Morgan
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The Morgan transcontinental expedition—Pierpont, Fanny, her sister Mary Tracy, and his cousin Mary Goodwin—left Jersey City at 5:00 P.M. on July 5, 1869. They were traveling under the escort of John Crerar, an officer of the Pullman Palace Car Company and a director of Chicago railroads and banks. They woke up on July 7 in Chicago.
Fanny’s journals give a running account of the trip, though not of her husband’s observations. For ten days the foursome visited friends in Chicago, went to dinners and the opera, toured stockyards, and took a quick trip with Mr. Crerar down the St. Louis Road to Lexington, Kentucky, and back. Minus Crerar, they continued west in a Pullman Palace car called the Minnesota. George M. Pullman’s luxurious sleeping coaches were palatial, with plush carpets and seats, glass chandeliers, heavy curtains, elaborate marquetry, and woodpaneled ceilings and walls. “Such comfortable rooms surely never were on a rail road before,” exclaimed Fanny. Pullman comforts did not include dining facilities. The travelers brought along sandwiches and cakes, and stopped at “eating houses” along the route. Pierpont rustled up fresh provisions wherever he could.
The rail lines crossing the country in 1869 had been built by competing companies in disconnected patches, with no standard track gauge and no national plan. Each company ran its own cars on its own tracks, which meant that passengers had to change trains—and carloads of freight had to be unpacked and reloaded—at each new stretch of road. Though the Morgans were getting the royal treatment, they had to wait for hours between trains like everyone else. They crossed the Mississippi at Fulton, Illinois, on a “fearful looking bridge resting on one or two islands,” noted Fanny, and were ferried across the Missouri from Council Bluffs, Iowa, into a Nebraska aspen forest. Waiting at Omaha for the Union Pacific train, the easterners spent an afternoon gathering wildflowers and weighing themselves: Mary Goodwin registered 112 pounds, Fanny and Mary Tracy 140 each, Pierpont 200.
Fanny shuddered at a band of Pawnees “just in from a fight with other Indians, riding the horses they had captured” in Columbus, Nebraska—“horrid looking wild creatures with no clothes to speak of—blankets & shivs & spears.… One came up and spoke to Pierpont, who, not understanding him, retired to the train immediately.” At Uinta, Utah, the Morgan party took a stagecoach to Salt Lake City: Fanny pronounced the Mormons “well and neat and prosperous” but the town “horribly dirty” and the hotel beds apparently “stuffed with chips of granite.” Pierpont and the Marys met “the old sinner” Brigham Young, who to their amusement seemed taken with Miss Tracy. Continuing by rail to Promontory Point, the travelers changed to the Central Pacific line, which took them across Nevada and California to Sacramento.
In Northern California they spent several days touring farmlands, coastal mountain ranges, and mines, surprised by cool weather. In San Francisco they stayed at the “palace” of Milton Slocum Latham, a pro-slavery senator during the Civil War, now manager of the London & San Francisco Bank. Fanny was delighted to be where there were doctors, fresh fruit, no mosquitoes, and full-dress dinner parties. Dining at the mansion of William C. Ralston, who had recently organized the Bank of California with Darius O. Mills, she noted a mechanical piano and “quantities of beautiful roses.” Another day, Ralston took her out in his four-horse charabanc. Pierpont went off on business with Mr. Latham.
Fanny’s diaries have none of Memie’s sparkle or sense of adventure, and myriad ailments curtailed her participation in her husband’s life. When their party went to Yosemite in early August, she was suffering from corns and diarrhea (“P. kept plying me with medicine”), and found the others’ activities “pretty severe for a nervous person.” Pierpont and “the girls” rode horses through Tuolumne Meadows, ate wild blackberries, and hiked up a ravine. After getting caught in a rainstorm one day, they dried their clothes before a log fire; Pierpont wandered around all afternoon in seersucker long johns, looking as if he’d been “spooned” into them, noted his wife. The two Marys washed their blackened skirts in the river. Fanny couldn’t wait to leave “this dirty place” and return to civilized life at the Lathams’.
