The Great Pierpont Morgan (11 page)

In every such case the railroad corporation had to be reorganized; for even the sorriest backwoods line was too vital to the life of the community—in a day when there were no automobiles, no trucks, no busses—to be permitted to go out of business. This meant that somebody had to invent a plan by which the company's debts could be whittled down to a point where it could safely meet all its interest payments out of current revenue. If the plan was to succeed, it must look fair and workable not only to the courts but also the various groups of clamoring creditors; and it must also assure new investors that the reorganized company would be a safe and profitable thing to put their money into.

The job of planning and putting through such a reorganization had almost nothing to do with railroading as you or I would have thought of railroading—with locomotives, timetables, ticket agents, passenger stations, freight trains, or lines of shining steel rail—with the night express roaring down the quiet valley and hooting for the grade crossing, or with the
daily accommodation train pulling alongside the plank platform of the country station and unloading passengers and mail bags and crates of farm produce. No expert in engine design or freight delivery or train scheduling could meet its requirements. It called rather for a mastery of money and the paper instruments which provide money. It was a job for an investment banker, with an expert in corporation accounting at one elbow and a corporation lawyer at the other. Here was Morgan's opportunity.

In almost every case the task was incredibly complex. To take a single example, the transfer of a whole series of companies and properties from the bankrupt Richmond Terminal and its offshoots to the new Southern Railway System involved executing two trustees' sales, one receivers' sale, ten foreclosure sales, six conveyances without foreclosure, and all manner of other contracts and agreements. Every one of these operations must be technically and legally correct—which required that somebody on the reorganizer's staff must have an absolute grasp of the complicated terms of innumerable bond issues, leases, and contracts. But the principal thing required of a reorganizer was that he should command confidence in the financial world—confidence that he would prepare a fair plan, that everybody who mattered would get behind it, that there was no use fighting it, that he had ample means to meet all emergencies, and that when he had completed his work the company's new bonds and shares would be widely approved as investments by bankers and brokers and men of means generally.

For such an assignment Morgan was uniquely fitted. He had his partner Charles H. Coster and his associate Samuel Spencer as his experts—Coster with his incredible mastery of detail and his uncanny ability to weigh the value of a given lease or contract; Spencer with years of railroad experience as vice-president and later president of the Baltimore & Ohio. He had Francis Lynde Stetson's legal ingenuity at his command. It had long been a favorite trick of crafty men to bring legal suit against reorganization plans in the hope of being bought off at blackmail prices. Morgan had been through this sort of experience when his reorganization of the West Shore Railroad had been imperiled by a suit brought by a minor stockholder named Belden, and he had learned that if a reorganizer
is to succeed, such potential interferers must know that every avenue to the success of their maneuvers has been barricaded.

Furthermore, there was nobody in the country who could match Morgan's own experience as a negotiator among railroad executives and financiers, or his reputation for financial impregnability, reliability, and personal authority. His plans had a way of working. Bankers and brokers and executives who allied themselves with him found the alliance usually very profitable to them, and those who opposed him must be prepared for a battle against odds. Thus it came about that during the middle nineties Morgan's firm acquired the lion's share of the business of reorganizing the larger railroads. Within the space of four years he reorganized the Richmond Terminal, the Erie, the Reading, and the Norfolk & Western; in alliance with James J. Hill, the great railroader of the Northwest, he reorganized the Northern Pacific; and he played a part also in the reorganization of the Baltimore & Ohio.

2

The Morgan method, as it developed during those years, might be summed up as follows:

First
, his experts estimated the minimum earning capacity of the road. Then the fixed debt of the company was ruthlessly pared down until even with minimum earnings it could readily meet its interest payments on that debt—holders of bonds being forced to accept bonds of lower yield, or stock, or both.

Second
, the present holders of stock were assessed to provide the reorganized road with working funds.

Third
, new stock was issued as lavishly as was necessary to keep everybody happy. In some cases the issues of preferred stock were so large that only a determined optimist could foresee the day when the common stock would be able to pay dividends; and in many cases so much stock was issued altogether that thereafter, if the company should need new capital, it could not raise it by selling more stock but would have to sell bonds instead—thus increasing once more its burden of fixed debt. In this respect the Morgan pattern of financing was shortsighted. As Professor William Z. Ripley remarked before the Industrial Commission, although it was intended to cut down capitalization, in the long run it had “exactly the
reverse effect.” But for the time being it worked. And that, for the moment, was the overwhelming necessity.

Fourth
, the reorganizers charged very heavily for their services. Of the Erie Railroad reorganization plan, for example, the London
Economist
said wryly, “… Messrs. Morgan state, with a candor which, as far as we know, has no precedent in such cases, that they are to get $500,000 cash for their trouble; and as, in addition, the syndicate which guarantees the success of the scheme is likely to get a good commission on the $15,000,000 bonds it purchases, the doctor's bill is sure to reach a million, and perhaps even two million dollars.” One might qualify this statement to explain that only a small fraction of the syndicate's commission would go to Morgan's own firm. (When a new issue of securities was put on the market, a long list of banks, investment houses, and individual investors joined the syndicate, i.e., undertook to subscribe to whatever shares were not disposed of in public sale; and when the sale was over, these syndicate members shared in whatever profit—or loss—there might be. Usually the Morgan firm, as one of many members of the syndicate, received only a small part of the syndicate's total profit.) One should add anyhow that the
Economist
found the Morgan plan fair and reasonable otherwise. Nevertheless, the bill was big indeed.

