by Jean Strouse
Roberts, smiling: “I suppose I have in mind who you mean.”
In the fall of 1911, President Taft’s Attorney General brought suit against U.S. Steel under the antitrust law, partly in response to the absorption of TC&I. “A desire to stop the panic was not the sole moving cause” of the takeover, read the charge; the corporation had also aimed to acquire “a company that had recently assumed a position of potential competition.”
If anyone in the drama of late 1907 can be retrospectively identified as Mrs. O’Leary’s cow, it is Grant Schley. He was fighting to save himself, and, fortunately for him, the prospect of his firm’s failure just as the panic was easing did represent a threat to the tenuous recovery. That Schley had an asset U.S. Steel might use was a stroke not of conspiratorial genius but luck. There were no other takers for TC&I in November 1907. In the 1911 investigation, Littleton asked Schley: “Was there any particular reason why the TC&I should be made the subject of a trade between you and the Steel Corporation?”
“It relieved my needs,” answered Schley frankly. “It relieved every friend I had and relieved my office.”
Morgan had been worried in the fall of 1907 not about a potentially competitive steel producer in the South but about sustaining the U.S. economy. Weighed against the enormous, long-range interests he had appointed himself to guard, TC&I scarcely tipped the scale. He and his colleagues were pragmatic men. If they had really wanted to force down TC&I’s price and pick the company up for a song, why didn’t they simply watch Moore & Schley fail, let the banks unload the shares, and pay far less than $30 million? U.S. Steel paid off $3 million in TC&I debts right away, and by 1913 had spent another $23.5 million on long-term improvements—almost exactly the amount its board chairman thought would be required—which effectively brought the acquisition price to $56.5 million, or twenty times TC&I’s 1906 earnings. Even if the takeover turned out to be a great deal for U.S. Steel, and it didn’t, Morgan had not substantially underpaid. He was negotiating during a crisis, and paid a far higher price than his associates advised. If TC&I was a steal, why were there no other buyers when all Wall Street knew it was on the table?
Some of the leading champions of the takeover were in Birmingham, Alabama. What northern politicians and journalists denounced as an act of invidious corporate imperialism, Birmingham saw as likely to bring greater output, more jobs, and higher profits. Absorption into the steel trust would “make the Birmingham district the largest steel-making center in the universe,” announced the Birmingham News in 1907. Six years later, the Age-Herald scolded the “demagogues and enemies of the corporation” who “have tried to make it appear that greed was the motive and the only motive.”e
That the U.S. economy had grown far beyond one man’s control was an irony Morgan’s critics missed. His American firms lost $21 million in 1907.f
John D. Rockefeller, reflecting on his and Morgan’s support of seventy banks during the panic, asked a senator: “Now, wasn’t that a pretty nice thing for two such very, very bad men to do?”
The 1907 crisis was relatively brief, but despite Morgan’s efforts it brought on a severe nationwide contraction that destroyed not only speculative enterprises but healthy banks and businesses as well, and threw people all over the country out of work. The Commercial and Financial Chronicle called the “industrial paralysis and prostration” of 1907–8 “the very worst ever experienced in the country’s history.” Those who did not blame these troubles on Morgan attributed them to the antiquated U.S. banking system, and the disaster seemed to confirm what Schiff, Morgan, and Baker had been saying for some time—that the country urgently needed a monetary policy, new banking legislation, and currency reform. Morgan and Baker went to see Roosevelt late in November 1907 about creating a more elastic money supply. Frank Vanderlip, Stillman’s vice president at the City Bank, reported to a colleague in December that “sentiment is unquestionably growing in favor of a central bank,” especially in the West (though some of the eastern bankers who “favored it at first now begin to suspect that their self interest will be conflicted with.… Very few people rise above their self interests in considering the whole subject”).
Those who regarded Morgan as a national hero after the 1907 panic wondered what would happen when he was no longer around to take charge, and for the first time he showed signs of anticipating his demise. In late February 1908, George Baker called at 219 as Morgan prepared to leave for Europe. Walking his guest to the door at the end of their interview, Morgan put his hands on Baker’s shoulders and said, “If anything happens to me, I want you to know that my association with you has been one of the most satisfactory parts of my life, especially the last six months. I have had many pleasant things in my life, but none more than this. I want you to remember it always.”
