Iron Empires

by Michael Hiltzik

  The third option was for the government to foreclose and run the UP itself. The advantage of this option was that it would give the government a direct hand in curbing the general iniquity of the transcontinental railroads: “All, unfortunately, have had their Credit Mobiliers, and all have had their Jay Goulds,” observed the business historian John P. Davis during the reorganization discussion. It would be a lesson to the other roads, he reasoned, to “see the stale water boiled out of the Union Pacific.” The government, he noted further, was hardly blameless in the UP’s fraud, and might itself learn a few things from having “to suffer the consequences of being in bad company.” But it was hardly to be expected that Congress would see things the same way.

  The reorganization committee’s ultimate proposal involved converting the government debt into a $300 million revolving credit line paying 3 percent. The plan was stillborn. It was published in December, and when June arrived without its even receiving a vote in Congress, the reorganization committee disbanded in frustration. It would be two years before failure could be turned into success. That transformation would bring a new figure onto the scene: a banker who would play a central role in the coming showdown between Harriman and Morgan.

  * * *

  IN THE LATE fall of 1895, Jacob Schiff, the senior partner of the investment bank Kuhn, Loeb & Co., was approached by Winslow S. Pierce, the personal lawyer of George Gould, with an invitation for Schiff to lead a fresh attempt to reorganize the Union Pacific. Gould was an indolent shadow of his father, devoted more to attending society fetes and raising racehorses than husbanding the family fortune. But he was not too dull to recognize that his extensive Union Pacific shareholdings, a legacy from his father, were at risk if another reorganization attempt failed.

  Schiff was an inspired choice. As head of Kuhn, Loeb, the Frankfurt-born banker’s authority on Wall Street was second only to Pierpont Morgan’s. A man of medium physical stature and unshakable dignity, Schiff spoke impeccably grammatical English, albeit with a heavy German accent. Deeply religious, he maintained the ritual of blessing his children for the Sabbath every week at Friday-evening dinner and rarely allowed business to interfere with his attendance at synagogue; in one youthful letter soliciting a job in America, he had specified “a position which will leave me free on that day, because I am inclined by principle to devout religious observance.” As it would happen, Schiff’s insistence on keeping the Sabbath would cost his future client Edward Harriman dearly at a critical juncture.

  Soon after his arrival at Kuhn, Loeb in 1873, Schiff was being regularly welcomed to the Solomon Loebs’ Fifth Avenue home for Sunday dinners. It seemed almost preordained that he would marry their eldest daughter, Therese. This placed him within the firm’s tradition of cementing its business bonds through marriage. The senior partner, Abraham Kuhn, was cofounder Solomon Loeb’s brother-in-law; another young banker who joined the firm at the same time as Schiff, Sam Wolff, was the son of another partner, Abraham Wolff (whose daughter, Addie, would marry Kuhn, Loeb partner Otto Kahn). Many years later Jacob Schiff’s own daughter, Frieda, would marry Felix Warburg, yet another Kuhn, Loeb partner.

  Jacob and Therese were married on May 6, 1875. After honeymooning in Niagara Falls, they moved into a house at 57 East Fifty-Third Street, just off Park Avenue, a gift from Solomon Loeb.

  Notwithstanding his stature as a banker and his leadership of Wall Street’s Jewish community in 1895, Schiff’s attitude toward his patrician rival Pierpont Morgan was deferential. “He was a hero-worshipper, although in a restricted and unusual sense,” observed his colleague and biographer, Cyrus Adler: Schiff admired individuals not necessarily because they served in elevated positions, but in recognition of the talents that had gotten them there and kept them in place. Morgan fit the model, although his father’s wealth and success had given him a leg up in making his way on Wall Street. He had, after all, brought the House of Morgan to heights that Junius Morgan could not have dreamed of.

