It was the euphoria before the crash. Pierpont Morgan and Ned Harriman were about to knock this market for a loop. Years later, Bernard Baruch would recall the night “panic struck the Waldorf . . . and transformed it from the preening ground of all that was fashionable to a lair of frightened animals.”
On April 30—a few days before Baruch witnessed his first market panic—volume on the New York Stock Exchange reached a once-unimaginable 3,303,017 shares. That would be the high-water mark of an age. The market would not touch that record again for twenty-seven years.
17
Lions Guarding the Way
ON APRIL 4, 1901, Pierpont Morgan boarded the White Star liner Teutonic in New York, bound for Europe and yet another of his annual forays into the art market.
The Gilded Age was reaching its zenith. The stock market was in the throes of a bullish frenzy. Exactly one month earlier, the Republican William McKinley, whose pro-business credentials were unassailable, had been sworn in for his second term as president. The most notable thorn in the side of establishment Republicanism, the progressive and unpredictable New York governor Theodore Roosevelt (the former New York police commissioner), had been quarantined impotently in the vice presidency. The only heavy weather confronting Morgan came from the stormy conditions on the high seas, which kept him imprisoned queasily in his cabin with only a solitaire deck for company.
Arriving in London on April 10, Morgan purchased Gainsborough’s portrait of Georgiana, Duchess of Devonshire, which was celebrated not merely for the subject’s physical beauty and scandalous lifestyle, but because it had been out of public sight for a quarter century, having been stolen from the art dealer William Agnew in 1876. The painting had been recovered only two weeks prior to Morgan’s arrival in London, when it was returned for ransom by its thief, the criminal mastermind Adam Worth—later to become Arthur Conan Doyle’s model for Sherlock Holmes’s nemesis Dr. Moriarty. Morgan, aware that his father had hoped to acquire the work just before it disappeared, offered an astonishing 30,000 pounds sterling for it (then about $150,000), sight unseen. He refused at the time to divulge the price. “Nobody will ever know,” he told a friend. “If the truth came out, I might be considered a candidate for the lunatic asylum.” “The Duchess” would remain in the Morgan collection until 1994.
Morgan departed London for Paris on April 19, two days after turning sixty-four. There he continued stripping the continent of any treasures that caught his eye. “He received the art dealers at his hotel after breakfast each morning,” Satterlee recorded, making “many mysterious trips to the jewelers on the Rue de la Paix and to collectors of antiques and pictures.” At the end of April, having capped his raid with the acquisition of Raphael’s Colonna Madonna and pieces by Rubens and Titian, he moved on to Aix-les-Bains for a rest cure.
The Burlington trade had been finalized, so as Pierpont Morgan went east, James J. Hill went west. Hill had business to transact in Seattle, where he headed by rail, escorting an advance guard of European investors over the Great Northern. But while Morgan was sating his appetite for art in London and Paris and wallowing luxuriantly in the South of France, and Hill was making his pitch to investors on the coast, matters at home were coming unglued.
* * *
JACOB SCHIFF HAD made one last effort to patch up his differences with Hill over the Burlington. He wrote Hill on April 8, shortly after the fraught meeting at the financier George Baker’s house in New York, invoking their long friendship: “I feel it is too late in our lives to personally go apart. . . . Friendships have little value, if they are only determined by personal interest and go to pieces upon the first clashing of interest; on my part, I can assure you, this will never be the case, as far as my esteem and attachment for you are concerned.” But he added that he thought Hill’s purchase of the Burlington at $200 per share had overestimated its value to the Great Northern: “I am afraid you have permitted others to induce you, because of the personal advantage and profit they will get therefrom, to pay an exorbitant price.” If this was a swipe at Morgan, the only individual who could have “induced” Hill to do anything, it was plainly misplaced, since Morgan himself had initially discouraged the Burlington purchase and it was Hill who had been determined to meet Perkins’s price. Schiff closed his letter with a repeat of the warning he had delivered to Robert Bacon: “As to the Union Pacific, it must take care of itself, as it will be able to do.”
