Kuhn, Loeb chairman Jacob Schiff, seen here in top hat promenading with his wife, Therese, the daughter of his firm’s cofounder, became Harriman’s banker and strategist of his campaign to win the Northern Pacific.
FOR CHARLES FRANCISADAMS, the reemergence of Jay Gould as a suitor for the Union Pacific was the last straw. The aging buccaneer had shrouded his resurgent financial interest in the railroad in misdirection; to some newspapers he disavowed any interest in regaining control of the road while orchestrating attacks on Adams’s management through others. Adams detected undercurrents swirling against him, but not until the very end did he realize they had been set in motion by Gould.
Starting in early 1890, Adams would recall,
I was receiving assaults from all quarters of the West, from a hand which I could not see, and could not understand. There would be something published in Chicago, and then copied in the East, attacking our credit, and then there would be an attack upon us in some Salt Lake City paper, or at Portland, Oregon, and the ball would move around the country to hit us in the back. I thought it was some attack from our rivals in the railroad business. I even suspected the Vanderbilts.
As late as November 11 Adams assured the Boston Herald that rumors of Gould’s interest in the UP were nothing but “a revival of the old story that was put in circulation some five or six years ago.” He said he did not “know anything about it,” and that acquiring control “would be a task of enormous proportions even for Gould.”
That very day, however, Gould had already secured control and begun to inform the world of his intention to sack Adams. “Under his direction,” Gould was quoted in the New York Times, “the Union Pacific, more than any other railroad in the West, has disturbed and upset harmony, knocked down rates, and forced the handling of business without profit.” He revealed that his backers included the Rockefeller family and other long-term shareholders, who “invited us to assume the control, direction, and management of the property. We accepted.” His comments to one reporter explaining his reemergence dripped with faux sentimentality: “There is nothing strange or mysterious about it. I knew [the railroad] very intimately when it was a child, and I have merely returned to my first love.”
Just days after scoffing at the very idea that Gould could be reestablishing his control of the Union Pacific, Adams showed up at Gould’s downtown office to capitulate. In his autobiography he described the episode as his having been “ejected by Jay Gould from the presidency of the Union Pacific,” but he acknowledged his relief. “In the course of my railroad experience,” he would recount bitterly, “I made no friends . . . ; nor among those I met was there any man whose acquaintance I valued. They were a coarse, realistic, bargaining crowd.”
It was barely two years since Adams and Gould had sat down with a dozen other railroad presidents and bankers at J. Pierpont Morgan’s town house to craft an industrywide peace plan. Clearly, peace was more distant than ever. But that was not Gould’s fault—not solely, at least.
Gould was not entirely wrong about Adams. The sad truth was that despite the ambitions Adams had brought to his service as Union Pacific president, the railroad was in worse shape after six years of his stewardship than when he took office. The decline was not all his fault: Freight fees dropped sharply in the last years of the 1880s because of falling commodity prices—a harbinger of the dreadful crash to come. Meanwhile, competition for transcontinental business had steadily increased.
The lack of progress on settling the road’s looming government debt was the fault of a recalcitrant Congress more than Adams. But Adams had also spent some $42 million to acquire some three thousand miles of branch lines. He defended the acquisitions by pointing out that they produced $5 million a year in revenues needed to cover the UP’s fixed charges, while glossing over the fact that the roads all operated at a loss. He shored up the railroad’s increasingly dire financial condition with loans from European banks, notably Baring Brothers; but on November 15, 1890, just a few days after Adams’s dismissive comments about Gould to the Boston Herald, the Barings firm failed. With it went the UP’s once-rock-solid source of credit—and any confidence Adams might have had about holding Gould at bay.
GOULD’S DISCONTENT WITH Adams had been brewing for months. Adams had been making deals for the Union Pacific with western and southwestern roads in a bid to quell rate wars. But these arrangements typically left Gould’s railroads on the outside looking in, while promoting the interests of Gould’s business enemies. Among them was Collis Huntington, whose Central and Southern Pacific had been competitors of Pacific Mail, a steamship line serving the Far East out of San Francisco, which Gould earlier had acquired by outsmarting its owner, the stock manipulator Alden Stockwell. In May 1890 Huntington wrested control of Pacific Mail from Gould and his son George, a deal that left Gould’s railroads especially vulnerable to an alliance between Huntington’s roads and Adams’s Union Pacific.
