Hill could scarcely have found a better formula for antagonizing Harriman than this truculent threat. Writing to Hill in September 1899, Schiff tried to describe Harriman’s reaction in sugarcoated terms, but Harriman’s anger leached out from between his lines. “Mr. Harriman has been much impressed by your suggestion,” Schiff wrote, “though, frank as I am always with you, I should add that I think he felt somewhat irritated by the mandatory tone in which your letter to him was written.”
Harriman himself never responded directly to Hill’s proposition. Instead, he spent the next few months reintegrating the Union Pacific, Oregon Short Line, and Oregon Navigation into a single jointly functioning railroad. Negotiations with Harriman having broken down perhaps irretrievably, Hill focused on the urgent goal of securing for the Great Northern and Northern Pacific an entry into Chicago. That meant acquiring the Burlington. It was a goal Harriman was also pursuing.
* * *
HARRIMAN HAD TRIED to beat Hill to the Burlington via a direct approach to Perkins, meeting five times with Perkins to press his suit. Reflecting the Burlington’s position as the belle of the midwestern railroad ball, Perkins chose to play hard to get. He informed Harriman that the Q was not for sale—but if it were, the price would be $200 per share. Even to a suitor as determined as Harriman, who was well aware of the danger to the Union Pacific should the railroad fall into his rival’s hands, the price seemed ridiculously inflated. Over the next few months he offered Perkins cash and bonds in several different permutations, but never more than the equivalent of $150 per share. Rebuffed repeatedly, he withdrew from the contest—on the surface. In fact, he had formed a syndicate with Schiff, James Stillman, and George Gould to quietly purchase Burlington shares on the open market.
Perkins advised his board that Harriman was undoubtedly in the market for stock, but that with so many shares in “widows’ and orphans’” hands, he doubted that control of the railroad could be achieved through piecemeal purchases on the open market. He was right. In the first six months of 1900 the Harriman syndicate acquired 70,000 shares, but then the well ran dry, with few shares available at prices they were willing to pay. By July 25, they had spent $10 million to accumulate 80,300 shares—less than 9 percent of the company, at an average price of more than $124. Just before the end of the year, Harriman gave in and liquidated the syndicate at a modest profit. Hill, who had been watching from the sidelines, chuckled at the syndicate’s failure. Its members “found themselves up against a stone wall,” he would remark later, adding that the small shareholders “resented [Harriman’s] attempt to buy into their company.” When his turn came, Hill decided, he would not bother with the small shareholders, but would go directly to the top.
Hill had thirsted for the Burlington for several years. The main obstacle in his way was Pierpont Morgan, who held the purse strings in their partnership. Morgan agreed with Hill that the Great Northern should have a direct link to Chicago, just as the New York Central, of which Morgan also was a director, should have its own link to Chicago. The best three candidates to carry the Great Northern into the hub were the Chicago & Northwestern; the Chicago, Milwaukee & St. Paul; and the Burlington. Of those, the Northwestern was off the table, since it was affiliated with both the Union Pacific and the Vanderbilt interests, which would hardly want to turn it over to the Great Northern. As for the other two, a buyout of the St. Paul would cost $227 million, versus $255 million for the Burlington. Morgan pushed for the St. Paul as the better bargain. “Hill did not agree with me,” Morgan testified later, “but he acquiesced.”
Hill disagreed because he considered the Burlington a much better fit for his railroad. The Great Northern and Northern Pacific needed access to “the great provision centers” of Kansas City, St. Joseph, Omaha, Chicago, and St. Louis, he observed to Mount Stephen. “The Burlington lets us into all these districts and commercial centers over better lines and with better terminals than any other road.” Hill also knew that if the Great Northern bought the St. Paul and left the Burlington to be acquired by Harriman, the latter’s combination with the Union Pacific would become a mortal threat to the Great Northern and Northern Pacific by commanding freight traffic across the Northwest.
