Iron Empires

by Michael Hiltzik

  Wall Street bankers were not the only Americans steeling themselves for the advent of the Roosevelt administration. Henry Adams fretted about the new president’s temperament. “Power when wielded by abnormal energy is the most serious of facts,” he would reflect in his autobiography, The Education of Henry Adams, “and all Roosevelt’s friends know that his restless and combative energy was more than abnormal. . . . He was pure act.”

  On the surface, Roosevelt was willing to mollify the financial community. He seemed to accept the counsel of Mark Hanna, the Republican senator from Ohio who had been widely regarded as the power behind McKinley’s throne, to “Go Slow. . . . You will be besieged from all sides . . . Hear them all patiently but reserve your decision.”

  Roosevelt’s first annual address to Congress, delivered on December 3, offered glimmers of the passive-aggressive approach he would pursue in dealing with Wall Street. In its opening passages he lionized the slain McKinley and appeared to endorse his predecessor’s hands-off business policies: “During the last five years business confidence has been restored, and the nation is to be congratulated because of its present abounding prosperity,” Roosevelt declared. “Such prosperity can never be created by law alone, although it is easy enough to destroy it by mischievous laws.” He praised “the captains of industry who have driven the railway systems across this continent, who have built up our commerce, who have developed our manufactures.”

  He bowed to the profit motive, which he acknowledged to be the spark of successful enterprises. The creation of great business fortunes, he observed, “has aroused much antagonism, a great part of which is wholly without warrant. . . . The mechanism of modern business is so delicate that extreme care must be taken not to interfere with it in a spirit of rashness or ignorance. Many of those who have made it their vocation to denounce the great industrial combinations which are popularly, although with technical inaccuracy, known as ‘trusts,’ appeal especially to hatred and fear.”

  Then, so smoothly it may have eluded his listeners at first, Roosevelt endorsed those very same denunciations. The “widespread conviction in the minds of the American people that the great corporations known as trusts are in certain of their features and tendencies hurtful to the general welfare” was not to be dismissed, for it was based not on envy or ignorance, but upon “the sincere conviction that combination and concentration should be . . . supervised and within reasonable limits controlled; and in my judgment this conviction is right.”

  Roosevelt called for a higher standard of disclosure—a concept that was anathema to trust barons who customarily kept the financial details of their businesses concealed even from their own directors and shareholders. “The first requisite is knowledge, full and complete—knowledge which may be made public to the world.” He demanded federal supervision and regulation over all corporations engaged in interstate commerce, especially of any deriving any portion of its profits from “some monopolistic element or tendency in its business”—the railroads, for instance. His words presaged vigorous enforcement of the Sherman Antitrust Act’s prohibition of any such combinations “in restraint of trade of commerce” for the first time since its enactment a decade earlier.

  Roosevelt placed the welfare of wage earners front and center in administration policy and pledged to protect workers’ rights to act “in combination or association with others [through] associations or unions of wage-workers.”

  The details of these proposals and pledges were vague. But there could be no doubt that the address represented not Republican Party orthodoxy but a specifically Rooseveltian worldview. “The President has written every word of it himself,” John Hay, who would serve Roosevelt as secretary of state as he had served McKinley, told journalist Joseph Bucklin Bishop, Roosevelt’s authorized biographer. Under McKinley, Hay explained, the annual message had been a composite of statements from cabinet departments; this one was Roosevelt’s alone. “It is the most individual message since Lincoln.” (Hay would know; he had served as Abraham Lincoln’s private secretary.)

  The vigor of Roosevelt’s speech won praise on Capitol Hill and in newspaper editorial offices around the country. But Wall Street bankers who reviewed its words carefully could not have been comforted by the signs that the White House was shifting from unquestioning support of business toward a broader concept of the public interest, including a tilt toward labor that sharply diverged from White House policy dating back to Grover Cleveland. Plainly, Roosevelt intended to make it his business to disrupt economic power if he thought its concentration led to abuses against the public good. Whom he would target first, however, remained to be seen.

  * * *

  MORGAN MIGHT WELL have thought his life’s work to be especially vulnerable to the new president’s reformist agenda, for only a month earlier—weeks after Roosevelt’s accession to the presidency—he had put the finishing touches on a solution to the chaos unleashed by the battle over the Northern Pacific. This was the creation of a new trust, the Northern Securities Company.

  Following the crash of early May and the joint decision of Kuhn, Loeb and Morgan & Co. to allow the Northern Pacific shorts to cover at $150 per share, the principals in the dispute showed little taste for prolonging hostilities. Hill, who habitually kept Wall Street and its machinations at arm’s length, was even jaunty about the end of the fight. On May 12, three days after the climactic panic, he had wandered into the Kuhn, Loeb offices for a companionable chat with Jacob Schiff, who was out. Instead he stopped by Felix Warburg’s desk.

  “How is Schiff?” he asked.

  “Not very happy,” Warburg replied.

  Hill shrugged. “He takes these things too seriously,” he said.