Particularly irksome to Gould was an arrangement Adams reached giving the Rock Island, the Chicago & Northwestern, and the Chicago, Milwaukee & St. Paul exclusive rights to use the Union Pacific’s bridge over the Missouri River at Omaha. This allowed the Rock Island and the St. Paul to pick up freight at Denver and carry it across the river to Chicago, and allowed the Northwestern to carry traffic from Chicago to Omaha and offload it directly to the Union Pacific. The deal was a dagger aimed directly at Gould’s Missouri Pacific, the odd road out.
But then opportunity beckoned, in the form of a collapse in the Union Pacific’s share price. The shares, which had been trading at $65, fell to the mid-$40s during the autumn of 1890, as a consequence of Adams’s failure to resolve the road’s financing problems, of the persistent rate wars, and conceivably of Gould’s own machinations. Gould was flush with cash, holding a war chest estimated by contemporaries at $15 million to $20 million. Indeed, he seemed to be the only investor interested in saving the Union Pacific; Adams’s quest for a white knight had failed utterly, as he realized when word reached him at the last moment that William H. Vanderbilt had refused to invest rescue capital into the UP. With all chance of resistance having faded away, Gould’s takeover of the road became one of the simplest, if one of the last, transactions in his career.
The railroad Gould reacquired, however, soon took on the appearance of a poisoned chalice. Traffic on the road was improving, but the crush of interest due was unremitting. Gould’s efforts to ease the Union Pacific’s overhang of debt were no more fruitful than Adams’s. In June 1891 Gould was forced to loan the railroad nearly $2 million out of his own pocket to meet its interest bill.
Meanwhile, Gould’s relationship with the country’s most important railroad financier, J. Pierpont Morgan, was fraying. Despite Gould’s position as owner of the most storied franchise in the railroad world, Morgan disparaged him as an inconsequential participant in the “community of interest” negotiations he was leading at the time, ignoring the numerous proposals Gould had offered to address the industry’s self-destructive habits of competition.
In their face-to-face dealings over the restructuring of Union Pacific debt, Morgan, who was managing the operation, treated Gould with unalloyed condescension, according to newspaper accounts plainly sourced in the Morgan camp. Morgan “had a talk with Mr. Gould yesterday,” the New York Times reported on September 27, “and ‘the wizard of Wall Street’ was given to understand that he was no longer a ‘wizard.’” According to the report, Morgan brusquely informed Gould that unless he “acted the part of a straightforward man he would not only be hustled out of the Union Pacific, but that his power in Wall Street would end summarily.”
Morgan demanded that Gould put up millions of dollars in excess collateral to guarantee the rescue debt. By then Gould no longer had the energy to resist. In 1891 one blow followed another: The Missouri Pacific skipped a quarterly dividend, foreign shareholders began agitating to oust him from the Union Pacific, and competitive rate-cutting was again draining his railroads of revenue. His businesses were failing and economic storm clouds heralded a recession, or worse, just over the horizon.
When the storm broke in 1893, Jay Gould would be spared the spectacle. Hollowed out by the final ravages of tuberculosis, he died on December 2, 1892. It had been so long since he had commanded affairs on Wall Street that the markets barely rippled at the news. “After his death, there was no one to carry on his work,” reflected his biographer Julius Grodinsky. “Although he left his cash, current assets, and stock holdings, he left no plans.” The Gould empire would pass to his son George, who was intellectually and temperamentally ill-suited to manage it. Gould’s passing would clear the way for Morgan and Harriman, who ultimately would solve the problems of rate stabilization and profitability that had long eluded their predecessors. But first, there was a major panic to deal with—and the indolent George Gould was having a devilish time holding his father’s railway system together.
A sharp decline in income is never welcome in business, but the Panic of 1893 and the “industrial paralysis” that followed, in the words of the Commercial and Financial Chronicle, wreaked havoc on the Union Pacific’s finances at precisely the wrong moment. Three-year notes issued in 1891 to retire the road’s floating debt were due to mature on August 1, 1894. An even weightier obligation loomed, for between November 1, 1895, and January 1, 1899, some $52 million in principal and interest on the government’s construction bonds would come due. A default would give the government the right to take over the Union Pacific, down to the gravel in its roadbeds. Yet while the railroad was manifestly unable to cover the debt, no one on Capitol Hill saw government operation of the Union Pacific as an attractive option. Some compromise would be necessary, but none that could win approval from Congress had yet emerged.
