there were indications that the advantages of the combination suggested by himself for the joint control of the Union Pacific and Northern Pacific for their common good had so impressed the managers of the Union Pacific that they themselves contemplated acquiring control of the Northern Pacific through the Oregon & Transcontinental. As the Deutsche Bank had already made itself morally responsible for the introduction of nearly thirty millions of Northern Pacific and Oregon Railway & Navigation bonds into the German market, this prospect was a serious matter, since the Union Pacific would surely manage the other companies mainly for its own benefit. It would also mean the loss to the Bank of the current business of the two companies, and of the steadying financial influence over them which the German bankers wished to and were entitled to exercise. The conclusion was reached that Mr. Villard should resume the Oregon & Transcontinental presidency, and that, in order to give him a proper backing, a syndicate should be formed to buy and hold 75,000 shares of the company's stock. Accordingly, he was chosen president on June 28, 1888, some weeks before his return from Germany.
From Berlin, Mr. Villard went to Karlsbad for treatment. While walking there on the principal promenade one day, he was surprised to meet Mr. Gardiner M. Lane, assistant to President Adams, who said to him: I came here by special order of President Adams to deliver an important message to you by word of mouth." Mr. Villard suspected at once that he had changed his mind regarding the settlement between the two companies, and so it turned out. The message was, in substance, that the contract could not be ratified by the Union Pacific unless certain modifications of it were conceded. As these seemed to him unimportant, he cabled at once to the Northern Pacific, recommending the concession. The reply came that it had already been made, but that the Union Pacific had backed out of the agreement altogether. ​On resuming the reins in New York, Mr. Villard found himself reluctantly obliged to resort at once to offensive measures when he ascertained that there was no hope left of coming to a peaceful understanding with the Union Pacific, and that the latter had already resorted to open hostilities by inducing the management of the Oregon Railway & Navigation Company to begin the construction of new lines into Northern Pacific territory. To stop this, legal proceedings were instituted to restrain the president and board of directors of the Oregon Railway & Navigation Company from the "misuse of the funds of the company in wasteful construction." But this injunction suit did not bring the building of the roads to a halt. The Northern Pacific retaliated by encouraging the duplication of the Oregon Railway & Navigation branch lines in southeastern Washington, and starting the construction of a line in Montana to break up the other company's monopoly of the Butte and Anaconda mining traffic. This state of things led to a determination on the part of Mr. Villard and his party to keep control of the Oregon & Transcontinental at the annual stockholders meeting in June, 1889, and through it of the Northern Pacific, and to oust the hostile management of the Oregon Railway & Navigation Company, which defiantly refused to surrender, although the other side represented the majority of the stock. The Union Pacific party, on the other hand, resolved also to secure possession of the Oregon & Transcontinental at any cost for the better protection of its lease of the Oregon Railway & Navigation Company, and to put a permanent end to all harm from the Northern Pacific by making themselves masters of it. Mr. Villard received early warning that a most formidable combination was forming against him, consisting not only of the Union Pacific people, but of James J. Hill and his followers and some of the largest financial corporations and leading brokers firms. Mr. Villard too was openly supported by strong institutions and firms, and both parties published calls for proxies, that ​of the opposition being signed by Sidney Dillon, Elijah Smith, John H. Hall, and Samuel Thomas.
Wall Street was divided into two camps, and the contest between them absorbed its attention for the time. Both sides strengthened themselves by purchases of Oregon & Transcontinental stock in the open market. As is usually the case, the crowd of speculators also became eager buyers, and the result of the scramble was the rise of the shares, with enormous transactions, from below 30 to 64, and a regular "corner," which came very near producing a crisis. The excitement grew from day to day with the approach of the closing of the books. It was the bitterest fight Mr. Villard ever had to engage in, and he had not only constantly to watch the market, but to conduct a protracted controversy in the press. A great deal of slander and vituperation was aimed at him, and he had also to meet injunction proceedings begun by the other side. It was the severest strain ever put upon him. He was victorious, and elected his ticket by an absolute majority of the stock; but the triumphant outcome was no compensation to him for the unenviable notoriety which the battle had once more given him. It was but proof to him how well founded his fears had been of the disagreeable consequences to himself personally of his return to power, and he could not help upbraiding himself, even after the struggle was over, for not having followed his own better judgment and remained a private business man.
