The consequence of silver coinage for the United States proved Gresham’s law, the economic principle that “bad money drives good money out of circulation”—that is, people will hoard good money (in this instance, gold) and use debased currency to settle accounts wherever possible. Because only gold, not silver, was accepted by foreign creditors in settlement of international trade, gold began to flow out of the United States at ever-increasing volumes. Silver became the preferred settlement currency only for domestic transactions. A loss of confidence abroad in the stability of the US economy and a slowdown in economic activity were the harvest.
Benjamin Harrison, the Republican who occupied the White House between Cleveland’s two terms, tried to put the best face on a faltering economy. “There never has been a time in our history when work was so abundant or when wages were as high, whether measured by the currency in which they are paid or by their power to supply the necessaries and comforts of life,” Harrison said in his final annual message to Congress on December 6, 1892. “If any are discontented with their state here, if any believe that wages or prices, the returns for honest toil, are inadequate, they should not fail to remember that there is no other country in the world where the conditions that seem to them hard would not be accepted as highly prosperous.”
Harrison put in a plug for the tariffs he had imposed: “I believe that the protective system . . . has been a mighty instrument for the development of our national wealth and a most powerful agency in protecting the homes of our workingmen from the invasion of want.”
But matters worsened after Cleveland began his second term. In the panic year of 1893, more than 640 banks failed—5 percent of all the banks in the United States—and fifteen thousand businesses went bankrupt. Of the nation’s nearly 178,000 miles of railroad track, roughly one-fifth were owned by railroads in receivership.
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JUST AS THE panic struck that summer, Morgan allowed himself to be dragged into another railroad rescue. This time the object was that perennial damsel in distress, the Erie, still wearing the scarlet letter pinned on its finances by Drew, Vanderbilt, Gould, and Fisk. The inevitable bankruptcy occurred in mid-1893. Morgan was tasked with the reorganization. The work would be notable not merely as a step in the evolution of Morganization—but as the occasion for a second clash of wills between Morgan and Edward Harriman.
Morgan’s plan laid most of the burden of the restructuring on holders of the Erie’s second-mortgage bonds, while protecting its shareholders from any sacrifice. This struck many observers as unjust on its face, since shareholders normally were last in line among a bankrupt enterprise’s investors. Among the holders of second-mortgage bonds was Harriman, who commuted on the Erie to New York City from his estate at Arden, New York. He obligingly stepped up as a spokesman for the objecting bondholders. In a series of open letters, the publication of which Harriman orchestrated, the creditors attacked Morgan’s plan as “unjust” and, more to the point, financially imprudent, since it would do nothing to reduce the Erie’s fixed charges—the real cause of the bankruptcy.
Morgan bulled through his reorganization plan at the Erie shareholders’ meeting that March. But he did not reckon with Harriman, who formed his own committee and filed a lawsuit to block the plan. (This episode gave rise to one of the more persistent, if fanciful, anecdotes about Harriman. It was said that he had visited Morgan’s offices to present his objections to the reorganization plan in person. When asked by Morgan whom he represented, he snapped, “Myself!” The journalist who appears to be the first to retail this story, Edwin Lefèvre, acknowledged in his article that “it may not be true,” but that as “characteristic of Harriman” it was plausible enough to be published.) When the dispute came to court, Harriman was dealt a defeat by the financial establishment: A New York judge ruled that, since holders of $31 million of the $38 million in second-mortgage bonds had assented to the plan and Harriman owned a bare $40,000, “the court should not interfere.”
Harriman’s last-ditch effort accomplished little beyond intensifying Morgan’s animosity. “Harriman always wanted to get terms which were a little better than other people’s,” remarked Satterlee (though Morgan himself was hardly above extracting the best terms possible in his own transactions). What truly irked Morgan was that Harriman “followed his usual tactics of retaining counsel and fighting in court,” Satterlee continued. “But he was unsuccessful in the end.”