In October 1893 the Union Pacific acknowledged it was insolvent and went into receivership. Over the next two years, the UP’s earnings fell by nearly $7 million, or about one-third. Not merely the general depression, but the collapse of silver mining in the West after the repeal of silver monetization in 1893 caused significant damage. Add the rate wars continuing among all the transcontinental roads, and the result was the transformation of the Union Pacific’s $2 million surplus of 1892 into a $2.6 million deficit in 1893. “Not . . . nearly as bad a showing as might have been expected under the circumstances,” the Chronicle judged upon examining the carcass, but still cause for alarm.
In these dire circumstances the railroad’s security holders, under the leadership of US senator Calvin Brice of Ohio (representing the government’s interests) appointed a reorganization committee to take the road out of the hands of its receivers. It was a sterling group, comprising General Grenville Dodge, the Union Pacific’s original builder; A. H. Boissevain, an experienced Dutch railroad investor representing the Europeans who at that point owned about half the shares; and in a subsidiary role, Pierpont Morgan.
The committee had only three realistic options. The first was for the government to accept as much as the railroad could pay for its bonds and write off the balance as a loss. The only positive aspect of this plan was that it would relieve Washington of a costly and troublesome burden, for managing its interest in the UP cost the government thousands of dollars a year, ensnared it in seemingly endless litigation, and forced both houses of Congress to maintain standing committees overseeing the railroad amid ceaseless legislative wrangling.
The second option was to extend the loans deep into the future at a sharply lower interest rate. A fifty-year bond issue paying as little as 2 or 3 percent was the preferred formula, but congressional critics regarded this as a far too indulgent treatment of a railroad that had been born and built in an atmosphere of persistent criminal fraud.
The third option was for the government to foreclose and run the UP itself. The advantage of this option was that it would give the government a direct hand in curbing the general iniquity of the transcontinental railroads: “All, unfortunately, have had their Credit Mobiliers, and all have had their Jay Goulds,” observed the business historian John P. Davis during the reorganization discussion. It would be a lesson to the other roads, he reasoned, to “see the stale water boiled out of the Union Pacific.” The government, he noted further, was hardly blameless in the UP’s fraud, and might itself learn a few things from having “to suffer the consequences of being in bad company.” But it was hardly to be expected that Congress would see things the same way.
The reorganization committee’s ultimate proposal involved converting the government debt into a $300 million revolving credit line paying 3 percent. The plan was stillborn. It was published in December, and when June arrived without its even receiving a vote in Congress, the reorganization committee disbanded in frustration. It would be two years before failure could be turned into success. That transformation would bring a new figure onto the scene: a banker who would play a central role in the coming showdown between Harriman and Morgan.
IN THE LATE fall of 1895, Jacob Schiff, the senior partner of the investment bank Kuhn, Loeb & Co., was approached by Winslow S. Pierce, the personal lawyer of George Gould, with an invitation for Schiff to lead a fresh attempt to reorganize the Union Pacific. Gould was an indolent shadow of his father, devoted more to attending society fetes and raising racehorses than husbanding the family fortune. But he was not too dull to recognize that his extensive Union Pacific shareholdings, a legacy from his father, were at risk if another reorganization attempt failed.
Schiff was an inspired choice. As head of Kuhn, Loeb, the Frankfurt-born banker’s authority on Wall Street was second only to Pierpont Morgan’s. A man of medium physical stature and unshakable dignity, Schiff spoke impeccably grammatical English, albeit with a heavy German accent. Deeply religious, he maintained the ritual of blessing his children for the Sabbath every week at Friday-evening dinner and rarely allowed business to interfere with his attendance at synagogue; in one youthful letter soliciting a job in America, he had specified “a position which will leave me free on that day, because I am inclined by principle to devout religious observance.” As it would happen, Schiff’s insistence on keeping the Sabbath would cost his future client Edward Harriman dearly at a critical juncture.
Soon after his arrival at Kuhn, Loeb in 1873, Schiff was being regularly welcomed to the Solomon Loebs’ Fifth Avenue home for Sunday dinners. It seemed almost preordained that he would marry their eldest daughter, Therese. This placed him within the firm’s tradition of cementing its business bonds through marriage. The senior partner, Abraham Kuhn, was cofounder Solomon Loeb’s brother-in-law; another young banker who joined the firm at the same time as Schiff, Sam Wolff, was the son of another partner, Abraham Wolff (whose daughter, Addie, would marry Kuhn, Loeb partner Otto Kahn). Many years later Jacob Schiff’s own daughter, Frieda, would marry Felix Warburg, yet another Kuhn, Loeb partner.
