by Jean Strouse
At 23 Wall Street, almost before the ink on the West Shore contracts was dry, Morgan took on another kind of fight. He had just induced bitter rivals to give up a “ruinous” struggle in mutual self-interest. Once a road was in financial ruins, however, he had more authority to impose his rationalizing will.
The Philadelphia & Reading Railroad, an anthracite coal line in eastern Pennsylvania, had gone into receivership in 1880. Two years later its president, Franklin B. Gowen, asked J. S. Morgan & Co. to reorganize the company. Tony Drexel wanted nothing to do with it, since Gowen’s financial reports had been “systematically unreliable,” and the Reading’s bonds were “not the kind I would care to buy or recommend.”§ If Junius decided to rescue this road, Drexel advised, he should control the entire transaction himself.
In the end, Pierpont rescued the Reading. The road’s managers applied to Drexel, Morgan for reorganization right after the Corsair agreement in 1885, and the junior Morgan had his London affiliates buy $1 million of Reading general mortgage bonds to assure control. Then he issued $20 million in new bonds, which he sold through a syndicate, and took charge of the company’s finances in what would become a pattern for future Morganizations.
Led by Coster, a team of men examined every aspect of the railroad’s operation from the servicing of debt, maintenance and running costs, and expenses and earnings on coal properties, to rents on leased feeder lines. Next, the bankers assessed stockholders for cash to fund the short-term debt and supply the company with new working capital. Over time they cut the road’s fixed costs in half—from $14 million to less than $6.5 million—by reducing its bonded debt and increasing its capital stock. They also created a reserve fund for expansion, and based the new capitalization on estimated minimum earning capacity so that even in stringent times the road should be able to meet its obligations.
To safeguard these measures, Drexel, Morgan refused to give responsibility for the reorganized company back to the men who had run it into default. They appointed a three-man management committee and a five-year voting trust. The titular head of the management committee was J. Lowber Welsh, a Philadelphia banker long associated with the Reading; the operative head was Pierpont Morgan, who also chaired the voting trust. Made up of Morgan partners and Morgan-sanctioned railroad men (including Welsh), the voting trust issued certificates to shareholders in exchange for the company’s common stock, which was registered in the names of the five trustees. For the next half decade the trustees would control the company, actively monitoring the railroad’s management, finances, and administrative reforms.
At the news of a Morgan “rescue,” American and European investors bought the Reading’s new bonds and bid the stock price up. Pierpont cabled Junius in January 1886 that if everything proceeded as he hoped, this reorganization would be “scarcely second to W. Shore.” His management committee negotiated agreements between the Reading and the region’s dominant carrier, the Pennsylvania, to maintain rates and divide up traffic. It also brought the Pennsylvania into an anthracite coal pool which proposed to limit production and maintain coal-price minimums—quite an achievement, Pierpont reported to Junius, since the trunk line had never agreed to take part in this kind of cartel before.
Morgan ran the Reading management committee for two years and headed the voting trust for five. His biggest problem proved to be exactly the one Tony Drexel had warned Junius about: the “unreliable” Franklin B. Gowen. In March 1886 Pierpont brought into the bond syndicate Austin Corbin, an old friend of Junius’s whom Gowen seemed to trust.‖ “We ourselves appreciate importance Corbin’s alliance also his influence with Gowen,” he cabled Walter Burns, “at same time doubt his or anybody’s ability to control FBG.”
Six months later, nobody had been able to control FBG, and the bankers decided he had to go. Morgan spent all day negotiating with Gowen’s agents on September 17, 1886, and by early evening he had the resignation he wanted.
His wife was away in England with Anne, and his elder daughters were giving a ball at Cragston that night for West Point cadets. Pierpont had told the girls he could not possibly get to Highland Falls in time for the party, but he managed to catch a train right after signing Gowen’s termination papers. He reached the house minutes before the guests were due, and his son helped sneak him upstairs in order to surprise Louisa and Juliet. “I created quite a sensation when after having slipped up to my room unperceived and donned my dress coat … I walked into the room quite unexpectedly,” he reported to Fanny. The ball went off with “great éclat—girls in powdered hair—officers in full uniform—they kept it up until midnight and all seemed to have a good time.” Louisa added, “The best part of the evening was Papa’s coming.”