That might have been true tactically, but subsequent events showed that Harriman had been absolutely correct in his assessment of the plan’s risks. Within a year, the Erie defaulted on the interest payments due on the reorganization securities, just as Harriman had forecast. Morgan was forced to put through a second reorganization plan that finally reduced the Erie’s fixed-charge burden so it could profit from the economic recovery of the final few years of the nineteenth century.
Morgan may have communicated his distaste for Harriman to the managers of the Erie. Soon after this second skirmish, Harriman sought a routine courtesy from the Erie typically offered by railroads to executives of other lines, such as the Illinois Central. One day Harriman missed the Erie local he had planned to take from New York to the trotting races at Goshen, about twenty miles away. He phoned the Erie to ask if its Chicago Express would make an unscheduled stop in Goshen to let him off. This time he was flatly refused. Still, since he knew that the westbound Chicago Express could be flagged to pick up any passenger for boarding along the way, he wired a friend in Goshen to buy a ticket to Chicago. When the train stopped in Goshen to pick up the phantom passenger, Harriman hopped off.
But the Erie contretemps, like the earlier confrontation over the Dubuque & Sioux City, was only a prelude to the struggles to come.
Harriman was as yet little known to the public as a railroad leader and little respected in Morgan’s elite circle. That was about to change. What would finally bring Harriman to prominence was the railroad that Morgan and his fellows still dismissed as “two streaks of rust”—the Union Pacific. Jay Gould, in one final act of destructiveness, had provided Harriman with the opening.
11
Savior of the Union Pacific
FOR CHARLES FRANCISADAMS, the reemergence of Jay Gould as a suitor for the Union Pacific was the last straw. The aging buccaneer had shrouded his resurgent financial interest in the railroad in misdirection; to some newspapers he disavowed any interest in regaining control of the road while orchestrating attacks on Adams’s management through others. Adams detected undercurrents swirling against him, but not until the very end did he realize they had been set in motion by Gould.
Starting in early 1890, Adams would recall,
I was receiving assaults from all quarters of the West, from a hand which I could not see, and could not understand. There would be something published in Chicago, and then copied in the East, attacking our credit, and then there would be an attack upon us in some Salt Lake City paper, or at Portland, Oregon, and the ball would move around the country to hit us in the back. I thought it was some attack from our rivals in the railroad business. I even suspected the Vanderbilts.
As late as November 11 Adams assured the Boston Herald that rumors of Gould’s interest in the UP were nothing but “a revival of the old story that was put in circulation some five or six years ago.” He said he did not “know anything about it,” and that acquiring control “would be a task of enormous proportions even for Gould.”
That very day, however, Gould had already secured control and begun to inform the world of his intention to sack Adams. “Under his direction,” Gould was quoted in the New York Times, “the Union Pacific, more than any other railroad in the West, has disturbed and upset harmony, knocked down rates, and forced the handling of business without profit.” He revealed that his backers included the Rockefeller family and other long-term shareholders, who “invited us to assume the control, direction, and management of the property. We accepted.” His comments to one reporter explaining his reemergenc
e dripped with faux sentimentality: “There is nothing strange or mysterious about it. I knew [the railroad] very intimately when it was a child, and I have merely returned to my first love.”
Just days after scoffing at the very idea that Gould could be reestablishing his control of the Union Pacific, Adams showed up at Gould’s downtown office to capitulate. In his autobiography he described the episode as his having been “ejected by Jay Gould from the presidency of the Union Pacific,” but he acknowledged his relief. “In the course of my railroad experience,” he would recount bitterly, “I made no friends . . . ; nor among those I met was there any man whose acquaintance I valued. They were a coarse, realistic, bargaining crowd.”
It was barely two years since Adams and Gould had sat down with a dozen other railroad presidents and bankers at J. Pierpont Morgan’s town house to craft an industrywide peace plan. Clearly, peace was more distant than ever. But that was not Gould’s fault—not solely, at least.
