Lords of Creation

by Frederick Lewis Allen

  It was at this moment that Harriman saw his opportunity. Morgan, banker for a number of the big roads, had been a member of the Brice committee that had tried to reorganize the Union Pacific and had given it up as a bad job. Jacob Schiff, the head of the smaller private banking house of Kuhn, Loeb & Co., took the task over, but he discovered that somebody in Wall Street—he could not make out who—was throwing obstacles in his way, arousing opposition to his plan, turning creditors of the road against it.

  The story is that Schiff went to Morgan and asked him if he was responsible for the opposition. No, said Morgan; he was no longer interested in the Union Pacific; but he would find out who was making the trouble. Later he reported that it was “that little fellow Harriman.” “You want to look out for him,” said Morgan. Schiff saw Harriman, who blandly admitted that he had been throwing monkey wrenches into Schiff’s machinery of reorganization because he intended to reorganize the Union Pacific himself. Ultimately a treaty was made: Schiff would go ahead without opposition from Harriman, and Harriman would have a place on the executive committee of the road when it was freed from bankruptcy.

  There was nothing in this episode to indicate that Harriman, thus bludgeoning his way into authority, was anything more than a ruthless Wall Street operator. But when at the end of 1897 the reorganized Union Pacific began operations, Harriman disclosed another personality. His knowledge of railroading proved to be immense and practical, his judgment swift and sure, his sense of the possibilities of the Union Pacific bold and strategic. The road ran from Omaha across the Rocky Mountains to Ogden, Utah, connecting there by means of the Central Pacific and the Oregon Short Line with the principal cities of the Pacific Coast. Harriman saw that if it were equipped to handle heavy freight rapidly and economically, it might secure a great share of the traffic moving from coast to coast; and that with prosperity returning—as it already was—and the Far West growing, and trade with the Orient expanding, this traffic would gain in volume and importance. But the road, long bankrupt, was in very bad shape to take advantage of these opportunities. It must be completely modernized.

  To decide what improvements were necessary, Harriman went on a long slow inspection tour of the line, in a private train pushed by a locomotive at the rear, with an observation platform out in front. Day after day, week after week, he sat on that platform with his subordinate officials.

  One of the division superintendents, it is said, had been worried for years by the fact that on a certain curve a signal tower was hidden from the engineer’s eye by a water tank. He had often recommended that the water tank be moved, but his pleas had been disregarded. When Harriman’s train passed this point the little bespectacled man was talking about something else and apparently noticed nothing. When finally the special train pulled off on a siding and the company sat down to dinner, Harriman said nothing about the condition of the road until the meal was ended. Then he suggested to his officials that they come down to business, and at once began a detailed account of the changes needed in that section of the line—grades to be altered, curves to be straightened, rails to be replaced, and so on; and at the proper place in his account he said that the water tank which obstructed the view of the signal must be moved immediately.

  This story is of a piece with Julius Kruttschnitt’s account of a change which Harriman later suggested when inspecting the Southern Pacific. As he and Kruttschnitt were walking along the line he picked up a track bolt and asked why the bolt protruded a fraction of an inch beyond the nut. Kruttschnitt said there was no reason except that bolts were always made so. Harriman asked how many bolts there were to a mile of track and then did some rapid figuring. “If you can cut an ounce off from every bolt, you will save fifty million ounces of iron,” said he, “and that is something worth while. Change your bolt standard.” Nothing escaped the little man’s observation—rails, ties, ballast, rolling stock, curves, grades, signals, even the condition of the boards on the station platforms; costs, rates, charges.

  As a result of Harriman’s inspection trip in 1898, he recommended the expenditure of some twenty-five millions of dollars on the rehabilitation of the Union Pacific, and presently a gigantic work of reconstruction was under way: grades were reduced to enable heavy trains to climb the Rockies, curves were smoothed out, new heavy steel rails and new ballast were provided. The mountains echoed with the roar of dynamite as cliffs were ripped away; the steam shovels puffed, tunnels were drilled through primitive granite, ravines were filled; one hundred and fifty miles of old track were abandoned in the process; it might almost be said that a new road was built.

