Morgan

by Jean Strouse

  The Court’s construction of the Sherman Act in the nineties tended to rule out loose cartel associations and price-fixing agreements, but not large-scale mergers or consolidations. According to the historian Thomas Cochran, the lesson seemed to be that “buying up of rivals and merging them into one big company” was lawful, while “efforts by small companies to control markets by cartels or agreements were illegal.” Ironically, the Court’s proscription of certain kinds of trade restraint under the Sherman law fostered not increased competition but stronger forms of consolidation, culminating in the great merger movement of the late 1890s.

  In the decade that followed the appearance of the first Dow Jones average, made up primarily of railroad stocks, the American investment landscape radically changed. Dow Jones began to publish The Wall Street Journal in July 1889, and when it inaugurated an industrial average in 1896, General Electric was on the list. Though it dropped out twice, in 1898 and 1901, GE is the only one of the original twelve companies that remains in the average one hundred years later.b Its cumulative performance over the century, excluding dividends and adjusted for stock splits, shows a rise of 21,999 percent, compared to the Dow Jones average performance of 10,120 percent. As of May 1997, it was the largest company in the United States, and the first to be valued at more than $200 billion.

  Outside the boardroom, Morgan served as ambassador-at-large for GE. He had helped bring Edison’s light to the attention of European and American capitalists in the early eighties; ten years later he recommended GE bonds to wealthy friends, and in September of 1893, when Boston was about to build a new railroad terminal—the Union (later North) Station—he sent a note to Lucius Tuttle, president of the Boston & Maine.

  “I don’t want favoritism,” he began, with his standard disclaimer about exercising undue influence, but hoped Mr. Tuttle would defer a decision on the electrical contract for the station until they could confer, “as I think that on an impartial examination you will find that the General Electric Company can suit you better than any of its competitors. I should like to feel sure that it got a chance on equal footing with the others. If you will do what you can in this direction I should be much obliged.”

  There was nothing improper in this request—it was the sort of promotional work Morgan did for many of his clients, and no doubt GE would “suit” the new station at least as well as its competitors. Yet the letter came from a uniquely powerful quarter. In the fall of 1893, Morgan had just negotiated peace between Tuttle’s Boston & Maine and its chief regional rival, the New Haven Railroad. This agreement to divide New England rail traffic, north and south, proved more effective than those made between western roads in 1889–90, because this time Morgan had financial control. He was a director of the New Haven, was in the process of reorganizing (yet again) the Philadelphia & Reading, which owned the Boston & Maine, and his bank was financing both roads: he had secured a $2 million loan for the Boston & Maine in 1891, and issued $13 million in New Haven securities in April 1893. When he wrote to Tuttle about the Union Station contract in September 1893, his bank was about to purchase another $6 million of Boston & Maine bonds. Yet in the end, Westinghouse supplied the pneumatic switch and signal system for the new station, and probably its electrical generators as well. The General Electric archives have no record of contracts for this station in the 1890s. Contrary to popular perception, Morgan did not dictate the decisions of his clients, even when he controlled their access to capital.

  For the 1892 election, the Republicans renominated Benjamin Harrison, but replaced Levi Morton with Whitelaw Reid, owner of the New York Tribune. The Democrats called Grover Cleveland back from his New York law practice to run with Adlai E. Stevenson of Illinois, grandfather of the Illinois Democrat who ran for President in the 1950s. Agrarian reformers, having scored significant victories in 1890, put up their own Populist candidate in 1892—General James B. Weaver, on a platform demanding free silver and government ownership of railroads. At the Populist convention in Omaha that July the renowned orator Ignatius Donnelly denounced the corrupt corporate “interests” to thirty minutes of applause. In November the Populists earned a million popular votes—8.5 percent—but Cleveland won the election with 5.5 million (46 percent) to Harrison’s 5.2 (43 percent). He was the only President ever returned to the White House after a term out of office.

