, there-
upon purchased for $215,227,000, of their joint
4 per cent.
upon purchased for $215,227,000, of their joint
4 per cent.
Louis Brandeis - 1914 - Other People's Money, and How Bankers Use It
Morgan & Co.
, in urging the "need of
large banks and the cooperation of bankers,"
said:
"The Attorney-General's recent approval of
the Union Pacific settlement calls for a single com-
mitment on the part of bankers of $126,000,000. "
This $126,000,000 "commitment" was not
made to enable the Union Pacific to secure
capital. On the contrary it was a guaranty that
it would succeed in disposing of its Southern
Pacific stock to that amount. And when it had
disposed of that stock, it was confronted with the
serious problem--what to do with the proceeds?
This huge underwriting became necessary solely
because the Union Pacific had violated the
Sherman Law. It had acquired that amount of
Southern Pacific stock illegally; and the Supreme
Court of the United States finally decreed that
the illegality cease. This same illegal purchase
had been the occasion, twelve years earlier, of
another "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the
Oregon Short Line, the Oregon Railway and
Navigation and the Oregon-Washington Railroad)
made, in the fourteen years, ending June 30,1912,
issues of securities aggregating $375,158,183 (of
which $46,500,000 were refunded or redeemed);
but the large security issues served mainly to sup-
ply funds for engaging in illegal combinations or
stock speculation. The extraordinary improve-
ments and additions that raised the Union Pacific
Railroad to a high state of efficiency were
provided mainly by the net earnings from the
operation of its railroads. And note how great
the improvements and additions were: Tracks
were straightened, grades were lowered, bridges
were rebuilt, heavy rails were laid, old equipment
was replaced by new; and the cost of these was
charged largely as operating expense. Additional
equipment was added, new lines were built
or acquired, increasing the system by 3524
miles of fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
512,328. But it needed no "large security
issues" to provide the capital thus wisely ex-
pended. The net earnings from the operations
of these railroads were so large that nearly all
these improvements and additions could have
been made without issuing on the average more
than $1,000,000 a year of additional securities for
"new money," and the company still could have
paid six per cent. dividends after 1906 (when that
rate was adopted). For while $13,679,452 a
year, on the average, was charged to Cost
of Road and Equipment, the surplus net
earnings and other funds would have yielded, on
the average, $12,750,982 a year available for
improvements and additions, without raising
money on new security issues.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 securities (except to the
extent of about $13,000,000 required for im-
provements, and the amounts applied for refund-
ing and redemptions) were available to buy
stocks and bonds of other companies. And some
of the stocks so acquired were sold at large
profits, providing further sums to be employed
in stock purchases.
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? A CURSE OF BIGNESS 167
The $375,000,000 Union Pacific Lines security-
issues, therefore, were not needed to supply
funds for Union Pacific improvements; nor did
these issues supply funds for the improvement of
any of the companies in which the Union Pacific
invested (except that certain amounts were
advanced later to aid in financing the Southern
Pacific). They served, substantially, no purpose
save to transfer the ownership of railroad stocks
from one set of persons to another.
Here are some of the principal investments:
1. $91,657,500, in acquiring and financing the Southern
Pacific.
2. $89,391,401, in acquiring the Northern Pacific stock and
stock of the Northern Securities Co.
3. $45,466,960, in acquiring Baltimore & Ohio stock.
4. $37,692,256, in acquiring Illinois Central stock.
5. $23,205,679, in acquiring New York Central stock.
6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
9. $6,750,423, in acquiring Chicago & Northwestern stock.
10. $6,936,696, in acquiring Railroad Securities Co. stock
(Illinois Central stock. )
The immediate effect of these stock acquisi-
tions, as stated by the Interstate Commerce
Commission in 1907, was merely this:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may journey by steamship
from New York to New Orleans, thence by rail
to San Francisco, across the Pacific Ocean to
China, and, returning by another route to the
United States, may go to Ogden by any one of
three rail lines, and thence to Kansas City or
Omaha, without leaving the deck or platform
of a carrier which he controls, and without
duplicating any part of his journey.
"He has further what appears to be a dominant
control in the Illinois Central Railroad running
directly north from the Gulf of Mexico to the
Great Lakes, parallel to the Mississippi River;
and two thousand miles west of the Mississippi
he controls the only line of railroad parallel to
the Pacific Coast, and running from the Colorado
River to the Mexican border. . . .
