To understand what happened you must realize that Harriman’s Union Pacific reached no farther east than Omaha, and had no access to Chicago. And also that the rival Northern Pacific, which was controlled by Morgan and James J. Hill, reached no farther east than St. Paul and Duluth, and likewise had no access to Chicago. The managements of both the Union Pacific and the Northern Pacific cast longing eyes upon a third road which not only had access to Chicago—and to St. Louis as well—but also was the most important road in the Iowa region; this was the Chicago, Burlington & Quincy, known for short sometimes as the C. B. & Q. and sometimes as the Burlington. Both the Union Pacific and the Northern Pacific wanted to buy control of the. Burlington for the sake of the useful connections it would give them. And in March 1901 the Morgan-Hill group, representing the Northern Pacific, got it—purchased a large majority of the Burlington stock and thus achieved what looked like a secure grasp. Apparently Harriman had lost his chance for the Burlington.
But Harriman would not accept defeat. What he thereupon did, with the aid of ample credit from Schiff and other bankers, was astonishing. He tried to buy, not the Burlington, but the Northern Pacific itself, his rivals’ own line, right out of their grip.
Morgan and Hill and their friends owned considerably less than half of the stock of the Northern Pacific. In ordinary cases such a minority holding was sufficient to guarantee control of a large corporation. But in this case it gave Harriman his opportunity. Acting through Schiff, he began to buy Northern Pacific stock heavily right on the open market, through the Stock Exchange. The moment was auspicious for such a maneuver, for the launching of the Steel Corporation had set off a furious stockmarket boom, speculative pools were active, and stocks were gyrating; Harriman rightly reasoned that if his heavy purchases caused the price of Northern Pacific to rise, people would simply assume that speculators were responsible. Harriman bought and bought and bought. The price of Northern Pacific climbed. Yet for many days nobody seemed to realize what was happening.
At the end of April old James J. Hill, who was out in Seattle, decided that the rise in Northern Pacific shares must be investigated, and set out for New York by special train. On Friday, May 3, he arrived in New York, went to see Schiff, and learned to his amazement that Harriman and Schiff had already succeeded—or almost succeeded—in buying control of the road. He at once reported the situation to Morgan’s partners, who were thunderstruck.
In Morgan’s absence, Robert Bacon was in charge at 23 Wall Street. (Coster, the great authority on railroad finances, had died a few months earlier.) Bacon and his colleagues had been caught sound asleep at the switch. They were aware that the Harriman group were buying, and thought this was being done with a view to gaining representation on the Northern Pacific board of directors, but they had no idea of the scale of the operation. It seemed incredible, but it was true.
As a matter of fact, Harriman had not yet quite succeeded in getting a sure majority. In the Northern Pacific, both the common and the preferred stock had the right to vote. Of a total of 750,000 shares of preferred, Harriman had got hold of 420,000—well over half. But of the 800,000 shares of common, he had thus far acquired only a little over 370,000—not quite half. Of the two classes of stock combined, that gave him a little over fifty per cent—790,000 out of 1,550,000. But in a pinch the common stock might be more valuable, since the preferred was subject to retirement; and of the common he still lacked a majority, though he was mighty close to achieving it.
The shocked Morgan partners conferred—and Bacon sent off a cable to his senior partner in Europe asking for authority to buy 150,000 shares of Northern Pacific common.
2
Of Morgan’s reaction when he received the news at the Grand Hotel in Aix-les-Bains there is no record, but it must have been blazing. He cabled the authority to buy. As he later testified, “When I heard that, I felt in this position. We had reorganized the Northern Pacific. We had placed all the securities of the Northern Pacific.… I feel bound in all honor when I reorganize a property, and am morally responsible for its management, to protect it, and I generally do protect it; so I made up my mind that it would be desirable to buy 150,000 shares of stock, which we proceeded to do, and with that I knew we had a majority of the common stock, and I knew that actually gave us control, and they couldn’t take the minority and have it sacrificed to Union Pacific interests.”