Mr. Villard proceeded to Portland, accompanied by counsel, in order to be personally present at the annual stockholders meetings of the Oregon & Transcontinental and Oregon Railway & Navigation Companies; travelling over the Canadian Pacific. On reaching Seattle, than which no community on the Pacific Northwest was more friendly to him, he found that the whole business part of the city had been reduced to ashes the day before. The great conflagration had destroyed all supplies of food, so that the whole population had to be fed from public tables for ​several days—a very sad sight. On reaching Portland, he learned that an injunction would be applied for to prevent the holding of the Oregon Railway & Navigation election. This led to negotiations which culminated shortly in the sale of all the holdings of Oregon Railway & Navigation stock of the Oregon & Transcontinental Company to the Union Pacific, at a satisfactory price. Mr. Villard came to the conclusion that this solution was the best one for his side, as he was advised by counsel that the lease of the Oregon Railway & Navigation system could not be broken, and as he knew, further, that the hostile branch lines north of the Snake River were completed and would have to be recognized as existing factors. In other words, the Oregon Railway & Navigation stock no longer embodied the power to protect the Northern Pacific, and, therefore, its principal value to the Oregon & Transcontinental Company was lost. From that time on, Mr. Villard never had anything to do with the management of the Oregon Railway & Navigation Company, whose creator he had been.
After the annual Northern Pacific election in September, 1889, Mr. Villard held for a month the chairmanship of the Finance Committee, and then, yielding once more to the importunities of his friends, consented to take the chairmanship of the board, a new office especially created in order to facilitate the more efficient supervision of the general affairs of the company other than the actual operation of the system, of which the president and the heads of departments had charge. The growth of the earning power of the road had been very satisfactory during the three years from 1886 to 1889, the earnings rising from $12,789,448.10 to $19,707,467.95 gross, and from $5,884,831.30 to $7,843,926.48 net, while the mileage had increased only from 2876 to 3419. With this favorable showing and the restoration of the company's credit by the financial relief Mr. Villard had obtained for it, the new chairman looked upon his task of providing for coming needs as a not very difficult one. According to the reports of the president ​to the board, a steady yearly gain in gross and net of from fifteen to twenty per cent, could be surely relied on, and this prediction was made good during the next few years. Encouraged by this prosperity, the executive department came before the board with one recommendation after another for the improvement of the track, the replacement of wooden by metal bridges, additional motive power and rolling-stock, the enlargement of terminal facilities, and the purchase and construction of new branch lines. It was but a repetition of the general experience of all Western roads developed under like conditions. A progressive spirit animated the board, and they yielded, no doubt too readily, to the arguments of the operating and engineering officers. But it was evident that a new departure in the financial policy of the company would have to be taken in order to supply the means for the proposed large new expenditures. The financiering of it had been only a desultory one, so to speak, since the creation of the first mortgage, which was expected to meet present wants but which had no reference to the future. Three separate general mortgages had already been made on the main line, and there existed three other mortgages on parts of it, besides nearly a dozen special ones on branch lines. Mr. Villard devoted himself to the problem of devising a financial scheme comprehensive enough to provide not only for the current requirements, but also for the gradual absorption of all the securities issued under existing liens into one form of indebtedness. A general mortgage large enough for both purposes seemed to him to offer the only practicable solution, and was finally decided upon. The details were worked out by himself together with the finance and executive committees, and the project was then placed in the hands of the several counsel of the company. Several of the legal questions involved were very intricate, and the lawyers spent many months in solving them. The plan was considered at several meetings of the board and definitively approved on August 21, 1889. It authorized the ​issue of no less than a total of $160,000,000 of consolidated five per cent, bonds, of which $75,000,000 were to be reserved to refund first-, second-, and third-mortgage bonds; $26,000,000 were to be issued against existing branch lines; $20,000,000 were to be reserved for additional roads and extensions; $20,000,000 were to be reserved for terminals, etc.; $10,000,000 were to be reserved for premiums on bonds exchanged or refunded; $9,000,000 were to be issued for general purposes of the company.
It was by far the largest mortgage ever created up to that time on any American railroad, and its size excited much wonderment and varied comment, but its reception upon the whole was rather favorable. Its author became the subject of a good deal of banter in the press and in social circles. At a reception given to the late James G. Blaine, with whom Mr. Villard had been well acquainted for nearly thirty years, Mr. Blaine inquired after his health, and, on being told that he suffered a good deal from rheumatism, replied that it was not to be wondered at that a man who could float a $160,000,000 mortgage was afflicted with rheumatic pains.
