by Jean Strouse
Harriman, of course, did not regard himself as butting in. He saw Hill and Morgan as filching the CB&Q out from under him—the new combination would be much stronger than the UP—and he quickly came up with a Napoleonic plan for revenge: to secure the CB&Q he would take over the giant Northern Pacific.
Buying stock out from under Morgan’s formidable nose would be next to impossible, however. Harriman was going to need a great deal of luck and even more cash, and to assure himself of the latter he turned to Kuhn, Loeb and to the commercial National City Bank. Between 1891, when James Stillman became president of the City Bank, and 1901, the amount of its deposits had multiplied nearly ninefold, and its total assets had risen from $22 million to $194.5 million. William Rockefeller, John D.’s brother and chief financial officer, had chosen the City as the Standard Oil bank, and he and Stillman had been helping Schiff and Harriman refinance the Union Pacific.‡
Morgan’s lofty manner and dominant position on Wall Street had not endeared him to his rivals, and Hill later claimed that what came next had more to do with banks than with railroads—that the “City Bank crowd” backed Harriman in order “to show the world that Morgan was not the only banker in America,” and to challenge his assumption “that all other Banking Houses were nothing more than his clerks.” Stillman, said Hill, talked of “cutting [Morgan’s] wings.”
Schiff, working for Harriman, began to buy Northern Pacific shares as soon as Morgan left for Europe at the beginning of April. McKinley’s second election had promised more heady times for Wall Street, and bullish investors were pushing volume and prices on the New York Stock Exchange to new highs. In January 1901 the market had its first 2-million-share day. In April, millionaires created by the steel merger, called the “Pittsburgh crowd,” descended on New York ready to gamble, which provided perfect cover for Harriman’s raid.
Morgan and his associates controlled the Northern Pacific board but owned less than half of its common stock; they assumed that no one would dream of trying to take over a $155 million railroad. NP common had ranged in price from 45 to 86 in 1900. It closed at 96 on April 1, 1901, on a heavy volume of 437,000 shares, and continued to climb all month. Kuhn, Loeb occasionally sold shares to modulate the rise and allay suspicion, attributing the run-up to Northern Pacific’s increased value after the CB&Q acquisition. The stock hit 103 on April 22, and 105 three days later. On April 30, volume on the Stock Exchange soared to a record 3.3 million shares.
Harriman had calculated that the Morgan partners in their Senior’s absence would not take alarm at the unusual activity in NP stock. The unsuspecting Bob Bacon actually sold 20,000 of Morgan’s own shares to profit from the rise, which seemed to confirm Hill’s prediction a year earlier that Coster’s death would leave the railroad end of Morgan’s business “unprotected.” John W. “Bet-a-Million” Gates told a reporter in May, “It looks as though the little boys … commenced while the big boy was away. If Mr. Morgan had been here this never would have happened.” By Wednesday, May 1, NP common was trading at 115, and on Sunday, the New York Herald looked back at “the most colossal week of speculative trading in the world’s history.”
Hill was in New York that week, and though he had noticed the upward pressure on Northern Pacific, he did not know that Harriman was behind it—until Schiff told him.
Schiff had been Hill’s own banker until 1897, when Harriman demanded Kuhn, Loeb’s exclusive attention, and Hill began to work more closely with Morgan. Both Kuhn, Loeb and the Great Northern had offices at 27 Pine Street, a block north of J. P. Morgan & Co., and it was there on Friday, May 3, that Schiff explained the situation to Hill. According to Hill, the banker invited him to join the effort to “throw Morgan overboard,” promising him the presidency of the Northern Pacific and “all manner of things by way of control of the Union and Southern Pacific as well.” Schiff said his group had spent $79 million, and held 420,000 of the NP’s 750,000 preferred shares and 370,000 of the 800,000 common—in other words, nearly majority control of the road. Adding Hill’s stock to this inventory would give Harriman a huge margin of victory, but Hill, on his own account, refused to “abandon Morgan” and join this “plan of piracy.” Hill may have embellished the story he told, but he did not invent its most surprising feature—that Schiff was mounting a brazen attack on the reigning lord of American finance.
