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August 2014 Issue [Easy Chair]

The Octopus and Its Grandchildren


When an 1882 cartoon in San Francisco’s Wasp newspaper depicted the Southern Pacific Railroad as an octopus with the whole state of California in its far-reaching tentacles, it launched an image of monopoly power still with us today. Supersize these animals and put people, institutions, and buildings within their reach, and those tentacles become an apt shorthand for the diversified interests of an acquisitive force. Likely inspired by the cartoon, Frank Norris took up the figure for his 1902 muckraking novel about the railroads, The Octopus. A few years later, Standard Oil was similarly represented in an illustration for Punch magazine. The animal had evolved somewhat by 2009, when Matt Taibbi called Goldman Sachs “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

You’d think all this would give octopuses — as well as vampire squid — a bad name, but it hasn’t as far as technology’s billionaires are concerned. Microsoft co-founder Paul Allen is only the world’s fifty-eighth-richest person at present, but he has the world’s thirteenth-largest private yacht: Octopus. The world’s fifth-richest person, Oracle CEO Larry Ellison, runs most of his fortune through Octopus Holdings LP. Incidentally, Ellison’s Oracle Corporation is, as of April, being sued — not for the first time — as a monopoly-seeking beast. A lawsuit filed by the tech-support company Terix argues that since acquiring Sun Microsystems, “Oracle has pursued a deliberate policy of attempting to eliminate competition in the market for the maintenance and support of computer hardware running the Solaris operating system.” Generally, policing such anticompetitive behavior is the job of the U.S. Justice Department, but it has been notably shy on that front since losing a high-profile antitrust case against Oracle after the company’s 2004 acquisition of the software company PeopleSoft. Many of the biggest tech companies have grown by eating up smaller companies and beating the resultant antitrust suits.

The resemblance between the original octopus and today’s version is more than coincidental — it’s genetic. Everyone knows that to a great extent Silicon Valley comes out of Stanford University, but where Leland Stanford Junior University comes from hardly anyone inquires. It comes directly out of the Southern Pacific, and though we tend to speak as though the nineteenth century were very long ago and any of its descendants are great-great-great-grandchildren at least, the lineage is in this case quite short. The Southern Pacific, back when the railroads were our state-of-the-art networked technology, begot Stanford, which begot Sun Microsystems, Google, Yahoo, and numerous others.

Leland Stanford, the railroad baron who founded the university in 1885, was one of the richest men this country has ever produced. Had his only child, Leland Jr., not contracted a fatal case of typhus on a grand shopping tour of Europe at fifteen, the railroad fortune would almost certainly have been left to him. Instead, his bereaved parents sought another legacy.

The father’s initial idea, as reported by the pastor of the Paris church where his son’s embalmed body briefly rested, was to create “a school or institution for civil and mechanical engineers on my grounds in Palo Alto.” Leland Stanford’s personal secretary recalled that he first proposed technical programs with practical purposes such as training skilled mechanics. Happily, the Stanfords’ project soon evolved into a scheme for a broader institution, a university that would admit women as well as men and teach the arts and sciences as well as engineering. (Nevertheless, the university has always had a strong technical and engineering component, even before Frederick Terman, a Stanford dean, encouraged his students Bill Hewlett and David Packard to go into business and started the school’s partnerships with technology firms at Stanford Research Park. Nowadays 17 percent of the university’s undergraduates and 38 percent of its graduate students specialize in engineering.)

The grieving parents toured great universities, hired faculty, and built on their 7,000-acre racehorse farm in Palo Alto dormitories, a grand church, a museum of their son’s antiquities, and a quadrangle of classrooms and offices. They deeded to the school 78,540 acres of California land (on which they and their son were later buried) and opened the place October 1, 1891, with 555 students and a promised endowment much larger than was Harvard’s at the time.

Less than two years later, Leland Sr. himself died suddenly, leaving Jane Stanford his principal heir and executor. She inherited a monumental battle as well. The Treasury was now seeking repayment from Stanford’s estate on $30 million in U.S. government bonds. Paying this debt would have undermined the school’s finances.