Gould was not entirely wrong about Adams. The sad truth was that despite the ambitions Adams had brought to his service as Union Pacific president, the railroad was in worse shape after six years of his stewardship than when he took office. The decline was not all his fault: Freight fees dropped sharply in the last years of the 1880s because of falling commodity prices—a harbinger of the dreadful crash to come. Meanwhile, competition for transcontinental business had steadily increased.
The lack of progress on settling the road’s looming government debt was the fault of a recalcitrant Congress more than Adams. But Adams had also spent some $42 million to acquire some three thousand miles of branch lines. He defended the acquisitions by pointing out that they produced $5 million a year in revenues needed to cover the UP’s fixed charges, while glossing over the fact that the roads all operated at a loss. He shored up the railroad’s increasingly dire financial condition with loans from European banks, notably Baring Brothers; but on November 15, 1890, just a few days after Adams’s dismissive comments about Gould to the Boston Herald, the Barings firm failed. With it went the UP’s once-rock-solid source of credit—and any confidence Adams might have had about holding Gould at bay.
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GOULD’S DISCONTENT WITH Adams had been brewing for months. Adams had been making deals for the Union Pacific with western and southwestern roads in a bid to quell rate wars. But these arrangements typically left Gould’s railroads on the outside looking in, while promoting the interests of Gould’s business enemies. Among them was Collis Huntington, whose Central and Southern Pacific had been competitors of Pacific Mail, a steamship line serving the Far East out of San Francisco, which Gould earlier had acquired by outsmarting its owner, the stock manipulator Alden Stockwell. In May 1890 Huntington wrested control of Pacific Mail from Gould and his son George, a deal that left Gould’s railroads especially vulnerable to an alliance between Huntington’s roads and Adams’s Union Pacific.
Particularly irksome to Gould was an arrangement Adams reached giving the Rock Island, the Chicago & Northwestern, and the Chicago, Milwaukee & St. Paul exclusive rights to use the Union Pacific’s bridge over the Missouri River at Omaha. This allowed the Rock Island and the St. Paul to pick up freight at Denver and carry it across the river to Chicago, and allowed the Northwestern to carry traffic from Chicago to Omaha and offload it directly to the Union Pacific. The deal was a dagger aimed directly at Gould’s Missouri Pacific, the odd road out.
But then opportunity beckoned, in the form of a collapse in the Union Pacific’s share price. The shares, which had been trading at $65, fell to the mid-$40s during the autumn of 1890, as a consequence of Adams’s failure to resolve the road’s financing problems, of the persistent rate wars, and conceivably of Gould’s own machinations. Gould was flush with cash, holding a war chest estimated by contemporaries at $15 million to $20 million. Indeed, he seemed to be the only investor interested in saving the Union Pacific; Adams’s quest for a white knight had failed utterly, as he realized when word reached him at the last moment that William H. Vanderbilt had refused to invest rescue capital into the UP. With all chance of resistance having faded away, Gould’s takeover of the road became one of the simplest, if one of the last, transactions in his career.
The railroad Gould reacquired, however, soon took on the appearance of a poisoned chalice. Traffic on the road was improving, but the crush of interest due was unremitting. Gould’s efforts to ease the Union Pacific’s overhang of debt were no more fruitful than Adams’s. In June 1891 Gould was forced to loan the railroad nearly $2 million out of his own pocket to meet its interest bill.
Meanwhile, Gould’s relationship with the country’s most important railroad financier, J. Pierpont Morgan, was fraying. Despite Gould’s position as owner of the most storied franchise in the railroad world, Morgan disparaged him as an inconsequential participant in the “community of interest” negotiations he was leading at the time, ignoring the numerous proposals Gould had offered to address the industry’s self-destructive habits of competition.
