The Masters of Capital: A Chronicle of Wall Street

by: John Moody

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The Railroad Builders: A Chronicle of the Welding of the States
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THE MASTERS OF CAPITAL

TEXTBOOK EDITION

THE CHRONICLES

OF AMERICA SERIES

ALLEN JOHNSON

EDITOR

GERHARD R. LOMER

CHARLES W. JEFFERYS

ASSISTANT EDITORS

JOHN PIERPONT MORGAN

After a photograph

THE
lASTERS OF CAPITAL

A CHRONICLE OF WALL STREET
BY JOHN MOODY

LVxeT

VERITAS

1 LVXET

i^i

I.VXET

lilsS^^

|v£HnA«|

NEW HAVEN: YALE UNIVERSITY PRESS

TORONTO: GLASGOW, BEOOK & CO.

LONDON: HUMPHREY MILFORD

OXFORD UNIVERSITY PRESS

1921

r r

7 a

381083

2 • • • - • -

CONTENTS

I. THE RISE OF THE HOUSE OF MORGAN Page 1

II. MORGAN AND THE RAILROADS '^ 19

m. THE IRONMASTERS " 35

IV. STANDARD OIL AND WALL STREET " 52

V. THE STEEL TRUST MERGER - 70

VI. HARRTMAN AND HILL '* 89

Vn. THE APEX OF •'HIGH FINANCE" " |09

Vra. THE PANIC OF 1907 AND AFTER " 134

IX. WALL STREET AND THE WORLD WAR " 155

APPENDIX " 181

BIBUOGRAPmCAL NOTE " 221

INDEX *' 225

ILLUSTRATION

JOHN PIEEPONT MORGAN

After a photograph. Copyright by Pach

Bros. Frontiipieee

'i '

• J

> >

THE MASTERS OF. CAPITAL

CHAPTER I

THE BISE OF THE HOUSE OF MORGijy

The old meaning of the word ** capital" — that is,
an accumulation of wealth, either money or sub-
stantial property, for use in the production of more
wealth — has been greatly enlarged within recent
times. In earlier days, under the crude methods 1
then prevailing, a given manufacturing plant might
earn, say, ten per cent on its invested capital; but
when power machinery and improved processes
came into use and earnings increased, say, to twenty-
five or forty per cent, the practice began of putting
a valuation on this inoreased earning power, and
the "value" of a given property, instead of being
based on its original or replacement cost, came to
be measured by its capacity to earn profits.

Upon this new basis, "capital," as expressed

2 THE MASTERS OP CAPITAL

through the issue of corporate stocks and bonds,
was created by leaps an4 bpun^. As the indus-
try of the community blscathe more efficient and
the unit of eflFort brought "forth greater results, cor-
porate securities WieV^/created in an ever increas-
ing ratio. Theut^as iiie new custom became more
firmly established j it was found that the limit of cap-
italization w^s'by no means reached when greggyrf^
earning po^er alone was capitalized, for in agh>w-
ing co^ftt^y'like the United States, with population
practic^illy doubling every generation, future eam-
i^igltrower was seen to be vastly greater. So the
'.£{t]|yitalists quite naturally took the further stq)
and issued corporate stocks and bonds based on
estimated future earnings.

Naturally, this modern practice of preempting
or capitalizing probabilities was overdone. Such a
process inevitably invited speculation ; and * * boom **
periods, with recurring lapses and setbacks, became
characteristic of the times. Eventually, the capi-
talists learned that this new capital, which repre-
sented not only accumulated wealth and current
earnings but the future possible earning power of
the community generally, must be bolstered up and
insured by some artificial process. So long as nor-
mal growth in population and industry continued,

THE RISE OF THE HOUSE OF MORGAN S

the capitalists could feel fairly secure, but dur-
ing industrial and^anking crises, crop failures, or
other adversities, the earnings of capital might
decline to such a point as seriously to impair the
valuation. Thus there arose among capitalists —
large and small — a widespread demand for legisla-
tion and public aid to protect the integrity of the
values which they had set up — a demand that cus-
toms tariflFs be made more rigid than before to pre-
vent foreign competition and for other measures to
preserve the status qvx) of the new dispensation.

The railroads, during the decade after the Civil
War, were the most conspicuous beneficiaries of
the new process; but when inventions came in,
such as the telephone and electric light and power,
as well as numerous other devices for economiz-
ing time and labor, the current results and future
possibilities of all these likewise were capitalized.
In case of public utilities the supposed value of the
franchise was made the primary basis of capitaliza-
tion. In th^ quarter century from 1890 to 1915,
the total capitalization in the form of stocks and
bonds of public service corporations in the United
States grew from less than two hundred million
to nearly twenty billion dollars. /^

This new capitalism is a phenomaxon of far-

4 THE MASTERS OF CAPrTAL

reaching magnitude in modem society. In the ag-
gregate it represents a valuation of about one
hundred billion dollars in a nation whose entire
wealth is roughly estimated at something more
than twice this sum. When it is remembered that
as recently as 1890 the wealth of the nation was
estimated at only sixty-five billions, and the cor-
porate capital at that time was only about twenty-
five billions, the significance of the development
during the last generation wiU be appreciated.
And when it is further realized that in the past
half century not only a new system of capitalizing
wealth-producing forces has grown up, but also a
concentration of control in small groups of powerful
men, the subject becomes intensely interesting.

The great financial houses of Wall Street, which
are today most closely identified with the organi-
zation and control of the great corporate enter-
prises of the country, nearly all started as firms
engaged in the dry-goods or clothing business. Not
only the Morgans, but the Brown Brothers, Kuhn,
Loeb and Company, the Seligmans, and other
old private banking houses of New York, b^an
in this way. It was a natural beginning, for prior
to the period of modem machinery capital in large

THE RISE OF THE HOUSE OP MORGAN 5

masses was employed chiefly by merchants, and
the wholesale handling of merchandise was among
the most profitable of undertakings. Before the
idea of capitalizing potential possibilities took pos-
session of the minds of men> the purely competi-
tive commercial business, such as the wholesale
merchandising of goods, still held the center of
the stage, both in this coimtry and Europe. Even
Nathan Rothschild, the most famous financier of
the early nineteenth century, had made his start by
financing the materials and products of the early
English cotton mills. So also in America, the
capital of the day tended to gather in the hands
of great merchants whose stock in trade was very
largely cloth or manufactures from cloth. /

Most Americans have forgotten all this early his-
tory. Our " merchant princes " — only sixty years
ago models of aspiration for every American boy —
have passed out of mind. The business of security
making and selling — sixty years ago a small, local,
irregular peddling trade |ls compared to the busi-
ness of the big American merchant — now looms so
large that it seems to have been always important.
In England they remember better. The men whom
we in this country call "private bankers," such as
the Rothschilds, the Barings, and the Morgans, are

6 THE MASTERS OF CAPITAL

not, even today, known as bankers over there,
but as " merchants. " They are the lineal business
descendants of the great East India Company of
olden times.

In the United States one particular section de-
veloped the international merchant. Before the
days of the American Revolution the sharp-eyed,
bony men of New England had gone out scouring
the coasts of Africa and the islands of the sea for
merchandise. There were no better traders in the
world than they, and there are probably no bet-
ter traders than the Yankee now. Then, after the
shipping troubles caused by the War of 1812,. the
men and money of New England turned to the new
business of the manufacture of cloth; and thus was
laid the foxmdation of the great modem industry
of New England, the manufacture of cotton goods.

In the year 1811, a sixteen-year-old dry-goods
clerk, George Peabody, was thrown out of em-
ployment by the burning of his brother's little
store in the old town of Newburyport, Massa-
chusetts. He then went with an xmcle to George-
town, D. C. (since incorporated with Washington),
and opened a small retail dry-goods store there.
After some years he moved to Baltimore and es-
tablished branches in Philadelphia and New York.

THE RISE OF THE HOUSE OF MORGAN 7

Finally, in 1837, at the age of forty-two, he went
to London and founded there the merchant bank-
ing house of George Peabody and Company, which
later became J. S. Morgan and Company.

George Peabody^s departure for London was not
in itself notably interesting at the time. In London
he continued to be a " merchant " just as he had been
in this coxmtry, but in establishing himself in the
greatest mercantile and banking center in the world
he was really making an advance along unusual lines.
The kind of enterprise he founded is excellently
described by his biographer, Fox-Bourne:

In London and in parts of England, he bought British
manufactures for shipment to the United States; and
the ships came back freighted with every kind of Ameri-
can produce for sale in England. To that lucrative
account, however, was added one far more lucrative.
The merchants and manufacturers on both sides of
the Atlantic, who transmitted their goods through him,
sometimes procured from him advances on account of
the goods in his possession long before they were sold^
At other times they found it convenient to leave large
sums in his hands long after the goods were disposed of,
knowing that they could draw whenever they needed,
and that in the meantime their money was being so
profitably invested that they were certain of a proper
interest on their loans. Thus he became a banker as
well as a great merchant, and ultimately much more of
a banker than a merchant.

8 THE MASTERS OF CAPITAL

j In London, the chief financial center of the
/world, George Peabody represented the greatest
land most profitable field for the investment of
capital — the American continent, as yet prac-
tically unscratched. Literally millions of square
miles of the richest farming and mineral lands
were there to be had for the asking; valueless it is
true until populated, but potentially of vast value.
The men who acquired or preempted this vast EI
Dorado, equipped it with power machinery, and
the means of transportation, thus setting labor
to work, would areate values which would mount
for generations to come. Untold wealth would
continuously flow into their coflFers.

To English and continental capital this prospect
was the dream of the ages. No such outlook or
opportxmity had ever come to England or the old
countries. The natural resources of England were
already preempted when modern inventions first
began to come into use; the rich farming lands
and rural regions, while undeveloped, were and for
ages had been in the possession of a rich land-hold-
ing class; labor opuld not be applied to them and
the modem anoration of capitalists found no ex-
traordinary opportunities there for the produc-
1 tion of wealth. Thus English capital inevitably

THE RISE OF THE HOUSE OF MORGAN 9

turned to America, for America had few or no cash
resources and any development of the country on
a large scale must be carried out by those who*
had the means. There was little capital anywhere.
Men were busily engaged, all along the Atlantic
seaboard, making their living in the ordinary, old*
fashioned way, and were not bent, to any great
degree, on amassing large fortxmes. The specu-
lative era in America had not yet arrived, ana,
though manufacturing had begun, we were still —
in the fourth decade of the century — a nation of
planters and farmers.

When Peabody took up his residence in London,
European capitalists were already competing for
the opportunity to exploit American enterprises.
Strong foreign houses were forming financial con-
nections between London and New York. The
Rothschilds had sent August Belmont^o represent
them in New York in the same year that Peabody
had settled in London. The Barings had married
into a Philadelphia family in the early years of
the century and were also financially interested
in the United States. Peabody/' irevertheless, set
out to be the chief representatives? America in
England. Every year he made a point of getting
the leading men of both countries together, and

10 THE MASTERS OP CAPITAL

his Fourth of July dinners in London grew to
be notable occasions for promoting friendliness
between the business interests of England and the
United States.

Peabody never aspired to be an originator or pro-
moter of enterprises. This work he left to others.
His business was that of the financier, a '* master
of capital. " Li this field his success was enormous
for the times, and his name grew constantly in Eng-
lish favor. He finally amassed a fortune of twenty
million dollars, became the greatest philanthropist
of his time, refused a title of nobihty from Queen
Victoria, and died in 1869 in the possession of the
thorough confidence of the English investing pub-
lic. After his death, his statue was set up in the
London financial district, not far from the dingy
little spot at Wanford Court which had been his
office during^his entire London business life.

When Peabody retired, in 1864, Junius S. Mor-
gan became the head of the business. Morgan was
another Yankee dry-goods trader — a member of
the firm of J. M. Beebe and Company of Boston
— who had been taken into partnership by Pea-
body ten years before. He was now about fifty-one
and was fully capable of carrying on the high tra-
ditions of the Peabody firm — doing international

THE RISE OF THE HOUSE OF MORGAN 11

commercial banking, holding deposits of customers,
and buying and selling securities. The firm placed
considerable issues of American railroad bonds
in London and n^otiated a loan to Chile. The
name of George Peabody and Company ended with
the death of Peabody, according to his own wish.
But the business was carried on without interruption
under the name of J. S. Morgan and Company.

Junius Morgan had a son, John Pierpont by name,
bom in Hartford, Connecticut, in 1837, when his
father was in the dry-goods business there. This
son was educated partly at the English High School
in Boston and had finished his education at the Uni-
versity of Gettingen in Germany. After leaving
the University he had entered his father's oflBce in
London. He was an extraordinary mathematician
and had been strongly tempted to take up the career
of professor of mathematics . But his father thought
otherwise, and in the oflBces of George Peabody and
Company young Pierpont got his first training in
the technicalities of commercial banking and no
doubt began the development of that unusual ca-
pacity for accurate and quick decision which so
strongly characterized his entire career.

It was in 1857, the year of a great financial panic
in the United States, that John Pierpont Morgan,

12 THE MASTERS OF CAPITAL

a tall, taciturn young man of twenty, stepped on
the stage of American business. At that time the
house of George Peabody and Company was doing
its American business through the New York firm
of Duncan, Sherman and Company, and this firm
was so seriously crippled in the financial crisis that
in order to save the situation George Peabody
and Company had to appeal to the Bank of Eng-
land for assistance. This experience impressed the
London house with the vital importance of closer
control of its American business, and it was decided
to send young Pierpont Morgan to represent the
firm in New York as cashier of Duncan, Sherman
and Company.

In the offices of Duncan, Sherman and Com-
pany, Pierpont Morgan met Charles H. Dabney,
a partner in the firm and also the accoxmtant. It
was through association with Dabney that Mor-
gan acquired his remarkable and accurate knowl-
edge of bookkeeping and accoimting. But the con-
nection of the Peabody firm with Duncan, Sherman
and Company was not destined to last very long.
In 1864, the year in which George Peabody retired
and was succeeded by Junius S. Morgan, Pierpont
Morgan and Dabney formed a new firm under the
name of Dabney, Morgan and Company, with

THE RISE OF THE HOUSE OF MORGAN 13 ''

offices in Exchange Place, New York. This new
firm became the correspondents of J. S. Morgan and
Company of London. A few years later, Duncan,
Sherman and Company failed and faded from view.

The house of Dabney, Morgan and Company
built up an excellent business in foreign exchange
and in the sale of miscellaneous securities and was
no doubt financially successful, for when Dabney
retired he was currently reported to have taken a
substantial fortune out of the business. But the
house had done nothing spectacular or striking;
it was not classed with the big bankers of the
Street; and its main prestige seems to have been
based simply on its connection with the strong
London firm of J. S. Morgan and Company. But
in the year 1871 a change came. Dabney retired,
the firm was dissolved, and young Morgan became
a partner with the Drexels of Philadelphia, under
the firm name of Drexel, Morgan and Company.
Anthony J. Drexel, the senior partner, then per-
sonally bought the southeastern comer of Wall and
Broad streets and built the Drexel Building, in
which the new firm began its great career.

The Drexels were sons of a German portrait
painter who had wandered about South America
and Mexico carrying on his profession. In the

14 THE MASTERS OF CAPITAL

course of his wanderings in the United States he
had found that he could do a profitable business
buying and selling state bank notes, which formed
the "wildcat" currency of the time. In 1837, the
same year in which Peabody moved to London,
the elder Drexel had established himself in Phila-
delphia on a street known locally by the signifi-
cant name of the " Coast of Algiers," where he laid
the foundation of a great business in buying
bank currency, "shaving" commercial paper, and
financing corporations.

John Pierpont Morgan was thirty-four years old
in 1871 ; Anthony Drexel, his principal partner, was
forty-five — a conservative, intelligent, and popu-
lar man.rp Hsere were four other members in the
new firm, all irom the Drexel house in Philadelphia.
The new firm had advantageous alliances: on one
side of the Atlantic, one of the richest financial
houses in America; on the other, the great English
house of J. S. Morgan and Company, in close touch
with English capital — the greatest body of capi-
tal in the world. Its advantages were clear; but it
also had its disadvantages. In the chief business
of the day — the funding of the government debt
— it came into a field already pretty well occupied.

Some years before the combination of the Drexels

THE RISE OF THE HOUSE OF MORGAN 15

and the Morgans had taken place and while Dab-
ney, Morgan and Company were still doing a quiet
banking business, a financial operation of vast mag-
nitude had been carried on in America. It was the
flotation of the American Civil War debt. This debt
had been placed very largely through Jay Cooke»
a Philadelphia banker and promoter. Cooke was
the typical American pioneer of his time, a tremen-
dous optimist, a great employer of the benefits of
friendship in high places, a sort of financial P. T.
Bamum, who exploited the Government's securi-
ties and later hi^ own. He organized a great
bond-selling campaign, giving "copy" to as many
as eighteen hundred newspapers at a time and
canvassing through his agents ever;^* Xiujalet in
the country. Later, he was naturally thfe man who
had the first opportunity to handle the great re-
funding operations in government bonds which
were put through in 1871.

Thus, the house of Jay Cooke and Company had
forged well to the front, and had built up very
strong connections abroad. During the Civil War
period, English capital as a whole had not flowed
very freely to the Northern States. Tied to the
South by the long established bonds of her cotton
trade, the English were at first more inclined to

16 THE MASTERS OF CAPITAL

/
buy Confederate than Union bonds. The Ger-
mans, however, as a whole were more sympathetic
towards the North, as the great body of German
inmiigrants following the uprising of 1848 were
Northerners and strong supporters of the Union.
And when the six per cent Union bonds had fallen
to sixty cents on the dollar in gold, the Germans,
and especially the rich South German Jews, bc^an
to sell their own and invest in American securities.
To the German Jew, America became the "land
of ten per cent. "

Jay Cooke estimated that by 1869 at least a
billion dollars' worth of United States bonds were
held abroad, of which a large proportion were held
in South Germany. This large investment had
established a new and powerful business interest
in America — the Jewish bond dealers, with foreign
connections in the great European money center
of Frankfort. With this new group of financial mer-
chants Cooke had naturally allied himself, since
the greatest source of English capital was only to
be tapped through the Drexel-Morgan interests.

A keen contest arose between the Cooke interests
y(with their German Jew backing) and the Drexel-
Morgan interests to secure the contracts for the
government financing. In this contest Cooke and

THE RISE OP THE HOUSE OF MORGAN IT

his party won and then carried through an extraor-
dinarfly difficult operation so successfully that
the Rothschilds offered themselves as Cooke's as-
sociates in future enterprises. But the Morgan
interests kept^ter the business, and subsequently,
in combination with Levi P. Morton, secured a
half interest in the government refunding operation
of 1873, involving a sale of $300,000,000 of bonds
— an enormous transaction for those days. Later,
in the fall of the same year. Jay Cooke and Com-
pany failed and this left the field in the United
States for great financial operations entirely in the
hands of the Drexel-Morgan-Morton associates.

By this time the house of Morgan had made
great strides. But its position as the leading finan-
cial house of America had not come about alone
through the downfall and eclipse of Jay Cooke
and Company. A year before the formation of the
Drexel-Morgan firm, an event of great importance
had contributed vastly to the fame and standing
of J. S. Morgan and Company. Toward the end
of October, 1870, the city of London had been
stirred by the news that J. S. Morgan and Com-
pany had taken a French loan of 250,000,000 francs.
It was a syndicate operation and one of the largest
and boldest ever known. Li the previous month

18 THE MASTERS OF CAPITAL

the Germans had crushed the French army at
Sedan, had taken the Emperor Louis Napoleon
prisoner, and had besieged Paris. The only au-
thority for the loan was a provisional government
at Tours. To take such a loan, even at the low
price of about eighty, was undergoing some risk
in view of the circumstances. One thing, however,
was very clear: the hand of a strong, bold man was
at the helm. The bonds were offered to the public
at eighty-five; they advanced at once in price and
within a year were selling fifteen points above what
they cost the Morgan firm. And the syndicate was
believed to have cleared $5,000,000 by the trans-
action. The reputation of the house of Morgan
was thus well established among European bankers
just at the moment when Pierpont Morgan, the
son of Junius, came to the front in combination
with the powerful Drexel interests, and just at
the moment when foreign capital was ready to
pour into America more freely than ever before.
This was the opportunity of the house of Morgan.
As the first big organizers of capital, the Mor-
gans — father and son — were to wield a mighty
influence in American finance.

CHAPTER II

MORGAN AND THE RAILROADS

The work of Drexel, Morgan and Company in the
refunding operations of the government debt, after
the failure of Jay Cooke and Company, added
greatly to American prestige abroad. For more
than forty years the United States had been a
burial ground for British capital. State bonds.
Confederate bonds, railroad bonds, had proved to
be disastrous investments. But now one single
monumental success had restored faith in Ameri-
can securities. In all, about $750,000,000 of bonds
were refunded, of which the Morgans handled a
large part, and this achievement reopened America
to British investors. In 1877 the financial mag-
nates of America gathered in New York at a dinner
to give thanks to Junius S. Morgan for "upholding
unsullied the honor of America in the tabernacle
of the old world, " as Samuel J. Tilden, the toast-
master, expressed the sentiment of the hour.

so THE MASTERS OP CAPITAL

By 1879, with the financing of the war debt ac-
complished, American bankers were ready to turn
to a new field of activity. But leadership in the
dawning financial era was to fall to the younger
men. August Belmont, who represented the Roths-
childs m America, was now sixty-three years old;
Levi P. Morton, who had been Junius Morgan's
fellow partner in the dry-goods firm of James
M. Beebe and Company in Boston, was fifty-five;
Junius Morgan himself, now sixty-six and present-
ing the ponderous figure of an East India mer-
chant prince in an old English play, was retiring
from active business life. The yoimger Morgan
was then forty-two, just about the age of George
Peabody and Junius Morgan when they began
their great careers in London. Hitherto he had
been, merely the son of his grim-mouthed father.
But he had learned the tools of his trade; he had
watched and helped to operate great syndicates;
and he was now well equipped to take his place in
the security markets of America,

Pierpont Morgan had wa^xihed the expansion of
the railroads for many years. He had witnessed the
most spectacular phenomenon of the period, for
he had seen Gould and Vanderbilt accimiulate
their colossal fortunes largely by the manipulation

MORGAN AND THE RAILROADS 21

of railroad properties. But he had taken little
part in the battle of the railroads. Back in 1869,
the firm of Dabney, Morgan and Company had
helped to wrest from Gould and his accoiifiplices
the control of the Albany and Susquehanna Rail-
roady which was turned over to the Delaware and
Hudson Canal Company. Again in 1878, when a
rich comb manufacturer, Adolph Poppenhusen,
had collapsed in the wild exploit of gridironing
Long Island with railroad lines, Drexel, Morgan and
Company picked up for a nominal sum his hold-
ings, which were afterwards to be merged as parts
of the Long Island Railroad. But aside from these
minor incidents, the Morgan firm had not been
active in railroad financing and were not in any

sense known as railroad bankers.

In 1879, however, an incident occurred which
brought Morgan directly into the field of rail-
road finance. William H. Vanderbilt, president and
chief stockholder of the New York Central an4
Hudson River system, was then being harassed
beyond endurance. Popular suspicion had been
excited by his accumulation of a fortune of o^e
hundred milliolis in ten years ; and the New York
Legislature, reflecting public indignation, was in-
vestigating the management of the New York

22 THE MASTERS OP CAPITAL

Central and was proposing radical control of rail-
road management. Besides, the rate wars between
New York and Chicago were then raging. Finally,
to add to these vexations. Jay Gould was at-
tempting blackmail because Vanderbilt would not
take him into the New York Central directo-
rate. Vanderbilt's friends advised him strongly to
dispose of a substantial portion of his stock in New
York Central and thus avert the legislation that
was aimed at him. But how to unload his vast
holdings was a problem. To throw half of them
on the market would result only in a panic; to
distribute the stock by private sale in Wall Street
would also greatly disturb values. Besides, what
banker would undertake to put through such a
gigantic transaction?

Vanderbilt consulted J. Pierpont Morgan, and
Morgan devised a scheme whereby a large block of
New York Central stock could be sold secretly in
England without in any way disturbing the Amer-
ican security markets. This plan was adopted.
The Morgan firm, through its London house, formed
a syndicate and distributed 250,000 shares of the
stock to permanent investors abroad. The trans-
action was kept secret for a time, but after a few
months the details were all published in the New

MORGAN AND THE RAILROADS 23

York and the London papers. Van3erbilt then an-
nounced that a large part of the greiat sum of money
he had received had been reinvested in United States
government bonds. Thus, at one stroke, J. Pier-
pont Morgan not only solved Vanderbilt's difficult
problem and allayed public criticism, but inci-
dentally, it was said, he made a profit for his
syndicate of more than three million dollars.

The financing of American railroads had been
left hitherto largely in the hands of promoters
whose primary interest had been to build the
greatest possible amount of railroad, regardless of
whether there was need for it or not, and sell it out
for the highest possible price. This had been the
programme in the halcyon days after the Civil
War and in the speculative period following the
panic of 1873. The Northern Pacific had been
extended westward to the coast; the Atchison,
Topeka and Santa Fe had been built through the
deserts of Arizona and New Mexico; Gould had
radiated his more or less dubious lines throughout
sparsely settled sections west of the Mississippi;
the Union Pacific had entered upon that policy of
constructing or acquiring branch lines and feeders,
which a few years later was its financial undoing.
And in the East a no less reckless and ill-advised

24 THE MASTERS OP CAPITAL

policy of construction had been going on. Most of
the older systems were carried away with the idea
of more and more mileage, more and more branches,
more and more parallel lines. By the early eighties
about twice as many railroad lines had been built
as the country could profitably employ, and there
had been issued about four times the amount of
securities that the country could pay interest or
dividends on. In 1884, Poor's Manual^ the rail-
road authority of that time, stated with great
positiveness that the entire capital stock of the
railroads of the United States — then about four
billion dollars — represented "water.'* It esti-
mated that, in the three years ending December
SI, 1883, two billions of capital and debt had been
created, and that the "whole increase of share
capital [about one billion] and a portion of the
bonded debt was in excess of construction."

It was a crucial time for genuine investors, both
at home and abroad. Thousands of these inves-
tors in Great Britain, on the Continent, and in >
the eastern parts of the United States, who had
supplied, in one form or another, the cash for this
vast promotion ot the American transportation
system, suddenly found their securities dwind-
ling away. There was urgent need for a strong

MORGAN AND THE RAILROADS 25

representative to champion their interests. After
his successful underwriting of the New York Cen-
tral transaction, Morgan began to be looked upon as
a rescuer of investors, a solver of difficult financial
problems. And he stood alone in this regard. The
great railroad names of the period — Jay Gould,
Russell Sage, Collis P. Huntington, Calvin Brice,
and others — connoted expansion and specula-
tion rather than wise control and conservative
management of railroad properties.

For a half dozen years the gigantic structure
of inflated railroad capitalization and over ex-
pansion stood — somewhat unsteadily — and then
the crash came. By 1884 there were five inde-
pendent lines operating between Chicago and the
Atlantic seaboard, and two more were building.
Three roads would have been ample for all the
business. Railroad rates were torn to pieces; pas-
sengers traveled from New York to Chicago for
a dollar a head; grain was handled at an actual
loss of fifty per cent. Three of these five roads were
tottering on the edge of bankruptcy, one had gone
bankrupt, and the New York Central was on the
verge of cutting down its dividends. It was high
time for something of a constructive nature to
be done.

£6 THE MASTERS OP CAPITAL

In the summer of 1885, William H. Vanderbilt
was again in dire need of a friend. The West Shore
Hailroad was about to begin business as a com-
petitor of the Vanderbilt lines. The Pennsylvania
Railroad interests were supposed to sympathize
with the West Shore project, for the reason that it
promised to embarrass seriously their chief com-
petitor. At the same time Vanderbilt was support-
ing a project in Pennsylvania to parallel the main
line of the Pennsylvania Railroad. The West
Shore, according to the custom of the times, had
l)een heavily overcapitalized and, just as the road
was nearing completion, the company was dying
ior want of cash. Unless the Pennsylvania interests
or some other strong capitalists should come to the
Tescue, it evidently could not survive. Just at this
juncture Morgan came forward with the remedy.
He arranged to sell to the Pennsylvania interests
Vanderbilt's competing road in Pennsylvania and
to sell to the New York Central, practically at cost,
the West Shore Railroad.

Again, when the Philadelphia and Reading prop-
erty, in which large amounts of English capital
had been sunk, was facing bankruptcy, a Morgan
syndicate furnished the millions needed for its
reorganization. In 1887, when the Baltimore and

MORGAN AND THE RAILROADS 27

Ohio Railroad was suddenly found to be also in a
state of financial collapse, the Morgans stepped for-
ward, found new capital for it, and commenced
a policy of reconstruction — a policy, however,
which was interrupted for a while by successful op-
position from the old speculative interests. And
a year later a Morgan syndicate reorganized the
Chesapeake and Ohio.

Thus, before the panic of 1893, the firm of Drexel,
Morgan and Company built up its reputation as
the financier and reorganizer of mismanaged prop-
erties and in this respect stood in a unique position
among American bankers. The great Jewish se-
curity merchants had as yet little hold on Ameri-
can railways. The Rothschilds were content to
remain a close ally of Morgan rather than a com-
petitor, so far as the American field was concerned.
Kuhn, Loeb and Company had not yet become a
raih*oad power. The Speyers were strong but not
masterful. The Seligmans, who had been promi-
nent in the government refunding operations, had
not become a leading house of issue for railway
securities. Consequently, when more than half
of the railroad mileage of the United States went
into the hands of receivers, investors, both foreign
and. American, looked to one man and one house

28 THE MASTERS OF CAPITAL

to defend their billions of investment in the rail-
roads — the house of Morgan and its strong bold
personality, John Fierpont Morgan, now known as
"Jupiter" Morgan.

^ First came the reorganization of the Southern
Railway. This system, whose connecting railroads
had been snarled into an inextricable tangle under
the Richmond and West Point Terminal control by
a group of New York and Richmond speculators,
fell into financial chaos. Morgan at first declined
to have anything to do with the mess. But, others
having tried in vain, the security holders finally be-
sought Morgan to undertake the task on his own
terms. In a comparatively short time a Morgan
syndicate had reorganized the company, and long
before the dire effects of the panic of 189S and
the ensuing depression had spent themselves, the
Southern Railway system had advanced far on its
new career of progress and prosperity.

It was not direct financial profit for himself or
his firm that induced Morgan to undertake this
reorganization; he was actuated by a larger, though
not entirely unselfish, motive. He felt obliged in "^
self-defense to see to it that the many millions of
capital (especially that of English investors) should
not be hopelessly wiped out. A firm whose greatest

MORGAN AND THE RAILROADS 29

specialty was the marketing of American secwities
abroad could not afford to have these securities
pass as worthless paper before the eyes of the world.
The fame of the house of Morgan in London and \
all its traditions were based on the greatness and \
wealth of America, and both the Morgans, father
and son, had always been *' bulls on America."

With the successful reorganization of the South-
em system, Morgan at last had a firm grip upon
that slippery thing, the American railroad cor-
poration. For forty years American railroad pro-
moters, reckless optimists, gigantic thieves, huge
confidence men — magnified a hundred times by
the size of their transactions — had juggled and
manipulated and exploited this great business for
their own profit and the general loss of every one
else concerned. Morgan had been watching for
twenty years this manipulation of railroad prop-
erty. The control of the properties lay in the vot-
ing power of the stock; and, if the voting power
could not be controlled, little could be accom-
plished against opposition. His attempt to recon-
struct the Baltimore and Ohio in 1887 was defeated
entirely because the controlling interests check-
mated him by voting his representative out. He
devised a plan whereby he himself would control the

so THE MASTERS! OF CAPITAL

* *

voting power. Before undertaking a reorganiza-
tion or finding the new capital, he provided for
a "voting trust," a device which, for a number of
years, placed in the hands of a few trustees selected
by himself the entire voting power of the stock.
This scheme was followed in the reorganization
of the Southern Railway and was adopted in all
later instances.

The next drastic reorganization was that of the
Erie system. Before undertaking this task Mor-
gan was particularly careful to concentrate control
in his own hands. Years before, J. S. Morgan and
Company had been the fiscal agents of the Erie in
London and had placed large amounts of Erie
bonds among British investors. Morgan was there-
fore particularly anxious to protect these bond-
holders, and in the scheme which he devised he
saw that these bondholders themselves got enough
voting power to outvote the scattered stockhold^*^,
though even the bondholders were controlled lor
the time being by a Morgan "voting tru t." It
was only fair that the stockholders rather than the
bondholders should suffer in the Erie reorganiza-
tion, because the great issues of Erie stock created
during the gambling days of Drew, Fisk, and Gould
represented little or no cash investment, while the

MORGAN AND THE RAILROADS 31

bonds had, for the most part, been issued for the
payment of actual property.

Other Morgan reorganizations now followed
apace. The Hocking Valley, a system of roads' in
the Middle West, was placed on its feet; the North-
em Pacific, after its checkered career of thirty
years of construction, collapse, and manipulation,
finally found permanent lodgment in the capacious
arms of the firm of Morgan. The Baltimore and
Ohio, the Atchison, Topeka and Santa Fe, and
several other large properties, although not exclu-
sively reorganized by the Morgans, came to life
again partially as a result of their work. The
•Philadelphia and Reading system, an acute sufferer
1mm the wild gambling spirit of the previous dec-
ade, was also taken in hand for the second time,
and vnth a strong financial organization started
on its^ career as the dominating factor in the an-
tbifacite coal combination; and other properties
nbf cJifiipletely wrecked in the smash of 1893,
he practically bequeathed
the management of the railroad to his secretary,
although Fish did not actually become president
until some years later.

Harriman and Fish had known each other for
many years, and as young men had traveled about
town a great deal together. In 1880 they were
both directors in the Ogdensburg and Lake Cham-
plain Railroad, a property of which Harriman had
hoped to acquire the control, for by this time Har-
riman had made very substantial progress in busi-
ness, having accumulated several hundred thou-
sand dollars through shrewd trading in securities.
He was now b^inning to turn away from mere
brokerage to railroad management and finance.

The Illinois Central had acquired control of an
extensive system of lines south of St. Louis, known
as the Chicago, St. Louis and New Orleans, and
Stuyvesant Fish had sought Harriman's assistance
in placing the bonds. In this work Harriman was
notably successful. Meanwhile he had himself
acquired a large block of Illinois Central stock
and had become more and more the confidential
adviser of Fish. At that time there was a large
Dutch stockholding interest in the road, whose

HABBIMAN AND HILL 9S

votes were cast collectively by the firm that had
originally placed the stock in Holland, Boissevain
Brothers. One member o{ this firm came on a visit
to America. Harriman met him, gained his confi-
dence, and then arranged to hold his proxies in the
Illinois Central meetings. Soon afterwards Harri-
man was elected a director and became the close
associate of Stuyvesant Fish in the actual operation
and control of the road.

No two men could have* been more dissimilar in
personality and bearing than these two. Harri-
man was small, quiet; restless, and. secretive; Fish
was a big, open-faced, easy-mannered young man,
whose blond hair and great stature had eam^ for
him in the financial district the name of '^ White
Elephant." For a time, however, the two men
worked together in harmony. They bought a por-
tion of the old Wabash, St. Louis and Pacific after
its failure in 1884; in 1887 they bought the Du-
buque and Sioux City Railroad; in the early nine-
ties they bought (much against the will of Collis P.
Huntington) the chain of roads with which Hunt-
ington had planned to hitch his Southern Pacific
system to the Atlantic seaboard; they bought an
important section of the St. Louis, Alton and Terre
Haute, which George Foster Peabody had been

94 THE MASTERS OF CAPITAL

developing in ^southern Illinois^ thus securing an
entry of their own into St. Louis; and they pur-
chased a great number of small roads, until, from
the^two thousand miles they had in 1888, they
owned and controlled in 1897 a system of over
five thousand miles.

This policy of expansion did not bring disaster,
as had been the case with so many other lines.
All through this period the road's credit remained
high, and even in the early eighties it was able to
sell three and one-half per cent bonds while other
roads of good credit were raising money at five or
six per cent. This high credit of the Illinois Cen-
tral was very largely due to the rigid policies which
Harriman introduced and developed. Harriman
was more than a mere banker or broker; he was a
practical railroad operating man. He had made
a thorough study of railroading and had early
adopted the theory that the first duty of railroad
management was to maintain the character of the
physical property and to consider mere current
profits as secondary. Thus, in the management of
the Illinois Central, he never "skinned" the road
to pay dividends; he never allowed the roadbed or
equipment to become inefiBcient. Another sound
idea he adopted was always to provide ample

HAKRIMAN AND HELL 95

funds and reserves for contingencies; never to
allow his property to take financial chances in
times of duUness or depression. Even when he was
raising large amounts of new capital for extensions
or purchases, he always provided far more cash
assets than were currently needed.

Harriman had very soon grown powerful enough "^
to cross the path of Pierpont Morgan. In 1887,
Morgan held the proxies of the stockholders in the
Dubuque and Sioux City Railroad, which Harri-
man wished to buy for the Illinois Central. Harri-
man fought his plan through and defeated Morgan.
This coup was regarded as a ten days' wonder in
Wall Street. From that time on Morgan disliked
Harriman. Again, in 1894, Harriman and Morgan
crossed swords. Harriman owned a few hundred
thousand dollars worth of underlying bonds about
the time that Morgan announced his plan of reor-
ganization for the Erie Railroad. Harriman ob-
jected to the proposed treatment of his securities,
brought suit to prevent the drastic reorganization,
and in the end forced Morgan to make concessions.

ELarriman was as yet little known outside of
Wall Street. Although chairman of the finance
committee of the Illinois Central and the power
behind the throne, he was eclipsed by the figure of

96 THE MASTERS OF CAPITAL

Fish. But in 1895 Harriman stepped to the front.
The Union Pacific Raihoad security holders were
looking in vain for some strong banking interests to
finance their property. The road was a frightful
wreck with a tangled mass of subsidiary companies*
and the United States Government was aggres-
sively insisting on the payment of the huge debt
representing the original government loans, with
the interest that had accumulated since its build-
ing thirty years before. Morgan had rejected the
suggestion that he reorganize it, as he was too
fully occupied with the rejuvenation of many other
railroad systems. Harriman then saw his chance.
He decided to reorganize the Union Pacific himself,
to make it a subsidiary of the Illinois Central, and
to utilize the credit of the latter company for the
gigantic financing which would be necessary. But
before he had progressed very far in this plan he
met with opposition from Kuhn, Loeb and Com-
pany, who had become bankers for the Chicago,
Milwaukee and St. Paul, the Great Northern Rail-
way, and other properties, and now also were bent
upon reorganizing the Union Pacific.

A keen contest for mastery followed. At first
Jacob H. Schiff, the head of Kuhn, Loeb and
Company, persistently ignored Harriman, feeling

HARRIMAN AND HILL 97

confident that no interest in New York could suc-
cessfully reorganize the property except Morgan or
himself; but Harriman soon forced him to change
his mind. The two were brought together, and,

in Wall Street parlance, laid their respective cards

on the table. It was an interesting and convincing
show-down. Schiff could raise the much needed
hundred millions of new capital at five or six per
cent through his strong German connections; but
Harrunan showed how he could raise this sum, and
more, on the Illinois Central credit, at from three
and on^half to four per cent. Schiff capitulated,
and finaUy reached an agreement with this new
master of capital. The road was reorganized by
Kuhn, Loeb and Company, and Edward H. Har-
riman was made the first chairman of its board
of directors and later its president.

Harrunan had now leaped at a bound into pub-
lic notice. And, coincidently, as we have already
seen — an event of great significance — the power-
ful Standard Oil capitalists interested themselves
in Wall Street affairs.

Too much credit cannot be given to the men who ^
carried out this reorganization of the Union Pacific
Railroad. In the first place, they paid to the

98 THE MASTERS OF CAPITAL

Federal Government over forty-five million dollars
in cash on a bankrupt railroad — all the principal
and full interest at six per cent on the Union
Pacific debt, which had accrued for thirty years.
Then they put the bonds and preferred stock of
the reorganized road on a straight four per cent
basis; and finally after these prudential measures,
they began to spend moriey by the tens and hun-
dreds of millions upon this ramshackle property
running across the " Great American Desert. **

In all these operations Harriman was the master-
ful leader. Fortune played into his hands. For
the first time in years the arid farming sections of
the West had copious rains and fine crops. The
Spanish-American War resulted in American oc-
cupation of the Philippines; and the Union Pacific
got a great business from these new possessions.
Harriman not only spent money but he spent it
quickly, accomplishing in two years' work what
had been estimated to take five. And he was reap-
ing the fruit of his enterprise. In three years, under
his direction, the system expanded from less than
two thousand miles to over fifteen thousand. The
old branches running up into the Oregon country
were all reabsorbed. After the death of CoUis P,
Huntington in 1900, Harriman bought in forty-five

HABRBCAN AND HELL 99

per cent of the Southern Pacific Company stocky
principally from the Huntington estate.

But now, just about the time that the great
steel merger was being carried through, when the
big banking interests of Wall Street were every-
where hitching themselves to the Morgan star,
Harriman's gigantic railroad plans came into vio-
lent collision with the equally gigantic plans of
James J. Hill. Until a short time before this. Hill
had not been looked upon as a big operator in Wall
Street. He had won fame as the builder and suc-
cessful manager of the Great Northern Railway
system, but he had not been directly involved in
the large Wall Street deals. At first, as the Great
Northern emerged from the panic of 1893, the
firm of Kuhn, Loeb and Company had done most
of the Great Northern financing in New York.
But after the reorganization of the Northern Pa-
cific property by Morgan in 1897, Hill and Mor-
gan began to work closer to each other. Hill had
acquired a substantial stock interest in the Chase
National Bank, one of New York City's old and
strong institutions, while Morgan began to add to
his interest in the First National Bank, of which
' George F. Baker was president. Baker and his
associates at this time also acquired a large interest

100 THE MASTERS OP CAPITAL

in the Chase National Bank, and the two institu-
tions became definitely allied in interest. Then,
as a natural step> James J. Hill acquired an im-
portant interest in the First National Bank. A
little later. Hill acquired a large part of the Mor-
gan interest in the newly reorganized Northern
Pacific property. This move brought Hill defi-
nitely into the group of Morgan financiers, while
Harriman was still closely associated with the
Rockefeller and City Bank interests.

Hill was now the controlling power in both
the Great Northern and the Northern Pacific sys-
tems and was becoming more and more of a com-
petitor of Harriman. The latter discerned the dan-
gers ahead and began to extend the Union Pacific
branch lines up into the Oregon district. But Hill
was looking to the East. Neither of his roads
controlled a connection to Chicago, the Northern
Pacific ending at St. Paul, and the Great Northern
at Duluth. The Union Pacific, on the other hand,
had a close alliance with the Illinois Central,
which entered Chicago, and maintained traffic
connections with other lines. At this juncture
Hill decided to have the Northern Pacific buy the
stock control of the great Chicago, Burlington and
Quincy system. When this move was announced.

HAKRIMAN AND HILL 101

it threw the Harrima^ ^pt^ple into conf usion, for
it meant that the Union Pacific would have a di-
rect competitor a third of ihe way to the Pacific.
While the Burlington line W^ 'fought primarily
for the sake of its lines extendiiig from St. Paul
southward to Chicago, yet the system had also a
lucrative line running to Denver and far beyond
into Wyoming.

Harriman now attempted to bargain* Sdth Hill
and to induce him to let the Union Pacifib'ifcw in
the Burlington purchase and thus tie up all^the
western systems in a common monopoly. But Hill
refused. Then, without the slightest hesitation,
Harriman quietly began to buy up the control of
the Northern Pacific in the open stock market.
In this way he hoped to checkmate Hill, as the
Northern Pacific (jointly with the Great Northern)
had been made the instrument to carry the Bur-
lington stock and Harriman reasoned that, while
a majority of Great Northern stock was doubtless
locked up in the strong boxes of Hill and his friends,
only a substantial minority of the Northern Pacific
stock was so held.

To buy up the control of such a property meant
the use of anywhere from $80,000,000 to $100,000,-
000 in cash. But Harriman knew where he could

102 THE MASTERS OF CAPITAL

lay his hands on the money. Already the Union
Pacific had a heavy bfdadx^e in its treasury; it had,
besides, about $609009^000 of unused bonds which
Harriman had the right to issue; and behind him
were the huge Ca^aih resources of Kuhn, Loeb and
Company and/ihe City Bank» with the Standard
Oil alliance.'- ^

Harrimdi^ had gone far on the way to controlling
the Noitthern Pacific before the fact was known to
J. P.'SjEorgan and Company. Morgan had gone on
I^s'Iusual spring and summer trip to Europe, and
just as a

HAKaBIAN AND HILL 107

smaller man would buy a block of stock for the
same purpose. He and Gates formed a strong com-
bination; but their reputation was that of manip-
ulators; and it was feared that they would wreck
the solid old Louisville and Nashville property
in short order by unsound financing and unprin-
cipled manipulation. Li fact, this was their inten-
tion. They worked up an enormous speculation
in the stock, caught certain large insiders short,
and threatened to start another "comer" simi-
lar to that in the Northern Pacific. To prevent the
recurrence of such a disaster, Morgan stepped in
and took the Louisville and Nashville off their
hands at their own price. Later, Morgan turned
the control of this railroad property over to the
Atlantic Coast Line, which had been welded to-
gether by Henry Walters and was being operated
in harmony with the Morgan interests along the
South Atlantic seaboard.

There was now but one large system of American
railroads that actually escaped the control of con-
servative bankers of the Morgan and Standard
Oil type, with their "community of interest" for-
mula. This was the Chicago, Rock Island and
Pacific. In 1902, their pockets bulging with the
miUions acquired in the big steel merger, the Moore

108 THE MASTERS OF CAPITAL

brothers, with Daniel G. Reid, and others, formed
a syndicate and bought the control of this property.
They inunediately loaded it up with several hun-
dred millions of watered capital, and then so fixed
the voting power that they could sell practically
all of it to the public and yet still retain control
of the property. Thus, the Rock Island system
became simply a football for Wall Street gamblers;
its roadbed and rolling stock were neglected; the
road was "skinned" year after year to pay divi-
dends; and an extravagant policy of expansion
was pursued which in the course of time forced
the entire system into bankruptcy, and the flimsy
structure collapsed like a house of cards.

CHAPTER Vn

THB APEX OP "high FINANCE*'

In 1903 the United Steel Corporation failed to earn
its dividends, its great issue of common stock fell
to a few dollars a share, and people began to think
that Morgan was no wizard after all. Carnegie,
the retired and intrenched multimillionaire, sat
back and IsAighed; Harriman, the enemy of Mor-
gan, gloalted over the fall of his rival; the Standard
Oil magnates, always jealous of the Morgan power,
said little but watched and waited. But while the
fickle public cried calamity, Morgan kept on being
a "bull. " He knew that the ebb was temporary;
that the tide would soon turn. He urged his clients
to buy steel and other good industrials. The de-
cision of the Supreme Court in 1904 ordering the
dissolution of the Northern Securities Company
caused a shiver in the framework of Morgan's gi-
gantic structure. But it was only a shiver. The
tide did turn, and big business went merrily on

109

110 THE MASTERS OF CAPITAL

tintil the storm broke in 1907. Steel stocks
rose above their original figures, and the house
of Morgan regained its prestige and added to its
financial strength.

During these years Morgan formed the great
shipping combination known as the International
Mercantile Marine Company, which absorbed the
White Star Line, the American Line, the Red Star
Line, the Leyland Line, and many other trans-
atlantic companies. The idea of this combination
was to eliminate the cutthroat competition which
then existed in the transatlantic trade in freight
and passenger rates. The leading lines between
New York and England, which included the Gu-
nard Line, the White Star, and the American Line,
had suflFered during the few previous years through
competitive conditions just as the trunk line rail-
roads had suffered for more than a decade prior to
the period when the Morgan idte of "combina-
tions" and "community of interest'' had been
so widely introduced. It was felt that the same
methods of combination in the ocean carrying
trade might have equally beneficial results.