If you had remarked on its size to Morgan or one of his partners, you would have been reminded that every one of these operations involved great risk. For if the new securities could not for any reason be sold at a good price (and sometimes they could not) his firm would at the least have tied up a lot of capital in an investment of dubious vendibility, and at the worst would incur a whopping loss; furthermore, the other members of the syndicate would suffer likewise, and Morgan's prestige among them would fall like lead. As he carried through reorganization after reorganization successfully, banks and big investors began to regard the Morgan name as carrying almost a guarantee of investment reliability. Nobody else in the land had such a reputation. Surely, therefore, the money value of the Morgan label was very great. Where the risk was great and the money value was great, he saw no reason why the charge should not likewise be great. In reply you might point out that it was heartless to charge heavily for an operation which involved writing off millions
of dollars of investments which had been innocently and hopefully made by small investors; and from that point of view surely the size of the fees charged by bankers and their lawyers for resuscitating bankrupt corporations has long been one of the cruelest anomalies of American business. But Morgan would have scoffed at such a judgment. He would have pointed out that it was not he who had destroyed the value of a widow's second-mortgage railroad bond, but the inefficient or predatory men who had let the railroad go to ruin; that all he did was to slice off the infected growth. At any rate, the profits from such surgical operations were often immense.

Every day Drexel, Morgan & Co. were engaged in a multiplicity of lesser financial operations, on each individual one of which the profit was usually very small—dealing in foreign exchange, the sale of letters of credit, the buying and selling of securities, and so forth. It was the sale of new issues of securities, and especially it was the reorganizations, that brought in the big money, a half-million or a million dollars or more at a time, in fees or in blocks of stock that could be sold profitably if the reorganized corporation seemed likely to return to health. And these profits, while they came irregularly, tended to grow from year to year as Morgan's position in the financial world became more and more central. They were the largest source of the growing income that paid the expenses of the
Corsair
and was translated into Madonnas and medallions.

Fifth
, the future control of the railroad was tied up so tightly—either through a board of directors in which Morgan partners and their friends and other men whom they trusted would be dominant, or, more likely, through a voting trust to the members of which the stockholders would surrender their voting rights—that prudent management in the future could be enforced. For Morgan had learned a lesson from what had happened to the Baltimore & Ohio and to the Reading, and was resolved that it should not happen again.

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He himself had reorganized the Baltimore & Ohio in 1887. For a while everything had seemed to go well. Samuel Spencer, who had been vice-president of the company, was installed as president. But presently the Garrett family and their friends,
under whose leadership the road had previously run into difficulties, decided to take over again; and since they still owned a majority of the company's stock, they were able to do it. They made things so difficult for Spencer that he had to resign (to become a Morgan railroad expert). They resumed their improvident course, and by 1896 the Baltimore & Ohio was once more in trouble. Not only that, but investigators looking over the books of the company found that it had been scandalously overstating its income and understating its liabilities. Again the London
Economist
expressed the dismay of English investors: “And when people here find that such malpractices as these have been carried on for a series of years, on what was believed to have been one of the best-managed of American railroads … it cannot be wondered at if the small degree of confidence that has been left them is still further impaired.”

That sort of comment made unpleasant reading for Pierpont Morgan, who less than ten years earlier had given his endorsement to the securities of the road, and who was always conscious of the weight of English investment opinion. In the second reorganization of the Baltimore & Ohio he played only a passive part; but while this was still proceeding, a group of James J. Hill's friends bought a controlling interest in the stock of the road and Hill sought Morgan's aid; and the result was indicative of Morgan's resolution that no one again should have a chance to run away with the property and ruin it. For the voting control of the reorganized road was placed for five years in the hands of a voting trust of five men, including Coster (a Morgan partner), Louis Fitzgerald (a firm ally), and three other men whom he and Hill regarded as trustworthy.

The adventures of the Philadelphia & Reading were somewhat similar—if more spectacular. This company, too, had been reorganized by Morgan during the eighteen-eighties. For a brief time it had been held in the grip of a voting trust. But after it was freed of this grip, a headstrong president, A. Archibald McLeod, embarked upon a course of management more ambitious than prudent. He leased or bought other railroad lines with the notion of getting a monopoly of the anthracite coal business; and then, not content with that, he launched a scheme for giving the Reading road a lion's share of the business
of carrying anthracite coal to New England. To this end he purchased not only a minor interest in the Boston & Maine Railroad but also a controlling interest in the New York & New England Railroad, a smaller line which crisscrossed southern New England.

Morgan was furious. In the first place, McLeod was acting with outrageous improvidence. The Reading Railroad's treasury could ill afford such large and diverse expenditures and commitments. (As a matter of fact, McLeod had been doing a very rash thing: he had been buying those New York & New England shares in his own name, on margin, and taking securities out of the Reading's treasury to put up with the brokers as collateral—a fact which hastened the road's ruin.) In short, McLeod was guilty of jeopardizing the safety of an investment which Morgan had sponsored.

In the second place, what McLeod was doing offended Morgan's conviction that each railroad should develop its own territory and not invade other roads' spheres of influence. Had he not worked long and hard, as a peacemaker, to try to enforce this principle? The Reading had no business going into New England.

In the third place, this invasion touched Morgan personally. He had recently become a director of the New York, New Haven and Hartford Railroad, to which he had long been emotionally attached because of his Hartford beginnings. This road was a meager thing indeed when he took his seat on its board in 1892. It owned outright only 141 miles of road (reaching from the outskirts of New York City to Springfield, Massachusetts, with a few short branch lines). It leased or partly owned 503 miles more, but its trains had to go over lines owned by other people even to reach Boston. To Morgan this seemed ridiculous. He had a vision of a single unified railroad system covering most of New England, and obviously the New Haven must be its nucleus. The first thing he did for it when he became a director was to buy for it the Housatonic Road, to extend its reach northward. He was planning also to annex the Old Colony, in order to give it satisfactory access to Boston. And here, suddenly, was this wild man McLeod barging right into the southern New England territory that rightly, he thought, belonged to the New Haven!