“But you can’t get control,” Hill exclaimed, reminding Schiff that he and his friends held as much as $40 million of Northern Pacific, and that as far as he knew, “none of it has been sold.”
“That may be,” Schiff replied, “but we’ve got a lot of it.”
In fact, by then his camp owned at least $60 million, on their way to a total of $78 million.
Hill as yet was unaware of the selling by his friends, heedless as they were of the threat posed by Harriman’s purchases. Hill later would recall that Schiff and Harriman applied pressure on him to allow the Northern Pacific to be swallowed up by the Union Pacific. He recounted to Lord Mount Stephen that Harriman had poked his head into his meeting with Schiff to offer him administrative authority over the combined lines—“You are the boss,” Harriman supposedly told him. “We are all working for you. Give me your orders.” This sounds unlikely, especially since Hill did not mention it to Mount Stephen until July 1904, more than three years later; possibly it reflected an effort by Hill to paint himself as a man who resisted even this alluring blandishment in the name of protecting the interests of his minority shareholders.
Monday, April 29, was an extraordinary day for the New York Stock Exchange in several respects. For one thing, it was the exchange’s first session in its temporary quarters at the New York Produce Exchange, a cavernous landmark overlooking Bowling Green at the foot of Broadway. The stock exchange was renting the south end of the building for $25,000 a year while a new building was constructed for its traders at Broad and Wall, two city blocks north. Workmen had labored through the weekend, tearing tickers and trading posts out of the old stock exchange “by the roots,” leaving a gutted building to be razed. Crews at the Produce Exchange finished installing the “annunciator,” a wall of five hundred signboards that notified brokers they were needed at the door or on the telephone; 450 telephones were wired and tested for the opening of trading. Western Union had installed six cables of fifty wires each, and tested these by sending sample dispatches to Chicago and San Francisco.
At nine thirty the next morning, McPherson Kennedy, the Stock Exchange chairman, stood on the floor, dubiously eyeing a rostrum “perched high on the Whitehall-St. side like a swallow’s nest on a cliff,” from which he would gavel open the trading day a half-hour hence. Brokers swarmed around him, trying to find trading posts that were not quite situated in the same places as they had been in their old digs, since the old configuration could not be precisely replicated. The floor was unusually congested, for dozens of senior traders who normally would have worked from their offices had decided to join the throng on this inaugural day.
Finally, at 10 A.M., Kennedy brought the gavel down from his swallow’s nest. Pandemonium instantly spread wall-to-wall. Wires were crossed and phones went dead. The annunciators failed to work. The stock trading floor was separated from the corn and wheat pits only by a low partition, and the open outcry of the commodities brokers mixed with the stock traders’ calls in a cacophonous babel. But that was merely the physical environment. From the moment trading began, the entire financial world seemed to be seized by insanity.
Before the first hour of trading had passed, 739,870 shares had been traded—a figure that would have surpassed the entire day’s volume on all but a handful of sessions in the previous year, generally by two- or threefold. By noon the volume had reached 1,138,000 million shares, and by the end of the day a new record of 2,760,000 was set. Fully one-third of the total volume was accounted for by trading in only seven stocks: Union Pacific common and preferred, Northern Pacific common and preferred, Southern Pacific, and United States Steel common and preferred—all companies associated with Harriman or Morgan. Union Pacific and Northern Pacific had gained a stunning eleven and ten and a half points, respectively. The next day would bring even more frenzied trading, ending with a volume record that would stand for decades.
The trading in Union Pacific reflected rumors that Harriman’s control of the railroad was slipping. The prevailing story was that a consortium of Chicagoans had caught him by surprise by buying up shares of UP, purportedly with the connivance of William K. Vanderbilt, the Commodore’s grandson and current head of the family. The newspapers took the bit in their teeth and ran with it. “Union Pacific Control Lost By E.H. Harriman,” the Times declared in its editions of May 1. “The story of how the control of this great property was lost by E.H. Harriman and his associates, who are credited as being among the shrewdest railroad men and financiers in the country, is one of the most interesting in the long chapter of remarkable incidents which have filled the history of American Railway management and financiering,” the Times reported.