But the organization of the International Mer-
cantile Marine Company proved to be one of Mor-
gan's business mistakes — until the unprecedented

THE APEX OP "HIGH PINANCE'* 111

demand for shipping in the Great War resulted
in large earnings. The vital fact was apparently
belittled or overlooked that a combination of car-
riers on the high seas cannot be welded into a
monopoly in the same way that a combination of
railroads can be. The ocean is free to all comers,
while a railway right of way is in its very nature
exclusive and grows more valuable as the territo-
ry covered increases in density of population and
wealth. It would be practically impossible, be-
cause of the stupendous costs, for a direct competi-
tor to be built today paralleling the Pennsylvania
Railroad between New York and Pittsburgh; but
it would be simple enough for an organization of
capital to establish an entirely new line of steam-
ships between New York and Liverpool.

This was but one of the facts which were over-
looked by the promoters of the steamship combina-
tion. The competing lines controlled in England
and Germany were all the beneficiaries of large
government subsidies, whereas the new Morgan
combination, being under American control and
financed by American capital, could not enjoy
these benefits. Moreover, as soon as the new e
combination began to compete aggressively with
the Cimard and German lines, both the English

112 THE MASTEBS OP CAPITAL

and German Governments came to the rescue with
further large subsidies and benefits. The Cunard
Line was able to make an arrangement with the
British Government whereby the latter advanced
money at two and one-half per cent for the con-
struction of new liners of mammoth capacity^ such
as the Lusiiania and the Mauretania.

A more successful flotation by the Morgan firm
was that of the Liternational Harvester Company.
This was a gigantic combination of manufacturers
of harvesting machinery and included the larger
plants in the United States and also many of those
in Europe. Its capitalization was large, but it dis-
tinctly stabilized business conditions in this line
of industry and prospered notably from the very
start. Credit was especially due to George W.
Perkins, Morgan's young partner, for forming this
new combination.

During a long period the Morgan firm had
been closely identified with the General Electric
Company, a great manufacturing concern which
had been building up a world-wide industry. But
the General Electric Company was now becoming
more than a mere manufacturing concern. With
its large capital and high credit it was steadily
going into the business of developing public utility

THE APEX OF "mGH FINANCE" 113

operating companies. The old North American
Company, which had originated as the Oregon
and Transcontinental Company many years before
and had been the holding corporation for the in-
terests of Henry Villard in connection with the
Northern Pacific and certain Oregon railways, had
now been revamped as a public utility holding
company and had gradually acquired control of,
or large interests in the street railways and light-
ing companies of St. Louis, the Milwaukee public
utilities, and the Detroit Edison Company.

But perhaps the most striking development of
this time was the further unification of railroad
control. After the Supreme Court decision dis-
solving the Northern Securities Company was
handed down in 1904, the stocks of the Great
Northern and Northern Pacific railways which
had been acquired by this holding company were
returned to their holders. The Union Pacific
Railway received into its treasury an enormous
amount of both Great Northern and Northern
Pacific stock. At this time, these stocks were of
tremendous market value. Both roads showed
large earnings and were paying liberal dividends, be-
sides cutting "melons" by dividing surplus prof-
its in one form or another. The stock market was

114 THE MASTERS OF CAPITAL ,

booming, and the quotations in these stocks soared
to unheard-of heights. Great Northern stock sold
in 1906 as high as $340 a share and Northern Pa-
cific at about $230. The Union Pacific suddenly
found itself rich beyond the dreams of avarice; its
treasury was overflowing with valuable securities.
And when, after this dissolution, the Harriman
and Hill interests reached a definite agreement on
matters of policy and division of territory by carry-
ing the "community of interest" idea to its logical
conclusion, there was no further need of the Union
Pacific to retain control of these large amounts of
stock. So Harriman decided to dispose of them.
These sales, which were spread over a considerable
period, brought an immense amount of cash into
the treasury of the company and resulted in a
total profit to the Union Pacific of more than fifty
millions of dollars.

Thus the Union Pacific Railway had become a
veritable storehouse of cash, in fact, a bank of
enormous resources. But Harriman had no inten-
tion of allowing the railroad to remain a bank; he
had more ambitious plans. The Supreme Court
decision, while preventing the practical merger of
competing hues, said nothing about the control of
connecting lines. So the Union Pacific cash was

THE APEX OF " HIGH FINANCE " 115

immediately employed in adding to the Union Pa-
cifiers interest in connecting systems. It had always
been Harriman's ambition to control an ocean to
ocean railroad, and he now began to purchase in
the interest of the Union Pacific great blocks of
stock in the Baltimore and Ohio Railroad, be-
sides adding heavily to that already owned by
the Union Pacific in the Illinois Central. By the
early part of 1906, the Baltimore and Ohio was
practically an eastern arm of the Union Pacific
Railway. And inasmuch as the Baltimore and
Ohio already owned practically a dominating in-
terest in yie Reading Company, with the control
of the anthracite fields, and the Reading controlled
the Central Railroad of New Jersey, with its en-
trance into the New York City district, the Union
Pacific now became a network of railway lines
extending from ocean to ocean.

In short, the general tendency was for all the
American railroads to become more and more close-
ly knit together in policy and interest. The St.
Paul in these years began to develop its west-
em extension, and the Rockefeller interests, which
were so closely alhed with the Harriman railroad
financiers, had complete control of the St. Paul.
The Grould properties were being linked into one

116 THE MASTERS OF CAPITAL

harmonious whole, and a plan was under way for
a Gould transcontinental line also stretching from
ocean to ocean. The Western Maryland system
was acquired by the Goulds, with Rockefeller aid,
and it looked as though a great system would soon
be built up, side by side with the Harriman lines,
but in close control and with the maintenance of
harmonious relations.

The Hill and Morgan properties of course ex-
hibited this same tendency towards greater har-
mony and concentration. Hill's lines radiated
throughout the Northwest but worked in har-
mony with both the Harriman and the Rockefeller
interests. The Atlantic Coast Line, with the great
Louisville and Nashville system, under the man-
agement of Henry Walters and under the partial
control of Morgan interests, operated in complete
harmony with the Southern Railway system on the
one hand and with the Illinois Central on the other.
Morgan took care that his Erie system maintained
favorable and harmonious relations with the great
Vanderbilt lines, while the Pennsylvania system,
under the guidance of that master hand, Alexander
J. Cassatt, worked in complete harmony with all
the other large railroad interests.

The intercorporate relationships of the railwa,ys

THE APEX OP "HIGH PINANCE** 117

reached their highest point before the panic of
1907. By the end of 1906, we find that of a to-
tal raihoad stock capitalization of about twelve
billions of dollars, more than one-third was owned
by the railroads themselves. In the cases of com-
peting or parallel systems, minority interests of
sufficient amount were held to create a substantial
if not a dominating interest; but in the case of
non-competing lines, or connecting lines, majori-
ty control was often effected. The latter was the
case in New England, where the New York, New
Haven and Hartford system, under Morgan in-
fluence, had acquired complete control of prac-
tically all the means of transportation, including
the many coastwise steamship lines.

This remarkable welding together of great cor-
porate interests could not, of course, have been
accomplished if the "masters of capital'' in Wall
Street had not themselves during the same period
become more closely allied. The rivalry of inter-
ests which was so characteristic during the reorgan-
ization period a few years before had very largely
disappeared. Although the two great groups of
financiers, represented on the one hand by Morgan
and his allies and on the other by the Standard Oil
forces, were still distinguishable, they were now

118 THE MASTERS OF CAPITAL

working in practical harmony on the basis of a sort
of mutual "community of interest" of their own.
Thus the control of capital and credit through
banking resources tended to become concentrated
in the hands of fewer and fewer men.

The machinery for the control of credit had
become steadily more effective since the days of
the Steel Trust merger. Two groups of banks,
partially allied but still independent, had been
reaching out through the entire country. The
National City Bank, now under the management
of Frank A. Vanderlip, James Stillman having
practically retired, had grown tremendously in
power and with imusual rapidity. It had formed
connections with large institutions in various cities
of the coimtry and had brought under its control
several great trust companies. The growth of the
Morgan banks and trust companies during this
period was no less notable.

In the same period began a contest for the con-
trol of life insurance assets. In earlier days the life
insurance business had occupied a modest place
in the American financial world. The old, solid
companies had grown steadily and quietly year by
year, increasing their patronage and adding to
their assets in a staid, conservative way. But

THE APEX OF "HIGH FINANCE^' 119

they were generally looked upon as a thing apart,
so far as banking connections or general financing
were concerned. The old Equitable Life Assur-
ance Society, although near the Wall Street dis-
trict, was as distinct from Wall Street influences
as though it had been located in Hartford or in
Philadelphia; and the same was practically true
of the Mutual Life Insurance Company and the
New York Life Insurance Company. The invest-
ments of these large and growing companies, as
well as those of a myriad of smaller ones, had from
time out of mind been confined to government
and municipal bonds and the highest grade of rail-
road securities. Each year had seen the surpluses
of these companies grow, but as a matter of course
their large cash resources were looked upon as un-
available for ordinary financial piuposes. While
the laws regulating the investment of life insurance
funds were far more liberal than those pertaining
to the investment of savings bank funds, yet Wall
Street did not r^ard the one as any more liquid
or available than the other for its own uses. As
late as 1889 it appears that very little attention
had been paid to the possibility of making use, in
financial schemes, of the large Uquid assets of these
giteat companies.

120 THE MASTERS OF CAPITAL

But in the early nineties the trust company move-
ment began to get vigorously under way. Trust
companies, formed as they were under unusually
liberal banking laws, could not only compete with
the ordinary state banks and the national banks
in doing a straight banking business — receiving
deposits, discoimting notes, and making loans on
collateral — but were fully empowered to do many
other lucrative things. They were perfectly free,
for example, to "underwrite" financial schemes
and to take large interests in promotions or finan-
cial enterprises of a more or less speculative nature.
Such underwritings or promotions frequently yield-
ed fabulous profits, and it was quickly seen that the
stock of a modem trust company was likely to pay
larger dividends than that of a bank, which operated
under rigidly restrictive laws.

These possibilities for lucrative profits b^an
to be more fully demonstrated as the readjust-
ment and reorganization period set in about 1893.
Up to that time trust companies had made a special
feature of acting as fiscal and financial agents,
paying coupons, dividends, and performing the
general work of trusteeship for both corporate
and individual interests. But now they began to
be the headquarters for bondholders' committees

THE APEX OF " HIGH FINANCE " 121

and the agencies for reorganization committees and
the like. Soon a further step was taken; abandon-
ing the mere rdle of trustee, they began to be re-
organizers and financiers of corporations directly.
Profits flowed in, the stocks of the trust companies
b^an to soar, and trust company dividends ranged
far higher than did old-line bank dividends. An
investment in the stock of a large Wall Street
trust company became far more lucrative than an
investment in a first class bank of the old style.
So trust companies began to be formed with
great rapidity.

But to form large companies with great re-
sources and substantial reserves required much
money. They were a new thing, and the type of
individual investor who was perfectly willing to
put money into a national or state bank was in-
clined to hesitate before embarking on this new en-
terprise. But money must be got somewhere ; so the
shrewd minds identified with or attracted by the
possibilities of the movement began to search for
untouched resources of some kind. Some success
was achieved in getting Standard Oil money into
the field, but only to a limited extent. For a while it
looked as though the trust company business would
have to take the usual course of any new business

122 THE MASTERS OF CAPITAL

with money-making ideas and prove its stability
with the lapse of time before it could hope to take
a permanent place in American financial affairs.

Suddenly a new and unexpected source of capital
opened. Identified with certain of the large life
insurance companies of New York, either as presi-
dents or managers, were a number of men of the
purely financial type, men who were more or less
involved in Wall Street interests and enterprises.
These men, with their swelling insurance assets,
were constantly looking for investments for the
surplus funds of their companies; and they were
not, as a rule, averse to making private fortunes
for themselves. Though the life insurance laws
restricted them to some extent in the use of the
policyholders* money, so that they could not, as a
private banker might, make use of this money in
any really free and speculative way, it was per-
fectly legitimate for a life insurance company to
invest its funds in any company operating under
the banking laws. There was therefore nothing to
prevent the Mutual Life or the Equitable Life
from holding the stock of a trust company. And
as the value of the capital stock of a bank or trust
company in those days depended largely upon the
character of its management or the personnel of its

THE APEX OF " HIGH FINANCE '* 128

board of directors, it was soon found that a trust
company which was openly identified with a large
and powerful insurance concern would be assured
of success.

Life insurance money thus began to go into trust
companies, and officers and directors of life insur-
ance companies began to take conspicuous places
as directors of trust companies. And in addition,
these new directors b^an to grow rich; and they
grew rich in many cases where at the start they had
no capital whatever. In forming a new trust com-
pany or in enlarging an old one by the issue of
new stock, they not only would have their insur-
ance company subscribe to a majority of the stock
but would themselves subscribe to a minority on
the same terms, and then deposit their own stock
as collateral for a loan which they would obtain
from their own insurance company. It would
not in all cases be necessary for them to deposit
any cash "margin" in the loan, for almost invari-
ably the stock would be sold to them, as to the
insurance company, at a figure considerably below
its market value.

At that time there were no restrictive laws
which forbade an officer of a corporation to borrow
money from his own company on collateral, and

124 THE MASTERS OF CAPITAL

the president or director of an insurance company
was perfectly free to make use of the funds of his
own company provided he deposited necessary se-
curityT And as he was himself the authority who
scrutinized the collateral^ it will be seen that his
path was generally a very easy one.
>J During the period from about 1890 to the open-
ing of the new century, this flow of life insurance
money into the coffers of the trust companies in-
creased rapidly. And as time went on, the move-
ment took on new phases. The life insurance
company, with its enormous cash assets, naturally
favored its own trust companies in the matter of
bank deposits and banking business generally. And
as the trust companies had also begun to go largely
into the investment business and dealt in stocks and
bcmds with practically the same freedom that a pri-
vate investment banker did, it was not long before
practically all the investing of life insurance funds
was being done through the subsidiary trust com-
panies. Naturally, in many cases the chief desire
of the directors and large individual stockholders
of the trust companies (who were also directors or
officers of the parent life insurance companies) was
to make big profits for the trust companies; so
that, in many cases, the insurance companies were

THE APEX OF "HIGH FINANCE" 125

discriminated against in the matter of prices by
their own directors or trustees.

But discrimination did not stop here. As we
have seen, the trust companies early became pro-
moters, financial imderwriters, and controllers of
big schemes. This sort of work involved the use
of much capital; and the tendency was to get more
and more life insurance money into the coffers of
the trust companies, so that the latter would have
plenty of funds to work with. There was "big
money" in these things for the trust companies,
but the life insurance companies often received
only the normal rate of interest on their fat de-
posits which were used to make unheard-of profits
for their own directors.

Notwithstanding the fact that trust compan-
ies and interlocking directors were growing rich
through this use of insurance funds, the life insur-
ance companies also continued to prosper. It was
a period when practically the whole country was
prospering, when New York City especially was
waxing richer and richer, and when more and more
men were not only taking out policies but were going
into the life insurance business. Extraordinary ef-
forts were continuously made by the great insur-
ance companies to add to their lists of policyholders

1«6 THE MASTERS OF CAPITAL

and to increase their surpluses. Naturally, all life
insurance directorates which were also interested
in trust companies and in Wall Street affairs
generally, wanted to see the funds of their com-
panies flow in a never ceasing stream, and they
developed the most efficient and far-reaching
organizations for getting new business.

By 1900 the assets of the great life insurance
companies in New York City had begun to loom
large in Wall Street operations. At the beginning
of the movement we have been following, many
more or less inconspicuous men were identified
with it, but it was not long before the larger bank-
ing powers of Wall Street began to realize the pos-
sibilities in the control of life insurance assets.
Prior to 1890 the "big three'' New York com-
panies — the Mutual, the Equitable, and the New
York Life — had few conspicuous banking affilia-
tions. But about that time, the Morgan house be-
gan to identify itself more closely with the New
York Life, whose new president, John A. McCall,
became known before very long as a Morgan man.
The Equitable Life had had its various banking
affiliations, and its president, Henry B. Hyde, was
fairly close to Wall Street affairs. It had early
become the controlling factor in the Mercantile

THE APEX OF "HIGH FINANCE" IW

Trust Company^ which, prior to the reorganization
period, had been prominent chiefly as a conserva-
tive, "old-line*' trust company, confining itself
almost exclusively to the original business of per-
forming the work of trustee and agent, to which
its banking and deposit business was only inci-
dental. The Mutual Life, with Richard A. Mc-
Curdy at its head, had grown steadily and solidly,
but it was not imtil the early nineties that its
name became identified with a trust company or
Wall Street business. About this time, however, a
small trust company, known as the New York Guar-
antee and Indemnity Company, came under the
control of the Mutual Life. Its title was changed
to that of the Guaranty Trust Company, and cer-
tain trustees of the Mutual Life Insurance Company
became prominent in its directorate. Its capital was
enlarged, iEtnd with the new connection its credit im-
proved and its business grew by leaps and bounds.
The control of the United States Mortgage and
Trust Company was also acquired by the Mutual
Life and its business also took a spurt.

In the course of time, many trust companies of
less prominence became identified with the insur-
ance companies, and finally. Wall Street bankers
and financiers of the influential type began to flood

128 THE MASTERS OF CAPITAL

the directorates of the insurance companies and
the trust companies alike. Then came the period
of big financings the decade of consolidation and
merger, followed by several years of feverish spec-
ulative activity in Wall Street and vast schemes
of promotion. All the large bankers were soon on
the finance committees of the life insurance com-
panies — such men as J. P. Morgan, several of his
partners, Jacob H. Schiff of Messrs. Kuhn, Loeb
and Co., Henry C. Prick, Edward H. Harriman,
and the Rockefeller representatives — indeed, all
the big captains and masters of Wall Street.
y Life insurance assets had now become a large
factor in high finance and a vital part of the move-
ment toward the control and capitalization of in-
dustry in general. Banking power, as identified
with the diflPerent groups, now implied the control
not merely of groups of national banks and trust
companies but also of the life insurance companies
with large assets and growing resources. Not only
were the "big three " involved in this steadily grow-
ing concentration of power, but other large com-
panies, such as the Metropolitan Life, the Prudential
Life of Newark, and several companies in more
distant cities, were becoming assets of importance
to the big contending groups in Wall Street.

THE APEX OF "HIGH FINANCE" 129

During that remarkable period from 1898 to
1904, when the industrial and commercial enter-
prises were being more and more heavily capi-
talized, when fabulous individual fortunes were be-
ing piled up, and when concentration of the control
of finance was rapidly hastening to its climax, the
assets of the insurance companies were handled
with steadily increasing recklessness. At first
considerable caution had been shown in the use
of these large sums, but towards the end of the
period they were more freely used in speculative
and uncertain enterprises. Both money and credit
were getting scarce under the strain of continued
capitalization and promotion; and in Wall Street
the period of "undigested" and "indigestible" se-
curities was arriving. Private bankers were not so
eager to secure large allotments in underwriting
syndicates; large bond and stock issues did not go
so well with the public as formerly. And yet all
the giant promoters, the Harrimans, the Morgans,
and their allies, needed cash and credit to carry
through vast enterprises. Naturally, therefore, in-
surance assets, on which there was httle or no re-
striction, were used more and more. Not only
were insurance companies of great strength "allot-
ted" abnormally large amounts of syndicate under-

130 THE MASTERS OF CAPITAL

writings and securities by their own trustee bank-
erSy but their subsidiary trust companies and
other financial dependencies were also loaded up
in the same way. The method became so free and
easy that a great banking house engaged in carry-
ing through some gigantic operation would sim-
ply "allot" to a certain insurance company a spe-
cified amount of bonds or other securities and
would then instruct its president or trustees to
take them, willy-nilly.

Naturally, this loose and extravagant method of
making use of hundreds of millions of dollars be-
longing to hundreds of thousands of policyholders
bred extravagance and corruption in the ranks of
the smaller minds in the insurance organizations.
In the great companies particularly, extravagance,
waste, and ineflBciency steadily grew. Millions of
dollars were spent annually in elaborate furnishings
for executive o£Sces; all sorts of useless positions
were created for retainers and worthless officers and
clerks; money was wasted nin buildings, in useless
advertising, and in many other ways. Graft in a
thousand forms began to creep in.

In 1903 occurred a semi-panic in the Wall Street
security markets. Business had fallen off notice-
ably in the industrial world; the railroads staggered

THE APEX OF "HIGH FINANCE" 181

in many cases under the heavy capitalizations
created during the speculative period of the few
years previous; and money was scarce and high.
President Roosevelt had attacked the Northern
Securities merger, and the Grovemment had started
suit for its dissolution. The great Steel Trust had
fallen on evil days, and its stocks and bonds had
dropped helter-skelter to low levels. This was a
period of ^^ undigested securities/' and pessimism
reigned everywhere.

Because of the scarcity of capital and the low
credit of many concerns, a feeling of unrest and in-
security prevailed in financial circles. Some out-
side interests began to investigate the stability of
largeconcems ; and some banking and trustcompany
failures ensued. Then the security holdings of in-
surance companies, which were obliged to file aa-
nual reports and lists of their securities, began to
be closely scrutinized, and it was realized that the
large companies were loaded up with many un-
profitable syndicate accounts and large invest-
ments which had undergone vast depreciation.
Criticism soon became rampant, and various suits
were started against companies and o£Scials. But
little change occurred until the following year,
when strenuous efforts b^an to be made for a

132 THE MASTERS OF CAPITAL

thorough investigation of the affairs and methods
of the companies.

A sensational insurance investigation which be-
gan in 1905 lasted for several months. Under the
direction of Charles E. Hughes, it disclosed to the
public the entire inside history of life insurance
finance during the previous decade, with all its
high finance, reckless manipulation of funds, waste»
extravagance, and graft. The result of this inves-
tigation was that new and far more stringent laws
were enacted looking to the safeguarding of the
assets of policyholders and the proper investment
of insurance funds.

Thus, at one stroke, a prolific source of free and
unrestricted cash was cut off from the speculator
and promoter. The hundreds of millions which
had for years been bandied about at the beck and
call and to the profit of small groups of powerful
men were no longer available.

The investigation of the insurance companies,
with its results, was undeniably one of the factors
which helped to save the situation when the
panic of 1907 arrived. Had not the reckless finan-
cial methods of handling insurance funds been
curbed a few years before, the crash of 1907 would
have been far more disastrous than it proved.

THE APEX OF "HIGH FINANCE" 183

The insurance companies were still loaded with
large amounts of unsalable securities, but they
bought no more, and under strict legal restric-
tions in the coiu'se of time they liquidated most
of their dangerous assets without material loss.

CHAPTER Vm

THE PANIC OP 1907 AND AFTEB

It is not to be assumed that the concentration of
banking power and the control of corporate activi-
ties had no unfortunate accompaniments. Unques-
tionably the consolidation of the great railroad
systems of the country, under the "community
of interest" plan, resulted in greatly stabilizing
freight rates; it increased efficiency of operation; it
enabled the managements to develop large amounts
of new business and to show greatly increased prof-
its; and it bred a spirit of invincible optimism in
Wall Street. The large crops of these years, the
unusually heavy tide of foreign immigration, and
the boom in business generally, all helped to
increase this feeling of optimism in Wall Street.
Great material progress and prosperity, however,
inevitably invite speculation; and speculation, once
begun, grows by what it feeds on.
, In the closing months of 1904 a great speculative

184

THE PANIC OF 1907 AND AFTER 1S5

movement in the stock market b^an and continued
almost without interruption through 1905 and well
into 1906. The prices of railroad stocks soared
to unheard-of heights; Great Northern preferred
rose above 800; Northern Pacific above 200; St.
Paul to nearly 200; Atchison, Southern Pacific,
Union Pacific, New York Central, and the rest all
steadily climbed to higher and higher levels. In-
dustrial stocks, also, were having their day, and
new enterprises were being floated in Wall Street
by the hundred. Credit was easy to obtain; in-
terest rates were low; and after 1905, most of the
bankers and speculative investors had become so
accustomed to high prices and large speculative
profits that almost any financial ** proposition''
foimd ready acceptance in Wall Street.

It was a new day for the underwriting syndicate,
and brokers eagerly sought for opportimities to un-
derwrite anything that promised profits, regard-
less of its merit. Many undertakings of extremely
doubtful or speculative natiu'e were passed along
as sound without any real investigation whatever.
Many private banking firms, even of relatively con-
servative reputation, acquired the habit of join-
ing in questionable underwritings. The new era of
banking control, moreover, had brought with it a

136 THE MASTERS OP CAPITAL

superficial notion that financial panics like those
of 1873 and 1893 could never again occur. It was
frequently said that the coordination of American
industry, under the control of powerful banking
institutions, would always be a safeguard against
the dangers of inflation and over-speculation. Yet
in 1906 financial America was in a very true sense
riding for a fall.

The United States Shipbuilding Company,
known as ""the Shipbuilding Trust," illustrates
the speculative spirit which was undermining the
financial credit of the country. This was a com-
bination of shipbuilding manufacturers, promoted
on the theory that Congress, under the control of
the Republican party, would soon pass a liberal
ship-subsidy law which would be followed by a
great revival in shipbuilding. This expectation
had also buoyed up Morgan's International Mer-
cantile Marine Company formed in 1902. No
legislation of the sort took place; but the promot-
ers of "the Shipbuilding Trust" continued their
efforts with undiminished fervor. A young man
named Daniel Le Roy Dresser organized the Trust
Company of the Republic and attempted to under-
write this United States Shipbuilding Company.
Eight companies, one or two of which were fairly

THE PANIC OP 1907 AND APTER 137

valuable, the rest being largely heaps of junk, were
merged in the combination, the capitalization of
which was colossal. An enormous bonded debt was
created to raise funds to buy up the operating
companies at high valuations. One small plant,
which the owners a year before would hiave been
glad to sell for $100,000, was bought up at a valua-
tion of over $2,000,000, one-quarter of which was
paid in cash.

The United States Shipbuilding Company had
hardly been formed when it began to fall to pieces.
The underwriters were not able to make good.
Then to the astonishment of everybody, its presi-
dent, Lewis Nixon, announced that the company
had bought the Bethlehem Steel Company from
Charles M. Schwab. This seemed incredible, as
the Bethlehem Steel Company was of more tan-
gible value than the whole outfit of shipbuilding
plants. Everybody thought Schwab was crazy, for
he was to be paid, so it was generally understood,
in bonds of the United States Shipbuilding Com-
pany, which promised to be worthless . But Schwab
was far from crazy. He had insisted that the
bonds carry voting power. Presently, when the
whole scheme went down with a crash, carry-
ing with it the Trust Company of the Republic,

188 THE MASTERS OP CAPITAL

Schwab was found in possession of the entire group
of plants, including the Bethlehem Steel. He then
lopped off the worthless properties and attached
the good shipbuilding plants as subsidiaries to the
Bethlehem Steel Company.

Another and equally unsound type of promo-
tion was going on in banking. A number of smaller
financiers, trying to copy Morgan and Standard
Oil, would form a chain of banks with unlimited
capital, to promote their speculations. Notable
among these speculative bankers was Charles W.
Morse, a man of unusual ability. He had made a
large fortune in the American Ice Company and
in the manipulation of its securities in Wall Street;
he had also done something in shipbuilding and
oi)erating steamships. By 1905 he had reached a
position of substantial power in Wall Street. He
acquired control of the Bank of North America,
one of Wall Street's old and solid institutions, and
began to make use of this bank's credit and re-
sources for financing his promotions. Finding him-
self in need of more capital, he acquired control
of other banks by making use of the resources of
the banks he already owned or controlled. By the
dose of 1906, he had under his own sway, or that
of his dose friends, seven or eight good banks,

THE PANIC OP 1907 AND APTER 139

besides having considerable influence in a number
of others. He then launched an ambitious scheme
for consolidating all the coastwise steamship lines
on the Atlantic seaboard, paying fabulously high
prices for these lines and capitalizing them to the
moon. Having thus acquired nearly everything
afloat from Maine to Florida, he bought from
Morgan all the stock of the Central of Georgia
Railroad Company in order to get control of the
Ocean Steamship Company, a line which operated
from Savannah to New York and connected with
the Central of Georgia.

Meanwhile the great pot in Wall Street went
boiling on. In the smnmer of 1906 the Harriman
financiers added fuel to the fire by suddenly in*
creasing from six to ten per cent the dividend on
Union Pacific common, thus sending that stock up
forty points practically overnight. Discretion in
Wall Street was thrown to the winds; many of the
most conservative houses b^an to push securities
of more and more doubtful types. A mining stock
craze broke out, and in a few months the whole
country was madly buying up worthless shares in
a thousand or more gold and silver mines at ri-
diculously high prices and without thought of in-
vestigation. The Wall Street ^^curb" became a

140 THE MASTEBS OF CAPITAL

bedlam of mining brokers, and even the Stock
Exchange gave dignity to a number of mining
ventiures by listing their stocks. '

Long before the close of 1906 there were omi-
nous signs of danger ahead, and many thoughtful
men began to urge caution. The wild speculation
caused a steadily increasing strain on credit, and
demand loans in Wall Street rose in September to
the highest figure they had reached in years. Li
the same month, the New York banks reported a
deficit in reserves and appealed to the United States
Treasury for surplus gold. This timely deposit
afforded temporary relief; but the year closed in
strain. Most of the Wall Street bankers, however,
persisted in the theory that fundamentally every-
thing was sound, that the outlook for 1907 was
distinctly hopeful, and that after the turn of the
New Year all would be well.

Wall Street financiers, high and low, seemed to
be hypnotized by the long period of easy money,
rising prices, quickly made fortunes, and successful

' The immediate cause of the mining stocl^ boom was the discovery,
in the previous year, of the great silver deposits in the Cobalt re-
gion of Canada and the gold deposits in the Goldfield region of Ne-
vada. A few companies, such as the Nipissing mines in Canada and
the Jumbo mine in Nevada, were real bonanzas and paid millions
in time to their stockholders, but nearly all the others sooner or
later turned out to be worthless.

THE PANIC OF 1907 AND AFTER 141

promotions. Harriman certainly did not foresee
any bad turn in affairs, for in 1906 he caused the
Union Pacific and Southern Pacific companies to
employ their large surpluses in buying large addi-
tional blocks of railroad stocks at top prices; the
Morgan and Hill interests did not seem to foresee
trouble, for they were developing their railroad
properties and spending money like water on im-
provements; the City Bank or Standard Oil mas-
ters did not gauge the future accurately, for they
were not only doing nothing to stem the tide of
speculation, but were actually floating various
schemes of their own on the current. Certainly
smaller and more speculative men, like Charles W.
Morse, Charles M. Schwab, F. Augustus Heinze,
and Charles T. Barney of the Knickerbocker Trust
Company did not fear the future, for they were ex-
tending their operations in all directions. Schwab
had gone into mining on a large scale; Heinze
was promoting a balloon known as the United
Copper Company, aided by the credit of the
Mercantile National Bank, control of which he
had acquired; Morse was floating his ship bub-
ble; and Barney was sinking the funds of the
great Knickerbocker Trust Company in all sorts
of unsound ventiu'es.

142 THE MASTERS OF CAPITAL

Little change in conditions occurred until Feb-
ruary, 1907» but with the opening of the month
the stock market b^an to crumble, and the banks

I commenced to call in loans and mend their f en-
ces. But the real unsoundness of the day was not

I understood until, a few weeks later, Henry H.
Rogers, vice-president of the Standard Oil G>m-
pany, found difficulty in seeming a loan of twenty
million dollars for his Virginian railway, which he
was at that time building to open up some soft-coal
fields in the western part of the State. Rogers had
to pay an equivalent of over eight per cent for this
loan, secure it with over thirty million dollars of the
highest grade investment stocks and bonds, and
personally endorse the notes, though his credit
was as high as that of any man in the United
States. This transaction created consternation.
^Ti the vice-president of the Standard Oil Company,
that great reservoir of ready cash, had to go into
the market for a pittance like twenty million
dollars and pay over eight per cent for it, then
indeed things were in bad shape.

The "March panic," or "silent panic" as it
was called, immediately followed. Stocks dropped
three to ten points at a time; money rates reached a
great height; banks closed their doors to borrowers;

THE PANIC OF 1907 AND AFTER 148

and stockbrokers b^an to fail. Speculators by
the thousands were wiped out; the mining boom
on the "curb" completely collapsed; and in Wall
Street financiers were seen daily and hourly, rush-
ing hither and thither, trying to devise ways
and means to weather the storm. But the high
money rates drew gold from Eiu-ope; the Secretary
of the Treasury deposited further funds in New
York banks; and as the crop-moving period had
ended, funds naturally gravitated to New York
City, and thus helped to -relieve the situation.
The panic was stayed for the time being.

Wall Street still refused to believe that any fur-
ther trouble was ahead. Business throughout the
country continued at high pressiu'e; railroad earn-
ings were large, and industries were booming; the
new crop outlook was favorable; and while money
rates were high, there seemed to be enough at the
moment to go round. Even the big "masters of
capital," although following a more cautious policy,
seemed to think that the worst was over. Nearly
everybody said, "Wall Street has now cleaned
house; we will soon be in a bigger boom than ever. "
All seemed to base their reasoning on the idea that,
with industry and business going on prosperously,
any further trouble in Wall Street was unthinkable.

144 THE MASTERS OP CAPITAL

After the 1st of July, however, there were de-
velopments which created disquietude in high
places. The United States Steel Corporation re-
ported an alarming falling off in unfiUed tonnage;
railroad earnings suddenly b^an to sag; then the
money market tightened up, and the fear became
widespread that the fast approaching crop-mov-
ing period would create a great money stringency.
Presently came the collapse of Charles W. Morse's
shipping combination. Then, to cap the climax,
came the failiu'e of the City of New York to sell a
large block of bonds in Wall Street. Altogether
August was an uneasy month for the *^ masters
of capital" and for their thousands of sateUites
and followers.

.September saw the heads of big business often
in consultation; the powers were at last awake to
the seriousness of the situation. The newspapers
were urged to talk encouragingly; Wall Street in-
terviews were uniformly optimistic. Clearly, stren-
uous efforts were being made to tide over the
crisis. But to no avail. In October came the
Heinze failiure, involving first the Ma-cantile
National Bank and then the whole Heinze-
Morse chain of banks. Next occurred the run on
the Knickerbocker Trust Company, the suicide of

THE PANIC OP 1907 AND AFTER 145

its puresident, and the closing of its doors. Then
followed in quick succession the failure of the Na-
tional Bank of North America and runs on the
Trust Company of America, the Lincoln Trust Com-
pany, and a dozen other institutions. All these
disasters involved banks in other cities and pulled
down private firms and brokers. The accompany-
ing panic in the stock market completed the havoc.
The holocaust was on.

The small group of mighty financiers — the men
who had been chiefly responsible for the building
up of the great concentrated system of banking
power, corporate control, community of interests,
and interlocking relationships, all of which had
finally culminated in this terrific smash — these
were the men whose powers were now to be taxed
to save financial America. The morning after the
Knickerbocker smash, while the run on the Trust
Company of America was filling all Wall Street with
crowds of excited depositors, a man walked into the
office of J. P. Morgan and Company, pushed past the
guard, and entered Morgan's private room. Mor-
gan nodded and said, "Good morning, Mr. Frick."
The two men talked quietly for perhaps ten min-
utes. Frick went away ; then Edward H. Harriman
came in. Following him came other "masters,**

146 THE MASTERS OP CAPITAL

one by one or in pairs. Finally came James Still-
man, president of the National City Bank and
spokesman for the great Standard Oil interests.

That day many millions of dollars were doled
out to the banks by the Secretary of the Treas-
ury; government bonds were supplied by institu-
tions and private investors for temporary use,
John D. Rockefeller alone lending ten million dol-
lars' worth. Then both Morgan and Stillman
made arrangements to buy bills of exchange in
enormous quantities, and force gold shipments
from Europe. These measures began the relief
which the situation needed.

Yet one of the gravest dangers remained. This
was the position of the brokerage firm of Moore
and Schley, involved in a big speculative pool in
the stock of the Tennessee Coal, Iron and Railroad
Company. Moore and Schley had pledged over
six millions of the Tennessee Coal and Iron stock
for loans among the Wall Street banks. The banks
had called the loans, and the firm could not pay,
as was of course known to Morgan and the others.
If Moore and Schley should fail, a hundred more
failures would follow and then all Wall Street might
go to pieces. The only thing to do was to save
Moore and Schley.

THE PANIC OP 1907 AND APTER 147

The Tennessee Coal, Iron and Railroad Company
was one of the chief competitors of United States
Steel and it owned enormously valuable iron and
coal deposits. It was Morgan's plan, in which
Frick, Harriman, and the others agreed, to buy the
Tennessee stock from Moore and Schley. In this
way the panic could be stayed and a big stroke of
good business done for the greater corporation.
Gary was called in to discuss the matter. The only
obstacle seemed to be the Government. Would a
purchase of this kind be construed as a violation
of the Sherman Act? A deputation, consisting of
Gary, Perkins, and others, was dispatched to Wash-
ington to lay the matter before President Roose-
velt. The President promised immunity and the
purchase was then immediately consummated. The
United States Steel Corporation paid thirty million
dollars in its own bonds for the Tennessee stock;
these bonds were accepted as collateral by the bank
where the Tennessee stock had been refused; and
the firm of Moore and Schley was saved. The an-
nouncement had an immediate effect, and from
that hour matters began to mend.

Before the turn of the new year. Wall Street was
normal again. The prices of securities had rallied
substantially, the money market had grown much

148 THE MASTERS OP CAPITAL

easier, fear and fright had disappeared, and men
were looking forward with confidence into the
future. And, as the year 1908 wore on, it became
evident that the panic marked the cuhnination of
^^high finance." The great banking groups were
still intact, to be sure, and their influence and
power seemed as far-reaching as ever. But the
glamour of speculation and promotion had largely
disappeared. The shock of the panic had put con-
servatism into the survivors and of course a great
horde of speculators had fallen.

Yet there was still rivalry between Harriman
and Morgan. In the fall of 1908 Harriman induced
the Mutual Life Insurance Company to sell him
half of the working control of the great Guaranty
Trust Company, with its one hundred million of
assets. And in the early part of the following year
Harriman obtained an option on a half interest in
the control of the Equitable Life Assurance So-
ciety. Harriman evidently proposed to form a
banking power greater even than that of the Na-
tional City Bank or of the Morgans, as a part of
a colossal scheme which he was developing. The
control of the Union Pacific system, the great-
est railroad system on the American continent —
for the Union Pacific at that time controlled two

THE PANIC OP 1907 AND AFTER 149

lines to the Atlantic seaboard — did not satisfy
this man's ambition. He was working for a world
railroad empire. Before the panic year Harriman
had made his control of the Baltimore and Dhio
practicaUy secure. During the dark days of the
panic he had taken over from Charles W. Morse
the stock of the Central of Georgia and had made
this railroad a subsidiary of the Illinois Central.
Now he was planning a railroad system in Asia
which would connect with the Siberian Railway in
Russia and finally work through to the capitals of
Europe. He had already secured an option on the
South Manchiuian Railway in China and was en-
deavoring to obtain the cooperation and backing
of the Japanese Government to further his plans.
Had Harriman Kved, no one knows what might
have occurred in railroad history during the follow-
ing few years. But he was playing a very difficult
game and the strain was beginnmg to tell on him.
In the summer of 1909 he was taken seriously ill
and died in the early fall. The death of Harriman
caused an almost inunediate change in the bank-
ing situation in New York. Within three months
Morgan and his associates had bought Harriman's
stock in the Guaranty Trust Company and with it
the holdings of the Mutual Life Insurance Company.

150 THE MASTERS OP CAPITAL

Later Morgan acquired from Thomas F. Ryan
control of the Equitable life Assurance Society,
which had fallen into Ryan's hands in 1905. Thus
we find Morgan in practical control of the ''Big
Three" in life insurance in New York, for he had
already dominated the New York Life for many
years. He then merged the Morton and the Fifth
Avenue Trust companies into the Guaranty s^nd
this union gave him and his associates a domi-
nating position among the trust companies of New
York, since he already controlled the powerful and
growing Bankers Trust Company, which had been
formed a few years before. These moves also re-
sulted in giving him a closer grip on the affairs of
the National Bank of Commerce.

This growth of the Morgan banking power did
not, however, excite any spirit of competition or
rivalry between his interests and those of Standard
Oil, for the time had passed when rivalry in bank-
ing was the fashion. Before long it could be said,
indeed, that two rival banking groups no longer
existed, but that one vast and harmonious banking
power had taken their place.

Harriman was now dead; Henry H. Rogers was
dead; Alexander J. Cassatt, the great Pennsyl-
vania Railroad president, was dead; James Stillman

THE PANIC OF 1907 AND AFTER 151

had retired from active business; William Rocke-
feller was no longer an active business promoter.
Times were changing and new men were coming to
the front. Frank A. Vanderlip, the young head of
the National City Bank» was becoming more and
more the spokesman for the Rockefeller interests;
George W. Perkins was still active with the Mor-
gans» but the strong personality of Henry P. Davi-
son was beginning to dominate the firm. Though
Morgan himself remained in command until his
death in 1913, he was clearly growing old and
was placing more and more responsibiUty on his
younger partners.

These newer men in Wall Street were not the^^
products of the old time, when exi>erience was
gained by building up and welding together the
parts of the vast modem industrial and banking
machine. They had not been educated in the hard
and struggling school for mastery through which
Morgan and Frick and Harriman and Rockefeller
had come. When they arrived, they f oimd the finan-
cial machine already in motion; their work was to
perfect it and keep it well oiled. Consequently,
with the arrival of the new and younger school of
financiers, a less spectacular season set in for Wall
Street. Money power increased; intercorporate

U2 THE MASTERS OF CAPITAL

relationships were maintained; but few further
stqps were taken in elaborating or developiiig
the system.

Long before the panic of 1907» political rum-
blings had reached the ears of Wall Street. In
President Roosevelt's first term, the Sherman Act
had been invoked against the Northern Securities
Company, and that gigantic product of the spirit
of consolidation had been dissolved by decree of
court. A little later, new powers were given to the
Laterstate Commerce Conunission over the opera-
tion of the railroads, and for the first time the Com-
mission was fully empowered to regulate freight
rates. The New York insurance investigation
under Charles E. Hughes, with its astonishing dis-
closures, had shown growing pubUc aversion to the
methods of "high finance."

The panic, with its accompanying disasters, had
a large share in prompting the Government at
Washington to take action against the trusts; and
before Roosevelt left the White House in 1909
suits had been brought against a large number of
industrial trusts, including Standard CMl and To«
bacco. Later, suits were instituted against the Steel
Trust, the Harvester Trust, and a great many
others. When Taft became President in 1909»

THE PANIC OF 1907 AND AFTER 15S

many of the big combinations formed during the
previous decade were practically under indictment.
In 1911 the Supreme Court ordered the dissolu-
tion of Standard Oil and Tobacco and of a large
number of smaller trusts as well. These decisions
brought about radical changes in the character of
the corporations. The original subsidiary compan-
ies were obliged to take over the properties under
nominally competitive conditions. Such dissolu-
tions proved in the end, however, to be mere changes
of form, for the various companies involved con-
tinued to be owned, controlled, and managed by
practically the same men, with little if any real
competition.

Later a drive against the railroads began in the
same way; the Union Pacific was forced to disgorge
its interest in the Southern Pacific Company, and
the Pennsylvania disposed of its control in its com-
petitor, the Baltimore and Ohio. The new federal
laws regulating freight rates made the "commu-
nity of interest" plan of interlocking control of lit-
tle use, so that the different railroads began liqui-
dating their interest in other properties to a large
extent. Within a few years, the ties binding to-
gether the big trunk lines and larger systems were
steadily loosened. And finally. Federal statutes

154 THE MASTERS OF CAPITAL

prohibiting interlocking directorates, not only
among competing railroad systems, but among
banks and industrial concerns, completed the proc-
ess of "unscrambling the eggs/' Before the Great
War opened, the long chapter of "high finance,"
as understood during the wild and dramatic days
of 1901 to 1906, had practically closed.

CHAPTER IX

WALL STBEET AND THE WORLD WAB

War is the great revealer; it demonstrates, as does ^
nothing else, the strength and weakness of a nation,
material and spiritual. The first two years of the
recent stupendous struggle disclosed the financial
and industrial greatness of the United States; the
last two years happily showed that the nation was
great in other things than money, mimitions, and
food. Yet it became apparent, even in the days
of American neutrality, that the support of Ameri-
can agriculture and industry was practically indis-
pensable to the allied cause. America possessed
the largest available supply of that copper, steel,
cotton, and food without which the armies of
the Entente would have struggled in vain. Wall
Street became, at least temporarily, the internation-
al money market; more than a third of all the gold
in the world soon found its way to New York; and
the United States which, since the Revolution, had

155

156 THE MASTERS OF CAPITAL

been a debtor nation, soon discovered that Europe
owed her far more money than she had ever owed
Europe. The mere fact that, in 1916, the United
States produced 43,000,000 tons of steel, while
Great Britain, which normally ranks next to this
country in steel manufacture, produced 9,000,000
tons, not only indicates the extent to which Ameri-
can industry had expanded under the pressure of
war, but gives some indication of the part which it
was playing on European battlefields. Thus, long
before American armies gave Marshal Foch that
superiority in men which turned the balance from
defeat to victory, American mines, American steel
mills, American farms, and American money had
become powerful elements in the war.

Wall Street awoke rather slowly to its new posi-
tion as a maker of history. Its first reaction to
the European nightmare was one of bewilderment
and panic. In this it merely reflected the mental
state of the European bourses of which it had been
a dependent for many years. The hardest headed
American business man had difiSculty in keeping
his poise when all the Stock Exchanges of Europe
had closed their doors and when the news ticker
reported a run upon the Bank of England. Wall
Street had never faced such a crisis as that which

WALL STREET AND THE WOULD WAR 157

dawned on the morning of August S, 1914. Only
once in its history of more than a hundred years
had this great market suspended operations, and
then only for a few days during the panic of 1873.
But the conditions facing it in August, 1914, were
unparalleled. The Kaiser's ultimatums to Rus-
sia and France, making war inevitable, caused
European investors to rush their securities to the
London stock market, which averted a panic only
by closing. Since all the important markets of
Europe and South America followed the London
example, there remained only one place in the
world where stocks could be sold — New York.
At that time European investors, for the larger
part British, held at least $4,000,000,000 of Ameri-
can securities. There was not the slightest ques-
tion that they would attempt to dispose of these
on ahnost any terms. There are experts now who
believe that the American market could then have
stood this strain, but there were few who enter-
tained such encouraging ideas in August, 1914.
The prevailing opinion then was that all American
securities would suffer such declines that a general
calling of bank loans would result and that the
country would be visited with the greatest financial
and industrial panic in its history. Yet Wall

158 THE MASTERS OP CAPITAL

Street was kept in suspense for twenty-four hours.
On Monday morning, the 3d of August, the usual
aggregation of brokers, most of them in a high state
^f excitement, gathered on the floor. The gong
which announces the beginning of business rings
promptly at ten o'clock: the employee whose busi-
ness it is to ring it stood stolidly at his post, having
received no instructions not to give the signal. As
the pointer on the clock passed fifteen minutes to
ten and started towards the fatal hour, the nerv-
ous tension increased. The excited members all
had vast quantities of stocks which they had been
ordered to sell, and they trembled at what would
happen when they threw these on the market.
It was not until five minutes to ten that an officer
of the Exchange stepped upon the floor and read
the official notice that the market would be closed
indefinitely. The cheer that went up eloquently
voiced the relief which this step brought to a
chaotic situation.

