The masters of capital : a chronicle of Wall Street

Contents

THE RISE OF THE HOUSE OF MORGAN Page MORGAN AND THE RAILROADS he THE IRONMASTERS ve STANDARD OIL AND WALL STREET se THE STEEL TRUST MERGER bee HARRIMAN AND HILL he THE APEX OF “HIGH FINANCE” a THE PANIC OF 1907 AND AFTER ee WALL STREET AND THE WORLD WAR rn

APPENDIX “ BIBLIOGRAPHICAL NOTE “ INDEX “

1 19 35 52 70 89

Chapter I The Rise Of The House Of Morgan

Tue old meaning of the word “capital”? — that is, an accumulation of wealth, either money or substantial property, for use in the production of more wealth — has been greatly enlarged within recent times. In earlier days, under the crude methods 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 increased 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, ‘“‘capitai,” as expressed 1 through the issue of corporate stocks and bonds, was created by leaps and bounds. As the industry of the community became more efficient and the unit of effort brought forth greater results, corporate securities were created in an ever increasing ratio. Then, as the new custom became more firmly established, it was found that the limit of capitalization was by no means reached when present earning power alone was capitalized, for in a growing country like the United States, with population practically doubling every generation, future earning power was seen to be vastly greater. So the capitalists quite naturally took the further step and issued corporate stocks and bonds based on estimated future earnings.

Naturally, this modern practice of preémpting 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 capitalists learned that this new capital, which represented 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 normal growth in population and industry continued, the capitalists could feel fairly secure, but during industrial and banking 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 legislation and public aid to protect the integrity of the values which they had set up — a demand that customs tariffs be made more rigid than before to prevent foreign competition and for other measures to preserve the status quo 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 capitalization. In the 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 phenomenon of far-reaching magnitude in modern society. In the aggregate 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 corporate capital at that time was only about twenty-five billions, the significance of the development during the last generation will 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 organization and control of the great corporate enterprises 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, began in this way. It was a natural beginning, for prior to the period of modern machinery capital in large 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 possession of the minds of men, the purely competitive commercial business, such as the wholesale merchandising of goods, still held the center of the stage, both in this country 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 history. 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 as compared to the business 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 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 developed 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 better 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 foundation of the great modern 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 employment by the burning of his brother’s little store in the old town of Newburyport, Massachusetts. He then went with an uncle to Georgetown, D. C. (since incorporated with Washington), and opened a small retail! dry-goods store there. After some years he moved to Baltimore and established branches in Philadelphia and New York.

Finally, in 1837, at the age of forty-two, he went to London and founded there the merchant banking 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 bea “merchant” just as he had been in this country, 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 American 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 @ banker than a merchant.

In London, the chief financial center of the world, George Peabody represented the greatest and most profitable field for the investment of capital — the American continent, as yet practically 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 preémpted this vast El Dorado, equipped it with power machinery, and the means of transportation, thus setting labor to work, would create values which would mount for generations to come. Untold wealth would continuously flow into their coffers.

To English and continental capital this prospect was the dream of the ages. No such outlook or opportunity had ever come to England or the old countries. The natural resources of England were already preémpted 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-holding class; labor could not be applied to them and the modern generation of capitalists found no extraordinary opportunities there for the production of wealth. Thus English capital inevitably 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, oldfashioned way, and were not bent, to any great degree, on amassing large fortunes. The speculative era in America had not yet arrived, and, 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 connections between London and New York. The Rothschilds had sent August Belmont to 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, nevertheless, set out to be the chief representative of America in England. Every year he made a point of getting the leading men of both countries together, and his Fourth of July dinners in London grew te be notable occasions for promoting friendliness between the business interests of England and the United States.

Peabody never aspired to be an originator or promoter of enterprises. This work he left to others. His business was that of the financier, a “‘“master of capital.”’ In this field his success was enormous for the times, and his name grew constantly in English favor. He finally amassed a fortune of twenty million dollars, became the greatest philanthropist of his time, refused a title of nobility from Queen Victoria, and died in 1869 in the possession of the thorough confidence of the English investing public. 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. Morgan 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 Peabody ten years before. He was now about fifty-one and was fully capable of carrying on the high traditions of the Peabody firm — doing international

THE RISE OF THE HOUSE OF MORGAN l11 commercial banking, holding deposits of customers, and buying and selling securities. The firm placed considerable issues of American railroad bonds in London and negotiated 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. 5. Morgan and Company.