His German friends had approved of the consolidated mortgage, and once more showed their faith in him and the Northern Pacific by purchasing immediately $6,000,000 of the new bonds and acquiring thereafter $4,500,000, all of which were introduced in the German market. His and their confidence was fully borne out by the gratifying growth in the earnings of the road from the figures of 1888–1889 to $25,151,544.09 gross and $10,211,141.91 net. This great gain was the more hopeful as it was earned notwithstanding the fact that the mining branches in Montana had begun to show a loss of traffic, owing to the decline in the market value of silver bullion. It even justified, in the judgment of the board, the distribution of a dividend at the rate of six per cent. on the preferred stock. Altogether, up to the spring of 1890, Mr. Villard was carried upward again by the high tide of success, and the prospects before him seemed never more serene and promising. ​ Notwithstanding the apparent clearness of the horizon, Mr. Villard judged that the gravest danger the Northern Pacific had encountered up to that time was the extension of the Great Northern transcontinental line to Spokane Falls and Puget Sound, for which, it was announced early in the winter of 1889-90, the necessary capital had been secured. In spite of all the reassuring arguments of the operating officers of the company, Mr. Villard was persuaded that the Northern Pacific would be put at a great disadvantage by a competing through-line which, owing to the decline in the cost of labor, material, and equipment, could be built for about half the cost of the Northern Pacific. The danger was all the greater because, since the rupture with the Union Pacific, President Charles Francis Adams had formed an alliance with James J. Hill, under which trackage rights over the Union Pacific line from Spokane to Portland were granted to the Great Northern. This alliance shut the door even to a compromise traffic arrangement. One way, however, for the prevention of serious consequences to the Northern Pacific remained open, and that was to acquire a majority interest in the stock of the St. Paul, Minneapolis & Manitoba, which controlled all its western extensions. After ascertaining, through intimate friends of James J. Hill, that he was disposed to sell his own holdings with those of his group of friends at a reasonable figure, Mr. Villard matured a plan for raising the necessary funds, estimated at $20,000,000, by the creation of collateral trust bonds guaranteed by the Northern Pacific and secured by the stock to be purchased. Good dividends had been earned on the latter, exceeding the proposed rate of interest on the collateral trust bonds. The plan was approved by his German friends, who were willing to market the bonds in Europe. Formal negotiations for the purchase were then opened. Several sets of James J. Hill's friends failed to come to conclusions with him. Finally, Calvin S. Brice, General Samuel Thomas, and Frederick P. Olcott undertook the task. The last two appeared late one evening at Mr. Villard's residence in the ​Tiffany House, New York, to announce that they had dined with James J. Hill and that he had positively agreed to sell a majority of shares at 120, and that they were all to meet at Mr. Villard's office the next morning to sign the papers. Mr. Villard told his visitors that he was very glad to hear the news, but he still doubted, in view of past vacillations of Mr. Hill, whether the bargain would go through. The callers protested against this, and insisted that Mr. Hill could not back out of his promise, and that he had positively agreed to sell. An appointment was made for ten o'clock the next morning, but Mr. Villard was the only one who kept it. After waiting an hour in vain, he called up Mr. Olcott by telephone and learned that Mr. Hill had slipped away again. In the light of the collapse of the Northern Pacific on the one hand and the great success of the Great Northern on the other, it is certainly not too much to say that, if this scheme had been carried out, it would have constituted the most important achievement in Mr. Villard's whole career, and the Northern Pacific would have had a record of unbroken and growing prosperity instead of passing a second time through insolvency.
Besides the consolidated mortgage, another very important proposition came before the Northern Pacific board at its meetings in the years 1889 and 1890. The parties who had been elected directors with Mr. Villard in 1887, in recognition of the claims of the Oregon & Transcontinental for representation, controlled the Wisconsin Central Railroad Company and the ownership of the terminal company that had been formed in order to secure an inlet into Chicago for that railroad. The terminal company had acquired a large body of real estate for right of way and for a passenger and freight station near the business centre of Chicago, for which the necessary buildings were near completion. The directors in question brought the subject of a lease of the Wisconsin Central and the terminal by the Northern Pacific before the board, which referred it to the chairman, the executive committee, and the ​executive officers, for investigation and report. This brought up the general question whether it would be wise, with regard to other roads, for the Northern Pacific to establish its principal eastern terminus at Chicago instead of St. Paul. There were strong reasons for and against the change. In the board, too, opposition was shown at first, but, after the operating and legal advisers of the board had, upon long consideration of the subject in all its bearings, recommended the lease of the Wisconsin Central and the terminals, it was authorized by resolution of the board on April 1, 1890, and executed. The terminals were organized and leased as a separate company under the name of Chicago & Northern Pacific. In its organization, the chairman followed the same plan that had proved so successful in the case of the St. Paul & Northern Pacific Company, so that the Northern Pacific received one-half of the stock as part of the consideration of the lease. It was expected that this stock would, as in the other case, become valuable assets. These consequential steps, which were believed to be a great advantage to both lessor and lessee, turned out to have been grave mistakes, and were corrected in the reorganization of the Northern Pacific.