In his last few days on the West Coast, Pierpont saw San Francisco’s Chinatown, the Almaden Mines, Napa Valley, Sonoma, and Vallejo. His party left Sacramento on August 21 with hampers of food. At Omaha, the end of the Union Pacific line, they dined “sumptuously” in a local hotel. John Crerar met them at Cedar Rapids in a Pullman car for the segment to Chicago. Men lined the platforms at small towns along the route to stare at the elegant coach; Fanny thought they were “delighted to see our two specimen California pears.” The travelers stopped in Chicago for three days, then headed home along the Lake Ontario shore.
Pierpont had just traveled six thousand miles on the “iron horse” he had applauded as a boy, and seen at firsthand both the promise and the difficulties of the roads his bank was helping build.
The money to be made in railroads had stimulated a frenzy of competitive construction. Anyone who could grab a land grant and hawk securities could promise to lay down a road. Some promoters issued phony stock and pocketed the proceeds; others built shoddy tracks over circuitous routes, since the government issued new loans based on mileage completed. One midcentury wit noted dryly that speculators were building lines that ran from nowhere in particular to nowhere at all. The well-run roads that did earn profits invariably attracted competition: rivals built parallel tracks, sometimes aiming to steal traffic, sometimes just to force the original line to buy them out. Buccaneer managers manipulated their own roads’ securities, plundered the capital reserves, bribed politicians for grants and loans, and formed construction companies to charge exorbitant fees that they themselves—as directors—willingly paid. It was classic free-market economics: a boom in demand led to overbuilding, which in turn led to cutthroat fights for survival.
The financial structure and competitive nature of this industry in the late 1860s presented the roads’ bankers, managers, and investors with novel problems. For one thing, railroads had to buy land, dig track beds, pay workers, buy and lay track, and purchase engines and cars long before they were earning anything at all—which meant that they had to keep borrowing money at interest, adding to their costs. Selling stock instead of borrowing would have required no fixed payments, but stocks in America’s fledgling capital markets were still considered highly speculative, and cautious investors wanted bonds—mortgages on the road’s property, issued at high rates of interest. Most U.S. roads were capitalized primarily with bonded debt.
For another thing, once a road was operating it could carry lots of passengers and enormous loads of freight for only slightly more than it cost to carry a single passenger or bushel of wheat. Since every additional item transported brought down the average cost, it made economic sense for the roads to use long trains, loaded full and run fast. This principle, called economies of scale, operated in many industries: if it cost less per unit to make or carry a lot of something than a little, large companies organized accordingly could operate far more cheaply and efficiently than small ones. In most of these industries the economies reached maximum efficiency (lowest cost) at a point that left room for several firms to remain in the competitive field. Business-cycle upturns might lead to overbuilding, excess capacity, and price wars, but competition sorted out the more efficient firms, the others eventually failed, and the market regulated the prices the survivors could charge.
The economic problem for railroads was peculiar, however. The roads required huge initial capital investments, and operated with an unusually high ratio of fixed costs (mainly interest payment on debt) to variable costs (engine fuel, workers’ wages). Before the development of trucking, railroads were “natural monopolies” in their own territories—one railroad could do the job more cheaply than two. Yet that road needed large volumes of traffic to stay in business because of its high fixed costs. By running big trains loaded full, line A could keep its operating costs low, and earn enough money to service its debt and turn a profit. If a parallel li
ne B slashed prices to siphon off A’s traffic, A would have to match the price cuts in order to maintain some volume and income. As a result, competition between parallel roads was singularly fierce.
Passengers and shippers, forced to pay high rates on routes where one road had a monopoly, welcomed this kind of competition since it forced prices down. Eventually, however, by drastically cutting prices and dividing the available traffic, neither line A nor line B could earn enough to cover its fixed costs, and both would operate at a loss until one or the other defaulted on its debt and went bankrupt. Paradoxically, bankruptcy brought a competitive advantage: since a road in default did not have to service its debt, it could operate with lower costs than its rivals and charge lower rates. The logical outcome of this struggle seemed to be bankruptcy for all—which was why competition among capital-intensive railroads seemed “ruinous” to their owners and managers. And the failure of enormously expensive roads, financed largely by foreign capital, affected the entire U.S. economy.
