THE CHRONICLES
OF AMERICA SERIES ALLEN JOHNSON
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MASTERS OF CAPITAL
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THE MASTERS OF CAPITAL
TEXTBOOK EDITION
THE CHRONICLES
OF AMERICA SERIES
ALLEN JOHNSON
EDITOR
GERHARD R. LOMER
CHARLES W. JEFFERYS
ASSISTANT EDITORS
In this "book, "Masters of Capital", we have a most remarkable "Time and Mo- tion Study" of Capitalism in action. In fact, it is, in effect, a copy of their formula, given us by one of the lfkeepers of the seals and records ", with accompany- ing exhibits of its effects, before and after. If proof of the pudding is really in the eating* it might be mentioned that I have seen and tasted most of the fla- vors, having lived a long life in the railroad atmosphere, and observed most kindred and related activities, from the tine of my entering their service in 1883 to the date of the last newspaper.
H. Gr. Wells has well reminded us that "human destiny is a race between or- dered thought made effectively education on the one side, and catastrophe on the other. So far, catastrophe seems to be leading. "
We observe, both by definition, ob- servation and experience, that Capitalism is the name that has been given to the process by which capital is purloined and manipulated in the control of the proces- ses and people by whom it is created.
In the theory and purpose of its operation, the process is continuous; "but it is subject to creeping paralysis, in- herent in the nature of its formula of increasing prices and reducing wages, thus destroying its own market, concur- rently rendering it impossible to attain or maintain the mathematically necessary trial "balance which is the recurrent test of all "business enterprise, and upon which its industrial, commercial, social and ethical obligations and survival de- pend. It logically and mathematically typifies, inevitably and invariably, a progressive cannibal's banquet in which each participant must eat or be eaten, - he must be the dinner or the diner.
Norman Cousins in his book, "Modern Man is Obsolete", pictures the status to which it has brought us, and Prof. Ralph Barton Perry, in his book, "One World In The Making", presents for us a "bill of particulars", as the lawyers might say, that must be faithfully observed in the "One World In The Making".
Fraternally submitted,
THE MASTERS OF CAPITAL
NEW HAVEN: YALE UNIVERSITY PRESS
TORONTO: GLASGOW, BROOK & CO.
LONDON: HUMPHREY MILFORD
OXFORD UNIVERSITY PRESS
Copyright, 1919, by Yale University Press
CONTENTS
I. THE RISE OF THE HOUSE OF MORGAN Page 1
II. MORGAN AND THE RAILROADS " 19
III. THE IRONMASTERS " 35
IV. STANDARD OIL AND WALL STREET " 52 V. THE STEEL TRUST MERGER " 70
VI. HARRIMAN AND HILL " 89
VII. THE APEX OF "HIGH FINANCE" " 109
VIII. THE PANIC OF 1907 AND AFTER " 134
IX. WALL STREET AND THE WORLD WAR " 155
APPENDIX " 181
BIBLIOGRAPHICAL NOTE " 221
INDEX " 225
2045513
THE MASTERS OF CAPITAL
CHAPTER
THE RISE OF THE HOUSE OF MORGAN
THE old meaning of the word "capital" — that is, an accumulation of wealth, either money or sub- stantial property, for use in the production of more wealth — has been greatly enlarged within recent times. In earlier days, under the crude methods then prevailing, a given manufacturing plant might earn, say, ten per cent on its invested capital; but when power machinery and improved processes came into use and earnings increased, say, to twenty- five or forty per cent, the practice began of putting a valuation on this increased earning power, and the "value" of a given property, instead of being based on its original or replacement cost, came to be measured by its capacity to earn profits.
Upon this new basis, "capital," as expressed
2 THE MASTERS OF CAPITAL
through the issue of corporate stocks and bonds, was created by leaps and bounds. As the indus- try of the community became more efficient and the unit of effort brought forth greater results, cor- porate securities were created in an ever increas- ing ratio. Then, as the new custom became more firmly established, it was found that the limit of cap- italization was by no means reached when present earning power alone was capitalized, for in a grow- ing country like the United States, with population practically doubling every generation, future earn- ing power was seen to be vastly greater. So the capitalists quite naturally took the further step and issued corporate stocks and bonds based on estimated future earnings.
Naturally, this modern practice of preempting or capitalizing probabilities was overdone. Such a process inevitably invited speculation ; and " boom " periods, with recurring lapses and setbacks, became characteristic of the times. Eventually, the capi- talists learned that this new capital, which repre- sented not only accumulated wealth and current earnings but the future possible earning power of the community generally, must be bolstered up and insured by some artificial process. So long as nor- mal growth in population and industry continued,
THE RISE OF THE HOUSE OF MORGAN 3
the capitalists could feel fairly secure, but dur- ing industrial and banking crises, crop failures, or other adversities, the earnings of capital might decline to such a point as seriously to impair the valuation. Thus there arose among capitalists — large and small — a widespread demand for legisla- tion and public aid to protect the integrity of the values which they had set up — a demand that cus- toms tariffs be made more rigid than before to pre- vent foreign competition and for other measures to preserve the status quo of the new dispensation.
The railroads, during the decade after the Civil War, were the most conspicuous beneficiaries of the new process; but when inventions came in, such as the telephone and electric light and power, as well as numerous other devices for economiz- ing time and labor, the current results and future possibilities of all these likewise were capitalized. In case of public utilities the supposed value of the franchise was made the primary basis of capitaliza- tion. In the quarter century from 1890 to 1915, the total capitalization in the form of stocks and bonds of public service corporations in the United States grew from less than two hundred million to nearly twenty billion dollars.
This new capitalism is a phenomenon of far-
4 THE MASTERS OF CAPITAL
reaching magnitude in modern society. In the ag- gregate it represents a valuation of about one hundred billion dollars in a nation whose entire wealth is roughly estimated at something more, than twice this sum. When it is remembered that as recently as 1890 the wealth of the nation was estimated at only sixty-five billions, and the cor- porate capital at that time was only about twenty- five billions, the significance of the development during the last generation will be appreciated. And when it is further realized that in the past ynalf century not only a new system of capitalizing / wealth-producing forces has grown up, but also a / concentration of control in small groups of powerful ' men, the subject becomes intensely interesting.
The great financial houses of Wall Street, which are today most closely identified with the organi- zation and control of the great corporate enter- prises of the country, nearly all started as firms engaged in the dry-goods or clothing business. Not only the Morgans, but the Brown Brothers, Kuhn, Loeb and Company, the Seligmans, and other old private banking houses of New York, began in this way. It was a natural beginning, for prior to the period of modern machinery capital in large
THE RISE OF THE HOUSE OF MORGAN 5
masses was employed chiefly by merchants, and the wholesale handling of merchandise was among the most profitable of undertakings. Before the idea of capitalizing potential possibilities took pos- session of the minds of men, the purely competi- tive commercial business, such as the wholesale merchandising of goods, still held the center of the stage, both in this country and Europe. Even Nathan Rothschild, the most famous financier of the early nineteenth century, had made his start by financing the materials and products of the early English cotton mills. So also in America, the capital of the day tended to gather in the hands of great merchants whose stock in trade was very largely cloth or manufactures from cloth.
Most Americans have forgotten all this early his- tory. Our " merchant princes " — only sixty years ago models of aspiration for every American boy — have passed out of mind. The business of security making and selling — sixty years ago a small, local, irregular peddling trade as compared to the busi- ness of the big American merchant — now looms so large that it seems to have been always important. In England they remember better. The men whom we in this country call "private bankers," such as the Rothschilds, the Barings, and the Morgans, are
6 THE MASTERS OF CAPITAL
not, even today, known as bankers over there, but as "merchants. " They are the lineal business descendants of the great East India Company of olden times.
In the United States one particular section de- veloped the international merchant. Before the days of the American Revolution the sharp-eyed, bony men of New England had gone out scouring the coasts of Africa and the islands of the sea for merchandise. There were no better traders in the world than they, and there are probably no bet- ter traders than the Yankee now. Then, after the shipping troubles caused by the War of 1812, the men and money of New England turned to the new business of the manufacture of cloth; and thus was laid the foundation of the great modern industry of New England, the manufacture of cotton goods.
In the year 1811, a sixteen-year-old dry-goods clerk, George Peabody, was thrown out of em- ployment by the burning of his brother's little store in the old town of Newburyport, Massa- chusetts. He then went with an uncle to George- town, D. C. (since incorporated with Washington), and opened a small retail dry-goods store there. After some years he moved to Baltimore and es- tablished branches in Philadelphia and New York.
THE RISE OF THE HOUSE OF MORGAN 7
Finally, in 1837, at the age of forty-two, he went to London and founded there the merchant bank- ing house of George Peabody and Company, which later became J. S. Morgan and Company.
George Peabody's departure for London was not in itself notably interesting at the time. In London he continued to be a "merchant " just as he had been in this country, but in establishing himself in the greatest mercantile and banking center in the world he was really making an advance along unusual lines. The kind of enterprise he founded is excellently described by his biographer, Fox-Bourne:
In London and in parts of England, he bought British manufactures for shipment to the United States; and the ships came back freighted with every kind of Ameri- can produce for sale in England. To that lucrative account, however, was added one far more lucrative. The merchants and manufacturers on both sides of the Atlantic, who transmitted their goods through him, sometimes procured from him advances on account of the goods in his possession long before they were sold. At other times they found it convenient to leave large sums in his hands long after the goods were disposed of, knowing that they could draw whenever they needed, and that in the meantime their money was being so profitably invested that they were certain of a proper interest on their loans. Thus he became a banker as well as a great merchant, and ultimately much more of a banker than a merchant.
8 THE MASTERS OF CAPITAL
In London, the chief financial center of the world, George Peabody represented the greatest and most profitable field for the investment of capital — the American continent, as yet prac- tically unscratched. Literally millions of square miles of the richest farming and mineral lands were there to be had for the asking; valueless it is true until populated, but potentially of vast value. The men who acquired or preempted this vast El Dorado, equipped it with power machinery, and the means of transportation, thus setting labor to work, would create values which would mount for generations to come. Untold wealth would continuously flow into their coffers.
To English and continental capital this prospect was the dream of the ages. No such outlook or opportunity had ever come to England or the old countries. The natural resources of England were already preempted when modern inventions first began to come into use; the rich farming lands and rural regions, while undeveloped, were and for ages had been in the possession of a rich land-hold- ing class; labor could not be applied to them and the modern generation of capitalists found no ex- traordinary opportunities there for the produc- tion of wealth. Thus English capital inevitably
THE RISE OF THE HOUSE OF MORGAN 9
turned to America, for America had few or no cash resources and any development of the country on a large scale must be carried out by those who had the means. There was little capital anywhere. Men were busily engaged, all along the Atlantic seaboard, making their living in the ordinary, old- fashioned way, and were not bent, to any great degree, on amassing large fortunes. The specu- lative era in America had not yet arrived, and, though manufacturing had begun, we were still — in the fourth decade of the century — a nation of planters and farmers.
When Peabody took up his residence in London, European capitalists were already competing for the opportunity to exploit American enterprises. Strong foreign houses were forming financial con- nections between London and New York. The Rothschilds had sent August Belmont to represent them in New York in the same year that Peabody had settled in London. The Barings had married into a Philadelphia family in the early years of the century and were also financially interested in the United States. Peabody, nevertheless, set out to be the chief representative of America in England. Every year he made a point of getting the leading men of both countries together, and
10 THE MASTERS OF CAPITAL
his Fourth of July dinners in London grew to be notable occasions for promoting friendliness between the business interests of England and the United States.
Peabody never aspired to be an originator or pro- moter of enterprises. This work he left to others. His business was that of the financier, a "master of capital. " In this field his success was enormous for the times, and his name grew constantly in Eng- lish favor. He finally amassed a fortune of twenty million dollars, became the greatest philanthropist of his time, refused a title of nobility from Queen Victoria, and died in 1869 in the possession of the thorough confidence of the English investing pub- lic. After his death, his statue was set up in the London financial district, not far from the dingy little spot at Wanford Court which had been his office during his entire London business life.
When Peabody retired, in 1864, Junius S. Mor- gan became the head of the business. Morgan was another Yankee dry-goods trader — a member of the firm of J. M. Beebe and Company of Boston — who had been taken into partnership by Pea- body ten years before. He was now about fifty-one and was fully capable of carrying on the high tra- ditions of the Peabody firm — doing international
THE RISE OF THE HOUSE OF MORGAN 11
commercial banking, holding deposits of customers, and buying and selling securities. The firm placed considerable issues of American railroad bonds in London and negotiated a loan to Chile. The name of George Peabody and Company ended with the death of Peabody, according to his own wish. But the business was carried on without interruption under the name of J. S. Morgan and Company.
Junius Morgan had a son, John Pierpont by name, born in Hartford, Connecticut, in 1837, when his father was in the dry-goods business there. This son was educated partly at the English High School in Boston and had finished his education at the Uni- versity of Gottingen in Germany. After leaving the University he had entered his father's office in London. He was an extraordinary mathematician and had been strongly tempted to take up the career of professor of mathematics. But his father thought otherwise, and in the offices of George Peabody and Company young Pierpont got his first training in the technicalities of commercial banking and no doubt began the development of that unusual ca- pacity for accurate and quick decision which so strongly characterized his entire career.
It was in 1857, the year of a great financial panic in the United States, that John Pierpont Morgan.
12 THE MASTERS OF CAPITAL
a tall, taciturn young man of twenty, stepped on the stage of American business. At that time the house of George Peabody and Company was doing its American business through the New York firm of Duncan, Sherman and Company, and this firm was so seriously crippled in the financial crisis that in order to save the situation George Peabody and Company had to appeal to the Bank of Eng- land for assistance. This experience impressed the London house with the vital importance of closer control of its American business, and it was decided to send young Pierpont Morgan to represent the firm in New York as cashier of Duncan, Sherman and Company.
In the offices of Duncan, Sherman and Com- pany, Pierpont Morgan met Charles H. Dabney, a partner in the firm and also the accountant. It was through association with Dabney that Mor- gan acquired his remarkable and accurate knowl- edge of bookkeeping and accounting. But the con- nection of the Peabody firm with Duncan, Sherman and Company was not destined to last very long. In 1864, the year in which George Peabody retired and was succeeded by Junius S. Morgan, Pierpont Morgan and Dabney formed a new firm under the name of Dabney, Morgan and Company, with
THE RISE OF THE HOUSE OF MORGAN 13
offices in Exchange Place, New York. This new firm became the correspondents of J. S. Morgan and Company of London. A few years later, Duncan, Sherman and Company failed and faded from view.
The house of Dabney, Morgan and Company built up an excellent business in foreign exchange and in the sale of miscellaneous securities and was no doubt financially successful, for when Dabney retired he was currently reported to have taken a substantial fortune out of the business. But the house had done nothing spectacular or striking; it was not classed with the big bankers of the Street; and its main prestige seems to have been based simply on its connection with the strong London firm of J. S. Morgan and Company. But in the year 1871 a change came. Dabney retired, the firm was dissolved, and young Morgan became a partner with the Drexels of Philadelphia, under the firm name of Drexel, Morgan and Company. Anthony J. Drexel, the senior partner, then per- sonally bought the southeastern corner of Wall and Broad streets and built the Drexel Building, in which the new firm began its great career.
The Drexels were sons of a German portrait painter who had wandered about South America and Mexico carrying on his profession. In the
14
course of his wanderings in the United States he had found that he could do a profitable business buying and selling state bank notes, which formed the "wildcat" currency of the time. In 1837, the same year in which Peabody moved to London, the elder Drexel had established himself in Phila- delphia on a street known locally by the signifi- cant name of the "Coast of Algiers," where he laid the foundation of a great business in buying bank currency, "shaving" commercial paper, and financing corporations.
John Pierpont Morgan was thirty-four years old in 1871 ; Anthony Drexel, his principal partner, was forty -five — a conservative, intelligent, and popu- lar man. There were four other members in the new firm, all from the Drexel house in Philadelphia. The new firm had advantageous alliances: on one side of the Atlantic, one of the richest financial houses in America; on the other, the great English house of J. S. Morgan and Company, in close touch with English capital — the greatest body of capi- tal in the world. Its advantages were clear; but it also had its disadvantages. In the chief business of the day — the funding of the government debt — it came into a field already pretty well occupied.
Some years before the combination of the Drexels
THE RISE OF THE HOUSE OF MORGAN 15
and the Morgans had taken place and while Dab- ney, Morgan and Company were still doing a quiet banking business, a financial operation of vast mag- nitude had been carried on in America. It was the flotation of the American Civil War debt. This debt had been placed very largely through Jay Cooke, a Philadelphia banker and promoter. Cooke was the typical American pioneer of his time, a tremen- dous optimist, a great employer of the benefits of friendship in high places, a sort of financial P. T. Barnum, who exploited the Government's securi- ties and later his own. He organized a great bond-selling campaign, giving "copy" to as many as eighteen hundred newspapers at a time and canvassing through his agents every hamlet in the country. Later, he was naturally the man who had the first opportunity to handle the great re- funding operations in government bonds which were put through in 1871.
Thus, the house of Jay Cooke and Company had forged well to the front, and had built up very strong connections abroad. During the Civil War period, English capital as a whole had not flowed very freely to the Northern States. Tied to the South by the long established bonds of her cotton trade, the English were at first more inclined to
16 THE MASTERS OF CAPITAL
buy Confederate than Union bonds. The Ger- mans, however, as a whole were more sympathetic towards the North, as the great body of German immigrants following the uprising of 1848 were Northerners and strong supporters of the Union. And when the six per cent Union bonds had fallen to sixty cents on the dollar in gold, the Germans, and especially the rich South German Jews, began to sell their own and invest in American securities. To the German Jew, America became the "land of ten per cent. "
Jay Cooke estimated that by 1869 at least a billion dollars' worth of United States bonds were held abroad, of which a large proportion were held in South Germany. This large investment had established a new and powerful business interest in America — the Jewish bond dealers, with foreign connections in the great European money center of Frankfort. With this new group of financial mer- chants Cooke had naturally allied himself, since the greatest source of English capital was only to be tapped through the Drexel-Morgan interests.
A keen contest arose between the Cooke interests (with their German Jew backing) and the Drexel- Morgan interests to secure the contracts for the government financing. In this contest Cooke and
THE RISE OF THE HOUSE OF MORGAN 17
his party won and then carried through an extraor- dinarily difficult operation so successfully that the Rothschilds offered themselves as Cooke's as- sociates in future enterprises. But the Morgan interests kept after the business, and subsequently, in combination with Levi P. Morton, secured a half interest in the government refunding operation of 1873, involving a sale of $300,000,000 of bonds — an enormous transaction for those days. Later, in the fall of the same year, Jay Cooke and Com- pany failed and this left the field in the United States for great financial operations entirely in the hands of the Drexel-Morgan-Morton associates.
By this time the house of Morgan had made great strides. But its position as the leading finan- cial house of America had not come about alone through the downfall and eclipse of Jay Cooke and Company. A year before the formation of the Drexel-Morgan firm, an event of great importance had contributed vastly to the fame and standing of J. S. Morgan and Company. Toward the end of October, 1870, the city of London had been stirred by the news that J. S. Morgan and Com- pany had taken a French loan of 250,000,000 francs. It was a syndicate operation and one of the largest and boldest ever known. In the previous month
18 THE MASTERS OF CAPITAL
the Germans had crushed the French army at Sedan, had taken the Emperor Louis Napoleon prisoner, and had besieged Paris. The only au- thority for the loan was a provisional government at Tours. To take such a loan, even at the low price of about eighty, was undergoing some risk in view of the circumstances. One thing, however, was very clear: the hand of a strong, bold man was at the helm. The bonds were offered to the public at eighty-five; they advanced at once in price and within a year were selling fifteen points above what they cost the Morgan firm. And the syndicate was believed to have cleared $5,000,000 by the trans- action. The reputation of the house of Morgan was thus well established among European bankers just at the moment when Pierpont Morgan, the son of Junius, came to the front in combination with the powerful Drexel interests, and just at the moment when foreign capital was ready to pour into America more freely than ever before. This was the opportunity of the house of Morgan. As the first big organizers of capital, the Mor- gans — father and son — were to wield a mighty influence in American finance.
