*The most serious stain on the Rockefeller labor record is the famous “Ludlow Massacre” of 1914 (some years after the quotation above), which cost the lives of twenty coal miners and their relatives. The mining company was not managed by the Rockefellers, but the family was its major shareholder, and John D., Jr., who ran the family interests, was very well informed. He defended the incident at first, but Ludlow eventually converted him to the cause of labor reform. John D., Sr., was seventy-five at the time and more or less completely retired from business.
*Although Garland does not comment on it, there is a distinct feeling in his interviews that, horrible as the life was, the men liked the mills—hot steel men swaggered, they got a masculine kick from the danger, and they bragged about it.
*See the chapter Notes for more detail on Frick’s performance record. In Carnegie’s defense, he and Frick most commonly differed over Frick’s proclivity to enter, and stick to, steel market sharing and price-maintenance agreements. Carnegie didn’t mind joining pools, but in economics-speak, whenever the pool price was higher than the market-clearing price, Carnegie would cut prices and take share. The earlier quote from John W. Gates about Carnegie’s disruptiveness was specifically with reference to Carnegie’s upsetting a price-maintenance agreement. But while Frick had his flaws, the company prospered mightily during his tenure, and it is hard to see Carnegie’s behavior as anything but destructive. The core problem may have been Carnegie’s inability to share a spotlight.
*Earnings in 1898 are often shown as $16 million. Steel and coke earnings, in fact, were $11.5 million, but the company also booked several extraordinary items: $2 million for a railroad right-of-way payment and $2.5 million of paper profits from a variety of security write-ups. The write-ups were a deviation from the company’s normal practice of carrying its subsidiaries’ securities at cost. My guess is that Frick and Phipps were quietly building their case for recapitalization or sale of the company. In Carnegie’s notes, he usually crossed out the $16 million and wrote in $11.5 million. The company did not use depreciation accounting, so interest and dividend payments had to be covered from book earnings.
†See Appendix I for details. Carnegie claimed, and other histories repeat, that the company made $40 million in 1900. That is about a third higher than the actual figure.
*The historian Albro Martin has pointed out that railroad rates disadvantaged every business with respect to its peers to the west, and similarly conferred an “unfair” advantage over any business to the east. New York, unfortunately, was where you ran out of east.
*Oliver Wendell Holmes, Jr., in a well-known dissent in Northern Securities, zeroed in on the logical weakness of the tight/loose distinction. The government finally abandoned it, and the antitrust division now reviews proposed mergers for their anticompetitive effect regardless of their legal form.
*Some of these judgments are, obviously, in the eye of the beholder. Another analysis, based on the same data, suggests that Emery may have been a “serial squeezee” rather than a willing serial seller, although it does not address the fact that the Standard was also an Emery investor.
*The lack of competing refiners in the region may explain the railroads’ paperwork snarls. The record showed that the Alton maintained 386 current commodity tariff filings—each a longish legal document. Testimony showed that the six-cent oil rate had been quoted for a number of years, while a subsequent hearing before a federal examiner also showed that six- to seven-cent commodity rates were common in the area. With no need to keep a community of customers regularly updated on rates, oil tariff filings may have been pushed to the bottom of the inbox.
†Landis’s decision was reversed on appeal. After the evidence had been presented in the retrial, the judge directed a verdict for the Standard, in effect, ruling that the government had failed to make a triable case.
*Frick Coke was also a major rebate recipient, and Cassatt’s action cut deeply into its earnings. Frick’s attempt to raise coke prices in 1899—which precipitated the break with Carnegie—was probably motivated by the lost rebates. Carnegie had not previously known the extent of the coke company’s rebates, and was furious when he learned of them—not because they were illegal but because they had not been paid to the steel company.
8
THE AGE OF MORGAN
Pierpont Morgan’s yacht, the Corsair, was half the length of a steel battleship and designed for speed; with its black hull, its black and gold silk upholstery, and its raked stacks, it had an intentionally racy look. The name itself spoke volumes of Morgan’s view of the modern banker. (Jay Gould built an even bigger yacht, but he was not admitted to the New York Yacht Club because of his “robber baron” notoriety.)