In the early 1860s, the federal government had given Stanford and his three railroad-building partners the right to sell bonds on which the government would pay interest to the bondholders; all they had to do in return — besides laying thousands of miles of track — was pay back the principal and simple interest within thirty years. To say this was a good deal is like saying the Pacific Ocean is a large pond: they got to own the railroad, the land underneath it that had been public land, the checkerboard of alternating parcels of land on either side of the railroad right-of-way (12,800 acres per mile of track), and all the profits therefrom — in other words, they got the chance to turn California itself into, essentially, a monopoly run for their benefit. They set about making a good deal even better by overpaying subcontractors that they happened to own, commissioning surveys that deemed flat land mountainous (high government construction subsidies), and buying votes to tip local, state, and federal administrations their way. One of the partners, Mark Hopkins, burned the books.

Stanford’s brother Philip is said to have gone around handing out five-dollar gold pieces to San Francisco voters during an 1863 referendum on railroad investment; Stanford himself was, conveniently, governor of California at the time, and so in 1863 California also gave $15 million in state bonds to the railroad. In The Big Four, a history of Stanford and his three business partners, Oscar Lewis wrote, “from the middle ’70s to 1910 the major share of the profit of virtually every business and industry on the Coast was diverted from its normal channel into the hands of the railroad and its controlling group.” Or, into the tentacles. There was no alternative to their transit networks, just as there is nowadays, for example, virtually no alternative to Google’s vast and spreading information networks.

Of the four who had profited so outrageously, only the monopoly’s wily finance man, Collis P. Huntington, was still living when the bonds came due. He went to war against timely repayment. It was a pitched and highly public battle that brought forth further public animosity toward the railroad empire. Jane Stanford also fought back against the government, which was demanding $15 million from her husband’s $20 million estate. She took the case to the Supreme Court and went to Washington, D.C., herself to ask President Grover Cleveland to intervene. He did, she won, and the rest is tech history.

Stanford (where, I should mention, I had a research fellowship last year) has its own internal critics, from the scholar Richard White, whose scathing history Railroaded won the Los Angeles Times Book Prize, to the communication professor Fred Turner, whose account of the Internet’s genesis is not much sunnier. The university is less dicey in its foundational funding than its Ivy League peers tainted by slavery, but it is also the most formidable institution that the Southern Pacific gave us, and the resemblance between that Victorian octopus and those of our own days, between the old robber barons and our sparkly new billionaires, can be striking.

White writes in Railroaded that he came to Silicon Valley

in the midst of the boom at a time when very many people were becoming very rich by creating companies, or owning the securities of companies, that lost vast amounts of money. . . . Eventually, I came to think of these new millionaires as descendants of men like Leland Stanford and his Associates. They had garnered large fortunes from heavily indebted corporations in ways that would not bear much looking into.

Part of the point of White’s monumental history is that the old railroad barons grew rich even when they created chaotic, dysfunctional corporations that ill served the public. They didn’t have to benefit us to benefit themselves.

San Francisco–based Twitter went public last year, creating 1,600 employee-millionaires overnight, many of whom sold their stock as soon as they could. Twitter also benefited from a payroll-tax break worth $56 million, which the mayor of San Francisco gave the company under threat that it would decamp if it had to pay what ordinary businesses do. That mayor, Ed Lee, is in thrall to the tech industry and to his principal campaign donor, the billionaire Ron Conway (who was an early investor in Google, Facebook, Twitter, Airbnb, and many more Internet companies).

In the Southern Pacific era, politicians were bought directly, even if taking kickbacks was illegal and considered immoral; now candidates are openly for sale via campaign donations and lobbying. Google spent more money on lobbying the federal government in 2012 than any other corporation except General Electric, and it still has one of the largest lobbies in the country.

Google, Facebook, and Apple use offshore shell games to largely avoid paying taxes, while the billionaire former PayPal CEO Peter Thiel co-founded (with none other than Milton Friedman’s grandson) a nonprofit pursuing the pipe dream of building artificial islands to which individuals and businesses can relocate to be free of regulations and taxes. “If we can solve the engineering challenges of Seasteading,” Patri Friedman explained to n+1, “two-thirds of the Earth’s surface becomes open for these political start-ups.” Another billionaire, the venture capitalist Tim Draper, is funding a ballot initiative to divide California into six states, one of which would comprise the whole Bay Area under the name Silicon Valley. Secession from the United States, rather than retreat to Friedman’s proposed islands, has also been a popular idea. A Stanford lecturer/startup maven named Balaji Srinivasan gave a talk last year entitled “Silicon Valley’s Ultimate Exit,” in which he proposed showing what “a society run by Silicon Valley looks like without affecting anyone who still believes the Paper Belt is actually good.”