Schiff may have shared Stillman’s desire to clip Morgan’s ample wings, but his formal manners, German accent, white goatee, and refined tastes spoke more of Old World haute banque restraint than of hostile takeovers and secret stock raids, and he had been careful not to “interfere” with what Morgan was trying to do in the UP reorganization. Perhaps in 1901 he had succumbed to pressure from Harriman and the “City Bank crowd,” hoping that Hill would join them in a bloodless coup.
Hill disguised his shock at this astonishing information on Friday, May 3, then left Schiff and raced down Broad Street to 23 Wall. There, poring over stock-transfer books, he and Morgan’s partners discovered to their immense relief a hitch. Since the road’s directors—virtually all Morgan men—could retire the preferred shares as of January 1, 1902, the common stock was the controlling factor, and Harriman did not yet have fully half of it. It was at this point that Bacon cabled his senior partner, and from Aix late Saturday afternoon Morgan wired instructions to buy 150,000 shares of NP common.
In New York that Saturday morning, Harriman was in bed with a cold and vaguely uneasy about not having 51 percent of the NP common. He sent a message to Schiff to acquire another 40,000 shares (the Stock Exchange was open on Saturdays till noon). Schiff got the order but decided not to carry it out. Perhaps he thought he already had a majority of the stock—or perhaps, having tipped his hand to Hill, he had belatedly realized the implications of trying to outfox Morgan, and determined not to deliver the coup de grâce. Had he bought 40,000 more shares on May 4, his group would have taken control of Morgan’s road.§
On Monday, May 6, brokers for the Morgan/Hill group went onto the exchanges in London and New York to buy all the Northern Pacific stock they could. They used cash supplied by the big life insurance companies—chiefly, Perkins’s New York Life. Northern Pacific shot up to 127½ by the end of the day in New York, and closed on Tuesday at 149¾. When Hill ordered his London associates not to sell NP common, one of them replied: “Friends here will stand firm. Much surprised Schiff should join in attempt to wrest control of NP from you. Keep me posted.” Not even the railroad’s managers knew what its bankers were doing. From St. Paul on Tuesday, NP president Charles Mellen wired his vice president in New York, “Cannot you give me some idea what is transpiring, to explain tremendous movement our stock?”
Short speculators had for days been selling into the rise, certain that it could not continue, and expecting to make a killing by contracting to deliver at $140 stock they would buy more cheaply as the price came down. On Tuesday, however, when the Morgan traders stopped buying at $146, the price did not come down. The market had gone berserk.
The risk for a buyer of stock has a boundary of zero—a share bought at $100 cannot lose more than 100 percent of its value. For short sellers, however, the risk is boundless, since the price can go up indefinitely and the seller is obligated to deliver what he has pre-sold regardless of what he has to pay. On May 7 and 8, 1901, other stock prices crashed as the NP shorts dumped everything they had to cover their sales, and on “Blue Thursday,” May 9, NP leaped to a preposterous $1,000 a share. Speculators grimly realized the market was effectively cornered: they had sold 100,000 more shares than had ever been printed, and could not buy the stock at any price.
The Morgan/Hill group had acquired 150,000 shares in two days. If they paid an average of $129 a share, they had spent nearly $20 million. They had also precipitated a major Wall Street panic. Aware on Blue Thursday that countless brokers and stockholders would be ruined and the markets ravaged if the panic was not contained, the bankers at J. P. Morgan and Kuhn, Loeb agreed to postpone delivery of stock t
hey had bought, and to sell enough shares at $150 to allow the shorts to cover. Hill and Harriman made a public promise to negotiate peace, with Morgan appointing a new board of Northern Pacific directors. The panic subsided.