  Harriman’s assurance in planning these vast changes was complete, and he took a huge zest in the work. A banker tells of going to the little giant’s office in New York and finding him standing at a long table littered with blue-print maps of the Union Pacific lines. For half an hour Harriman talked about his project, and finally he turned to the banker and said with his caustic humor, “You see, what I want to do is to put the road in such shape that if I were to die and you succeeded me, not even you would be able to undo my work!” Harriman’s biographer, George Kennan, tells of the surprise of Harriman’s former associates at his new zeal. “Ned Harriman!” they would say. “Why, I knew him years ago as a little ‘two dollar’ broker. What should he know about practical railroading?” He knew so much about practical railroading that within a few years he had transformed the Union Pacific from a badly broken-down road into a splendidly profitable and useful property.

  Let it not be thought that Harriman had entirely changed his spots. He could still suck a big profit out of a railroad. He was interested at this period in other properties than the Union Pacific; one of these was the Chicago and Alton. He was the leading member of a group which bought and refinanced this road in 1899. They gained control by buying nearly all the common stock of the road, partly reimbursed themselves by calmly declaring a dividend of thirty per cent, issued so many bonds and so much stock that the bonded indebtedness of the road was increased nearly seven-fold and its total capitalization was tripled, and sold these bonds and this stock to the public at a large profit to themselves; their total profit on the refinancing of the road has been estimated variously at from four and a half millions to twenty-three millions.

  It must be added that under Harriman’s brilliant management the Chicago and Alton did not fall down under the huge load of debt with which he had saddled it; that on the contrary, it did well so long as he was running it; and that its rates were not raised but on the average lowered. Nevertheless the refinancing operation was a perfect example of the way in which the reorganizers of a railroad could seize for themselves at one swoop a great sum of money earned not merely by their own astuteness and skill, but also by the growth of the country over a long period, the conservatism of their predecessors, and the labors of their engineers, executives, workmen, and customers, for many years past and to come. Clarence Barron quotes Judge Lovett of the Southern Pacific as saying that when you engage in this sort of operation “you are taking the company’s credit and transferring it to your own pocket.” The whole process was quite legal, a plausible justification could be found for every step in it, and the consciences of those who engaged in it could easily be salved by the fact that they did not seem to be taking money from anybody in particular; yet theft it morally was. The mountain of debt under which the railroads have struggled in recent years is in considerable degree a monument to such performances.

  Harriman may thus be regarded as two men in one—a sharp financier on the make, and an extraordinary railroad builder. He was also a man of Napoleonic ambition: an ambition which in the spring of 1901 was to push him into shattering conflict with the forces of Pierpont Morgan.

  2

  Of the railroads which ran east and west across the Rocky Mountains, linking the central part of the country with the Pacific Coast region, three immediately concern us now.

  First, and farthest to the south of the three, was Harriman’
s Union Pacific, which as we have seen ran from Omaha to Ogden, Utah, connecting there with railroads extending to the Coast. The Union Pacific was backed financially by Kuhn, Loeb & Co.

  Second, and considerably north of it, was the Northern Pacific, which ran from St. Paul and Duluth through the farming country of North Dakota and the mining country of Montana to the Coast.

  Third, and farthest north of the three, was James J. Hill’s Great Northern, hard against the Canadian border.

  These two latter roads, the Northern Pacific and the Great Northern, served virtually the same regions and were close neighbors; too close for comfort, in fact, had not their managements been allied. Morgan had tried to combine them a few years before so that the prosperous Great Northern might aid the Northern Pacific—just emerging from bankruptcy—by a sort of financial transfusion of blood, but the laws forbidding alliances between directly competing roads had prevented any such formal association. Both roads, however, did their banking with the House of Morgan. Hill was influential in both, the community of interest between them—to use Morgan’s favorite phrase—was generally acknowledged, and both were known as Morgan roads or as Hill roads.

