Lords of Creation

by Frederick Lewis Allen

  Exactly what transpired between Hill and Schiff at that meeting on Friday, May 3, 1901, is a matter of conflicting reports. The Hill version is that Schiff said that he and Harriman now controlled the Northern Pacific, but would like Hill to continue in the management with them. (This offer Hill subsequently denounced as a bribe.) The Schiff version, on the other hand, is that Schiff assured Hill that he had no idea of taking away from him the control of the road, but only of getting some say in the management, “to bring about the harmony and community of interest which other means and appeals to him had failed to produce.” According to Schiff’s version, they talked again that evening at Schiff’s house until after midnight, Schiff protesting that harmony was what he wanted, not conquest, and Hill replying that harmony could be achieved.

  The Schiff version seems acceptable—if one remembers also that an olive branch extended by a man who has just raided your camp can be infuriating. Probably a peaceful compromise of the struggle would have been quite satisfactory to Schiff. He had enough votes, presumably, to force the Northern Pacific to give the Union Pacific whatever advantages it might wish in the use of the Burlington, and after all it was the Burlington which originally was at stake and not the Northern Pacific; and he must have realized the hazards of continuing the raid.

  But peace without victory was not to Harriman’s taste. Hazards meant nothing to him. He was all for conquest. The next morning he was ill in bed, but he picked up the telephone and called up Schiff’s office to ask for the immediate purchase of 4 millions more of Northern Pacific common, which would lift his total from 37 to 41 (out of 80) and thus give him a clear majority of the common as well as the preferred. Schiff was not in the office and Harriman talked with a subordinate, but he hung up in the confidence that his order would be executed at once, and lay back content. As it happened, however, the peaceable Schiff was at the Synagogue that morning, his subordinates were unwilling to execute the order without his approval, and before he could be reached the short Saturday session of the Stock Exchange had come to an end. The stock was not bought.

  Meanwhile Hill had gone to the Morgan offices and was conferring with the amazed partners there. Apparently his meditations in the small hours of the morning had persuaded him not to rely upon Schiff’s protestations of peace. At his request a cablegram was sent to Pierpont Morgan, who was sunning himself at Aix-les-Bains in the foothills of the Alps, asking for permission to buy 15 millions of Northern Pacific common. Control of the preferred was already lost, but perhaps the common shares would have the legal power to retire the preferred and thus hold the command of the road; and as the Morgan-Hill forces still had some 26 millions of the common out of the total of 80, 15 more would give them a majority.

  One can picture the blinding wrath of Morgan when the cablegram came into his hands by the shore of the Lac du Bourget. “I feel bound in all honor,” he later testified, “when I reorganize a property and am morally responsible for its management, to protect it, and I generally do protect it.” Yet here was a Morgan railroad being ripped right out of his protecting hands!

  And it was worse than that. In launching the Steel Corporation Morgan had achieved vast prestige. This prestige was now imperiled. He had other great consolidations in progress—one of them an ambitious attempt to unite several big steamship lines. Even his success in the Steel venture was as yet unproved: the distribution of stock was only just begun and the organization of the company was still largely on paper. What a moment to admit defeat by little Harriman!

  Furthermore, Harriman was now working hand in glove not only with Schiff but with Stillman and the Standard Oil millionaires. Surely they were behind this sudden raid, seeking domination in the railroad sphere, in which Morgan had thus far been the outstanding power. Perhaps they sought to destroy Morgan altogether. Was he who had bought off the warring Carnegie only a few months before to be defeated by the warring Rockefellers? Come what might, Harriman must be beaten.

  Pierpont Morgan no more counted the hazards than did Harriman. He cabled his approval of the purchase of 15 millions of Northern Pacific common.

  A little arithmetic will show how inevitable was the result of the Harriman raid and the Morgan decision—a result which might have been foreseen by anybody save men who wanted what they wanted and did not care whether the heavens fell in consequence. There were 80 millions of Northern Pacific common stock. The Harriman group already had 37. The Morgan-Hill group was out to get 41. That left only something like two millions for everybody else, including the remote stockholders whose certificates were locked away and who did not know what was going on, and the speculators who were on the rampage in Wall Street. It stood to reason, furthermore, that as the price of Northern Pacific leaped upward under competitive purchases, other speculators would sell the stock short—in other words, sell shares which they did not possess, expecting to repurchase them at lower figures, and never dreaming that the shares which they wanted to repurchase were being put under lock and key. More stock would be sold than existed; in the phrase of the Street, Northern Pacific common would be “cornered.” Probably Schiff foresaw the danger of this; at any rate, no more purchases were made by the Harriman group. But the Morgan-Hill group went ahead regardless of arithmetic and the inevitable.