Fate intervened, in the form of a flat refusal by the St. Paul’s owners to consider a sale at any price. “They would not even name terms,” Morgan recalled. So he met again with Hill and said, “You can go ahead and see what you can do with the Burlington.”
Negotiations with Perkins now moved quickly. Given the vigorous trading in Burlington shares, Perkins reckoned that “Wall Street would soon have had 51 per cent of the stock in spite of us. Then the question was, who to sell to.” He decided that if his shareholders could get $200 per share for all their stock, “it was better than to let the market get 51 per cent, even if it paid more than $200.”
Hill finally agreed to buy the Burlington for $200 per share in cash on April 9, with Morgan’s assent. Under the terms of the deal, ownership of the Burlington would be held by the Great Northern and Northern Pacific on a fifty-fifty basis, though with both roads under Hill’s control—the Great Northern directly, the Northern Pacific indirectly—this was a mere formality.
News of the pending merger left Harriman rattled and Schiff humiliated. Although Hill long would maintain that he kept Harriman and Schiff apprised of his talks with Perkins, they later insisted that they knew nothing of his interest. As Schiff would recall in a long, petulant letter to Morgan, Hill had told him flatly in late March that “neither directly nor indirectly was he interested in Burlington stock, nor did he have any intention to control the property.”
“I accepted this statement on Mr. Hill’s part,” Schiff informed Morgan, “for I could not believe that a man whom I had known . . . for some fifteen years, whom I had never wronged, . . . and whom I believed to be my friend, would willingly mislead or deceive me.” But deceive Schiff he did, flagrantly.
Learning of Hill’s plans to travel from Washington to Boston to complete the Burlington purchase just prior to Easter Sunday, April 7, Schiff and Harriman staged one last-ditch attempt to block the transaction by intercepting Hill at his layover in New York. According to Schiff, he arranged in advance for financier George Fisher Baker to host an impromptu conference at his home for him, Hill, and Harriman. Schiff recalled dispatching his son Morti to waylay Hill as soon as he debarked from the Washington train and before he could transfer to the train for Boston. (Baker’s own recollection was that he earlier had arranged to accompany Hill to Boston via the midnight train to meet the Burlington’s directors and sign the acquisition papers, and had “inadvertently” mentioned within Harriman’s earshot that he and Hill would be dining together that evening. Harriman tipped off Schiff and at 8 P.M., as the dinner was just concluding, the two of them showed up uninvited at Baker’s front door.)
In any event, Schiff confronted Hill about his lie as soon as they set eyes on one another. According to Schiff, Hill apologized but explained that he had felt he had no choice, “knowing my relations to the Union Pacific.” Schiff later told Morgan, “I expressed my mortification but did not further discuss this.”
The reason for his forbearance may have been that Schiff and Harriman still hoped to salvage a compromise to avert the impending deal. Harriman was prepared to join the Burlington acquisition as a partner, putting up one-third of the purchase price, or about $65 million, in cash. Hill refused to give the proposal even a moment’s consideration. The various participants described the tone of his response differently. Schiff recalled that Hill “replied with platitudes.” Baker reported that the discussion proceeded with “increasing animation and fervor, not to say violence,” and continued as Harriman and Schiff accompanied Baker and Hill to Grand Central Station for the train to Boston. They carried on their argument right up until the moment the train pulled away, Baker recalled, leaving Harriman and Schiff to watch forlornly from the empty platform.
Harriman’s own recollection is certainly the mo
st dramatic, and the one that has been most frequently repeated. He recalled that the conversation ended abruptly at Baker’s home with Hill’s curt refusal, just as Hill and Baker prepared to depart for the terminal. “Very well,” Harriman said, rising to leave. “It is a hostile act and you must take the consequences.” (Hill might well have savored the irony of Harriman, who high-handedly had refused to share Oregon Navigation with the Great Northern and Northern Pacific only two years earlier, now appearing at Baker’s door to demand a similar accommodation from him.)