Congress in 1908 passed a Currency Act authorizing banks to form reserve associations that could issue money temporarily in emergencies, and setting up a National Monetary Commission to study the nation’s financial structure. Nelson W. Aldrich, chairman of the Senate Finance Committee, was appointed to head the commission. He promptly hired Henry P. Davison and the Harvard economist A. Piatt Andrew as his advisers. George Perkins cabled Morgan in July that Davison would soon be “meeting you London or elsewhere for conference regard to matter.… It is understood Davison is to represent our views and will be particularly close to Senator Aldrich.”
Aldrich represented “our” views as well. He had become one of Morgan’s key political allies after Mark Hanna died in 1904. Having started out in the wholesale grocery business, Nelson Wilmarth Aldrich entered the Senate in 1881 with about $50,000 in net worth; he retired three decades later worth about $7 million. In 1897 he had bought the Warwick, Rhode Island, estate of Fanny’s Hoppin in-laws, and his daughter, Abby, married John D. Rockefeller, Jr., in 1901. Lincoln Steffens in 1905 called Aldrich the “boss of the United States.” David Graham Phillips devoted a whole article to him in his series on “The Treason of the Senate.” Aldrich made most of his fortune in 1906, when he sold his Rhode Island street-rail systems to Charles Mellen at the Morganized New Haven Railroad for several million dollars.
Morgan arranged for the Aldrich Commission to meet with the heads of leading banks in London, Paris, and Berlin in the summer of 1908. Most British financiers were out of town when the Americans arrived that August. Teddy Grenfell asked U.S. Ambassador Whitelaw Reid to set things up for the visiting delegation: “Mr. Morgan thinks very desirable you give dinner Tuesday,” Grenfell wired. “… I understand that Lord Rothschild, Sir George Murray, the Governor of the Bank of England, and Mr. Huth Jackson have accepted your kind invitation.” The following winter, Aldrich added three more men to the commission: Paul Warburg of Kuhn, Loeb; Frank Vanderlip, who had been a journalist and assistant Secretary of the Treasury under Lyman Gage (1897–1901) before joining Stillman at City Bank; and Charles Conant, treasurer of the Morton Trust and a financial writer whose Principles of Money and Banking had been called “the standard work on the subject” by Bankers Magazine in 1906.
Morgan had functioned in the crisis of 1907 as the country’s de facto central banker, supplying liquidity as necessary to forestall more widespread collapse. The specter of a New York plutocrat taking charge of the nation’s economic equilibrium elicited more fear than admiration among the general public, but on Wall Street and in international finance the old man emerged from this trial with greater stature than ever. Over the next few years, as the Aldrich Commission conducted its investigation, Morgan worked with former rivals to manage, insofar as it was possible, America’s principal banks and money supply. His chief partners in this entente cordiale were Baker and Stillman. After 1907, they called themselves the Trio.g
From London at the end of 1909 Teddy Grenfell told a friend that Morgan’s “position to-day in America is not due to his riches. There are 20 richer men there. It is due to the fact that in the dark days of 1907, he knew no fear, he believed in the country & himself & imparted pluck & spirit
to others & infused strength & hope into men 20, 30 & 40 years younger than himself. If he had given way, the whole house of financial cards would have fallen.…
“[T]he popular idea of this man is very wide of the truth. He is neither hard nor cunning. Outwardly he is rough because he is very strong & yet very shy & has no command of words. He will run rather than make a speech. He sees clearly enough but his explanations in words are quite incoherent. He sees the goal & makes straight for it. He has made big mistakes & even when his schemes are well conceived, he runs big risks of being tripped up or attacked in flank by meaner or smaller men.…
“To-day in New York his old rivals Stillman & Kuhn Loeb, remembering 1907, offer him absolute obedience. They will share all with him, knowing that he will take no advantage.… Thinking of him as my senior, you can well believe I am proud to be his colleague. His shortcomings are so patent that they almost add to his attraction.”
* The judgment against Standard Oil was eventually overturned. Landis became the first commissioner of baseball.