  4

  On Monday morning, May 6, brokers began purchasing for the Morgan-Hill forces in quantity. A single broker, E. L. Norton, was reported to have bought 20 millions of Northern Pacific that day—more than enough for the Morgan purposes if Norton or others had not also been selling simultaneously to keep the price under some sort of check. As it was, the price, which had been 110 at the close of the market on Saturday, was 114 at the opening of the market on Monday, climbed during the day to 133, and had dropped only to 127½ when the gong brought trading to a close at three o’clock.

  The leap in Northern Pacific stimulated speculation in other securities. The bull-market hysteria of the preceding week was intensified. The sessions of the Stock Exchange were being held in temporary quarters in the Produce Exchange building while its new home was under construction; visitors to the Produce Exchange gallery described a scene of the utmost confusion on the floor where stocks were changing hands: “a struggling mass of humanity … howling and shrieking as though a mob were let loose.”

  Not yet, however, was the tumult in Wall Street a front-page newspaper story. The Times reported it on page three.

  On Tuesday the drama was further advanced. The inevitable was approaching. The Morgan forces were still buying; and as some of the speculators who had sold short began to guess their predicament and sought to buy to cover their sales, the price of Northern Pacific zigzagged crazily upward, touching 149¾ and closing at 143½, up 16 more points for the day. At the close of the market the Morgan purchases ceased: Morgan and Hill now had their 15 millions of stock. But the mischief had been done.

  During the final hour of trading there was a premonition of trouble, and prices in general broke sharply. Rumors—as accurate as Wall Street rumors usually are—were flying about: Northern Pacific was about to give valuable rights to its stockholders, the Vanderbilts had got control of the road, there was a plot on somebody’s part to “squeeze the shorts,” Harriman had lost control of the Union Pacific; but by nightfall the truth was apparent to the brokers who gathered on the street corners and in the downtown cafes and in the corridors of the Waldorf and the other uptown hotels. Northern Pacific was cornered. It was rumored that Norton, the broker who had bought 20 millions of Northern Pacific on Monday, had lent 12½ millions of it to short sellers. That looked as if there were a lot of them—and little or no stock available for them to buy. It was a desperate situation for the “shorts”: they had better buy Northern Pacific tomorrow, regardless of price, if they were to get it at all—even if this meant throwing overboard other stock to get the cash to buy it with.

  Still, however, the Times’s chronicle of the affair was printed on an inside page. A reported corner in a single stock wa
s not an event of the first importance.

  On Wednesday there was no purchasing of Northern Pacific for Morgan and Hill, and of course there was none for Harriman. There was other purchasing, however—by frantic shorts trying to escape bankruptcy. Northern Pacific opened at 155, gyrated even more senselessly than on the preceding day, touched 180, and closed at 160, up 16½ points for the day. Meanwhile, however, everything else was dropping. Men were selling stock to raise the money to pay for Northern Pacific, and their sales were breaking the market. “Where before the cry had been only ‘Buy, buy, buy,’ it became ‘Sell, sell, sell.’” Steel fell 7 points; Amalgamated Copper, 12; Union Pacific, 8½—and so on all along the line.

  Till late on Wednesday night excited crowds of brokers surged about the corridors of the Waldorf, the gilded gathering-place of Wall Street bulls and bears; from Peacock Alley into the bar and from the bar to the billiard room they swarmed, discussing with sinking hearts what might happen on the morrow. The air was blue with tobacco smoke, the bar was doing heavy business, reporters were threading their way through the crowds, picking up fantastic tales of gains and losses. It was said that the shorts were being shown no mercy; Norton had been calling back certificates which he had previously lent to them. Apparently the Morgan group dared not lend their certificates for fear they would not get them back again. Harriman, it was said, was unrelenting. He sat in his big office in Pine Street and listened to men pleading with him for mercy, but he would not lend. He too was bent on control, and had no eyes for anything else.

