The Great Pierpont Morgan

by Allen, Frederick Lewis;

  Most of us would call such sentiments—which were pretty representative of downtown business sentiment at that time—extremely conservative. Yet the label is misleading to the extent that it suggests that Morgan wanted to see things stand still. On the contrary, he was constantly intervening in businesses to reform and strengthen them in his own way, merging little railroads to make big systems, clearing the way for new construction, and (in later years) utilizing new legislation such as the New Jersey holding-company law to speed these new developments. In a real sense it was he and the other fabricators of giant industries, and the lawyers and legislative draftsmen inventing new corporate devices, who were the radicals of the day, changing the face of America; it was those who objected to the results who were conservatives seeking to preserve the individual opportunities and the folkways of an earlier time. You might question the direction in which Morgan was moving; but that he was moving fast, and with a purpose which seemed to him to be to the country’s benefit, is certain. In this the major sphere of his life, he was not a brake, he was an engine.

  Nor did his love for old customs and old traditions prevent him from hastening technological change. He was one of Thomas A. Edison’s earliest backers. He put money into the Edison Electric Light Co. as early as 1878, when the coming of electric lighting systems was only a hope. When, in September 1882, Edison’s first power station for lower Manhattan was completed, the Drexel Building was one of the first ones to be equipped (with 106 bulbs). Edison came to that building to turn on the lights for a brief experimental test; and when, at about five o’clock on the afternoon of Monday, September 4, 1882, the switch was finally thrown at Pearl Street, it was to Morgan’s office that Edison returned, along with five of his associates, to turn on the lights again in his backer’s presence, while “throughout a third of the downtown district little lamps began to glow.” (One of those five other men, incidentally, was Samuel Insull.)

  At that time Morgan was completing the alterations to 219 Madison Avenue, and he seized the opportunity to install the new lights there, thus making his house the first residence in the world to be thus lit throughout. Then began a chapter of troubles. There was no central power station in that part of the city, an engine had to be installed in a cellar under his stable, and an engineer had to visit this plant daily to get up steam so that the generator would operate. The gas lamps which had been installed in the house were used for the new electric-light bulbs, and this caused all sorts of troubles with the wiring. There were frequent short circuits or failures of power; once the lights died out at 11 P.M. while the house was full of guests, because the Morgans had forgotten that the engineer went off duty then. Neighbors complained of the noise of the motor; one even alleged that it gave off smoke and fumes which tarnished her silver. And when the lamp on the big desk in the middle of Pierpont Morgan’s library was wired—a new problem to Edison’s assistant, Everitt H. Johnson, who had previously wired only wall lamps—the inevitable happened: there was a short circuit and then a fire which ruined the rug and the desk and filled the house with the odor of charred wood.

  The next morning, according to Satterlee, Johnson arrived at the house when Morgan was at breakfast. He went into the library and surveyed the wreckage, apprehensive lest the banker lose all future interest in financing Edison’s enterprise. “Suddenly he heard footsteps, and Pierpont appeared in the doorway with a newspaper in his hand and looked at him over the tops of his eyeglasses. ‘Well?’ he said. Johnson had been formulating an explanation ever since he had heard of the fire and was preparing to make elaborate excuses. Just as he opened his mouth to speak, he saw Mrs. Morgan behind Pierpont. Catching Johnson’s eye she put her finger on her lips. Johnson took the hint, and looked dejectedly at the heap of debris. After a long minute’s silence, Pierpont said, ‘Well, what are you going to do about it?’

  “Johnson answered, ‘Mr. Morgan, the trouble is not inherent in the thing itself. It is my own fault, and I will put it in good working order so that it will be perfectly safe.’

  “Pierpont asked, ‘How long will it take to fix it?’

  “Johnson answered, ‘I will do it right away.’

  “‘All right,’ said Pierpont, ‘see that you do.’ And he turned and went down the hall and so on out.

  “The result of the new installation was so satisfactory that Pierpont gave a reception, and about four hundred guests came to the house and marveled at the convenience and simplicity of the lighting system.”

  The morning after the reception, when the financier Darius Ogden Mills visited the Drexel Building to buy a thousand shares of Edison stock, Morgan waylaid him and told him that he would permit his partners to make such a sale only on one condition, “that for every share of Edison stock that they buy for you, they buy one for me.” And still later, when a million dollars was needed to build an uptown power station, he subscribed half of the amount himself.

  That would not seem to be evidence of wholehearted resistance to change. It is evidence, rather, that this was the sort of change which kindled Morgan’s imagination: a wonderful invention, a wonderful investment, a wonderful chance for corporate promotion, and withal the germ of a great new industry which would shed its light over the whole country.

