#371 James J. Hill: The Empire Builder

**David Senra** (0:00)
I found out about James J. Hill from Charlie Munger. Munger said that Hill was a great operator like John D. Rockefeller and Andrew Carney, and I thought that was very high praise. And what jumps out when you read a biography on James J. Hill is just how difficult Hill was to compete with. And in this biography, they are constantly comparing the way Hill runs his business to his main competitors. And here's one example. It says, Many observers would later compare Hill with Henry Villard. The comparison was inevitable. While Hill was building carefully and checking his costs minutely, Villard built in ignorance of his costs. Amid mounting deficits, Villard was then forced to resign the presidency. Hill knew that the best defense against invading railroads was a better built system that could operate at lower rates. Well, just how sound was the system that James J. Hill built? Well, the Great Northern Railway lasted from 1889 to 1970 Hill died in 1916 That's over 50 years after he died, and you'll think that you'll find this interesting. The Great Northern Railway in 1970 is merged into the Burlington Northern Railway, which then the Burlington Northern Railways merged in 1996 to the BNSF Railway. And in 2010, Warren Buffett bought the BNSF Railway. Buffett still owns it to this day, and this all started with James J. Hill. James J. Hill knew that you could find a competitive advantage if you controlled your costs better than your competition. In fact, Sam Walton said exactly that. Sam Walton said, control your expenses better than your competition. This is where you could always find the competitive advantage for 25 years running. Long before Walmart was known as the nation's largest retailer, we ranked number one in our industry for the lowest ratio of expenses to sales. Anyone who is committed to being great at building their business is obsessed with watching their costs. Think about last week, the founder of IKEA said, we pushed cost awareness at all levels with almost manic frenzy. Warren Buffett has a great quote about this. He says, a good manager must be a demon on costs. Sam Walton, Ingvar Kamprad, James J. Hill, every person that runs a Berkshire-owned business and countless of history's greatest founders all have one thing in common. They made cost control an obsession. That is exactly why Ramp is now a partner of this podcast because all the founders of Ramp listen to the podcast. They picked up on the main theme from the podcast over and over again, the importance of watching your cost and controlling your spend and how doing so gives you a massive competitive advantage. That is the reason that Ramp exists. Ramp exists to give you everything you need to control your spend. Ramp exists to give you everything you need to make cost control an obsession. Ramp gives you easy to use corporate cards for your entire team, automated expense reporting and cost control. As you're about to hear in this episode, James J. Hill was obsessed with efficiency. Ramp helps you run an efficient organization. And I read a Ramp customer review that I think sums this up perfectly. It says, Ramp is like having a teammate who you never need to check in on because they have it handled. Ramp's website is incredible. Make history's greatest entrepreneurs proud by going to ramp.com to learn how they can help your business control costs. That is ramp.com. In the dead of winter in 1870, a young James J. Hill was on a 500-mile track from Canada to St. Paul, Minnesota. He had traveled by dog sled, horseback, and he was now on foot. It was dark. He was exhausted and covered in snow. He arrived at an inn in the town of Caledonia in the Dakota territory. The innkeeper took one look at Hill and refused to rent him a room. Hill then had to backtrack on foot and trudging through snow 15 miles to a farmhouse where a widow allowed him to stay for the night. James J. Hill would never forget the widow's kindness. He would not forget the cruelty of the innkeeper in Caledonia who had refused him shelter either. Ten years later, Hill was building his railroad and intentionally built his line to avoid Caledonia and instead pointed his road past the town of the widow who had taken him in. As a result, Caledonia disappeared from the map. The widow's town became the capital of county. That town was renamed Hillsboro in Hill's honor and still exists to this day.