  Aware that Morgan had been a principal of the Union Pacific’s first reorganization committee, Schiff was under the impression when he was approached by Winslow Pierce that Morgan had not given up the effort, only placed it on hold. “That’s Morgan’s affair,” he told Pierce when he came to his office as George Gould’s emissary. Pierce assured him that Morgan’s committee had abandoned the reorganization as a hopeless task.

  Still doubtful, Schiff visited Morgan a few days later. He got an earful. Congress’s refusal to give the reorganization committee’s plan even the courtesy of a vote had soured Pierpont on the entire enterprise, reinforcing a view of the Union Pacific that hewed close to its enduring description as “two streaks of rust” and derived in no small part from his grand tour back in 1869. “He was so disgusted with the political intriguing and wire-pulling” surrounding the reorganization and so pessimistic about the prospects, Schiff reported to his partners, that he would not even allow his firm to invest money in the new effort.

  * * *

  Kuhn, Loeb chairman Jacob Schiff, seen here in top hat promenading with his wife, Therese, the daughter of his firm’s cofounder, became Harriman’s banker and strategist of his campaign to win the Northern Pacific.

  * * *

  The Union Pacific in 1895 was even more derelict than it had been a few years before. The failure by Congress to treat the railroad as an asset worth saving had left it at the mercy of a pack of lupine creditors, who had been permitted by the receivers to foreclose piecemeal on branch lines from one end of the system to the other. By May 1895, these amputations had reduced its total mileage by nearly half, to 4,469 miles. This occurred even though any experienced railroad operator could see that once the economy revived, the UP would need a larger, not smaller, network.

  Notwithstanding Morgan’s doubts, Schiff agreed to proceed with the reorganization effort at Pierce’s urging. The railroad was in such low regard on Wall Street that Schiff had to bring in an entirely new set of business leaders to serve on the reorganization committee. Kuhn, Loeb, he told his partners, “would have to paint the whole thing over fresh.” The new committee members included Marvin Hughitt of the Chicago & Northwestern Railroad and Chauncey Depew, president of the New York Central. Since both were known as “Vanderbilt men,” rumors immediately spread in the financial press that the rescue of the Union Pacific was covertly a Vanderbilt affair, the ultimate goal of which must be the merger of the New York Central and Union Pacific to create another transcontinental trunk line. Schiff chose not to quash the rumors, reasoning that the Vanderbilt glow, however factitious, could only enhance the image of the hobbled Union Pacific on Wall Street when he brought its securities back to market.

  By October, Schiff’s reorganization committee was ready with a plan: The government would foreclose on the Union Pacific, after which the committee would buy it back for $45 million; that plus the $17 million in the sinking fund established by the Thurman Act of 1878 would make the government almost whole on its construction subsidy. The plan promptly garnered the approval of bankers, railroad executives, and the press. But late in 1896 obstacles unaccountably emerged. Objections to the deal were being aired in Congress, the press had turned hostile, holders of the old Union Pacific shares were launching legal challenges, and opinion among bankers on Wall Street and in Europe turned decidedly chilly. Rumors reached Schiff that the pushback was coming from none other than Morgan, who purportedly had become embarrassed by Schiff’s success and jealously sought to regain control of the reorganization.

  Schiff paid Morgan a second visit. Firmly denying the rumors, Pierpont offered to investigate their source. Presently he invited Schiff back to his office to reveal what he had heard. “It’s that little fellow Harriman,” he said, “and you want to look out for him.”

  If true, this was a genuinely new aspect of the matter. Schiff knew Harriman vaguely as the shrewd financial mind behind the success of the Illinois Central. But of Harriman’s interest in the Union Pacific he had had no clue—though h
e could have reasoned it out, for the Illinois Central and the UP competed directly in several markets. It made sense that the Illinois would desire to secure some control over—or at least a partnership with—the UP. Additionally, the Vanderbilt cronies on Schiff’s committee posed a threat to the Illinois Central: If the New York Central and the Chicago & Northwestern—Depew’s and Hughitt’s roads—gained control of the Union Pacific via the reorganization, the Illinois Central would be shunted aside, deprived of access to the East Coast, Chicago, and the Pacific Northwest at a single stroke.