This supposed contest for control of the Union Pacific was nonexistent, but reporters found irresistible the concept of Harriman “caught napping,” as the Times put it. “Representatives of Harriman interests . . . say they know nothing, and, although they will not admit that they have lost control, they will not deny that someone else has secured it.” The Times struggled to find credible sources, eventually reporting from Grand Central Station, the nerve center of Vanderbilt’s rail empire, that “every one from the porters up seemed to believe that Mr. Vanderbilt had secured control of the property [that is, the Union Pacific], though everybody denied having any specific reason for this belief.”
From Harriman’s standpoint, the market’s preoccupation with the fate of the Union Pacific was heaven-sent camouflage for what he was really up to, the securing of control of the Northern Pacific. He would wait until Thursday, May 2, to quash the rumors about the Union Pacific. “I certainly have not let go of anything that I have had,” he told reporters then. With that, the air promptly began leaking out of Union Pacific stock, which would fall as low as $76 in the ensuing week. But the frenzy in other railroad issues continued, underscoring Morgan’s later assertion that at the time “it was a common story . . . that nearly every day, somebody was negotiating for some line or buying, or trying to buy, a railroad.”
* * *
AT NOON ON Tuesday, April 30, the cream of New York Jewish financial society gathered at the home of Mr. and Mrs. Sigmund Neustadt at Sixty-Ninth Street and Fifth Avenue to witness the wedding of Miss Adele Gertrude Neustadt to Mortimer Leo Schiff, Jacob Schiff’s son. This was another dynastic intermarriage within the Jewish financial community, for Neustadt was the son of a founder of the prominent securities brokerage Hallgarten & Co. The event warranted a lengthy notice in the New York Times. Though not easily impressed, the Times remarked that “not since the Vanderbilt wedding have such costly and handsome presents been seen at any wedding” and counted one hundred valued at more than $1,000 each—a prize hoard that was displayed, in accordance with society custom, only to the relatives and most intimate friends of the couple. (The Times’ s reference was to the lavish 1899 wedding of William K. Vanderbilt II, the Commodore’s great-grandson, to Virginia Fair, heiress to the Comstock Lode.)
Among the guests were the Harrimans, the William A. Rockefellers (erroneously identified by the Times as the “William D.” Rockefellers) but not James J. Hill, even though a few years earlier he had employed Mortimer Schiff, known as Morti, at the Great Northern offices in St. Paul at Jacob’s request. Jacob and Therese, who had moved three blocks uptown to 965 Fifth Avenue at Seventy-Seventh Street, gave Morti and Adele the old family town home at 932 Fifth Avenue as a wedding present. “It’s nice to own a house in which I got so many spankings,” Morti, who had been something of a family black sheep and a disappointment to his father, was said to have remarked.* After the ceremony, the wedding party repaired to the opulent Sherry’s restaurant at Fifth and Forty-Fourth for a 3 P.M. reception.
While the ceremony was still ongoing, the stock market was continuing the frenzy of the previous day. The New York Sun calculated the value of trading that Tuesday at “a million every minute”—based on $1 million in par value (that is, the $100 face value of a stock share in that era) traded per minute. Not all the trading of 3,303,0
17 shares was on the upside, for Northern Pacific and Union Pacific both gave up some of their gains from the previous day, Union Pacific in part because Vanderbilt was rumored to have prevailed in his attempt to control the road. Exhaustion swept across the exchange, where the floor brokers, or “specialists,” staggered under the onslaught of orders. “The strain has affected the health of some of the specialists,” the Sun reported, “and they said that they were going to give up business for a time at any cost rather than risk a permanent breakdown.”
The trading surge continued unrelentingly over the next several days. Meanwhile, in the offices of the Great Northern and of the House of Morgan a few blocks from the Produce Exchange, a crisis of a different sort was developing.