But it was only by what looked like an accident, and may have been one, that the Morgan purchases—which did not begin until Monday—prevented a Harriman victory. For on Saturday morning, probably at just about the moment when Morgan was getting the news from New York, Harriman decided to buy 40,000 additional shares of Northern Pacific common to make his own position unassailable. He called up Schiff’s office and put in the buying order. It couldn’t be executed because Schiff, a devout Jew, was at the synagogue.
Was it simply devoutness that took Schiff there, or had he decided that enough was enough, and that further purchases might cause trouble? If so, he was quite right. For when, on Monday, May 6, the Morgan buying orders poured into the market through broker after broker, they caused something that a man as knowledgeable as Morgan must have foreseen if he had not been three thousand miles away. They caused a panic.
For what Harriman and Morgan had succeeded in doing, between them, was to buy more Northern Pacific common shares than there were in the market. (Remember that there were 800,000 in existence, of which many thousands must have been in the hands of people remote from the news of Wall Street. Harriman held over 370,000; Morgan’s order would bring the number that he and Hill and their friends held to some 410,000. That would make the total of shares going into the strongboxes of the two groups at least 780,000, leaving very few of the 800,000 for anybody else.) What happened, of course, was that the Morgan brokers were buying, in part, stock that didn’t exist. Traders who saw the price of Northern Pacific rising beyond all reason, and who had no idea of what was happening, were selling the stock short—selling stock that they didn’t own, in the hope of buying it later at a lower price to make delivery. And having sold this nonexistent stock, they were finding to their dismay that there was little stock to borrow and almost none to buy.
On Monday the Morgan brokers in New York bought no less than 127,500 shares of Northern Pacific, and the price climbed from 114 to 127½. On Tuesday they continued buying, and it touched 149¾. On Wednesday they had stopped buying, but it reached 180. And on Thursday, May 9, it leaped wildly all the way to 1,000—while the price of all other stocks cascaded furiously downhill, as brokers who realized that their inability to deliver the Northern Pacific shares that they had sold might make them liable for terrific sums of money sold everything they could lay their hands on to escape bankruptcy.
3
The Northern Pacific panic was brief. For that very Thursday the Morgan and Harriman forces made an agreement by which the short-sellers were saved from destruction. And presently they made a treaty of peace. They agreed that Morgan, who now held a clear majority of Northern Pacific common, would name the new board of directors and give Harriman some places on it; that they would consider setting up a new concern—a New Jersey holding company—to hold securely the shares of both the Northern Pacific and Hill’s Great Northern (with of course indirect control of the Burlington); and that in this new concern, which would be called the Northern Securities Company, Harriman as well as Morgan would have representation. Thus at last “community of interest” would be achieved. The Northern Pacific battle was over.
Morgan had repelled Harriman’s challenge. He did not have to return at once to the United States. He remained for several days at Aix-les-Bains, where the Grand Hotel looked out upon a pleasant little park, and the sulphur baths were soothing to the skin, and the views across the Lac du Bourget were enchanting, and his company of friends was congenial; then he returned to Paris, where the art dealers set siege to the Hotel Bristol, and to London, where with a deputation from the New York Chamber o
f Commerce he went out to Windsor Castle in silk hat and frock coat to pay respects to the new King Edward VII, and then—in due course—to New York, where the Corsair steamed out to meet his liner with all her pennants flying. He had won at least a partial victory, and new and impressive projects occupied his mind. But his prestige had suffered a heavy blow.
For not only had his organization been caught napping, not only had his position of supremacy in American railroading been rudely challenged by a rising power, but his headlong reaction to Harriman’s attack had been a financial barrage so destructive to innumerable bystanders as to outrage public opinion. Is this, people asked, the way in which the monarchs of American finance preserve order and peace in the business community?
The setback was sharp. And presently Morgan would have to face other challenges still more severe, and of another sort entirely.