  Schiff made an appointment with Harriman to complain about the mysterious opposition that had emerged to the committee’s reorganization scheme. “I understand this opposition is being directed by you,” he said. “What have you to say about it?”

  Harriman answered with characteristic directness. “I am the man,” he acknowledged.

  “But why?” Schiff asked.

  “Because I intend to reorganize the Union Pacific myself.”

  The confession struck Schiff as baldly quixotic. “How do you propose to do that?” he asked. “Most of its securities are in our possession. What means do you have?”

  Harriman fixed Schiff with his icy glare. “We have the best credit in the country,” he said, explaining that he would finance the takeover by floating $100 million in bonds of the Illinois Central at 3 percent. He expected the securities to sell at full price. “You, at the best, can’t get money for less than four-and-a-half percent. In that respect I am stronger than you are,” he told Schiff. “The Illinois Central ought to have that road, and we are going to take charge of the reorganization.”

  Schiff asked Harriman to name his price to stand aside. “There is no price,” Harriman replied. “I mean to get possession of the road.” Harriman said he would join forces with the reorganization committee only if he were named chairman. Schiff refused; the position had been promised to Winslow Pierce, who after all had brought the opportunity to Kuhn, Loeb and represented powerful interests on his own.

  Harriman waved a hand in dismissal. “Very well, Mr. Schiff,” he said. “Go ahead and see what you can do. Good day.”

  * * *

  HARRIMAN CONTINUED to orchestrate opposition to the reorganization plan until Schiff finally offered him an olive branch. If Harriman would stand down, Schiff would promise him a seat on the reorganized company’s executive committee. “If you prove to be the strongest man in that committee,” Schiff said, “you’ll probably get the chairmanship in the end.”

  Schiff may already have taken Harriman’s measure and concluded that the offer would appeal to his self-assurance. He was right. Harriman accepted, joining Schiff’s syndicate and putting in an investment of $900,000.

  Harriman was elected to the Union Pacific board on December 6, 1897, and immediately found himself in hostile territory. “Mr. Harriman was a newcomer, and by several members of the Board his advent was not regarded with friendly eyes,” related Otto Kahn, Schiff’s partner and a member of the same executive committee Harriman now joined. “He was looked at askance, somewhat in the light of an intruder. His ways and manners jarred upon several of his new colleagues, and he was considered by some as not quite belonging in their class, from the point of view of business position, achievements or financial standing—a free lance, neither a railroad man nor a banker nor a merchant.” Kahn boiled down the reaction of his contemporaries as: “Ned Harriman! Why, I knew him years ago as a little ‘two dollar broker.’ What should he know about practical railroading?”

  Among the skeptics was the executive committee’s most eminent banker, James Stillman, the forty-seven-year-old president of the National City Bank (the distant ancestor of today’s Citigroup). As the Rockefeller family bank, National City was celebrated as “the greatest reservoir of cash in America,” and was expected to provide a good deal of the capital needed to complete the reorganization. Stillman confessed in an interview years later that “a very prominent man had told me to ‘look out’ for Ed. Harriman. ‘He is not so smart as some people think and he is not a safe man to do business with.’” Upon receiving that warning, Stillman said, he had deliberately “steered clear of him,” until Harriman’s appointment to the Union Pacific executive committee forcibly brought them together.

  At that point Stillman, along with the other members of the board, discovered that Harriman was in fact much smarter than he had been given credit for. “I have been acquainted with all of the prominent men of this country during the last forty years,” Stillman recollected, “and I can truly say that Harriman, in his conception of vast achievements and his skill, energy and daring in bringing them to realization, far surpassed any other man I have ever known. His brain was a thing to marvel at.” For the next decade, until Harriman’s untimely death in 1909, Stillman would remain his principal banker.

  Harriman would make believers of the other board members too. The following May, less than six months after he was named to the Union Pacific board, he was elected chairman of its executive committee, effectively becoming the man in charge—just as Schiff had predicted.

