Morgan assumed the task of bringing the hostilities to an end. Planning his voyage home to New York from his annual excursion to London in May 1885, he contrived to book the same steamer as Vanderbilt, then used their week in close quarters to hector Vanderbilt into reaching a deal. After they landed in New York, the final settlement was cemented on Morgan’s yacht, Corsair, as it steamed up and down the Hudson. It was not a relaxing cruise. The July weather was sweltering even into the night. George Roberts, the Pennsylvania’s president, was determined to punish the New York Central for its earlier incursion into his territory. (“Mr. Roberts was not an easy man to deal with,” recalled Satterlee, who found him to be, like Vanderbilt, “a product of the times [who] lived in a world of railroad strife and was accustomed to giving and receiving hard blows.”) Morgan, who by then filled out his six-foot frame with two hundred pounds of flesh, watched over the negotiations as a lowering presence, fingering a big black cigar, inserting an occasional sharp interjection when the unruly discussion needed to be put back on course.
Eventually Roberts capitulated not merely to Morgan’s authority as one of the Pennsylvania’s bankers but to the inescapable logic of striking a compromise. Vanderbilt agreed to acquire the West Shore at a reasonable price, and the Pennsylvania to buy the South Pennsylvania from Vanderbilt. Because the Pennsylvania state constitution forbade the Pennsylvania Railroad to acquire a competing line, the nominal purchaser of the South Pennsylvania was J. Pierpont Morgan. The complex transaction gave rise to one of the legendary verbal exchanges of Pierpont’s career, starting with his instruction to Vanderbilt’s legal adviser, one Ashbel Green, to reduce the provisions into legal form. Green presently reported back that he thought the plan could not be executed legally.
“That is not what I asked you,” Morgan barked. “I asked you to tell me how it could be done legally. Come back tomorrow and tell me.”
Green presently proposed an intricate sequence of securities trades in which a Morgan syndicate bought the West Shore and leased it in perpetuity to the New York Central, while Morgan himself bought a 60 percent stake in the South Pennsylvania and traded it to the Pennsylvania for the bonds of another railroad. The multifaceted deal was widely regarded as a signal achievement for Morgan, who used it as a model for ending several other competitive wars vitiating the railroad industry. His formula was reduced to the term “community of interests”—a recognition that competing magnates would secure mutual benefits by rationalizing rates, ending wasteful construction, and exploiting what were, after all, natural monopolies by crafting mutual alliances. Morgan communicated to the road presidents that until they learned to work together, none of them would be able to turn a reliable profit. Consequently, none could hope to raise capital in the European markets, which would invest only in a rationalized industry. Failure to come to terms meant stagnation and eventually extinction.
Morgan was playing with fire, for the public’s growing disenchantment with the concentration of economic power represented by the development of railroad combines would soon produce the Sherman Antitrust Act of 1890, the first US law to declare monopolies illegal (even if it was only patchily enforced in its first decade).
Pierpont himself embodied the very concept of a community of interests. In time he became not only a director of the New York Central, but of the New York, Providence & Boston, which carried passengers from Grand Central Station to South Station in Boston; he was in constant demand for service on railroad boards along the Eastern Seaboard, not seldom because he also was those lines’ banker; and his partnership Drexel, Morgan & Co. was financier to the Pennsylvania.
Pierpont’s goal was to supplant the old pooling arrangements, which were so brittle in their terms and toothless in their enforcement, with “gentlemen’s agreements.” On the surface these seemed even looser than the old pools, for they exchanged the superficial formality of the pools for what Herbert Satterlee described as undertakings resting “solely on the spoken word between executives. . . . The only punishment for disregarding the object of these associations was to place the offending management in a very unfavorable light before other railroad men.” But it would be a mistake to assume that the informality alone worked where formality had failed. The element that was expected to make the gentlemen’s agreements function was a central authority, and that authority was Morgan.
Not everyone was willing to concede him that power. Railroad presidents as a species were accustomed to getting their own way and distinctly unaccustomed to taking orders from others. Jay Gould, for his part, remained under the impression that he was still the most powerful figure in the industry and therefore the man to dictate the terms of peace. In early December he presented Morgan with a roster of proposals to squelch competition, including a five-year ban on construction of parallel lines, all to be binding upon railroad presidents on pain of their being blacklisted for refusal. Gould’s record, however, had won him Morgan’s enduring disdain. According to Satterlee, Morgan was convinced that Gould and his cronies had “made it easy for the self-appointed champions of the people’s rights to build up a public opinion unfriendly to the railroads. . . . [They] had wrecked railroads and disrupted lines that might have grown into systems. . . . Their methods had often made legislatures and courts of law bywords of contempt.” (By contrast, Satterlee judged indulgently, his father-in-law “had the best interests of the public and the railroad employees at heart.”)