This closing indicated that the United States
was still the financial dependent of Europe. The
Exchange remained closed four months; then, on
the 28th of November, it timidly opened its doors
and began trading again in restricted fashion. Ex-
ternally the position of Wall Street in November

WALL STEUEET AND THE WORLD WAR 159

seemed to have changed little from its position
in August. The great European exchanges were
still closed; thus New York became the one market
on which European holdings could be "dumped/*
Europe still held vast quantities of American se-
curities on which it might be expected to realize.
Yet, when the American market opened, some-
thing quite extraordinary took place. Europe, as
was expected, began to sell American securities in
large amoimts, but stocks on Wall Street did not
decline; instead, they advanced. The reopening
of the Stock Exchange really started one of the
most sensational stock "booms" in the history of
that institution. Instead of having a panic on its
hands, as many had freely predicted, Wall Street
discovered that it had a bull market of unprece-
dented buoyancy. The real fact was that, in the
intervening four months, the financial prestige
of the United States had been enormously en-
hanced. Alone of all the great markets of the
world Wall Street had not had to resort to the ex-
pedients that commonly accompany panic condi-
tions. All European countries, including such a
financial giant as Great Britain, had declared a
moratorium, or a temporary suspension of the legal
obligation to pay debts, and most South American

160 THE MASTERS OP CAPITAL

countries had resorted to the same expedient. No
moratorium had been declared in the United States.
Practically all European countries, even including
England, resorted to various currency expedients
that amounted practically to inflation. The United
States resorted to no such unscientific expedients
as it had tried in the Civil War but met the de-
mands of the hour by supplying an elastic emer-
gency currency under the terms of the new Federal
Reserve Act. ' But certain developments even more
fundamental showed that this prosperity was not
fictitious. When war broke out, the United States
was harvesting the greatest wheat crop in its his-
tory, and at the same time the other great wheat
countries were showing a smaller production. The
closing of the Dardanelles kept Russia's wheat
from reaching its market. All the world now b^gan
to bid for America's food supply, a demand im-
mediately evidenced in the startling increase in our
export statistics. Meanwhile the allied nations be-
gan scouring the United States for all kinds of war
supplies. They found little in the way of guns or
ammunition, but they did find industrial plants

' Congress still further facilitated the issue of emergency currency
by amending the Federal Reserve Act. At the same time dear-
mg-house associations in the larger cities arranged for the issuing
Off certiOGates.

WALL STREET AND THE WORLD WAR 161

far greater than those of any other country which
could be very soon transformed into huge am-
munition factories. War orders for all kinds of
munitions started these plants going twenty-four
hours a day, while orders for clothing and other
indispensable materials of war put new life into
such great industrial regions as New England.
The result was a huge balance of trade in favor of ^
tbe United States. The gold supply of Europe be-
gan to find its way into the coflFers of Wall Street,
a movement that was continuous until 1917, when,
of the approximately $8,500,000,000 outstanding,
nearly $8,000,000,000 was ultimately deposited in
American safety vaults.

In the early days of the war England had prac-
tically abdicated, for the time being, the position
of international banker which she had held for a
hundred years. Li a single year Lombard Street,
up to the cataclysm of 1914, had invested over
a billion dollars in new securities, domestic and
foreign. Lombard Street had largely financed the
building of American railroads, had contributed
greatly to the financing of American enterprises
of all kinds, had been a large purchaser of govern-
ment and municipal bonds, not only in the United
States, but in South American countries. That

162 THE MASTERS OP CAPITAL

familiar annual phenomenon in the United States,
known as '^moving the crops," had been made
possible for many years with credits supplied by
England. But in the early part of 1915, the Brit-
ish Government vetoed all operations of this kind
and informed the bankers that their resources must
be used exclusively for war purposes. What mar-
ket could thus step into the position of interna-
tional banker which England by government fiat
had surrendered? Two years before, any sugges-
tion that Wall Street could do this would have been
regarded as absurd; yet the American market
adjusted itself to this position with comparative
ease. It not only supplied home demands for
ready money, but began making loans aggregating
hundreds of millions to Canada, Switzerland,
Norway, Sweden, and the South American re-
publics. Wall Street bought the bond issues of
Paris, Bordeaux, and Lyons, and even provided
funds for international trade. Soon it had to meet
new demands.

Up to 1914, Wall Street had played little part
in financing foreign governments, its activities in
this direction being limited almost to lending Great
Britair $200,000,000 at the time of the South
African War and Japan $50,000,000 at the time

WALL STREET AND THE WORLD WAR 163

of the Russian War. But as the war orders of the
Allies began flooding our markets. Great Britain
and France attempted to pay for their purchases
with cash, an expedient which drove British ex-
change up to a point which it had never reached
in the history of the New York market. It soon
became evident that, if the United States was to
do business with the Allies on this huge scale, some
other method must be adopted for settling the
account. What this method should be was clear.
Great Britain had built up her foreign trade largely
by lending to her customers the money with which
they purchased the goods. It was evident that we
should have to do the same thing. The simplest
way for the British and French Governments to
establish credits in the United States with which to
pay for war supplies would be to sell their bonds in
our markets. The money obtained from sales, when
deposited in American banks, could then be drawn
upon for settlements. Simple as this device might
seem in theory, it involved what seemed in 1915
to be insuperable difficulties. American investors
had never shown any great eagerness to purchase
government securities, excepting their own. There
really existed no public market for such invest-
ments, in the sense that such a market had for so

164 THE MASTERS OP CAPITAL

long existed in England, France, and other coun-
tries. Some of our supersensitive government
officials at first believed that such an operation
would be a violation of neutrality and a consider-
able pro-German element Kfted up their voices in
protest. There were others who questioned the
soundness of the investment: the war threatened
world-wide bankruptcy, and there was a fear that
even so powerful a nation as Great Britain might
not be able to pay her obligations. Nevertheless,
in the latter part of 1915, a distinguished Anglo-
Fr«ich mission arrived in New York for the pur-
pose of floating an American loan. The sum sug-
gested, $1,000,000,000, staggered Wall Street; no
Government had ever floated a foreign loan of
such proportions. In accordance with the advice of
American bankers the amount was cut to $500,000,-
000, and this was disposed of successfully. From
now on, all the purchases of the British and French
were paid for in this way. After this credit was ex-
hausted, these Governments continued to borrow in
Wall Street, usually pledging American securities.
Not only did England and France pay for their
suppUes with money furnished by Wall Street, but
they made their purchases through the same me-
dium. As related in a previous chapter, the house

WALL STREET AND THE WORLD WAR 165

of Morgan has always maintained close and con-
fidential relations with the British Government
and the British public. The necessity of buying
materials by the billions in the United States soon
produced a state of chaos in London. Contract
hunters and contract jobbers pounced upon the
British War Office; all kinds of irresponsible per-
sons, American and Eiuopean, obtained contracts
for speculative purposes. Unless disaster was to
result, it was evidently necessary to select some
trustworthy agency in this country which could
be depended upon to mobilize American indus-
try, place the European orders in the right quar-
ters, and attend to all the details. Inevitably the
house of Morgan was selected for this important
task. Thus the war had given Wall Street an
entirely new rdle. Hitherto it has been exclusively
the headquarters of finance; now it became the
greatest industrial mart the world had ever known.
In addition to selling stocks and bonds, financ-
ing railroads, and performing the other tasks of a
great banking center. Wall Street began to deal in
shells, cannon, submarines, blankets, clothing, shoes,
canned meats, wheat, and the thousands of other
articles needed for the prosecution of a great war.
This new function brought to the front an American

166 THE MASTERS OF CAPITAL

business man who had hitherto been practically
unknown. In looking for the man best quali-
fied to conduct this purchasing campaign the
Morgan firm discovered Edward R. Stettinius,
the president of the Diamond Match Company.
Stettinius in turn searched American industry
for the men best qualified to assist him in his gi-
gantic task, with the result that he got together a
force of 175, who organized themselves into a de-
partment known humorously as the "S.O.S." —
or "Slaves of Stettinius." In a short time this
group found themselves piux^asing supplies at the
rate of $10,000,000 a day. To a considerable ex-
tent the materials in which this agency dealt had
never been made in the United States before, at
least in appreciable quantities. They had to ex-
tend on a tremendous scale such munitions fac-
tories as already existed and to construct hun-
dreds of entirely new plants. American industry
adapted itself to the new demands speedily and
satisfactorily, and many concerns which had never
made munitions of any kind were soon turning
them out in perfect shape. So successfully was the
work done that up to September, 1917, the Mor-
gan firm had bought more than $3,000,000,000 in
merchandise and munitions and had, besides this.

WALL STREET AND THE WORLD WAR 167

marketed from $2,000,000,000 to $3,000,000,000 of
American securities which had formerly been held
by European investors.

With one American captain of industry the Brit-
ish Government dealt directly. He was a man
whose name has already figured in this narrative.
Lideed, next to J. Pierpont Morgan, the American
business man who was best known in England
was Charles M. Schwab. England understood even
better than Americans the proportions of the Beth-
lehem Steel 0>mpany and the manufacturing genius
of its head. When Kitchener became Minister
of War, one of his first acts was to cable Schwab
asking him to take the next boat for England. In
a few days Schwab and Kitchener were closeted at
the British War OflBce. The Secretary's demands
were to the point. How many shells could Schwab
supply? A million? Yes. How long would it take
him? Ten months. 0)uld Schwab furnish any
guns? Yes, and quickly.' In this way Kitchener
rehearsed all his requirements and Schwab pledged
all the capacity of the Bethlehem Steel plant. At
the end of several days' conferences Kitchener ap-
proached a delicate point. He had only one anxiety
about the Bethlehem Company, he said, and that
was that German interests might piurchase it.

168 THE MASTERS OF CAPITAL

Schwab immediately offered to sign an agreement
that the Bethlehem Company would not be sold to
any one so long as it had any British contracts under
way. And so this American manufacturer with the
German name became one of the strongest indus-
trial allies of the British Government. According to
the popular estimate he shipped not far from $800,-
000,000 worth of war materials to England in less
than two years. To do this he so increased his
facilities that the Bethlehem Company presently
became a larger munitions plant than the Krupps,
and Schwab's shipyards alone had a capacity for
turning out a larger tonnage than all the shipyards
in Germany. One of his particularly interesting
feats was the manufactiu^ of twenty submarines,
which were sent in parts to Canada, where they were
pieced together and sent across the Atlantic under
their own power. A year or so afterward Ger-
many sent the submarine Deutschland to the United
States and widely advertised the performance as
something unprecedented!

Valuable as all this work was in promoting the
cause of the Allies, it had one result that was still
more important. For it prepared financial America
for war. When Congress declared war on April
6, 1917, America, as a nation, had made little

WALL STREET AND THE WORLD WAR 169

preparation for participating in the great conflict.
We had an army only in skeleton; we had a navy
efficient in its personnel and in its ships but en-
tirely inadequate for the crisis; we had hardly any
mercantile marine. In only one part of the United
States had there been any real preparedness, and
that was the part which had for decades been per-
haps the most unpopular section of the country.
From August, 1914, Wall Street had displayed
an attitude that compares well with those ele-
ments in American life which had viciously assailed
business and industry. With the exception of one
or two Jewish-German banking houses, its sym-
pathies had been enthusiastically with the Allies.
And the part which ^t had played in financing the
Allies laid the foundations for the work it did in the
American period of participation. The outbreak
in 1914 had produced the wildest chaos in Euro-
pean business and finance: stocks had tumbled,
money rates had gone up, industry had ceased as
though stricken with paralysis, and general dis-
solution had been prevented only, as we have seen,
by resorting to a moratorium. But no such de-
moralization seized Wall Street when the United
States declared war. Instead of falling, the stock
market advanced — a movement generally hailed

170 THE MASTERS OP CAPITAL

as a fair augury of victory. Never had America
attained so sound and so preeminent a financial po-
sition. In two years we had ceased to be a debt-
or nation and now had Europe deeply in oiur debt.
We had lent foreign Governments, bankers, and
merchants not far from $2,000,000,000; yet so
plentiful was money in New York that the invest-
ment bankers complained because they could not
find enough securities to supply their customers.
Of the $4,000,000,000 American securities esti-
mated to have been held in England and France
in 1914, we had purchased all but $1,000,000,000,
and of this $300,000,000 had been pledged by the
British and French Governments as securities for
loans, while the remaining $700,000,000 lay in the
government exchequers for similar use as occa-
sion should arise. Thus there was no longer any
danger that these stocks and bonds would be sud-
denly unloaded on the American market with dis-
astrous results. At the beginning of the war our
gold holdings amounted to $1,887,000,000, while
by December 1, 1917, they had grown to $2,563,-
000,000. Moreover, there was no likelihood that
Europe could draw this away.

In recommending a declaration of war, President
Wilson said that we should extend to the allied

WALL STREET AND THE WORLD WAR 171

powers "the most liberal financial credits, in order
that our own resources may so far as possible
be added to theirs." At first it was thought that
perhaps oiur chief help to the Allies would be fi-
nancial and industrial. There were Germans, more
enlightened than the Prussian miUtarists and dip-
lomats, who did not regard such assistance with
indifference. "We are mad," said Albert Ballin,
the creator of the German mercantile marine, in
1917; "we have done a disastrous thing, a thing
which will throw its shadow over our economic life
for a generation. How are we to resume our for-
eign trade in the face of an Anglo-Saxondom which
loathes and must loathe our presence among them?
All the military victories and all the wild will-
of-the-wisps about Hamburg to Bagdad will not
help us. "

"Almost uncanny" was the comment of a Lon-
don observer on the quiet with which Wall Street
accepted the declaration of war. But events had
not progressed far when it became apparent that
this attitude was justified.

The way in which America's entrance first tan-
gibly affected the situation was that she imme-
diately took over the burden which Great Britain
had been carrjdng of financing the Allies. For

179 THE MASTERS 0» CAPITAL

two and a half yean Great Biitain had not onfy
met h^ own expenditures, but had made advances
on a huge scale to France, Italy, Russia, Bdgium,
Serbia, and the other Entente combatants. The
United States not only assumed these reqxmsibifi-
ties, but bc^an advancing enormous sums to Great
Britain herself. These were not subsidies, such
as Fitt had given to England's allies in the Na-
pcdeonic wars; they were loans. In reality, the
United States placed its credit at the disposal of
its fdlow combatants. It sold its own bonds in
the American market, advanced the mxmey so ob-
tained to the European powers, taking in exchange
their bonds at the same rate of interest. The prac-
tical outcome of the operation was to save Eng-
land, France, and the other borrowers great sums
in interest. The several acts authorizing American
bond issues contained provisions empowmng the
Treasury Department to make these loans to for-
eign governments; yet probably few imagined in
April, 1917, that these advances would ever be
so large. The mere fact that the United States,
besides spending enormous sums on its own mili-
tary preparations, was able to lend nearly $10,000,-
000,000 to European Governments in little less
lan two years, gives some idea of the resources

WALL STREET AND THE WORLD WAR 173

which this country brought to bear in the Euro-
pean conflict. Despite these almost unimagin-
able expenditures, the nation, judging from all ex-
ternal signs, was suffering no discomforts, hard-
ly any inconveniences, and there were no indica-
tions that the people could not withstand the
strain indefinitely.

The fact was that financial America in 1919
was an entirely different nation from that of 1914.
The successive bond issues had transformed us
into a nation of investors. Despite the power
which American finance had developed in the
period of neutrality, there were many pessimists
in 1917 who declared that the first popular Liberty
Loan for $2,000,000,000 could never succeed. The
American people, it was urged, were not thrifty;
they had not developed the habit of purchas-
ing government seciuities; floating bond issues in
the United States had always been almost exclu-
sively a banking undertaking. This statement was
not quite historically correct. Indeed, the methods
of popular subscription which had proved so success-
f ul in England were largely an American invention.
The first man who used somewhat spectacular
methods for selling government bonds to small
holders was Jay Cooke, the great financier of the

174 THE MASTERS OP CAPITAL

Civil War. Cooke's most remarkable feat — per-
/haps the most remarkable of the kind until the
outbreak of the European War — was his success
' in selling nearly $400,000,000 of the five-twenty
bonds of 1863. In order to market this — as de-
scribed in a preceding chapter — Cooke enlisted
a force of from two thousand to three thousand
canvassers, who visited all the towns and country
districts of the United States and made personal
solicitations from door to door, using handbills,
posters, brass bands, and parades for advertis-
ing purposes. Energetic as Jay Cooke was, how-
ever, it required a persistent campaign of this kind
finally to sell the issue; moreover, the bonds
brought considerably less than par and the inter-
est rate — six per cent — was high. This achieve-
ment had entirely passed out of the public mind
by 1917, when the Secretary of the Treasury be-
gan raising $2,000,000,000 by similarly intensive
methods. At first the gloomy prognostications of
those who foretold failure seemed justified. Wash-
ington made the mistake of announcing that the
public was rapidly oversubscribing the bonds, an
announcement that naturally somewhat cooled
popular enthusiasm. The financial houses of Wall
Street, however, presently abandoned routine busi-

WALL STREET AND THE WORLD WAR 175

ness and placed all their machinery behind the
loan. In the last few days the subscriptions came
in at a tremendous rate, the result being that the
public which had been asked for $2,000,000,000
oflFered the Government over $3,000,000,000. The
succeeding loans, for rapidly increasing amounts,
were likewise phenomenally successful, the climax
coming in November, 1918, on the eve of the
armistice, when the American people, as the re-
sult of a three weeks* campaign, subscribed nearly
$7,000,000,000 in a single issue. This is the largest
loan which history records.

The united efforts of the whole American peo-
ple, ranging all the way from the great Wall Street
banking houses to vaudeville performers, made these
loans successful. They indicated that Wall Street
was no longer a circumscribed geographical dis-
trict, but that — assuming that the phrase compre-
hends the financial resoiu'ces of the United States
— it included every town, every farm, every cross-
roads in the country. One of the most satisfac-
tory by-products of the war, indeed, was the fact
that it brought together many elements in our
national life that had hitherto worked at cross
purposes. It even diminished somewhat the wide-
spread ilnpopularity of Wall Street. That the

176 THE MASTERS OP CAPITAL

money power in the United States has many sin3
to answer for no rational person denies; happily for
the forces of great wealth, the war gave them an
opportunity to show that they, too, were American
first of all and that they placed the prestige and
dignity of their country above all personal sor-
did considerations. Only a few transparent dema'^
gogues and pro-Germans raised the cry that the
struggle was "Wall Street's War. " The Washmg-
ton Administration at first showed some suspicion
of the "interests," and for a time it attempted to
reorganize its departments and prepare for the
great struggle without the assistance of Big Busi-
ness. This unfriendly disposition proved almost
disastrous to the cause. It showed most conspicu-
ously in the matter of building ships and airplanes
— ^two things which seemed to be absolutely in-
dispensable to success. Both these departments for
a year were conducted by men who were entirely
inadequate to the task. England had undergone
a similar experience in the early days; she, too,
when the war started, had found that all her
big departments were headed by politicians, men
Yiho had little training in practical life and who
were thus incompetent to transact that great-
est of all modan enterprises — war. Gradually

WALL STREET AND THE WORLD WAR 177

Grreat Britain weeded out these men, r^Iacing
them for the most part by business leaders. Ul-
timately President Wilson adopted the same view*
Strangely enough, one of the first appointees to
go from Wall Street to an important Washing-
ton post belonged to precisely the class which
had incurred the President's distrust. Bernard
Baruch all his life had been primarily a Wall Street
opertLtoT — a very successful one, it is true, but
a man who had had absolutely no business train-
ing in the "" constructive " sense. Even Wall Street
itself gasped when it learned that the President
had made Baruch the head of the War Industries
Board, and, as such, the man who would do most
of the purchasing in this country for the United
States and the Allies. It is an evidence of the
flexibility of the Wall Street temperament that
Baruch, despite his lack of practical experience,
made a success of his job. When the war ended,
this official was buying wtt matmals at the rate
of $10,000,000,000 a year and was unquestionably
the greatest ** buyer" the world has ever known.

Wilson's other two conspicuous appointments
from Wall Street at first iu*oused great approval.
After the collapse of the aircraft programme, he
placed in charge of this work John D. Ryan,

178 THE MASTERS OF CAPITAL

president of the Anaconda Copper Mining Com-
pany. The result was the immediate revitalizing
of the department, although the war ended be-
fore Ryan had a chance to demonstrate his com-
plete success. But perhaps the Wall Street man
who scored the greatest triumph was Charles
M. Schwab. Wilson experimented disastrously
for more than a year with the Shipping Board,
the repeated failures of which almost disheartened
the American people and their allies. All this
time there was one man, and one man only, ideal-
ly fitted for the task. Finally Wilson sent for
the head of the Bethlehem Steel Company. At
first Schwab said that it would be utterly im-
possible for him to undertake the work. Being
pressed for an explanation, he declared that he
was no politician; the drastic reorganization he
would insist on making would be extremely un-
popular. The President immediately told him
that he should have an absolutely free hand and
that he would be required to do only one thing —
build ships. Schwab still hesitated; the first step
he should take, he informed the President, would
be to move the head offices of the Shipping Board
from Washington to Philadelphia. "You can
move them to Kalamazoo," the President is

WALL STEIEET AND THE WORLD WAR 179

reported to have answered, "if by doing so you
can build ships." This very satisfactory atti-
tude persuaded Schwab to take charge, which he
did with his characteristic enthusiasm and ener-
gy, and soon the vessels began to leave the ways
in great numbers. It is hardly too much to say
that Schwab's appointment sealed the fate of
submarine warfare.

Thus Wall Street emerged from the war with ^
greatly enhanced prestige. Without the financial
support which it placed at the Government's dis-
posal, without the mammoth industrial organi-
zation which America had developed since 1865,
the United States would have counted for little
in the struggle.

APPENDIX

EXTRACTS FROM CHAPTER THREE OF THE REPORT OF THB
COMMITTEE APPOINTED PURSUANT TO HOUSE RESOW*
TIONS 429 AND 504 TO INVESTIGATE THE CONCENTRA-
TION OF CONTROL OF MONEY AND CREDIT (hOUSE REPORT
NO. 1598, 6to CONGRESS, 8d SESSION, 1918)

Section S — Processes of Concentration

This mcreased concentration of control of money and
credit has been effected principally as follows:

First, through consolidations of competitive or poten-^
tially competitive banks and trust companies, which con-i
solidations in turn have recently been brought under
sympathetic management.

Second, through the same powerful interests boom-
ing large stockholders in potentially competitive banks
and trust companies. This is the simplest way of ac-
quiring control, but since it requires the largest vn-
vestment of capital, it is the least used, although the
recent investments in that direction for that apparent
purpose amount to tens of millions of dollars in present
market values.

Third, through the confederation of potentially com-
petitive banks and trust companies by means ot the
system of interlocking directorates.

Fourth, through the influence which the more power-

181

182 APPENDIX

f ul banking houses, banks, and trust companies have se*
cured in the management of insurance companies, rail-
roads, producing and trading corporations, and public
utility corporations, by means of stockholdings, voting
trusts, fiscal agency contracts, or representation upon
their boards of directors, or through supplying the money
requirements of railway, industrial, and public utilities
corporations and thereby being enabled to participate in
the determination of their financiial and business policies.
Fifth, through partnership or joint account arrange-
ments between a few of the leading banking houses,
banks, and trust companies in the purchase of security
issues of the great interstate corporations, accompanied
by imderstandings of recent growth — sometimes called
** banking ethics" — which have had the effect of effec-
tually destroying competition between such banking
houses, banks, and trust companies in the struggle for
business or in the purchase and sale of large issues of
such securities.

Section ^ — Agents of Concentration

It is a fair deduction from the testimony that the most
active agents in forwarding and bringing about the con-
centration of control of money and credit through one
or another of the processes above described have been
and are:

J. P. Morgan & Co.

First National Bank of New York.

National City Bank of New York.

Lee, Higginson & Co., of Boston and New York.

Kidder, Peabody & Co., of Boston and New York.

Kuhn, Loeb & Co.

APPENDIX 183

Section 11 — Iriiendations of Mernbera of the Oroup

Morgan & Co. and First National Bank. — Mr. Mor-
gan, head of the firm of Morgan & Co., of New York,
and Drexel & Co., of Philadelphia, and Mr. Baker,
head officer and dominant power in the First Nation-
al Bank since shortly after its organization, have been
dose friends and business associates from almost the
time they began business. Mr. Morgan testifying as to
their relations, said (p. 1034) :

Q. You and Mr. Baker have been old and close
friends and associates for many years, have you not?

A. For a great many years; yes.

Q. Almost since you began business?

A. Well, since 1873, at least.

Q. During that time your house has been of great
aid to the First National Bank in building up their great
prosperity and they have been of great aid to you?

A. I hope so.

Q. That is the fact, is it not?

A. That is the fact, I think.

Q. During that period you have made many pur-
chases of securities jointly and many joint issues of
securities, have you not?

A, Yes, sir.

Before becoming partners in Morgan & Co., Mr.
Davison and Mr. Lamont, two of the most active
members of the firm, were vice presidents of the First
National Bank, and still remain directors.

Next to Mr. Baker, Morgan & Co. is the largest stock-
holder of the First National, owning 14,500 shares,
making the combined holdings of Mr. Baker and his son
and Morgan & Co. about 40,000 shares out (A 100,000

184 APmtmtK

outstaadia^ *^ & joint investmeiit, Imia^ oil the tonrket
value, of $41,000,000 in this one institution.

llu^e ot the Morgan partners — Mr. Morgan himself,
Mr. Davison, and Mr. Lamcmt — are directors of the
first National, and Mr. Morgan is a member of the
executive committee of fotir, which has not, howevw,
been active and has rarely met.

Hie Pirst National has been associated with Morgan
& Co. in the control of the Bankers Trust Co. As be-
fore stated, when the company was organized, its entire
ci^ital stock was vested in George W. Perkins, H. P.
Davison, and Daniel G. Reid as voting trustees. Mr.
Perkins was then a Morgan partner and Mr. Davi-
son and Mr. Reid were, respectively, vice president and
a large stockholder of the First National. Mr. Davison,
who has since become a Morgan partner, and Mr. fteid
have continued as such trustees. Mr. Perkins has been
succeeded by the attorney of the company, who is also
Mr. Davison's personal counsel. Mr. Davison and Mr.
Lamont, of the Morgan firm, and Mr. Hine, president,
Mr. Norton, vice president, and Mr. Hepburn, member
of the executive committee of the First National, are
codirectors of the Bankers Trust Co., Mr. Hine being
also a member of its executive committee.

The First National likewise has been associated with
Morgan & Co. in the control of the Guaranty Trust
Co., Mr« Baker of the former being joined with Mr.
Davison and Mt. Portar of the latter as voting
trustees.

In the Astor Truist Co., contrcrfled by M6rgan &
Co. through the Bankers Trust Co., Mr. Bakeir and Mr«
Hine, chi^ officers ctf the First National, are directors.

In the Liberty National Bank» controlled by Morgan

APPENDIX 18S

& Co. through the Bankers Truat Co*, Mr. Hiue is also
a director.

Since its organization in 1894, Mr. Morgan and Mr.
Baker have been associated as voting trustees in the
control of the Southern Raiiwoy, of which, also, M(»r-
gan & Co. and the First Security Co. are stockholders,
and Mr. Steele of the former and George F. Baker, Jr.,
and H. C. Fahnestock of the First National are directors.

Mr. Morgan and Mr, Baker are also assodated as
voting trustees in the control of the Chicago Great
Western Railway.

Mr. Morgan and Mr. Baker are further associated as
directors and members of the executive committee of
the New York Central lines and as directors of the
New York, New Haven ta Hartford Railroad and the
Pullman Co.

At Mr. Morgan's request, Mr. Bak^r bi^eame aiid has
remained a director and member oi th^ finance Qom-
mittee of the United States Steel Coiporation, which,
as previously shown, was organized and always ha3
been dominated by the former. At the request of Mr.
Perkins, who, as a partner in Morgan i^ Co., was aqtive
in organizing the International Harvester Cq., liCr.
Baker became a director of that qompapy, resigsipg
only recently.

Mr. Stotesbury, of Morgan & Co., and Mr. Bak^ are
associated as voting trustees in the control of the
William Cramp Ship & Engine Building Co.

In 1901 Mr. Baker and associates, co5perating with
Mr. Morgan, transferred to Reading Co. a majority of
the stock of the Central Railroad of New Jersey, there-
by bringing under one control railroad systems trans-
porting SSy^ per cent of the anthracite coal moving from

186 APPENDIX

the mines and coal companies owning or controlling 63
per cent of the entire anthracite deposits. (Baker, R.,
1504, 1506, 1508.)

In the same year Mr. Baker co5perated with Mr.
Morgan in transferring to the Northern Securities Co.
controUing stock interests in the Northern Pacific and
Great Northern Railways, competitive transcontinental
systems.

One or more members of Morgan & Co. and one
or more officers or directors of the First National are
associated as codirectors in the following additional
corporations, among others:

The Mutual Life Insurance Co. of New York;

The anthracite railroads, including the Reading, the
Central of New Jersey, the Lehigh Valley, the Erie, the
New York, Susquehanna & Western, and the New York,
Ontario & Western;

The Northern Pacific Railway, in which also Mr.
Steele, of Morgan & Co., and Mr. Baker, of the First
National, are members of the executive committee;

Adams Express Co.;

American Telegraph & Telephone Co.; and

The Baldwin Locomotive Works.

But nothing demonstrates quite so clearly the close
and continuing cooperation between Morgan & Co.
and the First National Bank as their joint purchases
and imderwritings of corporate securities. Since 1908
they have purchased for their joint account, generally
with other associates, 70 odd security issues of 30 diflfer-
ent corporations, aggregating approximately $1,080,-
000,000. (Ex. 213, R., 1895; Ex. 235, R., 2127.) A com-
plete statement of such joint transactions in securities
will be found in a subsequent part of this report.

APPENDIX 187

It is thus seen that through stockholdings, inter-
locking directors, partnership transactions, and other
relations, Morgan & Co. and the First National Bank
are locked together in a complete and enduring com-
munity of interest. Their relations in this regard are,
indeed, a conmionplace in the financial world. Thus,
Mr. Schi£F being asked whether he knew **the close re-
lations between Messrs. Morgan and the First National
Bank," replied "I do.'* (R., 1687.)

Morgan & Co.^ First National Bank^ and National City
Bank. — Mr. Stillman, as president, chairman of the
board of directors and largest stockholder, for a long
time has held a position of dominance in the National
City Bank corresponding to Mr. Morgan's in his firm
and Mr. Baker's in the First National Bank.

For many years while Morgan & Co. and the First
National Bank were in close business union the Na-
tional City Bank apparently occupied a position of
independence. More recently, however, it has been
drawn into the commimity of interest existing between
the two first named, as is evidenced by a series of
important transactions.

First. Within three or four years Morgan & Co.
acquired $1,500,000 par value of the capital stock of the
National City Bank, representing an investment at the
stock's present market price of $6,000,000, and J. P.
Morgan, Jr., became a director. (Morgan, R., 1036,
1075, 1076; Davison, R., 1879; Ex. 134-A.)

Second. In 1910 Mr. Morgan in conjimction with
both Mr. Baker, his long-time associate, and Mr. Still-
man, head of the National City Bank, purchased from
Ryan and the Mr. Harriman estate $51,000, par value.

188 APPENDIX

of the stock of the Equitable Life Assurance Sodiety»
paying therefor what Mr. Ryan originally paid with
interest at 5 per cent — about $8,000,000 — the invest<- ...="" .="" 101="" 1068="" 1069="" 1071="" 1466="" 1467="" 1469="" 1470="" 1535="" 180="" 190="" 1910="" 1="" 4="" 5="" a.="" a4="" a="" abaat="" about="" acquired="" ago.="" agreed="" all.="" all="" alone.="" alone="" always="" am="" and="" any="" anything.="" anything="" appendix="" approximately="" arrangement="" as="" ask="" asked="" assets="" at="" back="" baker="" bank="" be="" because="" been="" before="" being="" better="" bottom="" bought="" business="" but="" buy="" buying="" by="" caie-ninth="" can="" care="" cent.="" cent="" chase="" com-="" come="" coming="" committed="" company="" compelled="" concerning="" confirming="" consulted="" control="" correct.="" correct="" correctly="" could.="" could="" date.="" desirable="" desire="" did.="" did="" disposi-="" do="" does="" done="" each="" earn="" enough="" equitable="" except="" existed="" explain="" explanation="" fair="" following="" follows="" for="" fourth="" from="" further="" gave="" general="" gentlemen="" give.="" give="" given="" go="" good="" greatly="" h="" had="" half="" hands.="" hands="" harriman="" harrimw="" has="" have="" having="" he="" held="" hie="" him.="" him="" his="" how="" i="" if="" im-="" improve="" in="" informally="" initials="" insisted="" interest="" interrogated="" interrupting="" investment="" is="" it.="" it="" itself="" j.="" jr.="" keep="" kind.="" kl="" kno="" know="" later="" law="" ld="" less="" letter="" life.="" life="" lof="" look="" made="" make="" matter="" may="" me.="" me="" ment="" messrs.="" money.="" money="" morgan.="" morgan="" mr.="" mr="" my="" myself="" nally="" no.="" no="" nor="" normal="" not.="" not="" nothing.="" now="" of="" on="" one-="" one-eighth="" one-ninth="" one-tenth="" only="" or="" ordinarily.="" ordinarily="" origi-="" osdy="" other="" over="" p.="" paid="" pany.="" par="" part="" pay="" pays="" per="" price.="" price="" proved="" provided="" pur-="" purchase="" purchased="" put="" q.="" q="" question="" questions="" rate="" rather="" reason.="" reason="" recollection="" record="" referring="" remember="" request="" requested="" respect="" ryan="" s="" safe="" said.="" said="" say="" saying="" security="" sell="" sir.="" sit-="" situation.="" situation="" so.="" so="" something="" speak="" special="" stated="" stillman="" stiuman="" stock="" stocks="" struck="" subject="" such="" sufficient="" suggest="" suppose.="" suppose="" take="" talk="" talking="" tell="" than="" that.="" that="" the="" them="" then="" there.="" there="" these="" thing="" think="" this="" thitt="" thought="" three="" thut="" time.="" time="" tion="" to="" transac-="" transaction.="" transaction="" trust="" trying="" two="" uation="" understand.="" understand="" unless="" value="" very="" want="" wanting="" was.="" was="" way="" we="" well="" were="" what="" when="" where="" which="" whom="" why="" will="" with="" within="" words.="" words="" would="" write="" wrote="" year="" years="" yes.="" yes="" yet="" yield="" yielding="" you="" your="" yourselves=""> what did you understand that to meanP

A. I did not understand that to mean much of
anything. I did not take much interest in it.

Third, about a year later Mr. StiUman and Mr. Baker,
fmrsulmt to an understanding between them and J. P.
Morgan & Co., purchased api»rosimately one-half of the
hoklings c^ the Mutual and Equitable Life insurance
ccmpanies in the stock of the National Bank of Com-
merce, amounting altogether to some 42,200 shares.
Mr. Baker being a member of the finance committee of
the Mutual, it was arranged that he should purchase
the Equitable's stock — about 15,250 shares '>— and Mr.
Still^tiaik the Mutual's* Pursuant to the understanding,
Mr. Stillman turned over 10,000 shares to Morgan fc
Co., who already owned 7000 shares. Mr. Baker kept
5000 shares, turned over 5000 to the first Security Co.,
aiid distributed the rest among various persons; dOOO
shares were allotted by Mr. Stillman and Mr. Baker to
£uhn, Loeb & Co.

Mr. Baker testified as follows regarding this traos-
action (B., 1468, 1464) :

Q. Was the purchase of that stock the result of an
understanding between you and him and others?

A. Yes, sir.

Q. Who were the others?

A. Some of the people at Mr. Morgan's.

Q. Who?

A. I can not remember whether it was Mr. Morgan
himsdf , or Jack -^ I niean Mr. J^ P. Morgan, Jr. — or
some others; I do not remember.

Q. Then the purchase altogether amounted to about
4)1,200 shares, did it not, fr6m the two companies?

APPENDIX 19S

A. Yes.

Q. What arrangement was there as to the distribu-
tion of that stock; how it should be distributed between
Messrs. Morgan and Stillman and yourself?

A. I can not remember that there was any in par-
ticular. I disposed of mine as I have told you, and that
is as near as I can remember. I can account for the
bulk of it.

Q. Was tber^ or was there not talk about the
distribution of that 42,200 shares?

A. There may have been, but I do not remember.

Q. You do not remember whether there was or not?

A. No, sir.

Q. And you can not tell what Messrs. Morgan &
Co. agreed to take before the stock was bought?

A' I do not know whether they agreed to take any.
I think Mr. Morgan took 10,000 shares, probably, from
Mr. Stillman.

Q. Before you bought the stock between you, these
three interests, was there not some understanding, and
if so, what was it, as to the way it should be divided up?

4* Possibly there was, but I do not remember
clearly enough to answer the question intelligently to
you. I am willing to admit, if it is of any interest to
the committee, that there was an understanding and
that we were to take it for joint account.

Q. The committee would rather not have any ad-
missions that do not agree with your recollection, if you
have no recollection of it at all.

A, I have not a definite enough recollection to state
under oath.

Q. Is it your impression that there was an und^pf*
standing that it was purchased for joint account?

IM APPENDIX

A. Yes.

Q. Between those three interests?
A. Yes; that it would be divided. I do not think
they were for joint account.

The National City Bank, the First National, and
Morgan & Co. now have two representatives each on the
board of directors of the National Bank of Commerce
— Mr. Vanderlip, president, and Mr. Simonson, vice
president, of the first named; Mr. Baker, chairman of
the board, and Mr. Hine, president of the second; and
H. P. Davison and J. P. Morgan, Jr., of the last; whilst
six of its finance committee of nine (it has no executive
committee) consist of Mr. Vanderlip and Mr. Simonson
of the National City Bank, Mr. Hine of the First Na-
tional, Mr. Wiggin, president of the Chase National,
which, as appeared above, has for some years been
controlled by the First National, and Mr. Davison and
Mr. J. P. Morgan, Jr., of J. P. Morgan & Co.

Fourth, during the same period in which occurred the
three transactions just described — that is, within the
last four years — the National City Bank, the First
National, and Morgan & Co. (excluding issues in which
there were other parties to the joint account) have
purchased or underwritten in joint account thirty-six
security issues (including the impending issue of the
Interborough Rapid Transit Co.) amounting to $484,-
456,000 and they, with other associates, thirty-one ad-
ditional issues amounting to $548,027,000, making in
all sixty-seven issues aggregating over $1,000,000,000
in which the First National, the National City Bank,
and Morgan & Co. were joint purchasers or under-
writers. Further, in the same period, the National

APPENDIX 196

City Bank and Morgan & Co. and other associates^
not including the First National, have purchased or
underwritten in joint account twenty security issues
aggregating $333,385,000. On the other hand, in the ten
years prior to 1908 the National City Bank joined with
Morgan & Co. in but one purchase or underwriting of
securities and with the First National in not one.

The acquisition by Morgan & Co. of a large block of
stock of the National City Bank with representation
upon its board of directors, and the transactions that
followed, in which those two institutions and the First
National Bank were joined, as above set forth, show a
unison of interest and a continuity of cooperation be-
tween the three such as for many years previously had
existed between two of them — Morgan & Co. and the
First National.

Combined potoer of Morgan & Co., the First National,
and National City Banks. — In earlier pages of the
report the power of these three great banks was sepa-
rately set forth. It is now appropriate to consider
their combined power as one group.

First, as regards banking resources :

The resources of Morgan & Co. are unknown; its
deposits are $163,000,000. The resources of the First
National Bank are $150,000,000 and those of its ap-
pendage, the First Security Co., at a very low estimate,
$35,000,000. The resources of the National City Bank
are $274,000,000; those of its appendage, the National
City Co., are unknown, though the capital of the latter
is alone $10,000,000. Thus, leaving out of account the
very considerable part which is unknown, the institu-
tions composing this group have resources of upward dt

196 APPENDIX

lUMyOOOyOOOy aside from the vast individual resouiees
of Messrs. Morgan, Baker, and Stillman.

Further, as heretctfore shown, the members of this
group, through stockholdings, voting trusts, interiocking
directorates, and other relations, have become in some
cases the absolutely dominant factor, in others the most
important single factor, in the control of the following
banks and trust companies in the city ol New Yend-
ently, as formerly. The fact is, however, . . . that
not only are small issues still very frequent, but they
are purchased in concert as regularly as the larger issues.
CNF the issues since 1907 . . . purchased or underwritten
by two or more of the banking houses there named acting
together, about ninety were for $5,000,000 and less, while
an additional sixty were for amounts between $5,000,000

APPENDIX 207

and $10,000,000. It also appears that forty-five of such
issues for $5,000,000 and less, most of them made since
1909, were purchased or underwritten by Morgan & Co.
in conjunction with associates.

Of course we do not suggest that banking houses may
not on particular occasions join in purchasing or under-
writing an issue of securities and yet remain entirely
independent and free to compete with each other gener-
ally in the purchase of security issues. But where a
group of such banking houses, pursuant to a settled
policy, regularly purchase these issues in concert, com-
petition amongst them in this vastly important com-
mercial function is effectually suppressed. And that is
the situation in this country. No less an authority
than Mr. Baker admitted as much (R.,,1542, 1543):

Q. But among these banking houses that we have
named is there not a strong and continuous community
of interest in the purchase and sale of securities?

A. I think there is. We have always tried to deal
with our friends rather than with people we do not know.

Q. It is a good deal better to deal with your friends
and split it up than it is to compete for the securities?

A. Not necessarily.

Q. That is what happens, is it not?

A. Oh, I do not think so to any great extent.

Q. Have you ever competed for any securities with
Morgan & Co. in the last five years? If so, give us the
name of them.

A. I do not know that we have competed with them.

Q. You divide with them, do you not? You give
them a part of the issues when you have it?

A. We are apt to.

Q, And if they take a security they give you a part

208 APPENDIX

of the issue, do they not?

A, Yes.

Q, That is what is known as the modem system of
co5peration and combination as against the antique
system of competition, is it not?

A. That is rather a long name for me.

Q, You understand the question. I would like to
have you answer it.

A. I never heard it called in that way before.

Q. How would you call it?

A. I would not call it at all.

Q. You know what co5peration is, do you not?

A, Yes.

Q. Is that not co5peration as against competition?
That is the modem system of cooperation as against
the archaic system of competition, is it not?

A. I do not understand how you state that.

Q. That is right, is it not?

A. All right; yes.

Q, And that has been found to work very well, has
it not?

A. I think so.

Q. For the bankers?

A. Yes; and for others, too.

Moreover, the banking houses which have joined in
the plan of cooperation comprise the principal mediums
through which the greater corporations of the country
obtain their supplies of capital.

The charge for capital, which, of course, enters uni-
versally into the prices of commodities and of service,
is thus in effect determined by agreement amongst those
supplying it, and not under the check of competition. If

APPENDIX 209

there be any virtue in the principle of competition,
certainly any plan or arrangement which prevents its
operation in the performance of so fundamental a
commercial function as the supplying of capital is
peculiarly injurious.

The possibility of competition between these banking
houses in the purchase of securities is further removed
by the understanding amongst them and others that
one will not seek by offering better terms to take
away from another a customer which it has theretofore
served, and by the corollary of this, namely, that where
given bankers have once satisfactorily united in bringing
out an issue of a corporation they shall also join in bring-
ing out any subsequent issue of the same corporation.
This is described as a principle of banking ethics. It is
thus stated by Mr. Hine, president of the First National
Bank of New York (R., 2045, 2046) :

Q, Recently your bank made an issue, jointly with
J. P. Morgan & Co. and the National City Bank, of
Chicago & Western Indiana Railway bonds, of ten
millions, did it not?

A. Notes.

Q. Ten millions of notes, yes. Why was it necessary
that three great banking houses should join in an issue
of that kind?

A. I do not know of any reason.

Q. Was it not because they had been jointly
interested in previous issues of the same company?

A. I do not know that it was.

Q. Had they been jointly interested in previous
issues?

A. I think they had.

Q. Is it or is it not the custom when banking houses

210 APPENDIX

are interested or become interested in one kind of
issues of a company that they retain that interest in
other issues?

A. Often it is so.

Q. That is part of the banking ethics, is it not?

A. Yes, I would say it is; on satisfactory terms.

Q. Is it another rule of banking ethics that bankers
shall not interfere with one another's customers?

A. The same ethics obtain in banking that obtain
in the legal profession and in the medical profession as
to infringing upon the preserves of others. .

Q. Well, what are the ethics in the banking pro-
fession as to trespassing upon the preserves of others?

A. If you will tell me what the ethics are in the legal
world, I will answer your question.

Q. No; I would rather have you tell me the ethics
in the world with which you are acquainted.

A. I can not state the matter any better than you
have. It is the custom — I am not dealing in ethics.

Q. What is the custom among bankers and banking
houses as to any one interfering with another's customer
in business?

A, I do not know whether there is any custom. I
think it is considered unprofessional.

Q. Unbusinesslike?

A. And not in good form according to the highest
principles of business practice.

Q. Is it not in accordance with banking ethics to
interfere with or take customers away from firms; to
take customers who have been doing business with
some other banking house?

A . I think that is ordinarily considered high-minded
practice not to do so.

APPENDIX 211

Mr. Davison testifying on the same subject said
(R., 1858, 1859) :

Q. Then you know of these three instances — the
Chicago & Western Indiana Railway Co., the Kansas
City Terminal Co., and the New York Central, all made
within a few weeks jointly with other banking houses —
those we have been discussing. Is there any rule or
custom among bankers that where they make one issue
of a company or are interested together in one issue they
remain interested in subsequent issues?

A. For tho, same company?

Q. Yes.

A. As a matter of practice, if it was satisfactory in
every particular, I should say it was the custom; yes.
It is a matter of banking ethics.

Q. A matter of banking ethics?

A. I should say so; yes.

Q. If either one of the three thereafter gets an issue
of that company it is a matter of banking ethics that it
is for joint account, is it?

A. I should say that the natural way of handling
that business would be to have it go to the parties who
handled it before, if it were satisfactorily handled; yes.

Q. You mean if they have not had any differences
or disagreements between themselves?

A. Yes, if it was satisfactorily handled.

Q. Have you not within the last few weeks also
taken an issue of $67,000,000 of American Telephone
& Telegraph Co. bonds jointly with Lee-Higginson and
other banking houses?

A. No.

Q. You participated with them in that issue?

A. Excuse me, I was going to answer your question.

ftU APPENDIX

I think with others, not including Lee-Higginson & Co.
as principals, but with Kidder, Peabody & Co., the
First National, the National City Bank, Baring Bros.
& Co. (Ltd.), of London, and Morgan-Grenfell (Ltd.),
of London, we have underwritten an issue of $67,000,000
of American Telephone & Telegraph Co. bonds.

Q. Are they the same parties

A. I beg your pardon — and Kuhn, Loeb & Co.

Q. Are they the same bankers or banking houses
with which you had previously underwritten issues of
the American Telephone & Telegraph Co.?

A. Exactly; and that is a complete answer to your
question.

Q. You have together underwritten, I think» $150,-
000,000 of those bonds, have you not?

A. That is my recollection.

Q. So that the same rule of banking ethics required
the same disposition of this issue as of the others?

A. I would not say it required it.

Q. It resulted in it?

A. It resulted in it, exactly.

Q. As a matter of fact, in business morals it would
require it.

A. It would require it if everything was properly
and satisfactorily handled, and there were no other
factors in the situation which might make it inexpe-
dient. The situation, when a transaction comes up,
always governs.