CHAPTER II
MORGAN AND THE RAILROADS
THE work of Drexel, Morgan and Company in the refunding operations of the government debt, after the failure of Jay Cooke and Company, added greatly to American prestige abroad. For more than forty years the United States had been a burial ground for British capital. State bonds, Confederate bonds, railroad bonds, had proved to be disastrous investments. But now one single monumental success had restored faith in Ameri- can securities. In all, about $750,000,000 of bonds were refunded, of which the Morgans handled a large part, and this achievement reopened America to British investors. In 1877 the financial mag- nates of America gathered in New York at a dinner to give thanks to Junius S. Morgan for "upholding unsullied the honor of America in the tabernacle of the old world, " as Samuel J. Tilden, the toast- master, expressed the sentiment of the hour.
30 THE MASTERS OF CAPITAL
By 1879, with the financing of the war debt ac- complished, American bankers were ready to turn to a new field of activity. But leadership in the dawning financial era was to fall to the younger men. August Belmont, who represented the Roths- childs in America, was now sixty -three years old; Levi P. Morton, who had been Junius Morgan's fellow partner in the dry-goods firm of James M. Beebe and Company in Boston, was fifty-five; Junius Morgan himself, now sixty-six and present- ing the ponderous figure of an East India mer- chant prince in an old English play, was retiring from active business life. The younger Morgan was then forty-two, just about the age of George Peabody and Junius Morgan when they began their great careers in London. Hitherto he had been merely the son of his grim-mouthed father. But he had learned the tools of his trade; he had watched and helped to operate great syndicates; and he was now well equipped to take his place in the security markets of America.
Pierpont Morgan had watched the expansion of the railroads for many years. He had witnessed the most spectacular phenomenon of the period, for he had seen Gould and Vanderbilt accumulate their colossal fortunes largely by the manipulation
MORGAN AND THE RAILROADS 21
of railroad properties. But he had taken little part in the battle of the railroads. Back in 1869, the firm of Dabney, Morgan and Company had helped to wrest from Gould and his accomplices the control of the Albany and Susquehanna Rail- road, which was turned over to the Delaware and Hudson Canal Company. Again in 1878, when a rich comb manufacturer, Adolph Poppenhusen, had collapsed in the wild exploit of gridironing Long Island with railroad lines, Drexel, Morgan and Company picked up for a nominal sum his hold- ings, which were afterwards to be merged as parts of the Long Island Railroad. But aside from these minor incidents, the Morgan firm had not been active in railroad financing and were not in any sense known as railroad bankers.
In 1879, however, an incident occurred which brought Morgan directly into the field of rail- road finance. William H. Vanderbilt, president and chief stockholder of the New York Central and Hudson River system, was then being harassed beyond endurance. Popular suspicion had been excited by his accumulation of a fortune of one hundred millions in ten years; and the New York Legislature, reflecting public indignation, was in- vestigating the management of the New York
22 THE MASTERS OF CAPITAL
Central and was proposing radical control of rail- road management. Besides, the rate wars between New York and Chicago were then raging. Finally, to add to these vexations, Jay Gould was at- tempting blackmail because Vanderbilt would not take him into the New York Central directo- rate. Vanderbilt's friends advised him strongly to dispose of a substantial portion of his stock in New York Central and thus avert the legislation that was aimed at him. But how to unload his vast holdings was a problem. To throw half of them on the market would result only in a panic; to distribute the stock by private sale in Wall Street would also greatly disturb values. Besides, what banker would undertake to put through such a gigantic transaction?
Vanderbilt consulted J. Pierpont Morgan, and Morgan devised a scheme whereby a large block of New York Central stock could be sold secretly in England without in any way disturbing the Amer- ican security markets. This plan was adopted. The Morgan firm, through its London house, formed a syndicate and distributed 250,000 shares of the stock to permanent investors abroad. The trans- action was kept secret for a time, but after a few months the details were all published in the New
MORGAN AND THE RAILROADS 23
York and the London papers. Vanderbilt then an- nounced that a large part of the great sum of money he had received had been reinvested in United States government bonds. Thus, at one stroke, J. Pier- pont Morgan not only solved Vanderbilt's difficult problem and allayed public criticism, but inci- dentally, it was said, he made a profit for his syndicate of more than three million dollars.
The financing of American railroads had been left hitherto largely in the hands of promoters whose primary interest had been to build the greatest possible amount of railroad, regardless of whether there was need for it or not, and sell it out for the highest possible price. This had been the programme in the halcyon days after the Civil War and in the speculative period following the panic of 1873. The Northern Pacific had been extended westward to the coast; the Atchison, Topeka and Santa Fe had been built through the deserts of Arizona and New Mexico; Gould had radiated his more or less dubious lines throughout sparsely settled sections west of the Mississippi; the Union Pacific had entered upon that policy of constructing or acquiring branch lines and feeders, which a few years later was its financial undoing. And in the East a no less reckless and ill-advised
24 THE MASTERS OF CAPITAL
policy of construction had been going on. Most of the older systems were carried away with the idea of more and more mileage, more and more branches, more and more parallel lines. By the early eighties about twice as many railroad lines had been built as the country could profitably employ, and there had been issued about four times the amount of securities that the country could pay interest or dividends on. In 1884, Poor's Manual, the rail- road authority of that time, stated with great positiveness that the entire capital stock of the railroads of the United States — then about four billion dollars — represented "water." It esti- mated that, in the three years ending December 31, 1883, two billions of capital and debt had been created, and that the "whole increase of share capital [about one billion] and a portion of the / bonded debt was in excess of construction."
It was a crucial time for genuine investors, both at home and abroad. Thousands of these inves- tors in Great Britain, on the Continent, and in the eastern parts of the United States, who had supplied, in one form or another, the cash for this vast promotion of the American transportation system, suddenly found their securities dwind- ling away. There was urgent need for a strong
MORGAN AND THE RAILROADS 25
representative to champion their interests. After his successful underwriting of the New York Cen- tral transaction, Morgan began to be looked upon as a rescuer of investors, a solver of difficult financial problems. And he stood alone in this regard. The great railroad names of the period — Jay Gould, Russell Sage, Collis P. Huntington, Calvin Brice, and others — connoted expansion and specula- tion rather than wise control and conservative management of railroad properties.
For a half dozen years the gigantic structure / of inflated railroad capitalization and over ex- pansion stood — somewhat unsteadily — and then the crash came. By 1884 there were five inde- pendent lines operating between Chicago and the Atlantic seaboard, and two more were building. Three roads would have been ample for all the business. Railroad rates were torn to pieces; pas- sengers traveled from New York to Chicago for a dollar a head; grain was handled at an actual loss of fifty per cent. Three of these five roads were tottering on the edge of bankruptcy, one had gone bankrupt, and the New York Central was on the verge of cutting down its dividends. It was high time for something of a constructive nature to be done.
26 THE MASTERS OF CAPITAL
In the summer of 1885, William H. Vanderbilt was again in dire need of a friend. The West Shore Railroad was about to begin business as a com- petitor of the Vanderbilt lines. The Pennsylvania Railroad interests were supposed to sympathize with the West Shore project, for the reason that it promised to embarrass seriously their chief com- petitor. At the same time Vanderbilt was support- ing a project in Pennsylvania to parallel the main line of the Pennsylvania Railroad. Tht West Shore, according to the custom of the times, had been heavily overcapitalized and, just as the road was nearing completion, the company was dying for want of cash. Unless the Pennsylvania interests or some other strong capitalists should come to the rescue, it evidently could not survive. Just at this juncture Morgan came forward with the remedy. He arranged to sell to the Pennsylvania interests Vanderbilt's competing road in Pennsylvania and to sell to the New York Central, practically at cost, the West Shore Railroad.
Again, when the Philadelphia and Reading prop- erty, in which large amounts of English capital had been sunk, was facing bankruptcy, a Morgan syndicate furnished the millions needed for its reorganization. In 1887, when the Baltimore and
MORGAN AND THE RAILROADS 27
Ohio Railroad was suddenly found to be also in a state of financial collapse, the Morgans stepped for- ward, found new capital for it, and commenced a policy of reconstruction — a policy, however, which was interrupted for a while by successful op- position from the old speculative interests. And a year later a Morgan syndicate reorganized the Chesapeake and Ohio.
Thus, before the panic of 1893, the firm of Drexel, Morgan and Company built up its reputation as the financier and reorganizer of mismanaged prop- erties and in this respect stood in a unique position among American bankers. The great Jewish se- curity merchants had as yet little hold on Ameri- can railways. The Rothschilds were content to remain a close ally of Morgan rather than a com- petitor, so far as the American field was concerned. Kuhn, Loeb and Company had not yet become a railroad power. The Speyers were strong but not masterful. The Seligmans, who had been promi- nent in the government refunding operations, had not become a leading house of issue for railway securities. Consequently, when more than half of the railroad mileage of the United States went into the hands of receivers, investors, both foreign and American, looked to one man and one house
28 THE MASTERS OF CAPITAL
to defend their billions of investment in the rail- roads — the house of Morgan and its strong bold personality, John Pierpont Morgan, now known as "Jupiter" Morgan.
First came the reorganization of the Southern Railway. This system, whose connecting railroads had been snarled into an inextricable tangle under the Richmond and West Point Terminal control by a group of New York and Richmond speculators, fell into financial chaos. Morgan at first declined to have anything to do with the mess. But, others having tried in vain, the security holders finally be- sought Morgan to undertake the task on his own terms. In a comparatively short time a Morgan syndicate had reorganized the company, and long before the dire effects of the panic of 1893 and the ensuing depression had spent themselves, the Southern Railway system had advanced far on its new career of progress and prosperity.
It was not direct financial profit for himself or his firm that induced Morgan to undertake this reorganization ; he was actuated by a larger, though not entirely unselfish, motive. He felt obliged in self-defense to see to it that the many millions of capital (especially that of English investors) should not be hopelessly wiped out. A firm whose greatest
MORGAN AND THE RAILROADS 29
specialty was the marketing of American securities abroad could not afford to have these securities pass as worthless paper before the eyes of the world. The fame of the house of Morgan in London and all its traditions were based on the greatness and wealth of America, and both the Morgans, father and son, had always been "bulls on America."
With the successful reorganization of the South- 7 ern system, Morgan at last had a firm grip upon < that slippery thing, the American railroad cor- poration. For forty years American railroad pro- moters, reckless optimists, gigantic thieves, huge confidence men — magnified a hundred times by the size of their transactions — had juggled and manipulated and exploited this great business for their own profit and the general loss of every one else concerned. Morgan had been watching for twenty years this manipulation of railroad prop- erty. The control of the properties lay in the vot- ing power of the stock; and, if the voting power could not be controlled, little could be accom- plished against opposition. His attempt to recon- struct the Baltimore and Ohio in 1887 was defeated entirely because the controlling interests check- mated him by voting his representative out. He devised a plan whereby he himself would control the
30 THE MASTERS OF CAPITAL
voting power. Before undertaking a reorganiza- tion or finding the new capital, he provided for a "voting trust," a device which, for a number of years, placed in the hands of a few trustees selected by himself the entire voting power of the stock. This scheme was followed in the reorganization of the Southern Railway and was adopted in all later instances.
The next drastic reorganization was that of the Erie system. Before undertaking this task Mor- gan was particularly careful to concentrate control in his own hands. Years before, J. S. Morgan and Company had been the fiscal agents of the Erie in London and had placed large amounts of Erie bonds among British investors. Morgan was there- fore particularly anxious to protect these bond- holders, and in the scheme which he devised he saw that these bondholders themselves got enough voting power to outvote the scattered stockholders, though even the bondholders were controlled for the time being by a Morgan "voting trust." It was only fair that the stockholders rather than the bondholders should suffer in the Erie reorganiza- tion, because the great issues of Erie stock created during the gambling days of Drew, Fisk, and Gould represented little or no cash investment, while the
MORGAN AND THE RAILROADS 31
bonds had, for the most part, been issued for the payment of actual property.
Other Morgan reorganizations now followed apace. The Hocking Valley, a system of roads in the Middle West, was placed on its feet; the North- ern Pacific, after its checkered career of thirty years of construction, collapse, and manipulation, finally found permanent lodgment in the capacious arms of the firm of Morgan. The Baltimore and Ohio, the Atchison, Topeka and Santa Fe, and several other large properties, although not exclu- sively reorganized by the Morgans, came to life again partially as a result of their work. The Philadelphia and Reading system, an acute sufferer from the wild gambling spirit of the previous dec- ade, was also taken in hand for the second time, and with a strong financial organization started on its career as the dominating factor in the an- thracite coal combination; and other properties not completely wrecked in the smash of 1893, among them the Lehigh Valley and the Central of Georgia, were likewise rejuvenated.
Pierpont Morgan was by 1898 a towering figure in the railroad and banking world. He had largely reorganized the railroad system of America. He was in complete voting control of the great network
S2 THE MASTERS OF CAPITAL
of lines radiating throughout the South Atlantic seaboard; he entirely dominated the Erie Railroad ; he was the chief factor in the policy of the Read- ing; he controlled the vast Northern Pacific; he had a powerful voice in the administration of the Baltimore and Ohio and also an important inter- est in the affairs of the Atchison, Topeka and Santa Fe; he had the entire capital stock of the rejuvenated Central of Georgia locked up in his safe; he controlled the Hocking Valley, the Chesa- peake and Ohio; and he was the real financial power behind the vast system of the Vanderbilt lines.
Credit must of course be given to other men for a substantial share in this great work. Aside from the Drexels, Morgan had been fortunate for years in securing the aid of partners of no mean ability. Perhaps he trained them; perhaps their qualities developed as a result of the environment in which he placed them. In any event, in these earlier years, several names stand out prominently. One of these is Egisto P. Fabbri, a native of Italy, who became Morgan's partner in 1876 and continued until 1884. Other conspicuous names in these and later days were J. Hood Wright, Charles H. God- frey, George S. Bowdoin, and Charles H. Coster. All these men either retired rich in middle life or
MORGAN AND THE RAILROADS 33
N
died in harness. Coster was a notable example of a man who worked himself to death. He was a ' great master of detail, besides being a genius at working out plans of reorganization. It is asserted that all the successful Morgan reorganization plans up to the time of Coster's death were his work. Perhaps this is true; at any rate during these trying years Coster was Morgan's right arm. He was a familiar figure in Wall Street — a white-faced, nervous man, hurrying from meeting to meeting and at evening carrying home his portfolios. He traveled across the country, studying railroad sys- tems, watching roadbeds from the back platforms of trains, evidently never getting a chance for rest or leisure. When he died suddenly in the spring of 1900, the newspapers pointed out that he had been a director in fifty-nine corporations.
And now, as the period of railroad reorganization closed and a new century was at hand, the house of Morgan once more found itself with only one commanding figure in its list of American part- ners. Fabbri was dead; J. Hood Wright was dead; Charles H. Coster was dead; Walter Burns, the Lon- don genius who had handled affairs there since the demise of the elder Morgan, was also dead — all having succumbed to the gigantic, nerve-racking
34 THE MASTERS OF CAPITAL
business and pressure of the Morgan methods and the strain involved in the care of the railroad capi- tal of America. Both the Drexels were also gone. "Jupiter" Morgan had alone come through that soul-crushing mill of business, retaining his healtbr vigor, and energy.
CHAPTER III
THE IRONMASTERS
*
ANDREW CARNEGIE came to America with his fa- ther, mother, and brother in 1848, when he was thirteen years old. His parents were utterly pen- niless. They gravitated to Allegheny, where the father secured work in a cotton mill, and young Andy became a bobbin boy at one dollar and twenty cents a week. His mother helped out by taking in washing and binding boots for a shoe- maker named Phipps, who had a small shop near by. This shoemaker had a ten-year-old son called Harry, and there it was that the two small boys, Henry Phipps and Andrew Carnegie, laid the foun- dations of their long friendship.
Andy worked as bobbin boy for a year, then be- came a stoker, and finally, at fifteen, he secured a job as a telegraph messenger boy at three dollars a week. He soon learned how to send and receive
Euessages, often practising with other boys before
35
36 THE MASTERS OF CAPITAL
the operator arrived in the morning. He had not been a messenger boy long before he displayed the striking quality which so characterized him in after life — audacity. The boys were forbidden to touch the instruments, but it one day happened that an important message came over the wires when the operator was out. Andy jumped to the instrument and took the message. For this break- ing of orders he was not only forgiven but was promoted to be an operator at a salary of six dollars a week. A few years later, his industrious efforts and efficient work came under the notice of Colonel Thomas A. Scott, who was general superintendent of the Pennsylvania Railroad in Pittsburgh, and young Carnegie soon became a railroad telegraph operator at a further increase in salary. He was now nineteen years old, and his audacity and initiative began to develop rapidly. One day, during the absence of Colonel Scott, an accident occurred on the lines, which tied up the traffic. Immediately Carnegie wrote a dozen telegrams, containing orders for setting the trains in motion and signed them all "Thomas A. Scott." This saved the day, and Scott, who recognized the great qualities in the lad, made him his private secretary. From the beginning of Colonel Scott's friendship,
THE IRONMASTERS 37
Carnegie's future was assured. In his new environ- ment, he gained a wider outlook on life, and es- pecially on business life, for Scott was an influential man in Pittsburgh and had his fingers in all sorts of business and speculative pies. Carnegie's first money was made in an oil speculation, without the investment of a cent of his own. He gave his note for a block of stock in one of the smaller Pennsyl- vania oil companies and then paid the note out of dividends received on the stock within a single year. This gave him a little capital and, under the guidance of Scott, he began to buy, with his small funds and with borrowed capital, shares here and there in many enterprises. Most of these enter- prises were things in which Scott was an "insider" and thus Carnegie was able to make safe specula- tions on "sure enough" information. In a little while, he was the owner of shares in such companies is the Columbia Oil Company, the Woodruff Sleep- ing Car Company, the Pittsburgh Elevator Com- pany, the Citizens' Passenger Railroad Company, and the Third National Bank of Pittsburgh.
For ten years Carnegie continued at his work as Scott's secretary and steadily added to his investments and his capital. In 1864, when he was twenty-eight, he succeeded Colonel Scott as
38 THE MASTERS OF CAPITAL
superintendent of the railroad. But young Car- negie never planned to remain a mere employee of a railroad or any other corporation. He meant, as soon as his funds were sufficiently large, to have a business of his own. His eyes and ears were always open, and he watched his chances, profiting by the inside information he obtained as Scott's secretary. At first he had thought seriously of entering the oil business on his own account; but evidently no real opportunity presented itself and he resolved to bide his time.
While the Civil War was drawing to a close, the country about Pittsburgh was being agitated not only by the petroleum boom, but by another type of industry, which, like the oil business, was also to leave its stamp on the economic life of America. This was the manufacture of malleable steel by the newly developed Bessemer process. Up to this time not a yard of railroad track in the United States had been laid with steel. American rail- roads were then iron roads. There were frequent references in those days to the "iron horse," and ''iron roads." But iron was really too poor a metal for railroad rails, and men were constantly looking for something harder and more durable. Steel had been made for many years in small
THE IRONMASTERS 39
quantities, but the cost was far too great to bring it into general use. Moreover, the demand, even for iron, had not developed far enough to attract capital in any great amount. Iron was produced in small furnaces and in small quantities, and no one dreamed that it would ever become anything more than the precarious, poverty-stricken, uncer- tain industry that it had always been. The best furnaces in those days did not produce a thou- sand tons of iron a year; and, because of the fluctua- tions in demand, most iron makers were without capital and constantly in debt. The panics of 1837 and 1857 had caused the failure of scores of iron founders. Nobody with capital wanted to put money into so precarious a business.
But, as railroad building expanded, the demand for more durable iron began to increase steadily. Steel was recognized as the ideal substance for rails, but the cost of making it was prohibitive. If some genius would only devise a method for making cheap steel, he would be one of the bene- factors of the century. And it usually happens, when the demand for a given thing is insistent enough, that the needed genius does arise. In 1847, a young man of thirty-six, William Kelly, bought the Suwanee Iron Works near Eddy ville, Kentucky.
40 THE MASTERS OF CAPITAL
Kelly was an inventive character, but a poor busi- ness man. He desired to specialize on good, high class wrought iron for sugar kettles. To do this he invented a new method for making larger kettles, which soon became famous as "Kelly's Kettles." But the process was the old slow one of using char- coal in large quantities — a process which involved much time and enormous quantities of charcoal.