  VI

  RAILROAD REORGANIZER—AND EMPEROR?

  1

  Like a general whose supreme tactical opportunity comes when the battle is going badly, Morgan had to wait for a time of financial and business disaster to come into his own as a really decisive power in the railroad industry. During the eighteen-eighties, as we have seen, he had ended one railroad war, had had some practice in reorganizing bankrupt or hard-pressed railroad companies, and had tried, with only indifferent success, to persuade the railroad chiefs of the country to end voluntarily the sort of corporate knifing and gouging that seemed to him to be imperiling the investment standing of the nation’s most important industry. Now he was to step into a position of unprecedented authority in that industry. The opportunity came during the financial hurricanes of the mid-nineties.

  For more than four years—1893, 1894, 1895, 1896, and part of 1897—the United States was tormented by what we would now call a major depression. (In those days they spoke of the Panic of 1893 and of the “hard times” which followed.) Business which formerly had been prosperous went into the red; factories shut down; bankruptcies multiplied; wages were cut; workers by the millions lost their jobs, and year after year faced the recurring nightmare of unemployment; and there was industrial strife, bitterness, and unrest—from the Homestead Strike of 1892 to the Pullman Strike of 1894, the pathetic march upon Washington of “Coxey’s Army,” and many another dramatization of the anger and bewilderment of the time.

  One of the most dismaying things about that depression was the epidemic of financial bankruptcy among the railroads. In some cases one would have had to go back many years to find the chief cause of financial trouble: it lay in the speculative looting and blackmail competition and gross overcapitalization to which company after company had been subjected during the preceding two or even three decades. In other cases there had been more recent waste, mismanagement, or folly. But in each case, as passenger and freight traffic declined and red ink replaced black ink on the company’s books, the moment came when the managers of the line no longer had money in the till to pay their debts and joined the melancholy procession to the courts of bankruptcy. According to Alexander Dana Noyes, the financial historian, within the short space of two years nearly one-fourth of the total railway capitalization of the country passed through these courts, and by the middle of 1895 no less than 169 railroads with 37,855 miles of track—amounting to more than one-fifth of the total mileage of the country—were being operated by receivers. Nor were little shoestring lines the only ones to suffer; many of the largest and proudest failed—including the Baltimore & Ohio, the Erie, the Northern Pacific, the Union Pacific, and the Santa Fe, to say nothing of the Reading, the Norfolk & Western, and the hodgepodge of
lines grouped under the loose direction of the Richmond Terminal (which later became the Southern Railway System).

  In every such case the railroad corporation had to be reorganized; for even the sorriest backwoods line was too vital to the life of the community—in a day when there were no automobiles, no trucks, no busses—to be permitted to go out of business. This meant that somebody had to invent a plan by which the company’s debts could be whittled down to a point where it could safely meet all its interest payments out of current revenue. If the plan was to succeed, it must look fair and workable not only to the courts but also the various groups of clamoring creditors; and it must also assure new investors that the reorganized company would be a safe and profitable thing to put their money into.

  The job of planning and putting through such a reorganization had almost nothing to do with railroading as you or I would have thought of railroading—with locomotives, timetables, ticket agents, passenger stations, freight trains, or lines of shining steel rail—with the night express roaring down the quiet valley and hooting for the grade crossing, or with the daily accommodation train pulling alongside the plank platform of the country station and unloading passengers and mail bags and crates of farm produce. No expert in engine design or freight delivery or train scheduling could meet its requirements. It called rather for a mastery of money and the paper instruments which provide money. It was a job for an investment banker, with an expert in corporation accounting at one elbow and a corporation lawyer at the other. Here was Morgan’s opportunity.

  In almost every case the task was incredibly complex. To take a single example, the transfer of a whole series of companies and properties from the bankrupt Richmond Terminal and its offshoots to the new Southern Railway System involved executing two trustees’ sales, one receivers’ sale, ten foreclosure sales, six conveyances without foreclosure, and all manner of other contracts and agreements. Every one of these operations must be technically and legally correct—which required that somebody on the reorganizer’s staff must have an absolute grasp of the complicated terms of innumerable bond issues, leases, and contracts. But the principal thing required of a reorganizer was that he should command confidence in the financial world—confidence that he would prepare a fair plan, that everybody who mattered would get behind it, that there was no use fighting it, that he had ample means to meet all emergencies, and that when he had completed his work the company’s new bonds and shares would be widely approved as investments by bankers and brokers and men of means generally.