“The Paper Belt” is his sneering expression for everything that came before about 1994 and isn’t run by the tech industry. The pervasive fantasy that Silicon Valley doesn’t need the government obscures the role of that government in funding much of the research that built it. The Internet itself, of course, was developed by the Department of Defense, and Silicon Valley is still key to the military and vice versa. The Office of Technology Licensing at Stanford estimates that the U.S. government funds 85 percent of research at the university, though the OTL insists the government is in turn a “significant beneficiary” of this research.

One beneficial invention the OTL recently licensed was “optimization software used in the design of yachts for the America Cup [sic].” That would be the America’s Cup, which Larry Ellison’s crew won in San Francisco Bay last year, overcoming the setback of being caught cheating to defeat the incongruously named Team Emirates New Zealand. Ellison soaked San Francisco with an $11.5 million bill for the spectacle.

Ellison has Leland Stanford’s love of extravagance and Collis P. Huntington’s cunning. Octopus Holdings LP is the official owner of his estate in Woodside, the billionaires’ hamlet a little ways from Stanford University in the heart of Silicon Valley. The home, a sort of theme park modeled after a Japanese imperial residence, was assessed at $166 million in 2005, but Ellison or his Octopus appealed and got a $3 million tax refund on the grounds that the house, built between 1995 and 2004, was obsolete and that its value had dropped $101 million. The refund came straight out of the San Mateo County budget, and half of it would have gone to public schools.

This outcome calls to mind another court ruling on the San Francisco Peninsula, better known because it still shapes our lives. The squabble, which took place in 1886, was between Santa Clara County and the Southern Pacific Railroad. The county (in which most of Silicon Valley is now situated; the rest is in San Mateo) wanted $13,366.53 in taxes on the company’s property. California law allowed individuals but not corporations to deduct their mortgages and debts from their taxable property’s value. But the judge — a friend of the Southern Pacific — found that the “defendant Corporations are persons within the intent of the . . . Fourteenth Amendment.” And so it was that an amendment that had recently given ex-slaves the rights of human beings was said to have given corporations the same rights, which meant the fact that the railroad hadn’t paid back its government loans saved it a bundle on local taxes, and which brings us almost up to the Supreme Court’s 2010 Citizens United decision and other fruit of corporate personhood . . . But let’s stay, as the old railroad metaphor has it, on track.

There are other ways in which the tycoons of the nineteenth century resemble those of the twenty-first. Stanford’s partner Charles Crocker undercut the cost of labor by hiring Chinese immigrants en masse; Facebook CEO Mark Zuckerberg founded to push immigration-law changes that would make it easier for Asian engineers to come to the United States. As many observers have noted, the primary attraction of foreign workers is not that they make up for a shortage in high-skill domestic workers — a shortage for which there is no evidence — but that they accept lower wages. When Huntington was grilled about his company’s finances, he said he couldn’t recall, had forgotten, was confused, as did the billionaire venture capitalist (and Sun Microsystems co-founder) Vinod Khosla this spring while being grilled about why he’d shut off all access to a public beach.

Technology was supposed to bring us forward — remember Bill Clinton’s “bridge to the twenty-first century” slogan and all the heady utopian promises about democracy and egalitarianism and a voice for everyone and economic magic and everything being free as in terms of liberty as well as in price? Fourteen years into that century, it looks a lot like the nineteenth. The economic divide has widened, and the ostentatiousness of the ultra-elite is a sneer at the rising desperation of most of the rest of the human beings on earth. Democracy in the United States has been undermined by corporate power, and that loss is augmented by the loss of privacy inflicted on us by the surveillance state with help from the tech sector. Amazon is intent on bringing the publishing industry to its knees; journalism, the great watchdog of the nineteenth century, has been bled almost to death by the Internet.

But there’s one cheerful thing to remember about the old octopuses, the Southern Pacific and Standard Oil. They arose in new resource landscapes, more or less completely unregulated. They helped create the obscene economic disparity of the age, and they helped stir up the ire of working people. What followed on the Gilded Age was the age of progressivism, the age that broke up the monopolies, regulated industry, and articulated a fierce vision of economic justice and rights for workers. We need to hope that we’re coming to that ourselves, or despair that we’ve become virtual serfs.

is a contributing editor of Harper’s Magazine. Her Easy Chair essay will appear in every other issue.

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