In their face-to-face dealings over the restructuring of Union Pacific debt, Morgan, who was managing the operation, treated Gould with unalloyed condescension, according to newspaper accounts plainly sourced in the Morgan camp. Morgan “had a talk with Mr. Gould yesterday,” the New York Times reported on September 27, “and ‘the wizard of Wall Street’ was given to understand that he was no longer a ‘wizard.’” According to the report, Morgan brusquely informed Gould that unless he “acted the part of a straightforward man he would not only be hustled out of the Union Pacific, but that his power in Wall Street would end summarily.”
Morgan demanded that Gould put up millions of dollars in excess collateral to guarantee the rescue debt. By then Gould no longer had the energy to resist. In 1891 one blow followed another: The Missouri Pacific skipped a quarterly dividend, foreign shareholders began agitating to oust him from the Union Pacific, and competitive rate-cutting was again draining his railroads of revenue. His businesses were failing and economic storm clouds heralded a recession, or worse, just over the horizon.
When the storm broke in 1893, Jay Gould would be spared the spectacle. Hollowed out by the final ravages of tuberculosis, he died on December 2, 1892. It had been so long since he had commanded affairs on Wall Street that the markets barely rippled at the news. “After his death, there was no one to carry on his work,” reflected his biographer Julius Grodinsky. “Although he left his cash, current assets, and stock holdings, he left no plans.” The Gould empire would pass to his son George, who was intellectually and temperamentally ill-suited to manage it. Gould’s passing would clear the way for Morgan and Harriman, who ultimately would solve the problems of rate stabilization and profitability that had long eluded their predecessors. But first, there was a major panic to deal with—and the indolent George Gould was having a devilish time holding his father’s railway system together.
A sharp decline in income is never welcome in business, but the Panic of 1893 and the “industrial paralysis” that followed, in the words of the Commercial and Financial Chronicle, wreaked havoc on the Union Pacific’s finances at precisely the wrong moment. Three-year notes issued in 1891 to retire the road’s floating debt were due to mature on August 1, 1894. An even weightier obligation loomed, for between November 1, 1895, and January 1, 1899, some $52 million in principal and interest on the government’s construction bonds would come due. A default would give the government the right to take over the Union Pacific, down to the gravel in its roadbeds. Yet while the railroad was manifestly unable to cover the debt, no one on Capitol Hill saw government operation of the Union Pacific as an attractive option. Some compromise would be necessary, but none that could win approval from Congress had yet emerged.
In October 1893 the Union Pacific acknowledged it was insolvent and went into receivership. Over the next two years, the UP’s earnings fell by nearly $7 million, or about one-third. Not merely the general depression, but the collapse of silver mining in the West after th
e repeal of silver monetization in 1893 caused significant damage. Add the rate wars continuing among all the transcontinental roads, and the result was the transformation of the Union Pacific’s $2 million surplus of 1892 into a $2.6 million deficit in 1893. “Not . . . nearly as bad a showing as might have been expected under the circumstances,” the Chronicle judged upon examining the carcass, but still cause for alarm.
In these dire circumstances the railroad’s security holders, under the leadership of US senator Calvin Brice of Ohio (representing the government’s interests) appointed a reorganization committee to take the road out of the hands of its receivers. It was a sterling group, comprising General Grenville Dodge, the Union Pacific’s original builder; A. H. Boissevain, an experienced Dutch railroad investor representing the Europeans who at that point owned about half the shares; and in a subsidiary role, Pierpont Morgan.
The committee had only three realistic options. The first was for the government to accept as much as the railroad could pay for its bonds and write off the balance as a loss. The only positive aspect of this plan was that it would relieve Washington of a costly and troublesome burden, for managing its interest in the UP cost the government thousands of dollars a year, ensnared it in seemingly endless litigation, and forced both houses of Congress to maintain standing committees overseeing the railroad amid ceaseless legislative wrangling.
The second option was to extend the loans deep into the future at a sharply lower interest rate. A fifty-year bond issue paying as little as 2 or 3 percent was the preferred formula, but congressional critics regarded this as a far too indulgent treatment of a railroad that had been born and built in an atmosphere of persistent criminal fraud.
Iron Empires Page 21