Almost by accident Kelly discovered that there was no need of charcoal; that air, too, was fuel. Every iron worker from time immemorial had be- lieved that cold air would chill hot iron. But Kelly was something of a student of metallurgy and he knew that carbon and oxygen had an affinity for each other. Therefore when one day he saw his yellow mass of molten metal turn to a white heat without charcoal, and simply because of the air which happened to strike it, the truth flashed across his mind in an instant. Of course, it was as simple as breathing. When the air was blown into the molten metal, the oxygen united with the im- purities of the iron and left the pure iron behind. Kelly was carried away with his discovery and im- mediately proclaimed it to an incredulous public. Instead of being rewarded, he was ridiculed. He found it impossible to convince any one that he
THE IRONMASTERS 41
was sane, and his business was finally ruined be- cause buyers of iron refused to take his goods unless they "were made in the regular way. " But Kelly persisted in his work, and within a few years he was actually producing malleable iron in substantial quantities.
But it took more than Kelly's discovery to bring steel into use on any large scale. The process he had worked out had to be put into general use and accepted abroad before American users of steel would have much to do with American-made steel. Hitherto practically all the steel used in America had been imported from England, and the tradition held that steel was essentially an English product and not a domestic article. Hence most people looked upon American-made steel as bogus and re- garded the imported as the only real article. While Kelly was experimenting, an Englishman, by the name of Henry Bessemer, was also following out the same idea. And soon, "Bessemer" steel be- gan to appear in small quantities in the United States. It was the same thing that Kelly had been making since 1847 by the same process; but where- as buyers at once accepted the imported "Besse- mer steel," they still remained prejudiced against Kelly's "fool-steel."
42 THE MASTERS OF CAPITAL
After this, Kelly's career was a checkered one, It was not until many years afterwards that he was really recognized as the discoverer of the proc- ess in the United States. He finally secured a patent but lost it through bad business manage- ment, and it was long after the close of the Civil War before he got any financial benefits for his work. Ultimately, however, he was given full credit by the world at large for his services to the industry, and he is now universally recognized as having discovered and perfected the Bessemer process well in advance of Sir Henry Bessemer; although the Englishman brought his work to fruition far more rapidly.
During the latter days of the Civil War, with big plans pending for the construction of the Pacific railroads, the demand for railroad iron was taxing all the plants in the country. And, as the cost of production was falling to a point where it was commercially possible for steel to be used, capital in substantial quantities was seeking investment in this new industry. It seemed at last as if the iron industry might develop into a big money-mak- ing enterprise after all. And so thought Andrew Carnegie, for in May, 1864, we find him buy- ing from Thomas N. Miller for $8920 a one-sixth
THE IRONMASTERS 43
interest in the Iron City Forge Company. The other stockholders at that time were Carnegie's boyhood friend, Henry Phipps, and Andrew Klo- man. At about the same time Carnegie formed the Keystone Bridge Company, inducing J. Edgar Thomson, Colonel Scott, and other railroad officials to join him in financing the enterprise. It proved immediately successful, and in four years Carnegie had paid for his own stock out of the profits. The backing of the Pennsylvania Railroad, which Car- negie had shrewdly procured, was a gold mine to him. This road was building steel bridges by the score at this time, and of course the Keystone Bridge Company got all the business it could handle.
After the Civil War, when prices fell, Carnegie's steel business suffered reverses, but the bad times were tided over. When business revived, Carnegie emerged in complete control of the enterprise, having bought out Kloman and Miller, and the company never experienced real trouble again. Andrew Carnegie made money with great rapidity and long before the panic of 1873 he was a million- aire several times over and one of the big ironmas- ters of America.
It has often been asserted that Andrew Carnegie was the first American ironmaster to make steel
44 THE MASTERS OF CAPITAL
by the Bessemer process. But this is not true. Car- negie was not a pioneer in this industry any more than John D. Rockefeller was in the oil business. Like Rockefeller, he took no real interest in a new idea until its practicality and future success had been well demonstrated by others. When Carnegie went into the iron business in 1864, he was still wedded to the idea that wrought iron, made by the old process, was to be the standard railroad metal of the future. But by 1866, many manufacturers were turning to the Bessemer process with evi- dent success. At this time, William Coleman, one of his partners, suggested that they begin making steel by the Bessemer process. The other partners agreed, but Carnegie strenuously objected. Indeed, Carnegie was not a steel or iron expert in the real sense. He was a financier, a capitalist, a business booster. As his business developed, he spent less and less time in the management of the concern, and gave his best attention to popularizing the Carnegie products among buyers throughout the country. He promptly removed to New York and began to make the acquaintance of all kinds of people with a view to gathering prestige for him- self and his business. He traveled widely and began to make many trips to Europe. In England
THE IRONMASTERS 45
he soon heard of Bessemer steel and realized that perhaps after all the new process was a sound one that should be adopted. Investigation thoroughly converted him to the idea. He rushed back to Pittsburgh and to the astonishment of his partners talked nothing but steel, steel, steel. Immediately the firm of Carnegie, McCandless and Company was formed with a capital of seven hundred thou- sand dollars. Carnegie subscribed the bulk of the amount needed and steps were at once taken for the construction of a large plant.
The new plant was situated a few miles from Pittsburgh and was named the Edgar Thomson Works, after the president of the Pennsylvania Railroad. This was another shrewd, calculating move on the part of Carnegie, who wished to get all the orders and advantages that could be obtained from this big consumer of steel rails. Moreover these were days of little or no railroad regulation, and railroad rebating was customary in both the oil and steel business. In fact, any large shippers could usually obtain rebates from the railroads to the disadvantage of the little shippers. In this way, also, Carnegie felt that a close relationship with the officials of the Pennsylvania Railroad would be an asset of value.
46 THE MASTERS OF CAPITAL
About the time that Carnegie was getting his money ready to buy out the Iron City Forge Com- pany, in 1864 a fourteen -year-old lad named Henry Clay Frick was working as errand boy in a village store at Mount Pleasant, about forty miles from Pittsburgh. He was the son of poor parents, whose ancestors had emigrated from Switzerland more than a century before, a quiet, thoughtful lad, self- contained and reticent. In those days a new in- dustry was developing at Mount Pleasant, known as coke making. Coal was mined and baked in brick ovens until it turned into crisp gray lumps. These lumps were very valuable to iron makers, who used them in smelting the iron ore. It is not probable that young Frick fully realized what developments were ahead in the iron and steel business of the country or that he foresaw the age of steel in which coke making would become a giant industry. But the boy saw in coke making a lucrative opportunity and began to save his money with the hope that in time he would have capital enough to buy a small strip of coal land and go into the business himself. In four or five years he had saved enough to buy a little coal land, and he then induced his grandfather and uncle to buy some ovens which were offered for sale at a
THE IRONMASTERS 47
low price. But shortly afterwards the panic of 1873 set in, and the little enterprise was balked. Frick had to continue working on a small salary and became bookkeeper for his grandfather, who was in the distillery business.
Young Frick had that audacity which is charac- teristic of successful men, and particularly of men who have made and developed great enterprises in America. Carnegie displayed this trait at the outset of his career, when he disobeyed orders to save a railroad wreck; Rockefeller displayed it when he plunged into the oil business with his little savings of seven hundred dollars ; Pierpont Morgan displayed it in early life and it was his chief char- acteristic all through his long, active career. One day, after the smoke of the 1873 panic had dis- appeared and business was reviving, a Pittsburgh banker named Mellon received by mail a request for a loan of twenty thousand dollars from an un- known person by the name of H. C. Frick. No security was offered but big profits were promised if the money was advanced at once. The banker liked the tone of the letter and sent his partner to Mount Pleasant to investigate. Naturally he expected to meet a man of wealth and property and was surorised to find that "H. C. Frick" was
48 THE MASTERS OF CAPITAL
merely a youth who was working for a few dollars a week and living in one room of a coal miner's house. But the banker had himself worked up from poverty; he liked the honest, bright face of the youth and was impressed with his sincerity and intelligence. Careful investigation confirmed his first impression, and the final result was that the twenty thousand dollars was advanced to the young operator.
Within a short time Frick became the foremost coke maker in the neighborhood. The price of coke kept rising in response to the great demand from the steel makers, and in one year Frick and his associates made a profit of one hundred per cent on their capital. All the profits went back into the business for the purchase of more coal lands and the building of more ovens. In a little while Frick was the coke king of Connellsville and was piling his profits up into the millions. He was more than a mere coke maker, however; he was an organizer of the highest type. He brought order out of chaos in the coke business; he induced his leading competitors to combine with him, thus eliminating cutthroat competition; he also settled troublesome labor problems by importing Hunga- rians and Slavs. His labor wars were not so much
THE IRONMASTERS 49
questions of wages as of law and order. On the whole he raised wages and improved the villages and mines in his region; but he was determined to be the master of his own business.
When in 1882 the tendency toward consolidation of interests had begun, it was natural enough that the coke making and the steel manufacturing busi- nesses should be drawn together. Both Frick and Carnegie recognized the logic of the idea. Con- sequently in this year Carnegie and his associates bought control of the H. C. Frick Coal and Coke Company. This change of ownership brought Henry C. Frick into the steel business. He ac- quired a substantial interest in the Carnegie Works and an influence which became more evident from year to year. His intelligence and masterful quali- ties were exactly what the Carnegie organization needed. A new chapter now opened in the affairs of the company. Having acquired control of one raw material by purchasing the coke business, the company was now to make a further advance and acquire ore beds. And, as the only ore deposits of value were far from Pittsburgh in the Lake Supe- rior region, it became necessary for the company to go into the transportation business also, to establish steamship lines on the Great Lakes
50 THE MASTERS OF CAPITAL
and to build railroads from the water to its works at Pittsburgh.
The Mesaba ore fields, acquired by the Carnegie associates, had been first opened up by Louis Merritt, who had sold his holdings to John D. Rockefeller some years before. Rockefeller, know- ing little at that time outside of the petroleum field, afterwards thought he had made a bad investment. But this was not the impression in Pittsburgh, where the possibilities of wealth in the mining of Lake Superior ore had now been fully recognized. A man named Harry Oliver, who had been in the steel business and had been a friend of Carnegie in his early days, realized the possibilities of the Mesaba Range and bought a large tract of land there for a small sum of money. Soon afterward Frick met Oliver on the street and suggested that the Carnegie company go into the Mesaba ore business with him. The terms suggested by Frick were that Oliver should surrender five-sixths of his stock, in return for which the Carnegie company would advance half a million dollars for the de- velopment of the mines. The bargain was made, and thus the Carnegie company acquired a prop- erty which in a few years was worth tens of millions of dollars. But this was only one step in the
THE IRONMASTERS 51
control of the ore supply. A few years later, Frick and Oliver joined forces with John D. Rockefeller in the Lake Superior ore business. This powerful alliance caused a great fall in the price of iron ore and forced many smaller producers to the wall. Their holdings were thereupon bought in by the Frick and Rockefeller combination.
Thus from small beginnings the steel business had grown into a gigantic industry. Meanwhile railroads had spread over the continent and the petroleum business had become a monopoly under the control of the Rockefellers. The time was at hand when the big bankers of Wall Street, al- ready busy in the railroad field, would take part also in petroleum, steel, and a multitude of other industrial enterprises and utilities which had so grown in size and value that they could no longer remain independent of vast banking interests.
CHAPTER IV
STANDARD OIL AND WALL STREET
IN 1859, ten years after the discovery of gold in California, another epoch-making discovery was made, this time in Pennsylvania. An enterprising prospector in Venango County drilled a well and produced a flow of petroleum, which was already known to have great commercial value. It was almost like finding liquid gold, for the stuff brought twenty dollars a barrel and it flowed at the rate of twenty-five barrels a day. In a few months' time the narrow valley in northwestern Pennsyl- vania where the discovery was made swarmed with madmen tearing open the ground in the frenzy of competition that characterizes all new mining dis- tricts. So far as was known, the petroleum might soon dry up and every one was hurrying to "strike oil " before it should be gone.
About this time a young commission merchant in Cleveland, Ohio, named John D. Rockefeller,
52
STANDARD OIL AND WALL STREET 53
had saved up about seven hundred dollars, nursing it from nothing, a few dollars at a time. In 1860 he took a chance with three other men in the ven- ture of mining petroleum, putting in a portion of his seven hundred dollars. Within two years the three men had run their investment up to about four thousand dollars. They made a good burning oil, and their profits, like those of all refiners at the time, were amazingly large. During the next few years, tens of thousands of dollars were made annually by this concern. But instead of drawing these profits out, Rockefeller, who dominated the combination from the start, insisted that every cent possible be reinvested in the business. "Take out what you've got to have to live on, but leave the rest in, " he kept urging his partners. "Don't buy new clothes and fast horses; let your wife wear her last year's bonnet. You can't find any place where money will earn what it does here. "
And this was true. But this new business had peculiar risks. In the first place, the operators had no experience to guide them. Indeed, no one knew when this petroleum would give out; many feared that it would be exhausted in a few years and that they would be left with useless plants on their hands. In the second place, it faced the reckless
54 THE MASTERS OF CAPITAL
competition of all enterprises promising fabulous profits. Rockefeller was farseeing enough to re- alize these dangers and shrewd enough to prepare for them. Thus he early advocated the theory that the oil business could only be made secure if bolstered up at all times by large cash reserves. He saw that, should more petroleum be discovered and the business continue on a large scale, only those concerns which had the immediate cash resources could hope ultimately to dominate the field. The producers and refiners who dissipated or spent their profits as they made them would have to succumb in the end to the stronger financial interests in the same field of activity.
Hence, during the period when the business was getting well established, the decade from 1860 to 1870, John D. Rockefeller and his friends year by year added steadily and quietly to their cash, until by 1867 they were in no sense dependent on bankers or financiers, as were the railroads and other large industries of the country. They were their own bankers from the start and were in a position even in those early days to snap their fingers at Wall Street and Lombard Street. When the Standard Oil Company of Ohio was formed in 1870 with one million dollars cash capital, it was
STANDARD OIL AND WALL STREET 55
undoubtedly the one great business corporation of America which had no debts and no direct banking alliances or affiliations.
There was, of course, a reason for this complete absence of banking or investing interest, aside from the announced policy of the Rockefeller group. From the beginning, such banking houses as the Morgans, the Drexels, and the foreign houses with American connections, had kept away from this new business, just as, until the twentieth cen- tury, conservative capital in Wall Street to a large extent kept away from precarious industries like copper mining, electrical enterprises, and so forth. The industry had not proved its permanence or sta- bility and was therefore classed as a " speculation " rather than a sure investment.
Rockefeller was farseeing enough to divine this attitude and to take advantage of it by so form- ing his policy that, if the industry should demon- strate its permanent strength and earning power, he and his associates would reap all advantages and would never have to divide profits with bank- ing interests or capitalists, in order to procure funds to carry the business through lean or unprofitable periods, as the railroad corporations had been forced to do. Not long after 1870 the wisdom of
56 THE MASTERS OF CAPITAL
this policy was demonstrated. Hard times came, and refiners in all parts of the country went to the wall for want of cash. Bankers would not help them because of the newness and precarious na- ture of the business. Then the Standard Oil Com- pany began to buy the weaker refineries at bargain prices and to establish a chain of plants across the country. This enabled it to organize production on a large scale and to reduce the cost of re- fining and distributing oil to a fraction of what it cost most of its competitors. The company then bought the pipes which connected the wells in all parts of the country and laid miles and miles of pipe lines of its own. This forced the railroads to come to terms, as they had been large shippers of oil; and they were obliged to accede to a policy of secret rebating in the interest of Standard Oil and at the expense of the independent refiners. Ultimately, nearly all the competition in the oil trade was eliminated by these methods, until, in 1879, the Standard Oil interests were the only bona-fide buyers, the only gatherers, and the only refiners of all but ten per cent of the petroleum of the country. One by one, all the plants in the business without sufficient cash capital had fallen into the hands of the one firm supplied with cash.
STANDARD OIL AND WALL STREET 57
During the decade in which this expansion of the Standard Oil Company took place, the policy was never abandoned of accumulating and retain- ing large cash resources. By 1875 the cash re- sources had risen from about one million in 1870 to over thirteen millions ; half a dozen years later they reached forty-five millions ; and during that decade the company and its subsidiaries had not only bought up most of their competitors with ready cash but in addition had paid out in dividends over eleven million dollars.
Up to this period, most men had not foreseen the possibilities of the petroleum industry. Least of all had they thought of its bringing about a concentration of capital. The great bankers who were coming to the front, such as Jay Cooke and Company, Drexel, Morgan and Company, and the Jewish representatives of German and Dutch capital in the United States were concentrating their attention almost exclusively on the develop- ment of steam railroads. The achievements of the Cookes and of the Morgans and their colleagues were the financing of governments and of railroads. This fact remained true long after the Standard Oil Trust had taken its place as the most powerful "master of capital" on the continent. Thus while
08 THE MASTERS OF CAPITAL
the banking interests of America, as represented by the Morgan type, were rising, there was also growing a new banking power which for a long time they persistently ignored. Adherence to the Rocke- feller policy meant that the Standard Oil capital- ists must organize in such a manner as to perform banking functions; so the Standard Oil Company of Ohio was from its very inception its own banker. As this industry spread and subsidiaries were formed in various States, it became necessary to have the vast financial operations handled from one central head. The New York office was then organized and became the financial center of the business. The numerous subsidiary companies all became responsible to the New York office, and all the cash and surplus funds gravitated to that point. With the year 1882 begins the period when the Standard Oil capitalists began to make their in- fluence more directly felt in Wall Street. In that year was formed the famous Standard Oil Trust and "26 Broadway" became the official financial and business center of the petroleum industry of the country. In a little while, the Standard Oil Trust was really a bank of the most gigantic char- acter — a bank within an industry, financing this industry against all competition and continually
STANDARD OIL AND WALL STREET 59
lending vast sums of money to needy borrowers on high class collateral, just as the other great banks were doing.
Standard Oil was swelling with cash assets, and the small group of men who controlled its destinies had become multimillionaires. Of the dividends of over eleven million dollars distributed between 1870 and 1882, John D. Rockefeller had received the bulk, but Oliver H. Payne, Henry M. Flagler, William Rockefeller, and a few others received a substantial remainder. Natu- rally these new millionaires sought investment for their fabulous incomes, aside from such portions of them as they were able to reinvest in the oil in- dustry. They were soon impelled to turn to other fields of enterprise, not only to employ their own funds profitably but to find investment for the steadily swelling surpluses and cash assets of the Standard Oil Company itself.
Far back in the period prior to the Civil War the great West India trading house of G. G. and S. Rowland was doing business at the foot of Wall Street. The last and possibly the greatest of the old school of New York' merchants — Moses Tay- lor— served his apprenticeship there. He had
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been brought up in the strictest traditions of the old-style merchants, for his father had been con- fidential agent for the old fur trader, John Jacob Astor. In 1832, when Taylor was twenty-six years old, he started in the West India business for him- self and became the chief figure in the great raw sugar trade. In 1855 he became president of the old City Bank — the bank of the merchants of raw materials.
The rich Cuban planters deposited their money with him and left in his care the reams of United States government bonds into which they had put their savings. The bank had also a strong cotton clientele, and it handled the business of such houses as the great importing metal firm of Phelps, Dodge and Company. It was even then what a strong bank should be — a federation of interests still stronger and greater than itself.1
1 In those days, the different classes of merchants had their particu- lar banks, as indeed they have today to some extent. To the north of Wall Street, towards the East River, where the tanyards lay in the "swamp," were the banks of the leather merchants. The banks of the dry -goods trade — such as the Park and the Chemical — kept near these merchants as they edged up Broadway. The leading bank of the raw materials' merchants — the City Bank — stayed where it was first founded in 1812, in the old center, the ancient banking row on the north side of Wall Street! It did not grow so fast as the banks of the dry-goods merchants, but it was destined in the end to outstrip all.