Hill’s conversation with Jacob Schiff on April 29 had brought home the point that even if Hill still had control of the Northern Pacific, his position was deteriorating rapidly. The selling into what appeared to be an unwarrantedly buoyant market for Nipper had taken on a life of its own. Hill began to wire his friends to stand fast, but insiders’ sell orders already in the pipeline were still being executed as if his control was secure. On May 2, J. P. Morgan & Co. sold ten thousand shares of Northern Pacific, a cool million dollars’ worth, “in the ordinary course of business.” The same day, the treasurer of one of the railroad’s own subsidiaries unloaded thirteen thousand more shares. What was uncertain was whether control already had passed to the Harriman clique. A counterstrike was imperative, Hill agreed with Robert Bacon, the senior partner at Morgan’s firm in New York. They dispatched a wire to Aix-les-Bains with a request for Pierpont’s permission to take it.
Around that time, John S. Kennedy encountered Pierpont at Aix, where they were sharing the waters. Morgan informed him apropos of Northern Pacific that “there were parties evidently purchasing the stock in New York, and he seemed to think it was with a view of getting control.” Ostensibly without prompting, Kennedy volunteered a pledge not to sell any of his own holdings of the stock. Kennedy claimed that Morgan did not mention Harriman’s name, nor what steps he intended to take. But his next move would become clear soon enough. The battle was now on, and the New York Stock Exchange was about to experience the wildest week in its history.
18
“A Good-Sized Panic”
BERNARD BARUCH MADE a habit of arriving at the stock exchange an hour or two before the opening, hoping to glean some intelligence that might allow him to repeat his 1899 triumph in Liggett & Myers. On Monday morning, May 6, the ambitious thirty-year-old broker was hanging out at the arbitrage desk, keeping an eye on incoming cables from London. Next to him stood Talbot Taylor, the son-in-law of James Keene, Pierpont Morgan’s ace trader. Baruch companionably pointed out that Northern Pacific was trading in London several points below its closing price in New York.
Taylor fixed him with a level stare. “Bernie, are you doing anything in Northern Pacific?”
“Yes,” Baruch replied. “And I’ll tell you how to make some money out of it: Take an arbitrage profit.” In other words, buy in London at the lower price and sell in New York simultaneously at the higher.
To any experienced broker, this was an obvious strategy. Taylor seemed to have doubts. He pondered the idea, thoughtfully tapping his lips with the blunt end of his pencil. Then he said: “If I were you, Bernie, I wouldn’t arbitrage Nipper.”
Baruch did not need to hear another word to know that something was up with Northern Pacific, and J. P. Morgan must be at the center of it. He told Taylor that he already had acquired some NP and would let him have the shares if he needed them. At that, Taylor took him by the arm and led him to a quiet spot.
“Bernie,” he whispered, “there is a terrific contest for control and Mr. Keene is acting for J.P. Morgan. Be careful, and don’t be short of this stock.” He explained that the contest would be won by whoever had the most shares actually in hand. There was no point in buying shares in London, for the week or more needed to ship the stock certificates across the Atlantic meant they would be useless in a situation that was likely to come to a climax within days. “What I buy must be delivered now,” Taylor said. “Stock bought in London will not do.”
Baruch was determined to keep Taylor’s words to himself, but their import could not be ignored. With Morgan and Harriman both in the market for Northern Pacific, every available share was likely to be snapped up in a strongly rising market. This posed a mortal threat to unsuspecting shorts—traders who had sold borrowed shares in the expectation that Nipper’s elevated price would collapse, at which point they could buy back the shares cheaply and return them to the lenders at a profit. Short sellers merely reversed the order of the Wall Street mantra to “buy low, sell high”—they sold high first, and bought low later. The practice required ready capital and intestinal fortitude, for a short who reckoned wrong was exposed to a theoretically infinite loss if the shares he had sold kept rising in price; he would have sold high and been forced to cover his positions by buying even higher.
Baruch knew that the shorts had been betting big on Nipper’s fall. If trading proceeded as Taylor hinted, they would have to raise millions to cover their Nipper shorts—almost certainly by dumping all their other stocks at fire-sale prices. “A corner in Northern Securities,” he reflected, “would produce a general collapse in the market.”
