by Peter Krass
It took Eads time to solve the challenge of sinking the two piers in the middle of the Mississippi, but he eventually discovered the solution on a trip to Europe, where he learned about French engineers using caissons, sealed chambers of compressed air with open bottoms that rested on the water’s bed, to allow the men to work underwater. In October 1869, the first caisson was floated into the Mississippi and construction on the east pier finally started. With construction successfully under way on the project’s most difficult segment, the St. Louis and Illinois Bridge Company could now consider bids for the superstructure and seek capital to complete the project.
Carnegie’s patient courting of Eads paid off as Keystone won the contract in February 1870. Financing the project, which was to cost more than $5 million, was now the main obstacle that the directors of the St. Louis and Illinois Bridge Company solved by deciding to sell bonds, just like the railroads did. When Carnegie read the published reports that $4 million in first-mortgage bonds were to be sold in New York and London to finance the completion of the St. Louis bridge, he pounced on the opportunity. Having proved himself the consummate salesman in peddling iron, bridges, and sleeping cars, why not bonds? With Thomson and Scott’s backing, he approached the chairman of the bridge company’s executive and finance committee, William Taussig, with a proposal that he sell the bonds for a commission of $50,000 in St. Louis and Illinois Bridge Company stock.17 Again, Carnegie was willing to sacrifice a short-term gain in cash for a higher long-term bonanza, a fantastic profit considering $50,000 was as much as he had made in all of 1868. Taussig agreed. With letters of reference tucked away, Carnegie sailed for London to penetrate the hallowed halls of finance and to curry favor with the redoubtable Junius Morgan, a rising American banker operating out of London who excelled at selling U.S. investments to Europeans. This marked the beginning of a brief but wild career as a bond salesman.
Peddling bonds was initially a delight, thus setting false expectations, as Morgan graciously received Carnegie at his fashionable London office at 22 Broad Street. With skeptical, light-blue eyes set on either side of a substantial nose crowned by a prominent forehead, the six-foot-tall Morgan was softening in the middle, but the banker remained a vigilant, hardmouthed, and brooding study in reserve. As he listened to the little Scotsman, it was difficult to resist Carnegie’s charm. The ebullient salesman described the monumental bridge, its significance to local trade, and the tollgate that would generate generous profits for the St. Louis and Illinois Bridge Company. Nothing before had been so glorious to Carnegie than this selling of America to Britain.
Using bonds to pay for a bridge was an entirely new concept, but Morgan was intrigued with such a “novel” project, and submitted the papers to his lawyers for review. After they scrutinized the terms, he requested a number of necessary changes before he would agree to handle the floating of the bonds.18 “You told me that you were going up to Scotland,” Morgan said. “Write your people and get the changes made and stop by here on your way back to America. If the changes are put through satisfactorily, I will buy some of your bonds.” That meant a five- or six-week time period, and Carnegie, the consummate salesman, had no intention of “allowing the fish to play so long.”19 Instead, he made good use of the transatlantic cable, which had been laid in 1866, and two days later he surprised Morgan by having the approved changes in hand. Before a week passed, he was able to report home that Morgan, who appreciated the young man’s resourcefulness, had agreed to take at least $1 million of the offering. This transaction was his first with European bankers, and while there would be others, none would be so straightforward. Not all men were as honest as Morgan, or as easily sold.
Fresh on the heels of his triumph with Junius Morgan, Carnegie, with the usual suspects of Thomson and Scott backing him, created yet another interlocked business venture, modeled on the Iowa Contracting Company, that involved the construction of a railroad from Davenport, Iowa, to St. Paul, Minnesota. In 1871, the trio was the driving force in forming the Davenport and St. Paul Construction Company, with Carnegie appointed treasurer and charged with selling bonds in Europe to finance the project. There was a complication, however, that would lead to serious trouble: the company’s client, the Davenport & St. Paul Railroad, wanted to survey and select the route.