Jack told his mother, “Papa is simply triumphant about this Reading business,” and a week later, “I have never seen him in such good spirits and so bright and well at this time of the year.”
With Gowen out of the way, Morgan installed Corbin as president of the Reading, and two years later congratulated him on accomplishing the “end we both had so much at heart.” They had resuscitated the bankrupt company, let the world know it had new, capable management—under the reassuring supervision of the Morgan bank—sold its securities in foreign and domestic markets, and turned a healthy profit. Drexel, Morgan & Co. earned $1 million on the sale of new bonds (5 percent of the $20 million total), 6 percent on additional advances, and a $100,000 commission for the management committee. The London firm saw additional gains on the $1 million of general mortgage bonds it had bought to ensure control.
Pierpont considered restoring the confidence of foreign investors the most important part of the business. He concluded to Corbin: “you have brought to the support of your Company a European alliance which I am sure you will find, at all times in the future, prepared to sustain you in the wise development of the property entrusted to your care.” Once again he had moved the right man into a difficult job. Gowen committed suicide in a Washington hotel room at the end of 1889, “for no apparent reason,” according to the Dictionary of American Biography.
Tight supervisory control was proving far more effective at promoting the “wise development” of railroad properties than any other means the Morgans had tried. In the crisis stage of the Reading reorganization, Pierpont did not hesitate to take charge of the company’s management committee and have it report to him as voting trustee; he also secured careful regulation for the future by appointing people he trusted to positions of authority. Once the emergency passed, however, he tried to avoid obvious conflicts of interest. Late in 1887 he vetoed a suggestion that Reading trustee J. Lowber Welsh be elected to the road’s board of directors. Serving in that double capacity would be a clear breach of duty, he told Welsh: “I cannot agree that (consistently with a proper interpretation of the Trust) the Voting Trustees can or should vote themselves in as Directors. How can they fairly judge of the wisdom or policy of the management if they are in advance committed to its action by the presence of its members or some of them in the Board of Directors?” In any case, with Corbin in charge of the road, he did not need Welsh on the board.
Wall Street praised the Reading reorganization as the salvation of the nation’s railroads and economic future, but the most significant praise came from London. At the end of December 1887 Junius wrote to “heartily congratulate” his son on the success of the Reading rescue—“a success of which you may well be proud, and of which I am proud for you.”
He could not leave it at that. This inexhaustible well of advice urged his fifty-year-old son to “rest upon your oars” and refuse all reorganizations not “of a character as important as those you have hitherto had.” Then, mixing metaphors, “I would hold off & let the ‘small fry’ go to some other Doctor.” Speaking of doctors, Junius went on: “But beyond & above all this is the question of your health.” In the past it had been Pierpont who worried about taxing his system with too much work and bringing on nervous collapse. Now it was Junius: “No body, however
strong & well he may be can stand such a strain upon his physical & mental powers as you have had the last two years without paying, sooner or later, the penalty unless he gives those powers a real rest & gives it to them in season – do I beseech of you give heed to this advice.”
Pierpont ignored it. He was worn-out by his exacting work, and complained of headaches, fevers, and heavy colds. (Leaving for Europe one spring, he slept ten hours a night crossing the Atlantic and took morning and afternoon naps.) Still, he did not break down. No longer an apprentice, he was exactly where he had always wanted to be—at the center of a drama he found as compelling as anything in his life. Moving out from under his father’s heavy thumb and serving as financial “doctor” to the largest business enterprise in the world brought about a marked improvement in his health.
Again, not everyone admired his work. Editorials in the New York Sun denounced the coal road consolidation as arrant price-fixing, and mocked Morgan’s assurance that it would promote “peace and fraternity.” The Times praised the Reading rescue but worried about monopoly power over traffic rates and coal prices, and wondered whether the arteries of public transport ought to be controlled by private bankers—questions that would shadow Pierpont Morgan for the rest of his life.