Accordingly, Baruch made two decisions on that fateful Monday morning. The first was to avoid any trading in Northern Pacific, for when behemoths were trampling each other, the only safe place to be was the sidelines. The second was to go short in several leading stocks in the market, anticipating the crash. Over the next four days, these resolutions enabled him to witness events “as if I were a spectator, and not one of its hapless victims.”
And spectacle it was—one of the great panics of Baruch’s career.
* * *
OVER THE WEEKEND of May 4–5, both sides in the battle over Northern Pacific had assessed their positions and found the results unnerving.
At their meeting that week, Jacob Schiff had assured James J. Hill that Harriman’s buying had not been aimed at driving Hill out of the Northern Pacific, but rather at bringing about “the harmony and community of interest which other means and appeals to him [that is, the proposal to share the Burlington] had failed to produce.” Hill was not comforted. After assessing his portfolio he warned the Morgan partner Robert Bacon that he and his associates held only $20 million of Nipper. Combining that with Morgan’s $8 million, they were still well short of a majority of the $80 million outstanding in Northern Pacific common and therefore had their flanks exposed to Harriman’s raid.
Bacon wired these figures to Morgan at Aix-les-Bains and asked him for permission to buy another 150,000 shares, or $15 million at par value, to put them over the top. His message did not reach Aix until after the stock market closed for the weekend at noon on Saturday, New York time. And when he received it, the wire rattled Morgan—not least because he considered his role in the reorganization of the railroad to be on a more elevated plane than the merely financial. “We had reorganized the Northern Pacific,” he recounted later. “I feel bound in all honor when I reorganize a property and am morally responsible for its management to protect it.” His reply telegram, bearing authorization to acquire 150,000 shares, was in Bacon’s hands by midday Sunday.
Harriman, meanwhile, had lain abed Friday night tormented by the thought that a loophole might have left his own position less than airtight. Thanks to assiduous buying by Kuhn, Loeb, the Union Pacific now controlled more than $78 million in Northern Pacific stock—a majority of all the $155 million in outstanding shares. But $42 million of the total was in preferred shares. The remainder was in common, but short of a majority in the common by about forty thousand shares.
The common and preferred shareholders had equal voting rights, but as Harriman knew, the corporate bylaws allowed Northern Pacific’s board to retire the preferred at par, or $100 per share, effective the following January 1. The rules gave th
e common shareholders the right to buy up the preferred shares and convert them to common, but no reciprocal right was afforded the preferred—its holders could not convert to common, but could receive only cash. This “bothered me somewhat,” Harriman reflected later, “and I felt that we ought not to leave open to them any chance of retiring our preferred stock and leaving us with a minority interest in the common stock.”
This was not a new concern. Aware of the bylaw provisions, Harriman and the partners at Kuhn, Loeb had polled five experts in corporate law about whether a majority of both classes together was tantamount to majority control of the company. The experts “agreed unanimously” that it was, Otto Kahn recalled. “On the strength of these legal opinions . . . Mr. Harriman was convinced at the time and ever afterward that he held, beyond any question of doubt, the winning hand.”
Yet the situation was not so clear-cut. It was true that Harriman’s majority holding of all shares would allow him to elect his own board at the annual shareholders meeting, which was to take place in October. Morgan and Hill, however, planned to hold an early board vote in May to retire the preferred as of January. They also proposed to postpone the annual meeting until after January 1. These two actions together would allow the majority of common stockholders—that is, the Morgan and Hill camp—to extinguish Harriman’s preferred holdings before he could elect his own board to block the move. Whether the sitting Northern Pacific board had the power to retire the preferred that far in advance and to postpone the annual meeting was unclear. Harriman’s lawyers answered in the negative, but as long as control remained in question, litigation—prolonged, expensive, and uncertain—threatened. Surely, Harriman reasoned, it would be better to make the issue moot by acquiring an undisputed majority of the common shares.
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