Even though the road was to run through flat land parallel to the Mississippi, Carnegie was wary of the railroad’s ability to handle the task, so to watch his flank he hired an old Allegheny City friend, William H. Holmes, as a consulting engineer to help determine the best route. Holmes and the railway’s president, Hiram Price, immediately came into conflict. In a lengthy February 1871 letter, the handwriting a smudged scribble, Holmes warned Carnegie that an impatient Price was pushing ahead with grading a 135-mile stretch with little thought to making provisions for feeder lines. (Knowing his friend Andy expected perfection, Holmes added a postscript concerning his penmanship: “I am ashamed of the looks of this but it is written in a cold room in a printing office with smutty fingers.”)20
As pressure was put on Price that spring to conform to Carnegie and his allies’ desires concerning the railroad’s route, he denounced the Pennsylvania crowd as “a pack of adventurers”—increasingly a truthful statement. By June, Carnegie and Holmes decided Price should be forced out. He did indeed resign; but Scott, while acknowledging there were lots of problems “out there,” was not ready to accept the resignation. Because Price had been instrumental in handing them the project, Scott believed he deserved better treatment. Before the summer was out, Scott finally acknowledged Price had blundered in laying plans for key connections and accepted his resignation. As a somewhat objective observer, Holmes was “mystified” by the manner in which Thomson, Scott, and Carnegie handled the Price affair—indecision was not the way to run a railroad—but Holmes was not attuned to the politics of money behind certain deals.
A change of management did nothing to correct the grading and line connections blunders that caused delays and cost money. By late 1872, the situation was so bad that Holmes asked Carnegie to exonerate him from any responsibility, which Carnegie did. But, for surreptitious reasons, he also warned Holmes against speaking out on the matter. Carnegie had good cause for suppressing the mismanagement: he was attempting to sell $6 million in bonds for the Davenport & St. Paul Railroad, which were guaranteed by the Pennsylvania Railroad, to finance the railroad construction, and nasty rumors would squelch any deal.
When Sulzbach Brothers, an investment-banking firm in Frankfurt am Main, Germany, expressed interest in floating the Davenport bonds, Carnegie sailed for Germany in the summer of 1872. The Sulzbachs were immediately suspicious of the interlocked venture. Many of the officers of the construction company were also the officers of the railroad, making the organization incestuous enough for the bankers to demand another guarantor of the bonds besides the Pennsylvania. The firm of Drexel, Morgan agreed to the added responsibility, with J. Pierpont Morgan taking charge.
Morgan immediately voiced impatience with the Sulzbachs’ questions and delays and with Carnegie for not closing the deal promptly. He demanded of the latter, “Don’t let’s have any more slip ups if they can be avoided. . . . Don’t leave Frankfort again till all O.K.”21 Still, in November 1872, after Carnegie had spent several months bouncing from Germany to Switzerland for relaxation, to Scotland for family visits, and then back to Germany, the negotiations continued to drag. The German firm expressed further concerns about the progress of the railroad, stating that “we should be much obliged to you by your procuring us some information about present conditions of the Davenport line, how many miles are completed and operating, when the entire line is expected to be finished and all this sort of thing; also earnings gross & net.”22 Finally, the Sulzbachs agreed to take $3 million; but as for the remaining balance of $3 million, they hesitated. In May 1873, the firm again voiced concerns over the health of the railroad, suspecting that Carnegie had not been completely forthcoming as to the facts. Also,
considering 150 miles of the line had already been built, the Sulzbachs thought the sale of the first $3 million in bonds would cover the completion of the road, so when Carnegie started pressing for the balance to be sold, the bankers became even more suspicious. A note from Carnegie suggesting Sulzbach Brothers was unnecessarily concerned did little to assuage its fears, and the banking firm responded with a blistering letter: “Although you say herein that the Davenport matters should not trouble us too deeply, we must confess that they really do.” The Germans, feeling insulted, demanded to know why construction had halted and why “you don’t give us even any notice of it and had it not been for our inquiries we would not even know the present condition of affairs.”23
Was Carnegie deliberately hiding trouble at the railroad to protect his own financial gain? Not if he expected to pursue future bond sales. He was quite concerned with his image and refused offers to sell bonds he considered too speculative, as he did for a mine development concern in Utah: “It would not do for me to try London on any mining scheme. I must stick to my role of first class steady-going Security man—very adverse to anything speculative, or ‘too good.’ Among the class I have been dealing with you frighten if anything much beyond six per cent is talked of.”24 Also, the railroad business continued to boom, and all associated with it breathed an air of invincibility. Carnegie was certain any difficulties could be overcome and the project would prove profitable. To ensure success, he spent a good deal of time in Davenport in 1871—so much so that his mother came for a visit, and the rising Napoléon of business provided his queen dowager with a tour of the area. Certainly her (omni)presence bolstered his moral conscience if it was beginning to wander, and certainly he would never allow his mother to visit a place where she might be exposed to a den of thieves.