  The next day—Thursday, May 9—panic came in dead earnest, making all that had gone before seem as nothing. On that day Northern Pacific opened at 170, swung up to 200, seesawed down and up—and then, to the utter consternation of those who in hundreds of banks and brokers’ offices were watching the ticker-tape chatter its news of disaster, pushed up to 320, to 650, to 700, and, on one sale, to 1000.

  Meanwhile the prices of other securities cascaded as if the bottom would never be reached. Money was almost unobtainable and the interest rate in the call-loan market at the Exchange had jumped to 75 per cent. The babel on the Stock Exchange floor, the white faces of cornered shorts, the disheveled brokers fighting frantically for a chance to buy Northern Pacific at ruinous cost and to sell everything else before prices sank to zero: all these are implicit in this record of a few consecutive transactions in the common stock of Morgan’s own baby, the six-weeks-old Steel Corporation, during the worst period of the collapse:

  A sale of one thousand shares at 40; of 600 at 39½ 1500 at 39; 2, 900 at 38½; 500 at 38. And then—

  300 at 37

  500 at 36

  200 at 34½

  100 at 34

  400 at 32

  1000 at 34½

  100 at 34

  200 at 32

  500 at 31

  800 at 32

  200 at 30⅞

  100 at 29¾

  1000 at 29

  4000 at 28

  500 at 27

  100 at 26

  It was incredible. The message hammered out by the ticker did not make sense. Only a few days before, Steel had been selling at 54¾. Thousands of men had been speculating in the shares on margin, and the crash of prices meant ruin to them. Such a catastrophe must not continue. Something must be done immediately.

  A little after noon it was done—about forty-eight hours too late. The ticker carried the news that the Morgan and Kuhn, Loeb firms had agreed not to demand immediate delivery of stock which had been sold short to them; and also that a number of banks had formed a pool for the relief of the money market, lending money at 6 per cent to men who a few minutes before had been clamoring for it at 75 per cent. The worst was over. In the last hour or two of trading there was a moderate recovery of prices, and Northern Pacific dropped from 1000 to 325. Later the contending groups, at the instigation of the alarmed Schiff, agreed to let the cornered shorts settle at the rate of $150 per share for Northern Pacific common. With that announcement the crisis ended. The next day there was recovery all along the line.

  But meanwhile the damage done had been great. It had been a wild day in Wall Street. The volume of trading on the Exchange had probably been the greatest in its history; though the official total of sales was 3,071,805, a little less than the record set a few days before, it was agreed that many sales had gone unrecorded in the excitement.

  Some of the frantic efforts made to get hold of Northern Pacific stock certificates for delivery had been picturesque: one certificate for 500 shares had ridden from Albany to New York on a special train engaged to transport it. At noon, half the brokerage firms in the Street had been technically bankrupt. The bold-face front-page headlines which shouted “DISASTER AND RUIN IN FALLING MARKET … LOSSES, UNTOLD MILLIONS” did not exaggerate. Thousands of families, their capital tied up in margin speculation, had lost everything. There were few men as fortunate as the visitor from Meriden, Connecticut, who had bought Northern Pacific at 84 some weeks previously, had taken the Yankee precaution of bringing with him to New York his certificate for 100 shares, and had succeeded in selling it Thursday noon for $700 a share, clearing over $60,000 without a stroke of work; or the Minnesota barber who owned 200 shares of Northern Pacific, and “when he heard the stock had reached 1,000 … dropped his razor in the cuspidor and locked up the shop.” For every triumph such as these there were a hundred unchronicled tragedies.

  To one unaccustomed to hearing great conservative newspapers speak out unreservedly about the errors of captains of finance, the editorial comments upon the Northern Pacific panic, as one turns back to them today, come with a shock of surprise. They were blistering. The New York Times, for instance, which had got off to a slow start in its editorial of Thursday by quoting from Bagehot’s essay on Shelley, was fully awakened by Friday, describing the panic as “an exhibition of the use of vast power for private ends unrestrained by any sense of public responsibility,” and charging the contending Wall Street groups with behaving “like cowboys on a spree, … shooting wildly at each other in entire disregard of the safety of the bystanders.” Russell Sage said bluntly that the panic was “a result of hoggishness.” That seemed to be the prevailing opinion, and the frank expression of it chastened the contestants for the control of the Northern Pacific.