  In the year 1900, the two groups of men in charge of these three railroads—Harriman and Jacob Schiff of Kuhn, Loeb on the one hand, representing the Union Pacific; and Hill and Morgan on the other hand, representing the Northern Pacific and Great Northern—both cast longing eyes upon another railroad to the east. This was the Chicago, Burlington, and Quincy, popularly known as the Burlington. It had a network of lines running through Illinois, Iowa, Missouri, and Nebraska; it connected with several other roads to the south and east; and better yet, it ran into Chicago. Morgan and Hill thought there would be great advantage in acquiring it for the Northern Pacific, chiefly because of the direct entrance into Chicago which it would give them; and Harriman wanted it for the Union Pacific for the same reason. Both groups therefore set about trying to purchase the Burlington.

  Harriman tried first. But the stock of the Burlington was mostly held by thrifty New Englanders who saw no reason for parting with their holdings; Harriman’s syndicate found that the shares came very hard, and by the end of 1900 the attempt had been abandoned. Harriman had other fish to fry at this moment, anyhow.

  Even more important to his Union Pacific than an entrance into Chicago was an adequate entrance into San Francisco, which Union Pacific freight could reach only by traveling over an inadequate line which he did not control. This inadequate line, the Central Pacific, was controlled by the Southern Pacific; and Harriman was engaged in boldly buying control of the Southern Pacific in order to get the subsidiary which he thought he needed. How he did this need not detain us, except to remark that the hazardousness of the operation was characteristic of the man and his day: he got the money for the purchase by selling an issue of Union Pacific bonds backed partly by the common stock of another recently acquired road—certainly a dubious kind of security. Harriman succeeded in this enterprise, partly because the bonds themselves were convertible into common stock and thus appealed to the speculative instinct at a time when the speculative instinct was rampant, and partly because he later regenerated the Southern Pacific and made it pay; but it was essentially bull-market financing, of the sort that can be carried to success only on a tide of prosperity, and not all his imitators have been so fortunate.

  Harriman was thus looking westward, not eastward, as the year 1901 began, and had abandoned, at least for the time being, his plan to buy the Burlington. But Hill was not thus diverted. Hill now went to work—and with a different result. During the early months of 1901 he succeeded in inducing the directors of the Burlington to sell. In April the deal was approved by the Burlington stockholders. Morgan and Hill had possession of the road.

  Harriman was beaten. But his ambition was overwhelming; as Judge Lovett said of him later, “when he started upon a course nobody could swerve him from it.” He had started to get the Burlington, and get it he would. Obviously he could not do it directly; so he decided to do it indirectly—by buying the Northern Pacific, Morgan’s and Hill’s own road, right out from under their very noses! He would do this not by arrangement with the board of directors, or by private negotiation with the large holders of stock, but in the open market on the New York Stock Exchange, and with all the rapidity and secrecy of which skillful stock-market operators are capable.

  It is said that this buccaneering project was proposed to Harriman by John W. Sterling, the eccentric and secretive corporation lawyer who was the constant intimate adviser of James Stillman of the National City Bank: the same Sterling, by the way, whose financial profits were subsequently converted into majestic Gothic towers at Yale.