Mr. Schiff was more guarded in his statement of the
practice (R., 1666, 1668, 1669) :

Q. And you would not, for instance, if you knew
Hie Southern Railway was going to make an issue of

APPENDIX ^18

securities, be willing to bid on them, would you?

A. We would not.

Q. In other words, these houses have their reeog*
nized clients, have they not?

A. To some extent.

Q. And is it not also recognized that they are their
clients and that they are not to be interfered with?

A. I think that is going a bit too far, because there is
very frequently interference or attempted interference.

Q. Has there ever been any interference with your
exclusively handling the issues of the Union Pacific
Railroad in the last ten years?

A. I do not think so.

Q. Have you any instance in mind in which in the
last five years you have invaded the field of Messrs.
Morgan & Co. or they have invaded yours?

A. I have not.

Q. Or have you in mind any instance in which you
have invaded the field of the National City Bank or
the First National Bank, or in which they have invaded
yours?

A. As to the First National Bank, I know we have
not. As to the National City Bank I can not say for
certain. I think they would do business to a certain
extent even where we are considered the agents, and
we would do certain business where they are considered
the agents; not to a large extent.

Q. Is not that where the corporation is a customer
of both of you? Is not that the only case in which the
corporation is claimed to be or regarded as a customer
of both of you or either of you?

A. It is in cases where a corporation is regarded as a

214 APPENDIX

customer of neither.

Q. That is, in a case in which the field happens to
be open?

A. Yes.

This custom, by whatever name it be called, and the
practice of these great banking houses which it supple-
ments of purchasing security issues in concert and not
independently can not have any other effect than the sup-
pression of competition in the purchasing of such securi-
ties, and the creation of a combination or community
of interest which may grant or withhold credit as it wills
and whose terms borrowing corporations must accept.

Undtie concentration admitted. — Mr. Beynolds, presi-
dent of the Continental & Commercial National Bank
of Chicago, was outspoken in the view that concentra-
tion of control of banking resources has already gone so
far as to be a menace to the country (R., 1654, 1655) :

Q. I suppose, Mr. Beynolds, that as president of a
great bank you have kept in touch with the very recent
trend toward concentration and control of money and
credit in the East?

A. Yes, sir; I have been constantly reminded of it
in the last year or so.

Q. You know the extent to which it has gone in the
last few years?

A. I have a general knowledge of it; yes, sir.

Q. Do you or not know the effect that has on the
marketing of securities of a great railroad and other
interstate corporations, and the trend of concentration
brought about through the concentration of this money
and credit?

A. I have read all that has been adduced at this

APPENDIX 215

examination, and a great many other things, and my
information in detail is very largely the result of this
reading, rather than from personal experience.

Q. But you have information and knowledge of the
conditions in New York, for instance, as between the
great banking houses. That is a matter of personal
knowledge?

A. Yes; I have a fairly general knowledge of that,
I should say.

Q. What would you say as to that concentration of
the control of money and credit being a menace to the
country?

A. That involves a very deep question. Personal-
ly I am inclined to believe that an excess of power of
any kind in the hands of a few men might properly be
called a menace. I do not mean to say by that that the
I)eople who had that control and power have used it
improperly. I do not mean to say that at all.

Q. Begardless of the way they have used it for the
time being, the question is, is it not, as to the way they
can use it?

A. I think a more wide distribution of the power of
credit, if that is what you mean, would really be better
in the long run.

Q. Taking the present situation as you find it, Mr.
Beynotds, what is your judgment as to whether that
situation is a menace?

A. I am inclined to think that the concentration,
having gone to the extent it has, does constitute a men-
ace. I wish again, however, to qualify that by saying
that I do not mean to sit in judgment upon anybody
who controls that, because I do not pretend to know
whether they have used it fairly or honestly or otherwise.

216 APPENDIX

Mr. Schiff also conceded rapid concentration of con-
trol of banking resources in New York in recent years,
but he stated that it caused him no anxiety so far as
the well-being of his own firm was concerned, as they
were able to take care of themselves. We quote (B.,
1686-1687, 1688) :

Q. Have you been an interested observer of the
concentration and control of money and credit in New
York in the last few years?

A. I have.

Q. You have seen it grow very rapidly, have you
not?

A, Yes.

Q. And you have seen it drift into fewer and fewer
hands, have you not?

A, It has drifted into fewer and fewer corporations.

Q. And the concentration and control of those
corporations has drifted into fewer hands, has it not?

A. I am not sure that it has done that.

Q. Do you know anything about it?

A. Well, I think the stockholding in different

Q. I say, do you know anything about it?

A. Not very closely.

Q. You have not watched it very closely?

A. I think stockholdings in most New York cor-
porations are very well divided.

Q. We are not talking about stockholdings, but
about practical control of management as distinguished
from stockholding. You see the difference?

A. I see the difference.

Q. It is a veiy substantial difference, is it not?

A. Yes, sir.
, Q. Now, confining yourself to the question of actual

APPENDIX 217

practical control of the management of these great
moneyed corporations, you have observed, have you
not, a growing concentration of control?

A, I have.

Q. And has it been a subject of concern to you?

A. No; it has not.

Q. You have been an interested onlooker in this
concentration?

A, An observer; yes.

Q. And you have understood the possibility of its af-
fecting you and your own sources of credit, have you not?

A. I have not been concerned in that.

Q. You do not require credit, then?

A. No.

Q. But you have considered its effect upon the small
banking houses, not so fortunately situated as you,
that do require credit?

A. Yes.

Q. Have you considered it?

A. Yes.

Q, And have you considered its effect on the ability
of the smaller houses to grow and become great issuing
houses?

A. Yes.

Finally, Mr. Baker, who is outranked only by Mr.
Morgan, if at all, as a factor in the concentration of
control of banking resources and credit into fewer and
fewer hands in New York, frankly admitted that in his
judgment the movement had gone far enough; that
even if it stopped where it is the peril would be great
if ambitious and not overscrupulous men should get into

818 APPENDIX

the places of power which have been created; and that
therefore the safety of the existing system lies in the
personnel of the men now in control. We quote from
his illuminating testimony (R., 1567, 1568) :

Q. I suppose you would see no harm, would you,
in having the control of credit, as represented by the
control of banks and trust companies, still further con-
centrated? Do you think that would be dangerous?

A. I think it has gone about far enough.

Q. You think it would be dangerous to go further?

A. It might not be dangerous, but still it has gone
about far enough. In good hands, I do not see that it
would do any harm. If it got into bad hands, it would
be very bad.

Q. If it got into bad hands, it would wreck the
country?

A. Yes; but I do not believe it could get into bad
hands.

Q. You admit that if this concentration, to the
point to which it has gone, were by any action to get
into bad hands, it would wreck the country?

A. I can not imagine such a condition.

Q. I thought you said so?

A. I said it could be bad, but I do not think it would
wreck the country. I do not think bad hands could
manage it. They could not retain the deposits nor the
securities.

Q. I am not speaking of incompetent hands. We
are speaking of this concentration which has come
about and the power that it brings with it getting into
the hands of very ambitious men, perhaps not over-
scrupulous. You see a peril in that, do you not?

A. Yes.

APPENDIX 219

Q. So that the safety, if you think there is safety
in the situation, really lies in the personnel of the men?

A. Very much.

Q. Do you think that is a comfortable situation for
a great country to be in?

A. Not entirely.

BIBLIOGRAPHICAL NOTE

The literature covering special phases of the develop-
ment and growth of capitalized industry and '^high
finance" in the United States during the past half cen-
tury is plentiful enough. Scores of volumes have been
written on the Trusts, on particular industries, and
special combinations of capital. But no exhaustive
study appears to have been made of the broad trend
toward the concentration and control of industry and
finance by Wall Street financiers, during the remark-
able period culminating in the aggressive antitrust
legislation after the financial crash of 1907.

Among the best popular books on the Standard Oil
Trust may be mentioned: Wealth Against Common^
Wealthy by Henry Demarest Lloyd (1894); History of
the Standard Oil Trust, by S. C. T. Dodd (1894) ; Rise and
Progress of the Standard Oil Company , by Gilbert Hol-
land Montague (1903) ; History of the Standard Oil Com"
pany, by Ida M. Tarbell (1904). To supplement these
books, bringing the facts relating to this great business
aggregation down to later dates, reference should be
made to government exhibits, such as the report of the
United States Industrial Commission (1900 and 1902);
the testimony in the Supreme Court suit for dissolution
(1910 and 1911) and the report of the "Money Trust
Investigation" made by the Conmiittee on Banking

221

222 BIBLIOGRAPHICAL NOTE

and Currency of the House of Representatives in 1918.
These latter are a real mine of information regarding
the activities not only of Standard Oil magnates in busi-
ness and banking fields, but of others as well during the
preceding decade.

The story of the Morgan banking house has never
been fully told, though the Life Story of J. P. Morgan^
by Carl Hovey (1911), presents a fair outline. Consult
also. Forty Years of American Finance^ by Alexander D.
Noyes (1909) which contains interesting chapters on the
government financing undertaken by the firm.

Thefacts of Edward H. Harriman's remarkable career
can be culled only from the current financial publica-
tions of the period. Government reports, such as the
testimony in the Supreme Court suit for the dissolu-
tion of the Northern Securities Company (1904) and
the report of the Committee on Banking and Currency,
show the general activities of the Harriman financiers
and their connections with Wall Street.

The rise to power of the steel and iron magnates and
the growth of allied industries have been presented to
the pubUc in various forms. A valuable but biased work
is the Inside History of the Carnegie Steel Company, by
James H. Bridge (1903). The Romance of Steel, by
Herbert N. Casson (1907) is a very readable story.

On the specific subject of Wall Street mechanism and
finance. The Work of Wall Street, by Sereno S. Pratt
(1912), and WaU Street and the Country, by Charles A.
Conant (1904), will be found interesting. The Truth
Ahovi the Trusts, by John Moody (1904), is a statistical
exhibit of capitalized industry and finance as it existed
at the apex of the merger movement.

On the general subject of industrial trusts and

BIBLIOGRAPHICAL NOTE 22S

combinations scores of volumes have been written, some
of value and many worthless. Among the informing,
popular books of the past two decades may be men-
tioned: The Story of Life Insurance^ by Burton J.
Hendrick (1907) ; Trusts^ or Industrial Combinations and
Coalitions in the United States^ by Ernst von Halle
(1895); Corporation Finance, by Thomas L. Greene
(1908); The Control of Trusts,hy John B. Clark (1901)
Trust Finance, by Edward Sherwood Meade (1903)
The Trust Problem, by Jeremiah W. Jenks (1900)
and InduMrial Combinations and Trusts, by William H.
Stevens (1913).

But to learn the full story of the great masters of
capital of the last generation, one must depend chiefly
on financial and investment periodicals. Chief among
these are the Commercial and Financial Chronicle, the
Wall Street Journal, and the New York Journal of Com-
merce. For purely banking subjects, the Bankers Maga-
zine is the best source of information. For full light on
the subject of the control of life insurance funds by
the powers of Wall Street, nothing better can be found
than the report of the joint committee of the New
York Legislature appointed to investigate life insur-
ance companies (1906). The facts regarding the dis-
solution of the Standard Oil Trust and the American
Tobacco Company are to be found in the testimony
in the Supreme Court suits against those companies.
The best popular description of the panic of 1907 is
contained in Alexander D. Noyes's Forty Years of
American Finance.

INDEX

Adams Express Company, 186,
196

Albany and Susquehanna Rail-
road, 21

Allegheny (Penn.)f Carnegie
at, S5

Allen and Ginter of Richmond,
in American Tobacco Com-
pany, 72

Amalgamated Copper Com-
pany, 68, 73, 199

American Bridge Company,
75,80

American Can Company, 199

American Car and Foundry
Company, 78

American Hide and Leather
Company, 78

American Ice Company, 188

American Line, 110

American Smelting and Refin-
ing Company, 78

American Steel and Wire Com-
pany, 74, 81, 82, 88-84,
106

American Steel Hoop Com-
pany, 75, 76, 86

American Sugar Refining Com-
pany, 71

American Telephone and Tele-
graph Company, 186, 200,
204-05. 211-12

American Tin Plate Company,
75,76

American Tobacco Company,
71, 72-73

American Woolen Company,
73

Anaconda Copper Company*
68, 178

Anglo-French mission to float
American loan, 164

Armour, P. D., 63

Asia, Harriman plans railroad
in, 149

Astor, J. J., 60

Astor Trust Company, 184,
196

Astors hold Illinois Central
stock, 91

Atchison, Topeka and Santa
F6 Railroad, 23; Morgan
and, 31, 82; Harriman and,
105; price of stock (1906),
135; under investigation by
House committee (1913),
197

Atlantic Coast Line, 107, 116

Bacon, Robert, 102, 104
Baker, G. F., President of First
National Bank, 99; under
investigation by House com-
mittee (1913), 183-88, 192,
194, 196, 200, 202, 207-08,
217-18
Baker, G. F., Jr., 185, 202
Baldwin Locomotive Works,

186
Ballin, Albert, quoted, 171
Baltimore, Peabody in, 6
Baltimore and Ohio Railroad,
reconstructed by Morgan,
26-27, 29-30, 31; Morgan
and control of, 32, 106; and
Union Pacific, 115; Harri«

225

2S6

D«)EX

Baltimore and Ohio R.R., Confd
man and, 149; and Penn-
sylvania Railroad, 158

Bank of North America, see
National Bank of North
America

Bankers Trust Company, 150,
184, 185, 196, 201

Banks, merchants*, 60

Baring Brothers of London,
205, 212

Barings, known as "mer-
chants," 5; and United
States, 9

Barnev, C. T., 141

Barucn, Bernard, 177

Beebe, J. M., and Company of
Boston, 10, 20

Belmont, August, 9, 20

Bessemer, Henry, steel process,
88, 41, 42; Carnegie and
Bessemer process, 44-45

Bethlehem Steel Company,
187-88. 167-68

Boissevain Brothers, 98

Bonds, American, sold in Eng-
land. 11; English buy Con-
federate, 15-16; sale of
Union bonds in Germany, 16;
British and French credits
in Great War, 168-64; Lib-
erty, 172, 178-75

Bowdoin, G. S., 82

Brice, Calvin, 25

Brown Brothers, 4

Brownsville (Tex.)f Stillman
born in, 62

Burns, Walter, 88

Canada, loans to, 162
Capital, meaning of term, 1-2
Carnegie, Andrew, early life,
85-86; and Scott, 86-88;
first investments, 87, 89;
and iron industry, 42-45 ; and
Bessemer steel, 44-45; per-
sonal characteristics, 47, 90;
and Frick, 49, 76; Mesaba
ore fields, 49-51; sale of busi-

ness, 75-78, 88; and Schwab,
78-80; competition, 80-82;
and Morgan, 88, 109

Carnegie, McCandless and Com-
pany, 45

Carnegie SteelCompany,
Moore offers to buy, 77;
see also Carnegie, sale of
business; Schwab becomes
president, 79; bibliography,
222

Case, J. I., Threshing Machine
Company, 199

Cassatt. A. J., 87, 106, 116, 150

Central of Georgia Railroad,
81, 189, 149

Central Railroad of New Jer-
sey, 115, 185, 186, 196, 197

Chase National Bank, 99-100,
194, 196

Chemical Bank, 60 (note)

Chesapeake and Ohio Rail-
road, 27, 82, 197

Chicago, railroads between At-
lantic and, 25

Chicago and Northwestern
Railroad, 105, 198

Chicago and Western Indiana
Railway, 209, 211

Chicago, Burlington and Quin-
cy Raihroad, 100, 101

Chicago Elevated Railways,
200

Chicago Great Western Rail-
way, 185, 197

Chicago, Milwaukee and St.
Paid Railroad, Stillman di-
rector of, 68; William Rocke-
feller and, 6S, 65, 67; and
Kuhn, Loeb and Company,
96; Union Pacific and, 105;
western extension, 115; price
of stock (1906), 185: Mor-
gan interests and, 198

Chicago, Rock Island and
Pacific Raihx>ad, 107-08,
198

Chicago, St. Louis and New
Orleans Railroad, 92

INDEX

227

Chile, loan to, 11

Citizens' Passenger Railroad,
Carnegie owns stock in, 37

City Bank, New York, Taylor
becomes president of, 60;
nature of, 60; location, 60
(note); reputation, 61 ; Pyne
as president. 61-62; Stillman
and, 62; Standard Oil Com-

?an^ and, 63-64; Union
acific and, 65-66, 102;
becomes National City Bank,
67; 8ee also National City
Bank

Cleveland, Rockefeller in, 52

Coke, Prick's enterprise, 46-49

Coleman, William, 44

Columbia Oil Company, Car-
negie owns shares in, 37

'^ Community of interest"
movement, 80, 87, 105, 106,
118, 134; 8ee iUao Industrial
combinations

Concentration of control of
money and credit, report of
House investigating com-
mittee (1913), 181 et seq.

Congress, House committee
investigates concentration,
181 et sea,

Conneaut (0.)f Carnegie plans
tube plant at, 81, 83

Connellsville, Prick coke king
of, 48

Consolidated Gas Company of
New York, 69, 200

Cooke, Jay, and American
Civil War debt, 15, 16-17,
178; allies himself to German
Jewish interests, 16; failure,
17; government and railroad
financing, 57

Cordage Trust, 71

Coster, C. H., 82, 33, 102

Cramp, William, Ship and
Engine Building Company,
185, 199

Cresson Springs ( P e n n . ) »
Schwab from, 78

Cunard Line, 110, 112
Cuttings hold Illinois Central
stock, 91

Dabney, C. H., 12

Dabney, Morgan and Com-
pany, 12-13, 21

Davison, H. P., in Morgan
firm, 151; in investigation of
House committee (1913),
183, 184, 194, 205-06

Delaware and Hudson Canal
Company, 21

Delaware and Hudson Rail-
road, 196

Delaware, Lackawanna and
Western Railroad, 197

Detroit Edison Company, 113

Deutschland (submarine), 168

Diamond Match Company, 76,
166

Dresser, D. L., 136

Drew, Fisk and Gould, 30

Drexel, A. J., 18, 14

Drexel, Morgan and Com-
pany, firm formed, 13, 14;
rivalry with Cooke, 16-17;
refunding government debt,
19; and railroads, 19 et aeq.,
57; banking, 55; see also
Morgan, J. P.

Dubuque and Sioux City Rail-
road, 93, 95

Duke, W., Sons and Company
of Durham, N. C, 72

Duluth, terminus of Great
Northern, 100

Duncan, Sherman and Com-
pany, Morgan with, 12;
failure, 13

East India Company, business
descendants of, 6

Eddyville (Ky.), Kelly at, 39

Edison Illuminating Company
of New York, 69

Elgin, Joliet and Eastern Rail-
way, 74

England, see Great Britain

228

INDEX

Eqmtable Life Asrarance So-
ciety, investments before
1890» 119; and trust com-
panies, 122, 12

Reference: https://archive.org/stream/masterscapitala00moodgoog/masterscapitala00moodgoog_djvu.txt

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Title: The Railroad Builders
       A Chronicle of the Welding of the States, Volume 38 in The
              Chronicles of America Series

Author: John Moody

Editor: Allen Johnson

Release Date: February 22, 2009 [EBook #3036]
Last Updated: September 6, 2015

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Produced by The James J. Kelly Library of St. Gregory's
University, Alev Akman, Dianne Bean, Stephanie Manke, and David Widger

THE RAILROAD BUILDERS

A CHRONICLE OF THE WELDING OF THE STATES

Volume 38 In The Chronicles Of America Series

By John Moody

New Haven: Yale University Press

Toronto: Glasgow, Brook & Co.

London: Humphrey Milford

Oxford University Press

1919

THE RAILROAD BUILDERS

CHAPTER I.	A CENTURY OF RAILROAD BUILDING
CHAPTER II.	THE COMMODORE AND THE NEW YORK CENTRAL
CHAPTER III.	THE GREAT PENNSYLVANIA SYSTEM
CHAPTER IV.	THE ERIE RAILROAD
CHAPTER V.	CROSSING THE APPALACHIAN RANGE
CHAPTER VI.	LINKING THE OCEANS
CHAPTER VII.	PENETRATING THE PACIFIC NORTHWEST
CHAPTER VIII.	BUILDING ALONG THE SANTA FE TRAIL
CHAPTER IX.	THE GROWTH OF THE HILL LINES
CHAPTER X.	THE RAILROAD SYSTEM OF THE SOUTH
CHAPTER XI.	THE LIFE WORK OF EDWARD H. HARRIMAN
CHAPTER XII.	THE AMERICAN RAILROAD PROBLEM

THE RAILROAD BUILDERS

CHAPTER I. A CENTURY OF RAILROAD BUILDING

The United States as we know it today is largely the result of mechanical inventions, and in particular of agricultural machinery and the railroad. One transformed millions of acres of uncultivated land into fertile farms, while the other furnished the transportation which carried the crops to distant markets. Before these inventions appeared, it is true, Americans had crossed the Alleghanies, reached the Mississippi Valley, and had even penetrated to the Pacific coast; thus in a thousand years or so the United States might conceivably have become a far-reaching, straggling, loosely jointed Roman Empire, depending entirely upon its oceans, internal watercourses, and imperial highways for such economic and political integrity as it might achieve. But the great miracle of the nineteenth century—the building of a new nation, reaching more than three thousand miles from sea to sea, giving sustenance to more than one hundred million free people, and diffusing among them the necessities and comforts of civilization to a greater extent than the world had ever known before is explained by the development of harvesting machinery and of the railroad.
The railroad is sprung from the application of two fundamental ideas—one the use of a mechanical means of developing speed, the other the use of a smooth running surface to diminish friction. Though these two principles are today combined, they were originally absolutely distinct. In fact there were railroads long before there were steam engines or locomotives. If we seek the real predecessor of the modern railroad track, we must go back three hundred years to the wooden rails on which were drawn the little cars used in English collieries to carry the coal from the mines to tidewater. The natural history of this invention is clear enough. The driving of large coal wagons along the public highway made deep ruts in the road, and some ingenious person began repairing the damage by laying wooden planks in the furrows. The coal wagons drove over this crude roadbed so successfully that certain proprietors started constructing special planked roadways from the mines to the river mouth. Logs, forming what we now call "ties," were placed crosswise at intervals of three or four feet, and upon these supports thin "rails," likewise of wood, were laid lengthwise. So effectually did this arrangement reduce friction that a single horse could now draw a great wagon filled with coal—an operation which two or three teams, lunging over muddy roads, formerly had great difficulty in performing. In order to lengthen the life of the road, a thin sheeting of iron was presently laid upon the wooden rail. The next improvement was an attempt to increase the durability of the wagons by making the wheels of iron. It was not, however, until 1767, when the first rails were cast entirely of iron with a flange at one side to keep the wheel steadily in place, that the modern roadbed in all its fundamental principles made its appearance. This, be it observed, was only two years after Watt had patented his first steam engine, and it was nearly fifty years before Stephenson built his first locomotive. The railroad originally was as completely dissociated from steam propulsion as was the ship. Just as vessels had existed for ages before the introduction of mechanical power, so the railroad had been a familiar sight in the mining districts of England for at least two centuries before the invention of Watt really gave it wings and turned it to wider uses. In this respect the progress of the railroad resembles that of the automobile, which had existed in crude form long before the invention of the gasoline engine made it practically useful.
In the United States three new methods of transportation made their appearance at almost the same time—the steamboat, the canal boat, and the rail car. Of all three, the last was the slowest in attaining popularity. As early as 1812 John Stevens, of Hoboken, aroused much interest and more amused hostility by advocating the building of a railroad, instead of a canal, across New York State from the Hudson River to Lake Erie, and for several years this indefatigable spirit journeyed from town to town and from State to State, in a fruitless effort to push his favorite scheme. The great success of the Erie Canal was finally hailed as a conclusive argument against all the ridiculous claims made in favor of the railroad and precipitated a canal mania which spread all over the country.
Yet the enthusiasts for railroads could not be discouraged, and presently the whole population divided into two camps, the friends of the canal, and the friends of the iron highway. Newspapers acrimoniously championed either side; the question was a favorite topic with debating societies; public meetings and conventions were held to uphold one method of transportation and to decry the other. The canal, it was urged, was not an experiment; it had been tested and not found wanting; already the great achievement of De Witt Clinton in completing the Erie Canal had made New York City the metropolis of the western world. The railroad, it was asserted, was just as emphatically an experiment; no one could tell whether it could ever succeed; why, therefore, pour money and effort into this new form of transportation when the other was a demonstrated success?
It was a simple matter to find fault with the railroad; it has always been its fate to arouse the opposition of the farmers. This hostility appeared early and was based largely upon grounds that have a familiar sound even today. The railroad, they said, was a natural monopoly; no private citizen could hope ever to own one; it was thus a kind of monster which, if encouraged, would override all popular rights. From this economic criticism the enemies of the railroad passed to details of construction: the rails would be washed out by rains; they could be destroyed by mischievous people; they would snap under the cold of winter or be buried under the snow for a considerable period, thus stopping all communication. The champions of artificial waterways would point in contrast to the beautiful packet boats on the Erie Canal, with their fine sleeping rooms, their restaurants, their spacious decks on which the fine ladies and gentlemen congregated every warm summer day, and would insist that such kind of travel was far more comfortable than it could ever be on railroads. To all these pleas the advocates of the railroad had one unassailable argument—its infinitely greater speed. After all, it took a towboat three or four days to go from Albany to Buffalo, and the time was not far distant, they argued, when a railroad would make the same trip in less than a day. Indeed, our forefathers made one curious mistake: they predicted a speed for the railroad a hundred miles an hour—which it has never attained consistently with safety.
If the American of today could transport himself to one of the first railroad lines built in the United States it is not unlikely that he would side with the canal enthusiast in his argument. The rough pictures which accompany most accounts of early railroad days, showing a train of omnibus-like carriages pulled by a locomotive with upright boiler, really represent a somewhat advanced stage of development. Though Stephenson had demonstrated the practicability of the locomotive in 1814 and although the American, John Stevens, had constructed one in 1826 which had demonstrated its ability to take a curve, local prejudice against this innovation continued strong. The farmers asserted that the sparks set fire to their hayricks and barns and that the noise frightened their hens so that they would not lay and their cows so that they could not give milk. On the earliest railroads, therefore, almost any other method of propulsion was preferred. Horses and dogs were used, winches turned by men were occasionally installed, and in some cases cars were even fitted with sails. Of all these methods, the horse was the most popular: he sent out no sparks, he carried his own fuel, he made little noise, and he would not explode. His only failing was that he would leave the track; and to remedy this defect the early railroad builders hit upon a happy device. Sometimes they would fix a treadmill inside the car; two horses would patiently propel the caravan, the seats for passengers being arranged on either side. So unformed was the prevalent conception of the ultimate function of the railroad, and so pronounced was the fear of monopoly that, on certain lines, the roadbed was laid as a state enterprise and the users furnished their own cars, just as the individual owners of towboats did on the canals. The drivers, however, were an exceedingly rough lot; no schedules were observed and as the first lines had only single tracks and infrequent turnouts, when the opposing sides would meet each other coming and going, precedence was usually awarded to the side which had the stronger arm. The roadbed showed little improvement over the mine tramways of the eighteenth century, and the rails were only long wooden stringers with strap iron nailed on top. So undeveloped were the resources of the country that the builders of the Baltimore and Ohio Railroad in 1828 petitioned Congress to remit the duty on the iron which it was compelled to import from England. The trains consisted of a string of little cars, with the baggage piled on the roof, and when they reached a hill they sometimes had to be pulled up the inclined plane by a rope. Yet the traveling in these earliest days was probably more comfortable than in those which immediately followed the general adoption of locomotives. When, five or ten years later, the advantages of mechanical as opposed to animal traction caused engines to be introduced extensively, the passengers behind them rode through constant smoke and hot cinders that made railway travel an incessant torture.
Yet the railroad speedily demonstrated its practical value; many of the first lines were extremely profitable, and the hostility with which they had been first received soon changed to an enthusiasm which was just as unreasoning. The speculative craze which invariably follows a new discovery swept over the country in the thirties and the forties and manifested itself most unfortunately in the new Western States—Ohio, Indiana, Illinois, and Michigan. Here bonfires and public meetings whipped up the zeal; people believed that railroads would not only immediately open the wilderness and pay the interest on the bonds issued to construct them, but that they would become a source of revenue to sadly depleted state treasuries. Much has been heard of government ownership in recent years; yet it is nothing particularly new, for many of the early railroads in these new Western States were built as government enterprises, with results which were frequently disastrous. This mania, with the land speculation accompanying it, was largely responsible for the panic of 1837 and led to that repudiation of debts in certain States which for so many years gave American investments an evil reputation abroad.
In the more settled parts of the country, however, railroad building had comparatively a more solid foundation. Yet the railroad map of the forties indicates that railroad building in this early period was incoherent and haphazard. Practically everywhere the railroad was an individual enterprise; the builders had no further conception of it than as a line connecting two given points usually a short distance apart. The roads of those days began anywhere and ended almost anywhere. A few miles of iron rail connected Albany and Schenectady. There was a road from Hartford to New Haven, but there was none from New Haven to New York. A line connected Philadelphia with Columbia; Baltimore had a road to Washington; Charleston, South Carolina, had a similar contact with Hamburg in the same State. By 1842, New York State, from Albany to Buffalo, possessed several disconnected stretches of railroad. It was not until 1836, when work was begun on the Erie Railroad, that a plan was adopted for a single line reaching several hundred miles from an obvious point, such as New York, to an obvious destination, such as Lake Erie. Even then a few farsighted men could foresee the day when the railroad train would cross the plains and the Rockies and link the Atlantic and the Pacific. Yet, in 1850 nearly all the railroads in the United States lay east of the Mississippi River, and all of them, even when they were physically mere extensions of one another, were separately owned and separately managed.
Successful as many of the railroads were, they had hardly yet established themselves as the one preeminent means of transportation. The canal had lost in the struggle for supremacy, but certain of these constructed waterways, particularly the Erie, were flourishing with little diminished vigor. The river steamboat had enjoyed a development in the first few decades of the nineteenth century almost as great as that of the railroad itself. The Mississippi River was the great natural highway for the products and the passenger traffic of the South Central States; it had made New Orleans one of the largest and most flourishing cities in the country; and certainly the rich cotton planter of the fifties would have smiled at any suggestion that the "floating palaces" which plied this mighty stream would ever surrender their preeminence to the rusty and struggling railroads which wound along its banks.
This period, which may be taken as the first in American railroad development, ended about the middle of the century. It was an age of great progress but not of absolutely assured success. A few lines earned handsome profits, but in the main the railroad business was not favorably regarded and railroad investments everywhere were held in suspicion. The condition that prevailed in many railroads is illustrated by the fact that the directors of the Michigan and Southern, when they held their annual meeting in 1853, had to borrow chairs from an adjoining office as the sheriff had walked away with their own for debt. Even a railroad with such a territory as the Hudson River Valley, and extending from New York to Albany existed in a state of chronic dilapidation; and the New York and Harlem, which had an entrance into New York City as an asset of incalculable value, was looked upon merely as a vehicle for Wall Street speculation.
Meanwhile the increasing traffic in farm products, mules, and cattle from the Northwest to the plantations of the South created a demand for more ample transportation facilities. In the decade before the Civil War various north and south lines of railway were projected and some of these were assisted by grants of land from the Federal Government. The first of these, the Illinois Central, received a huge land-grant in 1850 and ultimately reached the Gulf at Mobile by connecting with the Mobile and Ohio Railroad which had also been assisted by Federal grants. But the panic of 1857, followed by the Civil War, halted all railroad enterprises. In the year 1856 some 3600 miles of railroad had been constructed; in 1865 only 700 were laid down. The Southern railroads were prostrated by the war and north and south lines lost all but local traffic.
After the war a brisk recovery began and brought to the fore the first of the great railroad magnates and the shrewdest business genius of the day, Cornelius Vanderbilt. Though he had spent his early life and had laid the basis of his fortune in steamboats, he was the first man to appreciate the fact that these two methods of transportation were about to change places—that water transportation was to decline and that rail transportation was to gain the ascendancy. It was about 1865 that Vanderbilt acted on this farsighted conviction, promptly sold out his steamboats for what they would bring, and began buying railroads despite the fact that his friends warned him that, in his old age, he was wrecking the fruits of a hard and thrifty life. But Vanderbilt perceived what most American business men of the time failed to see, that a change had come over the railroad situation as a result of the Civil War.
The time extending from 1860 to about 1875 marks the second stage in the railroad activity of the United States. The characteristic of this period is the development of the great trunk lines and the construction of a transcontinental route to the Pacific. The Civil War ended the supremacy of the Mississippi River as the great transportation route of the West. The fact that this river ran through hostile territory—Vicksburg did not fall until July 4, 1863—forced the farmers of the West to find another outlet for their products. By this time the country from Chicago and St. Louis eastward to the Atlantic ports was fairly completely connected by railroads. The necessities of war led to great improvements in construction and equipment. Business which had hitherto gone South now began to go East; New Orleans ceased to be the great industrial entrepot of this region and gave place to St. Louis and Chicago.
Yet, though this great change in traffic routes took place in the course of the war, the actual consolidations of the various small railroads into great trunk lines did not begin until after peace had been assured. The establishment of five great railroads extending continuously from the Atlantic seaboard to Chicago and the West was perhaps the most remarkable economic development of the ten or fifteen years succeeding the war. By 1875 these five great trunk lines, the New York Central, the Pennsylvania, the Erie, the Baltimore and Ohio, and the Grand Trunk, had connected their scattered units and established complete through systems.
All the vexations that had necessarily accompanied railroad traffic in the days when each one of these systems had been a series of disconnected roads had disappeared. The grain and meat products of the West, accumulating for the most part at Chicago and St. Louis, now came rapidly and uninterruptedly to the Atlantic seaboard, and railroad passengers, no longer submitted to the inconveniences of the Civil War period, now began to experience for the first time the pleasures of railroad travel. Together with the articulation of the routes, important mechanical changes and reconstruction programmes completely transformed the American railroad system. The former haphazard character of each road is evidenced by the fact that in Civil War days there were eight different gages, with the result that it was almost impossible for the rolling stock of one line to use another. A few years after the Civil War, however, the present standard gage of four feet eight and one-half inches had become uniform all over the United States. The malodorous "eating cribs" of the fifties and the sixties—little station restaurants located at selected spots along the line—now began to disappear, and the modern dining car made its appearance. The old rough and ready sleeping cars began to give place to the modern Pullman. One of the greatest drawbacks to ante-bellum travel had been the absence of bridges across great rivers, such as the Hudson and the Susquehanna. At Albany, for example, the passengers in the summer time were ferried across, and in winter they were driven in sleighs or were sometimes obliged to walk across the ice. It was not until after the Civil War that a great iron bridge, two thousand feet long, was constructed across the Hudson at this point. On the trains the little flickering oil lamps now gave place to gas, and the wood burning stoves—frequently in those primitive days smeared with tobacco juice—in a few years were displaced by the new method of heating by steam.
The accidents which had been almost the prevailing rule in the fifties and sixties were greatly reduced by the Westinghouse air-brake, invented in 1868, and the block signaling system, introduced somewhat later. In the ten years succeeding the Civil War, the physical appearance of the railroads entirely changed; new and larger locomotives were made, the freight cars, which during the period of the Civil War had a capacity of about eight tons, were now built to carry fifteen or twenty. The former little flimsy iron rails were taken up and were relaid with steel. In the early seventies when Cornelius Vanderbilt substituted steel for iron on the New York Central, he had to import the new material from England. In the Civil War period, practically all American railroads were single track lines—and this alone prevented any extensive traffic. Vanderbilt laid two tracks along the Hudson River from New York to Albany, and four from Albany to Buffalo, two exclusively for freight and two for passengers. By 1880 the American railroad, in all its essential details, had definitely arrived.
But in this same period even more sensational developments had taken place. Soon after 1865 the imagination of the American railroad builder began to reach far beyond the old horizon. Up to that time the Mississippi River had marked the Western railroad terminus. Now and then a road straggled beyond this barrier for a few miles into eastern Iowa and Missouri; but in the main the enormous territory reaching from the Mississippi to the Pacific Ocean was crossed only by the old trails. The one thing which perhaps did most to place the transcontinental road on a practical basis was the annexation of California in 1848; and the wild rush that took place on the discovery of the gold fields one year later had led Americans to realize that on the Pacific coast they had an empire which was great and incalculably rich but almost inaccessible. The loyalty of California to the Northern cause in the war naturally stimulated a desire for closer contact. In the ten years preceding 1860 the importance of a transcontinental line had constantly been brought to the attention of Congress and the project had caused much jealousy between the North and the South, for each region desired to control its Eastern terminus. This impediment no longer stood in the way; early in his term, therefore, President Lincoln signed the bill authorizing the construction of the Union Pacific—a name doubly significant, as marking the union of the East and the West and also recognizing the sentiment of loyalty or union that this great enterprise was intended to promote. The building of this railroad, as well as that of the others which ultimately made the Pacific and the Atlantic coast near neighbors—the Santa Fe, the Southern Pacific, the Northern Pacific, and the Great Northern—is described in the pages that follow. Here it is sufficient to emphasize the fact that they achieved the concluding triumph in what is certainly the most extensive system of railroads in the world. These transcontinental roads really completed the work of Columbus. He sailed to discover the western route to Cathay and found that his path was blocked by a mighty continent. But the first train that crossed the plains and ascended the Rockies and reached the Golden Gate assured thenceforth a rapid and uninterrupted transit westward from Europe to Asia.