Junius Morgan had ason, John Pierpont by name, born 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 University of Géttingen in Germany. After leaving the University he had entered his father’s office 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 offices 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 capacity 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, 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 England 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 Company, Pierpont Morgan met Charles H. Dabney, a partner in the firm and also the accountant. It was through association with Dabney that Morgan acquired his remarkable and accurate knowledge of bookkeeping and accounting. But the connection 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 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 personally bought the southeastern corner 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 i4 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 “‘wildeat”’ currency of the time. In 1837, the same year in which Peabody moved to London, the elder Drexel had established himself in Philade]phia on a street known locally by the significant 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 popular man. There were four other members in the new firm, all from the Drexel house in Philadelphia. The new firm had advantageous alliances: on one side of the Atlantic, one of the richest financia) 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 capital 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 and the Morgans had taken place and while Dabney, Morgan and Company were still doing a quiet banking business, a financial operation of vast magnitude had been carried on in America. It was the flotation of the American Civil Wardebt. Thisdebt had been placed very largely through Jay Cooke, a Philadelphia banker and promoter. Cooke was the typical American pioneer of his time, a tremendous optimist, a great employer of the benefits of friendship in high places, a sort of financial P. T. Barnum, who exploited the Government’s securities and later his 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 every hamlet in the country. Later, he was naturally the man who had the first opportunity to handle the great refunding 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 buy Confederate than Union bonds. The Germans, however, as a whole were more sympathetic towards the North, as the great body of German immigrants 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, began 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 merchants 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 (with their German Jew backing) and the Drexel- Morgan interests to secure the contracts for the government financing. In this contest Cooke and his party won and then carried through an extraordinarily difficult operation so successfully that the Rothschilds offered themselves as Cooke’s associates in future enterprises. But the Morgan interests kept after 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 Company 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 financial 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 Company had taken a French loan of 250,000,000 francs. It was a syndicate operation and one of the largest and boldest ever known. In the previous month the Germans had crushed the French army at Sedan, had taken the Emperor Louis Napoleon nrisoner, and had besieged Paris. The only authority 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 transaction. 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 Morgans — father and son — were to wield a mighty influence in American finance.

Chapter II

Tue 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- ¢an 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 magnates 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 teastmaster, expressed the sentiment of the hour. 12

By 1879, with the financing of the war debt accomplished, 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 Rothschilds in 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 presenting the ponderous figure of an East India merchant prince in an old English play, was retiring from active business life. The younger 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 watched 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 accumulate their colossal fortunes largely by the manipulation 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 accomplices the control of the Albany and Susquehanna Railroad, 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 holdings, 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 railroad finance. William H. Vanderbilt, president and chief stockholder of the New York Central and Hudson River system, was then being harassed beyond endurance. Popular suspicion had been excited by his accumulation of a fortune of one hundred millions in ten years; and the New York Legislature, reflecting public indignation, was investigating the management of the New York

Central and was proposing radical control of railroad management. Besides, the rate wars between New York and Chicago were then raging. Finally, to add to these vexations, Jay Gould was attempting blackmail because Vanderbilt would not take him into the New York Central directorate. 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 American 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 transaction was kept secret for a time, but after a few months the details were all published in the New

MORGAN AND THE RAILROADS Qa

York and the London papers. Vanderbilt then announced that a large part of the great sum of money he had received had been reinvested in United States government bonds. Thus, at one stroke, J. Pierpont Morgan not only solved Vanderbilt’s difficult problem and allayed public criticism, but incidentally, 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 haleyon 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 Fé 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 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 railroad 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 estimated that, in the three years ending December 31, 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 investors 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 of the American transportation system, suddenly found their securities dwindling away. There was urgent need for a strong representative to champion their interests. After his successful underwriting of the New York Central 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 speculation rather than wise control and conservative management of railroad properties.

For a half dozen years the gigantic structure of inflated railroad capitalization and over expansion stood — somewhat unsteadily — and then the crash came. By 1884 there were five independent 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; passengers 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.