by Jean Strouse
Morgan rejected the railroad’s candidate for president as “useless,” and installed Eben Thomas, an Erie executive who had worked on the reorganization with Coster and on other “Morgan” roads as well. The men appointed to the new Erie board for long-term supervision included Coster, Stetson, Spencer, Jim Goodwin, and J. Lowber Welsh. Morganization imposed financial stability on the Erie for the first time in forty years.
It was the failure of the Philadelphia & Reading, along with National Cordage, that had started the 1893 panic. Morgan’s rescue of the Reading coal roads in 1886 had earned him Wall Street’s respect and extravagant praise, but seven years later his voting trust had disbanded and the conservative Austin Corbin had been replaced as president by Alexander A. McLeod, a reckless expansionist who preferred rate-cutting warfare to Morganatic cooperation. Drexel, Morgan refused to take on a second Reading rehabilitation unless McLeod resigned, and the holders of the road’s securities rejected several proposals before accepting a tough reorganization plan in the summer of 1895. It followed the usual Morgan pattern, and split the road’s rail and coal properties into independent entities under one corporate umbrella. The Commercial & Financial Chronicle called the plan not only “drastic and radical,” but “thorough and effective.” It was also expensive: in the fifteen months the Morgan firms spent on the second Reading rescue, they earned commissions amounting to $2.76 million, plus $650,000 in management fees.
Morgan was slowly imposing order on the “gigantic waste and fraud and duplication” of the American transport system. When the economy had fully recovered at the beginning of the new century, one Wall Street analyst said Morgan had made railroad bonds among the country’s “safest investments.” Henry Clay Frick compared them to Rembrandts.
However, a writer in the Machinists’ Monthly Journal asked, “When J. Pierpont Morgan, the patron of bishops and exalted pillar of the church, is at his devotions; when with a gilt-edged prayer-book in his hand he wiggles himself into a more comfortable position in his satin-lined pew … does he think of the starving miners who are suffering through his efforts and that of his colleagues of the coal trust? When he reads the lessons of charity and good will toward men, does he think of the tyrannous system that reduces wages to the subsistence point, or is he figuring some new combination whereby he can augment his plethoric fortune? When the organ peals forth does not his conscience supply a discord with the wails and cries of those whose lives are sacrificed to the voracious demands of his class?”
In July of 1893, as the stock market hit its postpanic nadir, Anthony Drexel died in Carlsbad, Germany. Pierpont reported himself “stunned” by this new loss: Mr. Drexel was “very dear to me,” he told a friend, “and I am at a complete loss to know how I am going to get along without him.” He cabled the same message to Walter Burns in London after the funeral, still feeling “dazed and staggered in deciding what best for future.” Perhaps Burns would come over to “help me decide.”
Morgan’s sense of paralysis had more to do with mourning than with basic doubts about his ability to carry on. The economic indicators echoed his mood: “Everything here continues as blue as indigo,” he wrote in late July as the country slid from panic into depression: “hope we shall soon have some change for the better, for it is very depressing and very exhausting.”
He virtually lived on board his yacht that summer, anchored in the Hudson River off 23rd Street or cruising up the Atlantic Coast to Newport and Maine with Edith Randolph. After consultation with Walter Burns, he arranged for Drexel’s estate to leave the partnerships as they were for a year, so that he would not have to close out the holdings in an economic downturn.
* The nineteenth-century uses of the financial term “trust,” according to the economic historians Thomas R. Navin and Marian V. Sears, include the following: “If a man trusted another, he placed his money in a trust fund in the other man’s care. When the other man established a company to handle a number of trust funds, he called it a trust company.… When the owners of a group of industrial enterprises surrendered their securities to a committee of so-called trustees, they called the resulting combination a ‘trust.’ … Laws set up to deal with large industrial combinations, of which the ‘trusts’ were the earliest examples, were called antitrust laws. There is still another use of the word trust to mean any large industrial combination, but this use is careless and inappropriate.”
