IN THE transactions culminating in the Securities Company, Mr. Bacon was associated not only with Mr. Morgan, of whose firm he was now a senior, but with James J. Hill, "the great man of the Northwest." Mr. Hill's confidence in Mr. Bacon was such as to lead him to say of the younger man, as he was wont to do of those who had captivated his head and heart alike, that one---meaning himself---could "go to sleep with one's thumb in his mouth."
There are three stages in the formation of the Securities Company on November 13, 1901. The first, and assuredly not the least important, deals with the early activities of Mr. Hill. Here it may only be said that with his associates he reorganized the St. Paul Pacific Railroad, which had failed in 1873, into the St. Paul, Minneapolis, and Manitoba. This was in 1878, and he began at once the extension of the line then only three hundred and eighty miles long, to the Pacific. Of this road he became president, five years later. The various secondary lines, in which he was interested, were brought together to form the Great Northern Railway, extending not only from the Middle West on the east to Puget Sound on the west, but by direct lines of steamships to China and Japan as well. Of this system Mr. Hill was president at the time of the formation of the Securities Company.(56)
In the first stage also belongs Mr. Morgan's reorganization, in 1896, of the Northern Pacific Railway, which had failed in 1893, as the Northern Pacific Railroad. This line likewise extended from the Middle West to the Pacific. It ran to the south of the Great Northern, but not far enough south to drain the vast region covered by the Chicago, Burlington & Quincy Railway system running from Chicago in Illinois to Denver in Colorado and Billings in Montana, gathering as within a net of iron the rich products of Iowa, Missouri, Kansas, and Nebraska.
Farther to the south was the Union Pacific system running from Kansas City in Missouri to Ogden in Utah; thence west and to San Francisco in California by the Southern Pacific, and northwest from Ogden to Portland in Oregon and Spokane in Washington, by the Oregon Short Line and the Oregon Railroad and Navigation Company. Mr. Hill, of the Great Northern, held large quantities of stock in the Northern Pacific with Mr. Morgan's approbation, so that these two lines were practically allied, if not actually united. The Union Pacific was controlled by Edward H. Harriman. To each of these systems the possession or control of the Chicago, Burlington & Quincy was of moment; to the Great Northern and the Northern Pacific, with terminals at Duluth and St. Paul in Minnesota, and to the Union Pacific, terminating at Kansas City in Missouri, it would give access to Chicago, the very centre and heart of commercial America.
The second stage was the acquisition of the Chicago, Burlington & Quincy system by the Great Northern and the Northern Pacific.
The third was the formation of the Northern Securities as a holding or investment company for these lines henceforth forming a single system.
As the negotiations leading to the acquisition of the Chicago, Burlington & Quincy are necessary to an understanding of the purposes of the Securities Company, they must therefore be considered, although they need not be set forth at length. Mr. Hill had thought of purchasing the Chicago, Burlington & Quincy in 1897, but the undertaking seemed then too large for the Great Northern alone. Mr. Morgan turned his great constructive mind to the project about the same time. In the course of the hearings in the Northern Securities case, Mr. Morgan said:
I think it was in 1899---it may have been in 1898---I made up my mind that it was essential that the Northern Pacific Railway Company should have its terminus practically in Chicago, and in the same manner that the New York Central, of which I am a director, at that time or soon after decided the same thing with regard to their line, that the western terminus of their line should be in Chicago, practically by acquiring the Lake Shore; in other words, that the transcontinental line should come to Chicago, and that the eastern line should go to Chicago, so that was to be the central point, and I talked it over with a great many people interested in the Northern Pacific, and I found they all agreed with me.()
