Outrageous as they sometimes were, the conflicts are more understandable as remnants from the pioneering company-building days of the 1840s and 1850s. Back then, fledgling roads often encouraged their executives to share investment risk in new technologies.* It was not until roads grew much richer and more powerful during the Civil War that risk sharing transmuted into profit skimming. At the Pennsylvania, at least, the truly rapacious era lasted only about ten years or so; other roads, with varying degrees of alacrity, gradually followed the Pennsylvania’s lead and adopted codes of conduct for their own executives.
But by then Carnegie had already found his new religion. During a bond-selling trip to England in 1872 he had visited the giant new steel works at Birmingham and Sheffield. Here was industrial scale that made the heart leap—no more maunderings of early retirement. Carnegie’s life plan for the next thirty years was suddenly clear.
The confidence of all businessmen, however, was about to be put to a severe test, in the Great Crash of 1873.
*Drew was the Erie treasurer for many years. A favorite tactic was to lend money to the Erie to bail it out of a tight spot, usually triggering a rise in the stock. He would take back both a note for the loan and a secret trove of stock. As the stock rose, he would sell short (using borrowed stock). When it was time to cover (return the borrowed stock), he would dump his secret trove on the market, driving down the price, so he could buy back the borrowed stock on the cheap and lock in the profit he had made on the rise. Even by the loose ethical standards of the day, this was regarded as reprehensible.
*Vanderbilt, like most big players, borrowed the money for stock purchases from his brokers, who held the stock as collateral for their loans. As the stock price fell, Vanderbilt had to make cash deposits to maintain the value of the loan collateral. These were huge sums of money. Currency comparisons over a gap of almost 140 years are just approximations, but the usual rule of thumb for the late nineteenth century is to multiply by 12–13x, so $10 million becomes $120–130 million. For another sense of the scale, in 1869 $10 million was about 0.15 percent of national product, equivalent to about $17 billion today.
*You “pop bubbles,” i.e., slow down a boom, by raising interest rates. In 1869, with no central bank, the government would sell gold to mop up excess greenbacks, counting on scarcer greenbacks to push up the interest rate on loans. The combination of an increase in circulating gold and scarcer greenbacks would cause the greenback to rise and gold to fall.
*Flagler, a few years older than Rockefeller, was originally a produce wholesaler, and had made and lost a fortune in salt mining. He returned to produce to recover his finances, and leased an office from Rockefeller. The two had become almost inseparable by the time Rockefeller invited him into the Standard.
*Railroads doubtless settled on rebates as the preferred method of discounting to window-dress performance for bondholders. By booking the base rate as revenue and showing the subsequent rebate as a cost, rather than as a revenue reduction, railroads could bulk up their top-line revenue growth. Some midwestern “Granger” states later passed antirebate laws, but most were quickly repealed when railroads responded by raising rates. In any case, they applied only to intrastate shipping.
†When he was on the federal Court of Appeals, William H. Taft (the future president and chief justice) wrote that contracts in “restraint of trade at common law were not unlawful in the sense of being criminal . . . but were simply void and were not enforced by courts.” After he became a steel magnate, for example, Andrew Carnegie could routinely enter, and then violate, steel price-fixing pools without worrying that his pool partners would sue him. But the agreements themselves were not illegal until the 1890 Sherman Act. Courts are similarly reluctant to enforce contractual restraints on alienation of land, but they are not “illegal,” and parties are free to abide by them. The supposed common-law criminality of contracts in restraint of trade is repeated even by usually careful historians, but as far as I have seen, only in connection with Rockefeller. By contrast, historians and contemporaries tend to praise people like Albert Fink, who oversaw the most important railroad pools of the era, which were clearly contracts in restraint of trade. Fink’s pools, moreover, were designed to raise prices, while Rockefeller’s pressure on the roads tended to force prices down.
*The business historian Naomi Lamoreaux has correlated insider dealing in the nineteenth century with the scarcity of business information. The willingness of a Tom Scott to coinvest with his company was a good “market signal”—in effect, a substitute for data.