4
“On the afternoon of September 14 [1901],” writes Herbert Satterlee, “Mr. Morgan had just finished his day’s work and was getting ready to go down to Great Neck. I was going with him on his yacht. He had put on his hat and we were both just starting to the front door of the office, when half a dozen newspapermen rushed in. The first one cried out, ‘Mr. Morgan, President McKinley is dead.’ He turned and went back to his closed desk, took off his hat, and sat down heavily as if he were very tired.
“The newspapermen gathered around, and nothing was said for a full minute. Finally the spokesman of the group said, ‘Mr. Morgan, what have you got to say about the news I gave you?’
“Again there was a long pause. Then Mr. Morgan got up and, looking at the reporters, said, ‘It is the saddest news I ever heard. I can’t talk about it.’
“Putting on his hat, he went but, drove in silence up to the yacht landing, and hardly spoke during the run down to Great Neck. Once down there, with the [Satterlee] baby in his arms, he brightened up, and during the evening he talked a great deal about President McKinley’s fine character and ability, and how really fond of him he had grown, and what a great loss the country had suffered.”
The loss was more than personal. For the death of McKinley at the hand of the assassin Czolgosz, and the arrival in the White House of Vice-President Theodore Roosevelt, might mean the end of an era.
Behind the amiable McKinley had stood the forthright Mark Hanna of Ohio, chief of the bosses of the Republican party, who believed that whatever was good for the big corporations of the country was good for the country; with the unpredictable Roosevelt in power, who could tell what might happen to Hanna’s influence and policies? Hanna himself, when he received the same news that had just reached Morgan, exclaimed to his friend Kohlsaat, “And now look—that damned cowboy is President of the United States!”
Morgan had felt he could rely on Hanna. He had met him in 1896, before McKinley’s election; had had him out on the Corsair for dinner, and as the two men sat smoking on the yacht’s afterdeck, looking over the waters of the North River to the lights of Manhattan, Morgan had argued to him that at all costs the Republican party must back the gold standard. It had done so, and had won; and from that time forward Morgan had felt that the government in Washington was as sound as any government made up of politicians could be. But this young Roosevelt was an upsetter of applecarts. As governor of New York he had on occasion brashly resisted the advice of boss Tom Platt, who knew what was sound for business. Platt had thereupon helped to get him kicked upstairs into the Vice-Presidency of the United States—with unforeseen results. Could one be sure that he would be any more amenable to Mark Hanna’s counsel than to Platt’s? Roosevelt came of a fine old New York family; in Morgan’s view, he ought to be aware of what sort of people were best fitted to run things in the United States. During his Vice-Presidency he had been sufficiently conscious of the value of maintaining friendly relations with men of substance to give a dinner for Morgan, and in fact had written to Secretary of War Root that this dinner represented “an effort on my part to become a conservative man in touch with the influential classes.” But Roosevelt was headstrong and sometimes said wild things. Could one be sure that he would not become the instrument of some of the popular discontent that was so strangely rising even when prosperity was high and wide?
That discontent was rising was quite true. Partly it was a delayed reaction from the suffering caused by the depression of the mid-nineties—following the rule that it is not when men are terrified by adversity that they listen to radical ideas, but when their confidence has returned and yet the memory of adversity is still strong in them. Partly it was due to the fact that a group of journalists—the “muckrakers,” as Roosevelt was later to call them—were beginning to report, in lurid detail, facts about business excesses and political corruption of which the public had previously been only vaguely aware. Partly it was a natural consequence of the sudden spectacle of unbridled wealth which had attended the big holding-company promotions of the late nineties—men making millions at a stroke when the average American wage earner’s family was struggling along on less than a thousand dollars a year. Partly it was due to the fact that many of these promotions of what were loosely called “trusts” unquestionably brought about monopoly—followed by rising prices—and to the average American, monopoly and “the trusts” had long been fighting words. And finally the discontent had been sharpened by the spectacular news of the formation of a “trust” of unprecedented size—the Steel Corporation—and by the coming of the Northern Pacific panic as the result of a battle between two giants of finance.