STANDARD OIL AND WALL STREET 61
Moses Taylor had his own ideas about running a bank. First of all, it must be strong; his cash re- serve was his pride. The City Bank always had a great holding of surplus cash. Whenever there is a panic, everybody puts his money in the safest place he knows. Moses Taylor's bank was safe and strong; with every panic it grew stronger. The story of the City Bank from the time Taylor took charge of it is a record of steady appreciation in credit and reputation. Behind it stood Moses Taylor, with his enormous private fortune which was estimated at fifty millions when he died in 1882. During that period Wall Street had grown out of its swaddling clothes and had become a cen- ter of finance and commerce far outreaching that of any other city in the country. In the neighbor- hood of the City Bank, and doing active business with it, were still the sugar merchants, the cotton brokers, the metal merchants, to whom had been added, as the years went on, the important anthra- cite coal interests, the leading New York gas com- panies, and some of the railway companies of the South and West.
When Moses Taylor died, the future of the City Bank, as the strongest if not the largest institution of its kind, was for a time uncertain. Percy R.
62 THE MASTERS OF CAPITAL
Pyne, a kindly, gentle man, who had charge of the Taylor mercantile interests, ran the bank for the next nine years; but during his administration no startling developments took place. The bank held its own; that was all. But, with the death of Pyne in 1891, a real "master of capital" appeared as the head of this famous bank. James Stillman was born in Brownsville, Texas, in 1850, of New Eng- land parents. He was a shy, reticent child, trained from the first in the virtues and customs of the old school merchant class. One of his earliest play- things, which he always preserved, was a toy bank, across the front of which he had printed "City Bank," his father having been associated with Moses Taylor and the City Bank interests. During his teens his father was stricken with paralysis, and young Stillman was thrown on his own resources. At the age of twenty-one he was a member of the firm of Smith, Woodward and Stillman, cotton commission merchants on South Street, near Wall. But Stillman did not care for ordinary mercantile business. While his partners were actively carry- ing on the mercantile end of the business with great success, he associated himself more and more with men of financial knowledge and power. In the early eighties, he was elected to the board of
STANDARD OIL AND WALL STREET 63
directors of the Chicago, Milwaukee and St. Paul Railroad, which was then seeking stronger financial connections. At the same time William Rocke- feller — whose bulging cash assets, as well as his brother John's, were looking for an outlet — James T. Woodward, president of the Hanover National Bank, and Philip D. Armour, the great packer of the Middle West, were elected to the same board.
Association on the board of directors of the St. Paul property brought Stillman and Rockefeller together, and their intimacy grew closer when in 1885 William Rockefeller was induced to become a director of the Hanover Bank of which Stillman was also a director. They became personal friends as well as business associates; and when in 1891 the presidency of the City Bank was offered Still- man, the Rockefeller business naturally began to gravitate to that institution. But no one realized at that time that Stillman was a great banking genius or was consciously planning the union of two great interests with the same policy of accumulat- ing heavy cash resources — the City Bank and the great Standard Oil Company.
The business of the bank displayed new life almost immediately. In 1891 its deposits were only twelve million dollars, but before the end of
64 THE MASTERS OF CAPITAL
the panic year 1893, they had risen to thirty-one millions. In 1891 there were several New York banks with double the deposits of the City Bank; two years later it was the largest bank in New York and was steadily becoming the greatest reservoir of cash in America. Slowly but surely the alliance with the Rockefeller interests became closer. William Rockefeller, who for many years had been in charge of the finances of Standard Oil, invested more and more of its surplus through the instrumentality of the City Bank. In the dark days of 1893, whenever the Standard Oil stepped into Wall Street to relieve the money strain by lending its idle millions temporarily, the City Bank handled the business. It was not long, therefore, before the institution began to be known as the "Standard Oil Bank."
But lending money in Wall Street was, indeed, only a small job for Standard Oil, whose cash assets grew, between 1882 and 1895, from $55,000,000 to over $150,000,000, while at the same time its stockholders received no less than $118,000,000 in dividends. This great accumulation of cash was not needed in the oil business, and it had to be put to some profitable use. The Rockefellers were not the type of investors who were satisfied with
STANDARD OIL AND WALL STREET 65
five or six per cent; they had been educated in a different school. They meant to make, if possible, as large profits in the investment of their surplus cash as they had been accustomed to make in their own line of business. But to make money at so rapid a pace called for the same shrewd, superior business methods that had been followed in the oil business. To discerning men, it was clear that ultimately these other enterprises into which Standard Oil put its funds must be controlled or dominated by Standard Oil. William Rockefeller had anticipated this development to some extent years before when he became active in the financial management of the Chicago, Milwaukee and St. Paul Railroad. But it was not until after the panic of 1893 that he and his associates began to reach out aggressively to control the destinies of many corporations.
\Vhen in 1897, Edward H. Harriman and Kuhn, Loeb and Company agreed upon the reorganiza- tion of the Union Pacific, as will be narrated in a subsequent chapter, they decided to finance the undertaking through the City Bank. They chose this bank because the Union Pacific reorganization, involving a payment of over $45,000,000 in cash
66 THE MASTERS OF CAPITAL
to the United States Government, was then the largest cash transaction of its kind, and the City Bank, with its great name and resources, was the fittest instrument for their purpose. In this way Standard Oil became associated with the Union Pacific and with the Harriman and Kuhn-Loeb in- terests. Among the first directors of the reorganized Union Pacific were Jacob H. Schiff, Edward H. Harriman, Henry C. Frick, James Stillman, and William Rockefeller. The City Bank men did not at first put much money into the Union Pacific; but they were important factors in the underwrit- ing syndicate, which got millions of stock as a fee. Many more millions were later bought by the members of the syndicate at from twenty to thirty dollars a share, until ultimately about one-third of the entire stock (practically the control) rest- ed in the hands of William Rockefeller, James Stillman, Edward H. Harriman, and Kuhn, Loeb and Company.
From the very start the Union Pacific was fi- nanced in traditional Standard Oil fashion. It was a veritable bank. It kept and handled great cash resources with all the skill of the strong finan- ciers who were charged with its management. In the following decade, through the brilliant and
STANDARD OIL AND WALL STREET 67
daring activities of Harriman, with the solid back- ing of Standard Oil, the Union Pacific rolled up nearly a billion and a half of capital on its own system and held the absolute control of about two billions of other capital.
Meanwhile the profits of Standard Oil, and of the Rockefeller group as a whole, were rolling over and over and growing like a snowball. The Union Pacific alone was not enough to keep this great money mill working. Other outlets must be found. William Rockefeller increased his interest in the St. Paul; John D. Rockefeller, whose only impor- tant activity outside of petroleum had been the Lake Superior ore lands, now joined with the de- cadent management of the Jay Gould estate, and bought large investments in the New York, New Haven and Hartford and other eastern railroad systems. And still other activities engaged this same group as the decade closed. The City Bank — now the National City Bank — had tradition- ally been the bank of the metal merchants and had always kept its connections with them. There were also men in the Standard Oil group who were identified with raw materials, particularly cop- per. Henry H. Rogers, who was now vice-presi- dent of the Standard Oil Company and practically
68 THE MASTERS OF CAPITAL
its manager and who had in recent years gone extensively into copper mining, now formed a gigantic holding company known as the Amal- gamated Copper Company, which acquired con- trol of the Anaconda Copper Company at Butte, Montana. This syndicate was floated in Wall Street through the National City Bank. The capi- tal was $150,000,000, and Amalgamated Copper, supported by Rockefeller money and the im- mense prestige of Standard Oil, at once became the favorite speculative stock of the day.
The deposits of the National City Bank had now mounted to above $100,000,000, and its capi- tal had increased from a nominal three millions to twenty-five millions, with fifteen millions of sur- plus. It overshadowed every other institution in the country. The so-called Morgan banks, such as the First National, began to look like pygmies beside it. The bank now occupied a unique posi- tion in the eyes of the American public; it was the leading institution of the "Money Power." And by "Money Power" was usually meant the Rocke- fellers and their allies, who were constantly show- ing their influence and power in new directions. They had recently gone into public utilities, and jointly with William C. Whitney, who was allied
STANDARD OIL AND WALL STREET 69
by marriage with Oliver H. Payne and had become a large stockholder in Standard Oil, had secured control of the Consolidated Gas Company of New York. The latter company in turn had acquired control of several competing gas companies, hither- to identified with the old City Bank interests. Then in 1899 had occurred the spectacular merger with the Edison Illuminating Company of New York. By one stroke all the lighting companies in New York City were brought under one con- trol. It looked as though the Morgan star was about to be eclipsed by a more powerful luminary.
CHAPTER V
THE STEEL TRUST MERGER
IN this story of fabulous wealth and phenomenal prosperity we have almost lost sight of the disas- trous panic of 1893, from which most of the large industrial enterprises of the United States emerged in a dilapidated condition. In the long depression which followed, manufacturers everywhere were forced into bankruptcy. Capital was scarce, the demand for goods was small, and thousands of plants remained in total or partial idleness for several years. This was particularly true of the steel and iron industry. Most of the steel plants, always excepting the Carnegie Works, were dor- mant or moribund. Dividends were discontinued; foreclosures were the order of the day; investors had lost their capital.
The tariff changes of 1894 had been a hard blow to many industries which had grown up and fat- tened in a quiet way during the long period of high
70
THE STEEL TRUST MERGER 71
protection from the close of the Civil War to the second Cleveland administration. Then, too, the Sherman Act of 1890, aimed particularly at com- binations in restraint of trade, had frightened in- vestors away from such "industrial trusts" as the Standard Oil Trust, the Cordage Trust, the Sugar Trust, and the Whiskey Trust which in the eigh- ties had thrived, unmolested by the law. While they were all finally reorganized in such a way as to avoid the penalties of the law, banking and investment prejudice was strongly against them.
But when the Republican party returned to power in 1897 and immediately enacted a new tariff law, with high protective duties, and when at the same time certain court decisions were handed down which seemed to limit the scope of the Sherman Act, a wave of reviving prosperity swept over the country, and capital turned with new confidence to the industrial field. Several of the earlier trusts besides Standard Oil had survived the panic and had been reorganized to conform to the law, notably, the American Sugar Refining Company and the American Tobacco Com- pany. The new industrial combinations were mod- eled after these. Instead of placing the control of acquired plants in the hands of "trustees,"
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holding companies were formed, which acquired all or a majority of stocks in certain competing plants and merged these plants under one control, often by exchanging the stock of the holding company for the stock of the plant.
The industrial consolidation movement was ag- gressively under way by 1899, when the time for it was ripe. Money was cheap, credit was every- where available, and prosperity was rising through- out the country. All the important railroad re- organizations, as we have seen, had been carried through, and the great bankers, whose coffers swelled with huge underwriting commissions, were looking for new business. When the promoters of the new type of industrial combination sought banking support in Wall Street, they met with little difficulty. Wall Street was not slow to per- ceive great possibilities in the financing of big in- dustrial enterprises. A conspicuous example was the American Tobacco Company, which had been created in 1890 as a combination of Allen and Ginter of Richmond, W. Duke, Sons and Company of Durham, North Carolina, and a number of other well-known manufacturers. Its original capital had been ten millions of preferred stock, represent- ing the cost of the properties, and fifteen millions
THE STEEL TRUST MERGER 73
of common stock, representing good will or " water." But the business had forged ahead so rapidly that by 1898 the "capital" was multiplied fivefold, creating a new group of millionaires.
Then arose the great Amalgamated Copper Com- pany, under the direction of Henry H. Rogers, and speculation in "industrials" became more and more the order of the day on the Stock Exchange. In quick succession a long string of new combina- tions followed; notably the American Smelting and Refining Company, with more than one hun- dred millions of capital and embracing over one hundred plants; the American Woolen Company, consolidating a large number of New England woolen mills under a fifty million dollar capitaliza- tion; the American Car and Foundry Company, merging the large car-building plants; the Ameri- can Hide and Leather Company, consolidating over twenty large manufacturers of upper leathers; the International Paper Company, a fifty million dollar combination of paper manufacturers; and a large number of other similar mergers in various lines of industry.
But the biggest of all the industrial trusts was the merger of the steel and iron interests of the country, which began with the incorporation of the
74 THE MASTERS OF CAPITAL
Federal Steel Company in September, 1898, as a holding company to acquire the stocks of the Illi- nois Steel Company, the Minnesota Iron Company, the Lorain Steel Company, and the Elgin, Joliet and Eastern Railway, a belt line operating about the city of Chicago. The authorized capital of this new concern was two hundred million dollars, of which about one-half was issued at the start. It was a powerful combination and was in the hands of strong and able financiers. The firm of J. P. Morgan and Company took a leading part in financing the enterprise. The general counsel of the Illinois Steel Company, Judge Elbert H. Gary, a leading corporation lawyer of Chicago, thus came into close touch with "Jupiter" Morgan and was chosen as the first president of the new company. The wisdom of the choice was well demonstrated by subsequent experience.
Following came the American Steel and Wire Company, with ninety millions of capital, fathered by the well-known John W. Gates. This was a combination of big western plants, many of them specializing in barbed wire, nails, and wire fencing, but including many other industries and encroach- ing more or less closely on the field preempted by the Federal Steel Company. Gates had originally
THE STEEL TRUST MERGER 75
been a barbed wire salesman and was a notorious speculator. There followed still other companies: the American Tin Plate Company, with fifty mil- lions of capital, the American Steel Hoop Company, the National Steel Company, and two Morgan con- solidations, the National Tube Company and the American Bridge Company.
Carnegie and his associates were watching the situation closely. The great revival in steel and iron had naturally favored them, and their power was steadily growing. But Carnegie and his two chief partners, Frick and Phipps, viewed the em- pire of business from different angles. For a decade or more Carnegie had been genuinely anxious to retire. He had made his millions, he was getting on in life, and he had no desire to become a great banker with multitudinous outside interests, like Morgan, William Rockefeller, or Stillman. Henry C. Frick, on the other hand, was a natural master of capital; he foresaw the trend of the times. To his mind the days of one-man power were over; great enterprises in the future would be dominated and controlled by groups of capitalists of diverse interests; and even complete industries, if they hoped to live, would of necessity become allied with others. He believed that combination must
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take the place of competition and that he and his associates must sooner or later become a part of the consolidation movement. Carnegie saw in the movement only an opportunity to sell out at his own price. Naturally Carnegie and Frick quar- reled. Frick was becoming more and more inter- ested in matters outside of the steel business. He had been connected with William Rockefeller and Henry H. Rogers in various enterprises and was even then one of the largest stockholders in the Pennsylvania Railroad, a director in many corpo- rations, and a conspicuous figure in Wall Street. These activities displeased Carnegie. His other partner, Henry Phipps, sided with Frick and so also estranged himself from Carnegie.
Meanwhile a group of Chicago speculators and promoters had come to the front. William H. Moore, a daring promoter, had organized the Dia- mond Match Company, the National Biscuit Com- pany, and the American Tin Plate Company. He and his associates had made several millions out of the organization of the American Steel Hoop Company and the National Steel Company. Flushed with success and with big cash balances, Moore now approached Carnegie and offered him a million dollars for a ninety-day option on his
THE STEEL TRUST MERGER 77
stock in the Carnegie Steel Company, the price being $157,950,000 of which over a third was to be in cash. Carnegie agreed, provided Moore would take Frick and Phipps with him. Carnegie guessed that while Moore single handed might not be able to raise the money, Frick, Phipps, and Moore together surely would. But it was not all plain sailing. Morgan had not yet become con- vinced of the soundness of the industrial move- ment; the Rockefellers could not be made to see the possibilities of such a gigantic scheme as this, though John D. Rockefeller had personally taken some interest in the Federal Steel Company. And just then a temporary panic occurred in Wall Street, as a result of the sudden death of Roswell P. Flower, who had been the conspicuous operator in the inflated bull market. This incident hampered the efforts of Frick and Moore and before they could raise the necessary money the ninety-day option had expired. Carnegie refused to extend it a single day and quietly pocketed the million dollars which had been given him for the option.
As the steel business continued to flourish and the country enjoyed great prosperity, Carnegie de- cided that his first offer had been entirely too cheap, and a little later, when John D. Rockefeller tried
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to buy him out, he placed his price at $250,000,000. It was Rockefeller's desire to solidify his interests in the ore lands and ore railway in Minnesota, as well as the capital invested in his fleet of ore- carrying vessels on the Great Lakes. But Car- negie's price was too high for Rockefeller, and nothing came of the proposal.
When Andrew Carnegie was laying the founda- tions of his steel and iron business, he built a small summer bungalow at Cresson Springs, Pennsyl- vania. Here there was a livery stable run by a man named Schwab, from whom Carnegie was in the habit of hiring horses. Schwab had a son called Charlie who used to hang around the livery stable, a merry, good-natured youngster whom every one liked. The boy had a good voice and interested Carnegie, who was very fond of music. "When that boy of yours is ready for a job, send him to me," said Carnegie to the father one day.
And so, by good luck, in 1880, at the age of eigh- teen, Charles M. Schwab entered the employment of Carnegie in the Edgar Thomson Steel Works. The young fellow made good and became chief engineer and assistant manager. When Carnegie
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bought out an important competitor at Home- stead, Schwab was selected as superintendent of the plant and showed his mettle by promptly making the Homestead Steel Works the most profitable of all the Carnegie properties. In 1889 he was brought back to Braddock and placed in charge of the Edgar Thomson Steel Works and three years later was made general superintendent of both plants.
Some time afterward Carnegie told Schwab that he had decided to make him a vice-president, to which Schwab replied:
"No, Mr. Carnegie, I am no good carrying out other men's orders, and I should have to do that as a vice-president. As superintendent I am boss of the plants I manage. "
Later again Carnegie approached him. "Well, " he said, "if you won't be vice-president, I suppose we'll have to make you president." And they did. In 1897 Charles M. Schwab became president of the Carnegie Steel Company.
Schwab naturally adopted Carnegie's ideas and business policy. He was long opposed to Frick's theory that the future of successful business lay in combination and interdependence. ' ' A big busi- ness enterprise," he said, "is invariably built up
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around one man. " But this was simply an echo of the philosophy of Carnegie, and when the "com- munity of interest" movement began to dominate American industry Schwab gradually changed his view. He was but thirty-eight years old, and his life was still before him. Carnegie at sixty-five was naturally wedded to the theories of the old school. Besides, Carnegie wanted to retire from business, while Schwab felt that he was just get- ting into business. At a banquet given to him at the University Club in New York, the younger man came out strongly in favor of combination among corporations and deprecated cutthroat competition and the rule-or-ruin policy.
After the failure of the negotiations with Moore and Rockefeller for the sale of his business, Car- negie quietly bided his time until the Morgan in- terests had plunged so deeply into the steel business in connection with the Federal Steel Company, the National Tube Company, and the American Bridge Company, that they could not possibly back out. Then he set on foot a series of opera- tions designed to create havoc among all the steel corporations of the country. To fight Morgan, he announced that he would go into the tube busi- ness in direct competition with the National Tube
THE STEEL TRUST MERGER 81
Company, and he actually acquired five thousand acres of land at Conneaut on Lake Erie and let con- tracts for the construction of a twelve million dollar tube plant. To fight John W. Gates and his Ameri- can Steel and Wire Company, he announced that a gigantic rod-mill would be erected at Pittsburgh. To fight Rockefeller, he ordered the construction of a large fleet of ore-carrying steamships to oper- ate on the Great Lakes. To fight the Pennsylvania Railroad, he set a corps of surveyors laying out a railroad route from Pittsburgh to the Atlantic Ocean. He also planned the immediate construc- tion of an ore-carrying railroad of vast capacity from Lake Erie to the Pittsburgh district.
Such threats as these were taken seriously, for everybody recognized that Carnegie had the power to carry them through. Already he had the whip hand in the steel world. The profits of his corpora- tion in 1900 had been over forty million dollars; he was already making over one-fourth of the Bessemer steel produced in the country and half of the structural steel and armor plate. His costs were lower than those of any of his competitors, and he had no debts. The entire steel trade of the country was thrown into confusion. There was an actual panic among the millionaires of Wall Street.
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"We must get rid of Carnegie/' they all shouted. "He will wreck both himself and us; he is a busi- ness pirate. " And the frightened financiers, whose millions were tied up in Federal Steel, American Steel and Wire, and the other great companies, rushed to Morgan for help. The Standard Oil bankers were appealed to; but the undertaking called for such a gigantic outlay and was fraught with such uncertainties, that even these bold finan- ciers hesitated, evidently preferring that Morgan should bear the brunt of the responsibility.