† That Lippmann later revised his views is characteristic of this controversial field. Harvard Law professor Philip Areeda, summing up a distinguished career in antitrust law, said not long before he died in 1995: “Like all fields of law, antitrust ebbs and flows, sometimes with greater populist concern for protecting small firms from big ones. At other times, the emphasis is on economic efficiency. The major change in the field has been in the growing awareness that business affairs are more complex than they might seem initially, and that motivations for what initially appears to be a restraint of trade might in fact be a more subtle way to promote competition.”
‡ The Bank of England led the rescue of the Barings, who shared the Argentina bond market with the Morgans after 1890.
§ Villard and Coster set the values at which constituent companies were brought in. The Morgan bank and its partners had invested over $1 million in the Light Company since 1878, and Coster made sure that EELC shareholders were amply rewarded in the reorganization: each $100 share was exchanged for new stock and trust certificates worth $266.66.
‖ Leaving the electrical industry behind, Edison worked on the phonograph, the iron-ore machine, a storage battery, and a motion-picture projector. He spent his GE profits on the iron-ore device. On being told what the stock would have been worth had he held on to it, he shrugged, “Well, it’s all gone, but we had a hell of a good time spending it.” His studio in West Orange, New Jersey, produced the world’s first feature film, The Great Train Robbery, in 1904, and a patent-pooling movie monopoly earned the inventor $1 million a year between 1907 and 1917.
One night at a dinner in 1896, he met a young engineer from the Detroit Edison Company named Henry Ford. Ford talked about an internal combustion engine he had devised for automobiles, when most people thought the future belonged to electric cars, and Edison offered enthusiastic encouragement. Ford never forgot it. Soon, he was making millions in Detroit, and bailed Edison out every time he got the chance. When Edison’s West Orange headquarters burned down in 1914, Ford gave the aging inventor a $750,000 interest-free loan. When Edison retired in 1926, Ford and the tire magnate Harvey Firestone put up $93,000 for an Edison Botanic Research Company, and quietly fed in money to keep the old man occupied. Edison called his young friend “Henry,” though Ford always addressed him as “Mr. Edison”—and this unlikely pair built houses next door to each other in Fort Myers, Florida. They toured the Everglades, and went camping in the Great Smokies. In 1929, to celebrate fifty years of incandescent light, Ford built a museum of Edison’s works, reconstructed the Menlo Park facilities in Dearborn, Michigan, and hosted a party that included President and Mrs. Calvin Coolidge, Marie Curie, Orville Wright, Jack Morgan, and all the original Edison employees who were still alive.
a Alfred D. Chandler, Jr., has compared the companies that grew to industry dominance with those that did not. Successful center firms, capital-intensive and technologically advanced, were able to take advantage of processes and equipment that made possible enormous economies of scale and scope. They integrated backward into resource acquisition and forward into product distribution; they devised managerial hierarchies to run complex operations, maximized their productive and allocative efficiency, and developed long-range planning strategies suited to their markets. By contrast, companies that were labor-intensive and relatively small did not gain significant scale economies; they tried to control prices and markets through cartels, did not integrate vertically, developed no managerial hierarchies, and paid more attention to short-term profits than to long-term planning. These peripheral firms, in modern
economic terminology, did not grow to dominate their industries, and most did not survive.
The major center firms that evolved during the period from 1880 to 1920 had extraordinary stability and longevity: Chandler compared the two hundred largest U.S. manufacturing firms (measured in assets) for 1917 and 1973, and found that the dominant companies remained concentrated in the same areas (petroleum, chemicals, food products, transportation equipment, rubber), and were mostly the same companies. He found an identical pattern abroad, with large center firms providing the stable, dominant group in Germany, France, Britain, and Japan, in the same industries as in the United States. That these firms survived for so long, in spite of intense domestic and foreign competition, leads to the conclusion that it was not simply a matter of monopoly or price control, but productive efficiency and the nature of the industries themselves that determined success. According to Chandler’s Harvard Business School colleague Thomas K. McCraw, the striking cross-national similarities “suggest strongly that the inherent economic and technological characteristics of given industries almost force them to assume either a center or peripheral configuration and to maintain that configuration over a long period of time. These inherent characteristics seem much more important than different legal systems or different national cultures in determining the relative size and organizational structure of firms within those industries. This is a fact of surpassing importance in assessing the historical record of big business in the United States and the conceptualization of the trust question from the late nineteenth century to the present day [his italics].”