"The testimony taken at this hearing shows
that about fifty thousand square miles of terri-
tory in the State of Oregon, surrounded by the
lines of the Oregon Short Line Railroad Com-
pany, the Oregon Railroad and Navigation
Company, and the Southern Pacific Company,
is not developed. While the funds of those
companies which could be used for that purpose
are being invested in stocks like the New York
Central and other lines having only a remote
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? A CURSE OF BIGNESS 169
relation to the territory in which the Union Pacific
System is located. "
Mr. Harriman succeeded in becoming director
in 27 railroads with 39,354 miles of line; and they
extended from the Atlantic to the Pacific; from
the Great Lakes to the Gulf of Mexico.
THE AFTERMATH
On September 9, 1909, less than twelve years
after Mr. Harriman first became a director in the
Union Pacific, he died from overwork at the age
of 61. But it was not death only that had
set a limit to his achievements. The multiplicity
of his interests prevented him from performing
for his other railroads the great services that had
won him a world-wide reputation as manager
and rehabilitator of the Union Pacific and the
Southern Pacific. Within a few months after
Mr. Harriman's death the serious equipment
scandal on the Illinois Central became public,
culminating in the probable suicide of one of the
vice-presidents of that company. The Chicago
& Alton (in the management of which Mr.
Harriman was prominent from 1899 to 1907, as
President, Chairman of the Board, or Executive
Committeeman), has never regained the pros-
perity it enjoyed before he and his associates
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? 170 OTHER PEOPLE'S MONEY
acquired control. The Pere Marquette has
passed again into receiver's hands. Long before
Mr. Harriman's death the Union Pacific had
disposed of its Northern Pacific stock, because
the Supreme Court of the United States declared
the Northern Securities Company illegal, and
dissolved the Northern Pacific-Great Northern
merger. Three years after his death, the Su-
preme Court of the United States ordered the
Union Pacific-Southern Pacific merger dissolved.
By a strange irony, the law has permitted the
Union Pacific to reap large profits from its illegal
transactions in Northern Pacific and Southern
Pacific stocks. But many other stocks held
"as investments" have entailed large losses.
Stocks in the Illinois Central and other com-
panies which cost the Union Pacific $129,894,-
991. 72, had on November 15, 1913, a market
value of only $87,851,500; showing a shrinkage
of $42,043,491. 72 and the average income from
them, while held, was only about 4. 30 per cent.
on their cost.
A bankers' paradise
Kuhn, Loeb & Co. were the Union Pacific
bankers. It was in pursuance of a promise which
Mr. Jacob H. Schiff--the senior partner--had
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? A CURSE OF BIGNESS 171
given, pending the reorganization, that Mr.
Harriman first became a member of the Executive
Committee in 1897. Thereafter combinations
grew and crumbled, and there were vicissi-
tudes in stock speculations. But the investment
bankers prospered amazingly; and financial con-
centration proceeded without abatement. The
bankers and their associates received the com-
missions paid for purchasing the stocks which
the Supreme Court holds to have been acquired
illegally--and have retained them. The bankers
received commissions for underwriting the securi-
ties issued to raise the money with which to buy
the stocks which the Supreme Court holds to have
been illegally acquired, and have retained them.
The bankers received commissions paid for floating
securities of the controlled companies--while
they were thus controlled in violation of law--and
have, of course, retained them. Finally when,
after years, a decree is entered to end the illegal
combination, these same bankers are on hand
to perform the services of undertaker"--and
receive further commissions for their banker-aid
in enabling the law-breaking corporation to end
its wrong doing and to comply with the decree of
the Supreme Court. And yet, throughout nearly
all this long period, both before and after Mr.
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? 172 OTHER PEOPLE'S MONEY
Harriman's death, two partners in Kuhn, Loeb <k
Co. were directors or members of the executive
committee of the Union Pacific; and as such
must be deemed responsible with others for the
illegal acts.
Indeed, these bankers have not only received
commissions for the underwritings of transactions
accomplished, though illegal; they have re-
ceived commissions also for merely agreeing to
underwrite a "great transaction" which the
authorities would not permit to be accomplished.