Just at this time, Charles M. Schwab and John W. Gates put their heads together and agreed to interview Morgan. Whether Schwab's overtures were directed by Carnegie or not may never be known, but Schwab by this time saw as clearly as any one that interdependence in the steel busi- ness was absolutely essential to its future prosper- ity. As for Gates, his motives were clear enough : he was one of the panic-stricken millionaires who were threatened with disaster. Schwab and Gates spent eight hours trying to convince Morgan of the necessity of buying Carnegie out. Schwab set forth the strong features of the Carnegie business and the glittering possibilities of industrial peace by means of a combination. Tradition says that
THE STEEL TRUST MERGER 83
he spoke with much eloquence; at any rate he made the sale; Morgan agreed to pay Carnegie his price. This price was much higher than that stated to Frick and Moore only eighteen months before, higher even than the price named to John D. Rocke- feller the previous year. Frick and Moore could have bought the entire Carnegie business for about $157,000,000; it was offered to Rockefeller for $250,000,000; but the amount Morgan paid in January, 1901, was equivalent to a cash price of over $447,000,000. This was represented by giving Carnegie and his associates $303,450,000 in bonds and nearly two hundred million dollars' worth of stock which immediately had a market value of about $144,000,000. It was the greatest sale in the history of the world.
Carnegie was now definitely shelved, so far as the steel business was concerned; his tube plant scheme at Conneaut, his plans for a railroad from Pittsburgh to the sea, and his big rod-mill project at Pittsburgh were all abandoned. But Morgan found his hands full when he came to deal with the other big steel interests. The Federal Steel direc- tors, aside from Judge Gary, had opposed the idea of allowing Carnegie to sandbag them; Gates now felt that Morgan should pay him a bigger price
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for American Steel and Wire than he had first named; Rockefeller, with his rich Lake Superior ore beds, also wanted large concessions if he was to become a party to the combination. In short, all the companies which it was planned to put into the merger suddenly discovered that their proper- ties were worth millions more, now that the menace of Carnegie had been removed.
It was indeed a difficult task that confronted Pier- pont Morgan. The various smaller steel " trusts " that had been formed during the two previous years were overcapitalized and had issued reams of "watered" stocks. For when the mania for con- solidation was under full swing during the period which began with the close of the war with Spain in 1898, discretion had been thrown to the winds, and industrial plants of every type had been bought up by promoters regardless of price. An incident is told which — whether true or not — will illustrate the tendency. When one of the smaller "trusts" was being formed, a party of steel men were on their way to Chicago one night after a buying tour. The men had been drinking and were in a convivial mood. Said one, "There's a steel mill at the next station; let's get out and buy it." "Agreed!"
It was past midnight when they reached the
THE STEEL TRUST MERGER 85
station, but they pulled the plant owner out of bed and demanded that he sell his plant.
"My plant is worth two hundred thousand dollars, but it is not for sale, " was the reply.
"Never mind about the price," answered the hilarious purchasers, "we will give you three hundred thousand — five hundred thousand."
The story is not improbable, for most of the con- stituent plants had been bought at prices far above their true values. Consequently, the corporation to be formed must have a fabulous capitalization; and stocks and bonds must be issued many times in excess of what the properties would have brought at forced sales in normal times. But Pierpont Morgan was equal to the emergency. He first called in his big lieutenants, one of whom was his young partner, George W. Perkins — a man des- tined to influence profoundly the policy and for- tunes of the corporation about to be born — and the magnates of the independent companies, in- cluding Elbert H. Gary, Marshall Field, Norman B. Ream, Henry C. Frick, and H. H. Rogers. It was Morgan's plan at first to include in the com- bination only those steel companies with which his firm had already become identified, but it was soon seen that it would be dangerous to exclude the
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others. If the Gates interests were left out, they might become a menace to the peace of the new concern, for John W. Gates would surely attempt to sandbag Morgan as Carnegie had done. If the Moore brothers were left to shift for themselves, they might get together with others and do the same thing. The chief danger was, however, from the Standard Oil. To allow John D. Rockefeller to remain independent, with his big Lake Supe- rior deposits and his fleet of ore-carrying vessels on the Lake, might easily lead to disaster. A second monster steel business might easily be built up under Standard Oil control. Therefore it must be a case of all or none. The steel industry must be completely merged into one, and all com- panies of strong financial connections or large resources must be included.
Judge Gary was appointed to open up negotia- tions with the independents. Daniel G. Reid, of the American Steel Hoop Company, was brought in, and he induced the Moore brothers to join the combination. The Gates group received what they demanded, and then Henry C. Frick was sent to see what he could do with John D. Rocke- feller. Frick's position at this time was somewhat unique. Since his break with Carnegie a couple of
THE STEEL TRUST MERGER 87
years before he had become more of a Wall Street speculator than a mere stee^ man. He had not definitely allied himself with either Morgan or Rockefeller but was on friendly terms with both. He had close associations with Henry H. Rogers . and James Stillman ; he had gone into Federal Steel ; he was a powerful factor in the affairs of the Penn- sylvania Railroad; altogether, he was looked upon as one of the leading protagonists of the "commu- nity of interest" idea which had been so strongly championed by Cassatt of the Pennsylvania Rail- road, Harriman of the Union Pacific, and Hill of the Great Northern.
Frick succeeded without much trouble in bag- ging Rockefeller, although the price he paid looked high at the time. Rockefeller received eighty mil- lions in the stock of the new corporation, of which half was preferred stock, besides eight and one- half million dollars in cash for his ore-carrying fleet. These were huge concessions, but the control of the Lake Superior iron mines was absolutely essential, for these deposits represented two-thirds of the new corporation's ore supply.
Having thus gathered together all the important steel interests of the country, Morgan launched the United States Steel Corporation. The stock
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capitalization was in excess of a billion dollars, with a bonded debt of more than three hundred millions, and both the big banking groups of Wall Street were firmly tied to the enterprise. The great merger dominated by Morgan drew into its orbit even the Standard Oil "Money Power." Among the big names included in the syndicate, aside from Morgan and his partners, were H. H. Rogers and Daniel O'Day of Standard Oil; Marshall Field, William H. Moore, James H. Moore, Elbert H. Gary, John W. Gates, H. H. Porter, and Norman B. Ream, of Chicago; Samuel Mather of Cleveland; Nathaniel Thayer of Boston; and Daniel G. Reid, Henry C. Frick, Charles M. Schwab, and D. O. Mills, of New York. So under the control of a single corporation passed seventy per cent of the American iron and steel industry. That industry, instead of being operated on the old plan of in- dividual control or independent corporate con- trol, was now linked with scores of banks of great power, with railroads, and with numerous other corporate undertakings.
CHAPTER VI
HARRIMAN AND HILL
EDWARD H. HARRIMAN was the son of a poor and unsuccessful Episcopal clergyman who spent the latter days of his life as a bookkeeper in the old Bank of Commerce in New York. Born in 1848, young Harriman was just fourteen years old when his father obtained a job for him as office boy with DeWitt C. Hays, a Wall Street stockbroker. This was just about the time when Pierpont Morgan was preparing to get into business in America; when Andrew Carnegie was accumulating his first money in speculative oil and railroad ventures under the tutelage of Scott and was scanning the horizon of the new Bessemer steel business; when John D. Rockefeller was laying the foundations of Standard Oil; and when Henry C. Frick — one year younger than Harriman — was doing duty as an errand boy in Mount Pleasant.
From the very first, young Harriman displayed
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unusual ability. He also had that trait of audacity which had shown so conspicuously in the char- acters of Frick, Carnegie, and Morgan. Almost immediately he began to make a little money in stocks. And he widened his acquaintance rapidly. He became intimate with Lewis Livingston, a member of one of the oldest New York families, who had a son named James. When in 1870, after having worked himself up to the position of book- keeper of the Hays firm, young Harriman bought a seat in the New York Stock Exchange at a cost of about three thousand dollars, he induced James Livingston to go into the stock brokerage business with him and supply capital through his father. Harriman was successful at once — so successful that within a few months he dissolved partner- ship with Livingston and formed a new firm with himself at the head and his brother William as a partner. He cultivated the friendship of people of means and social standing and in a few years be- came prominent among the younger "aristocrats" of New York. In this environment he ultimately came into close touch with the people associated with the Illinois Central Railroad, which had been built during the years prior to the Civil War and had proved wonderfully successful from the start.
HARRIMAN AND HILL 91
Running north and south, it caught broadside the westbound tide of migration; its government grant of rich Mississippi Valley lands was sold early at a good price; soon after it was built the Civil War gave it a big business, and it escaped the ruinous competition which so long devastated the 'trunk lines running east and west.
A group of old New York merchants had built this road. Though they sold five-sixths of its stock in England and Holland, it became a favorite solid investment for many of the old families of New York. The Astors and the Goelets and the Cut- tings were large holders of its stock in the seventies and eighties. The Illinois Central, indeed, was quite the "society railroad " of New York. During the long period from 1857 to 1883 the property had remained under the direct control and operation of William Henry Osborne, an old Manila merchant who had returned from the Philippines in the fifties with a fortune and who had operated the Illinois Central all these years as he would have operated his own warehouse. Osborne had a sum- mer home at Garrison, New York, where he was a neighbor of the old and rich Fish family, a younger member of which was Stuyvesant Fish. The latter became Osborne's secretary in 1872 and a few
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years later was made a director of the railroad. In 1883 when Osborne died, he practically bequeathed the management of the railroad to his secretary, although Fish did not actually become president until some years later.
Harriman and Fish had known each other for many years, and as young men had traveled about town a great deal together. In 1880 they were both directors in the Ogdensburg and Lake Cham- plain Railroad, a property of which Harriman had hoped to acquire the control, for by this time Har- riman had made very substantial progress in busi- ness, having accumulated several hundred thou- sand dollars through shrewd trading in securities. He was now beginning to turn away from mere brokerage to railroad management and finance.
The Illinois Central had acquired control of an extensive system of lines south of St. Louis, known as the Chicago, St. Louis and New Orleans, and Stuyvesant Fish had sought Harriman's assistance in placing the bonds. In this work Harriman was notably successful. Meanwhile he had himself acquired a large block of Illinois Central stock and had become more and more the confidential adviser of Fish. At that time there was a large Dutch stockholding interest in the road, whose
HARRIMAN AND HILL 93
votes were cast collectively by the firm that had originally placed the stock in Holland, Boissevain Brothers. One member of this firm came on a visit to America. Harriman met him, gained his confi- dence, and then arranged to hold his proxies in the Illinois Central meetings. Soon afterwards Harri- man was elected a director and became the close associate of Stuy vesant Fish in the actual operation and control of the road.
No two men could have been more dissimilar in personality and bearing than these two. Harri- man was small, quiet, restless, and secretive; Fish was a big, open-faced, easy-mannered young man, whose blond hair and great stature had earned for him in the financial district the name of "White Elephant." For a time, however, the two men worked together in harmony. They bought a por- tion of the old Wabash, St. Louis and Pacific after its failure in 1884; in 1887 they bought the Du- buque and Sioux City Railroad; in the early nine- ties they bought (much against the will of Collis P. Huntington) the chain of roads with which Hunt- ington had planned to hitch his Southern Pacific system to the Atlantic seaboard; they bought an, important section of the St. Louis, Alton and Terre Haute, which George Foster Peabody had been
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developing in southern Illinois, thus securing an entry of their own into St. Louis; and they pur- chased a great number of small roads, until, from the two thousand miles they had in 1883, they owned and controlled in 1897 a system of over five thousand miles.
This policy of expansion did not bring disaster, as had been the case with so many other lines. All through this period the road's credit remained high, and even in the early eighties it was able to sell three and one-half per cent bonds while other roads of good credit were raising money at five or six per cent. This high credit of the Illinois Cen- tral was very largely due to the rigid policies which Harriman introduced and developed. Harriman was more than a mere banker or broker; he was a practical railroad operating man. He had made a thorough study of railroading and had early adopted the theory that the first duty of railroad management was to maintain the character of the physical property and to consider mere current profits as secondary. Thus, in the management of the Illinois Central, he never "skinned" the road , to pay dividends ; he never allowed the roadbed or equipment to become inefficient. Another sound idea he adopted was always to provide ample
HARRIMAN AND HILL 95
funds and reserves for contingencies; never to allow his property to take financial chances in times of dullness or depression. Even when he was raising large amounts of new capital for extensions or purchases, he always provided far more cash assets than were currently needed.
Harriman had very soon grown powerful enough to cross the path of Pierpont Morgan. In 1887, Morgan held the proxies of the stockholders in the Dubuque and Sioux City Railroad, which Harri- man wished to buy for the Illinois Central. Harri- man fought his plan through and defeated Morgan. This coup was regarded as a ten days' wonder in Wall Street. From that time on Morgan disliked Harriman. Again, in 1894, Harriman and Morgan crossed swords. Harriman owned a few hundred thousand dollars worth of underlying bonds about the time that Morgan announced his plan of reor- ganization for the Erie Railroad. Harriman ob- jected to the proposed treatment of his securities, brought suit to prevent the drastic reorganization, and in the end forced Morgan to make concessions.
Harriman was as yet little known outside of Wall Street. Although chairman of the finance committee of the Illinois Central and the power behind the throne, he was eclipsed by the figure of
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Fish. But in 1895 Harriman stepped to the front. The Union Pacific Railroad security holders were looking in vain for some strong banking interests to finance their property. The road was a frightful wreck with a tangled mass of subsidiary companies, and the United States Government was aggres- sively insisting on the payment of the huge debt representing the original government loans, with the interest that had accumulated since its build- ing thirty years before. Morgan had rejected the suggestion that he reorganize it, as he was too fully occupied with the rejuvenation of many other railroad systems. Harriman then saw his chance. He decided to reorganize the Union Pacific himself, to make it a subsidiary of the Illinois Central, and to utilize the credit of the latter company for the gigantic financing which would be necessary. But before he had progressed very far in this plan he met with opposition from Kuhn, Loeb and Com- pany, who had become bankers for the Chicago, Milwaukee and St. Paul, the Great Northern Rail- way, and other properties, and now also were bent upon reorganizing the Union Pacific.
A keen contest for mastery followed. At first Jacob H. Schiff, the head of Kuhn, Loeb and Company, persistently ignored Harriman, feeling
HARRIMAN AND HILL 97
confident that no interest in New York could suc- cessfully reorganize the property except Morgan or himself; but Harriman soon forced him to change his mind. The two were brought together, and, in Wall Street parlance, laid their respective cards on the table. It was an interesting and convincing show-down. Schiff could raise the much needed hundred millions of new capital at five or six per cent through his strong German connections; but Harriman showed how he could raise this sum, and more, on the Illinois Central credit, at from three and one-half to four per cent. Schiff capitulated, and finally reached an agreement with this new master of capital. The road was reorganized by Kuhn, Loeb and Company, and Edward H. Har- riman was made the first chairman of its board of directors and later its president.
Harriman had now leaped at a bound into pub- lic notice. And, coincidently, as we have already seen — an event of great significance — the power- ful Standard Oil capitalists interested themselves in Wall Street affairs.
Too much credit cannot be given to the men who carried out this reorganization of the Union Pacific Railroad. In the first place, they paid to the
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Federal Government over forty-five million dollars in cash on a bankrupt railroad — all the principal and full interest at six per cent on the Union Pacific debt, which had accrued for thirty years. Then they put the bonds and preferred stock of the reorganized road on a straight four per cent basis; and finally after these prudential measures, they began to spend money by the tens and hun- dreds of millions upon this ramshackle property running across the "Great American Desert."
In all these operations Harriman was the master- ful leader. Fortune played into his hands. For the first time in years the arid farming sections of the West had copious rains and fine crops. The Spanish-American War resulted in American oc- cupation of the Philippines; and the Union Pacific got a great business from these new possessions. Harriman not only spent money but he spent it quickly, accomplishing in two years' work what had been estimated to take five. And he was reap- ing the fruit of his enterprise. In three years, under his direction, the system expanded from less than two thousand miles to over fifteen thousand. The old branches running up into the Oregon country were all reabsorbed. After the death of Collis P. Huntington in 1900, Harriman bought in forty-five
HARRIMAN AND HILL 99
per cent of the Southern Pacific Company stock, principally from the Huntington estate.
But now, just about the time that the great steel merger was being carried through, when the big banking interests of Wall Street were every- where hitching themselves to the Morgan star, Harriman's gigantic railroad plans came into vio- lent collision with the equally gigantic plans of James J. Hill. Until a short time before this, Hill had not been looked upon as a big operator in Wall Street. He had won fame as the builder and suc- cessful manager of the Great Northern Railway system, but he had not been directly involved in the large Wall Street deals. At first, as the Great Northern emerged from the panic of 1893, the firm of Kuhn, Loeb and Company had done most of the Great Northern financing in New York. But after the reorganization of the Northern Pa- cific property by Morgan in 1897, Hill and Mor- gan began to work closer to each other. Hill had acquired a substantial stock interest in the Chase National Bank, one of New York City's old and strong institutions, while Morgan began to add to his interest in the First National Bank, of which George F. Baker was president. Baker and his associates at this time also acquired a large interest
100 THE MASTERS OF CAPITAL
in the Chase National Bank, and the two institu- tions became definitely allied in interest. Then, as a natural step, James J. Hill acquired an im- portant interest in the First National Bank. A little later, Hill acquired a large part of the Mor- gan interest in the newly reorganized Northern Pacific property. This move brought Hill defi- nitely into the group of Morgan financiers, while Harriman was still closely associated with the Rockefeller and City Bank interests.
Hill was now the controlling power in both the Great Northern and the Northern Pacific sys- tems and was becoming more and more of a com- petitor of Harriman. The latter discerned the dan- gers ahead and began to extend the Union Pacific branch lines up into the Oregon district. But Hill was looking to the East. Neither of his roads controlled a connection to Chicago, the Northern Pacific ending at St. Paul, and the Great Northern at Duluth. The Union Pacific, on the other hand, had a close alliance with the Illinois Central, which entered Chicago, and maintained traffic connections with other lines. At this juncture Hill decided to have the Northern Pacific buy the stock control of the great Chicago, Burlington and Quincy system. When this move was announced,
HARR1MAN AND HILL 101
it threw the Harriman people into confusion, for it meant that the Union Pacific would have a di- rect competitor a third of the way to the Pacific. While the Burlington line was bought primarily for the sake of its lines extending from St. Paul southward to Chicago, yet the system had also a lucrative line running to Denver and far beyond into Wyoming.
Harriman now attempted to bargain with Hill and to induce him to let the Union Pacific join in the Burlington purchase and thus tie up all the western systems in a common monopoly. But Hill refused. Then, without the slightest hesitation, Harriman quietly began to buy up the control of the Northern Pacific in the open stock market. In this way he hoped to checkmate Hill, as the Northern Pacific (jointly with the Great Northern) had been made the instrument to carry the Bur- lington stock and Harriman reasoned that, while a majority of Great Northern stock was doubtless locked up in the strong boxes of Hill and his friends, only a substantial minority of the Northern Pacific stock was so held.
To buy up the control of such a property meant the use of anywhere from $80,000,000 to $100,000,- 000 in cash. But Harriman knew where he could
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lay his hands on the money. Already the Union Pacific had a heavy balance in its treasury; it had, besides, about $60,000,000 of unused bonds which Harriman had the right to issue; and behind him were the huge cash resources of Kuhn, Loeb and Company and the City Bank, with the Standard Oil alliance.
Harriman had gone far on the way to controlling the Northern Pacific before the fact was known to J. P. Morgan and Company. Morgan had gone on his usual spring and summer trip to Europe, and was on the ocean when the storm broke. Coster, his chief lieutenant, had died the year before. The Morgan firm was in charge of Robert Bacon, a fine, upstanding young man, handsome as a Greek god, but not of the Morgan caliber. He had been called to the Morgan firm a few years before from a brokerage house in Boston; but he was not the best substitute for Pierpont Morgan in a great financial crisis.