CHAPTER II. THE COMMODORE AND THE NEW YORK CENTRAL

A story was told many years ago of Commodore Vanderbilt which, while perhaps not strictly true, was pointed enough to warrant its constant repetition for more than two generations. Back in the sixties, when this grizzled railroad chieftain was the chief factor in the rapidly growing New York Central Railroad system, whose backbone then consisted of a continuous one-track line connecting Albany with the Great Lakes, the president of a small cross-country road approached him one day and requested an exchange of annual passes.
"Why, my dear sir," exclaimed the Commodore, "my railroad is more than three hundred miles long, while yours is only seventeen miles."
"That may all be so," replied the other, "but my railroad is just as wide as yours."
This statement was true. Practically no railroad, even as late as the sixties, was wider than another. They were all single-tracked lines. Even the New York Central system in 1866 was practically a single-track road; and the Commodore could not claim to any particular superiority over his neighbors and rivals in this particular. Instead of sneering at his "seventeen-mile" colleague, Vanderbilt might have remembered that his own fine system had grown up in less than two generations from a modest narrow-gage track running from "nothing to nowhere." The Vanderbilt lines, which today with their controlled and affiliated systems comprise more than 13,000 miles of railroad—a large portion of which is double-tracked, no mean amount being laid with third and fourth tracks is the outgrowth of a little seventeen-mile line, first chartered in 1826, and finished for traffic in 1831. This little railroad was known as the Mohawk and Hudson, and it extended from Albany to Schenectady. It was the second continuous section of railroad line operated by steam in the United States, and on it the third locomotive built in America, the De Witt Clinton, made a satisfactory trial trip in August, 1831.
The success of this experiment created a sensation far and wide and led to rapid railroad building in other parts of the country in the years immediately following. The experiences of a participant in this trial trip are described about forty years later in a letter written by Judge J.L. Gillis of Philadelphia:
"In the early part of the month of August of that year [1831], I left Philadelphia for Canandaigua, New York, traveling by stages and steamboats to Albany and stopping at the latter place. I learned that a locomotive had arrived there and that it would make its first trip over the road to Schenectady the next day. I concluded to lie over and gratify my curiosity with a first ride after a locomotive.
"That locomotive, the train of cars, together with the incidents of the day, made a very vivid impression on my mind. I can now look back from one of Pullman's Palace cars, over a period of forty years, and see that train together with all the improvements that have been made in railroad travel since that time.... I am not machinist enough to give a description of the locomotive that drew us over the road that day, but I recollect distinctly the general make-up of the train. The train was composed of coach bodies, mostly from Thorpe and Sprague's stage coaches, placed upon trucks. The trucks were coupled together with chains, leaving from two to three feet slack, and when the locomotive started it took up the slack by jerks, with sufficient force to jerk the passengers who sat on seats across the tops of the coaches, out from under their hats, and in stopping, came together with such force as to send them flying from the seats.
"They used dry pitch for fuel, and there being no smoke or spark catcher to the chimney or smoke-stack, a volume of black smoke, strongly impregnated with sparks, coals, and cinders, came pouring back the whole length of the train. Each of the tossed passengers who had an umbrella raised it as a protection against the smoke and fire. They were found to be but a momentary protection, for I think in the first mile the last umbrella went overboard, all having their covers burnt off from the frames, when a general melee took place among the deck passengers, each whipping his neighbor to put out the fire. They presented a very motley appearance on arriving at the first station. Then rails were secured and lashed between the trucks, taking the slack out of the coupling chains, thereby affording us a more steady run to the top of the inclined plane at Schenectady.
"The incidents off the train were quite as striking as those on the train. A general notice of the contemplated trip had excited not only the curiosity of those living along the line of the road, but those living remote from it, causing a large collection of people at all the intersecting roads along the route. Everybody, together with his wife and all his children, came from a distance with all kinds of conveyances, being as ignorant of what was coming as their horses, and drove up to the road as near as they could get, only looking for the best position to get a view of the train. As it approached the horses took fright and wheeled, upsetting buggies, carriages, and wagons, and leaving for parts unknown to the passengers if not to their owners, and it is not now positively known if some of them have stopped yet. Such is a hasty sketch of my recollection of my first ride after a locomotive."
The Mohawk and Hudson Railroad was originally constructed with inclined planes worked by stationary engines near each terminus, the inclinations being one foot in eighteen. The rail used was a flat bar laid upon longitudinal sills. This type of rail came into general use at this period and continued in use in parts of the country even as late as the Civil War.
The roads that now make up the New York Central were built piecemeal from 1831 to 1853; and the organization of this company in the latter year, to consolidate eleven independent roads extending from Albany to Buffalo, finally put an end to the long debate between canals and railroads. The founding of this company definitely meant that transportation in the United States henceforth would follow the steel route and not the water ditch and the towpath. Canals might indeed linger for a time as feeders, even, as in the case of the Erie and a few others, as more or less important transportation routes, but every one now realized that the railroad was to be the great agency which would give plausibility to the industrial organization of the United States and develop its great territory.
Besides the pioneer Mohawk and Hudson, this consolidation included the Utica and Schenectady, which had been opened in 1836 and which had operated profitably for many years, always paying large dividends. The Tonawanda Railroad, opened in 1837, and the Buffalo and Niagara Falls, also finished in the same year, were operated with profit until they were absorbed by the new system. In 1838 the Auburn and Syracuse and the Hudson and Berkshire Railroads were opened. The former after being merged in 1850 with the Rochester and Syracuse Railway, became a part of the consolidation. The Syracuse and Attica Railroad, opened in 1839, the Attica and Buffalo, opened in 1842, the Schenectady and Troy, opened in the same year, and several other small lines, some of which had undergone various changes in name and ownership, were all merged into the New York Central Railroad. This great property now comprised five hundred and sixty miles of railroad, the main stem extending from Albany to Buffalo. Though it had as yet no connection with the Hudson River Railroad, the New York Central Railroad at this period was the most substantial and important of American railroad systems. It developed a large and healthy through traffic to the Great Lakes and was practically free from railroad competition. The Erie Railway, which for many years had been struggling under great difficulties to reach the Great Lakes and had gone through nearly a generation of financial vicissitudes, was just getting its through line actively under way. The Pennsylvania Railroad was just pushing through to the waters of the Ohio and was not likely for many years to compete with the New York Central for the lake traffic. The Baltimore and Ohio, while remotely a competitor, was, like the Pennsylvania, looking more for the traffic of the Ohio Valley than for that of the Lakes.
The period of six years following the consolidation of 1853 was one of great prosperity for the New York Central system, and, notwithstanding the setbacks to business caused by the panic of 1857, large dividends were continuously paid on the capital stock. In the year 1859—before the Vanderbilt regime opened—the management embraced what to modern men of affairs are famous names. Erastus Corning was president, Dean Richmond was vice-president, and John V. L. Pruyn, Nathaniel Thayer, Isaac Townsend, and Chauncey Vibbard were directors. The headquarters of the company were at Albany, and the stock was owned mainly by residents of that city.
Meanwhile the building of railroads in other parts of the State and under other leadership was going forward rapidly. As far back as 1832 the first mile of the New York and Harlem Railroad was opened for traffic. This single mile remained for some time the only property of the company. It extended through what is now a thriving part of down-town New York. Its original terminus was at Prince Street, but the line was afterwards extended southward to the City Hall and later to the Astor House. It was not until 1837 that the road reached northward to Harlem and not until 1842 that Williamsbridge became the northern terminus. The line was looked upon as a worthless piece of property until 1852, when it was extended north to Chatham, to connect with the Albany and Stockbridge Railroad, and thus give a through line from New York City to Albany.
Another property built in these days and destined to become eventually an important part of the Vanderbilt lines was the Hudson River Railroad. This company was chartered in 1846, but for many years was frowned on as an unsound business venture, because of the belief that it would be in direct competition with the river traffic and therefore could never be made to pay. Nevertheless the promoters went ahead and by 1850 the road had been opened to Poughkeepsie. The entire line of one hundred and forty-four miles was completed to East Albany in 1851. At the same time the Troy and Greenbush Railroad, extending six miles to Troy, was leased, thus giving the new Hudson River Railroad an entry into the city of Troy. The Hudson River Railroad was entirely independent of the New York Central enterprise and was controlled in those early days by a group of New Yorkers, prominent among whom was Samuel Sloan.
As we enter the Civil War period, we find the three important properties which were afterwards to make up the Vanderbilt system all developing rapidly and logically into the strategical relationship which would make ultimate consolidation inevitable. The completion of the Erie Railway and its gradual development as the only through line across the State from New York to the Great Lakes; the opening, expansion, and general solidification of the Pennsylvania lines and their aggressive policy of reaching out to the lake region on the west and across New Jersey on the east; the extension of the Erie interests into the New England field, and the possibility that the latter might gain control of the Harlem or the Hudson River Railroad—all these considerations naturally aroused in the New York Central interests a desire to insure the future by obtaining for themselves control of the lines that would connect their own system with New York City and the Eastern seaboard.
During the Civil War, however, no progress was made in this direction. It was not until 1869, four years after the closing of the war, that any radical change took place. But in the years that had intervened, a new and commanding figure in the railroad world had come upon the scene. This man had grown to be the dominating genius, not only in the field of railway expansion, but in the world of finance as well. His name was Cornelius Vanderbilt. Born in 1794 in very humble circumstances, he had received little or no education, and as a youth had eked out a living by ferrying passengers and garden produce from Staten Island to New York. He had painfully saved a few hundred dollars within a year or two after his marriage, and with this capital he began his career in the transportation business. From his first ferrying project he engaged in other undertakings and laid the foundation of his subsequent fortune in steamboat navigation. About 1860, at an age when most men are beginning to retire from active affairs, the "Commodore"—as he was called on account of his numerous fleet—entered actively into the field of railway development, management, and consolidation. The extraordinary character and genius of the man are well depicted by the events of the years that followed.
Before the opening of the Civil War and until immediately after its end, the New York Central and the Erie systems were controlled by bitterly antagonistic interests. These interests were beginning to foresee the day when extremely aggressive competition would call into play their greatest energies. Vanderbilt, wiser than his generation, foresaw more than this. His vision took in the vast future values of the properties as developed trunk lines, and the greater possibilities of their control and operation as a consolidated whole. He was in a very real sense the forerunner or pioneer of the great consolidation period of a half century later. He was the Harriman and the Hill of his day.
The Erie had its own approach to New York City, but the New York Central was connected with the metropolis only by the river and the two independent roads—the Harlem Railroad and the Hudson River Railroad. To get the latter two roads under his complete control was Vanderbilt's first object. He would then have unimpeded access to New York and so become independent of the river.
He began his ambitious plans by making himself the master of the Harlem property, and in so doing got his first experience in railroad stock manipulation and at the same time picked up a moderate fortune. It was comparatively easy to buy the control of the Harlem Railroad. The Company had never paid a dividend, and, in 1863, when the Commodore quietly began his work, the stock was selling below thirty dollars a share. Before the close of this year he had manipulated the stock until it had reached ninety-two, and by a corner, in August of that year, he raised it to 179. On this deal Vanderbilt reaped a nice little fortune—but evidently not enough to enable him to carry through the ambitious plans which were in the back of his head, for in 1864 we find him manipulating another corner and this time running the price of the stock up to 285. In this wise the Commodore not only added millions to his already growing fortune but also made himself a power in the financial world. Financiers began to fear him, and he found it comparatively easy later to buy up the control of the Hudson River Railroad, which he did by paying about 100 for the stock. Then he began speculating again, sent Hudson River up to 180, and incidentally reaped another fortune for himself.
By this time Vanderbilt had achieved a great reputation as a man who created values, earned dividends, and invented wealth as if by magic; other railroad managers now began to lay their properties at his feet and ask him to do with them what he had done with the Harlem and the Hudson River. For under the Commodore's magic touch the Harlem Railroad for the first time in its long history began to pay dividends at a high rate, and in four years the earnings of the Hudson River property had nearly doubled.
One of the first properties to be placed at Vanderbilt's feet was the New York Central, and the control passed into his hands in the winter of 1866-67. He was now in a powerful position and immediately began to lay his plans for obtaining control of the Erie Railroad in the following year. In the latter effort he did not succeed, however, and after a protracted and dramatic contest he was defeated by his great adversary, "Uncle" Daniel Drew. The story of this contest need not be detailed here, as it is given in full in the chapter on the Erie Railroad.
In the fall of 1869 the Commodore, having secured everything in the railroad field he had sought except the Erie, put through his scheme for consolidation. The New York Central and Hudson River Railroad was incorporated. It included the old New York Central and also the Hudson River Railroad but not the Harlem. The capital of the consolidated company was placed at ninety million dollars, a figure of such magnitude in those days that the world was startled. The system embraced in all nearly 850 miles of railroad lines. A few years later the Harlem Railroad was leased to the property at a high valuation and a large dividend was guaranteed on the stock, the ownership of which was retained by the Vanderbilt family.
The Vanderbilt system as it is now understood really began with these transactions. From this time on, its history has been similar in many respects to that of other large systems which were the outgrowth of merger or manipulation in these early days. During the remarkable period of commercial and industrial development in this country from 1870 onward, when thousands of miles of new lines were built every year, when the growth of population was beginning to make the States of Ohio, Indiana, and Illinois centers of wealth and production, and when the wonderful Northwestern country embracing the States of Michigan, Wisconsin, and Minnesota, was so rapidly opened up and brought nearer to the Eastern markets, the Vanderbilt railroad interests were not idle. The original genius, Cornelius Vanderbilt, was soon gathered to his fathers, but his son, William H. Vanderbilt, was in many ways a worthy successor.
By 1885 the Vanderbilt lines had grown in extent and importance far beyond any point of which the elder Vanderbilt had ever dreamed. Long before this year the system included many smaller lines within the State of New York, and it had also acquired close control of the great Lake Shore and Michigan Southern system, with its splendid line from Buffalo to Chicago, consisting of more than 500 miles of railroad; the Michigan Central, owning lines from Detroit to Chicago, with many branches in Michigan and Illinois; the Canada Southern Railway, extending from Detroit to Toronto; and in addition to all these about 800 miles of other lines in the States of Ohio, Indiana, Michigan, and Pennsylvania.
In this same year 1885, another event of importance took place. The New York, West Shore and Buffalo Railroad, which after strenuous efforts extending over many years had constructed a new trunk line from Weehawken along the west shore of the Hudson to Albany and thence to Buffalo, came under the control of the New York Central. The great system in the Middle West, now known as the "Big Four," or Cleveland, Cincinnati, Chicago and St. Louis—embracing 750 miles of lines westward from Cleveland and Columbus, Ohio, to Indianapolis, Springfield, and Cincinnati, and having traffic connections with St. Louis—was also a Vanderbilt property at this time, although not under the formal control of these interests. Another important competing line secured in this period was the New York, Chicago and St. Louis, built to parallel the Lake Shore and known as the "Nickel Plate" route. This road extended from Buffalo to Chicago, and, like the West Shore, had been constructed with the hope of ultimately selling out to its competitor.
The development of railroad properties under the Vanderbilt influence was not confined to the territory east of Chicago and the Mississippi Valley. As early as 1859 a large system of roads had been merged in the section extending westward from Chicago to Omaha and radiating throughout Iowa, Minnesota, Kansas, Wisconsin, Missouri, and other States. This company was known as the Chicago and North Western Railroad, and its property, which was one of large and growing value, by 1886 embraced a system of over 3500 miles of road. Although neither controlled by the New York Central nor directly affiliated therewith, it was classed as a Vanderbilt property.
While for many years after the death of the Commodore the Vanderbilt family remained in direct financial and operating control of the New York Central and its myriad of subsidiary lines and their genius as railroad builders and operators was distinctly evident, yet the brains and resources of the Vanderbilts were not alone responsible for the brilliant career of the system down to recent times. William H. Vanderbilt, though a man of unusual ability, did not possess the breadth of view or the sagacity of his father, and in the course of a few years he found himself exposed to a cyclone of public criticism. He had let it be widely known that he was personally the owner of over eighty-seven per cent of the hundred million capital of the company. In 1879 the New York Legislature, backed by the force of the popular anger and surprise at the accumulation of a hundred million dollar fortune by one man in ten years, was investigating the management of the New York Central with a view to curtailing its power; the rate wars were on between the seaboard and Chicago; and Jay Gould was threatening to divert all the traffic of his Wabash, St. Louis, and Pacific lines from the New York Central and turn it over to other Eastern connections unless Vanderbilt would give him a vital interest in the Vanderbilt lines.
Vanderbilt was harassed beyond endurance and, being of softer material than his father, was fearful of the outcome of public opinion, notwithstanding the fact that in a moment of anger—according to the statement of a newspaper reporter whose veracity Vanderbilt denied to his dying day—he had used the familiar expression, "The public be damned!" There were intimations that the Legislature was planning to impose heavy taxes on the property, solely because Vanderbilt held this gigantic personal ownership in the property. This prospect frightened him and he consulted friends whose judgment he respected. They urged him to sell a considerable part of his holdings in order to distribute the ownership of the property among a large number of people.
This plan could not be carried out, however, in the ordinary way, because large sales of stock by the Vanderbilt interests, if the speculating and investing public learned that he was making them, would greatly depreciate the price and might create general demoralization and a panic, while they would certainly injure the credit of the New York Central property. But a way out of the dilemma had to be found. It was at this juncture that a new personality, later to be closely identified with the Vanderbilt lines for a long series of years, appeared upon the scene. Vanderbilt was advised to consult J. Pierpont Morgan, of the banking house of Drexel, Morgan and Co. At that time the name of J.P. Morgan was just beginning to come prominently to the front in banking circles in New York. The Drexels had been conspicuous in business in Philadelphia for many years and in a sense were the fiscal agents of the great Pennsylvania Railroad Company. But the spectacular success of the House of Morgan a few years before in marketing the French government loan in England had added largely to its prestige. And so Vanderbilt concluded that, if any man could show him a way out in his difficult problem, Pierpont Morgan was that man.
The upshot of the matter was that Morgan devised a plan for the sale of a large amount of Vanderbilt's stock holdings through private sale in England, and in such a way that the knowledge of such sale would not become public in America. A confidential syndicate was formed which undertook to take the stock in a block and pass it on to English investors at approximately its current market price of about $130 per share. The sale was promptly accomplished; the stock went into the hands of unknown interests abroad; Vanderbilt received more than $25,000,000 in cash, which he largely reinvested in United States government bonds, and the Morgan syndicate reaped a profit of about $3,000,000. Five months after the closing of the syndicate public announcement was made of the sale and of the syndicate profit. The striking success of this transaction naturally added greatly to the prestige of. J. P. Morgan as a financier of very large caliber, and it had the satisfactory effect of curtailing the legislative attacks on Vanderbilt.
From that date forward, the history of the Vanderbilt railroads has been closely identified with the House of Morgan. J.P. Morgan and his business associates became the company's financial agents, and thereafter all plans of expansion or consolidation were handled directly by them. In the board of directors Morgan banking interests had full representation, which they have held until this day.
The subsequent history of the Vanderbilt lines is chiefly a story of business expansion and growth. From 1885 to 1893, the great panic year, the New York Central each year added to its mileage, either by merger of smaller lines or by construction. All this time it was consolidating the system, eliminating the weaker links, and strengthening the stronger. Its lines penetrated all the best Eastern railroad territory outside of New England, New Jersey, and Pennsylvania, and no other railroad system in the country, with the single exception of the Pennsylvania, covered anything like the same amount of rich and settled territory, or reached so many cities and towns of importance. New York, Buffalo, Cleveland, Detroit, Chicago, St. Louis, Cincinnati, Indianapolis—these are a few of the great traffic centers which were included in the Vanderbilt preserves. The population of all these cities, as well as that of the hundreds of smaller places and the countryside in general, was growing by leaps and bounds. Furthermore the Northwest, beyond the Great Lakes and through to the Pacific coast, saw the beginnings of its great development at this time; and the wheat fields of the far western country became a factor of profound importance in the national development. Consequently when the period of depression arrived with the panic of 1893, the Vanderbilt properties were, as a whole, in a strong position to meet the changed situation and, like the great Pennsylvania property, they all passed through to the advent of the new industrial era without the defaulting of a bond or the passing of a dividend. The remarkable character of this achievement is evident in view of the fact that in the period from 1893 to 1898 more than sixty-five per cent of all the railroad mileage in the United States went into the hands of receivers.
After the close of this era of panic, the Vanderbilt lines began expanding again, though on a much smaller scale than in their more active time. In 1898 William K. Vanderbilt, then president, made the announcement that the New York Central had leased the Boston and Albany Railroad, at that time a lucrative line running from Albany across Massachusetts into Boston. This gave the system an entry into the New England field, which it has continuously held since. A few years later this New England interest was increased by the acquisition of the Rutland Railroad in Vermont, thus making connection with the Ogdensburg and Lake Champlain, a line running across the northern part of New York State, which had also come under Vanderbilt control.
When business revived in the closing years of the nineteenth century, the history of American railroads began a new chapter. Federal railroad regulation, which started in a moderate way with the passage of the Interstate Commerce Act in 1887, had steadily increased through the years; the Sherman Anti-trust Act, passed in 1890, had been interpreted broadly as affecting the railroads of the country as well as the industrial and other combinations. These influences had thus greatly curtailed the consolidation of competing lines which had gone on so rapidly during the decades following the Civil War. Railroad managers and financiers therefore began to face a very serious problem. Competition of a more or less serious nature was still rampant, rates were cut, and traffic was pretty freely diverted by dubious means. Consequently many large railroad systems of heavy capitalization bid fair to run into difficulties on the first serious falling off in general business.
Great men are usually the products of their times and one of the men developed by these times takes rank with the greatest railroad leaders in history. Edward H. Harriman had risen in ten years from comparative obscurity and was now the president of the Union Pacific Railroad, which he had, in conjunction with the banking house of Kuhn, Loeb and Company, reorganized and taken out of bankruptcy. Harriman was one of the originators of the "community of interest" idea, a device for the partial control of one railroad system by another. For instance, although the law forbade any railroad system from acquiring a complete control of a competing line by purchasing a majority of its capital stock or by leasing it, nothing was said about one railroad having a minority investment interest in another. A minority investment, even though it be as low as ten or twenty per cent, usually constitutes a dominating influence if held by a single interest, for in most cases the majority of the shares will be owned in small blocks by thousands of investors who never combine for a definite, practical purpose. Thus the interest which has the one large block of stock usually controls the voting power, and runs little risk of losing it unless a contest develops with other powerful interests—and this is a contingency which it almost never has to meet.
Carrying out this policy of promoting harmony among competing lines, the New York Central and Pennsylvania Railroad early in 1900 acquired a working control of the Reading Company, which in turn controlled the New Jersey Central and dominated the anthracite coal traffic. Later the Baltimore and Ohio shared this Reading interest with the Lake Shore of the New York Central system. The New York Central and the Pennsylvania acquired a working control of the same kind in the Chesapeake and Ohio Railway, which was an important element in the soft coal fields and was reaching out to grasp soft coal properties in Ohio and Indiana.
These and other purchases, and the consequent voice acquired in the management, established comparative harmony among Eastern railroads for a long time; they stabilized rates and enabled formerly competing roads to parcel out territory equitably among the different interests. Later, Harriman, and to some extent Morgan, carried the community of interest idea some steps further. Morgan caused the New York Central to acquire stock interests in certain "feeder" lines such as the New York, New Haven and Hartford and the Chicago, Milwaukee and St. Paul, as well as in competing lines; and Harriman caused the Union Pacific not only to dominate the Southern Pacific Company by minority control but also to acquire interests in the Illinois Central, the Baltimore and Ohio, the New York Central, and other eastern properties. The fact was that Harriman had plans in view for acquiring actual control of the New York Central for the Union Pacific and thus, with the Illinois Central, of creating a continuous transcontinental line from ocean to ocean.
In the past decade few unusual or startling events have marked the history of the Vanderbilt lines. The Vanderbilt family no longer possesses a majority interest in the stock, or anything which approaches it, and the New York Central system and its subsidiaries have come to be known more and more as Morgan properties. The system has grown up with the country. Many of its former controlled roads have now been merged into the main corporation and many new lines have been added to it. Hundreds of millions of dollars of new capital have been spent on the main lines and terminals since 1900. In 1919 the entire property, including controlled lines, embraced more than 13,000 miles of main track, besides about 5000 miles of extra tracks; over 200,000 freight cars are in use on the system, and every year upwards of 200,000,000 tons of freight are transported. The gross annual revenues of the entire system now aggregate more than $400,000,000, while the total capitalization in stocks and bonds exceeds a billion dollars. It is indeed a far cry from that day in August, 1831, when the De Witt Clinton locomotive made its trial trip over the primitive rails of the seventeen-mile Mohawk and Hudson road—a far cry even from that other day, thirty-eight years later, when the sagacious Commodore startled the financial world by his New York Central and Hudson River Railroad, with a capital of ninety million dollars.

CHAPTER III. THE GREAT PENNSYLVANIA SYSTEM

In the early forties the commercial importance of Philadelphia was menaced from two directions. A steadily increasing volume of trade was passing through the Erie Canal from the Central West to the northern seaboard, while traffic over the new Baltimore and Ohio Railroad promised a great commercial future to the rival city of Baltimore. With commendable enterprise the Baltimore and Ohio Company was even then reaching out for connections with Pittsburgh in the hope of diverting western trade from eastern Pennsylvania. Moreover the financial prestige of Philadelphia had suffered from recent events. The panic of 1837, the contest of the United States Bank with President Jackson, its defeat, and its subsequent failure as a state bank, the consequent distress in local financial circles—all conspired to shift the monetary center of the country to New York.
It was at this time that Philadelphia capitalists began to bestir themselves in an attempt to recover their lost opportunities. Philadelphia must share in this trade with the Central West. The designs of the Baltimore and Ohio Company must be defeated by bringing Pittsburgh into contact with its natural Eastern market. To this end, the Pennsylvania Railroad was incorporated on April 13, 1846, with a franchise permitting the construction of a railroad across the State from Harrisburg to Pittsburgh. An added incentive to constructive expansion was given by an act of the Legislature authorizing the Baltimore and Ohio to extend its line to Pittsburgh if the Pennsylvania Company failed to avail itself of its franchise.
In order to avoid the heavy cost of constructing a road between Philadelphia and Harrisburg, the Pennsylvania Railroad entered into arrangements with the Philadelphia and Columbia—a railroad opened in 1834 and owned by the State—which ran through Chester and Lancaster to Columbia. This road was primitive in the extreme and used both steam and horse power. As late as 1842 a train was started only when sufficient traffic was waiting along the road to warrant the use of the engine. Belated trains were hunted up by horsemen. Yet the road was in those days famous for the "rapidity and exceptional comforts of the train service." Between Columbia and Harrisburg passengers westward bound had to use the Pennsylvania Canal.
Construction of the main line westward to Pittsburgh began at once and progressed rapidly. By making use of the Alleghany Portage Railroad from Hollidaysburg, the Pennsylvania Railroad eventually secured a continuous line from Harrisburg to Pittsburgh. But between Philadelphia and Harrisburg passengers were for a long time subjected to many inconveniences. Finally in 1857 the Pennsylvania Railroad bought the Philadelphia and Columbia from the State, rebuilt it, and extended it to Harrisburg. At the same time the Pennsylvania bought the main line of the Public Works, which included the Alleghany Portage Railroad. On July 18, 1858, the first through train passed over the entire line from Philadelphia via Mount Joy to Pittsburgh without transfer of passengers. At the same time the first smoking car ever attached to a passenger train was used, and sleeping cars also soon began to appear.
The railroad genius identified with the history of the Pennsylvania Railroad during the following decade is J. Edgar Thomson. A man of vision and of great shrewdness and ability, he was more like the modern railroad head of the Ripley or Underwood type than of the Vanderbilt, Garrett, or Drew type. His interest was never in the stock market nor in the speculative side of railroading but was concentrated entirely on the development and operation of the Pennsylvania Railroad system. His dreams were not of millions quickly made nor of railroad dominance simply for the power that it gave; his mind was concentrated on the growth and prosperity of a vast railroad system which would increase with the years, become lucrative in its operations, and not only radiate throughout the State of Pennsylvania but extend far beyond into the growing West.
Under the Thomson management, which lasted until 1874, the record of the Pennsylvania Railroad was one of progress in every sense of the word. While Daniel Drew was lining his pockets with loot from the Erie Railroad and Commodore Vanderbilt was piling up his colossal fortune through consolidation and manipulation, J. Edgar Thomson was steadily building up the greatest business organization on the continent. In 1860, the entire Pennsylvania Railroad system was represented merely by the main line from Philadelphia to Pittsburgh, with a few short branches. By 1869 the road had expanded within Pennsylvania alone to nearly one thousand miles and also controlled lines northward to the shores of Lake Erie, through the State of New York.
But the master accomplishment of the Thomson administration was the acquisition of the Pittsburgh, Fort Wayne and Chicago line in 1869. This new addition gave the Company its own connection with Chicago and made a continuous system from the banks of the Delaware at Philadelphia to the shores of Lake Michigan, thus rivaling the far-flung Vanderbilt line, a thousand miles long, which the industrious Commodore was now organizing. Shortly thereafter the Pennsylvania began to expand on the east also and obtained an entry into New York City by acquiring the United Railroad and Canal Company, which owned lines across the State of New Jersey, passing through Trenton.
In the latter years of the Thomson management it became more and more evident that it was important for the Pennsylvania Railroad to have further Western connections which would reach the growing cities of the Middle West. While the Fort Wayne route made a very direct connection with Chicago and included branches of value, yet the keen competition which was developing in the expansive years following the Civil War made actual control of the Middle Western territory a matter of sound business policy. The Vanderbilt lines were reaching out through Ohio, Indiana, and Illinois; the Baltimore and Ohio was steadily developing its Western connections, and now Jay Gould had come actively on the scene with large projects for the Erie. To offset these projects, early in 1870 a "holding company"—probably the first of its kind on record—known as the Pennsylvania Company was formed for the express purpose of controlling and managing, in the interest of the Pennsylvania Railroad, all lines leased or controlled or in the future to be acquired by the Pennsylvania Railroad interests west of Pittsburgh and Erie. This Company took over the lease of the Fort Wayne route and also acquired control by lease of the Erie and Pittsburgh, a road extending northward through Ohio to Lake Erie.
After this date the expansion of the system west of Pittsburgh went on rapidly. In 1871 the Cleveland and Pittsburgh Railroad, which had been opened as early as 1852, came under the Pennsylvania control. Soon after this, many smaller lines in Ohio were merged in the system. The most important acquisition during this period, however, was the result of the purchase of the great lines extending westward from Pittsburgh to St. Louis, with branches reaching southward to Cincinnati and northward to Chicago. This system—then known as the "Pan Handle" route and later as the Pittsburgh, Cincinnati, Chicago and St. Louis was a consolidation of several independent properties of importance which had been gradually extending themselves over this territory during the previous decade. This new system, which embraced over fourteen hundred miles of road, gave the Pennsylvania a second line to Chicago, a direct line to St. Louis, a second line to Cincinnati, and access to territory not previously tapped.
While the achievements of the Pennsylvania Railroad Company during these years of consolidation and expansion are not to be compared with those of more modern times, it is well to realize that even as early as the seventh decade of the last century this railroad was always in the forefront in matters of high standards and progressive practice. It was the pioneer in most of the improvements which were later adopted by other roads. The Pennsylvania was the first American railroad to lay steel rails and the first to lay Bessemer rails; it was the first to put the steel fire-box under the locomotive boiler; it was the first to use the air brake and the block signal system; it was the first to use in its shops the overhead crane.
In these earlier years also the Pennsylvania had established its enviable record for conservative and non-speculative management. No railroad wrecker or stock speculator had ever had anything to do with the financial control of the company, and this tradition has been passed on from decade to decade. The stockholders themselves, even in those days of loose methods and careless finance, had the dominating voice in the affairs of the company and were also factors in the approval or disapproval of any proposed policies. In the matter of its finances the Pennsylvania developed and established an equally clean record. The company began almost at the beginning to pay a satisfactory dividend on its shares and continued to do so right through the Civil War period. Since the through line from Philadelphia to Pittsburgh was opened, not a single year has passed without the payment of a dividend—a sixty-year record which can be duplicated by no other American railroad system.
The Pennsylvania still continued to forge ahead even during the exciting period from 1877 to about 1889, when the trunk lines were aggressively carrying on that policy of cutthroat competition between Chicago and the Atlantic seaboard which resulted in so severely weakening the credit and position of properties like the Baltimore and Ohio and the Erie. The Pennsylvania, too, indulged in rate cutting, but the management was equal to the situation and made up in other directions what it lost in lower rates. It gave superior service, developed a high efficiency of operation, and steadily maintained its properties at a high standard. During these years the president was George B. Roberts, who had succeeded Thomas A. Scott in 1880.
Roberts's management spanned the period from 1880 to 1897 and embraced a decade of comparative prosperity for the country as a whole and nearly a decade of panic and industrial and financial depression. During the earlier decade the business of the Pennsylvania was continually benefited by the industrial development and growth which marked the period. It was at this time that the Pittsburgh district took its permanent place as the great center of steel and iron manufacture. The discovery of petroleum in western Pennsylvania, creating an enormous new industry in itself, proved to be an event of far-reaching significance for the Pennsylvania Railroad. The extensive opening up of the soft coal sections of western Pennsylvania, Ohio, and Indiana, also meant much for this great system of railroads.
Still further developments in other directions accrued to the benefit of the Pennsylvania Railroad. In this period, by obtaining the control of a line to Washington, the system acquired a Southern artery running through Wilmington, Delaware, and Baltimore to Washington. Afterwards, with other roads, the Pennsylvania acquired control of the Richmond, Fredericksburg and Potomac Railroad and thus obtained a line to Richmond, Virginia. On the north and to the east the expanding movement also went on. In addition to the development of its main line from Philadelphia to Jersey City, the Pennsylvania acquired many other New Jersey lines, including the West Jersey and Seashore, a road running from Camden to Atlantic City and Cape May.
During the whole of the aggressive administrations of both Thomas A. Scott and George B. Roberts the great system continued to spread out steadily until it had penetrated as far as Mackinaw City on the north and Chesapeake Bay on the south. Its network of lines stretched across the Eastern section of the continent from New York to Iowa and Missouri, while the intensive development of shorter lines in the State of Pennsylvania and to the north was unceasing. The Northern Central running south from Sodus Bay on Lake Ontario through central Pennsylvania to Baltimore, the Buffalo and Alleghany Valley extending from Oil City northward and joining the main system to the east, the Western New York and Pennsylvania operating north from Oil City to Buffalo and Rochester—these lines the Pennsylvania Railroad acquired and definitely consolidated in the Roberts regime.
After the retirement of Roberts, Frank Thomson, a son of the earlier president of the same name, was placed at the head of the system for three years. But in 1899 Alexander J. Cassatt, who had for many years been identified with the Pennsylvania as officer, director, and stockholder, took the helm, and a new chapter and probably the greatest in the history of this remarkable railroad began.
The name of Alexander J. Cassatt will always be linked with the comprehensive terminal developments in the region of New York City which were begun almost immediately on his accession to the presidency and which were carried forward on bold and far-reaching lines. Perhaps more than any other one person, Cassatt foresaw the approach of the day when New York City as a commercial center would outstrip both in density of population and in amount of wealth all the other cities of the world. He and his predecessors had for many years witnessed the great industrial development of the Pittsburgh district, where property values had grown by leaps and bounds and where the steadily advancing development of industry and material resources had been so unmistakably reflected in the increasing earning power and value of the Pennsylvania Railroad properties.
But while at Pittsburgh the road had everything to favor it as far as terminals and rights of way through the heart of the great industrial district were concerned, in the great Eastern metropolis the Pennsylvania Railroad was at an obvious disadvantage, particularly as compared with the New York Central, which had its splendid terminal rights penetrating to the heart of the city. Cassatt saw that his company must without delay take a number of bold and, for the time, enormously expensive steps toward the development of terminal facilities in Greater New York or else forever abandon the idea of getting nearer the heart of the city than the New Jersey shore and thus run the risk, in the keen contest for commercial supremacy, of ultimately falling behind other more advantageously situated lines.
There were still further incentives to immediate action on the part of the Pennsylvania Railroad. While the New York Central was in an ideal position for handling all traffic destined for the New England States, the Pennsylvania could control practically none of this business, as its terminals were on the wrong side of the Hudson and necessitated not merely the inconvenient transfer of passengers but also the much more expensive handling of freight. Other disadvantages from which the Pennsylvania suffered were involved in its inability to make the most economical terms for foreign shipping, as a large proportion of such freight had to be constantly transferred on lighters to the New York and Brooklyn sides of the harbor. Thus any comprehensive plan for terminal development on the part of the Pennsylvania must necessarily include not only a tunnel system into New York City but also an outlet through the city to Long Island and a connection with the New England railroads.
The first move in the development of this terminal system was the acquisition in 1900 of the control of the Long Island Railroad, embracing all the steam railway mileage on Long Island, with lines extending along both the north and south shores to Montauk Point. This acquisition added extensive freight yards and terminals on the Brooklyn side of the East River. The Company then obtained franchises and began the construction of its great tunnels under the North and East Rivers and entirely across New York City, with a mammoth passenger station at Seventh Avenue and Thirty-second Street. A great railroad bridge was planned to cross from Long Island to the mainland, connecting with the New York, New Haven and Hartford system, in the stock of which the Pennsylvania at this time purchased an interest.
The terminal construction occupied a period of many years and cost over one hundred million dollars, besides the added costs involved in building up and developing the old, worn-out Long Island Railroad. Only recently has the project been rounded out and completed through the final construction of the important connection with the New England railroad systems. But the realization of this plan is undoubtedly the greatest achievement in all the long career of the Pennsylvania Railroad. Had the project been delayed for another decade, it probably could not have been accomplished because of the growing expense of operation and the difficulties of getting franchise rights and rights of way through and under the metropolis.
While the tunnel development is the notable achievement of the Cassatt regime, this remarkable man's name is also closely identified with the "community of interest" idea already explained. This "community of interest" scheme was pushed aggressively by Cassatt in cooperation with Harriman, Hill, and Morgan. Large stock purchases were made in the Norfolk and Western, the Chesapeake and Ohio, and the Baltimore and Ohio. As the latter road had in its turn acquired, jointly with New York Central interests, a working control of the Reading Company, and the Reading Company had secured majority ownership of the New Jersey Central system, it is apparent that the domination which the Pennsylvania had obtained over the entire Eastern seaboard south of New York City and north of Baltimore was made nearly complete.
The "community of interest" plan held sway with the large railroads of the country and was very effective for perhaps half a dozen years, until the interstate commerce laws were amended in such a way as to give the Government complete control over railroad freight and passenger rates. In 1906 the Pennsylvania began to dispose of the bulk of its holdings in competing properties, the most notable transactions being the sale of its entire interest in the Chesapeake and Ohio to independent interests and a substantial part of its Baltimore and Ohio holdings to the Union Pacific Railroad. A few years later, when the Union Pacific was forced by the Federal courts to dispose of its control of the Southern Pacific Company, a trade was made between the Pennsylvania and the Union Pacific whereby the latter took from the Pennsylvania the remainder of its Baltimore and Ohio investment and gave in exchange a portion of its own large holding of Southern Pacific stock.
To get a fair idea of the meaning and magnitude of the great Pennsylvania Railroad system today one must do more than scan maps and study statistics. One should travel by daylight over its main line from New York to Pittsburgh. Although the route is over the same ground which the road followed a generation or two ago, a four-track line runs practically all the way, with long stretches of hundreds of miles of five, six, and eight tracks. Where mountains were climbed thirty years ago, one will now find them bored by tunnels; where sharp curves were necessary before straight trackage only will be encountered today. Grades have been eliminated everywhere and the whole route has been modernized and strengthened by the laying of one hundred to one hundred and fifty pound rails.
Undoubtedly the fortunate location of the Pennsylvania lines in the half dozen States which represent the financial and industrial heart of the continent has had much to do with its vast growth and the expansion of its business; but its high reputation can be explained only by the long record of its superior methods and management. One of the primary objects of Pennsylvania Railroad policy has been to keep pace with the growth of the country. Instead of following in the wake of industrial progress and making its improvements and extensions after its competitors had made theirs, its management has usually had the foresight to prepare well in advance for future needs.

CHAPTER IV. THE ERIE RAILROAD

"Before introducing a friend to a distinguished stranger, it is advisable to give him some account of the person whose acquaintance he is about to make; and so, fellow-traveler, whom I introduce to the New York and Erie Railroad, it may be well to prefix here a brief sketch of the history and present condition of this, the Lion of Railways. True, he is yet in an unfinished state, but you will find that what there is of him is complete, and of wondrous organization and activity. His magnificent head and front repose in grandeur on the shores of the Hudson; his iron lungs puff vigorously among the Highland fastnesses of Rockland; his capacious maw fares sumptuously on the dairies of Orange and the game and cattle of Broome; his lumbar region is built upon the timber of Chemung, and the tuft of his royal extremity floats triumphantly on the waters of Lake Erie."
This exultant, characteristically American, description appeared in Harper's "Guide-Book of the New York and Erie Railroad", published in 1851, soon after the opening of the main line of more than four hundred and sixty miles from Piermont on the Hudson to Dunkirk on Lake Erie. That this railroad, which after nearly twenty years of struggle and of financial vicissitudes had finally linked the Great Lakes with the Atlantic coast, was looked upon as a property of wonderful character and limitless future is indicated in all the railroad literature of that time. Appleton's "Illustrated Handbook of American Travel", published in 1857, devotes several pages to a description of this remarkable achievement in railroad extension and among other things says:
"This great route claims a special admiration for the grandeur of the enterprise which conceived and executed it, for the vast contribution it has made to the facilities of travel, and for the multiplied and various landscape beauties which it has made so readily and pleasantly accessible. It traverses the southern portion of the Empire State in its entire length from east to west, passing through countless towns and villages, over many rivers, through rugged mountain passes now, and anon amidst broad and fertile valleys and plains. In addition it has many branches, connecting its stations with other routes in all directions, and opening new stores of pictorial pleasures.... An interesting feature of this road is its own telegraph, which runs by the side of the road and has its operator in nearly every station house. This telegraph has a double wire, enabling the company to transact the public, as well as their own private business. Daily trains leave for the west on this route, with connections by boat from the foot of Duane Street, morning, noon, and night."
The Erie Railroad system was foreshadowed in the time of Queen Anne, when the Colony of New York appropriated the sum of five hundred dollars to John Smith and other persons for the purpose of constructing a public road connecting the port of New York with the West in the vicinity of the Great Lakes. The appropriation was coupled with the condition that within two years the beneficiaries should have constructed a road wide enough for two carriages to pass, from Nyack on the Hudson River to Sterling Iron Works, a distance of about thirty miles; and that they should cut away the limbs of trees over the track in order to allow the carriages to pass. In this way began the internal improvement system of the State of New York, which after the lapse of more than a century resulted in opening the Erie Canal and in projecting a railroad system connecting New York and the valley of the Hudson with Lake Erie.
After the opening of the Erie Canal in 1825, the Legislature of New York directed a survey of a state road which was to be constructed at public expense through the southern tier of counties from the Hudson River to Lake Erie. The unfavorable profile exhibited in the survey apparently caused the project to be abandoned. But the idea still held sway over the minds of many people; and the great benefits brought to the Mohawk Valley and surrounding country by the Erie Canal led the southern counties to demand a transportation route which would work similar wonders in that region. This growing sentiment finally persuaded the Legislature to charter in April, 1832, the New York and Erie Railroad Company, and to give it authority to construct a line and to regulate its own charges for transportation.
During the following summer a survey of the route was made by Colonel De Witt Clinton, Jr., and in 1834 a second survey was made of the whole of the proposed route. When the probable cost was estimated, many opponents arose who declaimed the undertaking was "chimerical, impractical, and useless." The road, they declared, could never be built and, if built, would never be used; the southern counties were mountainous, sterile, and worthless, and afforded no products requiring a market; and, in any case, these counties should find their natural outlet in the valley of the Mohawk. This antagonism was successfully opposed, however, and the construction of the road was begun in 1836.
The panic of 1837 interfered with the work, but in 1838 the state Legislature came forward with a construction loan of three million dollars, and the first section of line, extending from Piermont on the Hudson to Goshen, was put into operation in September, 1841. In the following year the company became financially embarrassed and was placed in the hands of receivers. This catastrophe delayed further progress for years, and it was not until 1846 that sufficient new capital was raised to go on with the work. The original estimate of the cost for building the entire line of 485 miles had been three million dollars, but already the road had cost over six millions and only a small portion had been finished. The final estimate now rose to fifteen millions, and, although some money was raised from time to time and new sections were built, there was no certainty that the entire road would ever be completed. Ultimately the State of New York canceled its claim against the property, new subscriptions of some millions were secured, and more money was raised by mortgaging the finished sections.
Finally, in 1851, after eighteen years of effort, the line was opened to Lake Erie. In addition there had been added various feeders or branches, giving the road an entry into Scranton, Pennsylvania, and into Geneva and Buffalo, New York. It had its terminus on Lake Erie at Dunkirk and its eastern terminus at Piermont, near Nyack on the Hudson, about twenty-five miles by boat from New York City.
The financial condition of the Erie at this time manifested the beginning of that general policy of improvidence and recklessness which afterward, for nearly a generation and a half, made the company a speculative football in some of the most disreputable games of Wall Street stock-jobbers. For though the original estimate had been three millions and the highest estimate of the cost during construction had been fifteen million dollars, the company, in 1851, started its career with capital obligations of no less than twenty-six millions—a very large sum for those days.
The fact that these initial obligations constituted a heavy burden became apparent when the Erie began operations. They made necessary such high freight rates that shippers held indignation meetings and again and again made appeals for legislative relief. Although much money had been raised after 1849 for improvements, the condition of the Erie steadily grew worse. It soon became notorious for many accidents due to carelessness in running trains and to the breaking of the brittle iron rails.
But in spite of these drawbacks the business of the Erie grew. In 1852 it acquired the Ramapo and Paterson and the Paterson and Hudson River railroads and in this way it obtained a more direct connection with New York City. It changed the tracks of its new railroads to the six-foot gage, which the Erie had adopted from the start and which it persisted in maintaining for many years despite the world-wide practice of establishing a standard width of four feet eight and one-half inches.
The most conspicuous figure in the history of the Erie Railroad system in these early days was Daniel Drew. From 1851, when the main line was opened, until 1868, this man was a director and, for the larger part of the time, treasurer. Born in 1797, he had driven cattle when a boy from his native town of Carmel in Putnam County to the New York City market and, for some years later, he had been proprietor of the Bull's Head Tavern. Shrewd, unscrupulous, illiterate, good-natured, and sometimes generous, he was in many ways unlike his great adversary in the railroad world, Commodore Vanderbilt. Drew affected a pious and sanctimonious attitude in all his dealings, while Vanderbilt had a more frank and open nature and usually made no pretensions to righteousness.
For many years following 1851, Drew, who owned or controlled nearly one-half the stock of the Erie, appeared to think that his office of treasurer carried with it the right to manipulate the stock of the road at any time it might help his pocketbook to do so. He frequently advanced money which the road could not obtain elsewhere, always taking full security and excessive commissions. This practice gave him the name of "speculative director," and by the time his great contests with Commodore Vanderbilt broke out, he was reputed to be worth many millions, most of which he had acquired by juggling in Wall Street with Erie securities.
The entire period in the affairs of the Erie system from the ascendancy of Daniel Drew in 1851 to the end of the Civil War witnessed an endless succession of stock-market exploits both large and small. In the spring of 1866, however, Drew found an opportunity to achieve a real masterpiece in manipulation. The stock of the Erie road was then selling at about 95 and the company was in pressing need of funds. The treasurer came to the rescue as usual and made the necessary advances on adequate security. The company had in its treasury a considerable amount of unissued stock and had also the legal right to issue bonds to the extent of $3,000,000 which could be converted into stock. Drew took these bonds and the unissued stock as security for a loan of $3,500,000.
It so happened, naturally, that Drew was soon heavily short of Erie stock in Wall Street. The market was buoyant; speculation was rampant; and the outside public, the delight and prey of Wall Street gamblers, were as usual drawn in by the fascination of acquiring wealth without labor. All this time our friend, Daniel Drew, was quietly selling Erie stock and closing contracts for the future delivery of the certificates; and he was doing this at rising prices. As the days went by, his grave, desponding manner grew more and more apparent. Erie stock continued to rise. In the loan market its scarcity became greater hour by hour. The rumor began to spread that "Uncle Daniel" was cornered. His large obligations for future delivery must be met. Where was the Erie stock to come from? The stock continued to soar, and Treasurer Drew seemed to become more and more depressed.
Then the blow fell. Drew laid his hands on the collateral which he held for his loan to the Erie. In the twinkling of an eye his $3,000,000 in Erie bonds was converted into Erie stock, which he proceeded to dump in Wall Street. Erie quotations fell from 90 to 50. Every one at last realized the trap—but not before Daniel Drew had pocketed a few millions in profits.
By this time Drew had come to be looked upon as a stock operator to be both admired and feared, and this incident took its place in Wall Street history as a brilliant coup side by side with Vanderbilt's Harlem Railroad and other celebrated exploits. It was soon followed, however, by much more sensational events. We have seen that the portentous figure of Vanderbilt was just at this time looming up in the railroad world, and Vanderbilt had his own theory of the management and financing of railroads. It was inevitable that he should clash with Drew. He was a few years older than Drew, and the two men, as we have seen, had much in common. Both were well on in life before they had transferred their activities to steam railroads. When finally, in 1868, they crossed swords in connection with the two railroad systems extending through New York State, both were more than seventy years old and had been successful in the acquisition of millions by methods of their own invention. They were no doubt equally unscrupulous, but, while Drew was by nature a pessimist and "bearish," Vanderbilt, in the Wall Street vernacular, was always a "bull."
Having obtained control of the New York Central, the Hudson River, and the Harlem railroads, Commodore Vanderbilt now decided in the summer of 1867 to go after the Erie, of which Drew was nominally in possession, although no one knew when he owned a majority of the stock or when he was temporarily short of it. Usually he loaded up as the annual election of officers approached and liquidated shortly thereafter. Besides Vanderbilt there was another interest at this time trying for the control of the Erie. This interest consisted of certain Wall Street speculators and certain Boston capitalists who proclaimed themselves railroad reformers. These so-called reformers were as unscrupulous and crafty as either of the other men, and they really represented nothing but an attempt to raid the Erie treasury in the interest of a bankrupt New England corporation known as the Boston, Hartford and Erie Railroad. As was well said, the name of this latter road was "synonymous with bankruptcy, litigation, fraud, and failure."
The Erie Railroad control was always nominally for sale, and, as the annual election approached, a majority of stockholders stood ready to sell their votes to the highest bidder. Commodore Vanderbilt cleverly secured the cooperation of the "reformer" element, corralling their proxies, and thus he appeared to be in a position to oust the Drew interests without difficulty. On the Sunday preceding the election the Commodore saw Drew and amicably explained to him the trap he had laid, and showed him clearly that there was no way out of the situation. Upon this disclosure, Treasurer Drew at once faced about and agreed to join hands with Vanderbilt in giving the market for the stock the strong upward twist it had lacked before that hour. Jointly they would make so much money that neither side would lose anything. "Uncle Daniel" went away apparently satisfied and contented with the compromise.
But the Commodore had not finished. A few hours later he took the Boston adventurers into his confidence and explained that he proposed to continue Drew in the directorate. The Boston men were puzzled and confused by this sudden change of front. Later, all parties met at Drew's house, and Vanderbilt brought the Boston men to terms by proposing a plan to Drew whereby they would be entirely left out. This ruse succeeded and a written agreement to the advantage of all, but at the expense of the outside stockholders and of the general public, was then drawn up.
This, however, was only the beginning of the fight. Vanderbilt was now in the Erie as a joint owner, but he had stretched out his hands to control the road and he meant to succeed. In February of 1868, Frank Work, the single representative of Vanderbilt on the Erie board, applied for an injunction against Treasurer Drew and his brother directors to restrain them from the repayment of the $3,500,000 borrowed by the railroad from Drew in 1866, and to restrain Drew from taking any legal steps toward compelling a settlement. Judge Barnard granted a temporary injunction, and two days later Vanderbilt's attorney petitioned for the removal from office of Treasurer Drew. The papers presented in the case exposed a new fountain of Erie stock which had up to that time been entirely overlooked.
A recently enacted law of the State of New York—probably fathered by Drew—authorized any railroad company to create and issue its own stock in exchange for the stock of any other railroad under lease to it. Upon the basis of this law Drew and his close satellites had secretly secured ownership of a worthless piece of road connecting with the Erie and known as the Buffalo, Bradford and Pittsburgh. Then, as their personal needs in the stock-market or at elections demanded, they had supplied themselves with new Erie stock by leasing the worthless road to the Erie and then exchanging Erie stock for the worthless stock of the leased line. The cost of the line to Drew and his friends, as financiers, was about $250,000. They then issued, as proprietors, $2,000,000 in bonds of the road, payable to one of themselves as trustee. This person then shifted his character, became counsel for both sides, and drew up a contract leasing the line to the Erie for 499 years, the Erie agreeing to guarantee the bonds in consideration. These men then reappeared as directors of the Erie and ratified the lease. After that it was a simple matter to divide the loot. The Erie was thus saddled with a $2,000,000 mortgage at seven per cent in addition to a further issue of capital stock.
Following the first injunction another was now issued restraining Drew and the Erie board from making any further issues of stock, by conversion of bonds or otherwise, and also forbidding the Erie to guarantee any further issues of bonds. An additional injunction forbade Drew from having any transactions in Erie stock or fulfilling any contracts until he had returned to the treasury the shares involved in his loan transaction of 1866 and in the purchase of the worthless Buffalo, Bradford and Pittsburgh road.
Matters now looked forbidding for Treasurer Drew. Instead of being allowed to manufacture fresh Erie stock certificates at his own will, as had been his habit for fifteen years, he was to be cornered by a legal writ and forced to work his own ruin. But notwithstanding the apparently desperate situation it was quite evident that Drew's nerves were not seriously affected. Although he seemed rushing on destruction, he continued day after day to put out more short stock, all in the face of a steadily rising market. His plans, apparently, were carefully matured, and he said that if the Commodore wanted the stock of his road he would let him have all he desired—at the proper price.
As usual the Erie treasury was short of funds, and as usual "Uncle Daniel" stood ready to advance all the money required—that is, on proper security. There was but one kind of security to offer and that was convertible bonds. No stock could be issued by the company for less than par, but convertible bonds could be disposed of by the directors at any price. A secret meeting of the executive committee was held, at which it was voted to issue immediately and to offer for sale $10,000,000 in convertible bonds at 72 1/2. Drew's broker at once became the purchaser of $5,000,000 worth. In ten minutes after the meeting had adjourned, the bonds had been issued, their conversion into stock demanded and made, and certificates for 50,000 shares of stock deposited in a broker's safe, subject to Drew's order.
A few days later came the injunction, and Erie stock began to soar in the markets, in response to which "Uncle Daniel," who had been industriously selling his many thousands of new shares, now determined to bring up the reserves and let the eager buyers have the other five millions; but before the bonds could be converted the injunction had been served. The date for the return of the writ was Tuesday the 10th of March; but the Erie ring needed less time than this and decided on Monday the 9th as the day to defeat the corner.
Saturday and Sunday were busy days for Drew and his friends. All his brokers had been enjoined, so a dummy was made the nominal purchaser of the bonds. This dummy then made his formal demand for the conversion of the bonds and was refused. All this was done upon affidavit, as it was the plan of Drew to get from some judge a writ of mandamus to compel the Erie Railroad to convert the bonds. The stock certificates for which they were to be exchanged were signed in blank and made ready for delivery.
Drew had agreed to sell 50,000 shares of stock at 80 to the firms of which Jay Gould and James Fisk, Jr., were members; they were also Erie directors. On Monday morning, the 9th of March, the certificates, filled out in the names of these firms, were handed by the secretary to an employee who was directed to carry them from the office of the company in West Street to the transfer clerk in Pine Street. The messenger left, but in a moment or two returned to report to the apparently amazed secretary that Fisk had met him outside the door, had taken the certificates away from him, and "had run away with them." It was true. The stock certificates had been "stolen" and were beyond the control of an injunction. The stock certificates next appeared in every part of Wall Street.
On the same day the Erie representatives applied to Judge Gilbert of Brooklyn for an injunction on the ground that certain persons, including Judge Barnard, had entered into a conspiracy to speculate in Erie stock and to use the process of the courts to aid the speculation. To the amazement of everybody, Judge Gilbert issued an injunction restraining all parties to all the other suits from further proceedings; in one paragraph ordering the Erie directors to continue in the discharge of their duties—in direct defiance of the injunction of one judge—and in the next paragraph forbidding the directors to desist in the conversion of bonds—in direct defiance of another judge. The Drew interests were now enjoined in every direction. One judge had forbidden them to move, and another judge had ordered them not to stand still.
It was a strategic position which Drew and his agents could not have improved upon, and while matters stood this way the 50,000 shares of Erie stock had been flung on the market. Vanderbilt, who was ignorant of this situation, bought the new stock as eagerly as the old. Then, when the facts came out, the quotations dropped with a thud. Uncle Daniel was victorious; the attempted corner had been a failure; and the Commodore was holding the bag.
Further dramatic events followed. The Erie directors learned that process for contempt had been issued and that their only chance of escape from jail lay in immediate flight. So, stuffing all that was worth while of the Erie Railroad into their pockets, they made off under cover of darkness to Jersey City. One man carried with him in a hackney coach over $6,000,000 in greenbacks. Two of the directors lingered and were arrested; but a majority collected at the Erie station in Jersey City and there, free from interference, went on with the transaction of business. Without disturbance they were able to count their expenses and divide the profits.
Vanderbilt was now loaded up with reams of Erie stock at high costs, and the load was a severe strain on him. He dared not sell for fear of causing a financial collapse. Drew had taken away about seven million dollars of his money and an artificial stringency had been created in Wall Street by this exodus of most of its available cash. But Vanderbilt weathered the storm and, as his generally optimistic attitude inspired confidence, the sky began to clear.
But this stock-market battle did not end the war. New injunctions flew in all directions. Osgood, son-in-law of Vanderbilt, was appointed receiver of the 100,000 shares of illegally issued stock and was immediately enjoined from acting by another judge. Then Peter B. Sweeney, of the Tammany ring, was appointed in his stead without notice to the other side. There was nothing for a receiver to do, as every dollar he was to "receive" was known to be in New Jersey and beyond his reach. Nevertheless he was subsequently allowed a fee of $150,000 by Judge Barnard for his services!
While the legal battle was going on neither Drew nor Vanderbilt was idle. A plot was arranged for bringing the Erie directors over by force, but this failed. In the meanwhile the Erie directors persuaded the New Jersey Legislature to rush through a bill making the Erie Railway a New Jersey corporation. This move, however, was intended merely to meet an emergency. It was the intention of the Erie interests to do their real work with the Legislature at Albany. This was also the intention of the Vanderbilt interests. Consequently, during the subsequent session, the grafters in that body were wooed by both sides. When the Legislature convened, a bill was promptly introduced making legal the recent issue of Erie stock, regulating the power to issue convertible bonds, providing for the guaranty of the bonds of the Boston, Hartford and Erie, and forbidding the consolidation of the Central and the Erie under the control of Cornelius Vanderbilt. But evidently the Commodore's purse was open wider than "Uncle Daniel's," for this bill was defeated by a decisive vote.
Now Jay Gould appeared upon the scene. He left Jersey City with half a million of the Erie's money in his pocket and arrived in Albany immediately after the defeat of this bill. On his arrival he was arrested on a writ issued against him for contempt of court and was held in bail of half a million dollars for his appearance in New York a few days later. He appeared before Judge Barnard in New York and was put in the charge of a sheriff. But the sheriff was served with a writ of habeas corpus, and Gould was again brought before the court. Then in some mysterious way the hearing was deferred and Gould returned to Albany, taking the officer as a traveling companion.
After reaching his destination Gould became so ill that he could not return to New York, though he managed to go to the Capitol in a driving snowstorm. Here he became rapidly convalescent, as did also many members of the Legislature. Members, indeed, who had been too sick or too feeble to attend the legislative sessions during this cold winter suddenly found their health returning and flocked to Albany on the fastest trains. Gould stayed in Albany until April, and by this time a remarkable change had come over the mentality of a majority of the legislators. On the 13th of April a bill was presented in the Senate which met the approval of the Erie interests and which Judge Barnard afterwards designated as a bill for legalizing counterfeit money. This bill, which was passed after due debate, legalized the issues of Erie bonds and stocks which had been put out by Drew; it provided for the guaranty of the bonds of connecting roads as desired by Drew; and it forbade all possible contracts for consolidation or division of receipts between the Erie and the Vanderbilt roads, a provision also desired by Drew. In fact it was the same bill in different form that had been voted down so decisively a short time before.
But the real tug of war was to get the bill through the lower House. Fabulous stories were told of money which would be expended and the market quotations for votes never soared so high. Then, at the critical moment, Vanderbilt surrendered, made a secret deal with his foe, and withdrew his opposition to the bill. The anger of the disappointed grafters and vote-sellers knew no bounds, and they immediately set to work passing other bills which they felt would annoy or injure Vanderbilt, with the hope that he would still be induced to give them what they regarded as their rightful spoils.
The details of this settlement between Drew and Vanderbilt were not announced until some months afterward. By the terms agreed on Vanderbilt was relieved of 50,000 shares of Erie stock at 70, payable partly in cash and partly in bonds guaranteed by the Erie, and received $1,000,000 in cash for an option given the Erie Railroad to purchase his remaining 50,000 shares at 70 within four months, besides about $430,000 to compensate his friends who had worked so heroically for him. This total sum of nearly $5,000,000 no doubt represented part of the "slush fund" which Drew expected that the company would have to give up to the venal legislators, and it was therefore no hardship to hand it over to Vanderbilt instead.
As a part of the general settlement the Boston interests were relieved of their $5,000,000 of largely worthless bonds of the Boston, Hartford and Erie Railroad, for which they received $4,000,000 of Erie securities. Thus in all about $9,000,000 in cash or securities was drawn out of the Erie treasury in final settlement of this great stock market manipulation. And this does not include the pickings of Gould and Fisk and the smaller fry, of which there is no official record. But that these gentlemen did not go empty-handed there is not the shadow of a doubt!
The sensational stock-market deal between the Drew and Vanderbilt interests was but a truce, however, and did not settle the troubles of the Erie. Jay Gould was now becoming a dominating factor and in October of 1868 was chosen president. The various stock-market struggles that ensued from the ascendency of Jay Gould to the receivership of the Erie in 1875 is a long and intricate tale. Suffice it to say that the events were generally similar to those already recounted—stock-market corners, over-issues of bonds and stocks, injunctions, court orders, arrests, legislative bribes. Less than a week after his election Jay Gould frankly announced that the company had just issued $10,000,000 of convertible bonds and that a third of these had already been converted into stock. He further announced that the company now had $60,000,000 of common stock outstanding, whereas the public had understood that it was only $45,000,000.
During the few years that followed, the poor Erie was systematically looted. Millions were wasted in New York real-estate speculation, and the company's money was used in the erection of the Grand Opera House on Twenty-third Street, to which the executive offices of the Erie Railroad were moved. Finally the new ring, comprising as leading spirits Jay Gould and James Fisk, Jr., eliminated Daniel Drew and left him high and dry without a cent, through a new stock corner. About this time the road was financially on its last legs, and Jay Gould was appointed receiver. This started further litigation which dragged on for several years until, in 1874, Gould was turned out by General Daniel E. Sickles in combination with the English shareholders. The new interests, when they finally got control, elected an entirely new management and made H. J. Jewett, a practical railroad man, president. But the Erie was already bankrupt, and not much could be done toward saving the situation. In May, 1875, the road confessed inability to meet its obligations, and Jewett was appointed receiver.
It was three years from the date of the receivership before the Erie property was taken out of the hands of the courts. In April, 1878, a new company, the New York, Lake Erie and Western Railroad, took over the property; Jewett was elected its president, and a new chapter in the history of the property began.
Had the reorganization of the Erie been drastic enough, the road might not so soon have fallen into financial difficulties again, for it owned valuable coal lands in Eastern Pennsylvania and rapidly increased its earnings in this region. Moreover the extension of the system westward should have increased its earning capacity. Up to this time the Erie had no Chicago connection and was at an obvious disadvantage compared with its competitors. It improved this situation in 1881 by acquiring the New York, Pennsylvania and Ohio, and the franchise of the Chicago and Atlantic Railway. Two years later it obtained control of the Cincinnati, Hamilton and Dayton and found itself in a position in which it could compete for through traffic with the Pennsylvania and the New York Central.
But in carrying through these extensive plans, the Erie again became involved in financial difficulties; the sensational Grant and Ward failure in Wall Street in 1884 was a severe blow to the company's credit, as this firm was at that time doing important financing for the Erie. The English security holders stepped to the front again, demanded President Jewett's resignation, and elected John King in his stead.
In 1885 and 1886 a financial readjustment took place, but the company continued to carry the bulk of the heavy load of obligations which had been created during the years of the Drew and Gould managements. It was surely an evidence of the inherent worth of the property that during the half dozen or more years following, the Erie succeeded in struggling along in the face of all its financial and other handicaps and at the same time showed substantial growth in the volume of its business. The company was kept above water until 1893 without again appealing to the courts; but by that time the indebtedness had once more mounted, and in July of that year Erie receivers were appointed for the fourth time in its history.
The name of Pierpont Morgan is closely identified with the story of the railroad during this latest reorganization period. Morgan's firm came to the front in 1894, with the powerful backing of the large English interests, and proposed a plan which involved heavy sacrifices by many of the security holders but which was designed to insure the permanent future of the property. The plan was vigorously opposed, however, by Edward H. Harriman, August Belmont, and other powerful interests, and it was not until August, 1896, that a final compromise was effected and a reorganization was carried through. But at last the Erie was taken out of receivership, and an entirely new company, intelligently designed and having ample working capital for future development, was formed with E. B. Thomas at its head. This new president, like Daniel Willard of the Baltimore and Ohio and many of the modern railroad leaders, was a practical railroad man who had worked up from the ranks and who had no large financial interest or banking connections to divert his attention from the real business of management. Under Thomas, who remained at the head of affairs from 1896 to 1900, the Erie made substantial progress. The system was solidified and its territory was more uniformly and systematically developed. In 1898, the Erie secured control of the New York, Susquehanna and Western system, gaining thereby an important branch to Wilkesbarre; and in 1901 it purchased jointly with the Lehigh Valley Railroad the stock of the Pennsylvania Coal Company of which the Erie later became sole owner. The real achievement of the Thomas administration was the development of the property as a heavy carrier of anthracite coal. On the financial side during this period the credit of the House of Morgan, intelligent administration, and modern methods did much to improve the reputation of the Erie and enable it to live down its bad inheritance.
In 1901 Frederick D. Underwood succeeded Thomas. Like his predecessor, Underwood represented the modern type of railroad president—a hard-working, eminently practical big business manager of great executive talent. Underwood's idea was to make the Erie a great freight-carrying system by developing its tonnage and its freight capacity in every way possible. Consequently he favored opening up the property more extensively in the soft coal fields of Ohio and Indiana, reconstructing roadbeds, laying extra tracks, and eliminating grades and curves.
The history of the Erie Railroad ever since 1901 has been a record of progress. During these years the system has been practically rebuilt. It now has a double track from New York to Chicago; it has extensive mileage in the soft coal regions of Ohio and Indiana, and its soft coal tonnage today far overtops its tonnage of anthracite coal; its train load averages far higher than that of the New York Central or of any other Eastern trunk lines except the Pennsylvania; its steep grades throughout New York State have been for the most part eliminated, and many short cuts for freight traffic have been built.
In carrying through these extensive developments in fifteen years the Erie has spent hundreds of millions of dollars. More money indeed has been used legitimately for improvement and development since the reorganization of 1896 than during the previous sixty years of its existence. Of course this outlay has meant that the Erie has had to create new mortgages and borrow many millions; but a large part of the expenditure for improvement has come directly from earnings. The Underwood administration has been conservative in paying dividends and the stockholders grumble. But the Erie is at last coming into its own. Instead of being a speculative football and a hopelessly bankrupt road, as it was for nearly forty years, it is now in the forefront of the great trunk lines of the eastern section of the United States. It is no longer, what it was called for many years, the "scarlet woman of Wall Street," but is a respectable member of the American railroad family.