It had actually been the short sellers, not the buyers, who drove the market to the frenzied heights of Blue Thursday, and it had been the Harriman group’s raid, not the Morgan defense, that had set the action in motion. Still, what the world saw was Wall Street bankers diving like great white sharks after their prey, and Morgan took responsibility for repairing the damage. He had issued instructions by cable from Aix all week, but on Blue Thursday he abandoned his holiday and went to Paris, then London, where the crisis was threatening to derange the English markets. At Princes Gate, Fanny noted in her diary: “Pierpont is coming tomorrow.… Tremendous excitement in Wall Street, over Union & Northern Pacific.”
Morgan found the City anticipating a “disastrous” panic, but once he and Kuhn, Loeb’s English associates offered London brokers the same terms advanced in New York, the British markets calmed down.
When Hill and Morgan’s New York partners counted up their NP stock, they learned that they had only 394,830 shares of the common, and needed 400,001 for a majority. They quietly bought more, mainly in London, and by May 18 had 420,000 shares, 52.5 percent of the total.
From New York on May 15, Hill cabled a partner at Baring’s, using the code name “Feejee” for Morgan: “everything clearing here … feejees strength increasing daily general feeling city and country runs high against Schiff’s conduct all our friends firm enemy making overtures.”
The next day, Schiff wrote Morgan a long, self-justifying letter, explaining that he had bought Northern Pacific stock in order to protect the Union Pacific with regard to the CB&Q—“not with a view of actually taking away the control and management of the property from those in whose possession it was,” but only to secure a position of influence on its board—and that he had told Hill of the purchase in order “to bring about the harmony and community of interest which other means and appeals to him had failed to produce.” Blaming most of the trouble on Hill, Schiff assured Morgan that the “Union Pacific interests” had never intended “to do aught meant to be antagonistic to you or your firm,” and that he and his banking partners had “at all times wished, as we continue to do, to be permitted to aid in maintaining your personal so well deserved prestige.” Both Kuhn, Loeb and the Union Pacific were
entirely ready to do anything in reason that you may ask or suggest, so that permanent conditions shall be created which shall be just to all interests and not bear within them the seed of future strife, discord, and possible disaster. Trusting, then, dear Mr. Morgan, that you will understand the spirit in which this letter is written, and hoping that the rest of your stay abroad may be pleasant and not interrupted by any unsatisfactory events, I am, with assurances of esteem,
Yours most faithfully,
Jacob H. Schiff
Morgan considered interrupting his European trip to deal with the “unsatisfactory events” that had just occurred, but the recovery of market equanimity persuaded him he could remain abroad. There is no record of his response to Schiff, or to the partners who almost lost a property he had been working on for twenty years—a road he thought he controlled, but had had to pay top dollar on the open market to secure, with horrendous consequences.
On May 15, Fanny’s birthday, he left London at 10:00 A.M. for Paris. He met Adelaide and her daughter there, and brought them back to England two weeks later. Fanny noted in her diary on June 2 that Mrs. Douglas and Sybil joined a dinner party at Princes Gate, and on the fourth that the Douglases came to call with Annette Markoe and her elder daughter, Dagmar Wetmore. On the fifth, Fanny sailed for home.
The uncrowned king of American finance was invited to lunch early that June with the new King of England (who would not be officially crowned until 1902). The royal family was still in mourning for Queen Victoria; Morgan, Jack, George Bowdoin, and Morris K. Jesup drove down to Windsor Castle in black frock coats and top hats. Edward VII gave them a tour of the palace art collections and lunch in the Orangery.
A few weeks later Morgan had another royal encounter, with Edward’s second cousin Leopold II of Belgium. He had declined an invitation to meet Leopold in Brussels in May, writing from the Hôtel Bristol of his “extreme” regret. With the panic on both sides of the Atlantic under control, he was probably more interested in seeing Adelaide than Leopold (whose chief historical distinction, unconscionable exploitation of the Congo, had mired him in debt). On June 21, Jack reported to Fanny: “Father … went down to Gravesend last night with Dawkins and dined with the King of the Belgians who wanted to see them about some business and brought his yacht over because Father could not go to Brussels. Rather amusing; they spent the night on board.”