4
WRENCHINGS
To an observer on the Pittsburgh hills on the night of July 21, 1877, the two-mile-long stretch of Pennsylvania Railroad yards running along Liberty Street on the Allegheny River would have looked like the burning of Atlanta. Angry mobs, thousands strong and many of them armed, torched some thirty-nine buildings and more than thirteen hundred cars and engines. The flames from a massive grain elevator leaped high into the sky, like a beacon of rage.
The violence started after Tom Scott demanded that Washington send a contingent of National Guard to break a spreading railroad strike. When the soldiers marched into the city on the afternoon of the twenty-first, they were met with a volley of stones from an angry crowd. The troop responded with gunfire, killing at least twenty people, then beat a disorderly retreat to the railroad roundhouse, a huge locomotive maintenance facility between 26th and 28th streets on Liberty. The torching of the rail yards started at the roundhouse, clearly with murderous intent. A mob pushed burning cars down tracks into the soldiers, who saved themselves with railroad hoses. The next morning was a Sunday, and as the crowds thinned and smoke built dangerously, the soldiers decided to fight their way out. This time the gunfire was apparently initiated by the crowd, and when the soldiers returned fire, they used a Gatling gun. Twenty-two or twenty-three people were killed, including several soldiers. The Commercial and Financial Chronicle (the Wall Street Journal of the day) deplored the “saturnalia of violence and pillage,” but laid equal blame on “bungling mismanagement at Pittsburgh.”
The 1877 strikes were the most lethal in American history and affected most major cities. Violence at Pittsburgh’s Pennsylvania Railroad yards was among the worst anywhere. After soldiers fired on crowds, mobs torched 1,300 cars and most of the company’s buildings.
Strikes spread throughout the country the next week. Eleven people were killed in a railroad strike at Reading, Pennsylvania, on Monday. By Tuesday and Wednesday, there were general strikes in Chicago and St. Louis, ugly clashes among police, troops, and workers, and a number of deaths. Strikes in San Francisco turned into murderous anti-Chinese riots. Virtually every major city saw some kind of disturbance before the violence finally dissipated from sheer exhaustion and the inexorable buildup of troops. On August 5, the head of the response team in Washington reported to the president and secretary of war that there was “peace everywhere.”
The 1877 strikes were by no means the first in America. But along with the bloody “Molly Maguire” Pennsylvania coal field confrontations between miners and Pinkertons a few years before, they were the first to have such a nasty, class-based edge. Superficially, the Pittsburgh crowds looked a lot like midcentury mobs in Europe, and newspapers freely invoked the specter of the “Commune,” the 1871 rising in Paris. Tom Scott, despite his hardscrabble roots, played the role of outraged plutocrat to perfection.
It was the strangest of decades. For generations, historians treated the 1877 labor risings as a reaction to the “long and merciless depression” of the 1870s, one that was usually described as the second worst in history after the collapse of the 1930s. More recent research, however, makes it clear that if there was a “depression” at all, it was brief and mild; in fact, the decade saw some of the fastest growth on record, and marked the point where American heavy industry began decisively to narrow the technology and productivity gap with Great Britain. But the times still felt awful, for bankers an
d businessmen and ordinary farmers and factory workers alike. There was a deep current of social unrest: farm protests swept through the midwest, industrial strikes left dead and injured on both sides of picket lines, and the characteristic easy-money, antimonopoly brand of American Populism first took root.
America was careening toward modernity. The momentum of technologic and commercial exploitation had been building since the 1840s and 1850s, even as traditional social structures were disrupted by the Civil War. The Whig vision of a frictionless, monadlike society of independent artisans and farmers was being swallowed up by its own relentless logic of development. The infrastructure of modernity—fast, cheap transportation; ready access to primary materials like coal, iron, and oil; real-time communications; smoothly flowing channels of finance capital—demanded behemoth-scale institutions, sprawling, soulless, autistically focused on pouring out more steel, more coal, more stocks and bonds, more of whatever they happened to do. During the 1870s, the wrenching forces of modernization achieved maximum torque on the old ways of living and governing and doing business. The captains of modernity, the Carnegies, the Rockefellers, the Goulds, and their admirers; all the people yearning to strike out on new salients, buy more things, behave in new ways; immigrants seeking release from the encrusted semifeudal strictures of Old Europe: they all reveled in the change. Probably half the country hated it.
