Lords of Creation

by Frederick Lewis Allen

  Into this frenzied market, in which—almost as in 1928 and 1929—clerks and shopkeepers were staking their savings, the millions of shares which had been handed out to the stockholders of the constituent companies and to the promoters and their associates began gradually to be fed. The stock was being “distributed” to the public, and the insiders were taking their profits—in hundreds of dollars, in thousands, and in millions. For example, you may recall that the Morgan syndicate had been paid for its services not in cash but in stock—a large block, amounting to nearly 1,300,000 shares. This stock had to be “distributed.” The result of the distribution was a profit to the syndicate, over and above all expenses, of sixty-two and a half million dollars, of which the House of Morgan took as its own share considerably more than twelve and a half million.

  Keene’s manipulative operations were fulfilling the triple function of providing a steadying influence for the market price, of advertising Steel common on the ticker tape and in brokers’ offices and on the financial pages and wherever speculators and investors gathered, and of providing plenty of buyers for those who had been allotted stock and wished to unload and gather in their cash.

  Meanwhile, also, across the street from the humming Stock Exchange, Morgan, with the righteous Gary to assist him in matters of policy and the entranced Schwab to supervise the processes of steel-making in scores of mills, began to face the vast problem of making his enterprise actually succeed.

  8

  It was a long time before Morgan and Gary succeeded in bringing into some sort of line the discordant methods and policies of all the companies now linked together under their suzerainty, or even the conflicting influences within the directorate itself. But a strike called by the Amalgamated union during the first precarious summer brought forth a resolution by the Board which prefigured the Corporation’s attitude toward labor organizations for a generation to come: a resolution “that we are unalterably opposed to any extension of union labor and advise subsidiary companies to take a firm position when these questions come up, and say that they are not going to recognize it.” Capital might combine; labor might not.

  The relationship between the management and the workmen was destined to remain feudal. Whenever a Steel Corporation official thereafter found himself on the witness stand and the embarrassing matter of the twelve-hour day or the seven-day week was brought up, he always expressed acute distress at the fact that the Corporation had not yet succeeded in doing away with this barbarous condition and said that it was about to do so—but the years dragged on and the twelve-hour day and the seven-day week remained, to the disgrace of American industry. It must be admitted that the Steel Corporation maintained conditions no worse than its competitors and probably a little better; that the trend of wages was haltingly upward during the first decade of the Corporation’s life; and that the labor policy of the Corporation was further mollified by such devices as a plan for the purchase of stock by employees on reasonable terms. The unsentimental essence of that policy, however, was: Pay what you have to pay in wages but keep absolute control in your own hands, and remember that profits come first.

  As for the policy of the Corporation with regard to prices, there was at least a trend in the direction so rapturously pointed out by Schwab in his University Club speech. Previous consolidations in the steel industry had been followed by a gleeful marking up of prices; no such advance took place during the Steel Corporation’s first year, and during the next decade prices in general moved somewhat downward. Bearing in mind the perpetual danger of prosecution under the Sherman Act, the company prudently refrained from overtly dictating prices to the rest of the industry. But it was noticeable from time to time that after Gary’s lavish dinners to the steel producers of the country, prices throughout the industry had a curious way of moving in concert.

  As to the ethics of corporate management, Gary’s policy, fully backed by the omnipotent Morgan, was strict. To the amazement of plungers on the Board of Directors such as H. H. Rogers, who had been accustomed to make good use on the Stock Exchange of advance inside information on earnings and dividend decisions, Gary insisted on keeping all information of this sort from the directors of the Steel Corporation until the regular directors’ meetings, on holding these meetings after the stock market had closed for the day, and on giving the information immediately to the press. So opposed was Gary, in fact, to the whole atmosphere of private speculation which surrounded the direction of corporations—and has surrounded it very often to this day—that he even lectured the members of the Board on one occasion on their lamentable custom of matching for the twenty-dollar directors’ fees of absent members. It was not simply that Gary’s Methodist soul revolted at gambling; he thought of the directors of corporations as trustees, and anything which detracted from the dignity of their fiduciary attitude offended him—as, he was well aware, it offended a suspicious public.

  In short, the policy of the Steel Corporation, as time went on, was the result of a number of forces: the Morgan preference for discipline and restraint; the ethical severity of Gary, and his further insistence upon maintaining an appearance of virtue even where virtue itself was too much to expect of greedy men; the accepted American doctrine that the end and justification of business was profit, and the more of it the better; and the Bourbonism of Wall Street’s attitude toward the laboring classes. The gulf between capital, as represented by boards of directors sitting in the splendid comfort of New York offices, and labor, as represented by Polacks and Hunkies slaving twelve hours a day in roaring mills, was widening, and the Corporation helped to widen it. But on the other hand the Gary-Morgan attitude of restraint was an undoubted influence against irresponsible corporate plundering. It sobered and thus prolonged the new era of industrial concentration.

  9

  To the men at the blast-furnaces of Pittsburgh the coming of the Steel Corporation on April first, 1901, meant no immediate change; it is probable that many of them were quite unaware that they now had new masters. But with the men at the top it was quite different.