  The irrepressible Harriman, it is true, still felt the lust of battle; in the midst of the excitement he had come down with appendicitis, and the first thing he did on coming out of ether was to telephone to Hill: “This is Harriman. I wanted to tell you that the operation’s over and I’m all right.” Hill, too, took the débâcle lightly. Three days after the panic he came into the Kuhn, Loeb offices, and finding that Schiff was out, walked over to Felix Warburg’s desk. “How is Schiff?” asked Hill. “Not very happy,” answered Warburg. “He takes these things too seriously,” said Hill. Schiff and the Morgan partners, however, were deeply chagrined at the devastation which their warfare had brought about. They realized that the armistice arrived at on Thursday, May g, at the crisis of the panic, must be followed by a peace treaty.

  In due course the treaty was made. Morgan, who now controlled a bare majority of the common stock of the Northern Pacific, was to be permitted to name the revised directorate of the road. The preferred stock, of which the Harriman forces held a majority, was to be retired. But Morgan had to give places on the Northern Pacific board to Harriman and his ally William Rockefeller, and Harriman also got a place on the Burlington board. Both groups were thus given representation; “community of interest” was thus achieved—at what cost!

  To put the results of the peace treaty on a secure and unchallengeable basis, a holding company was formed in due course. This company was designed to be too immense ever to be conquered in a raid like Harriman’s. The Northern Securities Company, as it was called, was to hold a majority of stock in the Northern Pacific and the Great Northern, and thus also was to control the Burlington indirectly; and on its board of directors were to sit ten Morgan-Hill men
, three Harriman men, and two others belonging to neither group.

  Was it peace without victory? Morgan was still dominant. His prestige was shaken, but survived. On the other hand he had been forced to give Harriman a place in the sun; and Harriman, with his Standard Oil backing, emerged from the struggle a man of new financial prowess. The one sure victor in the battle—a battle which from any broad social point of view, considering the railroads as public carriers rather than as pawns in a game of grab, appeared almost completely senseless—was the principle of consolidation and concentration of capital. The losers were the speculators and investors, large and small, who had been trapped between the contending armies.

  And what of the effect of the episode on the financial and industrial world in general? On the afternoon of the panic many of the minor potentates of Wall Street had hastened to issue reassuring statements, such as that of President Kimball of the Seventh National Bank: “I do not think that the flurry in Wall Street today will be anything else but incidental. The prosperity of the country will not be affected.” To a generation which recalls the synthetic optimism of more recent years, such a statement would seem less than convincing. President Kimball, however, was essentially right. Great as the speculative boom had been, it had not involved a fraction of the money or the men who were to be sucked into the boom of 1928-29; and the momentum of national growth was still tremendous. No depression followed the panic. Not even had the speculative movement been destroyed; it had merely been checked; by the end of May prices on the Exchange had regained most of their lost ground. Industrial and railroad combinations continued to be the order of the day.

  The complacent McKinley still sat in the White House. Mark Hanna, the gruff Republican boss who saw eye to eye with the big industrialists and bankers, still had McKinley’s ear. The Sherman Act seemed almost to have been forgotten; in December, 1899, in the Addyston Pipe Company case, the Supreme Court had at last taken a strong position with regard to conspiracies in restraint of trade, yet in the seventeen months since that decision McKinley’s Department of Justice had not brought a single action against any of the big business combinations. Senators were still deferential to the captains of industry; sometimes with good reason, as was later shown when the pilfered correspondence of John D. Archbold revealed how Archbold—a church trustee, a munificent donor to Syracuse University, and the executive head of the Standard Oil Company since John D. Rockefeller’s virtual retirement—had subsidized public men right and left. The Industrial Commission appointed by the government to investigate the trusts had turned in a singularly innocuous report, revised in accordance with Archbold’s wishes and secretly approved in advance of publication by him and perhaps by other industrialists. Big business was still securely in the saddle. Even a Northern Pacific panic could not change the new order.