To ease their concerns, the Sulzbachs demanded that Carnegie and his friends take $1.5 million worth of the remaining bonds to inextricably tie them to the railroad’s success; in other words, if it failed, they’d all go down together. In yet another salvo, the German firm took aim at the Pennsylvania and Carnegie’s reputation, ominously hinting that they would be sullied if the Davenport railroad were not completed satisfactorily: “You also have the greatest interest to see the matter arranged taking the question from the moral point & we count therefore upon your good services, reminding you of your pledge to protect & to promote our interest.”25
After years of taking on numerous and complicated ventures, Carnegie was now stretched too thin—a ball had finally dropped—for the Davenport & St. Paul would indeed fail after the financial panic of 1873, and Carnegie would feel the wrath of the Germans. This interlocked venture would haunt Carnegie for over a dozen years.
While Carnegie found himself entangled on a number of fronts in the early 1870s, bridge construction continued at a hectic pace. Yet another opportunity emerged in the Great Plains, one that would prove more financially disastrous than the Sulzbach Brothers deal. On February 24, 1871, the Bridge Act of Congress authorized the issuance of $2.5 million in 8 percent gold bonds to finance a bridge spanning the Missouri River at Omaha. Thomson and Pierpont Morgan were made two of the three Bridge Bond trustees, and they turned to Carnegie to handle the bond sales.26 Because the bridge would fill the last gap in the Union Pacific and Central Pacific’s jointly built transcontinental railroad network, linking the western with the eastern lines, it was a noteworthy project. No longer would the railroad have to rely on ferries in the summer and temporary tracks across the ice in the winter. As with other bridge deals, the tolls would pay off the debt. What Carnegie didn’t know was that a small group of Union Pacific executives were planning to use the proceeds from the bonds he sold to pay off personal debts and loans they had accrued in trying to keep the financially troubled railroad afloat. One director, Cornelius S. Bushnell, hoping to even profit from this new issue, bought a sizable block of the bonds and then made independent arrangements with Carnegie to resell them at a profit. Independently, Bushnell also arranged for Carnegie to sell an additional $1 million to $3 million worth of other Union Pacific bonds.27 The money was siphoned away as quickly as Carnegie sold the bonds, of course, and he discovered nothing remained to pay his commission. Greed had gotten the better of Carnegie, who should have been far more wary of dealing with the Union Pacific.
The dastardly situation in which Carnegie found himself originated when President Lincoln championed a transcontinental railroad and the necessary legislation was passed for subsidizing the construction with land grants, federal bonds, and loans. The Union Pacific Railroad was charged with building the line westward from Omaha, Nebraska, while the Central Pacific would build eastward from Sacramento, California. The Union Pacific’s first board of directors included J. Edgar Thomson, Cornelius Bushnell, Brigham Young, and Thomas C. Durant, the railroad’s chief, among others. Durant, however, never believed the Union Pacific would yield a cent of profit. He was, from the start, intent on making a fortune off the actual construction of the road.28 The fact that the government was willing to subsidize the construction and guarantee loans made to the Union Pacific provided the perfect opportunity for a good, sound fleecing.