The Morgans hated this kind of warfare, which played havoc with national financial markets and left their client-investors holding worthless paper. Hoping to transform railroad securities from high-risk speculations into stable, long-term investments, they and a few other bankers—chiefly the New York house of Winslow, Lanier & Co.—attempted to discipline the industry. The fact that railroads continually needed huge infusions of capital put the bankers in a powerful position.
Although competition effectively regulated consumer prices in industries with many participants—including railroads on long-distance routes, where the markets could support more than one major carrier—there had to be some form of external regulation for the “natural monopolies” the railroads had on local routes. Toward the end of the century, the states and the federal government began to regulate rates, but in the seventies and eighties railroad managers and their bankers had little external supervision.
As soon as Pierpont returned to New York at the beginning of September 1869 he was drawn into a fight over a small road in upstate New York called the Albany & Susquehanna. The A&S ran just 142 miles between Albany and Binghamton, but connected with four larger roads leading south to Pennsylvania’s coalfields. One of the four was the Erie, run by the “Mephistopheles of Wall Street,” Jay Gould. A small, driven, meticulously groomed man of few words and clever instincts, Gould cast a covetous eye on the A&S as soon as it was completed in December 1868.* He wanted this valuable link between New England’s markets and Pennsylvania’s coal supplies for the Erie empire, and did not want his competitors—chiefly, the New York Central—to control it.
Pierpont had a professional interest in the A&S. In May of 1869 he had helped negotiate a $500,000 third mortgage for the road and been appointed a co-trustee. That summer, as the Morgans headed across the continent, Gould and “Jubilee” Jim Fisk had begun buying stock in the A&S. Once they owned a controlling interest, they planned to elect their people to the board, install new officers, and take charge. They met a resolute opponent in A&S president Joseph H. Ramsey.
Gould bought up as many A&S shares as he could, and tried to bribe local stockholders for more. Ramsey retaliated by issuing to his allies thousands of shares that had been sitting on the company’s books; then he smuggled the books out of his office and buried them in the Albany Cemetery. Gould and Fisk had Ramsey suspended as president of the road by a judge they controlled on the New York State Supreme Court—George G. Barnard, a Tammany crony of “Boss” Tweed’s. Ramsey quickly applied to Albany judge Rufus W. Peckham (who later served on the U.S. Supreme Court), and both sides tried to force the A&S into the hands of a partisan receiver: Peckham got his order in first by a matter of minutes.
Over the next few days the battle escalated from stock raids and legal disputes to slapstick and physical combat. Fisk stormed the A&S office in Albany with a gang of New York City thugs, only to find himself marched off to jail by a man who turned out to be an A&S employee posing as a policeman. As soon as he was free Fisk retreated to Manhattan, then returned with restraining orders from Judge Barnard and fresh recruits. He and his “troops” took over the A&S station at Binghamton, appropriated a train, and headed down the line toward Albany, annexing stations as they went; A&S men flipped a switch to derail the cars. The two sides later met in a tunnel near Harpursville and went after each other with sticks, rocks, knives, and guns until the governor ordered the state militia to take charge of the road.
It was a long way from gunfights in Harpursville to the boardrooms of London’s merchant banks. Jim Goodwin reported to Junius in late August, with Pierpont en route from California, that Gould and Fisk were “carrying things with a high hand but they have found their match in Ramsey.” Dabney, Morgan had feared that Gould’s hostile takeover would succeed, but Judge Barnard was now being threatened with impeachment—this was not his first display of injudicious alliance with Gould—and the public was siding with Ramsey. Jim thought “G[ould] & F[isk] are losing their power somewhat, & if vigorous steps were taken there is a fair chance of getting rid of them—they are a shame and disgrace to the country.”
