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But a cloud was coming up the sky, at first no bigger than a man’s hand.
On the 6th of September, 1901, President McKinley was shot by the anarchist Czolgosz. On the morning of the 14th of September he died; and Theodore Roosevelt of New York, who had believed his public career to be over when he was shunted into the Vice-presidency, became President of the United States.
The assassination of McKinley was a hard blow to Wall Street. What would the new President do? He was not radical, but he was young and impulsive. “I told William McKinley it was a mistake to nominate that wild man,” cried Mark Hanna to his friend Kohlsaat, “… now look, that damned cowboy is President of the United States!” Friends hastened to counsel Roosevelt that he must do nothing which might disturb the equilibrium of business. Hanna took the first opportunity to urge him to “go slow,” to listen to advisers but “reserve your decision.” “I must frankly tell you,” Roosevelt’s brother-in-law had written while McKinley lay dying, “that there is a feeling in financial circles here that in case you become President you may change matters so as to upset the confidence … of the business world, which would be an awful blow to everybody—the West as well as the East—as that means tight money.” (A curious phenomenon is the Wall Street mind, which can look with equanimity upon the building of over-capitalized financial structures like those of Morgan and Harriman, to say nothing of the manipulations of men like John W. Gates and the speculative excesses and raids which lead to panics, and then tremble at the least suggestion that the stability of these structures may be examined and their legality possibly put to the test!)
At first Roosevelt proceeded with obliging caution. He had dreaded the thought that his arrival in the White House might be the signal for a slump in the stock market. He conciliated Mark Hanna. He sought the advice of Senator Aldrich and other stalwart conservatives. His first message to Congress was cautious to the last degree; as “Mr. Dooley” summarized the portions dealing with business, “‘Th’ trusts,’ says he, ‘are heejous monsthers built up be th’ enlightened intherprise iv th’ men that have done so much to advance progress in our beloved country,’ he says. ‘On the wan hand I wud stamp thim undher fut; on th’ other hand not so fast.’ “Wall Street began to think very well of the “damned cowboy’s” conservative wisdom.
And then, in February, 1902, the first blow fell. Without consulting Hanna or anybody else, Roosevelt instructed his Attorney-General to bring suit for the dissolution of the Northern Securities Company under the Sherman Act.
Morgan was at dinner in his big brownstone house on Madison Avenue when the news came. He expressed amazement to his guests that he had had no advance knowledge or warning of the suit. He went to Washington and saw the President. “If we have done anything wrong,” said he, “send your man to my man and they can fix it up.” Surely the Attorney-General and a Morgan lawyer ought to be able to adjust matters in quiet negotiation, without disturbing the markets as Roosevelt’s impetuous decision had disturbed them! But Roosevelt was unmoved. Morgan asked whether Roosevelt intended to attack his other interests, such as the Steel Corporation. He seemed to fear a general offensive on the part of the government. No, said Roosevelt, unless “they have done something that we regard as wrong.” He would not consider withdrawing the suit.
It may seem strange to one who considers the havoc wrought by the financial conflict over the Northern Pacific, that when a holding company was finally formed to reconcile the opposing forces and prevent such a thing from happening again, the government should act to dissolve it. But the dominant economic belief of the American people was still in free competition. Any idea of permitting such combinations and then regulating them in the public interest would have seemed dangerously socialistic. There were only two available alternatives—to let things alone or to dissolve the combinations. The Northern Securities Company was the first really important railroad holding company; it might be used for the purchase of other roads and the formation of a big railroad trust, annihilating the principle of free competition. Roosevelt’s understanding of economic forces was uncertain, but he felt this danger; and vaguely he felt also that the sovereignty of the government was at stake. If it did not take measures to curb the rising plutocracy, it would soon stand helpless before them. Undeterred by the alarm of Wall Street—expressed in a flustered stock market-Roosevelt proceeded with his first “trust-busting” project, which in due course was to win a Supreme Court decision dissolving the Northern Securities Company.
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Only a little over fourteen months had passed since Morgan and Schwab had sat together at dinner at the University Club, yet already the drama of twentieth-century American capitalism was well advanced and many of the principal performers had assumed their parts. Pierpont Morgan, by forming the largest corporation in the world, had set an authoritative example of industrial combination under Wall Street auspices through the medium of the heavily-capitalized holding company, the chief engine of twentieth-century financial power; and now he was proceeding to fresh conquests. Harriman, rising from obscurity, had established his technic of accumulating and reconstructing railroads, had fought Morgan to a draw, and was well on his way toward the completion of his empire. The first twentieth-century wave of speculation had curled and broken; but the groundswell of financial concentration still swept surely forward. Meanwhile governmental and public opposition to the financial powers had begun to take shape. The character of the new economic era was becoming established.
Chapter Three
THE OVERLORDS
THE pell-mell rush to form huge industrial consolidations and to speculate in their securities—a rush which did not slacken for long until late in 1902—had distressing after-effects. Although a sharp recovery followed the Northern Pacific panic, the spree was bound in time to bring a headache, and so it did: during the latter part of 1902 and the whole of 1903, Wall Street and the other financial centers suffered from a malady correctly ascribed by Pierpont Morgan to “undigested securities.” (James J. Hill, improving on Morgan’s phrase, remarked that the securities which caused the trouble were “indigestible,” and many of them surely were.)