Morgan’s relations with New York’s major newspapers in the 1880s were for the most part cordial. He moved in the same social circles as Whitelaw Reid, the publisher of the Tribune, and Charles A. Dana, the owner-editor of the Sun. He assumed these men would respect his expertise, and when the Sun assailed the Reading reorganization in February 1886, he sent a note to “My dear Mr. Dana,” explaining: “I am not in the habit of questioning anything that may appear in the newspapers, for I generally find them as a whole fair on any question of financial importance.” The recent articles, however, had been “so unfair that I cannot but feel they found their way into the paper without your knowledge.” Offering to discuss the matter in person, he asked the editor to excuse his frankness, but thought it “better not to have a transaction of such importance presented unfairly to the public in its inception.”
Criticism from newspapers apparently did not lead him to the conclusion drawn by A. J. Liebling decades later—that the only guarantee of a free press is owning a press—for he did not leap at a chance to buy New York’s Evening Post and The Nation when they were offered to him in 1886. Founded by Alexander Hamilton and edited for years by William Cullen Bryant, the Post had been owned by Henry Villard since 1881. Villard bought The Nation that year as well, in order to hire its renowned editor, Edwin Lawrence Godkin, and began publishing it as a weekly supplement to the Post.
The Anglo-Irish Godkin was a reformist Republican who campaigned in print against silver currency, boss politics, and municipal corruption. His crusades led one reader to reflect on New York’s infamous morals with a shrug: “What can you expect of a city in which every morning the Sun makes vice attractive, and every night the Post makes virtue odious?” For all the Post’s virtuous stands, there were no clearer lines of ethical demarcation between journalism and politics in the 1880s than between business and politics. Godkin helped lead the Mugwump support of Grover Cleveland, and after the election he lobbied the administration about appointments and policies, suggesting not very subtly that the Post would give full coverage to whatever trouble might result if the President did not take his advice.
Godkin tried to gain financial control of the Post after Villard’s nervous breakdown, and asked several of his wealthy friends, including Morgan, for help. He made his case to Morgan in the spring of 1886. The banker replied that July: “I am not quite prepared to say that there is no use in again discussing the subject we talked about before I sailed for Europe. It depends in a great measure upon the magnitude of the transaction.”
In September, Godkin told a friend that “Pierpont Morgan seems at present disposed to behave handsomely, but this is strictly confidential. The greatest difficulty with him is the fear of having it known. He thinks it might bother him in financial circles.”
Owning a leading New York newspaper would no doubt have “bothered” Morgan in political and journalistic circles as well—as it was, critics accused Godkin of editing a “railroad organ” for Villard—but nothing came of these discussions. When Villard returned from Germany in September of 1886, he was furious to learn of his editor’s discussions with Morgan. Still arguing over the incident several years later, Godkin protested to Villard that “no money would have induced me to ‘serve under’ Pierpont Morgan or anyone else. The proposed plan of purchase involved no such risk.”
Although their joint newspaper venture did not materialize, Morgan continued to support Godkin with personal loans. After the editor’s death in 1902, he helped endow a fund at Harvard for an annual E. L. Godkin Lecture on “The Essentials of Free Government and the Duties of the Citizen.”
Putting all his professional energies into stabilizing railroad finance and maintaining the flow of investment capital from Europe, Morgan did not pay much attention to public hostility toward the railroads or to the growing discontent of the American worker. He had his eye on the country’s long-term economic future. To the extent that he took the class conflicts and social problems of the present into account, he delegated them to Dr. Rainsford.