Hill replied the next day to explain why Harriman’s demand for a piece of the Burlington purchase could not have been accepted. The combination of the Union Pacific and Burlington, being two parallel lines, would have been illegal “west of the Mo. [Missouri] River,” he asserted. Harriman’s concern about the takeover of the Burlington by the Great Northern and Northern Pacific had been unnecessary, he added, because he had had no intention of competing with the four transcontinental lines already running between the East and Washington and Oregon or the two serving California. “We do not need any more through coast lines,” he wrote. “Therefore, I was strongly of the opinion that a control of the CB&Q by the Gt. Northern & Nor. Pac. would remove any object for extending to the Pacific, and insure the greatest harmony.” Thanks to Harriman’s stubbornness, “I find myself mistaken.”
He concluded in the same passive-aggressive tone that had antagonized Harriman in the past. “I like peace, and am not ashamed or afraid to work for it,” he wrote. “On the other hand, I do not think the time has come when we must acknowledge that we have no rights which our neighbors claim for themselves, or such as we are willing to accord to them.”
From Harriman’s standpoint, Hill’s rejection of his offer for a piece of the Burlington had made control of the Northern Pacific imperative. Notwithstanding Hill’s assurances that he was a man of peace and had no intention of extending the Burlington west to the coast, it was crystal clear to Schiff and Harriman that its ownership by Hill posed a mortal threat to the Union Pacific. Accordingly, Schiff and his partners at Kuhn, Loeb had begun buying Northern Pacific stock almost immediately after the meeting at Baker’s home.
As Schiff later confessed to Morgan, “the Union Pacific interests [i.e., Harriman and himself] held consultations and decided that, if the Burlington company had been so much of a factor for worriment and anxiety while independent, how much more intensified these conditions would necessarily become after the Burlington had passed into the hands of the two powerful Northern roads.” He wrote that “drastic measures” had been called for, and in that vein “we thereupon, on behalf of Union Pacific interests, set to work to accumulate Northern Pacific stock.” The goal was not to acquire control of the railroad itself, but merely to move into position to “exercise a potent influence upon the management . . . and thereby obtain also an influence upon the management of the Burlington.”
Schiff undoubtedly felt safe outlining his strategy to Morgan after the matter had been resolved. He knew he could count on Morgan’s discretion as a fellow financier—plus, they still had business to transact with one another related to the Northern Pacific and Great Northern. In public, however, Schiff would be cagey to the point of flagrant deception. Interrogated in court more than a year later by M. H. Boutelle, a Minneapolis lawyer representing the government in its attempt to break up the Northern Securities trust—the corporate device concocted to settle the Morgan-Harriman battle—Schiff flatly denied that Kuhn, Loeb had ever “represented the interests” of the Union Pacific or Oregon Short Line in its purchases of Northern Pacific stock. (Asked if he had represented Harriman’s interests, he declined to answer.) He portrayed his firm’s purchases of Northern Pacific shares and their subsequent transfer to the Union Pacific and Oregon Short Line as separate transactions—as if Kuhn, Loeb had first bought the shares for itself, and then just happened to sell them to the UP and Oregon line weeks later.
Whether Schiff was deliberately trying to conceal a strategy that had come under legal attack by the federal government or was resisting questions that he genuin
ely considered impertinent—he told Boutelle on several occasions that he would “decline to discuss the business of Kuhn, Loeb” unless “directed by the court,” which chose not to force the issue—he was spinning a yarn that was transparently implausible. By the time he had finished transferring all the firm’s holdings of Northern Pacific to Harriman, they came to $78 million. That was an enormous investment for even the best-capitalized banking firm to make on its own account, without a solid understanding that the assets would be promptly taken off its hands. The true nature of the dealings was so obvious to everyone in the courtroom and the marketplace that Boutelle did not bother to follow up.