On a warm July morning in 1885, the Corsair took Morgan and his friend Chauncey DePew, president of the New York Central, and later a U.S. senator, to a Jersey City pier where they picked up George Roberts and Frank Thomson, the two top executives of the Pennsylvania Railroad. The four spent the rest of the day beneath the yacht’s gaily striped deck awnings, cruising up and down the Hudson as they discussed selling out Andrew Carnegie. Morgan was the New York Central’s primary banker and a company director, while the Pennsylvania’s banking requirements were handled by his partner, Tony Drexel. (It did not seem to matter that Carnegie was also a long-time client and was numbered among the “friends of the firm” at Junius’s London office.)
At issue was a budding war between the two roads, egged on and partly financed by Carnegie. After years of fuming impotently over the Pennsylvania’s policy of price gouging its Pittsburgh-based customers, Carnegie had finally found a way to strike back—through the agency of William Vanderbilt, principal owner of the New York Central. Vanderbilt had mostly stayed clear of battles with the Pennsylvania, since the two lines had few overlapping territories. But the Pennsylvania had quietly backed the revival of a moribund line, the West Shore, to attack the heart of the New York Central franchise up the Hudson to the Great Lakes. Infuriated, the usually irenic Vanderbilt had ferreted out a dormant railroad charter of his own. As luck would have it, it was for a line that could connect from Carnegie’s steel plants across the Alleghenies to the Philadelphia & Reading, breaking the Pennsylvania’s monopoly on cross-state traffic. The line would be expensive—at least $15 million—and involved difficult mountain terrain, but as soon as Carnegie heard of it, he organized a pool of Pittsburgh manufacturers for a third of the capital. By the time of the Corsair excursion, work on the road was proceeding apace. Twenty-six workers had died, but the mountain tunnels were blasted, the artificial gorges cut, the piers placed for river bridges, and the rails ordered—all to an obbligato of impatient urgings from Carnegie.
But what Pittsburgh manufacturers saw as a bright new day of fairer rates and better service looked like unmitigated catastrophe to Pierpont and Junius Morgan. Like most of the day’s bankers, they used the words “ruinous” and “competition” as if they were hyphenated. After overshooting in the market runup of 1879–82, railroad security prices had fallen sharply in the short 1883 recession, and the last thing bankers wanted was lower fares.* The energies Junius and Pierpont devoted to heading off a confrontation underscore the importance they attached to it. When Vanderbilt had been in Europe in the spring, Junius did his best to dissuade him from his Pennsylvania venture. Failing that, he leaned on his client, Cyrus Field, the cable tycoon and a major investor in the new line, to delay a scheduled bondholders’ meeting, just so Pierpont could rush to Europe in time to accompany Vanderbilt on the sail back home.
Few men could stand up to a full week with Morgan, and Vanderbilt had never been overendowed with spine. By the time they docked the deal was cut. If the Pennsylvania would agree, the two roads would buy out each other’s new line; since there were legal obstacles to a direct Pennsylvania purchase of the cross-Allegheny line, the Morgans would buy it for them and exchange it for equivalent securities at some later time. Getting the Pennsylvania to sign on took a full day of De
Pew’s eloquence on the Corsair—Pierpont mostly glowered and waved his cigar—and the deal was agreed only when they landed in the evening. (The Morgans had made it so attractive that Roberts was suspicious.) Carnegie had no inkling of what was going on until he got a cryptic note from Vanderbilt that construction on the new road had been suspended. Both of the roads abandoned their new acquisitions, throwing away millions in investment. The Allegheny mountain cuts and tunnels, built at such a cruel human cost, were left to disappear in the forest undergrowth until they were delightedly discovered a half century later by engineers laying out the Pennsylvania Turnpike.
Andrew Carnegie posed in front of a tunnel cut for the railroad that Morgan forced him to abandon in 1885, wasting a multi-million-dollar investment. The tunnel was later used for the Pennsylvania Turnpike.