On the 1st of April, 1901, Morgan and the Hill people together held between $35,000,000 and $40,000,000 of the Northern Pacific stock out of a total of $155,000,000. They had paid an average of about sixteen for this stock only two or three years before and, seeing it rise beyond par, they
HARRIMAN AND HILL 103
were tempted to sell some of their holdings. On the 1st of May they held only $26,000,000 worth. Then Harriman announced that he had bought an actual majority of the Northern Pacific stock. And he had; but there was a loophole which Harri- man had overlooked. His purchases were in both common and preferred stock, but the charter of the company provided that the preferred stock could be retired at the will of the directors, thus leaving the voting power entirely in the common stock. It soon appeared that Harriman had not acquired enough common stock to give him con- trol. So Hill and his friends, with the Morgan house and its powerful connections, rallied and employed James R. Keene, the famous stock mar- ket manipulator, to buy a majority of the North- ern Pacific stock for them. Between the 3d and the 7th of May over $15,000,000 worth was bought — enough, they thought, to give them an actual majority.
But at the same time Harriman also was buy- ing; and by the 9th of May both parties claimed to have a majority. The stock had been "cor- nered"; the price soared and soared; at ten o'clock on the 9th of May it sold around $350 a share; one hour later it was quoted at $1000 a share. Wall
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Street plunged into a panic; stocks of every char- acter dropped with a thud; it was plain that, un- less something was done, every broker and every banker in Wall Street would fail by nightfall. So the two contestants had to suspend hostilities in order to save the financial world they lived in. A truce was signed pending Morgan's return to New York in July. In November, Bacon retired, broken in health by the gigantic strain of the Morgan busi- ness, just as Coster before him had been. But his place was more than filled by George W. Perkins. In the formation of the Northern Securities Company in the fall of 1901, another important link was forged which served to weld the rival finan- cial groups of Wall Street together. The North- ern Securities Company was a holding corporation with $400,000,000 capital, which was formed to ac- quire by exchange of stock all the capital of the Northern Pacific Railway and a majority of the capital of the Great Northern, thus insuring control of the Burlington, nearly all the stock of which had been acquired by these companies. As the Union Pacific and Harriman and Standard Oil interests had bought a great block of Northern Pacific stock, this agreement meant that they would control sub- stantially half of the Northern Securities Company
HARRIMAN AND HILL 105
stock. Thus, by a gigantic stroke, railway com- petition in the vast region west of the Mississippi was eliminated, and a combination of capital, far greater than that of the Steel Trust, was formed. The Harriman properties now embraced the Southern Pacific system, with its eleven thou- sand miles of railroad radiating throughout the entire Southwest, and the Illinois Central, with its five thousand miles extending down the Missis- sippi Valley to the Gulf. The Hill properties, now jointly controlled and operated by Hill and Harri- man, included over fifteen thousand miles of lines radiating throughout the entire rich region north and northwest of Chicago and extending through to the Pacific by two distinct routes.
But this alliance of western properties by no means represented all or nearly all the railroad power of either Harriman or Morgan. Harriman had. caused the Union Pacific to acquire important interests in the New York Central, the St. Paul, the Atchison, and the Chicago and North- Western, following out the "community of interest" theory of which he was such a strong advocate. Morgan, on his part, was just as firmly as ever in control of his eastern properties, the Erie and the Southern, and had important influence in the management of
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the Reading, the Lehigh Valley, the Baltimore and Ohio and, of course, the entire Vanderbilt lines. Interlocking directorates were becoming the vogue in the entire railroad world. The powerful Penn- sylvania Railroad, under the remarkable and force- ful personality of Alexander J. Cassatt, had pushed the "community of interest" idea aggressively, and its representatives were on the boards of di- rectors of all of its competing and many of its con- necting lines. In nearly all directions, the rail- road systems of the country had now been welded together under the financial control of practically one powerful interest.
There was, however, one loophole left open. The lucrative Louisville and Nashville Railroad was still outside the breastworks, when John W. Gates — who, since he had sold out his American Steel and Wire Company to the Trust in 1901, had be- come a notorious stock-market "plunger" — #nd Edwin Hawley joined forces in 1903 and bought a majority of the Louisville and Nashville stock. Hawley had been one of the lieutenants of Collis P. Huntington, after whose death and the sale of the Southern Pacific to Harriman he had be- come a free lance. He bought small railroads for the purpose of selling them out at a profit, just as a
HARRIMAN AND HILL 107
smaller man would buy a block of stock for the same purpose. He and Gates formed a strong com- bination; but their reputation was that of manip- ulators; and it was feared that they would wreck the solid old Louisville and Nashville property hi short order by unsound financing and unprin- cipled manipulation. In fact, this was their inten- tion. They worked up an enormous speculation in the stock, caught certain large insiders short, and threatened to start another "corner" simi- lar to that in the Northern Pacific. To prevent the recurrence of such a disaster, Morgan stepped in and took the Louisville and Nashville off their hands at their own price. Later, Morgan turned the control of this railroad property over to the Atlantic Coast Line, which had been welded to- gether by Henry Walters and was -being operated in harmony with the Morgan interests along the South Atlantic seaboard.
There was now but one large system of American railroads that actually escaped the control of con- servative bankers of the Morgan and Standard Oil type, with their "community of interest" for- mula. This was the Chicago, Rock Island and Pacific. In 1902, their pockets bulging with the millions acquired in the big steel merger, the Moore
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brothers, with Daniel G. Reid, and others, formed a syndicate and bought the control of this property. They immediately loaded it up with several hun- dred millions of watered capital, and then so fixed the voting power that they could sell practically all of it to the public and yet still retain control of the property. Thus, the Rock Island system became simply a football for Wall Street gamblers; its roadbed and rolling stock were neglected; the road was "skinned" year after year to pay divi- dends; and an extravagant policy of expansion was pursued which in the course of time forced the entire system into bankruptcy, and the flimsy structure collapsed like a house of cards.
CHAPTER VII
THE APEX OP "HIGH FINANCE"
IN 1903 the United Steel Corporation failed to earn its dividends, its great issue of common stock fell to a few dollars a share, and people began to think that Morgan was no wizard after all. Carnegie, the retired and intrenched multimillionaire, sat back and laughed; Harriman, the enemy of Mor- gan, gloated over the fall of his rival ; the Standard Oil magnates, always jealous of the Morgan power, said little but watched and waited. But while the fickle public cried calamity, Morgan kept on being a "bull." He knew that the ebb was temporary; that the tide would soon turn. He urged his clients to buy steel and other good industrials. The de- cision of the Supreme Court in 1904 ordering the dissolution of the Northern Securities Company caused a shiver in the framework of Morgan's gi- gantic structure. But it was only a shiver. The tide did turn, and big business went merrily on
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until the storm broke in 1907. Steel stocks rose above their original figures, and the house of Morgan regained its prestige and added to its financial strength.
During these years Morgan formed the great shipping combination known as the International Mercantile Marine Company, which absorbed the White Star Line, the American Line, the Red Star Line, the Leyland Line, and many other trans- atlantic companies. The idea of this combination was to eliminate the cutthroat competition which then existed in the transatlantic trade in freight and passenger rates. The leading lines between New York and England, which included the Cu- nard Line, the White Star, and the American Line, had suffered during the few previous years through competitive conditions just as the trunk line rail- roads had suffered for more than a decade prior to the period when the Morgan idea of "combina- tions" and "community of interest" had been so widely introduced. It was felt that the same methods of combination in the ocean carrying trade might have equally beneficial results.
But the organization of the International Mer- cantile Marine Company proved to be one of Mor- gan's business mistakes — until the unprecedented
THE APEX OF "HIGH FINANCE" 111
demand for shipping in the Great War resulted in large earnings. The vital fact was apparently belittled or overlooked that a combination of car- riers on the high seas cannot be welded into a monopoly in the same way that a combination of railroads can be. The ocean is free to all comers, while a railway right of way is in its very nature exclusive and grows more valuable as the territo- ry covered increases in density of population and wealth. It would be practically impossible, be- cause of the stupendous costs, for a direct competi- tor to be built today paralleling the Pennsylvania Railroad between New York and Pittsburgh; but it would be simple enough for an organisation of capital to establish an entirely new line of steam- ships between New York and Liverpool.
This was but one of the facts which were over- looked by the promoters of the steamship combina- tion. The competing lines controlled in England and Germany were all the beneficiaries of large government subsidies, whereas the new Morgan combination, being under American control and financed by American capital, could not enjoy these benefits. Moreover, as soon as the new combination began to compete aggressively with the Cunard and German lines, both the English
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and German Governments came to the rescue with further large subsidies and benefits. The Cunard Line was able to make an arrangement with the British Government whereby the latter advanced money at two and one-half per cent for the con- struction of new liners of mammoth capacity, such as the Lusitania and the Mauretania.
A more successful flotation by the Morgan firm was that of the International Harvester Company. This was a gigantic combination of manufacturers of harvesting machinery and included the larger plants in the United States and also many of those in Europe. Its capitalization was large, but it dis- tinctly Stabilized business conditions in this line of industry and prospered notably from the very start. Credit was especially due to George W. Perkins, Morgan's young partner, for forming this new combination.
During a long period the Morgan firm had been closely identified with the General Electric Company, a great manufacturing concern which had been building up a world-wide industry. But the General Electric Company was now becoming more than a mere manufacturing concern. With its large capital and high credit it was steadily going into the business of developing public utility
THE APEX OF "HIGH FINANCE" 113
operating companies. The old North American Company, which had originated as the Oregon and Transcontinental Company many years before and had been the holding corporation for the in- terests of Henry Villard in connection with the Northern Pacific and certain Oregon railways, had now been revamped as a public utility holding company and had gradually acquired control of, or large interests in the street railways and light- ing companies of St. Louis, the Milwaukee public utilities, and the Detroit Edison Company.
But perhaps the most striking development of this time was the further unification of railroad control. After the Supreme Court decision dis- solving the Northern Securities Company was handed down in 1904, the stocks of the Great Northern and Northern Pacific railways which had been acquired by this holding company were returned to their holders. The Union Pacific Railway received into its treasury an enormous amount of both Great Northern and Northern Pacific stock. At this time, these stocks were of tremendous market value. Both roads showed large earnings and were paying liberal dividends, be- sides cutting "melons" by dividing surplus prof- its in one form or another. The stock market was
8
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booming, and the quotations in these stocks soared to unheard-of heights. Great Northern stock sold in 1906 as high as $340 a share and Northern Pa- cific at about $230. The Union Pacific suddenly found itself rich beyond the dreams of avarice; its treasury was overflowing with valuable securities. And when, after this dissolution, the Harriman and Hill interests reached a definite agreement on matters of policy and division of territory by carry- ing the "community of interest" idea to its logical conclusion, there was no further need of the Union Pacific to retain control of these large amounts of stock. So Harriman decided to dispose of them. These sales, which were spread over a considerable period, brought an immense amount of cash into the treasury of the company and resulted in a total profit to the Union Pacific of more than fifty millions of dollars.
Thus the Union Pacific Railway had become a veritable storehouse of cash, in fact, a bank of enormous resources. But Harriman had no inten- tion of allowing the railroad to remain a bank; he had more ambitious plans. The Supreme Court decision, while preventing the practical merger of competing lines, said nothing about the control of connecting lines. So the Union Pacific cash was
THE APEX OF " HIGH FINANCE " 115
immediately employed in adding to the Union Pa- cific's interest in connecting systems . It had always been Harriman's ambition to control an ocean to ocean railroad, and he now began to purchase in the interest of the Union Pacific great blocks of stock in the Baltimore and Ohio Railroad, be- sides adding heavily to that already owned by the Union Pacific in the Illinois Central. By the early part of 1906, the Baltimore and Ohio was practically an eastern arm of the Union Pacific Railway. And inasmuch as the Baltimore and Ohio already owned practically a dominating in- terest in the Reading Company, with the control of the anthracite fields, and the Reading controlled the Central Railroad of New Jersey, with its en- trance into the New York City district, the Union Pacific now became a network of railway lines extending from ocean to ocean.
In short, the general tendency was for all the American railroads to become more and more close- ly knit together in policy and interest. The St. Paul in these years began to develop its west- ern extension, and the Rockefeller interests, which were so closely allied with the Harriman railroad financiers, had complete control of the St. Paul. The Gould properties were being linked into one
116 THE MASTERS OF CAPITAL
harmonious whole, and a plan was under way for a Gould transcontinental line also stretching from ocean to ocean. The Western Maryland system was acquired by the Goulds, with Rockefeller aid, and it looked as though a great system would soon be built up, side by side with the Harriman lines, but in close control and with the maintenance of harmonious relations.
The Hill and Morgan properties of course ex- hibited this same tendency towards greater har- mony and concentration. Hill's lines radiated throughout the Northwest but worked in har- mony with both the Harriman and the Rockefeller interests. The Atlantic Coast Line, with the great Louisville and Nashville system, under the man- agement of Henry Walters and under the partial control of Morgan interests, operated in complete harmony with the Southern Railway system on the one hand and with the Illinois Central on the other. Morgan took care that his Erie system maintained favorable and harmonious relations with the great Vanderbilt lines, while the Pennsylvania system, under the guidance of that master hand, Alexander J. Cassatt, worked in complete harmony with all the other large railroad interests.
The intercorporate relationships of the railways
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reached their highest point before the panic of 1907. By the end of 1906, we find that of a to- tal railroad stock capitalization of about twelve billions of dollars, more than one-third was owned by the railroads themselves. In the cases of com- peting or parallel systems, minority interests of sufficient amount were held to create a substantial if not a dominating interest; but in the case of non-competing lines, or connecting lines, majori- ty control was often effected. The latter was the case in New England, where the New York, New Haven and Hartford system, under Morgan in- fluence, had acquired complete control of prac- tically all the means of transportation, including the many coastwise steamship lines.
This remarkable welding together of great cor- porate interests could not, of course, have been accomplished if the "masters of capital" in Wall Street had not themselves during the same period become more closely allied. The rivalry of inter- ests which was so characteristic during the reorgan- ization period a few years before had very largely disappeared. Although the two great groups of financiers, represented on the one hand by Morgan and his allies and on the other by the Standard Oil forces, were still distinguishable, they were now
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working in practical harmony on the basis of a sort of mutual "community of interest" of their own. Thus the control of capital and credit through banking resources tended to become concentrated in the hands of fewer and fewer men.
The machinery for the control of credit had become steadily more effective since the days of the Steel Trust merger. Two groups of banks, partially allied but still independent, had been reaching out through the entire country. The National City Bank, now under the management of Frank A. Vanderlip, James Stillman having practically retired, had grown tremendously in power and with unusual rapidity. It had formed connections with large institutions in various cities of the country and had brought under its control several great trust companies. The growth of the Morgan banks and trust companies during this period was no less notable.
In the same period began a contest for the con- trol of life insurance assets. In earlier days the life insurance business had occupied a modest place in the American financial world. The old, solid companies had grown steadily and quietly year by year, increasing their patronage and adding to their assets in a staid, conservative way. But
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they were generally looked upon as a thing apart, so far as banking connections or general financing were concerned. The old Equitable Life Assur- ance Society, although near the Wall Street dis- trict, was as distinct from Wall Street influences as though it had been located in Hartford or in Philadelphia; and the same was practically true of the Mutual Life Insurance Company and the New York Life Insurance Company. The invest- ments of these large and growing companies, as well as those of a myriad of smaller ones, had from time out of mind been confined to government and municipal bonds and the highest grade of rail- road securities. Each year had seen the surpluses of these companies grow, but as a matter of course their large cash resources were looked upon as un- available for ordinary financial purposes. While the laws regulating the investment of life insurance funds were far more liberal than those pertaining to the investment of savings bank funds, yet Wall Street did not regard the one as any more liquid or available than the other for its own uses. As late as 1889 it appears that very little attention had been paid to the possibility of making use, in financial schemes, of the large liquid assets of these great companies.
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But in the early nineties the trust company move- ment began to get vigorously under way. Trust companies, formed as they were under unusually liberal banking laws, could not only compete with the ordinary state banks and the national banks in doing a straight banking business — receiving deposits, discounting notes, and making loans on collateral — but were fully empowered to do many other lucrative things. They were perfectly free, for example, to "underwrite" financial schemes and to take large interests in promotions or finan- cial enterprises of a more or less speculative nature. Such underwritings or promotions frequently yield- ed fabulous profits, and it was quickly seen that the stock of a modern trust company was likely to pay larger dividends than that of a bank, which operated under rigidly restrictive laws.
These possibilities for lucrative profits began to be more fully demonstrated as the readjust- ment and reorganization period set in about 1893. Up to that time trust companies had made a special feature of acting as fiscal and financial agents, paying coupons, dividends, and performing the general work of trusteeship for both corporate and individual interests. But now they began to be the headquarters for bondholders' committees
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and the agencies for reorganization committees and the like. Soon a further step was taken; abandon- ing the mere role of trustee, they began to be re- organizers and financiers of corporations directly. Profits flowed in, the stocks of the trust companies began to soar, and trust company dividends ranged far higher than did old-line bank dividends. An investment in the stock of a large Wall Street trust company became far more lucrative than an investment in a first class bank of the old style. So trust companies began to be formed with great rapidity.
But to form large companies with great re- sources and substantial reserves required much money. They were a new thing, and the type of individual investor who was perfectly willing to put money into a national or state bank was in- clined to hesitate before embarking on this new en- terprise. But money must be got somewhere; so the shrewd minds identified with or attracted by the possibilities of the movement began to search for untouched resources of some kind. Some success was achieved in getting Standard Oil money into the field, but only to a limited extent. For a while it looked as though the trust company business would have to take the usual course of any new business
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with money-making ideas and prove its stability with the lapse of time before it could hope to take a permanent place in American financial affairs.
Suddenly a new and unexpected source of capital opened. Identified with certain of the large life insurance companies of New York, either as presi- dents or managers, were a number of men of the purely financial type, men who were more or less involved in Wall Street interests and enterprises. These men, with their swelling insurance assets, were constantly looking for investments for the surplus funds of their companies; and they were not, as a rule, averse to making private fortunes for themselves. Though the life insurance laws restricted them to some extent in the use of the policyholders' money, so that they could not, as a private banker might, make use of this money in any really free and speculative way, it was per- fectly legitimate for a life insurance company to invest its funds in any company operating under the banking laws. There was therefore nothing to prevent the Mutual Life or the Equitable Life from holding the stock of a trust company. And as the value of the capital stock of a bank or trust company in those days depended largely upon the character of its management or the personnel of its
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board of directors, it was soon found that a trust company which was openly identified with a large and powerful insurance concern would be assured of success.
Life insurance money thus began to go into trust companies, and officers and directors of life insur- ance companies began to take conspicuous places as directors of trust companies. And in addition, these new directors began to grow rich; and they grew rich in many cases where at the start they had no capital whatever. In forming a new trust com- pany or in enlarging an old one by the issue of new stock, they not only would have their insur- ance company subscribe to a majority of the stock but would themselves subscribe to a minority on the same terms, and then deposit their own stock as collateral for a loan which they would obtain from their own insurance company. It would not in all cases be necessary for them to deposit any cash "margin" in the loan, for almost invari- ably the stock would be sold to them, as to the insurance company, at a figure considerably below its market value.
At that time there were no restrictive laws which forbade an officer of a corporation to borrow money from his own company on collateral, and
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the president or director of an insurance company was perfectly free to make use of the funds of his own company provided he deposited necessary se- curity. And as he was himself the authority who scrutinized the collateral, it will be seen that his path was generally a very easy one.
During the period from about 1890 to the open- ing of the new century, this flow of life insurance money into the coffers of the trust companies in- creased rapidly. And as time went on, the move- ment took on new phases. The life insurance company, with its enormous cash assets, naturally favored its own trust companies in the matter of bank deposits and banking business generally. And as the trust companies had also begun to go largely into the investment business and dealt in stocks and bonds with practically the same freedom that a pri- vate investment banker did, it was not long before practically all the investing of life insurance funds was being done through the subsidiary trust com- panies. Naturally, in many cases the chief desire of the directors and large individual stockholders of the trust companies (who were also directors or officers of the parent life insurance companies) was to make big profits for the trust companies; so that, in many cases, the insurance companies were
THE APEX OF "HIGH FINANCE" 125
discriminated against in the matter of prices by their own directors or trustees.