  Old Andrew Carnegie, his long dream now realized, sailed for the Riviera even before the Corporation began operations. His specially constructed vault in Hoboken now held something like three hundred million dollars in bonds. It was his delight to live in baronial splendor at Skibo on the coast of his beloved Scotland, where he had built a castle with medieval battlements, Pittsburgh steel girders, Westinghouse dynamos, and a covered swimming-pool with artificially heated water; to have a bagpiper wake him and his guests at eight in the morning by skirling from a far distance up to the great house and around it; to have an organist play for him throughout the breakfast hour; to construct a miniature waterfall to tinkle outside his bedroom window. At this castle—in some respects so much like a small boy’s dream come true—Carnegie entertained the mighty of the earth, statesmen, British noblemen, distinguished men of letters; and they came gladly, for their host was not merely a man of millions but a man also of broad understanding and gay humor. But the turrets of Skibo and the fine yacht and the massive house at Fifth Avenue and Ninety-first Street, New York, where Carnegie spent his winters, took only a trifling part of his great fortune. Years before, he had resolved to give away most of what he had earned; and this he now did with unexampled thoroughness and, on the whole, with remarkable wisdom—all the time reveling in the applause which greeted his successive benefactions.

  When Carnegie died in 1919 it was found that he had given away nine-tenths of his colossal fortune. An extraordinary creature, this little rosy old man, twinkling about his vast Scottish demesne, and giving away with such glee and such discretion the fruits of a lifetime of completely merciless competitive acquisition. Could such acquisition and such generosity have been combined in any one man in any other era of the world’s history?

  At an extreme from Carnegie stood Gates. First and last a gambler, he continued to plunge in and out of the speculative markets of Wall Street and in and out of the managements of
railroads and industrial corporations, fighting for mastery, hating his opponents in the speculative game with a rousing hate; sitting by the hour at a bridge table conveniently near the Waldorf-Astoria bar, and playing with such abandon that the story is told of a young man who found himself in a game with Gates, heard with some trepidation that the stakes were “ten a point,” thought this meant ten cents, and turned pale when he discovered the next day in his mail a check for thirty-three thousand dollars—his winnings. Gates conformed sufficiently to the millionaire pattern of the time to collect Corots and Meissoniers, but he gave away no libraries, endowed no observatories; with diamond studs in his shirt-front and three diamonds in each suspender buckle he flaunted himself in brokerage offices and at the Waldorf bar, winning fortunes and losing them.

  More typical of his generation, perhaps, than either of these men in his disposition of his millions was Frick, who after being bought out of his share in the Carnegie steel business in 1900 divided his time of retirement in almost equal parts among his investments, his collection of Old Masters, and a spacious leisure in his palace on Fifth Avenue—a mile from Carnegie’s—or at his ample country estate on the Massachusetts shore. It was Frick who threw a side-light on art-collecting with his reference to railroad securities as “the Rembrandts of investment.”

  Somewhat typical, also, was Schwab, who built himself a French chateau on Riverside Drive, and played on the great organ which he had built into it, and gave away millions, and speculated with other millions; and after he had slid out of the presidency of United States Steel, became the head of a company of his own, the Bethlehem, and grew into a somewhat heavier, somewhat more florid, somewhat less glowing orator at innumerable business men’s banquets over a quarter of a century, until at last in the depression of the nineteen-thirties his easy optimism came to seem like the standard product of an age gone by.

  Typical of one sort of new millionaire, perhaps, was a naïve Carnegie partner whose millions from the deal of 1901 so went to his head that when the Metropolitan Opera visited Pittsburgh he rose in his box during the intermission and in full view of the assembled elect of the city, graciously draped about his wife’s neck a pearl necklace. Pearl necklaces, Rembrandts, pipe organs, vast residences with expensive lawns; membership in clubs whose exclusiveness was constantly subject to the pressure of new-found millions; invitations to Assemblies with gorgeous cotillions: appeals from universities and museums and hospitals for benefactions; the awe of the multitudes,—all these, in varying proportions, came to the beneficiaries of those exchanges of certificates of stock which accompanied the consolidation of American industry.

  And Morgan?

  He too was a princely giver, though not on Carnegie’s scale; and a princely collector of recognized treasures of art, on a scale far larger than Frick’s. Morgan bought medieval armor, Chinese porcelains, rare old books and manuscripts, tapestries, miniatures, jewels, and paintings, paintings, paintings, of every age and every school except his own age and the American school; and though he built no palace on Fifth Avenue, he was soon to build, next to his substantial brownstone house, a palace of white marble for his books and his masterpieces. But always he defied classification, this gruff man of heavy silences and sudden boyish humor and thundering authority: so American in his optimism, his rough practicality, his instinct for dealing with American business men; in his reserve, so like the English among whom he liked to live; in his lust for the collection of the treasures of the earth, so like a conquering Renaissance prince.