However the encounter unfolded, Schiff found the situation profoundly unnerving. The next morning he repaired to Morgan’s office in the hope of finding a path for Harriman into the Burlington deal. But the banker, engaged in preparations for his annual voyage to Europe, granted Schiff only a few minutes’ audience, during which he declined to make any promise other than that he would be willing to consider any plan that Schiff could contrive to bring Harriman into the Burlington deal; just send it to him in London, he said.
In truth, Morgan had no intention of letting Harriman through the door. Due to his distaste for Harriman, born of the battle for the Dubuque & Sioux City in which the low-born broker had outmaneuvered him, “he manifestly did not want Harriman as a partner or associate,” Herbert Satterlee reported. Nor did he take seriously the veiled threat embodied in Harriman’s assertion that the refusal was “a hostile act.”
In any event, the Burlington deal was as good as final, as Schiff would discover when he took up the matter with Morgan’s junior partner, Robert Bacon, in Morgan’s absence. Schiff warned Bacon that placing the Burlington under the exclusive control of the Northern Pacific and Great Northern would create an inherently menacing competitive situation for every railroad line crossing the Missouri, and “particularly . . . a constant danger to the Union Pacific.” He repeated Harriman’s offer to pay the one-third price of the Burlington, $65 million, in cash.
“It’s too late,” Bacon replied. “Nothing can be done.”
The situation would be intolerable to the Union Pacific, Schiff warned. “The railroad will have to protect itself.”
He would be as good as his word. Hill might have seized the Burlington in a lightning strike, but Harriman would deliver a lightning bolt of his own in return. He would move to take over not the Burlington itself, but its half owner, the Northern Pacific. What followed would be a defining moment for the financial community at the very outset of the new century.
Part III
* * *
The Ghost Dance
16
Peacock Alley
THE 1800S DREW to a close with an entire generation of stock manipulators and buccaneers having passed away. Fisk, Drew, and Vanderbilt had died within a few years of one another in the 1870s—Fisk in 1872, Vanderbilt in 1877, and Drew in 1879. Jay Gould lasted a decade or two longer, dying in his bed of tuberculosis at the age of fifty-six in 1892.
The old guard had disappeared but their methods survived, taken up by a new generation of operators, some of whom were every bit as flamboyant as their predecessors. Figures like John “Bet-a-Million” Gates and the master stock trader James R. Keene, who worked his magic on behalf of such eminences as Pierpont Morgan, received the most voluminous press, but they were merely the center-ring acts in a big circus. After every trading day ended at 3 P.M., a select group repaired uptown to the Waldorf-Astoria to continue trading and to enjoy aftermarket conviviality. “To belong to the ‘Waldorf crowd’ meant that a man had arrived,” recalled Bernard Baruch, an up-and-coming broker who had earned admission to the elite group by orchestrating the takeover of the tobacco company Liggett & Myers for the financier Thomas Fortune Ryan.
The vast Waldorf-Astoria extended west from Fifth Avenue between Thirty-Third and Thirty-Fourth streets (today the site of the Empire State Building). An Astor family dispute had prompted two cousins to open their own hotels at opposite corners of the same block, but eventually they combined the original Waldorf Hotel, completed in 1893, with the Astoria, opened in 1897. The corridor connecting the two edifices became known as Peacock Alley, a thousand-foot-long promenade along which New York’s elite and aspiring elite paraded in their most ostentatious finery. At the Waldorf end was New York’s most exclusive restaurant, the Palm Room, where patrons were required to dine in full formal attire—men in white tie and tails, women in evening gowns.