Henry Adams had described with delight the “abject terror” of London and Berlin as Morgan’s nose “approached hourly nearer their bank vaults” in early April. Two months later, Swiss newspapers reported that the American Trustmeister was planning to take over Switzerland’s watch industry to protect New England watchmakers from competition. Morgan, still trying to take a vacation, was probably buying watches, not factories.
Jack reported to Fanny in mid-June that his furloughed father had spent a full day on the Thames (“I did not ask who were the party”), and “actually came to the office yesterday where he lunched and left almost at once.” Morgan surprised his son even more three days later. Just before leaving New York that spring he had received a call from two Boston doctors, Collins Warren and Henry Bowditch, who were raising money for a new Harvard Medical School campus near the Fenway. As the Bostonians laid out architectural sketches, Morgan in a characteristic hurry pointed to three structures and asked how much they would cost. Dr. Warren said he did not yet know the exact costs. “When you have gotten your plans and estimates,” said Morgan, “let me know.” Warren sent him the figures in London that June. Morgan wired back that he would give $1 million for three buildings in memory of his father. He called Jack into his office at Old Broad Street and showed him the cable without a word. “You had better believe I was pleased,” Jack told his mother. “I don’t know that there is anything he could have done which would have pleased me more, though I realize it was not done with that object!”
The senior Morgan returned to New York on the Deutschland, sailing June 28, with Charles Lanier, Waldo Story, and Mr. and Mrs. Clinton Dawkins. Adelaide and her daughter stayed on in England—in July they signed the Visitors Book Morgan had just begun to keep for people who came by private invitation to see his collections at Princes Gate.
For years Hill and Morgan had been trying to create a solid “community of interest” among the northwest roads, and the 1901 crisis provided both occasion and urgent motive. In the wake of the panic, Hill told his friend Lord Mount Stephen, a Canadian banker and railroad president now living in England, that he was spending all his time trying to unite “the Great Northern, NP, and CB&Q under one control. This will give us within five years the best railway property in America with larger annual income for dividends than the Pennsylvania and the New York Central combined. Had we delayed the opportunity would never again have arisen.… With the large fortunes of this country it is absolutely necessary for permanent safety to lock up control.” Morgan was thinking along the same lines. Mount Stephen cabled Hill on June 6: “Have just seen Morgan.… Wants prompt unification of 2 roads. Delay might lead to serious consequences.” Hill replied the next day: “Nothing more can be done [in the United States] until Morgan arrives.”
Once Morgan did arrive in early July, he installed a new board of Northern Pacific directors that included parties from both sides of the recent conflict—Harriman, William Rockefeller, and Hill—“in order,” he said later, “to show there was no hostility.” And as announced in May, the former adversaries devised a plan for permanent railroad peace in the Northwest—a giant holding company that would contr
ol the securities of the Northern Pacific, the CB&Q, and the Great Northern. Morgan was so impatient to wrap up this consolidation, and so cavalier about the antitrust law, that one of his attorneys snapped, “What do you want to do? Do you want to go to jail?”
While Stetson and his associates worked out details of the unification plan, Morgan turned his attention to another urgent conflict—a strike at U.S. Steel. The Amalgamated Association of Iron, Steel and Tin Workers had steadily lost membership after the Homestead strike of 1892, and its leaders saw the formation of the giant steel trust as an opportunity to revitalize the union. The corporation had recognized the Amalgamated where it was already established in April 1901, but refused to allow it to organize nonunion mills. The labor leaders moved quickly, convinced that if they did not act before U.S. Steel solidified its position, the union “would be virtually banished from the industry.”
That spring, Amalgamated president T. J. Shaffer demanded a union wage scale and recognition in all the mills of two U.S. Steel subsidiaries, and when the two companies rejected the plan for plants not previously under union contract, he called a strike against them. By July 10, thirty-six thousand steelworkers had walked out, and Shaffer was threatening to shut down U.S. Steel. He expected railroad and miners’ unions to join the fight.