  Harriman’s appointment to the board was little marked in the financial press, possibly because his prior railroad experience in the Midwest, out of earshot of the East Coast financial journals, had kept him in obscurity. But after his accession his transformative role could not be overlooked.

  12

  The Reconstruction

  THE SUCCESSFUL REORGANIZATION of the Union Pacific would stand as a milestone of the economic recovery following the Panic of 1893. In a meeting with President William McKinley, Grenville Dodge, observing that the deal included the final payment on the government loan, asked the president “if he didn’t think a monument ought to be raised by the Government to the men who built that road and paid the Government debt, an unheard of occurrence at that time.” McKinley, who was pleased to be relieved of the perennial Union Pacific controversy but determined to receive a share of the credit, replied, “Yes, General, but don’t you think that a monument should also be raised to the President who made them do it?”

  The man who actually deserved the credit was Edward Harriman. He assumed his duties as chairman of the railroad’s executive committee in 1898 with a vigor that left his new colleagues, not to mention his employees, gasping for breath.

  Shortly after taking office, Harriman set out on an inspection trip across the full length of the Union Pacific’s route. He was replicating, perhaps unwittingly, Pierpont Morgan’s grand tour of 1869—but Harriman would come to a very different conclusion about the railroad.

  Accompanied by his daughters Mary and Cornelia and five Union Pacific managers, Harriman departed from Kansas City on a train with an observation car placed at the front and the locomotive at the rear, affording him an unobstructed view of the countryside and right of way. They rolled across the prairie to Denver and thence northwest to Portland, traveling exclusively by daylight. They spent weeks to make a trip that could normally be completed in four or five days, stopping at every important station to give Harriman the chance to vacuum up information. Harriman closely examined “the physical condition of the road, estimated the value of its equipment, interviewed the shippers who made use of it, judged the characters of the officials in charge of it,” and began to make plans to set right all the shortcomings he discovered.

  An indefatigable tourist, Harriman also took time out for an overland trek up to Pike’s Peak. He and his party continued by rail to Cheyenne and on to Utah, where they were able to travel on a rail spur to Salt Lake City that had not existed in Morgan’s time. Reaching the Far West, Harriman examined the Oregon Short Line and Oregon Railway, which had been stripped from the Union Pacific during the foreclosure frenzy and which he was determined to reacquire. Then they headed south, reaching San Francisco on the Fourth of July. Finally they returned across the prairie, Harriman drinking in every detail of the territory, weighing its potential as a market for transport and judging what improvements were ne
eded to restore the Union Pacific to its competitive prime.

  While Harriman was taking the measure of his employees, they were acquainting themselves with their new patron. W. H. Bancroft, the general manager of the Oregon Short Line, knew almost nothing of Harriman “even by reputation,” but had imagined a man “larger in stature” than the bantamweight who stepped down from the observation car in Portland.

  “He impressed me as a man of unusual ability, with a wonderful grasp of affairs, full of energy, and apparently of physical strength,” Bancroft recorded, but the qualities that struck him most of all “were his general knowledge of the properties with which he had become so recently associated, and his rapid observation of all matters of detail.” Harriman insisted on learning pertinent facts as quickly as his officials could provide them: “His manner, at first, seemed to me brusque; but this was an erroneous impression, for I soon found that it was only his thorough way of transacting business.”

  The same incisive decision-making and gruff demand for information would be remarked on by others. “He saw every poor tie, blistered rail, and loose bolt on my division,” recalled one superintendent. Julius Kruttschnitt, a Southern Pacific executive who would eventually serve as Harriman’s right-hand man in the West, spoke of walking the line with his new boss shortly after Harriman acquired the Southern Pacific, inspecting the track virtually inch by inch. Harriman’s sharp eyes picked out a track bolt that was protruding well beyond the nut. When he asked about the oversized fixture, Kruttschnitt replied, “It’s the size which is generally used.”

  “But why should we use a bolt of such a length that a part of it is useless?”