  Though Morgan probably voted Republican, he had no objection to Cleveland, who had spent the last four years working with Stetson’s law firm. In March 1893 Harrison returned to Indiana, Morton to New York, and Cleveland to Washington with close friends and colleagues in the Morgan camp.

  The conservative Democrat had just taken the oath of office when a new stock market panic touched off one of the worst depressions in U.S. history: banks failed; factories, mills, and railroads went bankrupt; thousands of people lost jobs; and the price of farm crops, already in long-term decline, fell even further. The Dow Jones twelve-stock railroad average stood at 90 in January 1893; by July it had fallen nearly 30 percent, to 61.94.

  When a friend asked Morgan about General Electric, he replied that the stock had “tumbled so I do not know what to do about executing a discretionary order.” Bullish about the long run—he himself would “not hesitate” to buy GE—he was conservative with other people’s money: “these industrials have so fluctuated, without regard to their dividends, that I am loth to purchase it for another person without a direct order. If you are willing to take the risk, please let me know or if you prefer something that is absolutely sure with half the income.”

  A major factor in the 1893 panic was the Sherman Silver Purchase Act, which had had exactly the effect Morgan and his colleagues feared: as the dollar’s value plummeted in the early nineties, foreigners in a “flight to quality” cashed in American securities and shipped gold home. At the end of 1892, the Commercial and Financial Chronicle had deplored “the lack of confidence which our policy is causing Europe to feel in our financial stability. No more foreign capital comes to the United States and as fast as Europeans can dislodge their holdings in America they take their money away.”

  Treasury officials had tried since 1879 to maintain a $100 million gold reserve, and though there was no legal mandate for that figure, $100 million had become a measure of public confidence in government solvency. Morgan told the managing editor of Harper’s Weekly in February 1893 that repeal of the Silver Act was “essential to the sound financial policy of the government.” In April the Treasury reserve fell below $100 million, and in May the failures of the National Cordage Company and the Philadelphia & Reading Railroad sparked the stock market crash.

  President Cleveland shared Morgan’s view that silver was largely to blame. In August, as banks and businesses across the country failed and gold drained out of the Treasury, he told Congress that the crisis had been brought on largely by the Silver Purchase Act, and urged the legislature not only to repeal the law but to require the government to honor its obligations “in money universally recognized by all civilized countries”—i.e., gold.

  The administration’s clear intent to press for repeal of the Silver Act temporarily slowed the Treasury drain. Congress debated repeal in August, and William Jennings Bryan, the newly elected representative from Nebraska, delivered an eloquent three-hour oration that would echo through the nation’s political debates for years: “On the one side stand the corporate interests of the United States,” Bryan declared, “the moneyed interests, aggregated wealth and capital, imperious, arrogant, compassionless.… On the other side stand an unnumbered throng.… Work-worn and dust-begrimed, they make their mute appeal, and too often find their cry for help beat in vain against the outer walls, while others, less deserving, gain ready access to legislative halls.”

  Bryan notwithstanding, a majority of the House voted to repeal, the Senate followed suit, and at the beginning of November the government rescinded the Silver Purchase Act—to Morgan’s relief and the Populists’ dismay. Still, Europe worried about the U.S. comm
itment to gold. The Treasury drain continued. The lines of a class struggle over the politics of gold had been clearly drawn.

  The panic and crash of 1893 brought major corporations to 23 Wall Street for help. National Cordage, called the “rope trust,” had been using the bank’s international services for years. Reorganized as a holding company after the passage of the antitrust law—a holding company owns enough voting stock in subsidiary companies to control their management and operational policies—Cordage had embarked on an expansion spree that made its stock the most actively traded industrial on Wall Street in the early nineties and the talk of the financial town. When a stock market dip in May of 1893 caused lenders to call in their short-term loans, the overextended “rope trust” failed—hanged itself, mordant humorists said.