But discrimination did not stop here. As we have seen, the trust companies early became pro- moters, financial underwriters, and controllers of big schemes. This sort of work involved the use of much capital ; and the tendency was to get more and more life insurance money into the coffers of the trust companies, so that the latter would have plenty of funds to work with. There was "big money" in these things for the trust companies, but the life insurance companies often received only the normal rate of interest on their fat de- posits which were used to make unheard-of profits for their own directors.
Notwithstanding the fact that trust compan- ies and interlocking directors were growing rich through this use of insurance funds, the life insur- ance companies also continued to prosper. It was a period when practically the whole country was prospering, when New York City especially was waxing richer and richer, and when more and more men were not only taking out policies but were going into the life insurance business. Extraordinary ef- forts were continuously made by the great insur- ance companies to add to their lists of policyholders
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and to increase their surpluses. Naturally, all life insurance directorates which were also interested in trust companies and in Wall Street affairs generally, wanted to see the funds of their com- panies flow in a never ceasing stream, and they developed the most efficient and far-reaching organizations for getting new business.
By 1900 the assets of the great life insurance companies in New York City had begun to loom large in Wall Street operations. At the beginning of the movement we have been following, many more or less inconspicuous men were identified with it, but it was not long before the larger bank- ing powers of Wall Street began to realize the pos- sibilities in the control of life insurance assets. Prior to 1890 the "big three" New York com- panies — the Mutual, the Equitable, and the New York Life — had few conspicuous banking affilia- tions. But about that time, the Morgan house be- gan to identify itself more closely with the New York Life, whose new president, John A. McCall, became known before very long as a Morgan man. The Equitable Life had had its various banking affiliations, and its president, Henry B. Hyde, was fairly close to Wall Street affairs. It had early become the controlling factor in the Mercantile
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Trust Company, which, prior to the reorganization period, had been prominent chiefly as a conserva- tive, "old-line" trust company, confining itself almost exclusively to the original business of per- forming the work of trustee and agent, to which its banking and deposit business was only inci- dental. The Mutual Life, with Richard A. Mc- Curdy at its head, had grown steadily and solidly, but it was not until the early nineties that its name became identified with a trust company or Wall Street business. About this time, however, a small trust company, known as the New York Guar- antee and Indemnity Company, came under the control of the Mutual Life. Its title was changed to that of the Guaranty Trust Company, and cer- tain trustees of the Mutual Life Insurance Company became prominent in its directorate. Its capital was enlarged, and with the new connection its credit im- proved and its business grew by leaps and bounds. The control of the United States Mortgage and Trust Company was also acquired by the Mutual Life and its business also took a spurt.
In the course of time, many trust companies of less prominence became identified with the insur- ance companies, and finally, Wall Street bankers and financiers of the influential type began to flood
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the directorates of the insurance companies and the trust companies alike. Then came the period of big financing, the decade of consolidation and merger, followed by several years of feverish spec- ulative activity in Wall Street and vast schemes of promotion. All the large bankers were soon on the finance committees of the life insurance com- panies — such men as J. P. Morgan, several of his partners, Jacob H. Schiff of Messrs. Kuhn, Loeb and Co., Henry C. Frick, Edward H. Harriman, and the Rockefeller representatives — indeed, all the big captains and masters of Wall Street.
Life insurance assets had now become a large factor in high finance and a vital part of the move- ment toward the control and capitalization of in- dustry in general. Banking power, as identified with the different groups, now implied the control not merely of groups of national banks and trust companies but also of the life insurance companies with large assets and growing resources. Not only were the "big three" involved in this steadily grow- ing concentration of power, but other large com- panies, such as the Metropolitan Life, the Prudential Life of Newark, and several companies in more distant cities, were becoming assets of importance to the big contending groups in Wall Street.
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During that remarkable period from 1898 to 1904, when the industrial and commercial enter- prises were being more and more heavily capi- talized, when fabulous individual fortunes were be- ing piled up, and when concentration of the control of finance was rapidly hastening to its climax, the assets of the insurance companies were handled with steadily increasing recklessness. At first considerable caution had been shown in the use of these large sums, but towards the end of the period they were more freely used in speculative and uncertain enterprises. Both money and credit were getting scarce under the strain of continued capitalization and promotion; and in Wall Street the period of "undigested" and "indigestible" se- curities was arriving. Private bankers were not so eager to secure large allotments in underwriting syndicates; large bond and stock issues did not go so well with the public as formerly. And yet all the giant promoters, the Harrimans, the Morgans, and their allies, needed cash and credit to carry through vast enterprises. Naturally, therefore, in- surance assets, on which there was little or no re- striction, were used more and more. Not only were insurance companies of great strength "allot- ted" abnormally large amounts of syndicate under-
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writings and securities by their own trustee bank- ers, but their subsidiary trust companies and other financial dependencies were also loaded up in the same way. The method became so free and easy that a great banking house engaged in carry- ing through some gigantic operation would sim- ply "allot" to a certain insurance company a spe- cified amount of bonds or other securities and would then instruct its president or trustees to take them, willy-nilly.
Naturally, this loose and extravagant method of making use of hundreds of millions of dollars be- longing to hundreds of thousands of policyholders bred extravagance and corruption in the ranks of the smaller minds in the insurance organizations. In the great companies particularly, extravagance, waste, and inefficiency steadily grew. Millions of dollars were spent annually in elaborate furnishings for executive offices; all sorts of useless positions were created for retainers and worthless officers and clerks; money was wasted in buildings, in useless advertising, and in many other ways. Graft in a thousand forms began to creep in.
In 1903 occurred a semi-panic in the Wall Street security markets. Business had fallen off notice- ably in the industrial world; the railroads staggered
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in many cases under the heavy capitalizations created during the speculative period of the few years previous; and money was scarce and high. President Roosevelt had attacked the Northern Securities merger, and the Government had started suit for its dissolution. The great Steel Trust had fallen on evil days, and its stocks and bonds had dropped helter-skelter to low levels. This was a period of "undigested securities," and pessimism reigned everywhere.
Because of the scarcity of capital and the low credit of many concerns, a feeling of unrest and in- security prevailed in financial circles. Some out- side interests began to investigate the stability of large concerns ; and some banking and trust company failures ensued. Then the security holdings of in- surance companies, which were obliged to file an- nual reports and lists of their securities, began to be closely scrutinized, and it was realized that the large companies were loaded up with many un- profitable syndicate accounts and large invest- ments which had undergone vast depreciation. Criticism soon became rampant, and various suits were started against companies and officials. But little change occurred until the following year, when strenuous efforts began to be made for a
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thorough investigation of the affairs and methods of the companies.
A sensational insurance investigation which be- gan in 1905 lasted for several months. Under the direction of Charles E. Hughes, it disclosed to the public the entire inside history of life insurance finance during the previous decade, with all its high finance, reckless manipulation of funds, waste, extravagance, and graft. The result of this inves- tigation was that new and far more stringent laws were enacted looking to the safeguarding of the assets of policyholders and the proper investment of insurance funds.
Thus, at one stroke, a prolific source of free and unrestricted cash was cut off from the speculator and promoter. The hundreds of millions which had for years been bandied about at the beck and call and to the profit of small groups of powerful men were no longer available.
The investigation of the insurance companies, with its results, was undeniably one of the factors which helped to save the situation when the panic of 1907 arrived. Had not the reckless finan- cial methods of handling insurance funds been curbed a few years before, the crash of 1907 would have been far more disastrous than it proved.
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The insurance companies were still loaded with large amounts of unsalable securities, but they bought no more, and under strict legal restric- tions in the course of time they liquidated most of their dangerous assets without material loss.
CHAPTER VIII
THE PANIC OF 1907 AND AFTER
IT is not to be assumed that the concentration of banking power and the control of corporate activi- ties had no unfortunate accompaniments . Unques- tionably the consolidation of the great railroad systems of the country, under the "community of interest" plan, resulted in greatly stabilizing freight rates; it increased efficiency of operation; it enabled the managements to develop large amounts of new business and to show greatly increased prof- its; and it bred a spirit of invincible optimism in Wall Street. The large crops of these years, the unusually heavy tide of foreign immigration, and the boom in business generally, all helped to increase this feeling of optimism in Wall Street. Great material progress and prosperity, however, inevitably invite speculation; and speculation, once begun, grows by what it feeds on.
In the closing months of 1904 a great speculative
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movement in the stock market began and continued almost without interruption through 1905 and well into 1906. The prices of railroad stocks soared to unheard-of heights; Great Northern preferred rose above 300; Northern Pacific above 200; St. Paul to nearly 200; Atchison, Southern Pacific, Union Pacific, New York Central, and the rest all steadily climbed to higher and higher levels. In- dustrial stocks, also, were having their day, and new enterprises were being floated in Wall Street by the hundred. Credit was easy to obtain; in- terest rates were low; and after 1905, most of the bankers and speculative investors had become so accustomed to high prices and large speculative profits that almost any financial "proposition" found ready acceptance in Wall Street.
It was a new day for the underwriting syndicate, and brokers eagerly sought for opportunities to un- derwrite anything that promised profits, regard- less of its merit. Many undertakings of extremely doubtful or speculative nature were passed along as sound without any real investigation whatever. Many private banking firms, even of relatively con- servative reputation, acquired the habit of join- ing in questionable under writings. The new era of banking control, moreover, had brought with it a
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superficial notion that financial panics like those of 1873 and 1893 could never again occur. It was frequently said that the coordination of American industry, under the control of powerful banking institutions, would always be a safeguard against the dangers of inflation and over-speculation. Yet in 1906 financial America was in a very true sense riding for a fall.
The United States Shipbuilding Company, known as "the Shipbuilding Trust," illustrates the speculative spirit which was undermining the financial credit of the country. This was a com- bination of shipbuilding manufacturers, promoted on the theory that Congress, under the control of the Republican party, would soon pass a liberal ship-subsidy law which would be followed by a great revival in shipbuilding. This expectation had also buoyed up Morgan's International Mer- cantile Marine Company formed in 1902. No legislation of the sort took place; but the promot- ers of "the Shipbuilding Trust" continued their efforts with undiminished fervor. A young man named Daniel Le Roy Dresser organized the Trust Company of the Republic and attempted to under- write this United States Shipbuilding Company. Eight companies, one or two of which were fairly
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valuable, the rest being largely heaps of junk, were merged in the combination, the capitalization of which was colossal. An enormous bonded debt was created to raise funds to buy up the operating companies at high valuations. One small plant, which the owners a year before would have been glad to sell for $100,000, was bought up at a valua- tion of over $2,000,000, one-quarter of which was paid in cash.
The United States Shipbuilding Company had hardly been formed when it began to fall to pieces. The underwriters were not able to make good. Then to the astonishment of everybody, its presi- dent, Lewis Nixon, announced that the company had bought the Bethlehem Steel Company from Charles M. Schwab. This seemed incredible, as the Bethlehem Steel Company was of more tan- gible value than the whole outfit of shipbuilding plants. Everybody thought Schwab was crazy, for he was to be paid, so it was generally understood, in bonds of the United States Shipbuilding Com- pany, which promised to be worthless. But Schwab was far from crazy. He had insisted that the bonds carry voting power. Presently, when the whole scheme went down with a crash, carry- ing with it the Trust Company of the Republic,
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Schwab was found in possession of the entire group of plants, including the Bethlehem Steel. He then lopped off the worthless properties and attached the good shipbuilding plants as subsidiaries to the Bethlehem Steel Company.
Another and equally unsound type of promo- tion was going on in banking. A number of smaller financiers, trying to copy Morgan and Standard Oil, would form a chain of banks with unlimited capital, to promote their speculations. Notable among these speculative bankers was Charles W. Morse, a man of unusual ability. He had made a large fortune in the American Ice Company and in the manipulation of its securities in Wall Street; he had also done something in shipbuilding and operating steamships. By 1905 he had reached a position of substantial power in Wall Street. He acquired control of the Bank of North America, one of Wall Street's old and solid institutions, and began to make use of this bank's credit and re- sources for financing his promotions. Finding him- self in need of more capital, he acquired control of other banks by making use of the resources of the banks he already owned or controlled. By the close of 1906, he had under his own sway, or that of his close friends, seven or eight good banks,
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besides having considerable influence in a number of others. He then launched an ambitious scheme for consolidating all the coastwise steamship lines on the Atlantic seaboard, paying fabulously high prices for these lines and capitalizing them to the moon. Having thus acquired nearly everything afloat from Maine to Florida, he bought from Morgan all the stock of the Central of Georgia Railroad Company in order to get control of the Ocean Steamship Company, a line which operated from Savannah to New York and connected with the Central of Georgia.
Meanwhile the great pot in Wall Street went boiling on. In the summer of 1906 the Harriman financiers added fuel to the fire by suddenly in- creasing from six to ten per cent the dividend on Union Pacific common, thus sending that stock up forty points practically overnight. Discretion in Wall Street was thrown to the winds; many of the most conservative houses began to push securities of more and more doubtful types. A mining stock craze broke out, and in a few months the whole country was madly buying up worthless shares in a thousand or more gold and silver mines at ri- diculously high prices and without thought of in- vestigation. The Wall Street "curb" became a
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bedlam of mining brokers, and even the Stock Exchange gave dignity to a number of mining ventures by listing their stocks. 1
Long before the close of 1906 there were omi- nous signs of danger ahead, and many thoughtful men began to urge caution. The wild speculation caused a steadily increasing strain on credit, and demand loans in Wall Street rose in September to the highest figure they had reached in years. In the same month, the New York banks reported a deficit in reserves and appealed to the United States Treasury for surplus gold. This timely deposit afforded temporary relief; but the year closed in strain. Most of the Wall Street bankers, however, persisted in the theory that fundamentally every- thing was sound, that the outlook for 1907 was distinctly hopeful, and that after the turn of the New Year all would be well.
Wall Street financiers, high and low, seemed to be hypnotized by the long period of easy money, rising prices, quickly made fortunes, and successful
1 The immediate cause of the mining stock boom was the discovery, in the previous year, of the great silver deposits in the Cobalt re- gion of Canada and the gold deposits in the Goldfield region of Ne- vada. A few companies, such as the Nipissing mines in Canada and the Jumbo mine in Nevada, were real bonanzas and paid millions in time to their stockholders, but nearly all the others sooner or later turned out to be worthless.
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promotions. Harriman certainly did not foresee any bad turn in affairs, for in 1906 he caused the Union Pacific and Southern Pacific companies to employ their large surpluses in buying large addi- tional blocks of railroad stocks at top prices; the Morgan and Hill interests did not seem to foresee trouble, for they were developing their railroad properties and spending money like water on im- provements; the City Bank or Standard Oil mas- ters did not gauge the future accurately, for they were not only doing nothing to stem the tide of speculation, but were actually floating various schemes of their own on the current. Certainly smaller and more speculative men, like Charles W. Morse, Charles M. Schwab, F. Augustus Heinze, and Charles T. Barney of the Knickerbocker Trust Company did not fear the future, for they were ex- tending their operations in all directions. Schwab had gone into mining on a large scale; Heinze was promoting a balloon known as the United Copper Company, aided by the credit of the Mercantile National Bank, control of which he had acquired; Morse was floating his ship bub- ble; and Barney was sinking the funds of the great Knickerbocker Trust Company in all sorts of unsound ventures.
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Little change in conditions occurred until Feb- ruary, 1907, but with the opening of the month the stock market began to crumble, and the banks commenced to call in loans and mend their fen- ces. But the real unsoundness of the day was not understood until, a few weeks later, Henry H. Rogers, vice-president of the Standard Oil Com- pany, found difficulty in securing a loan of twenty million dollars for his Virginian railway, which he was at that time building to open up some soft-coal fields in the western part of the State. Rogers had to pay an equivalent of over eight per cent for this loan, secure it with over thirty million dollars of the highest grade investment stocks and bonds, and personally endorse the notes, though his credit was as high as that of any man in the United States. This transaction created consternation. If the vice-president of the Standard Oil Company, that great reservoir of ready cash, had to go into the market for a pittance like twenty million dollars and pay over eight per cent for it, then indeed things were in bad shape.
The "March panic," or "silent panic" as it was called, immediately followed. Stocks dropped three to ten points at a time; money rates reached a great height; banks closed their doors to borrowers;
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and stockbrokers began to fail. Speculators by the thousands were wiped out; the mining boom on the "curb" completely collapsed; and in Wall Street financiers were seen daily and hourly, rush- ing hither and thither, trying to devise ways and means to weather the storm. But the high money rates drew gold from Europe; the Secretary of the Treasury deposited further funds in New York banks; and as the crop-moving period had ended, funds naturally gravitated to New York City, and thus helped to relieve the situation. The panic was stayed for the time being.
Wall Street still refused to believe that any fur- ther trouble was ahead. Business throughout the country continued at high pressure; railroad earn- ings were large, and industries were booming; the new crop outlook was favorable; and while money rates were high, there seemed to be enough at the moment to go round. Even the big "masters of capital," although following a more cautious policy, seemed to think that the worst was over. Nearly everybody said, "Wall Street has now cleaned house; we will soon be in a bigger boom than ever. " All seemed to base their reasoning on the idea that, with industry and business going on prosperously, any further trouble in Wall Street was unthinkable.
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After the 1st of July, however, there were de- velopments which created disquietude in high places. The United States Steel Corporation re- ported an alarming falling off in unfilled tonnage; railroad earnings suddenly began to sag; then the money market tightened up, and the fear became widespread that the fast approaching crop-mov- ing period would create a great money stringency. Presently came the collapse of Charles W. Morse's shipping combination. Then, to cap the climax, came the failure of the City of New York to sell a large block of bonds in Wall Street. Altogether August was an uneasy month for the "masters of capital" and for their thousands of satellites and followers.
September saw the heads of big business often in consultation; the powers were at last awake to the seriousness of the situation. The newspapers were urged to talk encouragingly; Wall Street in- terviews were uniformly optimistic. Clearly, stren- uous efforts were being made to tide over the crisis. But to no avail. In October came the Heinze failure, involving first the Mercantile National Bank and then the whole Heinze- Morse chain of banks. Next occurred the run on the Knickerbocker Trust Company, the suicide of
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its president, and the closing of its doors. Then followed in quick succession the failure of the Na- tional Bank of North America and runs on the Trust Company of America, the Lincoln Trust Com- pany, and a dozen other institutions. All these disasters involved banks in other cities and pulled down private firms and brokers. The accompany- ing panic in the stock market completed the havoc. The holocaust was on.
The small group of mighty financiers — the men who had been chiefly responsible for the building up of the great concentrated system of banking power, corporate control, community of interests, and interlocking relationships, all of which had finally culminated in this terrific smash — these were the men whose powers were now to be taxed to save financial America. The morning after the Knickerbocker smash, while the run on the Trust Company of America was filling all Wall Street with crowds of excited depositors, a man walked into the office of J. P. Morgan and Company, pushed past the guard, and entered Morgan's private room. Mor- gan nodded and said, "Good morning, Mr. Frick." The two men talked quietly for perhaps ten min- utes. Frick went away ; then Edward H. Harriman came in. Following him came other "masters,"
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one by one or in pairs. Finally came James Still- man, president of the National City Bank and spokesman for the great Standard Oil interests.
That day many millions of dollars were doled out to the banks by the Secretary of the Treas- ury; government bonds were supplied by institu- tions and private investors for temporary use, John D. Rockefeller alone lending ten million dol- lars' worth. Then both Morgan and Stillman made arrangements to buy bills of exchange in enormous quantities, and force gold shipments from Europe. These measures began the relief which the situation needed.
Yet one of the gravest dangers remained. This was the position of the brokerage firm of Moore and Schley, involved in a big speculative pool in the stock of the Tennessee Coal, Iron and Railroad Company. Moore and Schley had pledged over six millions of the Tennessee Coal and Iron stock for loans among the Wall Street banks. The banks had called the loans, and the firm could not pay, as was of course known to Morgan and the others. If Moore and Schley should fail, a hundred more failures would follow and then all Wall Street might go to pieces. The only thing to do was to save Moore and Schley.