b The twelve stocks in the first industrial average were American Cotton Oil, American Sugar Refining, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas Light, National Lead, North American (which financed street railways and gas and electric companies), Tennessee Coal, Iron & Railroad, U.S. Leather (preferred), and U.S. Rubber. Several of the original twelve companies have survived in some form into the late twentieth century, but only GE has retained its membership in the Dow and its name. The early average was unweighted: Charles Dow simply added up the closing prices of the stocks (which came to 491.28 on May 26, 1896) and divided the total by 12, for an opening average of 40.94. He continued to publish a separate railroad listing, and frequently reconfigured both averages according to the fortunes of the corporations.
c In terms of investor safety, bondholders come first and holders of common stock last. Regular interest on bonds has to be paid at a specified rate, regardless of earnings. Common stock dividends are issued at the discretion of the directors, and vary with earnings. Preferred shares fall in between: they generally bear a set dividend rate, but it is paid only when earnings are sufficient. If the company defaults, the same order prevails in liquidation: bondholders take precedence, followed by preferred shareholders, then holders of common stock.
d Largely because of its high capitalization, the Southern did not pay dividends on the preferred stock until 1897, and then less than the 5 percent required to terminate the voting trust; it finally paid 5 percent in 1902. By 1906, when Samuel Spencer died, the company had not paid dividends on its common shares.
Chapter 17
ROMANCE
Fanny had spent most of the summer of 1893 at Cragston, although she went to Bar Harbor for two weeks in late July, noting the presence of “Mrs. Randolph” in her husband’s Corsair parties without comment. She left many of her diary’s pages blank in the first months of 1894, but reported from time to time, “Pierpont dined home,” “Pierpont dined out,” “had a treatment … & book keeping lesson.” On April 15 she wrote: “Spoke with P. about Mrs. R.”
Whatever she said to her husband that day, she never mentioned Mrs. R. in her diary again. She went to Europe for the summer of 1894 with Louisa and Anne, and after she returned, Pierpont no longer saw Edith in her presence.
“Why does the wife of a certain wealthy man always go to Europe about the time he returns home, and vice versa?” wondered Town Topics in July of 1895. The editorship of this gossip chronicle had passed in 1891 from its publisher/owner, Eugene Mann, to his brother, Colonel William D’Alton Mann, a Civil War hero and cheerful swindler who used the paper to blackmail prominent men. The colonel’s method was to detail some illicit behavior without specifying the transgressor, print the name in a paragraph nearby, and wait to be paid for silence. When he posed his question about the wife of a wealthy man in July 1895, he mentioned Mr. and Mrs. Pierpont Morgan and Edith Randolph in unrelated stories on the preceding page.
Mann knew that his success as journalist and blackmailer depended on getting facts right—he once fired an assistant for leaving the “h” out of Rhinelander. His network of informants included social climbers, servants, waiters, and chauffeurs. The names of men who had paid him off came out when he was sued for libel in 1906. Among them were William K. Vanderbilt ($25,000) and his brother-in-law, W. Seward Webb ($14,000), steelmaster Charles M. Schwab ($10,000), California railroad magnate Collis P. Huntington ($5,000), Pierpont Morgan ($2,500), and William C. Whitney ($1,000).
At his trial, Mann said these sums were simply loans that had not been repaid. Asked why a man of Morgan’s stature and character would “lend” $2,500 to a virtual stranger without security, the colonel replied: “I went to Mr. Morgan the same as I did to the other men of prominence, and asked them because I felt they were of such standing that if they accommodated me there would be no occasion for me to criticize them.”
Although Morgan no doubt took good financial care of Edith Randolph (all such matters were off the books), she was still relatively young, and once Fanny “spoke to P. about Mrs. R.” there was no getting around the fact that the beautiful widow might have a more satisfying future with someone else. Colonel Mann’s stories over the summer and fall of 1895 indicate how the couple solved this problem.