However, before Messrs. Hill and Morgan purchased the line in 1901, Mr. Harriman turned his attention to the Burlington Company. Late in 1899 he sounded the officials of the road who were either unwilling to sell or were unwilling to accept the terms offered. Mr. Harriman came back to the subject in the spring of 1900, and endeavoured to buy as many as two hundred thousand shares of Burlington stock. The shares were held by some fifteen thousand small shareholders. It was hard to locate them and when found the price seemed too high. Mr. Harriman and his friends therefore gave up the attempt. In the early part of the next year Mr. Hill, with the approval and indeed at the request of Mr. Morgan, took up the purchase of the Chicago, Burlington & Quincy with the then president, Charles E. Perkins, a man of the Hill and Morgan type of mind, and with the other directors of the road. The negotiations, conducted by Mr. Hill for the Great Northern, and Mr. Bacon and Mr. Charles Steele of J. P. Morgan & Company for the Northern Pacific, were successful. They were with the Burlington Company, whose Executive Committee fixed the price per share at $200, some twenty to twenty-five dollars above the price on the market, as Messrs. Hill and Morgan preferred to deal directly and openly with the authorized officers of the road, not indirectly and covertly upon the market; and in the name and benefit of the Great Northern and Northern Pacific systems, not as individuals and for their personal advantage. As a result the roads jointly purchased 96.79 per cent. of the total authorized issue of the stock, amounting to 1,075,772 shares of the capital stock of the Chicago, Burlington & Quincy Railroad Company and in payment of the two roads issued "their joint Collateral Trust Bonds and scrip to the amount of $215,154,000."(58)
The Burlington was a very large line and, exclusive of systems which it leased or controlled, operated at the time of the purchase some 7,911 miles.
A few weeks after the acquisition, Mr. Hill wrote to his Canadian friend, Lord Mount Stephen:
With the Great Northern, Northern Pacific, and Chicago, Burlington & Quincy under one grand control, we have placed ourselves in a position of strength as to traffic, terminal cities, and terminal facilities, and territorial control, which is now the strongest in the West and will daily grow stronger. We have secured another advantage by being in the best position to receive the western movement of population, which is beginning to assume proportions never before reached in the settlement of this country.(59)
The purchase turned out to the advantage of all concerned. Commerce between the states and foreign nations had increased more rapidly than in Mr. Hill's "forty years' experience. The total tonnage of the Great Northern increased about 30 per cent. The foreign business increased more than 100 per cent. The Northern Pacific reaped a similar benefit." The business of the Burlington increased "especially to the south and southwest." Traffic was created since the acquisition, so that "we are able", to quote Mr. Hill's exact words, "not to compete alone with railways, for that is a small matter in this business, but to compete in the matter of rates with the ships going from New Orleans or from Galveston, or the railways carrying it anywhere, or in connection with any other system of transportation." "We have been able," Mr. Hill continues, "to reduce rates from 10 to 15 per cent. in a year on the local business between the Pacific Coast and the Twin Cities and Lake Superior. The Northern Pacific rates have also been reduced, and their revenue has been such as to enable them to make this reduction without any reduction of their dividends."(60)
Mr. Hill's biographer is bold enough to say: "No act, no policy in the history of American railroading was more completely vindicated."
But the two Northern lines had barely completed the purchase before their existence was menaced by the Union Pacific. They saved themselves, but their attempt was balked by the Courts to place their interests in a securities company to continue their policies which had proved profitable to the stockholder and the public, and to defend themselves and their successors against the speculator or adventurer.
Mr. Harriman and his associates of the Union Pacific system quickly, determinedly, and successfully set about to buy up the quick stock of the Northern Pacific. Their purpose was divined by Mr. Hill and frustrated by Mr. Bacon and Mr. Steele during the absence of Mr. Morgan who had, after the purchase of the Burlington line, felt justified in going to Europe.
