by Jean Strouse
Furthermore—just as the Morgans had feared—railroad competition was destroying confidence in the markets. The foreign capital invested in U.S. railroads had quadrupled between 1876 and 1883, from $375 million to $1.5 billion, but the boom’s new rate wars, parallel building, and mismanagement sent that flow into reverse: between 1882 and 1885 foreigners sold off U.S. railroad holdings at the rate of $25 million a year.
Declining securities values agitated Wall Street in the fall of 1883 as Morgan and Fabbri were putting the Northern Pacific on solid ground. In May of the following year the failure of several New York brokerage firms and banks touched off a more ominous crisis.† Cyrus Field cabled Junius Morgan: “Many of our businessmen seem to have lost their heads. What we want is some coolheaded strong man to lead.” Junius’s son did what he could to forestall widespread liquidation, buying stocks as panicked investors sold, and advising friends to do the same. With the consequences of the 1857 and 1873 panics in mind, the New York Clearing House Association stepped in to act as “lender of last resort”—a phrase coined by the British financial journalist Walter Bagehot in 1873. The Clearing House issued $25 million in loan certificates to ease the strain on the money markets and keep sound firms afloat. The panic caused severe damage in New York but did not spread to the rest of the country or bring on a prolonged depression. The worst of the trouble was over by the summer of 1885, and the economy remained relatively stable for the next six years.
The contraction that began in 1882 did have stark effects on Wall Street. Drexel, Morgan’s earnings plummeted from $1.6 million in 1882 to $662,000 the following year, and the firm lost $41,000 in 1884.
Junius, always gloomy during economic reversals, was feeling worn-out and thinking about the future. In December 1884, as J. S. Morgan & Co. posted a $20,000 loss for the year, he revised the articles of his London partnership, authorizing Pierpont to continue the firm, or not, with £1 million in capital, in the event of his own retirement or death. Walter Burns wanted permission to run the firm himself if Pierpont chose not to, which Junius did not think “nice.” In the meantime, the elder Morgan brought in a new British partner, Robert Gordon, to take some responsibility off his shoulders. It would be a great relief to “turn my back on Old Broad St.,” he told Pierpont—“not that I do not enjoy business when I can take it easily & there is less wear & tear than now, for I do. But what I feel the want of now most of all is rest.”
Pierpont was also giving some thought to the future. He brought two new bankers into his New York firm in 1884. One was George S. Bowdoin, who had since 1871 been a partner in Levi Morton’s house, Morton, Bliss & Co. Bowdoin had managed the purchase of Corsair for Morgan in 1882, and was an original member of the Corsair Club. With a genealogy that included Alexander Hamilton, Philip Schuyler, and Gouverneur Morris, he was exactly the type of patrician people came to expect at the Morgan bank. In a photograph taken in the eighties with Morgan and Lanier he looks substantial, affable, calm—like someone you would trust with your grandmother’s bank account.
Morgan’s other new associate was Charles H. Coster, who had been working at Egisto Fabbri’s shipping and trading house. Fabbri highly recommended the thirty-two-year-old Coster, who soon proved invaluable to Drexel, Morgan. Pierpont in his first years on Wall Street had paid such close attention to detail and been so unable to delegate responsibility that he periodically collapsed in “nervous” exhaustion. Twenty years later, the business had grown far beyond even his capacity for single-handed control. Coster had what John Moody later called “a mind in a generation for detail,” and over the next few years he took charge of the technicalities in Morgan’s corporate work. Pale, meticulous, slight of build, high-strung, and prematurely gray, Coster traveled to railroad offices all over the country, racing from one meeting to the next, drafting reorganization plans late into the night, mastering fine points of finance and law. During a railroad foreclosure in the Middle West, an opposing lawyer pointed out that twelve hundred of the road’s bonds lacked a crucial endorsement and were therefore invalid. Coster asked for a lunch break. As he and his assistant left the building, the latter asked, “Where shall we lunch?” Coster snorted, “Lunch, nothing! Is there a printing press in town?” There was—one. For the next hour and a half Coster had the missing endorsements printed on the bonds, and personally signed them all.