Too much stock and too many bonds had been issued. Not only had the formation of each holding company called for the sale of quantities of stock to the investing public, but when a railroad company or a manufacturing company had purchased control of another concern to further the ambitions of the men in control (as when the Northern Pacific acquired the Burlington for Morgan and Hill, or the Union Pacific acquired the Southern Pacific for Harriman) this had usually meant the sale of a new issue of stock or of bonds, thus adding to the supply of securities outstanding without adding to the physical properties. At last the purchasing power of the possible buyers of securities was exhausted and they could take no more.
The exhaustion was intensified by the effects of the depredations of professional speculators and stock-market manipulators throughout the boom. The fine art of organizing pools to buy and sell securities in huge bulk on the Stock Exchange and thus push stock prices up and down, taking profits along the way from the pockets of unorganized and unlucky speculators, had never before attained such perfection.
For example, let us watch James R. Keene in action. (Keene was the man whom the Morgan syndicate engaged to distribute the shares of the Steel Corporation by manipulation on the Exchange.) According to an entry made by Clarence Barron in his journal in 1900, Keene managed the pool formed by the brokerage house of Moore and Schley to manipulate the stock of the “whisky trust,” and when the pool was organized “the question came up as to whether individual members of the pool could also operate on their own account. Mr. Keene said, ‘Certainly, operate all you want to; buy it and sell it; … but just understand that I will get the best of you all in the business and I invite you to trade with me.’ Then Mr. Keene began.… Ten thousand shares went out one day and were bought back the next day. He began moving it so many shares a day up and d
own, and kept swinging it back and forth—some days it was twenty thousand shares a day, again it was ten thousand shares a day. Then when the whole public was trading in whisky [stock] with a great big swing to the market, Keene gave them the whole business, possibly went short fifty thousand shares himself, and landed the entire stock of the pool on the public.”
Other speculators operated with equal power and assurance. Barron quotes Herman Sielcken, the “coffee king,” as saying early in 1904 of his manipulation of a commodity market, “I can put coffee down again just as easily as I put it down once before.” And as for the operations of the most potent group of all speculators of those days, the “Standard Oil crowd” led by William Rockefeller and Henry H. Rogers, who made millions by promoting the Amalgamated Copper Company and by pushing the price of its stock up to 130 and down to 60 again, listen to the testimony of Henry Clews, who, far from being a radical critic, was an enraptured believer in Wall Street as a national institution.
Clews wrote in 1900: “At his best, Jay Gould was also compelled to face the chance of failure [in his stock-market manipulations]. Commodore Vanderbilt, though he often had the Street in the palm of his hand, was often driven into a corner where he had to do battle for his life; and so it had been with every great speculator, or combination of speculators, until the men who control the Standard Oil took hold. With them, manipulation has ceased to be speculation. Their resources are so vast that they need only concentrate on any given property in order to do with it what they please.… With them the process is gradual, thorough, and steady, with never a waver or break. How much money this group of men have made, it is impossible even to estimate … and there is an utter absence of chance that is terrible to contemplate.”
So long had operators of this type enjoyed a field day that the supply of victims was bound ultimately to run short. By 1903 the crisis became acute. Syndicates which had been formed to launch new corporations found themselves with unsold securities piled upon their shelves. Market manipulators who had loaded up with stock in the hope of dumping it later into the laps of eager investors found the eagerness gone, stock-market prices sagging, and their loans from the banks frozen. So overgenerous had been the capitalization of most of the new giants of industry that a period of sustained prosperity would be necessary to squeeze the water out of them; and when the pace of business lagged a little and the strain on credit began to become oppressive, earnings declined, dividends were passed, some of the crazier of the new combinations went to the wall, and the stock market had a series of sinking spells.
Fortunately this crisis of 1903 was a “rich men’s panic,” and not to any large extent a poor men’s panic too. The momentum of industry was still strong, and the speculative excesses and consequent financial indigestion were generally limited to the professional promoters and speculators. The little investor, the occasional speculator, had been singed, or at least scared, in the Northern Pacific panic, and had learned a measure of discretion; and after all he did not then constitute a very numerous species. It must be remembered that even at the height of the hysteria of 1901 the total of daily transactions on the New York Stock Exchange had barely exceeded three million shares, as against frequent daily totals of five or six or seven million shares in 1928 and after. The number of men who were staking their accumulated savings on the rise of the market was probably hardly a tenth of the number who were to do so in the bull market of the nineteen-twenties. Few newspapers printed daily tables of stock prices. Investing in common stock was still considered somewhat hazardous for all but astute business men, and outside of the Wall Street area, speculation on borrowed money was still generally considered a form of legitimized gambling rather than a form of prudent “participation in American prosperity.” The rich men’s panic caused some spectacular failures and annihilated many a Wall Street plunger; but it checked only briefly the onward march of American industry.