During the progress of the negotiations for the purchase of the Burlington line, Mr. Harriman and his associates of the Union Pacific system asked to be a party to the transaction to the extent of a third interest and offered to pay one third of the purchase price. Mr. Hill refused "for the reason," among others, "that it would defeat our object in buying the Burlington."(61) To this refusal Mr. Harriman replied, "Very well, it is a hostile act and you must take the consequences."(62) Neither the Great Northern nor the Northern Pacific feared that the control of the Northern Pacific would pass into the control of other hands. With the shares of stock which Mr. Hill and his friends and the firm of J. P. Morgan held, Mr. Hill said that they had "in the neighbourhood of 35 or 40 millions of the stock out of a total of 155 millions, which was larger than is usually held in any of the large companies. I did not think at the time that it was at all likely that anybody would undertake to buy in the market the control of 155 millions of stock."(63) Yet this happened. Through Kuhn, Loeb & Company, bankers and brokers of New York, Mr. Harriman began "swiftly and secretly" buying up Northern Pacific stock. By Friday night, May 3rd, there had been bought for the account of the Union Pacific "about 370,000 shares of the common stock . . . and about 420,000 shares of the preferred, making a total of approximately $79,000,000. This was a clear majority of the two classes of stock taken together, but it lacked 30,000 or 40,000 shares of a majority in the common taken separately."(64)
Some of Mr. Hill's friends took advantage of the rise of Northern Pacific stock to sell to Mr. Harriman's agents.
"One large holder, for example, sold to them 35,000 shares in a single lot. Even the Northern Pacific Company, tempted by the high prices, sold its own stock. As late as the 2d of May one of its subsidiary corporations, which happened to have in its treasury 13,000 Northern Pacific shares, sold them by direction of the Northern Pacific board itself. So unsuspecting were Morgan & Co. that on the same day they sold 10,000 shares which had happened to come into their hands in the ordinary course of business. All of this stock, or most of it, went directly to Kuhn, Loeb & Co., who were buying for Harriman and the Union Pacific."(65) A few days more and Mr. Harriman would have accomplished his purpose. Something happened. Mr. Hill had noticed the unprecedented purchases of Northern Pacific stock, with the consequent and rapid advance in the value of common and preferred. He felt that something was wrong. He himself was in the far west, at Seattle. Mr. Morgan, his associate, was in Europe---art browsing in Italy. Therefore, Mr. Hill made up his mind to proceed at once to New York to size up the situation, to put himself in touch with Mr. Bacon, then in New York and in charge of the Morgan interests, and to take whatever measures were necessary and possible.
Mr. Kennan, in his interesting life of Mr. Harriman, tells how Mr. Hill got east; what he found and what was done:
He therefore called upon the operating officials of the Great Northern to give him at once the fastest possible special train to St. Paul with unlimited right of way over everything. The superintendent of the western division furnished the "special" immediately and said to the locomotive engineers: "The road is yours to St. Paul; everything else on the line will be held up to let you pass.
Mr. Hill arrived in New York on the afternoon of Friday, May 3d and went at once to the office of Kuhn, Loeb & Co. to see Mr. Schiff [an old personal friend and former director of the Great Northern.] In reply to an inquiry as to the meaning of the rapid rise in Northern Pacific shares, Schiff informed Hill that Kuhn, Loeb & Co. were buying them on orders from the Union Pacific. "But," said Hill, "you can't get control. The Great Northern, Morgan, and my friends were recently holding $35,000,000 or $40,000,000 of the Northern Pacific stock, and so far as I know none of it has been sold." "That may be," replied Schiff, "but we've got a lot of it. You secretly bought the Chicago, Burlington & Quincy and refused to give us a fair share; now we're going to see if we can't get a share by purchasing a controlling interest in the Northern Pacific."
Hill, after a brief talk, left the office, saying that he did not believe it could be done. He evidently feared, however, that it might be done, because on the following day, after making further investigations, he went to Robert Bacon, . . . told him that the situation was critical, and suggested that it might be well to cable J. Pierpont Morgan, . . . for authority to buy at least 150,000 shares of Northern Pacific stock, preferably the common. . . . The cablegram was sent to Morgan after the close of the Stock Exchange, Saturday, May 4th.(66)
When Mr. Morgan received the cable he felt, as he afterward stated, that something must have happened:
"Somebody must have sold. I knew where certain stocks were and I figured it up. I feel bound in all honour, when I reorganize a property, and am morally responsible for its management, to protect it, and I generally do protect it; so I made up my mind that it would be desirable to buy 150,000 shares of stock . . . and with that I knew we had a majority of common stock."(67)
The views of Messrs. Hill and Morgan have been given in their own language. Mr. Harriman should be heard in his own behalf:
On the morning of Saturday, May 4th, I was at home, ill. We had somewhat over $42,000,000 of the preferred shares of the Northern Pacific, or a clear majority of that issue, and somewhat over $37,000,000 of the common shares, which lacked being a majority of the common by about 40,000 shares. But we had a majority of the entire capital stock . . . and I had been competently advised, and was convinced, that this holding was sufficient to enable us to control the Company. Nevertheless, the fact that the Northern Pacific could, on the 1st of January following, retire the preferred shares, of which we had a majority, bothered me somewhat, and I felt that we ought not to leave open to them any chance of retiring our preferred stock and leaving us with a minority interest in the common stock, or involving us in litigation about it.(68)
Mr. Harriman therefore called up a partner of Kuhn, Loeb & Company and ordered the purchase of 40,000 shares.