Morgan supplied this lieutenant with whatever he required, and spent his own time bringing in new deals and negotiating for an end to railroad warfare. Wall Street watchers credited Coster with all the bank’s successful reorganizations between the mid-eighties and the end of the century. At one point he sat on fifty-nine corporate boards. Moody considered him “Morgan’s right arm.”
One of Coster’s first assignments was to take over from Fabbri the handling of the Edison business. Six years after his first successful experiment with incandescence, Edison had come to detest the dominion of the patent-holding Electric Light Company. His original backers still had seen no return on their investment, but the independent companies he set up to manufacture lamps, engines, and tubes were earning money; when the EELC directors asked for a share of the manufacturing business in the spring of 1884, Edison was outraged that men who had refused to fund these ventures wanted some of his profits. He no longer trusted his attorney, Grosvenor Lowrey, or Light Company president Sherbourne Eaton, regarding them as tools of the EELC board. That fall, with the company’s five-year contract about to expire, Edison waged a shareholder fight for control, and won: Lowrey and Eaton were voted out, along with several other directors.
The Light Company would be run by its executive vice president, Edward H. Johnson, the engineer who had rewired Morgan’s house. Morgan partner J. Hood Wright stayed on the board, and Coster was elected to replace Fabbri. Coster worked so well with his predecessor’s “Friend Edison” (whom he addressed as “Professor”) that he also succeeded Fabbri as treasurer of the EELC. Drexel, Morgan continued as bankers to the company and to Edison, who secretly gave Morgan and Wright 155 shares of Machine Works stock each.
The worst of the railroad conflicts that were driving foreign capital out of U.S. markets in 1883–84 involved the two largest railroads in the United States—the Pennsylvania and the New York Central. In the fall of ’84, Junius met with officers of both roads on his annual visit to New York and tried to persuade them to give up their “absurd struggle for pre-eminence.” He failed.
The previous June, when a small road called the New York, West Shore & Buffalo went into receivership, the Pennsylvania had bought up its devalued securities. The West Shore had been built expressly to compete with Vanderbilt’s New York Central: it ran from Weehawken, New Jersey, up the west bank of the Hudson to Albany—directly parallel to the New York Central tracks on the other side of the river—then on to Buffalo, where it connected with another line to Chicago. It also ran along the edge of Pierpont’s property at Highland Falls. As workmen laid down tracks in May of 1882, Louisa had reported from Cragston to her father in London: “I don’t think that the railroad is going to bother us this summer as we were afraid it would.… And I don’t think (Mama doesn’t either) that the men at work there are going to be so very bad. They will probably steal she says from the garden, but I shouldn’t think they would try to enter the house.”
The West Shore—financed by a syndicate that included Jay Gould, George Pullman, Henry Villard, and the firm of Winslow, Lanier—represented exactly the kind of parallel building the Morgans wanted to stop. With the New York Central already servicing the New York–Albany route, the West Shore was superfluous: on this kind of short haul, one line could efficiently carry all the available traffic. Having gone bankrupt, the West Shore should probably have been allowed to fail.
Pierpont was surprised to find Winslow, Lanier involved. He sent a private note around the corner to his friend one night by messenger: “My dear Charlie,” it began. “… I feel that you are surrounded by men … without the least particle of honor who will n
ot hesitate to put you in a false position if by so doing they can shield themselves or secure for themselves any benefit whatever.” He knew that his friend was “bothered and worried,” and promised to “do anything in my power to help you.” The time “may and probably will come when it will be necessary for you to take a stand against them and if so I know you will not hesitate, and I will stand by you through it all and so will everyone else that knows you. Call on me at any and all times.…” Lanier quit the railroad’s board early in 1884.
As soon as the West Shore was acquired by the Pennsylvania it became part of the larger conflict. William H. Vanderbilt said it had been built only to threaten the New York Central: “There is not a dollar’s worth of new business from one end to the other. All the business the road does is stolen from the Central. I tell you I look on the West Shore road just as I would on a man whose hand I found in my money drawer.” He suspected the Pennsylvania of having backed the West Shore venture all along, but couldn’t prove it.