Morgan was among the first generation of bankers whose clients were primarily private corporations instead of governments, but there were substantial continuities in approach. His mediations among the railroad barons were very much in the tradition of the supranational financial/diplomatic service operated by the Rothschilds and the Barings in midcentury Europe. Despite their occasional huge profits from war finance, the great banking houses detested war: the business disruptions were simply not worth it. The lead partners were in close touch with all the main ministries of the continent, regularly called upon the royal families, and while they never exercised the near-dictatorial powers of legend, they could withhold finance from bellicose rulers, and occasionally even brokered trades of ports or railroads to head off a fight. Morgan played much the same role his entire career, with the difference that he was heading off warfare among competitive private companies.
The Corsair deal was an important milestone in Pierpont’s ascendance to the leadership of the Morgan banking interests. It came at a time when Junius was steadily reducing his day-to-day involvement in the firm, although Pierpont continued to keep him closely informed and regularly sought his advice. By the time Junius died of a carriage accident in 1890, and Tony Drexel, the nominally senior partner of Drexel, Morgan, died in 1893, Pierpont—fifty-six and at the peak of his powers—was already the bank’s acknowledged leader on both sides of the Atlantic. The New York firm was renamed J. P. Morgan & Co. in 1894, with a branch in Philadelphia (Drexel & Co.) and another in Paris (Morgan, Harjes). J. S. Morgan & Co. remained a separate partnership in London, with Pierpont as its senior.
By the turn of the century Morgan was arguably the leading banker in the world, and no other firm even came close to the authority he exercised in the United States. He not only mediated substantial changes in the profile of American business, but, given America’s shameful lack of grown-up financial institutions, served as its de facto central banker as well.
“Jupiter”
Edward Steichen’s famous 1903 portrait-photograph of Morgan captures him as the “Jupiter” of the markets—the massive, smoldering presence; the glowering inarticulateness; the barely restrained explosiveness. People were in awe of Morgan—he had “the driving power of a locomotive,” according to one commentator—or were simply afraid of him. His power was real, grounded in his unique role in channeling the ballooning trove of American savings. One way or another, through control of boards, investment partnerships, or just implicit understandings that a bank’s or an insurance company’s investment committee would follow Morgan’s lead, he and his partners disposed of perhaps 40 percent of the liquid industrial, commercial, and financial capital of the United States, by far the largest pool of money in the world.
The World’s Banker: J. P. Morgan, as photographed by Edward Steichen in 1903.
Roughly from the turn of the century to the start of World War I, every American financing of more than $10 million was handled either by Morgan or one of just four other firms: two Boston firms, Kidder, Peabody and Lee Higginson; National City Bank; and Kuhn, Loeb, the first of the great American Jewish banking houses. All of them acknowledged Morgan’s primacy. As Jacob Schiff, the top partner in Kuhn, Loeb, once remarked as he declined a railroad deal, “That is J. P. Morgan’s affair. I don’t want to interfere with anything he is trying to do.”
Unlike the sprawling bureaucracies of a modern bank, the Morgan bank’s power was also very personal. During Morgan’s career, there were never more than twelve or thirteen partners at any one time, nor more than about eighty employees altogether. If you walked through the office, you could see Morgan’s desk arrayed along with the other partners’ in glass enclosures in full view from the floor. The senior partners often had great discretion to complete their own deals, but “Mr. Morgan’s” word on almost anything was final. Even the top men did not like to argue with him, or ask for another hearing once he had said “No.”
The bank’s high reputation in Europe was a key to its position in America. Europeans remained major buyers of American stocks and bonds throughout the nineteenth century, and clearly preferred paper with Morgan’s name on it. As Pierpont would have been the first to acknowledge, that respect was tribute to Junius’s many decades of solid, conservative banking performance. A signal indicator of the bank’s global stature came in 1890 when the Barings banking house nearly failed after a disastrous gamble on Argentinian bonds. With most London firms running for cover, the Bank of England turned to Pierpont to lead the Barings rescue: for nearly five years Morgan was effectively Barings’ receiver, making him an important player on the London exchanges.