To achieve his ignoble goal, Durant organized an independent construction company to which the railroad would then subcontract the construction and called it Crédit Mobilier of America, a fancy-sounding name that hardly suggested a company whose sole mission was to drain the Union Pacific of its capital through excessive overcharging. Yes, Durant and his cronies used their construction company to steal from their own railroad. To keep the money flowing, they floated more and more Union Pacific bonds and stock, thus overcapitalizing the company while slinking out the back door with Crédit Mobilier wheelbarrows full of money. This relationship between construction company and railroad, with the interlocking directorates, was identical to what Carnegie set up in Davenport, and this fleecing scenario was precisely what the Sulzbachs feared. Both construction companies charged a premium for services—only in Carnegie’s case, planning and construction blunders appeared to siphon off most of the money, not a pack of scoundrels like Durant and his associates.
Durant’s scheme was so bold that as early as 1868 Congress was threatening to investigate alleged corruption. To preempt an investigation, Union Pacific officials offered key congressmen large blocks of the company’s stock gratis or at severe discounts; included on the gift list were both of U. S. Grant’s vice presidents, Schuyler Colfax and Henry Wilson. The well-timed bribery squelched news of the looting for the moment, but by 1869, certain Union Pacific officials were so disgusted with themselves, with the company, and, in particular, with Durant’s extravagances that they forced him out. Then, in September 1870, Grant appointed a new attorney general, Amos T. Akerman, whose first initiative was to demand that all government-subsidized railroads repay accrued interest on subsidy bonds and make interest payments semiannually going forward, rather than waiting until the thirty-year bonds matured. Union Pacific executives, after reviewing the company’s ledgers, realized they could not make the payments, so Bushnell, the railroad’s president, Oliver Ames, and others pooled their finances and loaned the company money, with Bushnell personally arranging for and endorsing more than $600,000 in short-term loans from New York banks.29 Wall Street was not so kind and pummeled the stock. Seeing an opportunity to extend the Pennsylvania Railroad’s franchise, Thomson and Scott quickly purchased blocks of Union Pacific stock. (Pullman and Carnegie already had been given and had purchased sizable amounts due to the sleeping car connection.)
Union Pacific’s financial situation became so precarious that in early 1871 Bushnell traveled to Philadelphia to seek Thomson’s help in extricating the railroad from its troubles. He proposed that Thomson use Pennsylvania Railroad securities to obtain another sizable bank loan. After some negotiating, Thomson agreed. Carnegie was selected to handle the transaction, but before he approached the New York banks to facilitate the loan, Thomson invited him to his Philadelphia home, an imposing
mansion designed in the Greek-revival style. Almost twenty years had passed since they had first met: now Carnegie was entering his prime, still youthful looking with his blond hair thinning only slightly at the temples; in contrast, the heavyset Thomson was showing his years, with his face baggy and pliable, his gray hair receding halfway across his skull. A crucial moment was upon these men, one still seeking glory, the other a final and fitting crown. Thomson divulged the sensitive nature of Carnegie’s task: if a loan could be arranged, it would give the Pennsylvania Railroad the necessary leverage to seize control of the Union Pacific, greatly extending its franchise. There would be pecuniary benefits for him, too.
Once Carnegie secured the loan, Thomson demanded collateral from the Union Pacific, which he received in the form of thirty thousand shares of Union Pacific stock with a par value of $3 million. As an added bonus, the Union Pacific gave Thomson, Scott, Carnegie, and Pullman, who had also aided the transaction, the option of buying any or all of that stock at any time.30 They promptly did at severely discounted prices—and those shares, along with their previous purchases, gave them de facto control of the Union Pacific. Thomson’s plan had worked. On March 8, 1871, an ambushed Ames resigned. Scott was made president of the railroad, while Carnegie and Pullman joined Thomson as directors. It was a major triumph for Carnegie, who was suddenly elevated into his foremost position of power. It was about this time that he was hired to sell the Omaha Bridge bonds. He had to have been aware of Durant’s fleecing and the railroad’s still precarious financial situation, but he couldn’t ignore the chance for another windfall.