  For such an assignment Morgan was uniquely fitted. He had his partner Charles H. Coster and his associate Samuel Spencer as his experts—Coster with his incredible mastery of detail and his uncanny ability to weigh the value of a given lease or contract; Spencer with years of railroad experience as vice-president and later president of the Baltimore & Ohio. He had Francis Lynde Stetson’s legal ingenuity at his command. It had long been a favorite trick of crafty men to bring legal suit against reorganization plans in the hope of being bought off at blackmail prices. Morgan had been through this sort of experience when his reorganization of the West Shore Railroad had been imperiled by a suit brought by a minor stockholder named Belden, and he had learned that if a reorganizer is to succeed, such potential interferers must know that every avenue to the success of their maneuvers has been barricaded.

  Furthermore, there was nobody in the country who could match Morgan’s own experience as a negotiator among railroad executives and financiers, or his reputation for financial impregnability, reliability, and personal authority. His plans had a way of working. Bankers and brokers and executives who allied themselves with him found the alliance usually very profitable to them, and those who opposed him must be prepared for a battle against odds. Thus it came about that during the middle nineties Morgan’s firm acquired the lion’s share of the business of reorganizing the larger railroads. Within the space of four years he reorganized the Richmond Terminal, the Erie, the Reading, and the Norfolk & Western; in alliance with James J. Hill, the great railroader of the Northwest, he reorganized the Northern Pacific; and he played a part also in the reorganization of the Baltimore & Ohio.

  2

  The Morgan method, as it developed during those years, might be summed up as follows:

  First, his experts estimated the minimum earning capacity of the road. Then the fixed debt of the company was ruthlessly pared down until even with minimum earnings it could readily meet its interest payments on that debt—holders of bonds being forced to accept bonds of lower yield, or stock, or both.

  Second, the present holders of stock were assessed to provide the reorganized road with working funds.

  Third, new stock was issued as lavishly as was necessary to keep everybody happy. In some cases the issues of preferred stock were so large that only a determined optimist could foresee the day when the common stock would be able to pay dividends; and in many cases so much stock was issued altogether that thereafter, if the company should need new capital, it could not raise it by selling more stock but would have to sell bonds instead—thus increasing once more its burden of fixed debt. In this respect the Morgan pattern of financing was shortsighted. As Professor William Z. Ripley remarked before the Industrial Commission, although it was intended to cut down capitalization, in the long run it had “exactly the reverse effect.” But for the time being it worked. And that, for the moment, was the overwhelming necessity.

  Fourth, the reorganizers charged very heavily for their services. Of the Erie Railroad reorganization plan, for example, the London Economist said wryly, “… Messrs. Morgan state, with a candor which, as far as we know, has no precedent in such cases, that they are to get $500,000 cash for their trouble; and as, in addition, the syndicate which guarantees the success of the scheme is likely to get a good commission on the $15,000,000 bonds it purchases, the doctor’s bill is sure to reach a million, and perhaps even two million dollars.” One might qualify this statement to explain that only a small fraction of the syndicate’s commission would go to Morgan’s own firm. (When a new issue of securities was put on the market, a long list of banks, investment houses, and individual investors joined the syndicate, i.e., undertook to subscribe to whatever shares were not disposed of in public sale; and when the sale was over, these syndicate members shared in whatever profit—or loss—there might be. Usually the Morgan firm, as one of many members of the syndicate, received only a small part of the syndicate’s total profit.) One should add anyhow that the Economist found the Morgan plan fair and reasonable otherwise. Nevertheless, the bill was big indeed.

  If you had remarked on its size to Morgan or one of his partners, you would have been reminded that every one of these operations involved great risk. For if the new securities could not for any reason be sold at a good price (and sometimes they could not) his firm would at the least have tied up a lot of capital in an investment of dubious vendibility, and at the worst would incur a whopping loss; furthermore, the other members of the syndicate would suffer likewise, and Morgan’s prestige among them would fall like lead. As he carried through reorganization after reorganization successfully, banks and big investors began to regard the Morgan name as carrying almost a guarantee of investment reliability. Nobody else in the land had such a reputation. Surely, therefore, the money value of the Morgan label was very great. Where the risk was great and the money value was great, he saw no reason why the charge should not likewise be great. In reply you might point out that it was heartless to charge heavily for an operation which involved writing off millions of dollars of investments which had been innocently and hopefully made by small investors; and from that point of view surely the size of the fees charged by bankers and their lawyers for resuscitating bankrupt corporations has long been one of the cruelest anomalies of American business. But Morgan would have scoffed at such a judgment. He would have pointed out that it was not he who had destroyed the value of a widow’s second-mortgage railroad bond, but the inefficient or preda
tory men who had let the railroad go to ruin; that all he did was to slice off the infected growth. At any rate, the profits from such surgical operations were often immense.