by Jean Strouse
The syndicate offset some of its losses in the fall of 1903 by buying about 250,000 preferred shares on the open market and exchanging them for the higher-priced bonds, at a gain of about $10 per share (roughly $2.5 million). Since the conversion plan was proving no more advantageous to U.S. Steel than to the syndicate, the Finance Committee asked the Morgan bank on November 19 to terminate the contract, which it immediately did.
All told, the syndicate delivered more than the $100 million it had guaranteed, but in different proportions—not $20 million cash and $80 million in preferred shares exchanged for bonds, but $11 million cash and $114 million converted preferred; the additional shares probably came from the open market operations in the fall of 1903. If the syndicate did lose roughly $23.2 million on its delivery of preferred shares, if it gained back $2.5 million by buying shares in the fall of 1903 and trading them for bonds, and if it earned a $6.8 million fee (4 percent of $170 million), its total loss would have been about $14 million. Over the long run, the preferred stock sold at much higher prices than the bonds, which meant that stockholders and syndicate members who traded shares for bonds had sacrificed significant potential profit.
‖ Schwab had bought Bethlehem Steel in June 1901 for roughly $7 million. He sold it to the U.S. Steel syndicate at that price, then bought it back in 1902 for $7.2 million and sold it to his U.S. Shipbuilding Company for $30 million of its stock and bonds. He gave the Morgan syndicate 50,000 shares of the stock as profit on the resale, but the shipping venture failed in July 1903. In December 1904 Schwab secured a New Jersey charter for the Bethlehem Steel Corporation, sold off extraneous facilities, and concentrated on making commercial steel.
a Five months later the commission gave them a 10 percent raise and a nine-hour day, but did not recognize the union; instead, it created a conciliation board with worker representation. It also allowed the owners to raise coal prices 10 percent. Radical leaders denounced Mitchell for selling out the union.
b Many years later, in his autobiography, Roosevelt offered an analysis of the questions he had faced, and laid out the case for regulation. The nineteenth century in America, he wrote, had witnessed a “riot of individualistic materialism,” and the “total absence of governmental control had led to a portentous growth in the financial and industrial world both of natural individuals and of artificial individuals—that is, corporations.… In no other country in the world was such power held by the men who had gained these fortunes.… The power of the mighty industrial overlords had increased with giant strides, while the methods of controlling them, or checking abuses by them, on the part of the people, through the Government, remained archaic and therefore practically impotent.…
“One of the main troubles was the fact that the men who saw the evils and who tried to remedy them attempted to work in two wholly different ways, and the great majority of them in a way that offered little promise of real betterment. They tried (by the Sherman law method) to bolster up an individualism already proved to be both futile and mischievous; to remedy by more individualism the concentration that was the inevitable result of the already existing individualism. They saw the evil done by the big combinations, and sought to remedy it by destroying them and restoring the country to the economic conditions of the middle of the nineteenth century. This was a hopeless effort, and those who went into it, although they regarded themselves as radical progressives, really represented a form of sincere rural toryism.…
“On the other hand, a few men recognized that corporations and combinations had become indispensable in the business world, that it was folly to try to prohibit them, but that it was also folly to leave them without thoroughgoing control. These men realized that the doctrines of the old laissez-faire economists, of the believers in unlimited competition, unlimited individualism, were in the actual state of affairs false and mischievous. They realized that the Government must now interfere to protect labor, to subordinate the big corporation to the public welfare, and to shackle cunning and fraud exactly as centuries before it had interfered to shackle the physical force which does wrong by violence.”
Chapter 23
COMMUNITY OF INTEREST ON THE ATLANTIC
Pierpont Morgan … is carrying loads that stagger the strongest nerves,” wrote Henry Adams in April 1902. “Everyone asks what would happen if some morning he woke up dead.”