The hotel’s real attraction, however, was the opportunity to encounter celebrities face-to-face: famous writers, actresses, prizefighters, and those reigning stars of New York society, financiers. “On an afternoon or two at the Waldorf, one might brush elbows with Richard Harding Davis, Mark Twain, Lillian Russell, Gentleman Jim Corbett, Admiral Dewey, Mark Hanna, Chauncey Depew, Diamond Jim Brady, Edwin Hawley, and countless presidents of banks and railroads,” Baruch reported. “Judge Elbert Gary, the head of U.S. Steel, lived there, as did Charley Schwab and James Keene. It was at a private dinner party in the Waldorf that I saw John W. Gates place a $1,000,000 bet on a game of baccarat.” For those whose purpose extended beyond spending an hour or two in proximity to the great and near-great, there was always the prospect of putting over a business deal in the louche, smoky atmosphere of a Waldorf suite. It was as if all of Wall Street had become a moveable feast, more than two decades before Ernest Hemingway used the phrase as the title of his memoir of the Paris of the 1920s.
The most important characteristic of Wall Street at the end of the 1890s was that it was awash in money—euphorically so—for the country finally had shaken off the torpor that followed the Panic of 1893. The reserves of capital built up during the lean years were clamoring to be deployed. In 1896 came the presidential election in which the Republican William McKinley defeated William Jennings Bryan in part by promising to uphold the gold standard, signaling his determination to keep inflation in check. That was positive news for bankers and investors, whose holdings could only be drained of value by a general rise in prices, but bad news for farmers, who counted on inflation to buoy their income. McKinley had placed his thumb decisively on the scale for industry over agriculture, the city over the country.
* * *
The Palm Room of the Waldorf-Astoria was the epitome of Gilded Age elegance, in which patrons were required to wear formal attire; the hotel, assembled from two competing, adjoining hotels built by feuding members of the Astor family, served as the after-hours uptown refuge of Wall Street traders in the 1890s.
* * *
Ever creative, Wall Street bankers figured out exactly the right mechanism to put their torrent of capital to work: the industrial amalgamation, or the “trust.” Notwithstanding the lessons provided by the collapse of the cordage trust in 1893, the years 1898 and 1899 saw new cartels founded in paper, copper, glue, elevators, and steel. Typically these assemblages involved issuing new securities well exceeding their industries’ underlying values, but like a sick patient suddenly returned to health, America’s economic prospects emitted a golden glow.
Some of these combinations and recombinations occurred at such a dizzying pace that their own promoters could not keep track of the money. That was the case with the series of mergers in the steel-wire industry masterminded by Gates, starting with the consolidation in 1897 of seven Illinois factories into one corporation, the Consolidated Steel and Wire Company. A year later, Consolidated was acquired and combined with seven more mills by Gates’s American Steel and Wire Company of Illinois, which issued $24 million in new stock. A year after that, Gates formed the American Steel and Wire Company of New Jersey, paid $33.6 million for the Illinois company’s stock, bought eleven more plants, and issued $90 million in shares to cover it all. Somewhere along the line, $26 million in stock went missing.
“What became of it?” Gates was asked on the stand by a lawyer for a shareholder who had sued for an accounting.
“I don’t know,” Gates said.
“Have you got any of it?”
“No, I never got a cent’s worth of it,” Gat
es insisted.
Despite this evidence that Steel and Wire stock was so thoroughly watered that nearly a third of it could disappear without detection, the public did not seem to care. Over the first two months following the stock’s issuance, its price more than doubled.
The clamor for stock and more stock fed and was fed by the bankers’ inventiveness. Financial journalist Alexander Dana Noyes detected the signs of a speculative mania on every sidewalk and street corner. Especially worrisome was the popular conviction that the stock market was destined for a permanent rise. This was a period, Noyes wrote, in which punters and promoters comforted themselves with “the assumption that we were living in a New Era; that old rules and principles and precedent of finance were obsolete; that things could safely be done to-day which had been dangerous or impossible in the past.” Such euphoria, the conviction that “this time it’s different,” is a familiar signpost of every major crash, right into the twenty-first century.
Iron Empires Page 31