That was a story that I found while I was watching his four-part documentary called The Empire Builder, James J. Hill and the Great Northern Railway, that I was watching at the same time I was rereading this great biography on James Hill called James J. Hill, Empire Builder of the Northwest, which is written by Michael P. Malone. In the late 1800s and early 1900s, when James J. Hill was alive, he was one of the most famous entrepreneurs in America. His nickname was the Empire Builder. Hill had unlimited energy, he was stubborn, he had a temper, he was supremely arrogant, and he did more to transform the northern frontier of the United States than any other single individual. So I want to talk about his early life. There's a few things that jump out when you're reading about James J. Hill's childhood. He grows up in a poor family in Canada. It's said that family led a frontier existence. Later in life, James talks about knowing what it was like to be poor and that his father was not very prosperous. One of his most vivid childhood memories is the fact that he would lay awake at night staring at the moonlight that would beam through the holes in their roof. And that was back when he had two good eyes. When he was nine years old, he was out hunting with a bow and arrow. The bow that he had handmade had snapped, and the arrow flies backwards, hitting his right eye and prying it out of its socket. They were able to reattach the eye, but he was permanently blind out of that eye. And even with one eye, he read everything all the time. There's a handful of traits that James J. Hill has even when he's young that he carries with him throughout his entire life. One is his voracious reading habit. That left eye proved to be very strong and would serve him faithfully through a long lifetime of intensely close reading and reckoning. Hill would often tell the people about the inadequacies of his education. He says he never went to school a day after he was 14, but he could read, write and reckon, and more importantly, he loved to learn. And this will surprise you, but one of the subject matters he loved was history and biography. Now, this is something that he learned from reading a bunch of biographies. He learned the power of one dynamic individual. This is what the book says. Like so many other 19th century youths, young Jim Hill fell under the spell of Napoleon. He came to believe in the strength of will, the power of one dynamic individual to change the world. He believed in the conquering hero. In fact, later on, he says that the railroad entrepreneurs conquered. That's the word he uses. He said that the railroad entrepreneurs conquered the distance between remote communities in the American West. And so, this is the way I thought about Hill right before his father dies, because his father is actually going to die suddenly on Christmas Day when James is 14 That's why he said, I never went to school the day after I was 14 years old. He couldn't. He had to quit school and go to work. Right before his father's death, he had a poor father, a frontier existence, one eye, and he was a voracious reader. And so, now he has no father. He's still living on the frontier, has to go to work to support his family, still has one eye, still reading everything he can get his hands on. But then we start to see something that, another trait that he carries for his entire life. He accustomed himself to a large workload. If you were able to ask James J. Hill, starting at 14 when he goes to work, and then all the way up until he dies when he's in his 70s, how many hours a week do you work? His response would be all of them. So at 14, he gets a job at a general store. He keeps the books, does clerical work, milks cows and cuts wood. He is still in Canada. A few years later, a trader from St. Paul, Minnesota is at the store, and James is helping him with his horse. The trader hands James a copy of an American newspaper with the headline that says, Splendid Chances for Young Men in the West. And the trader tells him, go out there, young man, that's the place for you. Hill carries the copy of that newspaper around, and he reads and rereads it until it falls to pieces. And it's at 17 when he makes the most important decision of his life, and that's when he decides to seek adventure and profit and go to America. Now, there's something that we're going to talk a lot about, is the fact that he was an engineering and a financial genius, and something that opened up future opportunities for him is the fact that he saved all of his money. In fact, there's a quote that he says, if you want to know whether you were destined to be a success or failure in your life, you can easily find out. The test is simple and it is infallible. Are you able to save money? If not, drop out, you will lose. You may think not, but you will lose as sure as you live. The seed of success is not in you. And so this is what the book says about this part of his life. If he left with $600 in cash, his life savings, he took with him all the tools he would need to succeed in America. A quick intelligence, self-sufficiency, genuine courage and engaging personality, a fierce ambition and a remarkable work ethic. So actually we need to get into his personality. He was extremely charismatic. He was a natural salesman. He was a natural promoter. He held people's attention as he engaged them in characteristic, rapid fire, highly animated conversation, gesturing expansively and driving home his point with jabbing motions of his hands. He was the embodiment of high energy. So keep that in mind because that's going to serve him well when he winds up starting to work in the railroad industry. He doesn't start working in the railroad industry till he's 40, so more than 20 years in the future. But at the time, railroad