It was a good question. Morgan had just turned sixty-five, and though he had no intention of waking up dead, he was beginning to ease out from under his nerve-staggering load. When he left for Europe as usual that April, he was organizing the U.S. Steel bond-conversion syndicate, the defense of Northern Securities, and a gigantic international shipping trust.
None of the ideas for his major consolidations originated with him. Charles Coffin and Lee, Higginson & Co. had proposed the merger that became General Electric, Judge Gary broached the idea of Federal Steel, Charles Schwab sketched out the initial plan for U.S. Steel, and James J. Hill first argued for the union of competing northwest railroads that developed into Northern Securities. The maritime trust was no exception. It started at the instigation of men in the shipping trade.
A Philadelphian named Clement A. Griscom was the dominant figure in American transatlantic transport in 1900. His International Navigation Company, chartered in New Jersey, owned U.S., British, and Belgian lines that ran merchant ships between the eastern seaboard and Europe. Like E. H. Harriman and James J. Hill, Griscom had dreams of stretching America’s transportation empire around the world—of rail-ship links that would make it possible to send American grain on American carriers all the way from the midwestern plains to Liverpool and Hong Kong.
In the 1830s the United States had carried 90 percent of its relatively small international trade under its own flag, but high construction and operating costs, as the industry shifted from sail to steam, had caused a dramatic decline in domestic shipbuilding after 1850. By 1900 only 10 percent of U.S. foreign trade moved on U.S. ships. Griscom, aiming to expand the American merchant marine and free the richest country in the world from dependence on foreign carriers, had procured a federal subsidy for mail in 1891, and lobbied throughout the nineties for further government aid. Then the Boer and Spanish-American Wars stimulated shipbuilding, and a tremendous surge in U.S. exports between 1898 and 1900 won political as well as commercial support for greater American participation in oceangoing trade.
In this auspicious climate, Griscom decided to refinance some of his debt and build new ships. He engaged Drexel & Co. to float a $13 million loan for his INC in 1899. The ink on the bonds was barely dry when he learned that the largest freight carrier in the North Atlantic, Britain’s Frederick Leyland & Co., was about to acquire his only domestic rival, the Baltimore-based Atlantic Transport Company. British ownership of the ATC would threaten not only the INC but also the prospect of a strong U.S. presence in North Atlantic shipping—which was probably how Griscom described the situation to Morgan.
Exactly when and how he secured Morgan’s interest is not clear. The Leyland-ATC deal fell apart in May of 1900. When other bankers, possibly representing Leyland, approached Morgan about a “large shipbuilding combination” that July, he told his English partners, “I do not think favorably of entertaining shipbuilding business.” By the end of the year he had changed his mind. The highly competitive shipping industry had earned record profits in 1900, which may have helped persuade him that if a “large combination” could reduce rate wars, consolidate operations, and build fast new ships, it would be able to stabilize international trade and yield even greater returns.
In December 1900, Morgan agreed to finance a merger of the INC and the ATC, to advance cash for building new ships, and to bring in two more lines. He expected Congress to subsidize a U.S.-based merchant marine that would service the busiest trade route in the world.
One of the additional companies brought in under this agreement was Leyland & Co. Just months after the prosperous British freight line threatened to take over
America’s oceangoing transport, the direction of the takeover reversed. Early in 1901, as Morgan worked on the organization of U.S. Steel, his associates in London negotiated for Leyland. Its chairman, John R. Ellerman, was an experienced financier who held out for three times the Americans’ initial $3.5 million offer—his shareholders got $11 million, in cash. The house of Morgan advanced the $11 million, since the merger’s funding was not yet in place.
Before the Leyland purchase, Morgan had been acting simply as banker for Griscom’s plan—issuing credit, preparing to sell securities, organizing the merger. Once his bank committed $11 million, however (roughly equivalent to $165 million in the 1990s), he had an investment in transatlantic shipping. At some point in 1901, ownership of the Leyland shares was divided equally among the INC, the ATC, and J. P. Morgan & Co.