Whether by design or chance, the Pennsylvania Railroad officials who acquired the West Shore were in fact retaliating for an incursion into their monopoly of traffic in the Pennsylvania coal regions. In 1883 a syndicate that included Vanderbilt, the Rockefeller brothers, and Andrew Carnegie had begun building a line called the South Pennsylvania to run from Harrisburg west to Pittsburgh. Carnegie had had the enthusiastic backing of his former bosses at the Pennsylvania when he set up his iron and steel business in the early seventies, but once he started shipping huge quantities of coal and steel rails, he locked horns with the railroad giant over its freight rates—as had Standard Oil. The steel and oil men in the South Penn syndicate wanted a road of their own to break the Pennsylvania’s monopoly, and Vanderbilt joined in order to get his hand into his rival’s money drawer. As soon as construction began on the new road in the summer of 1884, the Pennsylvania’s freight rates dropped.
With the South Penn controlled by New York Central allies and the West Shore in the hands of the Pennsylvania, each side had a knife at the other’s throat. Junius failed to talk them into laying down their weapons in the fall of 1884, but his firm was ideally situated to intercede. Pierpont sat on the New York Central board and served as the road’s principal banker. The Drexels had been financing the Pennsylvania for years.
At the end of May 1885 Pierpont and Vanderbilt took the same steamer from London to New York. Junius told Vanderbilt just before they sailed that he expected a solution to the West Shore business “not very far in the future,” and was “glad therefore that you and Pierpont … will have an opportunity for exchanging views” on the Atlantic. Pierpont liked crossing the ocean with Vanderbilt, he told Louisa, because ship captains tried to show the old Commodore’s son “how fast they can go.” Still, between Liverpool and New York he had time to point out that Vanderbilt’s reputation was on the line along with his own—investors who had bought New York Central shares at 131 on the strength of Vanderbilt-Morgan representations had seen the price plummet to 82, thanks to this “absurd” struggle. Massive sell-offs were damaging the railroad and the U.S. economy. By the time the ship reached New York, Morgan had prevailed on Vanderbilt to negotiate. In June he and Coster went to see the officers of the Pennsylvania.
Morgan arranged for the Pennsylvania’s president and vice president, George B. Roberts and Frank Thomson, to meet with the New York Central’s newly elected president, Chauncey Depew (formerly Vanderbilt’s lawyer), on board Corsair. At ten o’clock one hot July morning, Morgan and Depew picked up Roberts and Thomson at the Jersey City pier and headed north. They stayed out all day, cruising up the Hudson to Garrison, back down to Sandy Hook, then north again, while Depew—speaking for himself, Vanderbilt, and Morgan—appealed for an end to the “ruinous” competition of parallel building and rate wars.
The big trunk lines had far more to gain from acting in concert than from continuing warfare, Depew pointed out, urging his rivals to join in a “community of interest” that would divide their territories into discrete “spheres of influence.” As a first step, he suggested that the two roads exchange their troublesome properties, the West Shore and the unfinished South Penn.
Morgan, smoking his signature Cuban cigars, made the bankers’ case for cooperation: if the flow of foreign capital to U.S. railroads were to continue, investors had to be protected from the waste and wild market fluctuations brought on by this kind of fight. No agreements—no more money.
The Corsair’s crew served lunch. The discussion went on. The day waned. Thomson came around, but Roberts seemed willing to go bankrupt in order to punish his rivals. He held out in silence until the yacht pulled alongside the Jersey City pier at 7:00 P.M. Finally, as he stepped onto the dock, he shook Morgan’s hand and said, “I will agree to your plan and do my part.”
The Drexel, Morgan bankers immediately executed the Corsair agreement. They set up a committee to buy the West Shore for $24 million and lease it in perpetuity to the New York Central. Since the Pennsylvania could not purchase the South Penn directly under the state’s antimonopoly law, Morgan bought a 60 percent interest in the $5.6 million road, then traded it to the Pennsylvania for the bonds of another line.
Wall Street hailed the West Shore agreement as a first step toward lasting peace in the railroad wars and Morgan as its architect. “To railroads, least of all, would our people like to see applied the principle of the survival of the fittest,” declared the Commercial and Financial Chronicle. “Mr. Morgan conceived the first [peaceable] settlement which was the embryo of them all.”