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The Tennessee Coal, Iron and Railroad Company was one of the chief competitors of United States Steel and it owned enormously valuable iron and coal deposits. It was Morgan's plan, in which Frick, Harriman, and the others agreed, to buy the Tennessee stock from Moore and Schley. In this way the panic could be stayed and a big stroke of good business done for the greater corporation. Gary was called in to discuss the matter. The only obstacle seemed to be the Government. Would a purchase of this kind be construed as a violation of the Sherman Act? A deputation, consisting of Gary, Perkins, and others, was dispatched to Wash- ington to lay the matter before President Roose- velt. The President promised immunity and the purchase was then immediately consummated. The United States Steel Corporation paid thirty million dollars in its own bonds for the Tennessee stock; these bonds were accepted as collateral by the bank where the Tennessee stock had been refused; and the firm of Moore and Schley was saved. The an- nouncement had an immediate effect, and from that hour matters began to mend.
Before the turn of the new year, Wall Street was normal again. The prices of securities had rallied substantially, the money market had grown much
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easier, fear and fright had disappeared, and men were looking forward with confidence into the future. And, as the year 1908 wore on, it became evident that the panic marked the culmination of "high finance." The great banking groups were still intact, to be sure, and their influence and power seemed as far-reaching as ever. But the glamour of speculation and promotion had largely disappeared. The shock of the panic had put con- servatism into the survivors and of course a great horde of speculators had fallen.
Yet there was still rivalry between Harriman and Morgan. In the fall of 1908 Harriman induced the Mutual Life Insurance Company to sell him half of the working control of the great Guaranty Trust Company, with its one hundred million of assets. And in the early part of the following year Harriman obtained an option on a half interest in the control of the Equitable Life Assurance So- ciety. Harriman evidently proposed to form a banking power greater even than that of the Na- tional City Bank or of the Morgans, as a part of a colossal scheme which he was developing. The control of the Union Pacific system, the great- est railroad system on the American continent — for the Union Pacific at that time controlled two
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lines to the Atlantic seaboard — did not satisfy this man's ambition. He was working for a world railroad empire. Before the panic year Harriman had made his control of the Baltimore and Ohio practically secure. During the dark days of the panic he had taken over from Charles W. Morse the stock of the Central of Georgia and had made this railroad a subsidiary of the Illinois Central. Now he was planning a railroad system in Asia which would connect with the Siberian Railway in Russia and finally work through to the capitals of Europe. He had already secured an option on the South Manchurian Railway in China and was en- deavoring to obtain the cooperation and backing of the Japanese Government to further his plans. Had Harriman lived, no one knows what might have occurred in railroad history during the follow- ing few years. But he was playing a very difficult game and the strain was beginning to tell on him. In the summer of 1909 he was taken seriously ill and died in the early fall. The death of Harriman caused an almost immediate change in the bank- ing situation in New York. Within three months Morgan and his associates had bought Harriman's stock in the Guaranty Trust Company and with it the holdings of the Mutual Life Insurance Company.
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Later Morgan acquired from Thomas F. Ryan control of the Equitable Life Assurance Society, which had fallen into Ryan's hands in 1905. Thus we find Morgan in practical control of the "Big Three" in life insurance in New York, for he had already dominated the New York Life for many years. He then merged the Morton and the Fifth Avenue Trust companies into the Guaranty and this union gave him and his associates a domi- nating position among the trust companies of New York, since he already controlled the powerful and growing Bankers Trust Company, which had been formed a few years before. These moves also re- sulted in giving him a closer grip on the affairs of the National Bank of Commerce.
This growth of the Morgan banking power did not, however, excite any spirit of competition or rivalry between his interests and those of Standard Oil, for the time had passed when rivalry in bank- ing was the fashion. Before long it could be said, indeed, that two rival banking groups no longer existed, but that one vast and harmonious banking power had taken their place.
Harriman was now dead; Henry H. Rogers was dead; Alexander J. Cassatt, the great Pennsyl- vania Railroad president, was dead; James Stillman
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had retired from active business; William Rocke- feller was no longer an active business promoter. Times were changing and new men were coming to the front. Frank A. Vanderlip, the young head of the National City Bank, was becoming more and more the spokesman for the Rockefeller interests; George W. Perkins was still active with the Mor- gans, but the strong personality of Henry P. Davi- son was beginning to dominate the firm. Though Morgan himself remained in command until his death in 1913, he was clearly growing old and was placing more and more responsibility on his younger partners.
These newer men in Wall Street were not the products of the old time, when experience was gained by building up and welding together the parts of the vast modern industrial and banking machine. They had not been educated in the hard and struggling school for mastery through which Morgan and Frick and Harriman and Rockefeller had come. When they arrived, they found the finan- cial machine already in motion; their work was to perfect it and keep it well oiled. Consequently, with the arrival of the new and younger school of financiers, a less spectacular season set in for Wall Street. Money power increased; intercorporate
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relationships were maintained; but few further steps were taken in elaborating or developing the system.
Long before the panic of 1907, political rum- blings had reached the ears of Wall Street. In President Roosevelt's first term, the Sherman Act had been invoked against the Northern Securities Company, and that gigantic product of the spirit of consolidation had been dissolved by decree of court. A little later, new powers were given to the Interstate Commerce Commission over the opera- tion of the railroads, and for the first time the Com- mission was fully empowered to regulate freight rates. The New York insurance investigation under Charles E. Hughes, with its astonishing dis- closures, had shown growing public aversion to thf methods of "high finance."
The panic, with its accompanying disasters, had a large share in prompting the Government at Washington to take action against the trusts; and before Roosevelt left the White House in 1909 suits had been brought against a large number of industrial trusts, including Standard Oil and To- bacco. Later, suits were instituted against the Steel Trust, the Harvester Trust, and a great many others. When Taft became President in 1909.
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many of the big combinations formed during the previous decade were practically under indictment. In 1911 the Supreme Court ordered the dissolu- tion of Standard Oil and Tobacco and of a large number of smaller trusts as well. These decisions brought about radical changes in the character of the corporations. The original subsidiary compan- ies were obliged to take over the properties under nominally competitive conditions. Such dissolu- tions proved in the end, however, to be mere changes of form, for the various companies involved con- tinued to be owned, controlled, and managed by practically the same men, with little if any real competition.
Later a drive against the railroads began in the same way; the Union Pacific was forced to disgorge its interest in the Southern Pacific Company, and the Pennsylvania disposed of its control in its com- petitor, the Baltimore and Ohio. The new federal laws regulating freight rates made the "commu- nity of interest" plan of interlocking control of lit- tle use, so that the different railroads began liqui- dating their interest in other properties to a large extent. Within a few years, the ties binding to- gether the big trunk lines and larger systems were steadily loosened. And finally, Federal statutes
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prohibiting interlocking directorates, not only among competing railroad systems, but among banks and industrial concerns, completed the proc- ess of "unscrambling the eggs." Before the Great War opened, the long chapter of "high finance," as understood during the wild and dramatic days of 1901 to 1906, had practically closed.
CHAPTER IX
WALL STREET AND THE WORLD WAR
WAR is the great revealer; it demonstrates, as does nothing else, the strength and weakness of a nation, material and spiritual. The first two years of the recent stupendous struggle disclosed the financial and industrial greatness of the United States; the last two years happily showed that the nation was great in other things than money, munitions, and food. Yet it became apparent, even in the days of American neutrality, that the support of Ameri- can agriculture and industry was practically indis- pensable to the allied cause. America possessed the largest available supply of that copper, steel, cotton, and food without which the armies of the Entente would have struggled in vain. Wall Street became, at least temporarily, the internation- al money market; more than a third of all the gold in the world soon found its way to New York; and the United States which, since the Revolution, had
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been a debtor nation, soon discovered that Europe owed her far more money than she had ever owed Europe. The mere fact that, in 1916, the United States produced 43,000,000 tons of steel, while Great Britain, which normally ranks next to this country in steel manufacture, produced 9,000,000 tons, not only indicates the extent to which Ameri- can industry had expanded under the pressure of war, but gives some indication of the part which it was playing on European battlefields. Thus, long before American armies gave Marshal Foch that superiority in men which turned the balance from defeat to victory, American mines, American steel mills, American farms, and American money had become powerful elements in the war.
Wall Street awoke rather slowly to its new posi- tion as a maker of history. Its first reaction to the European nightmare was one of bewilderment and panic. In this it merely reflected the mental state of the European bourses of which it had been a dependent for many years. The hardest headed American business man had difficulty in keeping his poise when all the Stock Exchanges of Europe had closed their doors and when the news ticker reported a run upon the Bank of England. Wall Street had never faced such a crisis as that which
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dawned on the morning of August 3, 1914. Only once in its history of more than a hundred years had this great market suspended operations, and then only for a few days during the panic of 1873. But the conditions facing it in August, 1914, were unparalleled. The Kaiser's ultimatums to Rus- sia and France, making war inevitable, caused European investors to rush their securities to the London stock market, which averted a panic only by closing. Since all the important markets of Europe and South America followed the London example, there remained only one place in the world where stocks could be sold — New York. At that time European investors, for the larger part British, held at least $4,000,000,000 of Ameri- can securities. There was not the slightest ques- tion that they would attempt to dispose of these on almost any terms. There are experts now who believe that the American market could then have stood this strain, but there were few who enter- tained such encouraging ideas in August, 1914. The prevailing opinion then was that all American securities would suffer such declines that a general calling of bank loans would result and that the country would be visited with the greatest financial and industrial panic in its history. While the New
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York Stock Exchange closed on July 31, 1914, Wall Street was kept in suspense for twenty -four hours. On Monday morning, the 3d of August, the usual aggregation of brokers, most of them in a high state of excitement, gathered on the floor. The gong which announces the beginning of business rings promptly at ten o'clock: the employee whose business it is to ring it stood at his post. As the pointer on the clock passed fifteen minutes to ten and started towards the fatal hour, the nerv- ous tension increased. The excited members all had vast quantities of stocks which they had been ordered to sell, and they trembled at what would happen when they threw these on the market. It was not until five minutes to ten that an officer of the Exchange stepped upon the floor and read the official notice that the market would be closed indefinitely. The cheer that went up eloquently voiced the relief which this step brought to a chaotic situation.
This closing indicated that the United States was still the financial dependent of Europe. The Exchange remained closed four months; then, on the 28th of November, it timidly opened its doors and began trading again in restricted fashion. Ex- ternally the position of Wall Street in November
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seemed to have changed little from its position in August. The great European exchanges were still closed; thus New York became the one market on which European holdings could be "dumped." Europe still held vast quantities of American se- curities on which it might be expected to realize. Yet, when the American market opened, some- thing quite extraordinary took place. Europe, as was expected, began to sell American securities in large amounts, but stocks on Wall Street did not decline; instead, they advanced. The reopening of the Stock Exchange really started one of the most sensational stock "booms" in the history of that institution. Instead of having a panic on its hands, as many had freely predicted, Wall Street discovered that it had a bull market of unprece- dented buoyancy. The real fact was that, in the intervening four months, the financial prestige of the United States had been enormously en- hanced. Alone of all the great markets of the world Wall Street had not had to resort to the ex- pedients that commonly accompany panic condi- tions. All European countries, including such a financial giant as Great Britain, had declared a moratorium, or a temporary suspension of the legal obligation to pay debts, and most South American
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countries had resorted to the same expedient. No moratorium had been declared in the United States. Practically all European countries, even including England, resorted to various currency expedients that amounted practically to inflation. The United States resorted to no such unscientific expedients as it had tried in the Civil War but met the de- mands of the hour by supplying an elastic emer- gency currency under the terms of the new Federal Reserve Act. x But certain developments even more fundamental showed that this prosperity was not fictitious. When war broke out, the United States was harvesting the greatest wheat crop in its his- tory, and at the same time the other great wheat countries were showing a smaller production. The closing of the Dardanelles kept Russia's wheat from reaching its market. All the world now began to bid for America's food supply, a demand im- mediately evidenced in the startling increase in our export statistics. Meanwhile the allied nations be- gan scouring the United States for all kinds of war supplies. They found little in the way of guns or ammunition, but they did find industrial plants
1 Congress still further facilitated the issue of emergency currency by amending the Federal Reserve Act. At the same time clear- ing-house associations in the larger cities arranged for the issuing of certificates.
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far greater than those of any other country which could be very soon transformed into huge am- munition factories. War orders for all kinds of munitions started these plants going twenty-four hours a day, while orders for clothing and other indispensable materials of war put new life into such great industrial regions as New England. The result was a huge balance of trade in favor of the United States. The gold supply of Europe be- gan to find its way into the coffers of Wall Street, a movement that was continuous until 1917, when, of the approximately $8,500,000,000 outstanding, nearly $3,000,000,000 was ultimately deposited in American safety vaults.
In the early days of the war England had prac- tically abdicated, for the time being, the position of international banker which she had held for a hundred years. In a single year Lombard Street, up to the cataclysm of 1914, had invested over a billion dollars in new securities, domestic and foreign. Lombard Street had largely financed the building of American railroads, had contributed greatly to the financing of American enterprises of all kinds, had been a large purchaser of govern- ment and municipal bonds, not only in the United States, but in South American countries. That
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familiar annual phenomenon in the United States, known as "moving the crops," had been made possible for many years with credits supplied by England. But in the early part of 1915, the Brit- ish Government vetoed all operations of this kind and informed the bankers that their resources must be used exclusively for war purposes. What mar- ket could thus step into the position of interna- tional banker which England by government fiat had surrendered? Two years before, any sugges- tion that Wall Street could do this would have been regarded as absurd; yet the American market adjusted itself, to this position with comparative ease. It not only supplied home demands for ready money, but began making loans aggregating hundreds of millions to Canada, Switzerland, Norway, Sweden, and the South American re- publics. Wall Street bought the bond issues of Paris, Bordeaux, and Lyons, and even provided funds for international trade. Soon it had to meet new demands.
Up to 1914, Wall Street had played little part in financing foreign governments, its activities in this direction being limited almost to lending Great Britain $200,000,000 at the time of the South African War and Japan $50,000,000 at the time
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of the Russian War. But as the war orders of the Allies began flooding our markets, Great Britain and France attempted to pay for their purchases with cash, an expedient which drove British ex- change up to a point which it had never reached in the history of the New York market. It soon became evident that, if the United States was to do business with the Allies on this huge scale, some other method must be adopted for settling the account. What this method should be was clear. Great Britain had built up her foreign trade largely by lending to her customers the money with which they purchased the goods. It was evident that we should have to do the same thing. The simplest way for the British and French Governments to establish credits in the United States with which to pay for war supplies would be to sell their bonds in our markets. The money obtained from sales, when deposited in American banks, could then be drawn upon for settlements. Simple as this device might seem in theory, it involved what seemed in 1915 to be insuperable difficulties. American investors had never shown any great eagerness to purchase government securities, excepting their own. There really existed no public market for such invest- ments, in the sense that such a market had for so
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long existed in England, France, and other coun- tries. Some of our supersensitive government officials at first believed that such an operation would be a violation of neutrality and a consider- able pro-German element lifted up their voices in protest. There were others who questioned the soundness of the investment: the war threatened world-wide bankruptcy, and there was a fear that even so powerful a nation as Great Britain might not be able to pay her obligations. Nevertheless, in the latter part of 1915, a distinguished Anglo- French mission arrived in New York for the pur- pose of floating an American loan. The sum sug- gested, $1,000,000,000, staggered Wall Street; no Government had ever floated a foreign loan of such proportions. In accordance with the advice of American bankers the amount was cut to $500,000,- 000, and this was disposed of successfully. From now on, all the purchases of the British and French were paid for in this way. After this credit was ex- hausted, these Governments continued to borrow in Wall Street, usually pledging American securities. Not only did England and France pay for their supplies with money furnished by Wall Street, but they made their purchases through the same me- dium. As related in a previous chapter, the house
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of Morgan has always maintained close and con- fidential relations with the British Government and the British public. The necessity of buying materials by the billions in the United States soon produced a state of chaos in London. Contract hunters and contract jobbers pounced upon the British War Office; all kinds of irresponsible per- sons, American and European, obtained contracts for speculative purposes. Unless disaster was to result, it was evidently necessary to select some trustworthy agency in this country which could be depended upon to mobilize American indus- try, place the European orders in the right quar- ters, and attend to all the details. Inevitably the house of Morgan was selected for this important task. Thus the war had given Wall Street an entirely new role. Hitherto it has been exclusively the headquarters of finance; now it became the greatest industrial mart the world had ever known. In addition to selling stocks and bonds, ' financ- ing railroads, and performing the other tasks of a great banking center, Wall Street began to deal in shells, cannon, submarines, blankets, clothing, shoes, canned meats, wheat, and the thousands of other articles needed for the prosecution of a great war. This new function brought to the front an American
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business man who had hitherto been practically unknown. In looking for the man best quali- fied to conduct this purchasing campaign the Morgan firm discovered Edward R. Stettinius, the president of the Diamond Match Company. Stettinius in turn searched American industry for the men best qualified to assist him in his gi- gantic task, with the result that he got together a force of 175, who organized themselves into a de- partment known humorously as the "S.O.S. " — or "Slaves of Stettinius." In a short time this group found themselves purchasing supplies at the rate of $10,000,000 a day. To a considerable ex- tent the materials in which this agency dealt had never been made in the United States before, at least in appreciable quantities. They had to ex- tend on a tremendous scale such munitions fac- tories as already existed and to construct hun- dreds of entirely new plants. American industry adapted itself to the new demands speedily and satisfactorily, and many concerns which had never made munitions of any kind were soon turning them out in perfect shape. So successfully was the work done that up to September, 1917, the Mor- gan firm had bought more than $3,000,000,000 in merchandise and munitions and had, besides this,
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marketed from $2,000,000,000 to $3,000,000,000 of American securities which had formerly been held by European investors.
With one American captain of industry the Brit- ish Government dealt directly. He was a mau whose name has already figured in this narrative. Indeed, next to J. Pierpont Morgan, the American business man who was best known in England was Charles M. Schwab. England understood even better than Americans the proportions of the Beth- lehem Steel Company and the manufacturing genius of its head. When Kitchener became Minister of War, one of his first acts was to cable Schwab asking him to take the next boat for England. In a few days Schwab and Kitchener were closeted at the British War Office. The Secretary's demands were to the point. How many shells could Schwab supply? A million? Yes. How long would it take him? Ten months. Could Schwab furnish any guns? Yes, and quickly. In this way Kitchener rehearsed all his requirements and Schwab pledged all the capacity of the Bethlehem Steel plant. At the end of several days' conferences Kitchener ap- proached a delicate point. He had only one anxiety about the Bethlehem Company, he said, and that was that German interests might purchase it.
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Schwab immediately offered to sign an agreement that the Bethlehem Company would not be sold to any one so long as it had any British contracts under way. And so this American manufacturer with the German name became one of the strongest indus- trial allies of the British Government. According to the popular estimate he shipped not far from $300,- 000,000 worth of war materials to England in less than two years. To do this he so increased his facilities that the Bethlehem Company presently became a larger munitions plant than the Krupps, and Schwab's shipyards alone had a capacity for turning out a larger tonnage than all the shipyards in Germany. One of his particularly interesting feats was the manufacture of twenty submarines, which were sent in parts to Canada, where they were pieced together and sent across the Atlantic under their own power. A year or so afterward Ger- many sent the submarine Deutschland to the United States and widely advertised the performance as something unprecedented !
Valuable as all this work was in promoting the cause of the Allies, it had one result that was still more important. For it prepared financial America for war. When Congress declared war on April 6, 1917, America, as a nation, had made little
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preparation for participating in the great conflict. We had an army only in skeleton; we had a navy efficient in its personnel and in its ships but en- tirely inadequate for the crisis; we had hardly any mercantile marine. In only one part of the United States had there been any real preparedness, and that was the part which had for decades been per- haps the most unpopular section of the country. From August, 1914, Wall Street had displayed an attitude that compares well with those ele- ments in American life which had viciously assailed business and industry. With the exception of one or two Jewish-German banking houses, its sym- pathies had been enthusiastically with the Allies. And the part which it had played in financing the Allies laid the foundations for the work it did in the American period of participation. The outbreak in 1914 had produced the wildest chaos in Euro- pean business and finance: stocks had tumbled, money rates had gone up, industry had ceased as though stricken with paralysis, and general dis- solution had been prevented only, as we have seen, by resorting to a moratorium. But no such de- moralization seized Wall Street when the United States declared war. Instead of falling, the stock