In that very summer of 1901 a steel strike had been called—to which the board of directors of the new Steel Corporation had replied with a resolution “that we are unalterably opposed to any extension of union labor and advise subsidiary companies to take a firm position when these questions come up, and say that they are not going to recognize it.” The strike was broken, but many people who then learned for the first time about the twelve-hour day in the steel industry sympathized with the strikers. Many more were to sympathize with the anthracite miners when they struck in 1902. Newspaper cartoonists—especially those who worked for Pulitzer and Hearst—had long been fanning the popular feeling; sometimes, in their caricatures, the big man with the dollar mark on his waistcoat who represented the “money power,” or the “trusts,” or the “interests,” looked like Mark Hanna; sometimes he bore an unmistakable resemblance to Pierpont Morgan. The reform spirit which was rising, and would continue in strength for well over a decade, was essentially a rebellion of the American conscience against gross inequality, corruption, and greed. And inevitably, after the manner of such rebellions, it lumped together as ogres all the men who seemed to it to typify the power which it distrusted.
Up to now this rebellion had lacked an effective leader or mouthpiece. During Theodore Roosevelt’s seven and a half years in the White House he was destined to be only intermittently and uncertainly its leader, for after every sally against big business he would go back to touch base with the conservative leadership of the Republican party. But he became and remained its most enthusiastic mouthpiece. And sometimes he not only talked but acted with decision, as Pierpont Morgan was soon to note.
At first, however, Roosevelt was very cautious. His first message to Congress, written and revised after consultation with many notables of the party, succeeded in facing both ways simultaneously on the issue of business combination. As Finley Peter Dunne described it in the person of “Mr. Dooley,” “‘Th’ trusts,’ says he, ‘are heejous monsthers built up by th’ inlightened intherprise iv th’ men that have done so much to advance progress in our beloved counthry,’ he says. ‘On wan hand I wud stamp thim undher fut; on th’ other hand not so fast.’”
But only a few weeks later the blow fell.
5
One evening in February 1902, Morgan was at dinner at No. 219 when he was called to the telephone by a newspaper friend who told him that the Attorney General of the United States was about to prosecute the Northern Securities Company f
or breach of the Sherman Anti-trust Act of 1890. The Northern Securities Company, you will recall, was the holding concern which Morgan had just set up in order to settle in an orderly way the Northern Pacific dispute with Harriman, and to prevent any further stock-market raids upon the northwestern railroad properties.
When the news of the government’s action came out the next day, the financial world was aghast, and there was frightened selling on the Stock Exchange. So seldom had any corporation been prosecuted under the Sherman Act that it had come to be regarded almost as a dead letter; and anyhow the best lawyers—following the decisions of the United States Supreme Court—had long since made up their minds that a combination brought about through a holding company was immune. Such holding companies were innumerable; did this mean that they were all to be in danger of attack from Washington? Morgan’s own reaction, when he got the news that February evening, has been well described by Mark Sullivan:
Morgan turned from the telephone to his associates at the dinner table, his countenance showing appalled dismay, but little anger. In telling the news to his guests he dwelt on what he felt was the unfairness of Roosevelt’s action. Roosevelt, he said, ought to have told him, ought to have given him a chance to make over the Northern Securities Company, if necessary, so as to conform to whatever Roosevelt thought was right. Or, if the company must be dissolved, Roosevelt ought to have given him an opportunity to dissolve it voluntarily.… He had regarded Roosevelt as a gentleman.…
Morgan went to Washington and had an interview with Roosevelt, in the presence of Attorney General Knox, who had brought the government’s suit. He protested that Roosevelt might have shown him the courtesy of advance warning.
The Great Pierpont Morgan Page 20