  Morgan now carried a load of responsibility such as none of these other millionaires had ever carried. Already he had gained dominion over many railroads and industrial corporations and his influence was felt through a great network of banks, and now he had become also the power behind half the steel industry of the country. When he was asked in the Pujo inquiry whether he had named the Board of Directors of the Steel Corporation, he answered solidly, “I am willing to assume the final responsibility, if that will answer your question.… I say that whatever was done, if passing upon it and approving it is equivalent to making it, I did it.” And again, when Samuel Untermyer asked him, “Is anybody nominated for it [the Board] against your protest?” he answered, “Not against my protest.” Morgan had brought the Steel Corporation to birth, his House had made over twelve and a half millions fathering it, and he intended to stand by it.

  Other consolidations almost as grandiose were being planned in Morgan’s office, for now his position in the financial and industrial world was more mighty than ever. But in the meantime he must have rest. So in April, 1901, only a few weeks after Carnegie’s sailing for the Riviera, Morgan also sailed—for a holiday at Aix-lesBains, from which he was to be rudely jolted by a frontal attack from an unexpected quarter.

  Chapter Two

  THE HARRIMAN CHALLENGE

  IN THE early spring of 1899, a small, unassuming-looking man with sharp eyes and a drooping mustache called upon Dr. C. Hart Merriam, the chief of the United States Biological Survey in Washington, and asked for his help in organizing a scientific expedition to Alaska. He said that his name was Harriman—E. H. Harriman—and that he was a railroad man. The name meant nothing to Doctor Merriam. After Harriman left, Merriam telephoned to a railroad official of his acquaintance to find out who his caller might be.

  The subsequent story of the Harriman Alaska Expedition need not concern us here. What is noteworthy for us is that in 1899 a well-informed citizen had never heard of Harriman. Doctor Merriam’s ignorance was by no means exceptional; at that moment the little giant of American railroading was virtually unknown outside of Wall Street and the railroad business. Yet within twenty-six months he was to engage in a financial adventure of unparalleled boldness which was to lead to a disastrous panic on the stock exchange, and within a few more years his power was to grow to such dimensions that men would be asking one another whether he would not soon control every railroad in the country.

  Few Americans have risen so swiftly to dominion; and the manner in which Harriman rose was significant of the man, the country, and the time. Edward Henry Harriman came of a substantial New York family and had the aid of wealthy and influential friends in his early. career, but his father, an Episcopal clergyman, was always hard pressed for money, and the boy Edward Henry not only did not go to college, but left school at fourteen to become a messenger for a firm of stockbrokers in Wall Street. He learned the business from the ground up, set up his own firm, speculated successfully, married the daughter of the president of a small railroad, and two years later went into railroading himself by the Wall Street entrance—by buying a small, run-down road, improving it, and selling it at a handsome profit. In 1883, at the age of forty-five, he became a director of the Illinois Central, and soon he was its vice-president, thus extending his knowledge of actual railroad operation. But until the eighteen-nineties Harriman was primarily known as a shrewd player of the financial game of buying low and selling high; a cool speculator, greedy for power; a sharp young man who belonged to fashionable clubs, had accumulated riches, liked to hunt and fish in the Adirondacks and race his fast trotters on the Speedway, exercised his generous instincts by organizing a boys’ club in the slums, but showed no readily visible signs of economic statesmanship.

  The history of American railroading during the years of unbridled national expansion between the Civil War and the eighteen-nineties had been magnificent and scandalous: magnificent in the bold vision of its promoters, in the engineering skill which threw lines of iron across the continent and through the snowy passes of the Rockies, in the irresistible conquest of district after district for an expanding civilization; scandalous in the sordid abuse of the privileges extended to the railroad barons by the federal government, in the corruption of state legislatures by tax-dodging railroad corporations, in the granting of secret rebates to favored industrial concerns, in the arbitrary raising of freight rates on short-haul traffic to enable the roads to set low rates on the long hauls
where they faced fierce competition, and above all in the watering and manipulation of their securities. The railroads were then the largest economic units in the country, and as such were usually financed by bankers and capitalists in New York, Boston, and Philadelphia, who often knew little about the local problems of the farmers and homesteaders whom the roads served, and cared less. Some of the railroad barons, such as James J. Hill of the Great Northern, had a far-sighted sense of the opportunity for solid gain which lay in developing the communities dependent upon their lines; but for every Hill, great or small, there was a Jay Gould, buying roads, plundering them financially for the benefit of his own pocket, and then washing his hands of them; or a financial blackmailer like the promoters of the West Shore line, building roads parallel to existing lines for the sheer purpose of threatening them with ruin and being bought out at fancy prices.

  Only the rapid growth of the country and the increasing efficiency of metal and steam had prevented recurrent disaster for the roads, for as a result of irresponsible absentee ownership and speculative plundering, by 1890 the railroad system of the country, by and large, was overbuilt and overcapitalized (and thus overloaded with debt). When the panic of 1893 dragged the country down into depression, the number and extent of railroad failures was dismaying. According to Alexander Dana Noyes, in the year 1894 at least 61 per cent of the outstanding shares of American railroads were receiving no dividend whatever, and 25 per cent of them represented bankrupt roads. In the West, where the iron horse had made its most splendid conquests, three great roads were in the hands of receivers: the Union Pacific, the Northern Pacific, and the Santa Fé.