He left no record of his response to the labor militance of the 1870s—the troubles at the anthracite coal mines that led to the execution of Molly Maguires, or the great railroad strikes of 1877. In the wake of these episodes, the Knights of Labor, a national federation of unions led by Terence V. Powderly, resolved to renounce violence and negotiate for higher wages, shorter hours, and better working conditions through collective bargaining, but when peaceful tactics failed during the 1884–85 depression, the Knights resorted to strikes: successful actions against the Union Pacific and Missouri Pacific railroads brought them national respect and new members. Then on May 1, 1886, radical anarchists in Chicago called for a general strike. Chicago police attacked the strikers at the McCormick farm-equipment plant on May 3, and four people were killed. The next day someone threw a bomb into the crowd at a protest demonstration in Haymarket Square, and the police opened fire; by the time the battle was over, fifty people had been wounded and ten killed, including six policemen.
The Haymarket affair sharply divided the country. A jury convicted eight (mostly foreign-born) anarchists of conspiracy to commit murder, and sentenced seven of them to death. People sympathetic to the strike thought the verdicts draconian, but many Americans feared violence and socialism more than the police. Membership in the Knights fell from 700,000 in 1886 to less than 100,000 by 1890. The American Federation of Labor, a loose association of trade unions organized in 1886, took its place. Led by Samuel Gompers, the AFL repudiated radical tactics, aiming to improve wages and working conditions through “pure and simple unionism.” Starting with 140,000 members, it grew to a million by 1900.
While Morgan worked on peace treaties and bankruptcy reorganizations in the 1880s, the railroad industry was imposing other kinds of order on itself—practical measures that increased efficiency and brought costs down. The problem of calculating the time across three thousand miles added to the complications of transcontinental shipping: Illinois had twenty-seven incremental measures of time, and Wisconsin thirty-eight, until the American Railway Association in 1883 divided the country into four temporal zones, shifting from “God’s time” to “Vanderbilt’s time.” Three years later the roads settled on a national standard track gauge of 4 feet 8½ inches, which meant that they no longer had to transfer freight to new cars at each new stretch of track. Furthermore, steel rails were replacing iron, and better signals, brakes, and couplers were improving safety.
Steadily decreasing transport costs combined with intense competition for traffic and an overall decline in prices to bring passenger rates down 50 percent between 1850 and 1900. Freight charges fell even further: railroad freight revenue went from 1.88¢ per ton mile in 1870 to .73¢ by 1900. These
declining revenues heightened the competition Morgan was trying to control, and the railroad managers’ ad hoc attempts to deal with the problem—especially price-fixing pools, secret rebates, and high rates on short routes where they had monopoly control—met with escalating opposition from the farmers and other shippers who wanted more competition among carriers rather than less.
Huge-volume producers such as Rockefeller and Carnegie could dictate special accommodations or buy railroads of their own. Shippers who did not have that kind of market power tried to get Grange associations and state legislatures to protect them.
Across the country throughout the eighties, from very different perspectives, the consumers and the managers of railroad services were deciding that the chaotic national transportation system needed some kind of external control. In February 1887 large majorities in both houses of Congress passed an Interstate Commerce Act, which President Cleveland signed into law. It forbade railroads to discriminate among shippers, required them to publish schedules of fares, outlawed rebates, and prohibited price-fixing and traffic-allocating pools; it also established a five-member commission to determine “just and reasonable” rates.
Some railroad managers, including Chauncey Depew at the New York Central and Charles Francis Adams, Jr., now president of the Union Pacific, hoped the new law would succeed at preventing rate wars where the roads themselves had failed. Staunch conservatives regarded it with contempt. The ardently pro-business Senator Nelson W. Aldrich of Rhode Island called the act “a delusion and a sham … an empty menace to the great interests, made to answer the clamor of the ignorant and the unreasoning.”
Junius Morgan denounced the law from London as “a disturbing cause … imposed by the National Will, a case of force majeure.” Force majeure refers to unexpected or uncontrollable events such as hurricanes and earthquakes (“acts of God”)—which apparently to Junius included acts of Congress. Pierpont did not think the government could solve the railroads’ problems—he believed more in banker control than political intervention—but once the law passed, he set out to work with it. He had marginally more faith in Washington than in state legislatures that were openly hostile to the railroads and the trusts.