One thing which undoubtedly alleviated the troubles of the financiers was the cautious attitude of the government toward business. Theodore Roosevelt had boldly moved to dissolve the Northern Securities Company early in 1902, and after long delay the Supreme Court sustained him in 1904 and the biggest holding company in the railroad business was broken up; but Roosevelt, for all his vehement activity and his fighting display of teeth, was no headlong reformer. He preferred the middle of the road, and big business had so long had its way virtually unmolested that to stick to the middle of the political road meant to interfere very little with the going financial and industrial order. Furthermore Roosevelt, as a Republican, was the heir apparent to the financial support of the captains of industry, and could hardly afford to run the risk of being disinherited. As the election of 1904 slowly approached he became very wary. Business was none too good. It would not do for his party to risk making it worse. There were no more major forays in the direction of Wall Street. Roosevelt was elected over Alton B. Parker with the aid of contributions—made apparently without his specific knowledge, but clearly attributable to his amenable attitude at the time—of $150,000 from J. P. Morgan, $100,000 from Rogers and Archbold of the Standard Oil, $100,000 from George J. Gould, $50,000 from Harriman, $50,000 from Frick, and further large sums from other big bankers and insurance men and industrialists. Not until Roosevelt was safely President in his own right—“no longer a political accident,” in his own words—did his zeal for reform find energetic expression again.
Furthermore, although the tide of public opposition to the financial empire was slowly rising, the inactivity of Roosevelt in economic reform was on the whole matched by the inactivity of Congress. The privileges of the banker, the promoter, and the speculator to have their way with corporate property—regardless of the wishes and the interests of unorganized stockholders and employees and consumers—had been multiplying rapidly, but it was easier for a President or a Congressman to inveigh against “malefactors of great wealth” and “the conspirators of Wall Street” than to devise practical measures to meet the situation. The venal politician—and his name was legion—was not interested in solving the problem: he knew on which side his bread was buttered. The disinterested politician, even if he watched the trend of economic affairs with concern, realized that so deeply were banks and investment houses and innumerable corporations committed to the continuation of the going methods of incorporation and of distributing securities, and so fully did these going methods depend upon an unquestioning public belief in their permanence, that to challenge them might bring widespread business troubles, at least for the time being. In a real sense the whole economic system of the country was already locked into acquiescence with the now established financial system.
Better not risk a major operation yet, a conscientious Congressman would say to himself; better wait and see. And of course there were public men who sincerely believed that any limitation upon the privileges of the capitalist constituted a blow at the “sacred rights of property,” at “the pioneer spirit which had built up the country,” and so on: who believed this, in fact, even when the privilege under debate—like that of setting up a Northern Securities Company to keep a firm grip on several railroads—was a new extension of a recent extension of a privilege granted by public authority, the privilege of incorporating to do business under limited liability.
So the challenge to the financial order was postponed.
Yet although the rich men’s panic of 1903 was in a sense a superficial phenomenon, to the men at the heart of the financial world it brought troubles indeed. The prevalence of indigestible securities hardly worried the already aging Rockefeller, for his Standard Oil companies had never been overcapitalized and if his other investments shrank there were always new millions rolling in; yet his days of benevolent ease in the great house above Tarrytown were disturbed by a rising clamor of public resentment as McClure’s Magazine published, month after month, Ida Tarbell’s astonishing history of the Standard Oil Company, with its revelation of his merciless methods; and his associates found
that for the time being their speculative operations were not certain of success.
Morgan was sorely beset. Filled with boundless confidence by his success in launching the Steel Corporation, he had tried to repeat the triumph by forming a gigantic holding company which would dominate transatlantic shipping. He had accordingly bought several British and American lines at extravagant prices. His International Mercantile Marine Company was a sad disappointment, however; violent British opposition to the threat of an American shipping monopoly prevented him from including the Cunard line in his group, the congestion in the securities market left his syndicate with quantities of unsold securities on its hands, and the new holding company never justified itself, at length sliding into receivership in 1915. It was clear that Morgan had guessed wrong, and his prestige suffered. Even his Steel Corporation languished during the rich men’s panic and was forced for a time to suspend dividends upon its vast issue of common stock, the price of which sagged to eight dollars and seventy-five cents a share—a humiliating figure to the head of a syndicate which had distributed that stock to the public at forty or fifty dollars a share. That genial buccaneer, John W. Gates, furious at Morgan’s having left him off the directorate of the Steel Corporation, now had his revenge; he got control of the Louisville & Nashville Railroad at a time when Morgan needed it, and Morgan had to send his partner Perkins to offer Gates ten million dollars more than he had paid for the road. Gates’s relish at having “put one over on the old man” was brief, to be sure; shortly afterward the gambler retired in defeat to a little town in Texas to spend the rest of his days as a big frog in a very small pool. The Louisville & Nashville episode, however, was hardly agreeable to Morgan. And other blows fell upon him, including the Supreme Court decision in the Northern Securities Case. For a time his empire seemed almost to be tottering.
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