CHAPTER V. CROSSING THE APPALACHIAN RANGE

The story of the Baltimore and Ohio Railroad takes us back more than ninety years. When the scheme for the construction of a railroad from Baltimore to the waters of the Ohio River first began to take form, the United States had barely emerged from the Revolutionary period. Many of the famous men of that great day were still living. John Adams and Thomas Jefferson had been dead only a year; Madison and Monroe had recently retired from public life; John Quincy Adams held the office of President, and the "reign" of Andrew Jackson had not yet begun.
At this time steam navigation on the rivers was only in its beginnings, but no one could doubt that it would come into general use. Two decades had passed since the Clermont had been launched on the Hudson by Robert Fulton, and steamboats were now carrying cargoes successfully against the swift currents up the Mississippi from New Orleans and were threatening the extinction of the aggressive flatboat traffic. Great strides had also been made in the construction of turnpike roads. The famous National Pike from Cumberland to Vandalia, Illinois, had been in large part completed and had done much for the opening up of the Western territory.
Canal building was likewise an extensive development of this period. The idea of connecting the waters of the Chesapeake with those of the Ohio had been broached by George Washington before the Revolution, and he had also prophesied the union of the Hudson and Lake Erie by canal. He believed that a country of such great geographical extent as the United States could not be held together except by close commercial bonds.
The opening of the Erie Canal to New York in 1825 stimulated other cities on the Atlantic seaboard to put themselves into closer commercial touch with the West. This was especially true of the city of Baltimore. A canal connecting Chesapeake Bay and the Ohio River was advocated to protect the trade of Baltimore and the South from the competition of New York and the East which would inevitably result from the construction of the Erie Canal and the Public Works of Pennsylvania. But discouragements in plenty frustrated the plan. The cost was believed to be excessive and the engineering difficulties were said to be almost insuperable. George Bernard, a French engineer, was of the opinion that the high elevations and scarcity of water along the route would prevent such a canal from having much practical value. For these reasons Baltimore believed that its position as a center for the rapidly developing Western trade was slowly but surely slipping away.
This was the situation that led to the building of the Baltimore and Ohio Railroad. Two men—Philip E. Thomas and George Brown—were the pioneers in this great undertaking. They spent the year 1826 investigating railway enterprises in England, which were at that time being tested in a comprehensive fashion as commercial ventures. Their investigation completed, they held a meeting on February 12, 1827, including about twenty-five citizens, most of whom were Baltimore merchants or bankers, "to take into consideration the best means of restoring to the city of Baltimore that portion of the western trade which has lately been diverted from it by the introduction of steam navigation and by other causes." The outcome was an application to the Maryland Legislature for a charter for a company to be known as "The Baltimore and Ohio Railroad Company" having the right to build and operate a railroad from the city of Baltimore to the Ohio River. The formal organization took place on April 24, 1827, with Philip E. Thomas as president and George Brown as treasurer. The capital of the proposed company was fixed at five million dollars.
The construction of the railroad began on July 4, 1828. The venerable Charles Carroll of Carrollton, then more than ninety years old and the only surviving signer of the Declaration of Independence of fifty-two years before, said on this occasion, as he laid the first stone: "I consider this among the most important acts of my life, second only to my signing the Declaration of Independence." His vision was indeed prophetic.
It was determined that the first section of road constructed should extend to Ellicott's Mills, twelve miles distant, but, owing to delays in obtaining capital, the actual laying of the rails was not begun until the fall of 1829, and this first section was not opened for traffic until May 22, 1830. At first, experiments were made with sails for propelling the cars, but it was soon found that a more effective source of power was supplied by mules and horses. The Flying Dutchman, one of the cars devised to furnish motive power, provided for the horse or mule a treadmill which would revolve the wheels and make the distance of twelve miles in about an hour and a quarter. Steam locomotives at this time were in their infancy and, until the opening of the Liverpool and Manchester Railroad in this same year, they had attained a speed of only six miles an hour. Horses and mules, and even sail cars, made more rapid progress than did the earliest locomotive. In spite of these crude and primitive facilities for transportation, however, the traffic on the new railroad was of large volume from the beginning, and the company could not handle the amount of merchandise offered for transport in the first months.
Construction was now rapidly pushed ahead, and by 1832 the whole line had been opened to Point of Rocks, with a branch to Frederick, Maryland, making seventy-two miles in all. In 1831, steam locomotives were tested, and one of them, the York, was found capable of conveying fifteen tons at the rate of fifteen miles an hour on level portions of the road. This achievement was regarded as a great triumph, and in 1832 the directors of the road called attention to "the great increase in velocity" that had been obtained in this way.
From this time forward the expansion of the railroad proceeded with a certainty born of success. A branch was built to Washington and the main line was extended to Harper's Ferry. Beyond this point construction was slow because financial difficulties stood in the way, and it was not until after the panic of 1837 that further aggressive building began. But by 1842 the line was completed to Cumberland, Maryland, and by 1853, to Wheeling. Meanwhile, the branch from Cumberland to Parkersburg, Virginia, was built. The road now comprised a total system of more than five hundred miles and reached two points of importance on the Ohio River, one northward near the Pennsylvania-Ohio state line and one southward in the direction of Cincinnati. The Parkersburg extension was of great importance because it opened a through route to St. Louis, by means of the Cincinnati and Marietta Railroad—which was at this time completed from Cincinnati to Belpre, Ohio, opposite Parkersburg—and the Ohio and Mississippi, which extended more than three hundred miles from St. Louis to Cincinnati.
Times were not the best, however, and, although much traffic was developed, the immense cost of the extensions heavily burdened the Baltimore and Ohio Company, while the panic of 1857 seriously embarrassed its credit. Soon after this panic and before the company had begun to recover from its effects, John W. Garrett, one of the large stockholders in the road and son of a Baltimore banker, was elected to its presidency, and a new chapter in the history of the Baltimore and Ohio began. Almost immediately following Garrett's election, a remarkable change became apparent. Losses were turned into gains; deficits were converted into surpluses; and soon Garrett had gained the reputation of being the most remarkable and efficient railroad manager in the world. He seemed to be almost an Aladdin of railroad management for, even when he could not show increases in amount of business done, he reported greater profits by showing lower expenses. In those days the railroads did not furnish detailed reports of business to the stockholders or to the public. At the annual meetings it was customary for a president or the directors simply to announce, either orally or in a brief printed statement, the amount of gross business and profits for the year. No such thing as a balance sheet or detailed financial statement saw the light of day—practically everything was taken by the stockholders on faith. And great was their faith. When, therefore, Garrett announced large increases in profits in years when most railroads were standing still or were incurring losses, he was implicitly believed.
Under Garrett's management a new era of expansion almost immediately began; work was started on the long delayed branch to Pittsburgh and plans were laid for establishing a line of steamships from Baltimore to the leading European ports. But the Civil War, which bore heavily on the Baltimore and Ohio, interfered with these ambitious schemes. Early in 1861 the Confederates took possession of a large part of the line east of Cumberland; in the next four years important sections of the road were repeatedly destroyed and rebuilt, as they passed into the hands of the Federal or Confederate troops. The company, however, managed to get through without default in its securities, and, when peace was restored in 1865, the Baltimore and Ohio resumed its policy of aggressive expansion.
Before very long the road, with its connections constructed or purchased, reached the cities of Pittsburgh, Sandusky, and Chicago, and further strengthened its connections with Cincinnati and St. Louis. It acquired steamboats, grain elevators, and docks; it constructed hotels as mountain summer resorts; it built dry docks in Baltimore; and finally it proceeded to organize and operate an express company, a telegraph company, and a sleeping-car company. To carry out these ambitious plans the capital stock and debt were of course increased again and again, and in the course of these operations a large part of the new securities issued was sold to English investors. Notwithstanding these great increases in liabilities, the company continued to report large surpluses and to pay large dividends, generally ten per cent annually. In fact, this liberal rate was, with brief exceptions, paid right through the Civil War period, in spite of the fact that large parts of the line were frequently destroyed and traffic was often at a standstill. With such prosperity under such conditions Garrett's reputation as a railroad manager naturally suffered no eclipse.
In the course of the Civil War, as already noted, through traffic routes from New York to Chicago had been established, and in the succeeding years the consolidations of the great competing systems into trunk lines had taken place. The struggle of the Baltimore and Ohio for its share of Western business led to fierce rivalry with the Pennsylvania. This competition became so severe and intense that, in 1874, the Pennsylvania road refused to carry the Baltimore and Ohio cars over its line to New York on any terms whatever. Since this was the only way in which the Baltimore and Ohio could reach New York, the situation was a serious one. Garrett retaliated by making destructive reductions in passenger rates from Washington and Baltimore to Western points. The cuts were soon made on other roads and affected both freight and passengers. All the lines became involved. Passenger fares from Chicago to Baltimore and Washington were reduced from nineteen dollars to nine dollars, and those to New York and Boston from twenty-two to fifteen dollars. Still the fight continued, and before the end of 1875 it was possible to travel from Chicago to New York first class for twelve dollars and to ship grain to New York for as low a rate as twelve cents.
Despite the fact that competition had cut earnings almost to the point of extinction, the Baltimore and Ohio continued to report surprisingly good profits. The company borrowed additional funds from time to time but continued to pay the liberal ten per cent dividend until 1877, when it somewhat reduced the rate. These dividend payments indicated, however, a prosperity that was only apparent, and they did not greatly deceive the bankers, for the credit of the Baltimore and Ohio weakened from day to day. The fact is that the reports of operations inspired little public confidence; to the farseeing, there were danger signals ahead. Nevertheless the ten per cent dividends were resumed in 1879 and continued at this rate without interruption until 1886.
On the death of John W. Garrett in 1884, his son Robert, who succeeded him as president, continued the same policy of competition and aggression. With the object of gaining an entrance into Philadelphia and through that gateway of reaching New York, he started work on a branch from Baltimore to Philadelphia to meet, at the northern boundary of Maryland, the Baltimore and Philadelphia Railroad—a line which independent interests were then building through Delaware with the intention of obtaining an entrance into Philadelphia. The Pennsylvania interests strongly opposed Garrett's new project and many years before had gone so far, in their determination to block the Baltimore and Ohio from acquiring control of the Philadelphia, Wilmington and Baltimore Railroad, as to purchase that road themselves. Despite this opposition the Baltimore and Ohio went forward with their plans and secured an entry into Philadelphia by acquiring control of the Schuylkill East Side Railway, which was a short terminal road of great strategic value. North of Philadelphia the company arranged a traffic contract with the Philadelphia and Reading, whose lines extended to Bound Brook, New Jersey, and also with the Central Railroad of New Jersey beyond Bound Brook to Jersey City. Afterward, by purchasing the Staten Island Rapid Transit Company the Baltimore and Ohio acquired extensive terminals at tidewater on Staten Island and constructed a connection in New Jersey with the New Jersey Central. Thus, after many years of struggle and at heavy cost, the Baltimore and Ohio finally secured an entry into the New York district independently of the Pennsylvania Railroad.
Both freight and passenger charges, however, were still maintained at an unprofitable rate, and, after the death of John W. Garrett, the credit of the Baltimore and Ohio continued to decline. Dividends were gradually reduced and by 1888 were omitted entirely. As is usually the case, the cessation of dividends awakened the sleeping stockholders. They began an investigation to ascertain the whereabouts of that remarkable surplus which had been reported from year to year and which, according to official report, had shown a constant growth.
This investigation disclosed a startling state of affairs. Instead of a surplus, the company had been piling up deficits year after year, had been borrowing money right and left on onerous terms, had been charging up millions of dollars of expenses to capital accounts—and as a matter of fact, instead of making money, it had for the most part been losing it. Now the company urgently needed cash, and the only way it could obtain that essential commodity was by selling its express, telegraph, and sleeping-car business.
During the entire administration of John W. Garrett, extending over more than two decades, current expenditures of enormous amounts which should have been deducted from the income had been credited to the surplus; many millions which would never be returned had been advanced to subsidiary lines, or had been spent, and therefore should have been put down in the books as losses. When these facts became public, the capital stock of the Baltimore and Ohio, which for generations had been looked upon as one of the most secure of railroad investments, dropped to almost nothing, and the most strenuous financial efforts were required to keep the company out of bankruptcy.
These disclosures, towards the end of 1887, ended the first period of active Garrett management in the Baltimore and Ohio. The directors then turned to New York bankers for the cash that was needed to put the affairs of the company on a sound basis. Samuel Spencer, who afterward became a partner in the banking house of J. P. Morgan and Company, was elected president and active manager. He introduced radical reforms, entirely revolutionized the organization, and adopted modern methods. He wrote off the books a large amount of the much vaunted "surplus" and he took important steps toward the general improvement of the property.
Had the new interests been allowed to continue their efforts unmolested, the history of the Baltimore and Ohio in the next decade might have been very different. But the original controlling interests, the Garrett family, still held the balance of power. As the bad bookkeeping and other irregularities of the past naturally reflected on the Garretts, it was their interest to suppress further investigation as far as possible; and their antagonistic attitude toward the policy adopted by the new Spencer management was seen in the annual election of directors in November, 1888. Only five of the members of the board were reelected, President Spencer was ousted, and Charles J. Mayer was elected in his place.
This second change in management sidetracked the plans for radical reform, and little improvement resulted either in earning power or in financial condition. The company had fallen upon evil days. The net profits did not increase, and eight years after 1888 they were smaller than in that year, while the debt and interest charges constantly grew. Despite these ominous facts, dividends were paid regularly on the preferred stock and in 1891 they were resumed on the common stock. In the latter year a twenty per cent dividend was declared "to compensate shareholders for expenditures in betterments and improvements in the physical condition of the property," while at the same time the directors decided to raise five million dollars of new capital for expenditures which would be necessary to handle the increased traffic created by the World's Fair at Chicago.
The traffic problem continued to be a thorn in the flesh and until 1893 freight rates were constantly being cut. The opening of the Baltimore and Ohio connection to New York had brought keener competition from the Pennsylvania Railroad and had made deep inroads into the Baltimore and Ohio revenues. Such conditions made even the Garrett interests feel that something should be done, and in 1890 a "community of interest" scheme was proposed. To control the stock of the Baltimore and Ohio Railroad, Edward R. Bacon in New York, acting harmoniously with the Garrett family, formed a syndicate of capitalists representing the Richmond Terminal system, the Philadelphia and Reading Railroad, the Northern Pacific Railroad, and other properties. The ultimate plan, which proved too visionary, was to consolidate under one control a vast network of lines extending all over the continent.
The syndicate had made little progress toward rehabilitation when the panic of 1893 occurred. In this year and the next the earnings of the Baltimore and Ohio fell off rapidly and the dividend was reduced. Nevertheless, as late as January, 1895, the directors insisted that financially the company was in better condition than for several years and that on the whole it was in a stronger position than at any time since 1880. But in this same year it became necessary to stop all dividend payments; the company began to have difficulties in securing ready money; and before the close of the year the situation seemed hopeless. Early in 1896 Mayer tendered his resignation, and John K. Cowan succeeded him. The new president did his utmost to obtain money to meet the current needs, but he was unsuccessful. A receivership and reorganization seemed absolutely necessary, and in February, 1896, the receivership was announced.
With the property now in the hands of the courts, the opportunity at last came to make real the reforms which had been proposed and begun nearly a decade earlier under the wise but quickly terminated administration of Samuel Spencer. A thorough housecleaning was now carried through without interference or interruption. A reorganization committee was formed, with whom were deposited the Garrett shares as well as those of the Morgan and New York and Philadelphia interests. A full investigation of past management disclosed that the records for the interim extending from the brief Morgan control under Spencer to the receivership contained the same kind of irregularities and errors of policy that had prevailed under the earlier Garrett management. Statements of profits had been swelled by arbitrary entries in the books and nearly six million dollars which had not been earned had been paid out in dividends. Furthermore the company had endorsed the notes of certain subsidiary roads to the extent of over five million dollars, and had made no record whatever of this action for the stockholders.
As in the case of numerous other railroads, the financial breakdown of the Baltimore and Ohio Railroad was primarily due to a bad or reckless financial policy, for there was nothing inherently insecure in the railroad property itself. During all the years of the Garrett regime, the company had shared in the general growth and expansion of industry, wealth, and population within its territory. It had been progressive in matters of expansion and had built up its system to meet the needs of modern times. Its trackage and equipment compared favorably with similar systems, and most of its extensions and branches had been wisely planned and had proved profitable. The operating management of the railroad was generally good and it usually secured its proportion of what business was to be obtained. But the steady increase in its debts over a number of years, its extravagance in dividend payments, and its painful efforts to keep down its operating expenses had so weakened the property that, when the hard times of 1893 to 1896 arrived, it was in no position to weather the storm. The only wonder is that the management succeeded in keeping the system intact and apparently solvent so long as it did.
The receivership at once adopted a vigorous policy of improvement. The rolling stock had run down until it could not handle even ordinary business. While the company had been depleting its credit and paying out all its cash in dividends, the equipment had been going into the scrap heap. For two years the receivers made large expenditures on equipment and roadbed, borrowing money for this purpose; the result was that when, in 1898, the courts surrendered the property, it was in splendid condition to take advantage of the tide of commercial and industrial prosperity which was just then beginning to flow throughout the United States.
While the reorganization of the Baltimore and Ohio was not so drastic as that of many other systems which went through the courts during this period, it was thorough enough to meet the situation. The fixed charges were cut down radically and the stockholders were assessed in large amounts. In all, more than thirty-six million dollars was raised by assessments and the sale of new securities; the liabilities of the Company were greatly reduced; and its credit was promptly restored. Formerly the Baltimore and Ohio had been struggling under a burden of floating indebtedness, with so little money in its treasury that it could not even put a new coat of paint on the passenger cars and had to continue to use oil lamps to light some of its best trains. But now the floating debt was replaced by a large available cash capital, and as a result of the liberal policy followed by the receivers, the equipment and roadbed were brought fully up to the standards required for handling the traffic of the road both economically and effectively.
With the reorganization of 1898 finished, the Baltimore and Ohio Railroad entered a new period in its history. The strong, progressive interests which now took control concentrated their energies on developing traffic, increasing earnings, and rounding out the general system. They adopted careful measures for unifying the system by adding other lines and connections of value; they paid much attention to the improvement and development of terminals; and they spent many millions in acquiring and expanding the terminal properties of the company at Chicago, St. Louis, Philadelphia, and Baltimore.
The financial history of the Baltimore and Ohio since the close of the nineteenth century is interesting chiefly in connection with changes in the control of the property. After the reorganization a group of prominent financiers, including Marshall Field, Philip D. Armour, Norman B. Ream, and James J. Hill jointly purchased a large interest in the stock. But this purchase, while perhaps representing a dominating interest, did not involve actual control. Soon afterward, interests identified with the Pennsylvania Railroad began to appear in the Baltimore and Ohio, and before long the Pennsylvania had a strong representation on the board. As a consequence, the Baltimore and Ohio almost lost its individuality and for a time was popularly regarded practically as a subsidiary of its old rival line.
The purpose of the Pennsylvania in obtaining this ascendency over the Baltimore and Ohio was to regulate the soft coal traffic. Already it had acquired dominating interests in the Chesapeake and Ohio, the Norfolk and Western, and other soft coal properties. These purchases were merely manifestations of that "community of interest" policy which at this time led several large systems to acquire interests in competing lines. Several of the railroad leaders of that time, notably James J. Hill and Edward H. Harriman, believed that if these great systems actually owned large blocks of stock in each other's properties, this common association would ipso facto end the competition that, if continued, would ultimately ruin them all. The Supreme Court had decided that the "pooling" arrangements which had so long prevailed among great competing roads violated the Sherman Anti-Trust Act; and the American public, which now was cultivating a new interest in railroad problems, believed that the "community of interest" plan was merely a scheme to defeat the Interstate Commerce Act and the Sherman Act and to maintain secretly all the old railroad abuses. These inter-railroad purchases therefore became so unpopular that the Pennsylvania sold its Baltimore and Ohio stock. At this time Edward H. Harriman of the Union Pacific, who had at his disposal vast funds of the latter property which he had obtained by the settlement of the Great Northern and Northern Pacific deal, decided to acquire control of a system of roads in the East in order to establish a complete transcontinental line in the interest of the Union Pacific. It was the theory that such a purchase by the Union Pacific would not defy the law or outrage the popular conscience because the Union Pacific, unlike the Pennsylvania, did not compete with the Baltimore and Ohio, but was only a western extension of that system. Harriman in August, 1906, therefore purchased nearly all the Pennsylvania holdings in the old Garrett property and thus obtained virtual control.
At this same time the Baltimore and Ohio had been developing a "community of interest" plan on its own account. In the year 1903, it acquired a substantial stock interest in the newly reorganized Reading Company, which controlled the Philadelphia and Reading Railroad and the Philadelphia and Reading Coal and Iron Company. It did not obtain a majority interest but, with the Lake Shore and Michigan Southern Railroad of the New York Central system, it now controlled the Reading system. The Reading Company meanwhile had secured control of the Central Railroad of New Jersey, over the lines of which the Baltimore and Ohio reached New York City.
In the following years the Baltimore and Ohio property was still further rounded out by purchasing the Cincinnati, Hamilton and Dayton, a small system of doubtful value radiating through the State of Ohio and, by additional extensions, into the soft coal fields of West Virginia. New energy was put into the expansion and improvement of the southwestern lines to St. Louis, while the eastern terminal properties were still further improved.
The practical control of the Baltimore and Ohio remained in the hands of the Union Pacific interests until 1913. In that year, however, the Union Pacific liquidated its holdings by distributing them to its own individual stockholders in the shape of a special dividend. The Baltimore and Ohio thus became once more an independent property.
The story of the Baltimore and Ohio for the past decade has been mainly a record of a growing, well-managed, and efficient business. It is closely identified with the personality of its notable and efficient president, Daniel Willard, a conspicuous example of the modern type of railroad manager. In the earlier days of railroading, and especially in the long period which came to an end with the death of Harriman, the typical railroad president was usually a man of great wealth who had secured his position by owning a large financial interest in the property. The country was full of "Wall Street Railroad Generals." But in recent years the efficient railroad head has come more and more to be the practical railroad man who has risen from the ranks, who has no important personal financial interest in the property but who is paid an adequate salary to operate a system in a purely businesslike way. Notable examples of this modern type of railroad president are, besides Daniel Willard, Edward P. Ripley of the Atchison, Topeka and Santa, Fe, Benjamin F. Bush of the Missouri Pacific, and Fairfax Harrison of the Southern.
The efficient management of today is abundantly shown in the recent record of the Baltimore and Ohio. President Willard has been unmolested by financial interests and has been continuously backed up in his policies by the owners of the road. As a result the Baltimore and Ohio of the present decade has reached an enviable position as one of the great Eastern trunk lines, comparing well with other progressive properties like the Pennsylvania, the New York Central, the Southern, the Illinois Central, and the Louisville and Nashville. Millions have been poured into the property in the past fifteen years; its main lines have been largely rebuilt; its rolling stock is chiefly of the most modern types; and its terminals and structures are such as modern conditions demand.

CHAPTER VI. LINKING THE OCEANS

In 1862, when the charter was granted by the United States Government for the construction of a railroad from Omaha to the Pacific coast, the only States west of the Mississippi Valley in which any railroad construction of importance existed were Iowa and Missouri. During the three decades which had passed since the first railroad construction, the earlier methods of transportation by boat, canal, and stage coach gave place in the Eastern half of the United States to more modern methods of transportation. As a result of these new conditions, the States, cities, and towns were welded together, and population and prosperity increased rapidly in those inland sections which had formerly languished because they had no means of easy and rapid communication.
The construction of extensive railways, however, and particularly the consolidation of small, experimental lines into large systems, dates from the days of the discovery of gold in California. The nation did not begin to realize the extraordinary possibilities of the vast Western territory until its attention was thus suddenly and definitely concentrated on the Pacific by the annual addition of over fifty million dollars to the circulating medium. The wealth drawn so copiously from this Western part of our continent had a stimulating effect on the commerce, manufactures, and trade of the entire Eastern section. People began to understand that with the acquisition of California the nation had obtained practically half a continent, of which the future possibilities were almost unlimited, so far as the development of natural resources and the general production of wealth were concerned.
The public conviction that a railroad linking the West and the East was an absolute necessity became so pronounced after the gold discoveries of '49 that Congress passed an act in 1853 providing for a survey of several lines from the Mississippi to the Pacific. Though the published reports of these surveys threw a flood of light on the interior of the continent, they led to no definite result at the time because the rivalry of sections and groups of interests for the selection of this or that route held up all progress.
The Act of 1862, which created the Union Pacific Railroad Company, together with the amending Act of 1864, authorized the construction of a main line from an initial point "on the one hundredth meridian of longitude," in the Territory of Nebraska to the eastern boundary of California, with branch lines to be constructed by other companies and to radiate from this initial point to Sioux City, to Omaha, to St. Joseph, to Leavenworth, and to Kansas City. * Provision was made for a subsidy of $16,000 a mile for the level country east of the Rocky Mountains; $48,000 a mile for the lines through mountain ranges; and $32,000 a mile for the section between the ranges. The original plan to secure the government subsidies by a first mortgage on the lines was amended so as to allow private capital to take the first mortgage, the Government taking a second lien for its advances. In addition to these subsidies the several companies were to receive land grants of 12,800 acres to the mile in alternate sections contiguous to their lines. Upon the same terms the Central Pacific, a company incorporated under the laws of California, was authorized to construct a line from the Pacific coast, at or near San Francisco, to meet the Union Pacific Railroad.

    * These ambitious designs were never fully realized. The main
line ran eventually west from Omaha, meeting the Sioux City branch at
Fremont. The only other branch which was constructed to connect with the
Union Pacific was that from Kansas City and it ran first to Denver.

The public was quick to realize the significance of this huge enterprise, for the papers of the day were full of such comments as the following:
"It is useless to enlarge upon the value and importance of this great work. It concerns, not the United States alone, but all mankind. Its line is coincident with the natural and convenient route of commerce for the world.... Over it the trip will be made from London to Hong Kong in forty days, over a route possessing every comfort and attraction, which takes a continent in its course, and which, from the variety and magnitude of its sources, from the race which now dominates it, and from the extent of their numbers, wealth and productions, must soon give law to the commercial world."
Notwithstanding these and similarly optimistic sentiments, the meager financial support given to the enterprise by the public at large had been very discouraging. Although the construction had been liberally subsidized by the Government, gross extravagance had promptly crept in; juggling of accounts for the purpose of securing profits on the government advances was freely indulged in, and after only a small section of the line had been completed it was announced that more capital must be forthcoming or the work would cease. Out of this situation grew the plan for subletting the work to a construction company known as the Pennsylvania Fiscal Agency—a name which was afterwards changed to that of the Credit Mobilier of America. The story of the Credit Mobilier, with its irregularities involving conspicuous politicians, is one of the most disgraceful in American history. The detailed history of these operations need not be considered here; it is sufficient to say that finally, in spite of political scandals, the Union Pacific lines were brought to completion. Within two years after the letting of the contracts to this new company, in 1866, over five hundred miles of road were completed and in operation. An advertisement published late in 1868 announced that "five hundred and forty miles of the Union Pacific Railroad, running west from Omaha across the continent, are now completed, the track being laid and trains running within ten miles of the Rocky Mountains.... The prospect that the whole grand line to the Pacific will be completed by 1870 was never better."
As a matter of fact, the line through to the coast was finished earlier than had been predicted. One fact which increased the rapidity of construction was the growing financial difficulty of the company. It was absolutely imperative that the through line be completed in order that the resulting business might make the operation of trains pay. But aside from this, another influence was at work to encourage rapid construction. The Act of 1862 provided that the Central Pacific might also build across Nevada to meet the Union Pacific, on condition that it completed its own allotted section first. As the Central Pacific also was receiving a heavy government subsidy per mile, and as there was great profit in construction undertaken with this government subsidy, there was naturally a strong incentive for both companies to build all the mileage possible and as rapidly as possible.
The Central Pacific enterprise was backed by a group of men who were awake to the possibilities of the situation and who had made large fortunes in the gold-mining boom of previous years, such as Leland Stanford, Collis P. Huntington, Mark Hopkins, and the Crockers. The rivalry between them and the Union Pacific interests woke the whole continent and formed a chapter in American railroad history as startling and romantic as anything in the stories of the Vanderbilts and Goulds with their financial gymnastics.
As the contest proceeded, public interest increased and the entire country watched to see which company would win the big government subsidies through the mountains. Through the winter of 1868 the work continued on the Union Pacific with unabated energy, and freezing weather caught the builders at the base of the Wasatch Mountains; but blizzards could not stop them. The workmen laid tracks across the Wasatch on a bed of snow and ice, and one of the track-laying trains slid bodily, track and all, off the ice into a stream. The two companies had over twenty thousand men at work that winter. Suddenly the Central Pacific surprised the Eastern builders by filing a map and plans for building as far as Echo, some distance east of Ogden. The Union Pacific forces, however, were equal to the occasion. At first, one mile a day had been considered rapid construction, but now, even with the limited daylight of the winter months, they were laying over two miles a day, and they finally crowned their efforts by laying in one day between sunrise and sunset nearly eight miles of track.
In the meantime the Central Pacific also had stopped at nothing. The company had a dozen tunnels to build but did not wait to finish them. Supplies were hauled over the Sierras, and the work was pushed ahead regardless of expense. On May 10, 1869, the junction was formed, the opposing track layers meeting at Promontory Point, five miles west of Ogden, Utah. Spikes of gold and silver were driven into the joining tracks, and the through line from the Missouri River to the Pacific Ocean had been completed; the first engine from the Pacific coast faced the first engine from the Atlantic. The whole country, from President Grant in the White House to the newsboy who sold extras, celebrated this achievement. Chicago held a parade several miles long; in New York City the chimes of Trinity were rung; and in Philadelphia the old Liberty Bell in Independence Hall was tolled again.
The cost of the Union Pacific Railroad from Omaha to its junction with the Central Pacific formed a subject of controversy for a generation. The saving of six months of the allotted time for completing the road no doubt increased its cost to the builders, for at times they borrowed money in the East at rates as high as 18 and 19 per cent. Besides, in pushing the line far beyond the bounds of civilization without waiting for the slower pace of the settler and the security which his protection afforded, it often became necessary for half the total number of workmen to stand guard and thus reduce the working capacity of the construction force. Even so, hundreds were killed by the Indians. Governmental restrictions of various kinds also increased the cost of the road. For example, the stipulation that only American iron should be used increased the cost by at least ten dollars for every ton of rail laid. The requirement that a cut should be made through each rise in the Laramie plains, thus giving the track a dead level instead of conforming to the natural roll of the country, ultimately resulted in a waste of from five to ten million dollars. Extraordinary costs such as these, combined with the extravagant methods of construction and financing, brought the total cost of the property up to what was in those days a fabulous sum of money. The records indicate that the profits which accrued through the Credit Mobilier and in other ways in the construction up to the time of the opening in 1869 exceeded fifty millions of dollars.
While the Union Pacific was being built, from 1862 to 1869, other railroads were not idle, and many were rapidly reaching out into the Central West. Not only had the Chicago and North Western reached Omaha and made connection with the Union Pacific, but the Kansas Pacific had penetrated as far west as Denver and had joined the Union Pacific at Cheyenne.
The close relationship between railroad expansion and the general development and prosperity of the country is nowhere brought more distinctly into relief than in connection with the construction of the Pacific railroads. With the opening of a transcontinental line the vast El Dorado of the West was laid practically at the doorstep of Eastern capital. Not only did American pioneers turn definitely toward the West, but foreign emigrants bent their steps in vast numbers in that direction, and capital in steadily increasing amounts made its way there. Towns sprang up everywhere and soon developed into busy centers of trade and commerce. Caravan trains, which a few years before had followed a single westward line, now started from points along the railroad artery and penetrated far to the north and south. The settlers knew that the time was not far distant when all the vast territory west of the Missouri, from the Canadian border to the Rio Grande, would be reached by the rapid spread of the railroad. In the sixties and seventies there sprang up and rapidly developed in size and importance such centers as Kansas City, Sioux City, Denver, Salt Lake City, Cheyenne, Atchison, Topeka, Helena, Portland, Seattle, Duluth, St. Paul, Minneapolis, and scores of smaller places. The entire Pacific slope was soon dotted with towns and cities, and even the great arid plains of the West—as well as the "Great American Desert" covering Utah, Arizona, New Mexico, and parts of Nevada—began to take on signs of life which had not been dreamed of a decade before.
But the development of this great section of the country during the next few years was even more notable. By 1880 four different lines of railroad were running through to the Pacific States, and a fifth, the Denver and Rio Grande, had penetrated through the mountains of Colorado and across Utah to the Great Salt Lake. These were the years when the modern industrial era was really beginning. Man's viewpoint was changing, and instead of remaining content with the material achievements of the Atlantic and Central sections of the continent, he began to realize that the vast Western regions and the thousand miles of Pacific coast line were destined to be America's inexhaustible patrimony for the years to come.
In 1880 the Union Pacific began its expansion to the eastward and acquired control of the Kansas Pacific, which had come upon evil days, and of the Denver Pacific, a most important connecting link. In January, 1880, these two companies were absorbed by the Union Pacific, which thus obtained a continuous line from St. Louis westward. In the meantime the Central Pacific, operating from Ogden west to the coast, had added many branches, while a new company—known as the Southern Pacific Railroad of California—had for some years been constructing a system of lines throughout that State south of the Central Pacific and by 1877 had penetrated to Yuma, Arizona, 727 miles southeast of San Francisco. It had also built lines into Arizona and New Mexico and soon joined the Santa Fe route, which had for some time been working westward.
During 1881 the Southern Pacific continued its eastern extensions along the Rio Grande to El Paso, Texas, where it formed a connection with a new road under construction from New Orleans. A junction was also made at El Paso with the Mexican Central, which was under construction to the City of Mexico. The Southern Pacific Railroad was closely allied with the Central Pacific interests headed by Collis P. Huntington, and in 1884 the great Southern Pacific Company was formed, which acquired stock control of the entire aggregation of railroads in the South and Southwest. At the same time the Central Pacific came under direct control of the Southern Pacific through a long lease.
During these eventful years, while the Southern Pacific properties were penetrating eastward through the broad stretches of country to the south of the Union Pacific lines, equally interesting events were occurring in the north. In 1879 a consolidation was formed of the Oregon Steamship and Navigation Company with several short railway lines in Oregon and Washington, under the name of the Oregon Railway and Navigation Company. These railroad lines extended east from Portland to the Oregon state line, and north to Spokane, and they finally made connection with the new Northern Pacific. At the same time, another road, known as the Oregon Short Line Railroad, was built from Granger, Wyoming, on the line of the Union Pacific to a junction with the Oregon Railway and Navigation Company at Huntington, Oregon, on the Snake River. The Oregon Short Line came under the control of the Union Pacific and was opened for traffic in 1881. Later a close alliance was made with Henry Villard, the controlling spirit in the Oregon Railway and Navigation Company. Ultimately the entire system of Oregon lines passed under Union Pacific control, to be lost in the receivership of 1893, but later recovered under the Harriman regime.
When, after ten more years of expansion, the great Union Pacific property went into the hands of receivers in 1893, it had grown to a system of more than 8000 miles. It completely controlled the Oregon railway and steamship lines, the lines to St. Louis, and also an important extension known as the Union Pacific, Denver and Gulf Railroad, running from a point in Wyoming across Colorado to Fort Worth, Texas. The financial failure of the system was due to a variety of causes. Its management had been extravagant and inefficient, and construction and expansion had been too rapid. The policy of building expensive branch lines where they were not needed and of obligating the parent company to finance them had been a grievous mistake and had contributed largely to the downfall of the company. Further than this, the credit of the Union Pacific was steadily growing weaker because the time was drawing near when its heavy debt to the United States Government would fall due. In all its history of more than twenty years the company had never paid any interest on the government debt nor had it maintained a sinking fund to meet the principal when due. Consequently, the accruing interest had mounted year by year and, should the Government enforce payment at maturity in 1897-99, the company would be doomed to bankruptcy. This government debt, including accrued interest, amounted to the sum of $54,000,000.
Attention should not, however, be diverted from the fact that during all these years a vast expansion of competitive lines had been going on far southward of the Union Pacific. Under the guiding genius of Collis P. Huntington, the Southern Pacific Company in 1884 had consolidated and solidified a gigantic system of railways extending from New Orleans to the Pacific and throughout the entire State of California to Portland, Oregon, with branch lines radiating through Texas and making close connection with roads entering St. Louis. In addition to these railroads, Huntington acquired control of a steamship line operating from New York to New Orleans and Galveston, and subsequently of the Pacific Mail Steamship Company, operating along the coast from Oregon south to the Isthmus of Panama and across the Pacific Ocean. The ever-growing effects of this powerful and well-managed competitor—combined with the large development of the Santa Fe system during these years, the competition of the completed Northern Pacific, and the possibilities of the new Great Northern Railway or Hill line, now completing its main artery to the Pacific—were far-reaching enough in themselves to bring the Union Pacific upon evil days. Consequently few were surprised when, under the great pressure of the panic of 1893, the property was forced to confess insolvency. The Union Pacific had simply repeated the story of most American railroads; it had been constructed in advance of population and had to pay the penalty. Yet it had more than justified the hopes of the daring spirits who projected it. It may have made individuals bankrupt, but it magnificently fulfilled the part which it was expected to play. It had opened up millions of acres to cultivation, given homesteads to millions of people, many of whom were immigrants from Europe, developed mineral lands of incalculable value, created several new great States, and made the American nation a unified whole. Its subsequent history belongs to another chapter of this story—a history that is richer than the first in the matter of financial success but that can never surpass the early pioneering years in real and permanent achievement.