  Morgan had wanted to end the conflict over the Northern Pacific as much as anyone else, but he constructed the peace settlement exactingly. Concerned with finding a way to block any new battle for control of the Northern Pacific, he dusted off a structure that had been conceived years earlier by Hill for the consolidation of the Northern Pacific and Great Northern, but had been shelved after the state of Minnesota blocked the merger: a holding company to which the shares of both railroads would be contributed by their owners, to be managed as a unified enterprise.

  Hill and Morgan—along with Harriman and Schiff—would testify later that the idea of eliminating competition between the two northern roads never entered their heads, though it obviously would be the inevitable result of unified management. Morgan put the case succinctly that the Northern Securities trust reflected the higher imperative of averting another takeover effort, since that would interfere with the future he envisioned for the Northern Pacific, and which NP shareholders ostensibly endorsed.

  “We didn’t want convulsions going on,” Morgan explained. His goal was to protect the reorganization plans he had made for the railroad, “for the carrying out of which we were morally responsible. . . . It was not a question of control. It is a moral control.”

  The idea was to quarantine the shares in an entity whose very size placed it beyond the grasp of hostile attackers. “I wanted to put it in a company that nobody could ever buy,” Morgan testified. Northern Securities, as he conceived the trust, would have a capitalization of some $400 million, mostly comprising the shares of Northern Pacific and the Great Northern. That would create what Morgan described as “the only investment or trust company that I knew of where the stock was large enough so that in all human probability I felt that if it was not safe there it was not safe anywhere . . . There is no interest that I know of to-day that can control the Northern Securities Company.”

  For the scheme to work, however, almost all the shares of Northern Pacific had to be contributed. That meant bringing Harriman into the tent.

  Still combative in public, Harriman understood that he had little choice but to join up. For the record, he continued to question whether the majority holders of Northern Pacific common—that is, the Hill and Morgan camp—had the right to retire the preferred shares for cash, wh
ich would render him powerless despite his owning a majority of all shares, preferred and common. But practically speaking, his sole option was to exchange his Northern Pacific shares for stock in the new Northern Securities Company. This forced exchange, he observed, “was a foregone conclusion unless we were prepared to commence litigation, which would be protracted and which would probably be detrimental to the value of all railroad securities in view of the panic of May 9.”

  Jacob Schiff, desperate to end the hostilities between his current and former clients, importuned Harriman to accept the peaceful resolution by depicting it as a boon to his extensive holdings. He reassured Harriman that his reputation as a master dealmaker was undiluted and “a great ‘stock in trade,’ which you and we must be very careful not to imperil” through willful obstruction of the trust. “Although the Union Pacific is in the minority in this holding company, it will nevertheless exercise a potent influence upon the management of the two Northern lines,” Schiff promised. The Union Pacific, after all, had already reached an agreement with the Northern Pacific and Great Northern protecting it from competition for traffic to the Pacific Northwest. “I believe the whole arrangement,” Schiff remarked, “justifies in every way our attempt last spring to preserve the Union Pacific from damage.”

  By the end of May, Harriman had agreed to hand over his Northern Pacific shares and to grant authority to Pierpont Morgan to name the directors of the new company, trusting Morgan to apportion the board seats fairly. In the event, the fifteen-member board named by Morgan included Harriman, Schiff, and Stillman; Morgan’s own associates Daniel S. Lamont, Robert Bacon, and John S. Kennedy; and Hill and several of his lieutenants. Whether Morgan had made a formal undertaking to give Harriman seats on the Northern Securities board is unclear, but it must have been understood that shutting out the Harriman camp entirely would have been an affront to the principles of comity and cooperation he regarded as his personal contribution to the railroad industry. Morgan said his purpose was to show that Northern Pacific management and the Morgan firm “were acting under what we know as a community of interest principle, and that we were not going to have that battle on Wall Street. There was not going to be people standing up there fighting each other.” (He testified later that “the people that were more than surprised that they were put on [the board] were the Union Pacific interests themselves.”)

  Morgan failed, however, to reckon with one individual spoiling for a fight: Theodore Roosevelt.

  * * *

  IT WAS INDISPUTABLE that ordinary Americans shared the new president’s skepticism about the increasing concentration of economic power, to which he had alluded in that maiden address to Congress. Public discontent with economic imperialism was stirred by magazines such as McClure’s, which had been publishing investigative articles by journalists Ida Tarbell, Lincoln Steffens, and Ray Stannard Baker, all of whom had trained their gun sights on big corporations. Theodore Roosevelt was about to take up the muckrakers’ cause in his own inimitable way.

  On September 19, 1902, just after the securities markets closed for the day, Attorney General Philander Knox made good on Roosevelt’s threat to regulate big business, announcing that the president had directed him to file suit to dissolve the Northern Securities Company as a violation of the Sherman Antitrust Act of 1890.