Numerous railroad presidents had stated publicly that they would not attend any meeting at which Gould would be present or “join in any arrangement Mr. Gould may propose,” the New York Tribune reported. But Morgan knew he could not avoid including Gould in the railroad confederation he envisioned, since it would be better to have Gould’s roads inside the arrangement than taking shots at it from the outside, so he tendered the buccaneer an invitation to participate. The proposal Morgan eventually put forth would share some features with Gould’s, but it would be made clear that the ideas were Morgan’s, not Gould’s, and that Morgan was driving the train, with Gould merely one passenger among many.
* * *
MORGAN SUMMONED A dozen railroad presidents and their bankers to his sumptuous art-filled mansion at 219 Madison Avenue on December 20, 1888, for the opening stage of his campaign to end the railroad civil wars. The underlying purpose of the meeting was for “the representatives of capital . . . to show the railroad men the whip,” one of Morgan’s confidants later explained. “They intended to convey a very definite impression that further misbehavior would be punished by cutting off the supplies” of capital.
Charles Francis Adams arrived at 9 A.M. to find the railroad men seated grumpily around Morgan’s dining room table, joined by representatives of the banking firms Drexel, Morgan & Co.; Kidder, Peabody; and Brown Brothers. Adams marked Gould as looking “dreadfully sick and worn,” as he recorded in his daily journal. (Gould was, in fact, suffering from the tuberculosis that would kill him three years later.)
From the head of the table, Morgan brusquely informed the railroad men that he had called the meeting “to cause the members of this association to no longer take the law into their own hands when they suspect they have been wronged. . . . This is not elsewhere customary in civilized communities, and no good reason exists why such a practice should continue among railroads.”
The railroad presidents bristled at Morgan’s tone. “I object to this very strong language, which indicates that we, the railroad people, are a set of anarchists,” groused Roberts of the Pennsylvania. He was right to be irked, for none of the overbuilding that provoked the rate cutting could have taken place had not the bankers in the room connived to finance the excess construction.
The railroad leaders were not yet ready to yield a dictatorial role to Morgan, though they had nothing novel to offer. Ransom Reed Cable, the truculent head of the expansion-minded Rock Island line, offered a scheme to fix rates that Adams mentally judged to be “the old story once more—proposing to bind the railro
ads together with a rope of sand.” Cable’s plan, which carried no provision for enforcement, was greeted with “expressions of contempt,” Adams noted. After the meeting adjourned for the day, Adams trudged up Madison Avenue with his old rival Jay Gould. “I told him that it seemed to me to be the merest child’s play for us to be going round and round in this old circle,” he recalled. “We might as well go home and leave events to take their course,” unless the joint arrangement they mapped out would be subject to some “compulsory force which would establish obedience.” Casually, Adams suggested using the very entity that the railroads had worked so hard to render toothless—the Interstate Commerce Commission. To his surprise Gould jumped at the suggestion and even offered to present it personally to the gathering the next day.
The more Adams turned the idea around in his mind, the sounder it seemed. “The railroad situation today is one of simple anarchy,” he reflected. “We need law and order. We resemble nothing so much as a body of Highland clans—each a law unto itself—each jealous of its petty independence, each suspicious of any outside power which could compel obedience. Such a state of affairs . . . cannot—and will not—last. The thing is to back it up. In other words, a railroad Bismarck is needed,” he concluded, using the increasingly common term for a dictatorial authority. Would Morgan be able to exercise the authority needed to bring the rest of the presidents to the same conclusion? “It remains to be seen,” Adams mused.
The next day’s meeting did not start auspiciously. Gould presented the idea of bringing in the ICC, “but in so weak and vague a way that it made no impression,” Adams recalled. Adams took over, and according to his own recollection, finally made the idea take—though not before he delivered some home truths to his colleagues. The industry’s troubles, he told them, “lie in the covetousness, want of good faith, and low moral tone of railroad managers, in the complete absence of any high standard of commercial honor.” The question was whether the railroad bosses were prepared to publicly state that they would violate the precepts of the Interstate Commerce Act “rather than submit to arbitration” by the government regulators. The meeting ended with an agreement to meet again on January 8, and for Morgan in the meantime to interest the ICC commissioners in the plan.
The January 8 session convened in an atmosphere of mutual resentment, for another round of rate cutting had occurred in the interim. Yet improbably—and surely to the amazement of all concerned—the meeting resulted in what appeared to be an enforceable agreement, signed by twenty-two railroads. The ICC agreed to assume the role of arbiter of interline disagreements by convening a board to take testimony when necessary. One ICC member, Aldace Walker, the commission’s only experienced railroad man, resigned to become chairman of what was dubbed the Interstate Commerce Railway Association, an example of the revolving door between government and private service that is generally frowned upon today but was interpreted then as a sign of confidence in the arrangement.
Morgan won universal praise for his role and the agreement itself was hailed as the harbinger of a new age of harmonious cooperation in a major industry. “When the party that furnishes all new money needed, and the party that owns the old money invested, and the party managing the corporation meet, the result means revolution,” gushed the Commercial and Financial Chronicle. The Chronicle was certain that the ICC’s arbitration board would act effectively: “Kickers”—that is, railroad presidents who violated the terms—“will be brought into line or suppressed. . . . With, then, the stockholders of American roads and with the world’s capital as its reserve backing this new institution, there need be no fear of a lack of strength to enforce its decisions.”