Mr. Schiff was at the Synagogue, and he instructed his partner "not to execute the order, "and that "he [Schiff] would be responsible."(69) If Mr. Harriman had not been ill, or if Mr. Schiff had not been at the Synagogue . . .
Saturday morning passed, and with the morning, the golden opportunity. The Stock Exchange had closed at noon. On Sunday, the 5th, Mr. Bacon received the desired authority by cable from Mr. Morgan. On Monday morning the Morgan forces "took the field." As Mr. Kennan says: "With the reopening of the Stock Exchange, Monday morning, their brokers swarmed over the floor, bidding eagerly for Northern Pacific common, and taking all that could be had at prices that advanced steadily from 110 to 130. Tuesday they continued this aggressive buying, and ran the price of the common up to 149 3/4---an advance of nearly forty points in two business days. [Commercial & Financial Chronicle, May 18, 1901.] But they attained their object. Before Tuesday night they were in possession of the 150,000 shares that Morgan had authorized them to buy. With this addition to their holdings, the Morgan-Hill interests had something like 30,000 shares more of the common than they needed."(70)
They had, in common parlance, the whip hand.(71)
Why this anxiety to hold a majority of the common, when all stockholders could vote, and preferred stock is, as the name indicates, ordinarily more desirable? The reason is simple. It was a temporary issue, for a temporary purpose.(72) It could, therefore, be retired.(73) Upon retirement of the preferred, Mr. Harriman would receive common stock, but he would only be able to vote it and reorganize the Board of Directors after the Annual Meeting of the Stockholders in October, and the Board of Directors could postpone the annual meeting. It did. In the meantime, many things could happen. Mr. Morgan and Mr. Hill decided to protect their interests by forming a securities company against "raiding," which is the technical word for Mr. Harriman's attempt. To this company the stockholders of the Great Northern and Northern Pacific could sell their stock and receive stock of the new concern in return. It would not be a railroad, it would be an investment company. Mr. Harriman concluded, instead of struggling further for control, to content himself with representation in the Directorate of the Northern Pacific and the Burlington. The investment company was formed by general consent.
Mr. Harriman agreed to sell his Northern Pacific stock to the new company and to receive its stock in return. There were to be two bites to the cherry.
On November 13th, Mr. Harriman sold his preferred and common stock to J. P. Morgan & Company at an agreed price. The Northern Securities Company, incorporated the same November 13th, agreed to take this stock from the Morgans at the same price, and to issue stock of the new company to Mr. Harriman. It was done.
This turn of affairs did not come about by itself. A panic in Wall Street had inclined the principals in the struggle to compromise. Northern Pacific stock had been bought; it had not been delivered. It had been sold "short"---that is, the broker sold Northern Pacific stock which did not belong to him, and which he did not possess, in the expectation of procuring it somewhere, somehow, at a lower price, at the time of delivery agreed upon.