Jacob and Therese were married on May 6, 1875. After honeymooning in Niagara Falls, they moved into a house at 57 East Fifty-Third Street, just off Park Avenue, a gift from Solomon Loeb.
Notwithstanding his stature as a banker and his leadership of Wall Street’s Jewish community in 1895, Schiff’s attitude toward his patrician rival Pierpont Morgan was deferential. “He was a hero-worshipper, although in a restricted and unusual sense,” observed his colleague and biographer, Cyrus Adler: Schiff admired individuals not necessarily because they served in elevated positions, but in recognition of the talents that had gotten them there and kept them in place. Morgan fit the model, although his father’s wealth and success had given him a leg up in making his way on Wall Street. He had, after all, brought the House of Morgan to heights that Junius Morgan could not have dreamed of.
Aware that Morgan had been a principal of the Union Pacific’s first reorganization committee, Schiff was under the impression when he was approached by Winslow Pierce that Morgan had not given up the effort, only placed it on hold. “That’s Morgan’s affair,” he told Pierce when he came to his office as George Gould’s emissary. Pierce assured him that Morgan’s committee had abandoned the reorganization as a hopeless task.
Still doubtful, Schiff visited Morgan a few days later. He got an earful. Congress’s refusal to give the reorganization committee’s plan even the courtesy of a vote had soured Pierpont on the entire enterprise, reinforcing a view of the Union Pacific that hewed close to its enduring description as “two streaks of rust” and derived in no small part from his grand tour back in 1869. “He was so disgusted with the political intriguing and wire-pulling” surrounding the reorganization and so pessimistic about the prospects, Schiff reported to his partners, that he would not even allow his firm to invest money in the new effort.
Kuhn, Loeb chairman Jacob Schiff, seen here in top hat promenading with his wife, Therese, the daughter of his firm’s cofounder, became Harriman’s banker and strategist of his campaign to win the Northern Pacific.
The Union Pacific in 1895 was even more derelict than it had been a few years before. The failure by Congress to treat the railroad as an asset worth saving had left it at the mercy of a pack of lupine creditors, who had been permitted by the receivers to foreclose piecemeal on branch lines from one end of the system to the other. By May 1895, these amputations had reduced its total mileage by nearly half, to 4,469 miles. This occurred even though any experienced railroad operator could see that once the economy revived, the UP would need a larger, not smaller, network.
Notwithstanding Morgan’s doubts, Schiff agreed to proceed with the reorganization effort at Pierce’s urging. The railroad was in such low regard on Wall Street that Schiff had to bring in an entirely new set of business leaders to serve on the reorganization committee. Kuhn, Loeb, he told his partners, “would have to paint the whole thing over fresh.” The new committee members included Marvin Hughitt of the Chicago & Northwestern Railroad and Chauncey Depew, president of the New York Central. Since both were known as “Vanderbilt men,” rumors immediately spread in the financial press that the rescue of the Union Pacific was covertly a Vanderbilt affair, the ultimate goal of which must be the merger of the New York Central and Union Pacific to create another transcontinental trunk line. Schiff chose not to quash the rumors, reasoning that the Vanderbilt glow, however factitious, could only enhance the image of the hobbled Union Pacific on Wall Street when he brought its securities back to market.
By October, Schiff’s reorganization committee was ready with a plan: The government would foreclose on the Union Pacific, after which the committee would buy it back for $45 million; that plus the $17 million in the sinking fund established by the Thurman Act of 1878 would make the government almost whole on its construction subsidy. The plan promptly garnered the approval of bankers, railroad executives, and the press. But late in 1896 obstacles unaccountably emerged. Objections to the deal were being aired in Congress, the press had turned hostile, holders of the old Union Pacific shares were launching legal challenges, and opinion among bankers on Wall Street and in Europe turned decidedly chilly. Rumors reached Schiff that the pushback was coming from none other than Morgan, who purportedly had become embarrassed by Schiff’s success and jealously sought to regain control of the reorganization.
Schiff paid Morgan a second visit. Firmly denying the rumors, Pierpont offered to investigate their source. Presently he invited Schiff back to his office to reveal what he had heard. “It’s that little fellow Harriman,” he said, “and you want to look out for him.”