  At the time of the failure, Cordage had over $1 million in outstanding credits with J. S. Morgan & Co., and Pierpont helped set up a syndicate to refinance the company with $5 million of first mortgage collateral trust bonds. Drexel, Morgan took a small ($250,000) share. By keeping the company’s mills working, the loan enabled Cordage to repay some of its debt—J. S. Morgan & Co. recouped $1 million in February 1894. Pierpont told his London partners that these “satisfactory” results had come “after the hardest fight we have had in some time.”

  Nonetheless, Cordage failed again in 1895. Its initial default and the depression that followed cast a four-year pall on the market for industrial securities, which reinforced Morgan’s caution. Besides, bankrupt railroads were demanding his time.

  More roads defaulted during the 1890s than at any other time in American history. A year after the panic, 192 lines operating 40,000 miles of road and capitalized at $2.5 billion had fallen into the hands of receivers. By 1898, a third of the nation’s track mileage was in foreclosure, and the impact of these failures on the national economy was catastrophic: a single rail system employed more workers and used more capital than the Post Office or the entire U.S. military service, and the railroads’ bonded debt dwarfed the Treasury’s.

  The repeated failures of Morgan’s efforts to stabilize what was still the country’s most important industry had led him finally to give up on voluntary agreements and negotiated peace. He concluded after 1890 that only tighter forms of consolidation would work, and other experts agreed: John Moody had predicted that protecting investment capital from the “gigantic waste and fraud and duplication” of the American railroad system would require concentration in a “few strong hands,” and Charles Francis Adams had wondered whether Morgan had the force to become a “railroad Bismarck.” As bankruptcy delivered rail properties all over the country into Morgan’s hands, he built huge regional consolidations that definitively answered Adams’s question.

  The technicalities of the bank’s railroad work in the nineties were largely managed by Coster, Stetson, and Samuel Spencer, a special adviser to the firm who had years of experience as vice president of the Baltimore & Ohio and president of the Elgin, Joliet & Eastern. Describing Spencer some years later, The New York Times said, “there was no man in the country so thoroughly well posted on every detail of a railroad from the cost of a car brake to the estimate for a terminal.”

  The first big “Morganization” of the nineties involved a weak agglomeration of roads in the Southeast called the Richmond & West Point Terminal and Warehouse Company, which connected Washington, D.C., to major cities in the South, including Richmond, Atlanta, Birmingham, and New Orleans. The Richmond Terminal had been mismanaged for years by speculators interested mainly in their own profits, and a group of its investors applied to the Morgan bank for rescue in May of 1892. Knowing that the road had been used as “football of speculation,” Morgan refused to take the case unless he had full control. He invited three of the principal stockholders to his office and asked them to surrender their shares. Two agreed, the third did not. According to Jack, William P. Clyde lounged on the partners’ sofa at 23 Wall Street and said, “in a queer drawling tone with considerable smacking of the lips”—“Well, Mr. Morgan, I’ve bought the Richmond Terminal at 7 or 8 and sold it at 15 twice in the last few years—and see no reason why I should not do it again.”

  Morgan showed his visitors out. They shopped the property around until the onset of the 1893 panic brought them back to the Morgan bank. This time, Clyde agreed to surrender his shares. Coster drew up a radical plan for a new company, the Southern Railway, to take over the Richmond Terminal and its profitable subsidiaries but not the less successful roads. He was able to dictate terms because the Richmond Terminal had no choice—it could either work with Morgan’s experts or fail. To cut down on fixed charges, the bankers refinanced some of the road’s debt at lower rates, and replaced the rest with preferred stock; to raise new capital for the floating debt and future expansion, they assessed stockholders for cash and issued new securities.