  What Sterling proposed to Harriman was no petty operation. The Northern Pacific had 80 million dollars’ worth of common stock and 75 millions of preferred stock outstanding, and both classes of stock had voting rights, the only difference between them in voting power being that the preferred stock might be retired any time after January 1, 1902, and thus lose its vote (though presumably it might meanwhile have its say as to whether it should be retired or not). Both the preferred and the common were selling on the market at somewhere near $100 a share. To acquire a 51 per cent interest in 155 million dollars’ worth of stock would therefore take all of 78 millions—and more if the buying pushed the price up, as of course it would. Harriman was accustomed to using the credit of his own companies lavishly, as was shown in his Southern Pacific exploit, and he had wealthy backers, including not only Schiff and his banking house but men like James Stillman, whose National City Bank could draw upon the vast hoards of the Standard Oil men, and George Gould, inheritor of a fortune from the notorious Jay Gould; nevertheless the Southern Pacific purchasing operation was still incomplete, and to engage in another one at this moment required great temerity. Certainly this was straining the credit of the Union Pacific to the breaking point: taking a risk incommensurate with the probable advantage to the railroad or its stockholders.

  Furthermore, in trying to seize the Northern Pacific, Harriman was raiding Pierpont Morgan’s own preserve; Morgan had just organized the Steel Corporation that very spring, his prestige was high, and the weight of his enmity could be crushing.

  But Harriman was counting upon the chance of catching Jupiter nodding. He knew or guessed that the Morgan-Hill forces and their friends held only 33 or 35 millions of Northern Pacific stock out of a total of 155; it generally was considered unnecessary for a group in the saddle to have an actual majority, and ninety-nine times out of a hundred it was actually unnecessary. Morgan himself had sailed for Europe; the handsome Robert Bacon was in charge at 23 Wall Street. The launching of the Steel Corporation only a few weeks before had stimulated a wild speculation in stocks; trading was so heavy and gains in prices under the manipulation of pools were so frequent that large purchases of Northern Pacific might possibly escape attention. As to the stock market boom which was then in progress, read this description and try to believe that it appeared not in 1928 or 1929—no, nor even in June or July of 1933—but in the Commercial and Financial Chronicle of May 11, 1901: “The most serious part of the recent situation lay in its indications that the fever of speculation was spreading to all ranks of society. It was coming to be believed that the conditions underlying this market’s movement were so novel and unprecedented that old rules could no longer hold. From such conviction it was but one step to the belief that nothing could stop or reverse the upward movement of prices.… It is notorious that for weeks the smaller brokers’ offices and the ‘bucket shops’ have been crowded with people of moderate means who were speculating with all the money they could control for a rise in stocks.”

  The moment was ripe for Harriman. The soaring confidence of the time was matched by his own. He gave an order to Kuhn, Loeb & Co. to buy Northern Pacific stock in quantity for the account of the Union Pacific railroad.

  3

  Naturally the price rose. On Monday, April 22, Nor
thern Pacific common had been quoted at 101; by Tuesday, April 30, it had risen to 117¼. To many of the men in the Morgan-Hill camp the climb in prices seemed to offer a delightful chance to sell blocks of their stock at a profit, and they did so—quite unaware of the destination of the shares. One man sold three and a half million dollars’ worth, never suspecting what was afoot. The Northern Pacific board itself approved the sale of a block of shares held by one of its subsidiaries. Even the House of Morgan sold 10,000 shares which had happened to come into their hands.

  But at the end of April old Jim Hill suspected that something was wrong. The rising price disturbed him. He was in Seattle at the moment, but he had a special train made up for him and went roaring across the continent, with a right of way over everything to the Mississippi River; and reaching New York on Friday, May 3, he went straight to the office of Jacob Schiff.

  Here the two men confronted each other: the bulky, shaggy Scotch-Irish pioneer, with his immense shoulders and his great dome of a head and his unkempt countryman’s attire; and the small, erect, precise German-Jewish banker with his impeccable garb and a flower in his buttonhole. Hill asked Schiff what he was up to.

  Already the Harriman-Schiff forces had accomplished their bold purpose—or very nearly so. Of the preferred shares of the Northern Pacific they had over 42 millions out of 75. Of the common shares they had over 37 millions out of 80. Not quite half of the common, you will observe; but a clear majority of the two classes together—79 out of 155—which meant control unless in some way the preferred shares could legally be retired without getting a vote in the matter. Harriman, if not victorious, was at least on the verge of victory.