Schiff’s traders at Kuhn, Loeb managed to accumulate a large portion of Northern Pacific common and preferred shares all throughout April without arousing suspicion, even as NP common rose from $101 to $109. The run-up seemed almost natural, given the likely enhanced value of a Northern Pacific owning half the Burlington under the leadership of the eminently capable Jim Hill. The traders were also beneficiaries of luck, for their large block purchases of “Nipper,” as the Northern Pacific was known in Wall Street shorthand, were buried within the general frenzy that had seized stock market investors.
The volume of transactions on the stock exchange throughout April took traders’ breaths away. Experts struggled to explain it. “Early theories that adroit manipulation was alone or even chiefly responsible for current record-breaking accomplishments must be abandoned,” the New York Times counseled. “Pools and cliques and operators ‘making a turn’ have in times past been able to give the market impetus and for a time maintain it; but no such market as the present has ever been so developed or supported. The Stock Exchange trader is a pigmy in this movement, his skill, his orders, and his influence being insignificant compared with the forces that are actually dominating.” Since the previous autumn, the Times observed, the judgments of market sages that the run-up was “illogical” and bound to lead to disaster were confounded; every bear trend was outpaced by a subsequent bull run. “Scant sympathy will be wasted in or out of Wall Street upon over-clever traders who have been guessing and betting wrong” by selling short, the newspaper gloated.
One could find plausible explanations for the surge in certain stocks. United States Steel, cobbled together as a giant conglomerate by Morgan, had recently begun trading. The flotation drew considerable attention not merely for the optimism the huge issue betokened for the US economy, but for the skill of Morgan’s master trader, James R. Keene, in placing the securities on the market. The flotation of US Steel would be judged Keene’s greatest triumph, for the steel trust organized by Pierpont Morgan was the largest stock issuer ever to come to market, with an inventory of a half-billion dollars each of common and preferred shares. Few thought that the market could absorb the full billion dollars without driving the steel shares or even the general market lower, absent a huge capital commitment by the Morgan bank. “But Keene had an uncanny ability to mix orders to buy and sell so that the market would respond to his control,” Bernard Baruch recalled. Using market-making techniques that eventually would be outlawed, Keene placed the shares so skillfully that “all that the Morgan firm had to put up was $25,000,000. The public supplied the rest.”
Yet in general the buoyant stock market seemed to be nothing more than what the nation deserved, given its manifest virtues and the leadership of its bankers and financiers. “The existing financial situation is remarkable,” declared a prominent broker interviewed by the Times, “but it is not more remarkable than the foundation upon which it rests. . . . The master minds of trade and finance enjoy public confidence to a greater degree, perhaps, than any similar number of men of business in this country.”
The truth was, however, that much of the trading volume in that period stemmed from Harriman’s campaign to undo Hill’s acquisition of the Burlington. As Hill’s biographer, Joseph Gilpin Pyle, described Harriman’s strategy, “He would buy the mare to get the filly.”
The Northern Pacific was the mare; the Burlington, of which it was half owner, the filly. The secret stock transactions that Pyle described in horse-trading terms, however, would create a maelstrom in the securities markets in April and May of 1901, culminating in a catastrophic crash that would bring ruin to thousands of innocent investors.
Pyle felt obliged to doff his hat to the sheer daring of Harriman’s plan to wrest control of the Northern Pacific from Hill and Morgan: “From those two grim old lions who guarded the way, the quarry was to be snatched before they sensed the presence of an enemy.” Harriman’s execution was “so swift, so unsparing, so successful, that but for a single oversight his stroke would have gone home.” He was right, in that the single oversight would cost Harriman millions of dollars and a new empire.