  Roosevelt’s sudden initiative thrilled Morgan critics like Henry Adams, though Adams’s relish was tempered with disquiet about where “our stormy petrel of a President” might turn his attentions next. “Suddenly, this week, without warning, he has hit Pierpont Morgan, the whole railway interest, and the whole Wall Street connection, a tremendous whack square on the nose,” Adams wrote to his friend Elizabeth Cameron. Observing that Roosevelt had given his orders to Attorney General Knox without consulting anyone else in his cabinet, Adams added, “the Wall Street people are in an ulcerated state of inflammation.” To underscore his umbrage at Roosevelt’s action, Morgan even had “declined the White House dinner” for Prince Henry of Prussia, Kaiser Wilhelm’s brother, an important diplomatic event with commercial and high-society overtones. (Morgan eventually attended after all.) Roosevelt “has knocked the stock market silly, and made enemies of pretty much every man in Congress,” Adams commented. Adams was right about Wall Street’s reaction: “Not since the assassination of President McKinley has the stock market had such a sudden and severe shock,” observed the New York Tribune.

  Morgan, perceiving the Northern Securities lawsuit to be the opening salvo of a war on his corporate mergers, including the creation of US Steel, promptly booked a train to Washington to remonstrate with the president in person. The encounter seemed only to increase the president’s delight in having struck the plutocrat “square on the nose.” When Morgan complained about the president’s having acted without warning him in advance, Roosevelt replied, “That is just what we did not want to do.”

  “If we have done anything wrong,” Morgan said, “send your man [Knox] to my man [presumably Francis Lynde Stetson, Morgan’s chief legal counselor] and they can fix it up.”

  “That can’t be done,” Roosevelt shot back. Added Knox, who was in the room, “We don’t want to fix it up, we want to stop it.”

  Finally, Morgan asked if the Northern Securities suit presaged an attack on US Steel.

  Roosevelt’s reply was less than comforting. “Certainly not,” he said, adding mischievously: “Unless we find out that in any case they have done something that we regard as wrong.”

  After Morgan departed, the president reveled in having bested the banker in hand-to-hand combat. “That is a most illuminating illustration of the Wall Street point of view,” he told Knox. “Mr. Morgan could not help regarding me as a big rival operator, who either intended to ruin all his interest or else could be induced to come to an agreement to ruin none.”

  The federal lawsuit and a companion case filed by the state of Minnesota wended their way through the federal courts until fetching up at the Supreme Court for oral arguments on December 14, 1903. The court issued its ruling three months later, to the day: a narrow 5–4 decision finding the Northern trust illegal and ordering its breakup.

  The majority opinion by Justice John Marshall Harlan addressed two questions: whether the Sherman Act extended to railroads even though it seemed to apply strictly to businesses engaged in the manufacture or production of goods or commodities; and if so, whether the Northern trust operated in “restraint of trade or commerce,” which would violate the act. Harlan answered both questions in the affirmative, thus not merely endorsing Roosevelt’s campaign against concentrated economic power but broadening its potential reach.

  Harlan was not persuaded by Morgan’s statements about the “moral” imperatives underlying the creation of the trust, or his goal of fulfilling the simple desire of aging shareholders to see that their hopes for their railroads would survive them. Harlan found that the trust organizers’ intention was “to destroy competition between two great railway carriers engaged in interstate commerce in distant States of the Union.” This goal, he observed, “was concealed under very general words that gave no clue whatever to the real purposes of those who brought about the organization of the Securities Company.”

  The decision in Northern Securities Co. v. United States solidified the federal government’s jurisdiction over corporate behavior, giving Roosevelt a legal cudgel he would continue to wield as the nation’s “trustbuster.” But it is perhaps most noted among legal historians for the ringing dissent lodged by Justice Oliver Wendell Holmes, whom Roosevelt had appointed to the court in the first month of his presidency. “Great cases, like hard cases, make bad law,” Holmes wrote in his pithy fashion. Northern Securities was a “great case” merely because of the “accident of immediate overwhelming interest” that placed it on the political front burner—that is, popular discontent with the concentration of economic power. That circumstance distorted the legal reasoning underlying the case, which Holmes wrote should have been decided in favor of
the company. He felt that the majority had interpreted the language of “restraint of trade” improperly; the phrase did not apply to business combinations merely because they might be big enough to cause public “anxiety,” but to those that actively interfered with competition from outside. In other words, the Great Northern and Northern Pacific should be free to combine in order to limit their competition with each other; only if they prevented competition from outsiders would they be in violation of the law. Otherwise, Holmes concluded, “I can see no part of the conduct of life with which on similar principles Congress might not interfere.”

  Roosevelt was not the first president to have his expectations confounded by his own appointee to the Supreme Court (and would not be the last). But he certainly felt the sting of Holmes’s dissent deeply and personally. “I could carve out of a banana a judge with more backbone than that,” he exclaimed to a friend. Holmes later acknowledged that his dissent in Northern Securities “broke up our incipient friendship,” since Roosevelt looked upon the dissent “as a political departure (or, I suspect, more truly, couldn’t forgive anyone who stood in his way).”

  Yet the Supreme Court’s Northern Securities decision was not to be the last word. Although the justices had ordered the trust broken up, they were silent on how to do so. That was left to the Northern Securities board—and here Pierpont Morgan’s apportionment of only three seats to the Harriman camp, which seemed at the time to be fair, gave Hill and his majority group a significant advantage. For the board voted to distribute the company’s assets pro rata to the contributors, rather than to return to the shareholders the shares they had originally contributed.