CHAPTER VII. PENETRATING THE PACIFIC NORTHWEST

It is only when one reads such a book as Francis Parkman's "Oregon Trail" that one fully realizes the vast transformation which has taken place within little more than half a century in the great Northwestern territory beyond the Mississippi and the Missouri. In that fascinating history we read of the romantic and thrilling experiences of Parkman and his companions in their summer journey across the plains of Nebraska and through the mountain ranges of Wyoming, Montana, and Oregon. We read of their hairbreadth escapes from the Indians; their chase of the buffalo and other wild animals of the far Western country; of the wearisome weeks that they spent in crossing the deserts where absolute loneliness reigned; and finally of their arrival, after months of hardship, in the vast Oregon country, which with its great natural resources, splendid climate, and large extent has come to be known in these modern days as the Empire of the Northwest.
It was to penetrate and bring this great virgin region within reach of the East that the Northern Pacific Railroad Company was chartered by Congress in 1864, just prior to the closing of the Civil War. During this same period the Union Pacific route was being surveyed, and the first ground was broken in December, 1863, for the line which was later to connect Omaha with San Francisco.
Like the Union Pacific charter, that of the Northern Pacific also contained an extensive land grant. From the modern viewpoint, such land grants look colossal, but in those days the general opening up and development of the Western country had progressed to so slight an extent that the significance of giving away millions of acres of the public lands to encourage a precarious railroad enterprise was then no more than the passing over to capitalists today of exclusive rights in extensive tracts of territory in Brazil and the other South American Republics. Even these great opportunities to acquire almost an empire of fertile lands or rich forests were not as a rule looked upon as attractive enough to tempt capital into the wilderness. The old saying that capital is the most timid thing in the world and does not like pioneering is strongly emphasized by such instances as this, and no doubt in 1864 the enormous grants of free land made by Congress did not appear especially attractive to the man who had money to invest.
Whatever the public attitude may have been, the Act of Congress of July 2, 1864, creating the Northern Pacific Railroad, gave that Company the right to construct a line from some point on Lake Superior, either in Minnesota or in Wisconsin, westward and north of latitude 45 degrees, to or near Portland, Oregon. The land grant consisted of forty alternate sections of public land for each mile within the Territories penetrated and twenty alternate sections within the States through which the railroad might pass.
The hazardous character of this undertaking will be realized when it is remembered that at this time no railroad had yet penetrated the Rocky Mountains; that the entire railroad system of the United States was less than 40,000 miles; and that west of the Mississippi there was no mileage worth mentioning. It was still less than a generation since Parkman and his companions had made their four months' journey from St. Louis to the mouth of the Columbia River, and between the fringe of civilization along the Pacific slope and the region about Chicago and St. Louis lay almost a third of the continent uninhabited, undeveloped, and unknown. The scheme languished for several years until finally, in 1869, the firm of Jay Cooke and Company of Philadelphia undertook to raise the necessary capital.
The story of the Northern Pacific for the next few years was closely bound up with that of Jay Cooke, who was one of the most conspicuous characters of his time in the financial world. He was a man of commanding personality, great energy, unusual resourcefulness, and with a large personal following. He had built his reputation through his great success in financing United States government loans during the Civil War. He now undertook to raise more than one hundred million dollars to carry through the Northern Pacific enterprise. He achieved remarkable success for a time and within three years had built over five hundred miles of the main line to the Pacific coast. But the outbreak of the Franco-Prussian War and the consequent financial stringency abroad, the difficulty of marketing bonds on an uncompleted enterprise, combined with the poor showing made by those sections of the line completed and in operation, brought matters to a crisis, and in September, 1873, Jay Cooke and Company were obliged to close their doors. The affairs of the railroad were so closely involved with those of the banking firm that, although strenuous efforts were adopted to save the railroad, its revenues were inadequate. As a result, in April, 1874, General Lewis Cass was appointed receiver.
The uncompleted property was operated for some years thereafter under the protection of the courts and no plan of reorganization was devised until 1879. During the receivership only a moderate amount of additional mileage was constructed, and it was not until many years had passed that the system penetrated the mountains and reached the Pacific coast. But when the new company took possession in 1879, aggressive building was resumed, and for a time it looked as though the project would be promptly finished. However, in 1882, the company still had about one thousand miles to construct in order to complete its main artery. At this time financial difficulties appeared, and the days of stress were tided over only by the help of a syndicate and the Oregon and Transcontinental Company.
With the formation of the Oregon and Transcontinental Company begins the regime of Henry Villard, the dominating factor in Northern Pacific affairs for many years afterward. Some years before, Villard, who had long been interested in Western railroad enterprises and who had become prominent through his activities in connection with the Kansas and Pacific Railway, had succeeded in forming the Oregon Railway and Navigation Company as a combination of steamboat lines operating on the Willamette and Columbia rivers in Oregon, with an ocean line connecting Portland and San Francisco. A connecting railroad line, which had been built to Walla Walla in southeastern Washington, penetrated a portion of the territory through which the Northern Pacific was projected. In 1880 a contract was arranged between the two companies whereby the Oregon Railway and Navigation Company, in order to share in the traffic, undertook to construct a line eastward to meet the Northern Pacific line at the mouth of the Snake River. This arrangement would allow the Northern Pacific to run its trains into Portland and would obviate the necessity of constructing its own road into that city.
In spite of this arrangement, Villard feared that the Northern Pacific Company might decide, after all, to build its own line to Portland as soon as it was able to finance the project. It was for the purpose of preventing this move that he formed the Oregon and Transcontinental Company, a holding corporation which promptly acquired, in the open market and by private purchases, a dominating interest in the Northern Pacific Railroad. At the same time Villard placed the control of the Oregon Railroad and Navigation Company in the hands of the new Transcontinental.
Villard thus came to control the entire Northern Pacific system and, backed by the Deutsche Bank of Berlin and other German and Dutch interests, at once began an aggressive policy of expansion and development. The business of the system developed rapidly. The main line through to the Pacific coast was now in operation, and the entire system amounted to about 2300 miles of road. But Villard followed a financial policy which was not sound and paid dividends without justification. In a short time the company consequently found itself financially embarrassed.
As a result of financial losses in 1884, Villard was obliged to retire from active control of the properties. But in 1887 he once more got possession of the Northern Pacific with German capital and succeeded in arranging a lease of the Oregon Short Line, which had been developed by the Union Pacific interests, embracing a cross-country road from its main lines in Wyoming northward into Oregon and Washington. At the same time the interest of the Transcontinental Company in the Oregon Railway and Navigation Company was linked with the Oregon Short Line Company. These transactions, however, still left the Transcontinental Company in control of the situation, as it retained its majority ownership of Northern Pacific Railroad stock.
For the next few years the Northern Pacific did not follow a policy of rapid expansion. Other trunk lines, such as the Union Pacific, Rock Island, Santa Fe, Burlington, and North Western, were all growing and keeping pace with the rapid settlement of the West; but the Northern Pacific in these years simply rested content with its position as a single track transcontinental route having but few branches. Its only important extension was made by acquiring the Wisconsin Central Railroad, which gave the company a line between St. Paul and Chicago and a valuable and important entrance into the latter city. It was expected that, with this accession, the affairs of the company would be permanently established on a sound basis, but the overliberal policy of paying out practically all the surplus in dividends was continued in the face of large increases in fixed charges.
Early in 1892 it began to be rumored that the Northern Pacific was not in so easy a financial position as had been assumed. The stockholders took alarm; and the committee which was appointed to investigate the situation discovered a deplorable state of affairs. As a result of the severe criticism of Villard's policy, steps were at once taken to oust him from control, but without success until June, 1893. Two months later, receivers were appointed who discovered that the company was insolvent and had no funds to pay quickly maturing obligations. Receivers were appointed also for most of the branch lines, including the Wisconsin Central system. The Oregon Short Line, which was tied through guarantees with the Union Pacific although leased to the Northern Pacific, was involved in the general crash but was later separately reorganized.
To rehabilitate the Northern Pacific Railroad effectively was a difficult problem. Its debt was enormous; its roadbed and rolling stock had been neglected; and, as a result of the recent crash, its valuable feeders on both east and west, the Wisconsin Central and the Oregon properties, were removed from its control. Besides these adverse conditions, competition of a serious nature was looming up. James J. Hill had for many years been quietly developing the Great Northern Railway. This great system he had financed in an extremely conservative manner; he had extended it through territory where construction costs were low; and he had secured control of branches and feeders which might have come under the sway of the Northern Pacific had that company been more farsighted. Hill had operated his road from the beginning at very low cost; he had kept its credit high; and even in the period of financial depression he had reported large profits and had paid substantial dividends on his stock. With such a competitor in the field, it really looked for a while as though the Northern Pacific could have no future whatever.
Finally, in May, 1895, a plan sponsored by Edward D. Adams, representing New York interests and those of the Deutsche Bank of Berlin, proposed a practical merger with the Great Northern Railroad Company: the old stock and bondholders were to make all the sacrifices and to supply all the new capital, and the Great Northern was then to be presented with half the stock of the new company, in consideration for which it was to guarantee the new Northern Pacific bonds. The situation was somewhat similar to that which existed in New York State as early as 1868 when Commodore Vanderbilt had achieved his great reputation as a wizard at railroading by acquiring the Harlem and Hudson River railroads and by forcing the New York Central lines to terms. James J. Hill had become a modern wizard, and the only hope for the Northern Pacific seemed to be to lay the road at his feet and ask him to do with it what he had done with the Great Northern—make it a "gold mine."
This plan, however, met with too much opposition and was abandoned. During the following year a new plan, backed by both the American and the German interests, secured the strong cooperation and endorsement of J. P. Morgan and Company. This was the first instance of Morgan's entry into railroad reorganization in the West. During the previous few years he had been increasing his reputation as a reorganizer of Eastern railroad properties, and by this time he had successfully organized or was rehabilitating the Erie, the Reading, the Baltimore and Ohio, the Southern, and the Hocking Valley systems. But he had kept clear of the far Western field and had definitely refused to reorganize the Union Pacific on the ground that its territory was too sparsely settled and that there was little hope for its future, especially as its partial control by the United States Government made any reorganization extremely difficult. The new plan for the Northern Pacific was carried out with no regard to the Hill interests: the old stockholders were heavily assessed; all bondholders were forced to make sacrifices; the Wisconsin Central lines were entirely eliminated and separately reorganized; and the Oregon lines were dissociated from the Northern Pacific and afterwards returned to the control of the new Union Pacific.
While the new Northern Pacific as reorganized in 1898 came directly under Morgan's control and was immediately classed as a Morgan property, it did not remain exclusively such for very long. In the promotion and development of the Great Northern system, Hill had hitherto maintained an independent position so far as banking alliances were concerned, but he now began to develop closer relations with the Morgans and became heavily interested in the First National Bank of New York, an institution which for many years had been more or less directly identified with the Morgan interests. On more than one occasion thereafter the banking firm of J. P. Morgan and Company acted as financial agent for the Great Northern.
Soon after the reorganization of the Northern Pacific, it became known that Hill had acquired an important interest in the property, and as time went on this interest was substantially increased. Within a year or two the Northern Pacific began to be classed as one of the Hill lines. With a substantial Hill representation on the board of directors and a managerial policy which was clearly inspired by Hill, the company now entered upon a new stage in its career.
The outstanding dramatic event in the story of the modern Northern Pacific was the famous corner which occurred in the spring of 1901 as a result of a contest between the Hill and the Harriman interests for the control of the property. The details of this operation, which sent the price of Northern Pacific stock up to $1000 a share and precipitated a stock-market panic, form part of the story of the Harriman lines. The contest resulted in the formation of the Northern Securities Company, a corporation of $400,000,000 capital, devised as a holding company under the joint control of the Hill and Harriman interests, for the purpose of retaining a majority of the stocks of the Northern Pacific and the Great Northern.
The Hill interests, jointly with the Morgan control of the Northern Pacific, had been quietly accumulating stock in the Chicago, Burlington and Quincy Railroad, and Harriman felt that there was grave danger to the Union Pacific in this move, as the Burlington had already penetrated into the Union Pacific territory and might at any time start to build through to the coast its own line parallel to the Union Pacific. Harriman consequently began to buy up Northern Pacific stock in the open market and thus, together with the efforts of the Hill and Morgan people to retain and strengthen their control, brought about the corner.
The Northern Securities Company was designed to harmonize all interests and to keep the control of the Burlington property jointly in the hands of Harriman and Hill. But as the result of a suit under the Sherman Anti-Trust Act, this combination was declared illegal, and in 1904 the company was dissolved. The final outcome of the situation was that the Northern Pacific, sharing with the Great Northern the joint control of the Burlington lines, was left indisputably in the hands of the Hill-Morgan group, where it has ever since remained. These three great railroad systems, the Northern Pacific, the Great Northern, and the Chicago, Burlington and Quincy, constituting nearly twenty thousand miles of railroad, have been known ever since as Hill lines.
Since the dramatic days of the Harriman-Hill contest the history of the Northern Pacific system has been simply a striking reflection of the growth in population and wealth of the great Northwest. The States through which it operates have grown with astounding rapidity during the past two decades; small cities have spread into great centers of manufacture and trade; hundreds of smaller towns have sprung up; natural resources of untold value have been developed. In the meanwhile the Northern Pacific has forged ahead in its earnings and profits, and the stock of the road has come to be known as one of the highest class of investment issues. Although new competition appeared, in both the local and the through business of the company—notably by the extension of the St. Paul system largely through Northern Pacific territory to the Puget Sound region—the superior modern business management of James J. Hill, backed by the strong resources of the Morgan banking interests, made the Northern Pacific one of the standard railroad systems of America.

CHAPTER VIII. BUILDING ALONG THE SANTA FE TRAIL

The Santa Fe Route, or the Atchison, Topeka and Santa Fe Railroad, which has in modern times developed into one of the largest and most profitable railroad systems in this country, was projected long before the idea of a transcontinental line to the Pacific coast had taken full possession of men's minds. As early as 1858 a plan was worked out for the construction of a line of about forty miles within the State of Kansas to connect what were then the obscure and unimportant townships of Atchison and Topeka. At that time not a mile of railroad had been built in Kansas or in any Territory west of that State, except on the Pacific coast, to which there had been an enormous immigration occasioned by the wonderful discovery of gold.
The outbreak of the Civil War delayed the undertaking of the Atchison-Topeka line, and nothing more was done until 1868. In that year new interests took control of the enterprise and acquired rights for its extension through southwestern Kansas in the direction of Santa Fe, the capital of the Territory of New Mexico. The company, which had originally been the Atchison and Topeka, now changed its name to the Atchison, Topeka and Santa Fe and obtained from the Government a very valuable land grant of 6400 acres for every mile constructed, the only condition being that within ten years the line should be completed from Atchison to the western border of Kansas. The plan involved the building of only 470 miles of road, which when finished would assure the company nearly three million acres of land within the State of Kansas.
A decade would seem to be ample time for the construction of this comparatively short railroad, particularly with the inducement of so extraordinary a land grant. Not only the Union Pacific but the Central Pacific and Kansas Pacific—all built within this decade—had to accomplish far more construction in order to secure their respective grants, and yet they had their complete lines in operation years before the Santa Fe had fifty miles of track in actual commission. The reason for this delay was of course a financial one. The other roads had all received government aid in cash or securities in addition to land grants. But the Atchison line was, from the start, thrown on its own resources in raising capital, and it was not until late in 1869—nearly a year after the opening of the Union Pacific to the coast—that any construction work whatever was done. In that year the section from Topeka to Burlingame, consisting of about twenty-eight miles, was opened for traffic, and a year later the extension to Emporia was finished, thus making a total of sixty-one miles under operation.
The terms of the land grant provided that the entire line across Kansas should be completed by June, 1873. When by 1872 only sixty-one miles of track had been built, the company still had over four hundred miles to go within ten months if it expected to obtain the land grant. But so energetically did the owners of the property work from that time on that within seven months they had reached the eastern boundary of Colorado and had thus saved the grant.
But like most of the Western railroads built in those early days the Santa Fe property was, in a sense, ahead of its time. The rapidity with which it shot across the State of Kansas in 1872 was equaled only by the promptness with which it fell into financial straits. No sooner had its complete line been opened for traffic than the panic of 1873 occurred; the company became embarrassed by a large floating debt; and a compromise had to be made with the bondholders whereby a postponement of a year's interest was arranged.
No attempts were made to extend the Santa Fe during the long period of depression following the panic of 1873. The road ended in 1872 at the Colorado state line, and during the next few years the only building of importance was a western spur to connect with the Denver and Rio Grande at Pueblo, thereby giving an outlet to the growing city of Denver and the rapidly developing mining regions of Colorado. About 1880, construction was resumed in a leisurely way, down the valley of the Rio Grande into New Mexico and in the direction of Albuquerque. In this extension, as in later building, the line of the old Arizona trail was usually followed. One writer has declared that "the original builders of the Atchison followed the line of the Arizona trail so religiously that if the trail skirted a ten-foot stream for a quarter of a mile to strike a shallow spot for fording, the railroad builders did likewise, instead of bridging the stream where they struck it, and where the trail ran up a tree or hid in a hollow rock to avoid the wolves or savages, the railroad did the same!"
The traveler of a generation ago over this particular section of the Santa Fe lines might have felt that there was some truth in this criticism; but the Atchison has long since cut out these idiosyncrasies of early construction, and the main line in this section of New Mexico is now noted for alinement and absence of curves and grades.
The builders of the Santa Fe lines in the early days no doubt planned ultimately to penetrate to the Pacific coast, knowing that the real opportunity for the road lay in that direction. The Southwest was yet but sparsely settled; and no railroad which had as its objective the plains or alkali deserts of Arizona or New Mexico could thrive—at least it could not for decades to come. And yet in the early eighties the real objective of the Atchison system had not been determined. Having passed its original objective point, Santa Fe, the road had reached Albuquerque, but it could not afford to stop there. Through traffic it must have or die. New Mexico, with its thin population and its total lack of development, could not supply traffic in sufficient amount even to "feed the engines."
To extend somewhere, then, was an imperative necessity. But whither? Several routes were under consideration. The Southern Pacific lines had worked eastward to El Paso on the Mexican border, several hundred miles due south from Albuquerque, and it looked feasible to extend the Atchison to that point and arrange a traffic agreement with the Southern Pacific, or to build an extension through New Mexico to Deming and then westward along the river valleys and down into Mexico to Guaymas on the Gulf of California. It was possible, in the third place, to build directly west from Albuquerque through Arizona and Southern California to the coast. Ultimately all of these plans were carried out.
The first extension of the Santa Fe was to Deming, New Mexico, where in March, 1881, its tracks met those of the Southern Pacific, and by agreement the company secured the use of the Southern Pacific to Benson, Arizona. From the first this new through route to the Pacific began to pay handsomely. Later on the line into Guaymas, Mexico, was added by the purchase of the Sonora Railway. Soon afterward the Santa Fe secured from the St. Louis and San Francisco Railway a half interest in the charter of the Atlantic and Pacific, a company which planned to build through to the coast. Meanwhile the St. Louis and San Francisco had been acquired by the Gould and Huntington interests, which, as the owners of the Texas and Pacific and the Southern Pacific systems, naturally opposed the plans of the Santa Fe. The matter was compromised by the agreement of the Santa Fe to build no farther west than the Colorado River, where the Santa Fe was to be met by an extension of the Southern Pacific line from Mojave, California.
This arrangement proved unprofitable to the Santa Fe, for the Southern Pacific naturally diverted traffic to El Paso and Ogden. A new arrangement was accordingly made in 1884, involving the purchase, by the Atlantic and Pacific, of the Southern Pacific division between Needles and Mojave, the obtaining of trackage rights between Mojave and San Francisco, and the use of the Southern Pacific terminals at San Francisco. To assure a connection with the coast in Southern California, the Santa Fe built a line to Colton, acquired the California Southern Railway from Colton to San Diego, and effected an entrance to Los Angeles by leasing the Southern Pacific tracks from Colton.
The Santa Fe had now reached the Pacific coast over its own lines, but it was handicapped by poor connections with the East. Its next move therefore was eastward to Chicago, where it acquired the Chicago and St. Louis Railroad between Chicago and Streator, Illinois, and then constructed lines between the latter point and the Missouri River. During the same year the company opened branches southward to the Gulf of Mexico, until by May, 1888, the entire system comprised 7100 miles.
This rapid expansion of the property, combined with extravagance in management and a reckless policy in the payment of dividends, brought the company into financial difficulties within a year after the completion of the system. Unprofitable branches had been built, and these had become an immediate burden to the main system. It is the same story that has been told of most of the large railroads of those days. Strenuous efforts were made to save the property from a receivership, and a committee was appointed in September, 1889, to devise ways and means of reform and reorganization.
The new management of the Santa Fe was a rational one and substantially reduced the obligations of the road. Had its spirit been maintained, a second failure and reorganization a few years later would not have been necessary. New interests, however, came into the property, and, though it was hoped that they would support a conservative policy, the former programme of expansion was resumed until in 1890 the St. Louis and San Francisco system was merged with the Santa Fe on a very extravagant basis. Within a year it was clear that the St. Louis and San Francisco would prove more of a liability than an asset. During the same time the less important purchase of the Colorado Midland Railway also turned out to be a poor investment.
The next four years were marked by more bad financial management which culminated in the failure of the reorganized company. In 1892 an exchange of income bonds for fixed interest-bearing bonds so increased the fixed charges of the company that, as a result of the panic of 1893 and its ensuing depression, the great Santa Fe system suddenly found itself in the hands of a receiver. The president, John W. Reinhart, had persistently asserted throughout 1893 that the company was financially sound; but an examination of its books subsequently made in the interest of the security holders disclosed gross irregularities, dishonest management, and manipulation of the accounts.
During the year 1894 the property was operated under the protection of the courts, and early in 1895 a new and comprehensive scheme of reorganization was carried out. This latest plan involved dropping the St. Louis and San Francisco system, the Colorado Midland, and all other unprofitable branches; it wiped out the floating debt; it supplied millions of new capital; and it enabled the succeeding management at once to build up and improve the property.
At the head of the new company was placed Edward P. Ripley—a railroad manager of great executive ability and a practical, broad-minded business man of the modern type, who has ever since remained president of the road. The history of the Santa Fe since 1895 has been closely identified with Ripley's business career, and its record during these two decades has been an enviable one. Steady progress from year to year in volume of business, in general development of the system, in improvement of its rights of way, terminals, and equipment, has characterized its history through periods of depression as well as times of prosperity. Its resources have grown to vast totals; its credit equals that of the best of American railroads; its stocks and bonds are prime investments; and each year it pours millions of dollars of profits into the hands of its stockholders.

CHAPTER IX. THE GROWTH OF THE HILL LINES

The States which form the northern border of the United States westward from the Great Lakes to the Pacific coast include an area several times larger than France and could contain ten Englands and still have room to spare. The distance from the head of the Great Lakes at Duluth to the Pacific coast in the State of Washington is greater than the distance from London to Petrograd or the distance from Paris to Constantinople, and three times the distance from Washington, D.C., to Chicago.
Fifty years ago these States, with the single exception of Wisconsin, were practically a wilderness in which only the Indian and buffalo gave evidences of life and activity. No railroads penetrated the forests or the mountain ranges. Far southward some progress in the march of civilization had been made; the Union Pacific had linked the West with the East before the eighth decade of the century began, and the Northern Pacific project was being painfully pushed through the intermediate tier of States during the seventies. But the material resources of the Great Northwest had still to be discovered.
When the Northern Pacific Railway failed in 1873, the crash involved a little railroad known as the St. Paul and Pacific, running out of St. Paul for a couple of hundred miles westward, with a branch to the north joining the Northern Pacific at Brainerd, Minnesota. The St. Paul and Pacific had been acquired in the interest of the Northern Pacific some years earlier but was now regarded as a property so worthless that its owners would be glad to get rid of it, if only they could find a purchaser rash enough to take it over.
During the three years following the panic of 1873 the crops of Minnesota were practically eaten up by the grasshoppers, and poverty reigned among the farmers. At that time a short, stocky man with long hair, one blind eye, and the reputation of being the greatest talker in town, kept a coal and wood store in St. Paul. His name was James J. Hill. For years he had been a familiar figure, sitting in his old chair in front of his store and discoursing on current events. This man was not only an interesting talker; he was a visionary, a dreamer—and one of his dreams was to buy the St. Paul and Pacific Railroad and to transform it into a real railway line. Nearly twenty years had passed since he had drifted in, an eighteen-year-old Scotch-Irish boy from Ontario, and had begun work in a steamship office on the levee at St. Paul. Now, in 1876, he was thirty-eight years old and a town character. And the town felt that it had his measure. He had already tried a variety of occupations, and at this time was agent for lines of steamboats on the Mississippi and the Red River. Everybody knew him and liked him, but no one took him very seriously. The idea of his controlling the St. Paul and Pacific was even amusing.
Now the most promising part of the St. Paul and Pacific when it failed in 1873 was the line from St. Paul to Breckenridge on the Red River. Hill was the Mississippi steamboat agent at one end; at the other, an old Hudson Bay trader, Norman W. Kittson, ran two little old stern-wheel steamboats from Breckenridge to Winnipeg. A large part of the freight that Hill and Kittson handled was for the Hudson's Bay Company. It came up the Mississippi, went across on the St. Paul and Pacific to Breckenridge, and then down the Red River on Kittson's steamboats until it was received at Fort Garry, Winnipeg, by Donald Alexander Smith, then commissioner for the Hudson's Bay Company.
Smith, who became afterwards Lord Strathcona and High Commissioner for Canada in England, was a tall, lean, urbane Scotchman with a soft manner and a long red beard. In 1876 he was fifty-six years old, with a life of strange, wild adventure behind him. He had gone when little more than a boy to Labrador to take charge of a station of the Hudson's Bay Company. Among the northern Indians he stayed for thirteen years. In the sixties he was practically king over all the savage territory of the company along the waters entering Hudson Bay. By the seventies he was a man of means and he had some influence in the new Dominion of Canada.
It would be a great advantage to Smith to have a good railroad from St. Paul to Winnipeg as the Red River boats were frozen up in the winter and the service on the St. Paul and Pacific, under the receiver, was impossible. So Smith listened with favor to Hill's project of getting hold of the St. Paul and Pacific and making a real railroad out of it. And whenever Smith went to Montreal he talked the matter over with his cousin George Stephen—later Lord Mount Stephen—who was the head of the Bank of Montreal. In 1877 Stephen and Richard B. Angus, the general manager of the Bank, went to Chicago on business. While there, they had two weeks' time on their hands, and tossed a penny to decide whether to run down to St. Louis or up to St. Paul. The penny sent them to St. Paul. "I am glad of that," said Stephen; "it will give us a chance to see the prairies and look over that St. Paul and Pacific road that Donald Smith is always talking about."
When they arrived in St. Paul, James J. Hill took them over the line to Breckenridge. The country had been scoured by the grasshoppers and looked like the top of an old rusty stove. But Stephen was a broad-minded man, wise enough to know that the pest of grasshoppers could not last forever. He was greatly impressed with the ultimate possibilities of the soil and, under the hypnotic influence of Hill's eloquence, became quite enthusiastic over the scheme for getting hold of the railroad; but, as it would evidently involve millions, he didn't see how it could be done.
The road had originally been financed by bonds sold largely in Holland, and to do anything at all it was necessary to get in touch with these Dutch bondholders. In 1877 Stephen went over to Amsterdam and secured an option on the bonds at thirty cents on the dollar—less than the accrued interest which was due and unpaid on them. He then came back to America, conferred with John S. Kennedy at New York, who represented both Dutch and American bondholders, and brought Kennedy into the combination.
In the spring of 1878 the St. Paul and Pacific was taken over. People still smiled at Hill and wondered how he had induced a hard-headed bank president like Stephen to put up the money. Nobody in St. Paul believed in the future of the road. Even the syndicate's attorneys, when offered a choice between taking $25,000 in cash or $500,000 of the new road's stock for their services, preferred the cash. Had they taken the stock and held it for thirty years, they would have had, in principal and interest, some $30,000,000.
To the surprise of everybody, including Hill and his friends, the grasshoppers suddenly disappeared in the early summer of 1877 and never came back. That summer saw the biggest wheat crop that had ever been harvested in Minnesota. "Hill's Folly," as it was afterwards called, with its thirty locomotives and few hundred cars, was feverish with success. Hill worked every possible source to get extra cars and went all the way to New York to buy a lot of discarded passenger coaches from the Harlem Railroad. By the end of the season it was evident to everybody that the St. Paul and Pacific was going to have a career and that "Jim" Hill's dream was coming true.
Immediately the fortunate owners began to plan for the future. They had acquired the road at an initial cost of only $280,000 in cash. In the following year they advanced money for the completion of the unfinished section, as necessary to obtain the benefit of a generous grant of land from the State. Then, in 1879, having acquired full possession of the property, and having several millions of dollars in profits, they issued bonds for further developments. This gave them sufficient basis to enlarge their scheme greatly, and in the formation of the St. Paul, Minneapolis and Manitoba Railroad, they created $15,000,000 of stock, which was divided equitably among Hill, Stephen, Angus, Smith, Kennedy, and Kittson. This stock was all "water," but the railroad prospered so extraordinarily in the succeeding few years that by 1882 the stock was worth $140 a share. And in 1883 they issued to themselves $10,000,000 of six per cent bonds for $1,000,000—a further division of $9,000,000, coming out of nothing but good will, earning power, and future prospects.
The decade from 1880 to 1890 witnessed a steady growth of the system formed in 1879 under the name of the St. Paul, Minneapolis and Manitoba. The 600 odd miles which it embraced when Hill and his coterie made their big stock division had grown in 1890 to 2775 miles. It then consisted of a main line reaching from St. Paul and Minneapolis across Minnesota and the northern part of North Dakota, far into Montana, with a second main line from Duluth across Minnesota to a junction with the St. Paul line in North Dakota, besides numerous branches reaching points of importance in both these States.
But the development of the Hill properties had by no means reached its limit at this time. Hill's dream had been to construct a through line across the northern tier of States and Territories to the Pacific, and this plan had been constantly in his mind while he was building up the system in Manitoba. The original line running up into Manitoba and reaching Winnipeg was all very well as a start. It had paid so well that the original group of men had become millionaires almost overnight. But Hill meant to show the public that, after all, the early success was only an incident and merely a stepping-stone to the really great thing.
Practical railroad men everywhere ridiculed the idea of a railroad running across the far northern country, climbing mountain ranges, traversing hundreds of streams and extending for great stretches through absolutely wild and uninhabited regions. Especially did they deem it absurd to attempt such an undertaking without government aid, subsidies, or grants of land, pointing to the experience of such roads as the Union Pacific, Northern Pacific, and Santa Fe. All these had received financial assistance and large land grants, and yet all had gone through long periods of financial vicissitude before they had become profitable and stable enterprises.
But Hill was more farseeing than his critics. In 1889, the name of the company was changed to the Great Northern Railway, and under this title the extension to the coast was rapidly carried forward and was opened in the panic year of 1893. When all the other transcontinental lines went into bankruptcy, Hill's road not only kept out of the courts but actually earned and paid annual dividends of five per cent on its stock. The five years from 1896 to 1901 were years of uninterrupted prosperity for the Great Northern Railroad. Each year its credit rose; each year it grew to be more of a force in the Western railway situation. In these years the control of the property had somewhat changed and a few of the original promoters had died or had withdrawn. But Hill, Lord Strathcona, Lord Mount Stephen, and John S. Kennedy of the original group, all held their large interests, and Hill in particular had added to his holdings as the years had gone by.
The secret of Hill's striking success with his Western extension was the method by which the line was constructed. Hill had a theory that it was far better to go around mountains and avoid grades than to climb them or to bore through them; it was always better to find the route which would make long hauls easy and economical. He thus built his road with the idea of keeping down the operating costs and of showing a larger margin of profit than the others. From the very start the Great Northern was noted for its low ratio of operating expenses and its comparatively long trains and heavy trainloads. It was by this method that it really made its money.
By the year 1901 the Great Northern Railway absolutely controlled its own territory. But it was still handicapped by lack of an independent entrance into Chicago, as its eastern lines terminated at Duluth and St. Paul. At the western end also, the situation was unsatisfactory. It seemed important for the Great Northern to control a line of its own into Portland, Oregon, because the Northern Pacific Railroad, which, as we have seen, had been reorganized several years before by the Morgan interests, had been rapidly extending its lines in Oregon and Washington. Hill and his associates, therefore, had been quietly buying a substantial interest in the Northern Pacific property and thus, in the course of time, had come into closer relations with the Morgan group in New York. Soon afterward, under Hill's influence, the Northern Pacific began the construction of further extensions in Oregon and reached into territory that the Harriman interests in the Union Pacific Railroad had regarded as their own. This move created much friction between the Harriman and Hill groups, and in order to forestall danger Harriman in turn began quietly accumulating an interest in the Northern Pacific property by purchases in the open market.
The story of the battle royal between the Hill and Harriman interests will be told in a subsequent chapter. It is not necessary to repeat the history of the famous corner of 1901 nor of the compromise effected by the formation of the Northern Securities Company. The final result of this contest was the complete harmonizing of the Western railroad situation, so far as the Hill and the Harriman interests were concerned. In the succeeding years the Great Northern system penetrated to the heart of Manitoba and constructed lines through British Columbia to Nelson and Vancouver. It built other branches to Spokane, Washington, and Helena and Butte, Montana. Moreover by the discovery of extensive ore deposits on the lines of the company in northern Minnesota and by subsequent purchases of other mines, the Great Northern acquired control of about sixty-five thousand acres and hundreds of millions of tons of iron ore. All the properties so controlled were leased on a very profitable basis to the United States Steel Corporation. The Great Northern Railroad itself did not retain control of the ore lands but, through a trusteeship, gave a beneficial interest in them to its stockholders in the shape of a special dividend.
The profits under this lease promised to be very large in the course of time, but the Steel Corporation had the option to cancel after a five-year period, and in 1912, as the result of a United States Government suit for the dissolution of the Steel Corporation, the lease was canceled. Since that time the trustees of the ore lands have executed other leases, and the Great Northern ore certificates are bringing in a substantial return to their owners.
The three Hill lines—the Great Northern, the Northern Pacific, and the Chicago, Burlington and Quincy—have been unusually profitable. The Great Northern and the Northern Pacific have steadily paid liberal dividends to their stockholders on increasing amounts of capital stock; and the Burlington, whose whole stock is owned by these two roads, has also handed over liberal profits year by year, at the same time accumulating an earned surplus of more than one hundred million dollars and spending an almost equal amount of profits on the improvement and maintenance of the property. The Burlington today controls the Colorado Southern, which extends southward from the Burlington lines in Wyoming, passing through Denver, Pueblo, Fort Worth, and other points southward to the Gulf.

CHAPTER X. THE RAILROAD SYSTEM OF THE SOUTH

In the year 1856 a small single-track railroad was opened from Richmond to Danville, Virginia. This enterprise, like many others in ante-bellum days, was carried out largely with funds supplied by the State. As long afterwards as 1867, three-fifths of the stock was owned by the State of Virginia, but soon after this time the State disposed of its investment to a railroad company operating a line in North Carolina from Goldsboro westward to Greensboro, and projected southward to Charlotte. In modern times, this little road, like the Richmond and Danville, has become an integral part of the Southern Railway system, but in those days it was controlled, curiously enough, by the Pennsylvania Railroad Company.
After 1867 the new owners of the Richmond and Danville began aggressively to extend their lines. By leasing the North Carolina Railroad, a small property forming a link with the Greensboro line, they created a through route from Richmond to Charlotte. By 1874 they had built the road southward to Atlanta, Georgia, and had thus formed the first continuous route from Richmond to that city. Because of the extreme disorder and depression in the South during the years after the Civil War the line did not prosper and was sold under foreclosure about 1875. But the company was reorganized in 1878 and acquired the Charlotte, Columbia and Augusta, thus extending its lines into the heart of South Carolina and tapping a rich territory. During these early years the Pennsylvania Railroad interests, which still held control, supplied the funds necessary for making improvements.
At the same time that the Richmond and Danville was linking up the commercial centers of the southern Atlantic seaboard, another system—known as the East Tennessee, Virginia and Georgia—was being built up in the Appalachian Mountains to the west. This property and its predecessors had to some extent been state-owned enterprises at first, but in 1870 the Pennsylvania Railroad interests acquired control. A holding company called the Southern Railway Securities Company was now formed for the purpose of controlling all the Pennsylvania Railroad interests south of Washington. Besides the properties mentioned, this Securities Company soon obtained several other Atlantic seaboard properties extending from Richmond to Charleston, and also the Memphis and Charleston Railroad, running from Memphis to Chattanooga.
Thus at this early day a considerable railroad system had been welded together in the South, reaching many points of importance and forming direct connection at Washington with the northern properties of the Pennsylvania system. Had this experiment been successful, we would perhaps today reckon the great Southern Railway system as part of the Pennsylvania group. But the outcome was disappointing; the roads did not prosper; and soon the poorer sections began to default. The Pennsylvania then disposed of its interests and left the roads to shift for themselves.
The East Tennessee was the best of these minor lines, and in 1877 it began to acquire others extending through the South. Soon it had penetrated the heart of Alabama, reaching what is today known as the Birmingham district. Additional extensions were made to Macon and Rome, Georgia, and on the north an alliance was arranged with the Norfolk and Western, while with a view to securing some of the business of the West, a connection was constructed at Kentucky-Tennessee state line. Such was the condition of the East Tennessee property by the end of 1881. In the meantime the Richmond and Danville had practically stood still.
About this time a definite revival set in throughout the South as the long-drawn-out period of depression following the war came to an end. Railroad activity revived, and both the East Tennessee, Virginia and Georgia and the Richmond and Danville roads passed into the hands of new and more aggressive interests. The new owners constructed the Georgia Pacific, which ultimately stretched across Alabama and Mississippi. To finance this enterprise and to consolidate their interests, a new holding company—the Richmond and West Point Terminal Railway and Warehouse Company—was formed in 1881 with large powers and authority to acquire the stocks and bonds of railroad properties in many Southern States. In addition to the properties already named, the Virginia Midland Railway was now acquired, and by 1883 the entire system had been merged under this organization. The company also secured the control of a line of steamboats running from West Point, Virginia, to Baltimore, and made close traffic arrangements with the Clyde line of steamers running between New York and Philadelphia and all important Southern points.
The personality at the head of the Richmond and West Point Terminal Railway and Warehouse Company was Calvin S. Brice, a man who had become increasingly prominent in railway affairs in the Southern States. Brice was something of a genius at combination and by 1883 had linked together and solidified the various properties in a very efficient manner. Nevertheless the competitive conditions of the time, combined with the necessarily more or less crude and hazardous methods adopted in financing and capitalizing the enterprise, prevented the credit of the organization from reaching a sound and secure level. The Tennessee properties especially proved an encumbrance, and they were almost immediately threatened with bankruptcy. Brice therefore decided to reorganize these subsidiary lines, and a new company called the East Tennessee, Virginia and Georgia Railway took over this section of the system in 1886.
In the meanwhile the Richmond and Danville properties, which were themselves becoming burdened with an ever growing debt, gave the Brice interests constant trouble. A large amount of the stock of the Richmond and Danville, as well as most of its bond issues, remained still outstanding in the hands of the public. Consequently the only way in which Brice and his friends could save the Richmond and Danville property from completely breaking up was to merge it more closely with the holding company in some way. But the credit and standing of the holding company itself were anything but high, for in addition to paying no dividends it had piled up a heavy floating debt of its own and had a poor reputation in Wall Street.
The situation thus becoming acute, the management carried through a remarkable stock-juggling plan. Instead of merging the Richmond and Danville directly into the West Point Terminal Company, the directors secretly decided to turn the Terminal Company assets over to the Richmond and Danville without apprising the stockholders of the Terminal Company. In conformity with this plan, early in 1886 the Richmond and Danville leased the Virginia Midland, the Western North Carolina, and the Charlotte, Columbia and Augusta railroads, and later in the year the Columbia and Greenville and certain other small lines. At about the same time the Richmond and Danville obtained in some unknown way large amounts of the Terminal Company stock, a portion of which it now issued in exchange for stocks and bonds of certain of these subsidiary companies which it had leased. Having carried through these transfers, the Richmond and Danville then threw the remainder of its Terminal Company stock on the market, where it was bought by investors who knew nothing about these secret transactions.
The Terminal Company was now left high and dry so far as the Richmond and Danville was concerned. But at this juncture a surprising thing happened. The management of the Terminal Company, in its turn, began to buy shares of Richmond and Danville stock and in a short time regained its former control. This shifting of power exactly reversed the situation which had previously existed, when the Terminal Company itself had been controlled by the Danville Company. These changes were followed by a further move on the part of the Brice and Thomas interests, which now formed a syndicate and turned over to the Terminal Company a majority of the stock of the East Tennessee Company for $4,000,000 in cash and a large amount of new Terminal Company stock.
When these transactions had been accomplished, the Terminal Company found itself once more securely in control of the entire system, and the Brice and Thomas interests had incidentally very considerably increased their fortunes and also their hold on the general situation. From this time, the Terminal Company went aggressively forward in an ambitious plan for further expansion. By acquiring control of the Central Railroad and Banking Company of Georgia, the Terminal management was involved with new financial interests which immediately sought to control the system and to eliminate the Brice and Thomas group. The consequent internal contest was adjusted, however, in May, 1888, by electing as president John H. Inman, a man who had been identified with the Central Railroad of Georgia system.
The Richmond Terminal system now put in motion further plans for expansion. In 1890 it acquired a system of lines extending south from Cincinnati to Vicksburg and Shreveport, known as the Queen and Crescent route, and in the meantime made a close alliance with the Atlantic Coast Line system. By the end of 1891 the Richmond Terminal system embraced over 8500 miles of railroad, while the Louisville and Nashville, the next largest system in the Southern States, had only about 2400 miles.
But as 1891 opened, the vast Richmond Terminal system was perilously near financial collapse. Notwithstanding the great value of many of the lines, its physical condition was poor; the liabilities and capitalization were enormous; and much of the mileage was distinctly unprofitable. About this time many disquieting facts began to leak out: during the previous year the Richmond and Danville had been operated at a large loss, and this fact had been concealed by deceptive entries on the books; the dividends, paid on the Central Railroad of Georgia stock had not been earned for some years; and the East Tennessee properties were hardly paying their way.
Various investigating committees were now appointed, and finally a committee headed by Frederic P. Olcott of New York took charge and worked out a complete plan of reorganization. The scheme, however, met with strenuous opposition, and thus matters dragged on into the panic period of 1893, when the entire system went into bankruptcy and into the hands of receivers. The various sections were operated separately or jointly by receivers during this unsettled period, and it looked for some time as though an effective reorganization which would prevent the properties from entirely disintegrating could not be successfully accomplished.
In the dark days of 1893, after Olcott and the Central Trust Company had failed to effect a reorganization of the Richmond Terminal system, a new interest came to the rescue, represented by the firm of J. P. Morgan and Company, whose growing reputation was due to the unusual personality of J. P. Morgan himself. He was essentially an organizer. The railroad properties which had become more or less identified with the Morgan interests had for the most part prospered. It was felt that Morgan's banking-house was the only one in Wall Street which might be equal to the task. The proposal was made to him; he did not invite it. In fact, it is said that for some time he was much opposed to taking hold of this disintegrated and broken-down system of railroads operating largely in poor and unprogressive sections, populated for the most part by negroes. Said Morgan, "Niggers are lazy, ignorant, and unprogressive; railroad traffic is created only by industrious, intelligent, and ambitious people."
After months of discussion, however, Morgan finally agreed to undertake the task, and out of the previous chaos there emerged the Southern Railway Company, which has been closely identified with Morgan's name ever since. Probably of the many railroad systems which Morgan reorganized from 1894 down to the time of his death, no system has become more distinctly a Morgan property than the Southern Railway Company.
The plan of reorganization whereby this great aggregation of loosely controlled and poorly managed Southern railroads was welded together into an efficient whole was a very drastic one in its effect on the old security holders. Debts were slashed down everywhere, assessments were levied, and old worthless stock issues were wiped out. Valueless sections of mileage were lopped off, and an effort was immediately made to strengthen those of real or promising value. Millions of dollars of new capital were spent in rebuilding the main lines; terminals of adequate scope were constructed in all centers of population; and alliances were made with connecting links with a view to building up through traffic from the North and the West.
The first ten years of the Southern Railway system under the Morgan control were practically years of rebuilding and construction. While after ten years of work the main system still radiated through most of the territory already occupied in a crude way in 1894, yet it had acquired a large number of feeders and smaller railroads in other sections. The Mobile and Ohio, operating with its branches about one thousand miles from Mobile to St. Louis, Missouri; the Georgia Southern and Florida, furnishing an important connection from the main system to various points in the State of Florida; the Alabama Great Southern, operating in and near the Birmingham district of Alabama—all these properties were molded into the system during these years. The system was then rounded out toward the North and consolidated through joint control, with the Louisville and Nashville, of the Chicago, Indianapolis and Louisville Railroad, which operated lines northward into Ohio and Illinois and on to Chicago. Thus, with the lines of the Queen and Crescent route running southward from Cincinnati to New Orleans, the system secured a direct through line from its various southern points to the shores of the Great Lakes.
In addition to these developments, the management of the Southern Railway system arranged direct connection with Washington through the joint acquisition with other lines of the Richmond, Fredericksburg and Potomac; it made traffic arrangements with the Pennsylvania and the Baltimore and Ohio systems to Baltimore, Philadelphia, and New York; and it also developed close alliances with the coastwise steamships plying northward from various Southern points.
In the reorganization of 1894 the Central of Georgia Railway system was cut off and separately reorganized, although it remained under the control of Morgan for a number of years. Finally in 1907 Morgan sold his Georgia properties to Charles W. Morse. They subsequently passed to Edward H. Harriman, who afterwards merged them into the Illinois Central system, under which control they have since remained.
As compared with the old Richmond Terminal aggregation with its broken-down rails and roadbed, poor equipment, and miserable service, the modern Southern Railway system shows startling changes. The Southern States have grown enormously in population and wealth during the last generation; the industrial activities of the South at the present time are elements of large importance to the country as a whole. Cities have vastly increased in population; new towns and manufacturing districts have been built up; and at the present there is scarcely a mile of unprofitable railroad in the entire 9000 miles under operation. In recent years large soft coal deposits have been discovered and developed on many of the branch lines, and today the coal tonnage of the Southern Railway is exceeding the relatively unstable lumber tonnage of two or three decades ago.