The fourth company the combination set out to acquire early in 1901 was not a cargo carrier but White Star, the most profitable and prestigious of Britain’s luxury passenger lines, and Morgan’s personal favorite. By June—after the formation of U.S. Steel, the Northern Pacific raid and panic, Morgan’s aborted vacation at Aix, and his lunch at Windsor with Edward VII—men acting for him in London had arranged to purchase the White Star line for $32 million. They negotiated chiefly with William J. Pirrie, the second-largest holder of White Star securities and head of the prominent Belfast shipbuilding company, Harland & Wolff. The president of White Star, and the largest shareholder, was J. Bruce Ismay, son of its recently deceased founder.*
Rumors about these secret negotiations circulated immediately, but the British took nearly a year to panic over U.S. acquisition of their major freight and passenger lines. Germany reacted at once. Two Germans in particular were keeping a wary watch on Britain’s maritime fortunes and Morgan’s oceanic ambitions—Kaiser Wilhelm II and Albert Ballin, head of the Hamburg-Amerika line (HAPAG).
The Kaiser had embarked in 1898 on a program of aggressive naval expansion intended to challenge Britain’s long-term supremacy at sea, and to consolidate the plans for a German Empire set in motion by Otto von Bismarck in 1871. Wilhelm’s admirals worked quickly, as did the owners of Germany’s commercial fleets: by 1900, HAPAG was the largest steamship company in the world. Ballin called it “the embodiment of the national purpose of a ‘greater Germany’ and of imperial power.”
Although Germany’s military and industrial growth dwarfed that of Great Britain in the last third of the nineteenth century, England expected the blood ties between the Prussian Hohenzollerns and the largely Germanic British royal family (Saxe-Coburg-Gotha until 1917, when George V changed the name to Windsor) to ensure peace. The Kaiser was Queen Victoria’s grandson: his mother, Princess Victoria, had married Crown Prince Friedrich of Prussia in 1858. Wilhelm, however, managed to infuriate Buckingham Palace as soon as he succeeded his father in 1888, when his “Uncle Bertie” was still Prince of Wales. Willful, grandiose, and insecure, he complained that the Prince treated him “as an uncle treats a nephew” instead of recognizing him as an emperor. The Queen dismissed this grievance as “perfect madness”—“it is really too vulgar and too absurd.” Prince Edward said his nephew ought to learn that he was living at the end of the nineteenth century, not in the Middle Ages.
Queen Victoria’s death at the beginning of 1901 brought personal hostilities to a temporary halt, although the poet and diplomat Wilfrid Scawen Blunt predicted that it would “mean great changes in the world, for the long understanding among the Emperors that England is not to be quarrelled with during the Queen’s lifetime will now give place to freer action. The Emperor William does not love his uncle, our new king.”
The Emperor William soon raised the stakes in his quarrel with England. Hearing the rumors about an Anglo-American alliance in the North Atlantic, and fearing that Morgan railroads would give preferential rates to Morgan ships, he dispatched Mr. Ballin to London to investigate. Ballin, a German Jew, had been trying to control competition in the transatlantic lanes for years. He met with Pirrie, the temporary spokesman for the trust, and suggested establishing a “community of interest” between the Anglo-American combination and Germany’s major shipping companies, HAPAG and North German Lloyd. Negotiations proceeded slowly. In February 1902 Ballin went to New York to meet with Morgan.
He had noted in his diary six months earlier that the American financier was reputed to combine “the possession of an enormous fortune with an intelligence which is simply astounding”—a view he endorsed when he and Morgan saw eye to eye in New York. On Thursday, February 20, the Germans and Americans signed agreements to divide Atlantic traffic geographically for ten years, to stay out of each other’s waters, cooperate on rates, and share certain profits and ventures—including the purchase of the British Cunard and Dutch Holland-America lines. Ballin reported that Morgan gave a dinner in honor of his new friends “at his private residence which abounds in art of all descriptions.” After the two men cabled news of their agreement to Berlin, the Kaiser awarded Ballin the Order of the Red Eagle, and invited Morgan to meet him on the imperial yacht at Kiel in June.