At home, Morgan was primarily a railroad banker through the mid-1890s, and was the dominant figure in restructuring railroad finances after the crash of 1893–94. Financial headlines had blared “Panic” in the 1870s, and again in 1883, but those crises were mostly financial markets phenomena with relatively mild effects in the real economy. The break in 1893–94, however, was a different story; the 6.5 percent drop in output in 1894 is by far the worst performance of the entire nineteenth century outside of the Civil War years. In the wake of the 1893–94 crash, some 192 railroads, with 41,000 miles of track and a market capitalization of $2.5 billion, or about a fourth of the entire rail system, were in various stages of bankruptcy.
By the late 1890s, American railroads had more or less coalesced into a half dozen loosely connected systems, held together by stock ownership or networks of common directors, and Morgan was a primary figure in four of them. He served as the banker for three major networks—the Pennsylvania’s, the Vanderbilt lines, and James J. Hill’s in the West and Northwest—and he controlled outright another substantial group of lines through his power to appoint their finance committees. The two remaining networks, that of George Gould, Jay’s son, who had succeeded to his father’s empire, and E. H. Harriman’s, were not under Morgan’s direct influence, and his relations with them varied from antagonistic to the merely correct. Although Gould did a good job of shepherding his father’s lines through the 1890s downturn, he was otherwise an inattentive manager who left little mark on the industry. Harriman came late to the railroad business, but by the turn of the century had emerged as one of the first of the great modern railroad executives.
Morgan’s restructuring of the Philadelphia & Reading in 1885, one of his earliest, is a prototype for his operations in the 1890s. Although it lived in the shadow of the Pennsylvania, the Reading was one of the country’s major railroads and one of the largest coal operators. Its principal partner, Franklin Gowen, mercurial, bellicose, and with a flair for publicity, had been a central actor in the bitter Pinkerton–Molly Maguire coal field wars of the mid-1870s, and again in the lethal railroad strikes of 1877. He had also been the railroad partner in the Tidewater pipeline’s attempt to undercut the Standard Oil–Pennsylvania oil shipping franchise, just as he was the key partner in Vanderbilt and Carnegie’s new railroad—the Reading would have provided the linkage to the coast, once the road crossed the Alleghenies. The Reading was also in receivership, in great part from the lingering strains of losing the pipeline war. It can hardly be a coincidence that Morgan agreed to take t
he line out of receivership just a few months after the Corsair agreement, on the express condition that Gowen step down. In the Rothschilds’ European territorial settlements, they always went to great lengths to tie up all the potentially disruptive elements. Gowen would have been outraged at Morgan’s quashing his railroad deal with Vanderbilt and Carnegie, so the Reading’s sudden emergence as a Morgan client, and the quick departure of Gowen, looks like another example of a diplomat-banker locking up a deal.
Nineteenth-century restructurings operated pretty much like restructurings today. A troubled company’s balance sheet is a palimpsest of past business reverses and managerial misjudgments—the layers of debt and preferred stock pile up like scar tissue as the company is forced to go back to investors again and again for the cash to navigate through yet another bad patch. In the hard-asset-oriented nineteenth century, “floating,” or unsecured, debt meant that a company had no hard assets left to mortgage—a sure sign of terminal trouble. The Reading was deep in floating debt, ripe for a dose of Morgan’s purgatives. Previous layers of debt and preferred stock were wiped out and replaced with common stock at a fraction of the previous valuations (today we call it “cramdown” stock). A simplified structure of debt and preferred stock for new investors brought interest and dividends down to manageable levels. The Reading’s voting stock was placed in a trust under Morgan’s control for a period of five years—another standard Morgan condition—and financial covenants were enforced through regular, audited, statements of account. Morgan’s fees for his trouble were very high, almost always at least 5 percent and sometimes as much as 10 percent of the new money raised. In fairness, he usually took most of it in stock so that his interests were aligned with those of his investors.
The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany Page 29