Yet Morgan’s compact was doomed to failure as inevitably as the pooling arrangements it supplanted. Within two months of its signing—“barely enough time for the railroad presidents to get back from Morgan’s,” historian Gabriel Kolko reflected—a new rate war erupted in the West. Adams’s own Union Pacific was at its center, in a contest for coastal traffic with Henry Villard’s Northern Pacific. By June, Kolko noted, “the chaotic status quo was restored.”
For more than a year, Morgan struggled to reimpose order. In December 1890 he summoned another clutch of railroad presidents to his town house, emerging with another compact among fifteen railroads and another proclamation that peace was at hand. “Think of it,” Morgan told the press—“all the competitive traffic of the roads west of Chicago and St. Louis placed in the control of about thirty men.” To later generations, power concentrated to this degree would seem scandalous; to Morgan, it made the agreement “as strong as could be desired.” But his optimistic words could scarcely conceal the enmity that had afflicted the presidents’ dealings with one another. It soon transpired that at one point during the negotiations A. B. Stickney, formerly the president and now chairman of the Chicago, St. Louis & Kansas City road, had blurted, “I have the utmost respect for you gentlemen individually, but as railroad presidents I wouldn’t trust you with my watch out of my sight.” Thomas Oakes, the head of the Northern Pacific, snapped in response: “Have you reached that opinion recently, Mr. Stickney, or did you entertain it when you were a president?”
That attempt to conjure up a “community of interest” would fail like all those that came before it and followed afterwards. The chaos among the railroads only grew wilder in the first years of the 1890s, and left the industry utterly unprepared to face what would be the worst crisis in its existence: the Panic of 1893.
* * *
UNLIKE ITS PRECURSOR in 1873, the Panic of 1893 was not primarily triggered by the railroads, though they would be among the most deeply injured enterprises. The immediate cause, instead, was the failure of the most admired of the industrial trusts that had sprung up over the previous decade, the National Cordage Association. The “cordage trust,” which controlled some 90 percent of the rope market in the United States, had been riding high in investors’ esteem as recently as January 1893, when it issued a 100 percent stock dividend, shaving its share price to $70 from $140 to enhance its appeal to Wall Street speculators. (The stock dividend did not change the capitalization of the trust, for it merely doubled the number of shares, which traded at half the previous price—a shareholder who previously owned one share valued at $140 now owned two valued at $70 each.) The collapse of the trust was another example of the ills of monopolization that had prompted Congress to enact the Sherman Antitrust Act in 1890.
The real problem, as was true of many other overgrown trusts of the era, was that the financial condition of the cordage trust was opaque to its investors and even its bankers. Of its directors, only the president and treasurer knew all the facts—specifically, that the trust was hobbled by overproduction, a lack of credit, and the evaporation of its working capital. On May 2, the trust had assured the public that it had $4 million in ready funds. In fact, the cash box held but $100,000.
Businesses dependent on public confidence are the most vulnerable to sudden collapse when the first crack appears in the wall of trust. The end came for Cordage on May 5, when it abruptly announced that it had placed itself in the hands of bankruptcy receivers. “Cordage has collapsed like a bursted meteor,” reported the Commercial and Financial Chronicle the next day, “and the other industrials have all of them shared to a considerable extent in the decline.” Belatedly, the Chronicle rued the lack of transparency of the nation’s biggest industrial concerns. “We know little about ‘Cordage,’” the journal observed. “We know but little also about most of the other industrials; indeed it is because so little is generally known of these properties and prices are consequently so largely speculative that confidence in them has been so grievously disturbed.”
To be sure, the Cordage collapse did not occur in a vacuum. Disquieting currents had been swirling within the American economy for years. One was a persistent conflict over the monetary system. Laborers, farmers, miners, and other producers of commodities, all of whom would benefit from inflation, favored an expansion of the
money supply through the free coinage of silver to supplement gold as the specie backing the US currency. Manufacturers and bankers were on the other side. They demanded adherence to the gold standard, which governed international trade and promoted stable currency values. These were important to bondholders and other investors expecting periodic returns over long periods of time; devaluation of the dollar through an expansion of the money supply could only sap their investments of their worth.
This conflict played out in the presidential election of 1892, particularly in the contrast between Grover Cleveland, seeking his nonconsecutive second term as a gold-standard Democrat, and James Weaver, the candidate of the new Populist Party, which advocated silver coinage. At the time, the silver lobby appeared to be in the ascendance, due to passage of the Sherman Silver Purchase Act of 1890, which mandated limited government purchases of silver. Cleveland balanced his ticket with Adlai Stevenson, a silver-coinage advocate, as his vice presidential running mate, and won a plurality of the popular vote and a decisive electoral-vote majority when the Populists and Republicans split the pro-silver vote. (In a political turnabout, the Populists later would merge with the Democratic Party, which would nominate silver advocate William Jennings Bryan as its presidential candidate in 1896, 1900, and 1908.)
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