entrepreneurs were actually called promoters. James J. Hill was a natural born promoter. So he goes to the town that the trader was from, which is St. Paul, and he gets a job in St. Paul working for a company that serves a fleet of steamboats. His job title was technically shipping clerk and he did maintain the books, but he also did a ton of manual labor. So he would have to handle incoming and outgoing freight. He'd work on the docks and in the warehouse. He also gets a job working for wholesalers who are shipping commodities by both rail and by steamboat, which gives him a ton of experience in logistics and forwarding. This is gonna be another advantage that he's gonna have when he moves into railroading in about 20 years. And so this is how Hill's biographer described this part of Hill's life. He worked incredibly hard, sometimes laboring late into the night, falling asleep at his desk, then getting up for a swim in the river and a cup of black coffee, then going back to work. These years formed his apprenticeship and he learned much more than bookkeeping. He learned how to extract favorable rates from shippers, how to beat back their attempts to inflate their rates artificially, how to purchase commodities cheaply and undercut competitors, how to deliver efficiently, and how to cultivate and maintain the loyalties of customers by anticipating and looking after their every wish. These lessons would serve him well when he switched over to the world of transportation. So when I'm sitting here reading about the work that Hill is doing for these whole-shell grocers, this reminded me of a very similar experience that Rockefeller had early in his career. And so I want to read you my note and highlight from what is my favorite Rockefeller biography of all time. It's the book that I covered back on episode 254 The book is called John Dee, the founding father of the Rockefellers. And it's describing a young Rockefeller having a similar work experience as a young James J. Hill is. And at the time, Rockefeller is working for Hewlett and Tuttle, which are forwarding groceries and other commodities by rail. And the book says, Rockefeller saw that posted rates supposedly fixed could also be negotiated. All was not as it seemed on the outside. A favored shipper at the end of the month would receive a rebate on that rate that could amount to a substantial sum. And so the note I left myself when I read that is, there is no standard oil monopoly without this happening first. Rebates played a huge role in Rockefeller's empire. And he says, rebates existed in other industries. I just applied them to oil. And so when you read about the early career of both James J. Hill and John D. Rockefeller, you realize that the sequence that experience is happening is very important. There is no standard oil empire without the experience of Rockefeller as a Hewlett and Tuttle. And there is no great Northern Railway Empire without James J. Hill having all these businesses and jobs that all interacted with the railroad for two decades before he gets control of his own railway. And so Hill is a great employee, but he doesn't want to stay an employee forever. It's as if there's ever a born entrepreneur, it was Jim Hill. Highly intelligent, highly motivated, highly acquisitive. It was only a matter of time before he went into business on his own. There is a great line from Max Levchin, one of the co-founders of PayPal. It is from this book called The Founders, written by my friend Jimmy Sony, which tells the history of PayPal. And in that book, it says, Levchin added an unexpected qualification for PayPal employees that he felt contributed to the company's success and the later achievements of its alumni. Many of its earliest employees simply hated being employees. The very best employee at any job, at any level of responsibility, is the person who generally believes this is their last job working for someone. The next thing they'll start will be their own. And one thing that James J. Hill understood is that relationships run the world in a great way to transition from employee to entrepreneur is by partnering with an older, more established, wealthier businessman. So he works very hard at befriending this guy named Norman Kitson. So Norman Kitson is about a generation older than Hill. He's one of the most successful entrepreneurs in St. Paul. He had made money in the fur trade and as a steamboat operator. Eventually, he's also gonna partner with Hill on railroads as well. Norman Kitson is going to be so important to Hill that Hill names his first born son, James Norman, in Kitson's honor. And so Hill partners with Norman Kitson and helps Kitson with his existing fur trading business. And one of the things that Kitson and everybody around James J. Hill at this point of slide just realized how focused he was. It says Hill drank little, worked hard, and confined his socializing to respectable settings. As always, he read incessantly. He permitted himself few distractions in his relentless drive to achieve wealth and status. And so in addition to working with Kitson, he's gonna found his very first company. This is gonna be the James J. Hill Company. You know, this is very fascinating. And again, another trait that he has for his entire life. Inefficiency disturbs him greatly, okay? So he is watching, he's on the riverbank. He's seeing that dock workers are unloading cargo from steamboats onto horse carts. Then they would haul the cargo, use the horse carts to haul the cargo up the hill to then be reloaded under railroad cars. That extra step of adding the horse-tron carriages up the hill disturbed him so much, that he founds a company to fix and to remove that step. So this goes back to why he kept saying, if you can't save money, the seed of success is not in you. And he was always