It was in the midst of these negotiations that Roosevelt announced the prosecution of Northern Securities. Morgan went to Washington as soon as he could leave the Germans. He divided his time in the capital between trying to defend his railroad trust against the President’s “attack” and trying to secure federal support for his maritime trust, with the President’s approval. Roosevelt, who took an internationalist view of America’s new manifest destiny, was waving his antitrust banner with one hand and beckoning Wall Street to promote a stronger U.S. presence at sea with the other. Other champions of the shipping trust in Washington included the Secretaries of War and State, Elihu Root and John Hay, the influential naval historian Alfred T. Mahan, and Senators Hanna, Depew, Nelson Aldrich, and Henry Cabot Lodge. Congress that February was debating a shipping subsidy bill. Morgan partner Charles Steele reported to London on February 26 that he, Morgan, and Griscom had just returned from Washington where “Senators in charge of Shipping Bill” were “enthusiastic about general plan [for the merger] but request delay publishing for three weeks within which they predict final action will be taken by U.S. Congress.”
On March 17 the shipping subsidy bill won Senate approval and went to the House.† The impending maritime merger gave Morgan until April 30 to form an underwriting syndicate—he had the right to withdraw from his commitment at any time before that date, although the sellers did not: all parties were waiting to see whether Congress would authorize the subsidy. Planning to go abroad at the beginning of April, he organized a provisional syndicate pledged to raise cash in exchange for bonds of the as yet unnamed transatlantic trust. He had no trouble finding participants: men profiting from the U.S. Steel syndicate eagerly signed on.
Morgan gave testimony to a U.S. Circuit Court in the case against Northern Securities on March 26—a special examiner had been sent to depose witnesses in New York—then sailed for Europe on April 2 with his daughter Anne. In London he conferred with the owners of White Star and its chief rival, Cunard, while his American partners kept him posted on the subsidy measure. Western congressmen, adamantly opposing what they saw as yet another Wall Street swindle, amended the bill to prohibit U.S. assistance to foreign-built ships, which included most of those in the proposed combine. On April 10, Perkins and Steele reported that their friends in the Senate were “willing we should go ahead to bring out shipping combination” without waiting for the House vote. Perkins had “talked freely with President of U.S. on subject,” and found him reluctant to sign the radically weakened bill even if it passed. Morgan’s resourceful Secretary of State suggested that announcing the combination might help defeat the now unwelcome legislation, a plan that “appealed strongly to President and he was most enthusiastic in urging such a course.” The bankers had little to lose by making the combine public, counseled Perkins, especially as it “would help materially with President in disposing of Northern Securities case”—presumably b
y doing him a favor on the high seas.
Morgan replied, “fully agree your views”—he thought Cunard more likely to join later in any case—and added after a week, “quite willing go ahead now and form Syndicate.”
The decision not to wait for federal aid proved in one sense wise, since the subsidy bill died in the House. Going ahead without government assistance, however, meant that the combine would have to bear the full cost of building and operating expensive new ships—and the economics of the industry had radically changed between 1900 and 1902. The shortages created by the Boer and Spanish-American Wars had produced unprecedented earnings and a shipbuilding boom. Over 4 million tons of new ships entered the water between 1896 and 1900, their owners following the prevalent if improvident practice of adding to capacity at the end of an upturn. Then, in 1901–2, tonnage commandeered for the Boer War returned to compete for trade, a depression on the Continent reduced freight traffic, the American corn crop failed, and U.S. immigration began to wane. Freight rates fell 30 percent during 1901, and profits were cut in half. Passenger lines suffered as well: Cunard’s earnings plummeted 50 percent in 1901, and in March of 1902 Cunard paid out more than it had earned to issue half of its expected dividend.