CHAPTER XI. THE LIFE WORK OF EDWARD H. HARRIMAN

In a previous chapter there has been related the early history of the great line that first joined the Atlantic and the Pacific Oceans—the Union Pacific. But the history of this property in recent years is almost as startling and romantic as its story in the sixties and seventies. It was not until recent days that the golden dreams entertained by these early builders came true. The man who really reaped the harvest and who at the same time gave the Union Pacific that position among American railroads which its founders foresaw was the last, and some writers think, the greatest of all American railroad leaders.
The Union Pacific, a bankrupt railroad in 1893, lay quiescent under the stress of the hard times that lasted until 1898. The long story of its tribulations hardly made it a tempting morsel for the men who were then most active in the railroad field. In 1895 or 1896 the several protective committees which had been appointed to look after the interests of stockholders and defaulted bondholders had tried to induce J. P. Morgan to undertake the reorganization, but he had refused. To reorganize the Union Pacific meant that not far from one hundred millions of new capital would sooner or later have to be supplied, and there was no other banking-house in America at that time which seemed strong enough for the task. Smaller concerns were all involved in the Morgan syndicates or in other undertakings, and a combination of these at the moment seemed out of the question.
About this time the German-Jewish bankinghouse of Kuhn, Loeb and Company began looking into the situation. Kuhn, Loeb and Company were known as a very conservative but very rich concern with close connections in Frankfort and Berlin. Though it had been long established in New York it had not been identified with the railroad reorganization movement nor had it been prominent as an investing or underwriting institution. But now the active partner of the business, Jacob H. Schiff, set out seriously to persuade the various committees to adopt a plan of reorganization which he had devised. Though he made some progress, he soon found much secret opposition and thought that Morgan might be quietly attempting to secure the property. Morgan, however, was not interested. The mystery was still unsolved.
The fact was that Edward H. Harriman, who for some years past had been a powerful influence in the affairs of the Illinois Central Railroad but who was unknown to the average Wall Street promoter and totally unheard of throughout the country, had made up his mind to reorganize the Union Pacific Railroad. He therefore began to work quietly with various interests in an attempt to tie up the property. But soon he, like Schiff, encountered serious opposition. He also immediately jumped to the conclusion that Morgan was secretly at work, and he called on Morgan for the facts. Morgan replied, as he had replied to Schiff, that he was not interested, but that he wished Harriman success.
As Schiff continued to meet with difficulty, he soon called on Morgan again. Again Morgan replied that he was not interested. "But," he said, "I think if you will go and see a chap named E. H. Harriman you may find out something."
Who was Harriman? Schiff had hardly heard of him and had never met him. How could a small man like Harriman, with no money, no powerful friends, no big financial backing, reorganize a great system like the Union Pacific Railroad? The idea seemed ridiculous. Nevertheless, as the opposition continued, Schiff soon got in touch with Harriman. In the course of a conference, he warned this daring interloper to keep his hands off the Union Pacific. But Harriman was not moved by threats. On the contrary, he insisted that Schiff should leave the Union Pacific alone; that he himself had already worked out his plans to reorganize it. Schiff laughed at this idea, termed it chimerical, and asserted that Kuhn, Loeb and Company were easily able to obtain the needed one hundred millions or more through their foreign connections on a basis of from four to five per cent, and that in America no such sum of new capital could at that time be raised through banking activities at better than six or seven per cent.
Harriman then sprang his surprise on Schiff. For some years he had been financially interested in the affairs of the Illinois Central. This property had at that time higher credit than any other American railroad; it had raised large sums of capital in Europe on as low a basis as three per cent, and on most of its bonds paid only three and one-half per cent interest. For nearly fifty years the property had been paying dividends with hardly an interruption, and altogether it had an enviable reputation as one of the soundest investments. Harriman's influence in the affairs of the company had been increasing quietly for years; the management had been left almost completely in his hands; and the directors were in effect largely his puppets, and a majority would do his bidding in almost anything he might propose.
Harriman now announced to Schiff that he intended to have the Union Pacific reorganized as an appendage of the Illinois Central. The necessary one hundred millions would be raised by a first mortgage on the entire Union Pacific lines at three per cent, and the mortgage would be guaranteed by the Illinois Central, while the latter company would receive a majority of the new Union Pacific stock in consideration for giving its guarantee.
Here was a poser for Schiff, who saw at once that if Harriman could use the Illinois Central credit in this way, he certainly could carry out his plan. Schiff soon found that Harriman would have no difficulty in using Illinois Central credit. The upshot of the matter was that the two men got together and jointly reorganized the Union Pacific. Harriman was made chairman of the Board of Directors, and Kuhn, Loeb and Company became the permanent bankers for the new railroad system.
Thus with one bound Harriman had leaped to the forefront in American railroad finance and by a bold act which was characteristic of the man. For Edward H. Harriman was not only a hardheaded, practical business builder who like Morgan thought in big figures, but he was also a bold plunger, which Morgan was not. Possessing a vivid imagination, he not only saw far into the future but he also planned far into that same future. Morgan was also a man of vision, but his vision did not carry him far beyond the present. The things Morgan saw best were those immediately before him, while the things that Harriman saw best were at a distance. Morgan's big plans of procedure were based on what he saw in a business way in the near future; he reorganized his railroads with the idea of making them pay their way as soon as possible and of showing a good return on the capital invested. He thought little of what might be the outcome a decade or two hence or of what combinations might later be worked on the chessboard as a result of his immediate moves. Morgan's mind was not philosophical; it was intensely practical.
While Morgan declined the proffered control of the Union Pacific on the theory that it was only a "streak of rust" running through a sparsely settled country and across an arid desert, Harriman dreamed of the great undeveloped West filling up with people during the following generation, of the empty plains being everywhere put under cultivation, and of the arid desert responding to the effects of irrigation on a large and comprehensive scale. He foresaw the wonderful future of the Pacific States—the opening up of natural resources in the mountains, the steady stream of men and women who would ultimately emigrate to this vast section from the East and from foreign lands and who would build up towns and great cities. At the same time, with that practical mind of his, Harriman calculated that the Union Pacific Railroad—situated in the heart of this huge area, having the most direct and shortest line to the Pacific, and with all traffic from the East converging over half a dozen feeder lines to Omaha and Kansas City—would haul enormous amounts of tonnage just as soon as the Western country revived from the depression under which it had been struggling for half a dozen years.
When Harriman took hold of the Union Pacific he had already determined to absorb the Oregon lines, with their tributaries running up into the Puget Sound country and to the Butte mining district; to get hold of the Southern Pacific properties at the earliest possible moment; and to link the Illinois Central in some way to the Union Pacific so that the latter would have its own independent outlets to Chicago and St. Louis. All these plans he ultimately accomplished, as well as many others, some of which his farseeing imagination may have conceived then.
While Harriman was able very promptly to carry through his first scheme and recapture the Oregon lines, which had been separately reorganized as a result of the receivership, he found it a far more difficult matter to secure a dominating interest in the great system of railroads controlled by Collis P. Huntington. Huntington was a hard man to deal with. Himself one of the practical railroad magnates of his time, he also had the gift of vision and undoubtedly foresaw that the ultimate result must be a consolidation of the properties; but he fully expected that his company would absorb the Union Pacific. Had it not been that during the panic period the Southern Pacific had heavy loads of its own to carry and that its credit was none too high, Huntington might then have attempted to gain control of the Union Pacific.
Events finally worked to the benefit of Harriman. When Collis P. Huntington died in 1900, it was in most people's minds only a question of time as to when the powerful Harriman interests would take over the Southern Pacific properties. Consequently there was no surprise when in 1901 announcement was made that the Union Pacific had purchased the holdings of the Huntington estate in the Southern Pacific Company and was therefore in virtual control.
By a master stroke the railroad situation in the West had been radically changed. The Huntington system comprehended many properties of large and growing value, which were now feeling the full benefit of the agricultural prosperity at that time spreading throughout the great Southwest. Aside from this prize, the Union Pacific acquired the main line to the Pacific coast which it had always coveted and thus added to its system over nine thousand miles of railroad and over four thousand miles of water lines, besides obtaining a grip on the railroad empire of this entire portion of the continent not to be readily loosened by competitors.
At the same time that Harriman was strengthening his position on the west and south, the Great Northern and Northern Pacific properties, both now operated under the definite control of James J. Hill, were following a policy of expansion fully as gigantic as that of the Union Pacific. The Great Northern lines operating from Duluth to the Pacific coast had become powerful elements in the Western railroad situation, and Hill had devised many plans for diverting to the north the through traffic coming from the central section of the continent. He had established on the Great Lakes a line of steamships running from Duluth to Buffalo, and was also operating on the Pacific Ocean steamship lines which gave him a connection with Japan, China, and other oriental countries.
After the reorganization of the Northern Pacific Railroad, which fell under the domination of Morgan, the affiliations of the Hill and Morgan interests became very close, and in a short time Hill had as secure a grip on the Northern Pacific as he had always had on the Great Northern. This powerful combination looked like a menace to the Harriman-Kuhn-Loeb interests which controlled the territory to the south and radiated throughout the State of Oregon. When, therefore, the Northern Pacific began a little later to build into territory in Oregon and Washington which the Union Pacific regarded as a part of its own preserves, much bad feeling was engendered between the two interests. Matters were brought to a climax in the spring of 1901 when the Harriman people suddenly made the discovery that the Hill-Morgan combination had been quietly buying control of the valuable Chicago, Burlington and Quincy Railroad, which operated a vast system west and northwest of Chicago, penetrated as far into the Union Pacific main-line territory as Denver, and connected at the north with the eastern terminals of both the Great Northern and Northern Pacific systems. This move meant but one thing to Harriman: the Hill-Morgan interests were trying to surround the Union Pacific and make it powerless, just as the Southern Pacific had attempted to do many years before.
Harriman now played one of his bold strokes. He immediately began to purchase Northern Pacific stock in the open market in order to secure control of that property. It was well known that while the Hill-Morgan alliance dominated the Northern Pacific, it did not actually own a majority of the stock, and to secure this majority was Harriman's purpose. This move would effectually check the invasion of the Union Pacific territory by giving the Harriman interests a voice in the control of the Chicago, Burlington and Quincy.
The price of Northern Pacific common stock soared day after day until on May 9, 1901, it sold at $1000 a share, and a momentary panic ensued. At the time Morgan was on the ocean and could not be reached. His partners were apparently not equal to the emergency. But Harriman was. When the panic reached its height, both interests had purchased far more than a majority of Northern Pacific stock—in contracts for future delivery. It was seen that to insist on the delivery of shares which did not exist would not only bankrupt every "short" speculator, large and small, but would undoubtedly bring all Wall Street tumbling down like a house of cards. So, in the midst of the excitement, the two interests reached a compromise.
The outcome was the formation of the Northern Securities Company with a capital of $400,000,000, nearly all of which was issued to acquire the capital stocks of the Northern Pacific and Great Northern railroads. All the properties, including the Burlington, thus came under the joint control of the Harriman and Hill groups. The division of territory on both the east and the west was worked out amicably: the Northern Pacific abandoned some of its plans for extensions in Oregon, and the Burlington system remained as it was, with the understanding that no extensions should be built to the Pacific coast. Later the Burlington acquired control of a cross-country system, the Colorado Southern, extending south to the Gulf, but to this day has made no attempt to build beyond the lines it owned to Wyoming in 1901.
As is well known, the Northern Securities Company was subsequently declared to exist in violation of the Sherman Anti-Trust Act, and on a decision of the United States Supreme Court in 1904 it was practically dissolved and all its securities were returned to the original holders. This dissolution left the Hill-Morgan interests in undisputed control of the Burlington properties, but harmonious relations had in the meantime been established among the contestants, assuring an equitable division of territory and traffic. The final outcome was that the Union Pacific Railroad Company, which had purchased with its large surplus and by the use of its high credit many million dollars' worth of the capital stocks of the Great Northern and Northern Pacific railroads, received these stocks back after several years of great prosperity and after the appreciation in the market values of the stocks had exceeded $60,000,000. There was no further necessity for holding them and most of the stocks were sold at the high prices of 1905 and 1906, with actual net profit for the Union Pacific Railroad in excess of $50,000,000. No such gigantic financial transaction as this had ever before been carried through by an American railroad corporation.
With an overflowing treasury in the Union Pacific, Harriman immediately turned his face toward the East. It had for years been one of his dreams to control a continuous line of railroad from the Atlantic to the Pacific. As early as 1902 he had all but completed negotiations for the acquisition of the New York Central lines in the interest of the Union Pacific; but this plan had met with opposition from the Vanderbilts and Morgan and had been dropped. Harriman now took advantage of an opportunity which presented itself to acquire for the Union Pacific what was practically a dominating interest in the Baltimore and Ohio, a large block of whose stock was disposed of by the Pennsylvania Railroad. Harriman had already largely added to the Union Pacific's holdings in the Illinois Central. Jointly with the Lake Shore of the Vanderbilt system, the Baltimore and Ohio had, as already described, acquired a dominating interest in the Reading Company, including all the latter company's interests and affiliations as well as its entry into the New York district through control of the Central Railroad of New Jersey. Harriman, therefore, by a single stroke, now found himself in practical possession of a coast-to-coast system of railroads extending all the way from New York to San Francisco, Portland, and Los Angeles, and passing through all the important cities of the country. The Illinois Central system, operating nearly five thousand miles of road southward from Chicago to New Orleans, passing through St. Louis, with an arm reaching out to Sioux City on the west and a network of branches covering the Middle States, had thus become the great link welding together the eastern and western Harriman systems.
Later the Union Pacific acquired large interests in other properties and purchased substantial amounts of stock in the Atchison, Topeka and Santa Fe, the New York Central, the St. Paul, and the Chicago and North Western railroads. It also acquired a dominating interest in the Chicago and Alton property, operating from Chicago to St. Louis, with Western branches. In the panic period of 1907, Harriman personally purchased from Charles W. Morse, who had acquired the property from Morgan a short time before, the entire capital stock of the Central of Georgia Railway, which he later turned over to the Illinois Central. The Central of Georgia lines connect at several points with the Illinois Central and have given the system various outlets on the South Atlantic seaboard.
Harriman died in September of 1909, and with his death the wizard touch was clearly gone. What would have been the later history of the Union Pacific had he lived can be only conjectured. The new management, with Judge Robert S. Lovett at its head, continued the broad and efficient operation which had characterized Mr. Harriman's regime, but it soon abandoned the policy of further growth and expansion. This alteration in policy, however, was perhaps more the result of changing conditions than of relinquishment of Harriman's aims. Many new laws for the regulation of the railways had been passed, and in 1906 the powers of the Interstate Commerce Commission were greatly augmented. A period of reform had now begun, and after 1909 a wave of "progressivism" overspread the country. New interpretations were given to the Sherman Act, and suits were soon under way against all the railroads and industrial combinations which appeared to be infringing that statute. The great Standard Oil and Tobacco trusts were dissolved in this period, and a suit which was brought to divorce the Union Pacific and the Southern Pacific Company was finally decided against the Union Pacific, with the result that the two big properties were separated. The Union Pacific turned a large amount of its Southern Pacific stock holdings over to the Pennsylvania Railroad, in exchange for which it received from the Pennsylvania the remainder of the Baltimore and Ohio stock which the Pennsylvania interests had retained after the sale to the Union Pacific in 1906. Immediately after this, the Union Pacific management, seeing no particular advantage in retaining an interest in the Baltimore and Ohio, gave the shares to its own stockholders in a special dividend.
Thus, since Harriman's death, the Union Pacific Railroad has once more returned to very much its original condition prior to its acquisition of the Southern Pacific. It still controls the Illinois Central and the Chicago and Alton and has investment interests in a large number of other railroads. It is still the premier system of the West and promises to remain so indefinitely; but the bold Harriman touch is gone and will never return.

CHAPTER XII. THE AMERICAN RAILROAD PROBLEM

During the last fifty years the railroad has perhaps been most familiar to the American people as a "problem." As a problem it has figured constantly in politics and has held an important position in many political campaigns. The details that comprise this problem have been indicated to some extent in the preceding pages—the speculative character of much railroad building, the rascality of some railroad promoters, the corrupting influence which the railroad has too frequently exerted in legislatures and even in the courts. The attempts to subject this new "monster" to government regulation and control have furnished many of the liveliest legislative and judicial battles in American history. Farmers, merchants, manufacturers, and the traveling public have all had their troubles with the transportation lines, and the difficulties to which these struggles have given rise have produced that problem which is even now apparently far from solution.
Railroads had been operating for many years in this country before it dawned upon the farmers that this great improvement, which many had hailed as his greatest friend, might be his greatest enemy. It had been operating for several decades in the manufacturing sections before the enterprising industrialist discovered that the railroad might not only build up his business but also destroy it. From these discoveries arose all those discordant cries of "extortion," "rebate," "competition," "long haul and short haul," "regulation," and "government ownership," which have given railroad literature a vocabulary all its own and have written new chapters in the science of economics. The storm center of all this agitation concerned primarily one thing—the amount which the railroad might fairly charge for transporting passengers and freight. The battle of the people with the railroads for fifty years has been the "battle of the rate." This has taken mainly two forms, the agrarian agitation of the West against transportation charges, and the fight of the manufacturing centers, mainly in the East, against discriminations. Perhaps its most characteristic episodes have been the fight of the "Grangers" and their successors against the trunk lines and that of the general public against the Standard Oil Company.
Even in the fifties and the sixties, the American public had its railroad problem, but it was quite different in character from the one with which we have since grown so familiar. The problem in this earlier period was merely that of getting more railroads. The farmer pioneers in those days were not demanding lower rates, better service, and no discrimination and antipooling clauses; they asked for the building of more lines upon practically any terms. This insistence on railroad construction in the sixties explains to a great extent the difficulties subsequently encountered. In a large number of cases railroad building became a purely speculative enterprise; the capitalists who engaged in this business had no interest in transportation but were seeking merely to make their fortunes out of constructing the lines. Not infrequently the farmers themselves furnished a considerable amount of money, expecting to obtain not only personal dividends on the investment but larger general dividends in the shape of cheap transportation rates and the development of the country. Even when the builders were more honest, their mistaken enthusiasm had consequences which were similarly disastrous. The simple fact is that a considerable part of the Mississippi Valley, five or ten years after the Civil War, found itself in the possession of railroads far in excess of the public need. In the long run this state of affairs was probably not a great economic evil, for it stimulated development on a tremendous scale; but its temporary effect was disastrous not only to the railroads themselves but to the struggling population. The farmer had mortgaged his farm to buy stock in the road; and his town or county or State had subsidized the line by borrowing money which it frequently could not repay. When this property became bankrupt, not only wiping out these investments but leaving the agricultural population at the mercy of what it regarded as exorbitant rates and all kinds of unfair discriminations with high interest charges on its mortgages and high local taxes, the blind fury that resulted among the farmers was not unnatural.
Many of the railroad evils were inherent in the situation; they were explained by the fact that both managers and public were dealing with a new agency whose laws they did not completely understand. But the mere play of personal forces in themselves aggravated the antagonism. The fact that most of the railroad magnates lived in the East added that element of absentee landlordism which is essential to most agrarian problems. Many of the Western capitalists were real leaders; yet it is only necessary to remember that the most active man in Western railroads in the seventies was Jay Gould, to understand the suspicion in which the railroad promoter of that day was generally held. It is significant that of all the existing railroad abuses, the one which seemed to arouse particular hostility was the free pass. There were many greater practical evils than this, yet the fact that most editors and public officials and politicians and legislators and even many judges rode "deadhead" was a constant reminder of the influence which this "alien" power exercised over the government and the public opinion of the communities of which it was theoretically the servant. Many of these roads had a greater income than the States they served; their payrolls were much larger; their head officials received higher salaries than governors and presidents. The extent to which these roads controlled legislatures and, as it seemed at times, even the courts themselves, alarmed the people. The stock-jobbing that had formed so large a part of their history added nothing to their popularity. Yet, when all these charges against the railroads are admitted, the fundamental difficulty was one which, at that stage of public enlightenment, was beyond the power of individuals to control. Nearly all the deep-seated evils arose from the fact that the railroads were attempting to do something which, in the nature of the case, they were entirely unfitted to do—that is, compete against one another. When the great trunk lines were constructed, the idea that competition was the life of trade held sway in America, and the popular impression prevailed that this rule would apply to railroads as well as to other forms of business. To the few farseeing prophets who predicted the difficulties which subsequently materialized, the answer was always made that competition would protect the public from extortion and other abuses. But competition between railroads is well-nigh impossible. Only in case different companies operated their cars upon the same roadbed—something which, in the earliest days, they actually did on certain lines—could they compete, and any such system as a general practice is clearly impracticable. One railroad which paralleled another in all its details might compete with it, but there are almost no routes that can furnish business enough for two such lines, and the carrying out of such an idea involves a waste of capital on an enormous scale. Probably the country received its most striking illustration of this when the West Shore Railroad in New York State was built almost completely duplicating the New York Central, with the result that both roads were nearly bankrupted.
While no one railroad can completely duplicate another line, two or more may compete at particular points. By 1870 this contingency had produced what was regarded as the greatest abuse of the time—the familiar problem of "long and short haul." Two or more railroads, starting at an identical point, would each pursue a separate course for several hundred miles and then suddenly come together again at another large city. The result was that they competed at terminals, but that each existed as an independent monopoly at intermediate points. The scramble for business would thus cause the roads to cut rates furiously at terminals; but since there was no competition at the intervening places the rates at these points were kept up, and sometimes, it was charged, were raised in order to compensate for losses at the terminals. Thus resulted that anomaly which strikes so strangely the investigator of the railroad problem—that rates apparently have no relation to the distance covered, and that the charge for hauling a load for seventy-five miles may be actually higher than that for hauling the same load one hundred or one hundred and fifty miles. The expert, looking back upon nearly a hundred years of railroad history, may now satisfactorily explain this curious circumstance; but it is not surprising that the farmer of the early seventies, overburdened with debt and burning his own corn for fuel because he could not pay the freight exacted for hauling it to market, saw in the system only an attempt to plunder. Yet even the shippers at terminal points had their grievances, for the competition at these points became so savage and so ruinous that the roads soon entered into agreements fixing rates or formed "pools." In accordance with this latter arrangement, all business was put into a common pot, as the natural property of the roads constituting the pool; it was then allotted to different lines according to a percentage agreement, and the profits were divided accordingly. As the purpose of rate agreements and pools was to stop competition and to keep up prices, it is hardly surprising that they were not popular in the communities which they affected. The circumstance that, after solemnly entering into pools, the allied roads would frequently violate their agreements and cut rates surreptitiously merely added to the general confusion.
The early seventies were not a time of great prosperity in the newly opened West, and the farmers, looking about for the source of their discomforts, not unnaturally fixed upon the railroads. Their period of discontent coincided with what will always be known in American history as "the Granger movement." In its origin this organization apparently had no relation to the dissatisfaction which its leaders afterward so successfully capitalized. Its founder, Oliver Hudson Kelley, at the time when he started the fraternity was not even a farmer but a clerk in the Agricultural Bureau at Washington. Afterward, when the Grangers had become an agrarian force to be feared, if not respected, it was a popular jest to refer to the originators of this great farmers' organization as "one fruit grower and six government clerks." Kelley's first conception seems to have been to organize the farmers of the nation into a kind of Masonic order. The Patrons of Husbandry, which was the official title of his society, was a secret organization, with signs, grips, passwords, oaths, degrees, and all the other impressive paraphernalia of its prototype. Its officers were called Master, Lecturer, and Treasurer and Secretary; its subordinate degrees for men were Laborer, Cultivator, Harvester, and Husbandman; for women—and women took an important part in the movement—were Maid, Shepherdess, Gleaner, and Matron, while there were higher orders for those especially ambitious and influential, such as Pomona (Hope), Demeter (Faith), and Flora (Charity). Certainly these titles suggest peace and quiet rather than discontent and political agitation; and, indeed, the organization, as evolved in Kelley's brain, aimed at nothing more startling than the social, intellectual, and economic improvement of the agricultural classes. Its constitution especially excluded politics and religion as not being appropriate fields of activity. It did propose certain forms of business cooperation, such as the common purchase of supplies, the marketing of products, perhaps the manufacture of agricultural implements; but its main idea was to contribute to the social well-being of the farmers and their families by frequent meetings and entertainments, and to improve farming methods by collecting agricultural statistics and by spreading the earliest applications of science to agriculture. The idea that the "Grange," as the organization was generally known, would ultimately devote the larger part of its energies to fighting the railroads apparently never entered the minds of its founders.
Had it not been for the increasing agricultural discontent against railroads and corporations in general, the Patrons of Husbandry would probably have died a painless death. But in the early seventies this hostility broke out in the form of minority political parties, the principal plank in whose platform was the regulation of the railroads. Farmers' tickets, anti-monopoly parties, and anti-railroad candidates began to appear in county and even state elections, sometimes achieving such success as to frighten the leaders of the established organizations. The chief aim of the discontented was "protection from the intolerable wrongs now inflicted onus by the railroads." "Railroad steals," "railroad pirates," "Wall Street stock-jobbers," and like phrases supplied the favorite slogans of the spirited rural campaigns. These parties, though much ridiculed by the metropolitan press, started a political agitation which spread with increasing force in the next forty years and in recent times eventually gained the ascendency in both the old political parties.
The panic of 1873 and the unusually hard times that followed added fuel to the flame. It was about this time that the Patrons of Husbandry gave evidences of a new vitality, chiefly manifested in a rapidly increasing membership. On May 19, 1873, there were 3360 Granges in the United States, while nineteen months later, on January 1, 1875, there were 21,697, with a total membership of over seven hundred thousand. In the Eastern States the movement had made little progress; in the South it had become somewhat more popular; in such States as Missouri, Iowa, Kansas, Nebraska, Montana, Idaho, and Oregon, it had developed into almost a dominating influence. It is not difficult to explain this sudden and astonishing growth: the farmers in the great grain States seized upon this organization as the most available agency for remedying their wrongs and rescuing them from poverty. In their minds the National Grange now became the one means through which they could obtain that which they most desired—cheaper transportation. Not only did its membership show great increase, but money from dues now filled the treasury to overflowing. At the same time the organs of the capitalist press began to attack the Grange violently, while the politicians in the sections where it was strongest sedulously cultivated it. But the leaders of the movement never made the fatal mistake of converting their organization into a political party. It held no political conventions, named no candidates for office, and even officially warned its members against discussing political questions at their meetings. Yet, according to a statement in the "New York Tribune", "within a few weeks the Grange menaced the political equilibrium of the most steadfast States. It had upset the calculations of veteran campaigners, and put the professional office-seekers to more embarrassment than even the Back Pay." The Grangers fixed their eyes, not upon men or upon parties, but upon measures. They developed the habit of questioning candidates for office concerning their attitude on pending legislation and of publishing their replies. Another favorite device was to hold Granger conventions in state capitals while the legislature was sitting and thus to bring personal pressure in the interest of their favorite bills. This method of suasion is an extremely potent political force and explains the fact that, in certain States where the Granges were most powerful, they had practically everything their own way in railroad legislation.
The measures which they thus forced upon the statute books and which represented the first comprehensive attempt to regulate railroads have always been known as the "Granger Laws." These differed in severity in different States, but in the main their outlines were the same. Practically all the Granger legislatures prohibited free passes to members of the legislatures and to public officials. A law fixing the rate of passenger fares—the maximum ranging all the way from two and one-half to five cents a mile—was a regular feature of the Granger programme. Attempts were made to end the "long and short haul" abuse by passing acts which prohibited any road from charging more for the short distance than for the long one. More drastic still were the laws passed by Iowa in 1874 and the famous Potter bill passed by Wisconsin in the same year. Both these measures, besides fixing passenger fares, wrote in the law itself detailed schedules of freight rates. The Iowa act included a provision establishing a fund of $10,000 which was to be used by private individuals to pay the expenses of suits for damages under the act, and this same act made all railroad officials and employees who were convicted of violations subject to fine and imprisonment. The Potter act was even more severe. It not only fixed maximum freight rates, but it established classifications of its own. The railroads asserted that the framers of this law had simply taken the lowest rates in force everywhere and reduced them twenty-five per cent. But Iowa and Wisconsin and practically all the States that passed the Granger laws also established railroad commissions. For the most part these commissions followed the model of that established by Massachusetts in 1869, a body which had little mandatory authority to fix rates or determine service, but which depended upon persuasion, arbitration, and, above all, publicity, to accomplish the desired ends. The Massachusetts commission, largely owing to the high character and ability of its membership—Charles Francis Adams serving as chairman for many years—had worked admirably. In the most part these new Western commissions were limited in their activities to regulating accounting, obtaining detailed reports, collecting statistics, and enforcing the new railroad laws.
These measures, following one another in rapid succession, produced a national, even an international sensation. The railroad managements stood aghast at what they regarded as demagogic invasions of their rights, and the more conservative elements of the American public looked upon them as a violent attack upon property. Up to this time there had been little general understanding of the nature of railroad property. In the minds of most people a railroad was a business, precisely like any other business, and the modern notion that it was "affected with a public interest" and that the public was therefore necessarily a partner in the railroad business had made practically no headway. "Can't I do what I want with my own?" Commodore Vanderbilt had exclaimed, asserting his exclusive right to control the operations of the New York Central system; and that question fairly well represented the popular attitude. That the railroad exercised certain rights of sovereignty, such as that of eminent domain, that it actually used in its operations property belonging to the State, and that these facts in themselves gave the State the right to supervise its management, and even, if necessity arose, to control it—all this may have been recognized as an abstruse legal proposition, but it occupied no practical place in the business consciousness of that time. Naturally the first step of the railroads was therefore to contest the constitutionality of the laws, and while these suits were pending they resorted to various expedients to evade these laws or to mitigate their severity. A touch of liveliness and humor was added to the situation by the thousands of legal fare cases that filled the courts, for farmers used to indulge in one of their favorite agricultural sports—getting on trains and tendering the legal two and a half cents a mile fare, a situation that usually led to ejectment for nonpayment and then to a suit for damages. The railroads easily met the laws forbidding lighter charges for long than for short hauls by increasing the rates for the longer distances, and the laws fixing maximum rates within the State by increasing the rates outside the State. When the courts decided the cases against the railroads, as in most cases they did, these corporations set about to secure the repeal of the laws. They started campaigns of education, frequently through magazine or newspaper articles pointing out the injustice of the Granger laws and insisting that they were working great public damage. It is a fact that a decrease in railroad construction followed the Granger demonstration, and the friends of the railroads insisted that timid capital hesitated to embark in an enterprise that was constantly subject to legislative attack. These campaigns succeeded much better than the more violent opposition to which the railroads had first resorted. The Western States in the majority of cases repealed their most drastic legislation. Nearly all the laws fixing maximum rates disappeared from the books, and even Iowa and Wisconsin substituted for these measures supervisory and advisory commissions after the Massachusetts model.
While the Granger movement thus failed effectively to curb the railroads, it succeeded in arousing great popular interest in the railroad problem and in placing before the public several of the most important details of that problem. Not the least of its achievements were the decisions which it obtained from the Supreme Court of the United States. The Granger cases are among the most epoch-making in American history, and they fixed for all time the principles of American policy in dealing with the railroad question. They are particularly worthy of study by those who have regarded the Supreme Court as the bulwark of social injustice and as a body which can always be relied upon to protect the rights of property against the interests of the masses. In its railroad decisions this charge hardly holds; for these Granger cases sustain practically all the legal contentions made by the Granger legislatures. * The cases fixed for all time the point that a State, acting under the police power, may regulate the charges of a railroad even to the extent of fixing maximum rates. They even went so far as to hold that the right to fix rates is not subject to any restraint by the court on the ground of unreasonableness, a principle which the Supreme Court has reversed in more recent times. The courts also held that a State, at least until Congress acted, could regulate interstate commerce, but this decision also has since then been reversed. These subsequent reversals of decisions which were exceedingly popular at the time, however, not only constituted sound law but promoted the public interest, for they established that body of law which has made possible the present more comprehensive system of Federal regulation of railroads.

    * The cases of particular interest were: Munn vs. Illinois, 94
U.S. 114; Peik vs. Chicago and Northwestern Railway Company, 94 U.S.
164; and Chicago, Burlington and Quincy Railway Company vs. Cutts, 94
U.S. 155.

Meanwhile the demand for regulation was gaining strength in the Eastern States, but for somewhat different reasons. The farmers of New England, New York, and the Eastern region in general had not particularly sympathized with the Granger legislation; they already had great difficulty in competing with the large Western farms, and a reduction in rates to the seaboard would have made their position even less endurable. This attitude was unquestionably selfish but entirely comprehensible. The agitation for railroad reform in the East came chiefly from the manufacturing and commercial classes. Here the main burden of the complaint was the railroad rebate. This was a method of giving lower rates to large shippers than to small—charging the favored shipper the published rate and then, at stated periods, surreptitiously returning part of the payment. This was perhaps the most vicious abuse of which the railroads have ever been guilty. That the common law forbade the practice and that it likewise violated the implied contract upon which the railroad obtained its franchise was hardly open to dispute; yet up to 1887 no specific law in this country prohibited the practice. For many years the rebate hung over the American business world, a thing whose existence was half admitted, half denied, a kind of ghostly economic terror that seemed persistently to drive the small corporation to bankruptcy and the large corporation to dominating influence. The Standard Oil Company was the "monster" that was believed especially to thrive upon this kind of sustenance, though this was by no means the only industry that maintained such secret relations with the railroads; the Carnegie Steel Corporation, for example, accepted rebates almost as persistently. It was not until 1879, when the Hepburn Committee in New York State had its hearings, that all the facts concerning the rebate were exposed officially to public view. The contracts of the Standard Oil Company with the railroads were placed upon the records and these showed that all the worst suspicions regarding this practice were justified. This disclosure made the railroad rebate one of the most familiar facts in American industrial life; and in consequence a demand arose for Federal legislation that would definitely make the practice a crime and also for some kind of Federal supervision to do effectively the work which the state commissions had failed to do.
By this time it was clear enough that the only hope of adequate regulation lay with the Federal Government. Congressman Reagan, of Texas, had for years been pushing a bill to regulate interstate commerce and to prohibit unjust discriminations by common carriers; other measures periodically made their appearance in the Senate; but the Houses had been unable to agree and nothing had been done.
Two facts presently gave great impetus to the movement; in 1886 the United States Supreme Court, reversing its previous decision, decided that no State could fix rates for railroad lines outside its own borders, in other words, that interstate rates were exclusively within the jurisdiction of the Federal authority *; and a Senate committee, under the chairmanship of Shelby B. Cullom, conducted an investigation of railroad conditions which made clear the need of immediate reform. As a consequence, Congress passed the Interstate Commerce Act, which received President Cleveland's signature on February 4, 1887. This measure specifically made illegal rebates, pools, higher charges for short than for long hauls (when the hauls in question were upon the same road); it required railroads to file their tariffs, and it established a commission of five members, who had powers of investigation, including the right to make the companies produce their books. This commission received power to establish systems of accounting and the like, but it had no prerogative to fix rates. Inadequate as this measure seemed to the radical element, it was generally hailed as marking the beginning of an era in the Federal control not only of railroads but of other corporations, and this impression was increased by the high character of the men whom President Cleveland appointed to the first board.

    * Wabash, St. Louis and Pacific Railway Company vs. Illinois, 118
U.S. 557.

The Interstate Commerce Commission lasted essentially in this form for nearly twenty years. On the whole it was a failure. Such was the judgment passed by Justice Harlan of the United States Supreme Court when he remarked in one of his decisions that the commission was "a useless body for all practical purposes"; and such, indeed, was the judgment of the commission itself, for in its report of 1898 it declared that the attempt at Federal regulation had failed. The chief reasons for this failure, the commission said, were the continued existence of secret rates and the fact that published tariffs were not observed. * The managers of the great American railroad systems would not yet admit that the fixing of railroad rates was the concern of any one but themselves, and they still regarded railroad management as essentially a private business. If they could obtain large shipments by granting special rates, even though they had to do it by such underhanded ways as granting rebates, they believed that they were entirely justified in doing so. Thus rebates flourished almost as much as ever, passes were still liberally bestowed, and pools were still formed, though they sometimes took the shape of "gentlemen's agreements."

    * But it should be added that the effectiveness of the commission
as an administrative and regulating body was diminished by decisions
of the courts, notably the decision of the Supreme Court in the maximum
rate case. See 160 U.S. 479.

In 1906, when President Roosevelt became intensely active in the railroad problem, conditions were fairly demoralized. Attempts to enforce the anti-pooling clause had led railroads to purchase competing lines, and when the United States Supreme Court pronounced this illegal, the situation became chaotic. The evils of overcapitalization also became an issue of the times. The Interstate Commerce Commission had become almost moribund, and there was a general sentiment that the trouble arose from the fact that the commission had no power to fix rates and that the solution of the railroad problem would come only when such power was vested in it. * The Interstate Commerce Act which became a law on June 29, 1906, was the outcome of one of the greatest battles of President Roosevelt's political life. The act increased the membership of the commission from five to seven members, placed under its jurisdiction not only railroads but pipe lines, express companies, and sleeping-car companies, added to the other familiar restrictions a "commodities clause," which prohibited any railroad from transporting a product which it had produced or mined, "except such articles or commodities as may be necessary and intended for its use in the conduct of its business as a common carrier"—this clause was intended to end the railroad monopoly of the coal mines—and made the failure to observe published tariffs a crime punishable with imprisonment. The amended law did not give the commission the right to fix rates in the first instance but did empower it, on complaint, to investigate charges and on the basis of this investigation to determine just maximum rates, regulations, and practices, though carriers were given the right of appeal to the courts.

    * The Elkins Act of 1903 had, it is true, increased the
effectiveness of the commission in dealing with discriminations, but it
had not solved the problem of securing reasonable rates.

Thus, in essence, the public had obtained the reform which it had been demanding for years. The reorganized commission did not hesitate to exercise its new powers. It soon began actually fixing rates, and from being a half-alive despised institution it rapidly developed into one of the most powerful agencies of administration. In the succeeding ten years its powers were still further enlarged by acts of Congress and the privilege of fixing charges practically passed out of the hands of the railroads into the control of the Interstate Commerce Commission. The railroads, that is, practically lost the power to regulate their own income. Meanwhile, the progressive movement in American politics had led to the creation of commissions in most of the States, with similar authority over rate making within the States, besides exercising numerous other powers over service and capitalization. Many railroads fell upon evil days and receiverships again became common. Naturally the railroad managers attributed these calamities to the fact that they were so constantly being regulated; but they probably pushed this claim too far, for the causes of their troubles were more complex.
In 1916, in the heat of a political campaign, the Federal Government took a step which introduced a new principle into railroad management and made the roads practically helpless. The four brotherhoods of railroad operatives were making demands for a so-called eight-hour day, and threatened a general strike that would paralyze all business and industry and throw the whole life of the nation into chaos. Properly to appreciate the consequences of this event, it is necessary to keep in mind the fact that the plea for an "eight-hour day" was spurious. An eight-hour day cannot be rigidly enforced on railroads; the workmen well knew this, and indeed they did not really demand such working hours. What they asked for was a full day's pay for eight hours and "time and a half" pay for all in excess of that amount; that is, they demanded an increase in wages. President Wilson, having failed in his attempt to settle the difficulty by arbitration, compelled a Democratic Congress over which his sway was absolute to pass a law-sponsored by Chairman Adamson of the House Committee on Interstate Commerce—which granted practically what the unions demanded. In passing this law, Congress asserted an entirely new power which no one had ever suspected that it possessed—that of fixing the wages which should be paid by common carriers and possibly by other corporations engaged in interstate commerce. The railroads immediately took the case to the United States Supreme Court, which promptly sustained the law. This decision, unquestionably the most radical in the history of that body, declared virtually that Congress could pass any law regulating railroads which the public interest demanded.
And thus, after fifty years of almost incessant struggle with the public, was the mighty railroad monster humbled. It had lost power to regulate the two items which represent the existence of a business—its income and its outgo. The Interstate Commerce Commission was now fixing railroad rates, and Congress was fixing the amounts of railroad wages. It remained for the Great War to precipitate the only logical outcome of this situation—government control. The steadily increasing responsibilities of war soon told heavily upon all lines until, in the latter part of 1917, the whole railroad system of the United States had all but broken down. The unions were pressing demands for wage increases that would have added a billion dollars a year to their annual budgets. The fact that so large a part of the output of American locomotive works was being shipped to the Allies made it difficult for the American lines to maintain their own supply. Nearly all coastwise ships and tugs were utilized for war work, a large part of them had been sent to the other side, and this put an additional strain upon the railroads. The movement of troops, the heavy building operations in cantonments and shipbuilding plants, the manufacture and transportation of munitions, all put an unprecedented pressure upon them. Everywhere there was great shortage of cars, equipment, and materials. Possibly the railroads might have risen to the occasion except for the fact that the enormous increase in the cost of labor and supplies made demands upon their treasuries which they could not meet. They repeatedly asked the Interstate Commerce Commission for an increase in rates, but this request was repeatedly refused. The roads were therefore helpless, and their operations became so congested as to create a positive military danger. Under these circumstances there was profound relief when President Wilson took over the roads and placed them under government control, with William Gibbs McAdoo, Secretary of the Treasury, in active charge.
McAdoo immediately took the step which the Administration, while the railroads were under private control, had steadily refused to sanction, and now increased the rates. These increases were so great that they made the public fairly gasp, but, under the impulse of patriotism, there was a good-natured acquiescence. McAdoo also increased wages by hundreds of millions of dollars. His administration on the whole was an able one. He ignored for the moment the prevailing organization and managed the roads as though they constituted a single system. He instituted economies by concentrating ticket offices, establishing uniform freight classifications, making common the use of terminals and repair shops, abolishing circuitous routes, standardizing equipment, increasing the loads of cars and by introducing a multitude of other changes. All these reforms greatly increased the usefulness of the roads, which now became an important element in winning the war. Properly regarded, the American railroads became as important a link in the chain of communications reaching France as the British fleet itself. It is not too much to say that the fate of the world in the critical year 1918 hung upon this tremendous railroad system which the enterprise and genius of Americans had built up in three-quarters of a century. In February, 1918, Great Britain, France, and Italy made official representations to the American Government, declaring that unless food deliveries could be made as they had been promised by Hoover's food administration, Germany would win the war. McAdoo acted immediately upon this information. He gathered all available cars, taking them away from their ordinary routes, and rushed them from all parts of the country to the great grain producing States. All other kinds of shipments were discontinued; officials and employees from the highest to the lowest worked day and night; and presently the huge supplies of the indispensable food started towards the Atlantic coast. So successful was this operation that, on the 12th of March, the supplies so exceeded the shipping capacity of the Allies that 6318 carloads of food stood at the great North Atlantic ports awaiting transportation. This dramatic movement of American food supplies was an important item in winning the war and fairly illustrated the great part which the American railroads played in turning the tide of battle from defeat to victory.

BIBLIOGRAPHICAL NOTE

General literature on the history of American railroads is surprisingly scarce. While numerous volumes have been written in recent years on special phases of the railroad question, few histories of any real value are available. Probably the best outline history of American railroad development as a whole is still Arthur T. Hadley's "Railroad Transportation, its History and its Laws" (1885), but this necessarily covers only the earlier periods of railroad growth and its discussions are limited to the problems which confronted the carriers many years ago. An extremely valuable book (now out of print) giving a very complete picture of railroad building and expansion in the pre-Civil War period is "The Book of the Great Railway Celebration of 1857", by William Prescott Smith. This is primarily a description of the opening of the Ohio and Mississippi Railway, which connected the Mississippi Valley for the first time with the Eastern seaboard. A volume of real value, but somewhat technical, giving a complete and accurate view of the reorganization period of the great railroad systems, from 1885 to 1900, is "Railroad Reorganization", by Stewart Daggett (1910). This book contains outline sketches of the histories of nearly all of the large systems, as well as very accurate details of the financial reorganizations of all of the defaulted properties. The most comprehensive history of any American railroad system is "The Story of Erie", by H. S. Mott (1900), but even this is partially unreliable and much of it is compiled from unofficial sources. On the financial history of the Erie Railroad, the really valuable authority is Charles Francis Adams in his "Chapters of Erie" (1871). This book furnishes a full and accurate account of the regime of Daniel Drew, Jay Gould, James Fisk, Jr., and the famous "Erie ring," including "Boss" Tweed, and also throws side lights on the character and career of Commodore Vanderbilt. Among other important histories of particular railroad systems may be mentioned "The Union Pacific Railway", by John P. Davis (1894) and "History of the Northern Pacific Railroad", by Eugene V. Smalley (1883); but neither of these volumes covers the recent and more interesting periods in the development of these properties. To get a complete and satisfactory view of the later development of the Northern Pacific system, one must turn to modern biographical works, such as the "Life of Jay Cooke", by E. P. Oberholtzer (1910), the "Memoirs of Henry Villard" (1909), and the "Life of James J. Hill", by Joseph Gilpin Pyle (1916), which also recounts at length the rise and development of the Great Northern Railway system. But in these volumes, as in many biographies of great men, the authors often betray a bias and misrepresent facts vital to an understanding of the development of both of these railroad systems. A recent volume entitled the "Life Story of J. P. Morgan", by Carl Hovey, although extremely laudatory and therefore in many ways misleading, contains valuable information about the development of the Vanderbilt lines after 1880 and also about the financial vicissitudes and rehabilitation of the many Morgan properties, such as the Southern Railway, the modern Erie system, the Northern Pacific, the Reading, and the Baltimore and Ohio.
Some of the railroad companies many years ago themselves published histories of their lines, but most of these attempts were of little value, as they were always too laudatory and one-sided and evidently were usually written for political purposes. The best of this class of railroad histories was a book issued by the Pennsylvania Railroad many years ago, giving a record (largely statistical) of the growth and development of its lines. But this book has been long out of print and covers the period prior to 1885 only.
For original material on American railroad history, one must depend almost entirely on financial and railroad periodicals and official and state documents. By far the most valuable sources for all aspects of railroad building and financing during the long period from 1830 to 1870 are the "American Railroad Journal" (1832-1871) and "Hunt's Merchant Magazine" (1831-1870). Both of these periodicals are replete with details of railroad building and growth. And for the period from 1870 to the present time the best authority is the "Commercial and Financial Chronicle", with its various supplements. The story of modern railroading is so intertwined with finance and banking that to get any broad and complete view of the subject one must consider it largely from the viewpoint of Wall Street. For facts regarding operation and management of modern railroads, the "Railroad Age-Gazette" also is extremely useful. By far the most valuable sources for railroad statistics, railroad legislation, and all related facts, are the annual reports and bulletins of the Interstate Commerce Commission, which have been regularly issued since 1888. Many state commissions also have issued volumes of value.
The best account of the origin of the Granger laws is contained in S. J. Buck's "The Granger Movement" (1913). The beginnings of Federal regulation are traced in L. H. Haney's "A Congressional History of Railways in the United States, 1850-1887" (1910). The history of recent railroad regulation by state and Federal legislation, and of court decisions affecting the railroads, is clearly and succinctly told in William Z. Ripley's "Railroads: Rates and Regulation" (1912), and in Johnson and Van Metre's "Principles of Railroad Transportation" (1916).

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Monday, November 18, 2019

KNOW WHO THE CORPORATION PLAYERS ARE *****Books: John Moody - The Masters of Capital; The Railroad Builders;

The Masters of Capital: A Chronicle of Wall Street

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Full text of "The Masters of Capital: A Chronicle of Wall Street"

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THE RAILROAD BUILDERS

A CHRONICLE OF THE WELDING OF THE STATES

Volume 38 In The Chronicles Of America Series

By John Moody

New Haven: Yale University Press Toronto: Glasgow, Brook & Co. London: Humphrey Milford Oxford University Press 1919

Contents

THE RAILROAD BUILDERS

THE RAILROAD BUILDERS

CHAPTER I. A CENTURY OF RAILROAD BUILDING

CHAPTER II. THE COMMODORE AND THE NEW YORK CENTRAL

CHAPTER III. THE GREAT PENNSYLVANIA SYSTEM

CHAPTER IV. THE ERIE RAILROAD

CHAPTER V. CROSSING THE APPALACHIAN RANGE

CHAPTER VI. LINKING THE OCEANS

CHAPTER VII. PENETRATING THE PACIFIC NORTHWEST

CHAPTER VIII. BUILDING ALONG THE SANTA FE TRAIL

CHAPTER IX. THE GROWTH OF THE HILL LINES

CHAPTER X. THE RAILROAD SYSTEM OF THE SOUTH

CHAPTER XI. THE LIFE WORK OF EDWARD H. HARRIMAN

CHAPTER XII. THE AMERICAN RAILROAD PROBLEM

BIBLIOGRAPHICAL NOTE

Amelia Gora

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New Haven: Yale University Press

Toronto: Glasgow, Brook & Co.

London: Humphrey Milford

Oxford University Press

1919