Former Navy Secretary Whitney had also courted Edith in 1890, but his wife had put a stop to it. Then in 1893 Flora Payne Whitney died. Her husband inherited her large fortune, and emerged from the requisite period of mourning as a leading candidate for the 1896 Democratic presidential nomination. In August of 1895 he sailed his new yacht, Columbia, up the Atlantic coast to Bar Harbor. Edith was there with her mother and children, as was Morgan on Corsair. On August 15, Town Topics reported the “first of the autumn nor’westers” whirling down the coast from Bar Harbor—“a tale of the devoted attentions paid by a former member of the Cabinet and a possible Democratic presidential candidate to a charming widow, one of a family noted for the superb physique of both its women and men, and even of his probable engagement to her.”
The well-informed Colonel Mann continued: “The presence on the scene in his handsome steam yacht of an eminent financier who has long been a warm friend and supposed adviser of the widow in question has added still more to the piquancy of this Bar Harbor breeze and made the tale a more complicated one—dividing, indeed, the gossips into two hostile camps regarding it. Meanwhile, the prominent politician … pursues the even tenor of his ways, and the eminent financier takes the widow and her friends a-sailing o’er the blue waters of Mount Desert on his yacht.” On the next page appeared the inevitable item naming notable members of the Bar Harbor colony that summer—including ex-Secretary Whitney, Edith Randolph’s brother, Fred May, Levi P. Morton (elected governor of New York in 1894), and “Mr. Pierpont Morgan, on Corsair.”
Henry Adams wrote to an American friend from London that fall—referring to Whitney’s presidential prospects—“As for our situation at home, it is wholly in the hands of Mr. Morgan and Mrs. Randolph.”
Mr. Morgan’s hands were in fact quite full. Colonel Mann reflected philosophically on September 19 that “It has become more and more not only a luxury but a necessity for married women in the ‘smart set’ to have, each one, her own private and devoted slave, selected from among the men, married or single, of the same class.” Dropping a pointed reference to Morgan’s work with the bankrupt National
Cordage Company, Mann reported having heard over the summer about “one particular affair of this kind that is now ‘on,’ in which the admirer is a very well-known father of a family, who has been all too well acquainted with the woes of Cordage. His devotion is so marked as to entitle him to a certain amount of praise for frankness. The fair object of his cult is a young matron, full of fun and dash, whose object in life is apparently to have a good time, and to that end she devotes her energies, which are conspicuous. She and her family are, I hear, to spend the winter in the country at a not too great distance from the abode of the languishing swain.”
The “fair object” of the “languishing swain’s” attentions was Edith Randolph’s best friend, Adelaide Douglas. Elegant and handsome although not conventionally pretty, she had blue eyes under hooded lids, a throaty alto laugh, and, as Mann observed, an energetic pleasure in living that matched Pierpont Morgan’s. She also had a husband and two children.
Born Adelaide Louisa Townsend in 1853, she had grown up at 120 Fifth Avenue and in Bayside, Queens. Her father, descended from English Quakers who settled on Long Island in the early seventeenth century, was Effingham Lawrence Townsend, the head of a prominent auction house, Townsend & Montant. In 1879 Adelaide married William Proctor Douglas at New York’s Grace Church, in a ceremony conducted by the Reverend Henry Codman Potter.
Adelaide’s husband had inherited a substantial fortune and a mansion with three hundred acres of land on Little Neck Bay, Long Island.* In 1873 his family had leased their house on 14th Street to the Metropolitan Museum of Art while the Vaux-Mould building was under construction on upper Fifth Avenue. William donated a building on his Long Island estate to serve as the local railroad station in 1876, on condition that the town be called Douglaston. Eleven years older than Adelaide, with curly dark hair parted in the middle, a waxed mustache and a thick beard, he figured conspicuously in the leisured masculine society of the Gilded Age. He spent his days playing polo, organizing Coaching Club races, and sailing: his yacht Sappho had defeated a British challenger for the America’s Cup in 1871. He and Adelaide spent a yearlong honeymoon in France, where his close friend James Gordon Bennett, Jr., was running a Paris edition of the Herald.