Wednesday, May 8th, opened with great uneasiness; by noon it was evident that trouble was impending. The next day, Thursday, the 9th, the storm broke.(74) Because of the demand for stock of the Northern Pacific, the common rose to $1,000 a share. This affected the whole market. Other standard stocks fell to half their ordinary value. The brokers who dealt in Northern Pacific saw themselves ruined for they could neither procure the stock nor pay the price if procurable. Holders of other stocks suffered, at least temporarily. Wall Street was in a ferment. Something had to be done. Mr. Schiff, acting for Mr. Harriman, and Mr. Bacon, acting for Mr. Morgan, agreed that the brokers who had sold Northern Pacific "short" should settle with Messrs. Harriman and Morgan at $150 per share. This allayed the immediate apprehension and tension of these brokers. An agreement limited to Northern Pacific stock was not sufficient. Holders of standard stocks had been affected by the events of the past few days. A contest between Messrs. Harriman and Morgan for control of the Northern Pacific involving a half interest in the Burlington would seriously affect the stock of the Great Northern.(75) It was therefore not only in the interest of Messrs. Harriman and Morgan, but also of Mr. Hill, that a working agreement should be reached. It was also in the interest of the public, for in these days the earnings of the poor as well as the rich are invested in stock, and the stockholders of small amounts are scattered throughout the length and breadth of the land. It was therefore agreed that there should be no contest over the election of members to the future board of the Northern Pacific. It was further decided not to wait until the annual meeting, but to take steps at once. It was proposed that Mr. Morgan should choose the members. Mr. Bacon would only consent to this upon the clear and definite understanding that Mr. Morgan should be free and untrammelled in his choice. This was agreed to; Mr. Morgan accepted.
A statement of the agreement was made public with quieting effects. Mr. Morgan advised some of the members of the Directorate to withdraw at once. This they did. Mr. Morgan was thus able to reorganize the Board before the annual meeting, and the element of uncertainty and the fear of a contest were eliminated. Then there was the matter of the retirement of the preferred stock. Messrs. Harriman and Morgan had obtained from competent counsel the opinions they wanted, but litigation confronted the principals even if they were sure of their legal rights and eventual triumph. By common consent the reorganized Board voted the retirement of the preferred stock at its meeting of November 13th, to take effect on January 1, 1902, and by like consent the annual meeting was postponed. By common consent Messrs. Harriman, Hill, and Morgan agreed to sell their holdings of Great Northern and Northern Pacific stock to an investment company to be organized, and which was actually incorporated in New Jersey on November 13, 1901, under the name of the Northern Securities Company.
A fundamental principle of the transaction was equality of treatment of all stockholders. All holders who might care to sell their stock in these companies to the Investment Company were to receive, and actually did receive, the same price per share, $180 for Great Northern, $115 for Northern Pacific. In the end, 76 per cent. of the Great Northern was sold at this rate to the new company, although it was selling for $200 on the market; 96 per cent. of the Northern Pacific was sold to the Northern Securities Company. This was contrary to the anticipations of Messrs. Hill and Morgan, who figured on less than a majority. This mark of confidence in their character and ability was doubtless pleasing although far from unusual. Mr. Hill had long planned an investment company for the Great Northern and the holdings of its stockholders in the Northern Pacific in order to see to it that the policy which had made the Great Northern System so successful in the past should be continued in the future. Mr. Morgan had in mind a similar company for the Northern Pacific and for like reasons. The events of the past few months caused them to take early action and to create a single holding company. Mr. Hill had repeatedly stated the reasons for his action in a statement to the press, in private personal letters, and in sworn testimony. Mr. Morgan has likewise given his reasons. Both expressly denied any purpose on their part to restrain trade or to stifle competition. Mr. Hill was elected president of the Northern Securities Company. In this capacity he issued a statement explaining the organization of the company, announced that the three railroads would continue to be operated separately, and asked fair play and time within which to prove that the establishment of the Northern Securities Company was in the public good.
Time was not to be granted. Suit was brought in the Circuit Court for the District of Minnesota by the United States against the Northern Securities Company, a corporation of New Jersey; the Great Northern Railway Company, a corporation of Minnesota; the Northern Pacific Railway Company, a corporation of Wisconsin; James J. Hill, a citizen of Minnesota; and William P. Clough, D. Willis James, John S. Kennedy, J. Pierpont Morgan, Robert Bacon, George F. Baker, and Daniel S. Lamont, citizens of New York, to procure the dissolution of the Securities Company.
The suit was based upon the Anti-Trust Act of 1890.(76) The first section declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States or with foreign nations." The second section made it a misdemeanour for any person to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several States or with foreign nations."