* * *
TRADERS FINALLY TOOK notice of the steady gain in Northern Pacific shares in late April, though they saw it as an opportunity to take profits by selling—not a good development for Hill, as it would turn out, for he would need every available share to be assured of control. The complacency extended to Hill’s friends and Morgan’s own traders, whose sales of Nipper sent their shares directly into the accounts of Kuhn, Loeb and thence into Harriman’s hands. When the truth became known, mortification would be widespread. “I cannot tell you how sorry I am,” Charles Ellis, a crony of Lord Mount Stephen’s, wrote Hill late in May. “I sold all my N.P. shares thinking this was nothing but a mad gamble . . . But of course we were all in the dark . . . I would sooner have thrown the money into the sea than look as if I had sold away for the sake of profit.” Another investor who had sold thirty-five thousand shares, or $3.5 million at par value, confessed that he would have “burned his stock” had he known the consequence of his action.
The greatest embarrassment may have been felt by Edward D. Adams, the US representative of Deutsche Bank. Even though he was a member of the Northern Pacific’s executive committee, Adams dumped a large block of Deutsche Bank’s holdings onto the market and sold short another seven thousand shares on the assumption that NP was about to top out as its price neared $100. He was wrong, exposing his bank to a loss of as much as $6 million as the shorted stock kept rising. When that tally was made, however, he was out of communication on the high seas, sailing for Europe. Morgan, it would be reported, was “deeply incensed by the disclosure that an officer of the Northern Pacific had so sold, and thus perhaps contributed to a change in the control of the company.”
The complacency even reached Hill himself. When he was queried by a Great Northern director in the early spring about the chance that the Northern Pacific might pass into hostile hands,
I answered that, with what my friends held at that time, and what Morgan & Co. held, we would have somewhere in the neighborhood of 35 or 40 millions of the stock out of a total of 155 millions, which is larger than is usually held in any of the larger companies. I did not think, at the time, that it was at all likely that anybody would undertake to buy in the market the control of 155 millions of stock.
He was not alone in thinking so, for his holdings combined with Morgan’s indeed seemed out of the reach of mere financial mortals. He soon would learn differently.
Toward the end of the month, Hill realized that something other than the market’s general euphoria must be driving Northern Pacific shares higher. His reaction has been inflated into one of Wall Street’s great historical legends—a mad cross-country dash from Seattle to New York to get his arms around the crisis, with all rail traffic shunted out of his way and the transcontinental trip completed in two and a half days. But legend it almost certainly is: The best evidence indicates that Hill left Seattle on April 18 and dallied at home in St. Paul.
But a week later his journey east at last became invested with a sense of urgency. On Friday, April 26, he learned that Northern Pacific had advanced three points that day on astonishing volume of 106,500 shares. Plainly, an attempt to corner the stock was unfolding, and equally plainly, Harriman was behind it.
No one could have been more aware than Hill of the threat this posed to the Great Northern. His entire life’s work hung in the balance. Control of the Great Northern rested securely in the hands of himself and his friends, but ownership of Northern Pacific was spread among a fragmented, aging, and none too dependable cadre of small investors. “Some of them were 86 years old, others are more than 80, and so on,” Hill testified later. With a well-financed Edward Harriman in the field, “they might have concluded that they would sell their stock, and it might have made a difference as to the majority of the common stock.” And if control of the Northern Pacific passed to the Union Pacific, control of the Great Northern would follow almost inevitably. “We would not have held it a day longer than we could have sold it,” he said. “You can see readily that we didn’t want to hold a line from Lake Superior and the Twin Cities to Puget Sound, with all the rest of the roads in the United States in a position to fight us and without power to fight back.”
Hill boarded an express to Chicago on Saturday, April 27, and was in New York by Monday morning, April 29. Here the chronology of Hill’s travels becomes murky. By some accounts, he headed downtown immediately after disembarking in New York and marched through the front doors of 27 Pine Street, an edifice that housed the headquarters of both the Great Northern and Kuhn, Loeb. According to Schiff, the visit did not take place until Friday, May 3. Schiff based his recollection on the fact that the meeting preceded a dinner at Schiff’s home at which Hill, typically, overstayed his welcome until after midnight even though the Jewish Sabbath, which Schiff observed rigorously, had begun at sundown.
What all agree on was that Schiff took this opportunity to inform Hill that he had been buying Northern Pacific on the Union Pacific’s behalf.
Iron Empires Page 33