Morgan reached New York on September 1 and was immediately drafted by Ramsey allies. After consulting his lawyer father-in-law, who had trained upstate, he hired an Albany attorney named Samuel Hand (father of the future Court of Appeals judge Learned Hand), and entered the fray. In Dabney, Morgan’s name he bought six hundred shares of A&S stock (the books had been retrieved from the Albany Cemetery). Then he contacted all the stockholders who were guaranteed to back Ramsey, and made sure they or their proxies attended the annual meeting in Albany on September 7. He personally presided over the voting, and was elected a vice president and director of the road.
In a separate election, the Gould-Fisk forces voted in men of their own. Two months later the New York State Supreme Court upheld the Ramsey group’s victory. Morgan leased the A&S to a coal carrier, the Delaware & Hudson Canal Company, for ninety-nine years, which took the company out of play.†
Although his own speculations five years earlier had provoked his father to outrage, the junior Morgan was coming around to the senior’s point of view, and this first venture into a railroad war bore what would become his professional signature. On behalf of the company’s bondholders, he managed to outmaneuver corporate raiders and stow the road where he considered it safe. The New York Times a few years later declared that the A&S contest, “waged not only by litigation but by force of arms,” had “made Mr. Morgan universally respected as an able financier.”
Mr. Morgan was doing well in many ways—a confidential R. G. Dun & Co. report estimated his net worth at $600,000 to $700,000 (and Junius’s at $8 million to $10 million)—but he did not yet have the unalloyed admiration of Wall Street. The credit agency described him as “consd. of excellent char., extra ability, shrewd, quick of perception, but oftentimes close & sometimes erratic in minor details which with his peculiar brusqueness of manner has made him & his house unpopular with many.” Still, the house had “rich & strong bus. friends & relations. Do a conservative, paying bus. & are safe for their engts.”
The Dun & Co. estimates were high—Junius by this time had a net worth of roughly $5 million, Pierpont about $350,000. The last part of the credit report would have pleased Junius, but the first part, which echoed Duncan, Sherman’s warning about the younger Morgan’s “sharp and contracted” dealings with colleagues, was also true. As if to illustrate the point, Pierpont was not getting along with his partners. He wanted to ease his brother-in-law George out of the firm—they disagreed on just about everything—and he no longer had much use for Charles Dabney. Even Jim Goodwin complained that since Pierpont kept his professional correspondence with his father private, the others often had no idea of the elder Morgan’s views. Jim was so troubled by this state of affairs that he wrote to Junius about it at the end of 1869.
Dabney, now sixty-three, felt he had “lost his influence” with Pierpont, reported Jim, and that his former ap
prentice did not treat him “with enough respect.” When the five-year term of the partnership expired in 1871, Dabney planned to resign. Jim did not think Pierpont could run the firm alone: Dabney’s “moral influence in our favor” had been “very great with the public at large,” but there was “no use denying” (here Jim practically quoted from the Dun report) that “Pierpont’s brusque manners have made him personally unpopular with a great many—all this has had a damaging effect upon us.”
Both Dabney and Jim wanted to bring in Frank Payson’s partner, Emil Heinemann (another Dabney son-in-law: Heinemann’s wife and Payson’s wife were sisters), but Pierpont did not. In prose that stutters with self-justification, Jim repeated to his uncle that while their house had attained a “very good position” under Dabney, “Pierpont alone could not retain [it].… All admit his great executive abilities – but and I say it in all kindness – many (I have good reason to believe it) object to his impulsiveness and manners, and I have not sufficient force to control him.” Pierpont’s “quick comprehension and fondness for detail” would match up nicely with Heinemann’s “tact and judgment for planning and originating business,” urged Jim.
Nothing came of the Heinemann plan, and Junius did not appreciate his nephew’s frankness. Jim apologized: “Please do not say anything to P. or any one else about these letters I wish them forgotten.” Junius left the problems of his New York affiliates unresolved for the time being, although he continued to worry about unsecured credits and to advise “masterly inactivity” in times of the slightest financial unease.