† Morgan had been a director of the National Bank of Commerce since 1875, when it participated in the Treasury refundings, and a vice president from 1893 to 1904. The Commerce had merged with several other bank and trust companies to become the second largest bank in the country by 1904, and also one of the most stable. It managed enormous sums of money and acted as a clearinghouse for half the money flowing through New York’s financial institutions, including the three big life insurance companies. New York’s official Clearing House Association settled bank transactions at the end of each day, totaling up checks and drafts and coordinating transfers of funds; it also served as lender of last resort for member banks that needed help during panics, issuing loan certificates—paper that could be used as currency among the banks—secured by sound but temporarily illiquid assets. After 1903, when the Clearing House insisted that trust companies keep 10 percent of their deposits on reserve, most of them resigned from the association and cleared through the National Bank of Commerce. Though Morgan stepped down as vice president of the Commerce early in 1904, he remained a director and a member of its executive board. Because of his long-term affiliation, the Bank of Commerce was often referred to as J. P. Morgan’s bank. In fact it was owned by the Equitable Life Assurance Society, which, as of June 1905, was owned by Thomas Fortune Ryan.
‡ At the “money post” on the Stock Exchange floor, banks furnished “call loans” to brokers for anywhere from a minute to a few days. If a bank suddenly called in its loan, a broker could usually turn around and borrow the same amount from someone else, but in volatile markets interest rates fluctuated wildly according to the money supply.
§ These certificates, secured by collateralized obligations, could be used as currency among banks that belonged to the Clearing House Association.
‖ Schley was married to George Baker’s sister. He had worked at the First National from 1874 to 1880, and became a stockholder in the bank at the insiders’ price ($300 a share, when $700 was bid, none offered) in 1901.
a TC&I had been one of the industrials that made up the first Dow Jones average in 1896, and it remained on the list in 1907. It had, however, severe technical and managerial problems, high production costs, poor local markets, and insufficient capital. A northern steel man who became chairman of its board in 1901 found “scarcely any of the property that was right, if it was possible for it to be wrong,” and estimated five years later that the company would need $25 million to bring it up to northern standards. TC&I’s outlook had improved in 1906, when the Schley-Gates syndicate installed new management and supplied $6.2 million to modernize the facilities. The company reported its highest earnings in 1906—$2,753,160—or about $9.40 per share. Gary and Frick thought TC&I possibly worth the $60 a share on which Morgan had based his October loan, but Schley was holding out for $100—ten times peak earnings.
TC&I did own large iron ore, limestone, and coal properties in close proximity to its plants, whereas the big northern steelmakers had to ship raw materials in from distant mines. The company estimated that it had 300 million to 700 million tons of ore, and close to a billion of coal, but not all that acreage was productive, the facilities had inadequate water supplies, and the ore was of a lower quality than that of mines in the North. U.S. Steel in 1906 had leased the rights to more than half of James J. Hill’s Great Northern ore lands on the Mesabi Range in Minnesota; the high-quality ore in Hill’s 65,000 acres was estimated at 400 million to 500 million tons.
The TC&I plant at Ensley, Alabama, was by 1907 manufacturing open-hearth steel rails. Birmingham’s high-phosphorus ore was better suited to open-hearth than to cheaper Bessemer processing, and the new rails were stronger, though more expensive to make, than the old. It was clear that American roads would be switching to the superior rails, and U.S. Steel was constructing a large new integrated mill of its own at Gary, Indiana, on Lake Michigan, with open-hearth capacity of over a million tons a year. In the spring of 1907, E. H. Harriman ordered 157,000 tons of rails from Ensley for his Union and Southern Pacific roads—an apparent coup for southern steel. Production costs proved so high, however, and the technology still so problematic, that TC&I manufactured the Harriman rails at a loss of $4 a ton, and many had to be returned as defective.
b The corporation would put up second mortgage bonds, then quoted at 84, which had a face value of $35,407,000 and a market value of about $29,742,000. It would take in exchange 297,420 shares of TC&I valued at 100, nominally worth $29,742,000. The corporation would pay an additional $632,655 in cash.
c The Bank of England and the Imperial Bank of Germany, anxious to protect their own reserves and prevent large-scale exports of gold, raised their rates to 7 percent and 7½ percent, respectively—higher than at any time since 1873.