If true, this was a genuinely new aspect of the matter. Schiff knew Harriman vaguely as the shrewd financial mind behind the success of the Illinois Central. But of Harriman’s interest in the Union Pacific he had had no clue—though he could have reasoned it out, for the Illinois Central and the UP competed directly in several markets. It made sense that the Illinois would desire to secure some control over—or at least a partnership with—the UP. Additionally, the Vanderbilt cronies on Schiff’s committee posed a threat to the Illinois Central: If the New York Central and the Chicago & Northwestern—Depew’s and Hughitt’s roads—gained control of the Union Pacific via the reorganization, the Illinois Central would be shunted aside, deprived of access to the East Coast, Chicago, and the Pacific Northwest at a single stroke.
Schiff made an appointment with Harriman to complain about the mysterious opposition that had emerged to the committee’s reorganization scheme. “I understand this opposition is being directed by you,” he said. “What have you to say about it?”
Harriman answered with characteristic directness. “I am the man,” he acknowledged.
“But why?” Schiff asked.
“Because I intend to reorganize the Union Pacific myself.”
The confession struck Schiff as baldly quixotic. “How do you propose to do that?” he asked. “Most of its securities are in our possession. What means do you have?”
Harriman fixed Schiff with his icy glare. “We have the best credit in the country,” he said, explaining that he would finance the takeover by floating $100 million in bonds of the Illinois Central at 3 percent. He expected the securities to sell at full price. “You, at the best, can’t get money for less than four-and-a-half percent. In that respect I am stronger than you are,” he told Schiff. “The Illinois Central ought to have that road, and we are going to take charge of the reorganization.”
Schiff asked Harriman to name his price to stand aside. “There is no price,” Harriman replied. “I mean to get possession of the road.” Harriman said he would join forces with the reorganization committee only if he were named chairman. Schiff refused; the position had been promised to Winslow Pierce, who after all had brought the opportunity to Kuhn, Loeb and represented powerful interests on his own.
Harriman waved a hand in dismissal. “Very well, Mr. Schiff,” he said. “Go ahead and see what you can do. Good day.”
HARRIMAN CONTINUED to orchestrate opposition to the reorganization plan until Schiff finally offered him an olive branch. If Harriman would stand down, Schiff would promise him a seat on the reorganized company’s executive committee. “If you prove to be the strongest man in that committee,” Schiff said, “you’ll probably get the chairmanship in the end.”
Schiff may already have taken Harriman’s measure and concluded that the offer would appeal to his self-assurance. He was right. Harriman accepted, joining Schiff’s syndicate and putting in an investment of $900,000.
Harriman was elected to the Union Pacific board on December 6, 1897, and immediately found himself in hostile territory. “Mr. Harriman was a newcomer, and by several members of the Board his advent was not regarded with friendly eyes,” related Otto Kahn, Schiff’s partner and a member of the same executive committee Harriman now joined. “He was looked at askance, somewhat in the light of an intruder. His ways and manners jarred upon several of his new colleagues, and he was considered by some as not quite belonging in their class, from the point of view of business position, achievements or financial standing—a free lance, neither a railroad man nor a banker nor a merchant.” Kahn boiled down the reaction of his contemporaries as: “Ned Harriman! Why, I knew him years ago as a little ‘two dollar broker.’ What should he know about practical railroading?”
Among the skeptics was the executive committee’s most eminent banker, James Stillman, the forty-seven-year-old president of the National City Bank (the distant ancestor of today’s Citigroup). As the Rockefeller family bank, National City was celebrated as “the greatest reservoir of cash in America,” and was expected to provide a good deal of the capital needed to complete the reorganization. Stillman confessed in an interview years later that “a very prominent man had told me to ‘look out’ for Ed. Harriman. ‘He is not so smart as some people think and he is not a safe man to do business with.’” Upon receiving that warning, Stillman said, he had deliberately “steered clear of him,” until Harriman’s appointment to the Union Pacific executive committee forcibly brought them together.
At that point Stillman, along with the other members of the board, discovered that Harriman was in fact much smarter than he had been given credit for. “I have been acquainted with all of the prominent men of this country during the last forty years,” Stillman recollected, “and I can truly say that Harriman, in his conception of vast achievements and his skill, energy and daring in bringing them to realization, far surpassed any other man I have ever known. His brain was a thing to marvel at.” For the next decade, until Harriman’s untimely death in 1909, Stillman would remain his principal banker.
Harriman would make believers of the other board members too. The following May, less than six months after he was named to the Union Pacific board, he was elected chairman of its executive committee, effectively becoming the man in charge—just as Schiff had predicted.
Harriman’s appointment to the board was little marked in the financial press, possibly because his prior railroad experience in the Midwest, out of earshot of the East Coast financial journals, had kept him in obscurity. But after his accession his transformative role could not be overlooked.