very financially conservative. So much so, I guess I should tell you this now. James J. Hill, the reason that he's so remarkable, I guess I should tell you how I found him. I didn't know who James J. Hill was until many, many years ago, like five or six years ago. I'm reading Poor Charlie's Ominac and Charlie Munger. James J. Hill was mentioned twice in there. And so Munger is talking about how great Jim Sinegal, the founder of Costco is. And he says, Jim Sinegal is a fabulous business operator, like a Carnegie Rockefeller or James J. Hill. And so you and I have talked about this a bunch of times, but I think it's really important. When you find somebody you admire, like I admire Charlie Munger, go find who they admire and then read about them too. And so that's what made me pick up a biography of James J. Hill for the first time five or six years ago. But then when you read about it, we realized why Munger and other people admired him so much. James J. Hill was the only American railroad entrepreneur in history to build a railroad and never go bankrupt. And one of the things that made him so hard to compete with is how efficient he was constantly refining the efficiency of his railroad. He was obviously obsessed with what's watching his costs. And there's multiple examples in his biography where they compare how he managed the expense side of the railroad compared to his other competitors. And he was constantly preaching the importance of being financially conservative in building for the long term. So at 27 years old, he winds up withdrawing his life savings, which at that time was $2,500. And he uses that money to start the James J. Hill company. This company is going to be a forwarding agent for the St. Paul and Pacific Railroad. That is the railroad he's eventually gonna buy out of bankruptcy many years in the future. Okay, so his company this time, they get hired to transfer goods from the riverboats and load them on the trains. And so his first innovation was, hey, I'm just gonna build a two story warehouse on the riverbank. The first floor is gonna be level with the dock. The second story was level with the railroad, making it much easier to transfer from boat to railroad and eliminated the need to unload and reload on to horses. I would say from reading a lot about him and then spending four hours watching the documentary too, he loved, James J. Hill loved eliminating steps. Eliminating that one step drastically reduced the cost of transfer. There's a maxim that I have about this that I think about all the time. It says genius has the fewest moving parts. This will be a reoccurring theme for everything that Hill does. If you study what he does, he's an unbelievably clear thinker. He limits the number of details and then he makes every detail perfect. And so his first business is founded on an observation that, hey, I could do that a better way. His second business is founded on an observation. The railroad operators are spending a lot of money on fuel at the time that's mostly wood. I should start a business that sells fuel to the railroads. And so there's a ton of things going on in his life. So right now, he's starting more businesses. He's learning more about railroads. You'll see immediately, he has this bias towards vertical integration. What we call vertical integration, he has a great line for it. He called it rational integration. And then we also see that he has uncompromising standards. He's a very difficult person to deal with. So he winds up partnering with this guy named Griggs. They start Hill, Griggs and Company, and it's a fuel company. And it starts out selling wood for fuel to the railroads. And so at the exact same time, because Hill's very observant, he notices that coal is starting to be used in place of wood, that it had many more benefits, that coal had many more benefits as a fuel sourced in wood. And so there's a line in the biography that again is another trait that I need to put into your brain about James J. Hill. He always quickly gets out in front of an emerging trend. He immediately goes all in on the coal business, and this is the description in his biography. Hill's rise to the top of the coal business is interesting, not only because it formed a cornerstone of his career and generated venture capital for later investments, but also because it revealed the first time his instincts toward vertical integration and ruthless monopolization. He purchased mass tons of high-quality coal. Then as the size of his shipments and his bargaining power grew, he remorselessly leveraged railroads to deliver the coal at preferred rates. He formed a purchasing pool with other large coal businesses. His partners controlled a third of all the freight traveling on this railway route. Now about his uncompromising standards. He applied this not only to his employees for the rest of his life, but also to his partners. As time passed, he felt his partner Griggs wasn't cutting it, and so he forces a breakup of the partnership. Griggs gets mad, is going to set up his own fuel business and then compete directly with Hill. And that leads us to another lifelong trait of Hill, the fact that he was very pragmatic. This is a great description of how his modus operandi, how he would operate through his entire career. Ever the pragmatist as well as the top competitor, Hill also eventually previewed another future characteristic when he abruptly changed course and parlayed with his chief competitors to bring peace to the coal industry by joining together in a market sharing consortium. Hill had an entirely pragmatic business personality. When competition suited him in a market, he competed fiercely. But when competition became wasteful to him, he did not hesitate to end it, even if it meant joining with old enemies to create a monopoly.