  Years of experience with bankrupt railroads had convinced Morgan that high fixed costs were a greater danger than large capitalization, and the hallmark of his reorganizations came to be the reduction of obligatory charges to little more than a road’s minimum earning capacity; with less debt to service, the company would be able to avoid bankruptcy even in stringent times. Morganization tended to shift the balance of a firm’s securities from debt to equity—from mortgage bonds requiring annual interest payments to stocks that depended on company earnings. To persuade investors to trade their relatively safe, high-interest notes for riskier equity instruments, the bankers relied heavily on preferred stock, which took precedence over common: companies had to pay dividends on the preferred stock first, at a specified rate.c

  The financial restructuring of the Richmond Terminal was just the beginning. The bankers put all the new company’s stock into a voting trust headed by Morgan, George Baker, and Charles Lanier, which would oversee the Southern Railway’s management and balance sheets for five years, or until the preferred shares began paying an annual 5 percent dividend. In its first major decision, the trust appointed Samuel Spencer president of the company.

  With the ongoing help of the Morgan bank, Spencer took over a badly structured, unprofitable consortium of roads and turned it into a smoothly functioning regional system. The Southern Railway added new track miles, bought back some of the roads it had sold, doubled its rolling stock, and spent millions on other improvements. Earnings over the following decade tripled.

  Almost everyone connected with the Southern Railway did well. Shippers and passengers got continuous, efficient service; bondholders earned regular interest; the reorganization syndicate took payment in $750,000 of Southern common stock (5 percent of the first $15 million issued), and Drexel, Morgan earned additional management and underwriting fees.d

  That the syndicate took its fee in common stock was a measure of Morgan’s confidence in the railway’s long-term profitability. He would be charged in the coming decade with overcapitalization, or “watering” his companies’ stock. In fact he was basing his financings on future earning capacity rather than on the traditional measure of asset value, and in most cases the “water” in the stock was eventually absorbed. By taking its own payment in common stock, the syndicate assumed the highest level of risk.

  Contemporary observers called the Richmond Terminal rescue “one of the noteworthy achievements of American railroad history,” and predicted a “new era” for transportation in the South. The Morgan bank emerged from its twenty months of work with a secure hold on all future Southern Railway business, control of the system’s management, and enhanced prestige. The combination of Morgan’s reputation and his strong affiliate firms in Europe enabled him to sell the railroad’s bonds even at the height of the 1890s depression.

  Other major roads on which the bank performed reconstructive surgery in the mid-nineties included the long-troubled Erie, the Philadelphia & Reading, and the Northern Pacific. Morgan had rescued the latter two lines before, and these repeat failures, after the expiration of banker-dominated voting trusts, strengthened his commitment
to vigilant, protracted control.

  The New York, Lake Erie & Western—once run by Jay Gould, who died of tuberculosis in December 1892—declared its fourth bankruptcy the following July. The Morgan firms had sold millions of dollars’ worth of Erie securities, and proposed a draconian reorganization that would reduce debt, raise cash, and consolidate the line’s subsidiary roads into one tightly managed system. It took two years and another bankruptcy, but in November 1895 the bankers (chiefly Coster) brought the main line and its affiliates into a fully integrated network called the Erie Railroad Company—two thousand miles of track running through New York, Pennsylvania, Ohio, Indiana, and Illinois. To fund the plan three months before it went into effect, Morgan sold $25 million of new Erie bonds through syndicates in London and New York: frankness about the road’s condition, and capitalization based on realistic projections of earnings, helped assuage investor anxiety. The syndicates sold the entire issue in a month—an astonishing feat in a depression, and “an impressive show of confidence in Morgan’s business judgment and financial strength,” since no one trusted the Erie.

  For two years of work, Morgan charged the road $500,000, payable in $5 shares of common stock, plus expenses. His New York and London houses split the fee, each dividing its half with the members of its syndicate. Walter Burns wanted payment in cash, but Morgan insisted on the material and moral value of equity: “We have always taken reimbursement in common stock,” he cabled—“first, because think it desirable, more valuable in itself,” and also because it publicly demonstrated “our belief in property when reorganized.” He offered to buy London’s allotment for $250,000 if Burns held out for cash, but his brother-in-law accepted the shares. In July, at the time of this exchange, the stock was trading at 8 in New York, its low for the year. By the end of December, when both syndicates closed their accounts, the price was 15¾.