d The Satterlees spent a “thrilling” day with Roosevelt on the USS Mayflower early in 1909, Louisa told Fanny. She was “extremely interested” in hearing the President talk:. “His egotism is something overwhelming. I really believe that since Congress is attacking him about the Tennessee Coal & Iron deal … he is beginning to think that he—by permitting it—was the one who stopped the panic!!… the barefaced, fulsome flattery dished out to him by his friends is really worse and more blatant than what I hear bestowed upon Father!”
e At the end of 1907, producing open-hearth rails at the TC&I mill in Ensley, Alabama, cost $29 a ton, just $1 below the nominal market price—a small margin of profit that disappeared if the rails sold at a discount. Between 1907 and 1909, U.S. Steel cut the tonnage loss in rail manufacture from 40 percent to 10 percent. The corporation opened new local mines, built by-product ovens, imported water, and increased Ensley’s steel capacity from 60,000 to 600,000 tons. Still, by 1910 the Alabama mill was turning out open-hearth rails for $19.24 a ton, while the cost at northern plants was $17.53. In 1913 it still cost $2 a ton more to make rails in Birmingham than in Pittsburgh, and the new president of TC&I, southerner George G. Crawford, concluded: “The Birmingham district is one that cannot be made like the rosy pictures I have heard described, but it can develop into a reasonably good business proposition.” Most of the steel industry had operated under a “basing point pricing” system since 1880. Because of Carnegie Steel’s undisputed dominance, Pittsburgh prices served as the industry’s point of reference: other mills sold steel at the Pittsburgh price plus transportation charges to a given buying point. In 1905 TC&I had sold finished products at “Pittsburgh Plus” prices, although rails were exempt. After U.S. Steel acquired TC&I in 1907, Crawford persuaded the corporation to replace “Pittsburgh Plus” with a smaller “Birmingham differential”—a charge of $3 per ton above Pittsburgh prices, to account for TC&I’s higher production costs. Another southern U.S. Steel subsidiary, American Steel and Wire, had to charge $15 a ton over Pittsburgh prices. The TC&I differential, which rose from $3 to $5 in 1920, has often been cited as evidence of U.S. Steel’s attempt to stifle competition from the South; in fact the corporat
ion’s policy favored TC&I, and was less an attempt to throttle its own subsidiary than to “manage” industry-wide competition and maintain national price stability. According to the historian Kenneth Warren, at the 1914 Iron and Steel Institute meetings in Birmingham, “U.S. Steel was widely praised for putting southern steel-making firmly on its feet at last.”
f The net profits for J. P. Morgan & Co. and Drexel & Co. had fallen from $12 million in 1905 to $1.2 million in 1906. The 1907 loss came to $21.5 million. Profits rose in 1908 to $13.2 million, and to $19.4 million in 1909.
g After the United States passed legislation establishing the Federal Reserve System in 1913, Ben Strong became the first governor of the Fed Bank in New York. Milton Friedman and Anna Schwartz, pointing out the “striking contrast” between Morgan’s effective handling of the 1907 crisis and the failure of the Federal Reserve to contain the 1929 panic and limit the consequent depression of the thirties, speculate about what might have happened had Strong not died in 1928: “Strong, more than any other individual, had the confidence and backing of other financial leaders inside and outside the [Federal Reserve] System, the personal force to make his own views prevail, and also the courage to act upon them.… If Strong had still been alive and head of the New York Bank in the fall of 1930, he would very likely have recognized the oncoming liquidity crisis for what it was, would have been prepared by experience and conviction to take strenuous and appropriate measures to head it off, and would have had the standing to carry the System with him.”
Chapter 29
TRIO
Once the panic was over, Morgan, Baker, and Stillman worked together to forestall any possible recurrence. Morgan and Baker had collaborated for years. The City Bank was the newcomer to the alliance. After seeing Stillman at Aix in April of 1908, Morgan cabled Jack: “Inform [Baker] that [Stillman] said he was unwilling do anything except with cordial endorsement of the trio, nor anything which would change permanency or joint efforts for public welfare already established and recognized throughout country, and to which he was unchangeably pledged.”