Among those not cheering were Andrew Carnegie and the thousands of other shippers who objected to the prices the railroads could charge once competition was out of the way.‡
William H. Vanderbilt died in 1885, leaving most of his $200 million fortune to his sons, Cornelius II and William K., and $10 million each to his six remaining children. Cornelius took over the family interest in the New York Central. He was the only Vanderbilt the Morgans actually liked, and Pierpont worked easily with him and Chauncey Depew on New York Central affairs.
In addition to public acclaim and the satisfaction of ending the Pennsylvania–New York Central standoff (at least for the moment), the Corsair agreement brought Morgan a new lawyer. Since Fanny’s father had just died, her brother, Charles Edward Tracy, did the legal work on the West Shore deal. The Vanderbilts’ attorney was Francis Lynde Stetson, who handled the negotiations so effectively that Morgan began to solicit his professional advice. Drexel, Morgan retained Charles E. Tracy for a year, but early in 1887—possibly at Morgan’s urging—the Stetson law firm hired him and changed its name to Bangs, Stetson, Tracy, & MacVeagh. Charles Tracy soon moved to the sidelines as counsel to the bank. Morgan worked almost exclusively with Stetson.
A prominent Democrat, Frank Stetson had helped prosecute Boss Tweed in the seventies as assistant to New York City’s corporation counsel, William C. Whitney. He had supported Samuel Tilden’s failed bid for the presidency in 1876 and Grover Cleveland’s successful run in 1884. Offered a cabinet position in the Cleveland administration, he declined (his friend Whitney was appointed Secretary of the Navy), but served as an unofficial adviser to the President. Stetson played a leading role in the development of modern corporate law over the next thirty-five years, and became known as Morgan’s Attorney General.
Junius in the early 1860s had set out to build an international network of banks based, like Rothschilds’ and Barings’, on family ties. Things had not worked out that way. Pierpont found fault with most of his early associates, and in the seventies and eighties had begun to build a different kind of dynasty based on merit. Of all the men assigned to work with him, he retained only Tony Drexel and Walter Burns. At the end of 1885, when Fabbri retired to Italy, Coster took his place. In selecting Frank Stetson rather than Charles Tracy, Pierpont again rated professional ability over family connections. His closest friends in the eighties were Lanier and Bowdoin—good, not brilliant bankers—but the men whose jud
gment he relied on were Coster and Stetson.
The exigencies of railroad wars did not prevent Morgan from taking his annual trip to Europe each spring. In May of 1885—shortly before he sailed home with William H. Vanderbilt—Louisa reported to Fanny from Venice that “Papa enjoyed it all, except the churches. He would sit outside & smoke, holding converse (in very broken Italian) with gondoliers and beggars,” while the rest of the party “explored the interior of some ‘very fine’ church with praiseworthy fidelity, assisted by our fiery red copy of Baedeker.”
In 1886 Pierpont and Junius celebrated their April birthdays in Rome. Egisto Fabbri came down from Florence to see them. Alice Mason was probably there as well. Louisa told Fanny that Junius wanted to stay in Rome partly on his son’s account, “as here there is no office for him to go to, & he does rest.” Suffering with a toothache, her Papa was not doing much sightseeing, “and not even much shopping,” although he found “one or two beautiful pieces of embroidery” and several Greek terra-cotta figures.
After an American dentist took care of the troublesome tooth, the Morgans spent their days touring the city, dined out every night, and called on the William Wetmore Storys. Louisa admired the expatriate sculptor’s colossal statue of America Victrix, which was about to be cast in bronze and sent to San Francisco, but found the work of his son, Waldo, far more “delicate and … poetical, if not so strong and grand. People say that the Father has talent, the son, genius.” Her father bought three of Waldo’s sculptures for £600: two heads—of a gladiator and Honorius, the last emperor of Rome—and a seated figure called Phryne holding a silver Cupid. Louisa told Fanny: “I think it quite exquisite and am sure you will admire it—especially as she has plenty of clothes on!”