The Government by its bill challenged the right of the Northern Securities Company to hold and own the stock in the two railroads.
The case was decided against the company, and the judgment of the Circuit Court(77) was affirmed on appeal to the Supreme Court of the United States by five judges for and four judges against confirmation.(78)
In the opinion of the majority, and therefore in the judgment of the Supreme Court, the Northern Securities Company was an illegal combination, and should be and was dissolved. The divergent views of the members of that august tribunal show the difficulty of the case and the closeness of the decision. However, the Supreme Court is always right, because, as the late Mr. Justice Brewer was wont to say, "it has the last guess."
The Court of last resort had spoken, and there was nothing to do but to comply. On March 22, 1904, eight days after the decision of the Supreme Court, the Directors of the Securities Company met in New York and decided that it was necessary, in order to carry out the decision of the Court, to reduce the capital stock of the company and to distribute to its shareholders the shares of stock which it possessed of the two railroads.
To Mr. Harriman the method of distribution was unsatisfactory. He insisted that the Northern Pacific stock which he had transferred to the company should be returned. If this were done, he would control the Northern Pacific Railway Company in the future; if shares of Northern Pacific and of the Great Northern were issued, he would lose control of the Northern Pacific Company. He therefore filed a bill in the Circuit Court of the United States for the District of New Jersey to enjoin the Northern Securities Company from distributing the shares of the Northern Securities as proposed. The injunction was granted, but reversed in the Court of Appeals on the ground that the stocks of the Northern Pacific and of the Great Northern had been sold not merely deposited with the Securities Company; that title to the stock had therefore passed to the Securities Company, and that Mr. Harriman was only entitled to the distribution of the stock of the Northern Securities authorized by the company.
Proverbially, we cannot see the forest for the trees. Participants in the case, it is to be feared, have their feet entangled in the details. In any event, they lack perspective. The judgment of the onlooker is often preferred. Perhaps it may be so in this case. And it would be difficult to find greater knowledge of the subject, combined with poise and balance, than pervades the History of the Northern Securities Case, written by Dr. Balthasar Henry Meyer, at present a member of the Interstate Commerce Commission of the United States.
Competition as a regulative principle of railways and as a force which will maintain proper relations between the railways themselves and the railways and the public has failed in every country of the world where it has been given a trial. . . . The Great Northern and Northern Pacific railways are parallel and competing in so far as physical location is concerned, and with respect to a relatively small part of their interstate, traffic. They are not, and have not been, competitive with respect to any but an inappreciable part of their total traffic. . . .
It was assumed that competition had been stifled without first asking the question whether competition had actually existed; and whether, if competition could be perpetuated, the public would profit by it. . . . This undiscriminating opposition to all forms of open concerted action on the part of the railways is in my mind the greatest single blunder in our public policy toward railways. . . . I also wish to repeat . . . that I regard the application to railways of the Sherman anti-trust law of 1890 as one of the gravest errors in our legislative history. It is demonstrable that if railway companies had been permitted to coöperate with one another under the supervision of competent public authority . . . the railway situation in the United States would to-day be appreciably better than it is. . . . The American public seems to be unwilling to admit that agreements will and must exist, and that it has a choice between regulated legal agreements and unregulated extra-legal agreements. We should have cast away more than fifty years ago the impossible doctrine of protection of the public by railway competition.(79)
What was the outcome of years of intellectual effort, of the expenditure of vast sums of money involved in the making and unmaking of the Northern Securities Company? The return to the early days of May, 1901, when Mr. Hill conferred with Mr. Bacon, and Mr. Bacon and Mr. Steele of J. Pierpont Morgan & Company blocked the effort of Mr. Harriman and Mr. Schiff to purchase the necessary stock on the market to obtain control of the Northern Pacific Railway.
Physically, the strain on Mr. Bacon had injured his health. Upon his physician's advice he took a year's leave of absence, and at its expiration withdrew from J. Pierpont Morgan & Company, a well man with his future before him---a future made possible by "long experience, wide culture, sound judgment, and perfect tact."