The Crash of 1873
The banking house of Jay Cooke & Co., its portfolio stuffed with unsellable Northern Pacific railroad bonds, closed its doors on September 18, 1873, triggering a banking crisis and, in the traditional telling, initiating the “Great Depression of the 1870s.” The shock of Cooke’s failure would be hard to overstate, for he was widely perceived as America’s leading private banker, and there had been little inkling of the difficulty he was in. The Commercial and Financial Chronicle said that the news was “received with almost derisive incredulity on the part of the mercantile public.”
Cooke’s was the one name on Wall Street that reverberated far beyond the financial community. He was a marketing genius, who had single-handedly stabilized the Union’s finances in the darkest days of 1862–63 by mounting a massive town to town, almost house to house, bond sale, the first true retail bond drive in history. Cooke went on to place two massive federal bond issuances, totaling almost $1 billion, while charging razor-thin commissions and bearing all the marketing expenses. His retail customers also proved to be ideal security holders. Ordinary folk bought for long-term savings, not for speculation; their bonds disappeared into sugar bowls and mattresses instead of weighing on securities markets. While Cooke made only modest profits on the bonds, he emerged as one of the world’s best known bond bankers, a man that even the Barings and the Rothschilds were happy to partner with.
A string of Wall Street houses toppled in Cooke’s wake. The stock exchange suspended trading, and New York clearinghouse banks closed for more than a week. Official opinion at first resisted the bad news. The Chronicle, whose commentary was usually quite acute, derided the notion that the “present Jay Cooke panic” signaled that anything was seriously awry, for “Since the close of the war there has never been a time when our mercantile community have been in a better condition than now.”
In fact, the country was undergoing a full-fledged banking crisis, one that persisted into mid-1874. Like fiber optic lines in the 1990s, railroads had been built far ahead of actual demand; Cooke’s Northern Pacific was just an especially egregious example. The Chronicle doggedly insisted that railroad earnings still easily covered their debt service obligations, which was true—if you ignored the havoc from constant-dollar debt service in an era of falling nominal prices. Eighty-nine railroads had defaulted on their bonds by the end of 1873, and the default count grew to 108 over the following year. This was a time when railroads accounted for about 80 percent of total stock market capitalization—even a budding mogul like Rockefeller stayed away from the public securities markets—so a crisis in the roads devastated the entire Street.
The Chronicle had been worrying about a cash crunch since late summer. Crop exports were weak in 1872, so the new year opened with an unusually large trade deficit, which was financed by short-term borrowings abroad. The loans were deposited in New York, leaving the banks temporarily brimming with cash. As railroad issues sold poorly throughout the spring, Wall Street supported its bond inventories with call loans, which banks could pull at any time. New York banks, in short, were financing long-term borrowers with foreign hot money, just as Thai and Malaysian banks did in 1997. Then July and August brought the good-bad news that western farmers were harvesting a spectacular crop, and cash started flowing west to start the grain trains rolling. In the best of circumstances, a financial squeeze was inevitable. Pierpont Morgan was one of the few Wall Street figures to call the turn correctly, and demanded payment on most of Drexel, Morgan’s outstanding credits well before the crash hit. Not very public-spirited, perhaps, but good banking.
Events in Europe turned a tight patch into a perfect storm. After his lightning victory in the 1870–71 Franco-Prussian war, Prussian chancellor Otto von Bismarck exacted stiff tribute from the French in 1872 and 1873. The total payment, $1 billion in gold, was about the same size in real terms as the World War I reparations exacted at Versailles, with the difference that the French actually paid it, virtually all at once, and from a much smaller economy than the Germans had in 1919. Raising the money was arguably the greatest tour de force of nineteenth-century banking, and the crowning achievement of the Rothschild family, especially its French branch. But the enormous transfer of funds disrupted the continent’s bourses throughout 1873, even in Germany, and cash flows from Europe to America fell sharply. Europeans had long been souring on American railroads because of outrages like the Erie Wars. But now, even if they had wanted to help, there wasn’t a sou to be had.
Sophisticated observers stumbling through the ruins of the Crash of 1873 could see little but economic desolation ahead. More than a year later, President Grant’s message to Congress spoke of the continuing “prostration in business and industries.” On the raw numbers, in fact, he was quite wrong: the American economic engine was demonstrating its real power, churning ahead as never before.
A Most Peculiar Decade
The new evidence for the 1870s is a product of the young discipline of “cliometrics” or economic history. Simon Kuznets produced the first comprehensive set of nineteenth-century national growth tables in the 1940s, and his student, Robert Gallman, devoted much of a long career to extending and refining them. The reconstructive work is extraordinary; researchers spend years poring through trade and business reports to pin down arcana like inventory cycles.
The data are consistent and unambiguous: the 1870s was a decade of very strong growth. Depending on your starting point, or whether you use five-year averages, as Kuznets and Gallman prefer, average real (inflation-adjusted) annual growth rates were somewhere between 4.5 percent and 6 percent, among the fastest, if not the fastest, decadal growth rates on record. (A more recent analysis places the real annual growth for the decade at a blazing 6.7 percent and per capita growth at 3.9 percent, both probably the fastest ever.) There was a recession in 1874, after a spectacular 1872 and near-flat 1873, but growth recovered sharply thereafter, maintaining a vigorous pace well into the 1880s. Consumption grew even faster than total output. At a time of high immigration and rapid population growth, real consumption per person grew by almost 50 percent over the decade. No country in Europe had nearly so strong a record.
Railroad construction slowed dramatically, of course, especially in the middle of the decade, but virtually every other measure of physical output, including railroad freight loadings, was up strongly. The population grew by 26 percent from 1870 to 1880, but fuel consumption doubled, metals consumption tripled, oil production was up fivefold, and the real value of manufacturing output increased by two-thirds. America had no steel production to speak of in 1870, but was neck and neck
with Great Britain by the early 1880s. Henry Frick, the leading Pennsylvania coke vendor (for iron and steel smelting), remembered the 1870s as an “awful” time, even though his coke output tripled in the last half of the decade.
Tonnage measures of food production and consumption grew spectacularly. The volume of grains and cotton consumed at home increased by 50 percent, while exports of wheat were up threefold, corn fourfold, and cotton by 60 percent. Per capita beef consumption increased by 20 percent, while exports shot up ninefold. Employment also grew steadily, at a compound annual rate of 3 percent a year, against an annual population growth of 2.3 percent. By the end of the decade, Americans were better fed, better clothed, and better educated; they had bigger farms with higher output, had access to a much broader range of metal products, like stoves, wash tubs, farm tools, and machinery, and were far more likely to enjoy the benefits of artificial lighting.
So why did it feel like a depression? One reason was that prices fell throughout the decade and beyond, in a slide that was steep, relentless, and continuous. The wholesale price index fell by 25 percent from 1870 to 1880, a decline that continued through the 1880s at about half that rate, before flattening out at essentially zero inflation in the 1890s. Falling prices were reflected in falling money incomes. Because prices, in the main, fell faster than incomes did, real income grew strongly, but shrinking pay packets, or diminishing cash returns from crop sales, still felt awful. A small number of contemporary analysts speculated that the fall in prices was giving “the wage-earning class a greater command over the necessities and comforts of life.”* But the average American was a farmer or an artisan, a housekeeper or a small businessperson in a rural town, and had no way of knowing what was happening to overall price levels. Like people in any age, as their money incomes went down, they forgot about their new curtains, and tools, and kerosene lamps; as far as they knew, they were getting poorer, and they were mad as hell about it.
The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany Page 13