The $126,000,000 underwriting (that "single
commitment on the part of bankers" to which
J. P. Morgan & Co. refer as being called for by
"the Attorney General's approval of the Union
Pacific settlement") never became effective;
because the Public Service Commission of Cali-
fornia refused to approve the terms of settlement.
But the Union Pacific, nevertheless, paid the
Kuhn Loeb Syndicate a large underwriting fee for
having been ready and willing "to serve," should
the opportunity arise: and another underwriting
commission was paid when the Southern Pacific
stock was finally distributed, with the approval
of Attorney General McReynolds, under the
Court's decree. Thus the illegal purchase of
Southern Pacific stock yielded directly four
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? A CURSE OF BIGNESS 178
crops of commissions; two when it was acquired,
and two when it was disposed of. And during
the intervening period the illegally controlled
Southern Pacific yielded many more commissions
to the bankers. For the schedules filed with the
Pujo Committee show that Kuhn, Loeb & Co.
marketed, in addition to the Union Pacific
securities above referred to, $334,000,000 of
Southern Pacific and Central Pacific securities
between 1903 and 1911.
The aggregate amount of the commissions paid
to these bankers in connection with Union
Pacific-Southern Pacific transactions is not dis-
closed. It must have been very large; for not
only were the transactions "great"; but the
commissions were liberal. The Interstate Com-
merce Commission finds that bankers received
about 5 per cent. on the purchase price for buying
the first 750,000 shares of Southern Pacific stock;
and the underwriting commission on the first
$100,000,000 Union Pacific bonds issued to make
that and other purchases was $5,000,000. How
large the two underwriting commissions were
which the Union Pacific paid in effecting the
severance of this illegal merger, both the company
and the bankers have declined to disclose.
Furthermore the Interstate Commerce Com-
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? 174 OTHER PEOPLE'S MONEY
mission showed, clearly, while investigating the
Union Pacific's purchase of the Chicago & Alton
stock, that the bankers' profits were by no means
confined to commissions.
THE BURLINGTON
Such railroad combinations produce injury
to the public far more serious than the heavy tax
of bankers' commissions and profits. For in
nearly every case the absorption into a great
system of a theretofore independent railroad has
involved the loss of financial independence to
some community, property or men, who thereby
become subjects or satellites of the Money Trust.
The passing of thu Chicago, Burlington & Quincy,
in 1901, to the Morgan associates, presents a
striking example of this process.
After the Union Pacific acquired the Southern
Pacific stock in 1901, it sought control, also, of
the Chicago, Burlington & Quincy,--a most
prosperous railroad, having then 7912 miles of
line. The Great Northern and Northern Pacific
recognized that Union Pacific control of the
Burlington would exclude them from much of
Illinois, Missouri, Wisconsin, Kansas, Nebraska,
Iowa, and South Dakota. The two northern
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? A CURSE OF BIGNESS 175
roads, which were already closely allied with
each other and with J. P. Morgan & Co.
, there-
upon purchased for $215,227,000, of their joint
4 per cent. bonds, nearly all of the $109,324,000
(par value) outstanding Burlington stock. A
struggle with the Union Pacific ensued which
yielded soon to "harmonious cooperation. " The
Northern Securities Company was formed with
$400,000,000 capital, thereby merging the Great
Northern, the Northern Pacific and the Burling-
ton, and joining the Harriman, Kuhn-Loeb, with
the Morgan-Hill interests. Obviously neither
the issue of $215,000,000 joint 4's, nor the issue
of the $400,000,000 Northern Securities stock
supplied one dollar of funds for improvements of,
or additions to, any of the four great railroad
systems concerned in these "large transactions. "
The sole effect of issuing $615,000,000 of securities
was to transfer stock from one set of persons to
another. And the resulting "harmonious co-
operation" was soon interrupted by the govern-
ment proceedings, which ended with the dissolu-
tion of the Northern Securities Company. But
the evil done outlived the combination. The
Burlington had passed forever from its inde-
pendent Boston owners to the Morgan allies,
who remain in control.
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? 176 OTHER PEOPLE'S MONEY
The Burlington--one of Boston's finest achieve-
ments--was the creation of John M. Forbes.
He was a builder; not a combiner, or banker, or
wizard of finance. He was a simple, hard-
working business man. He had been a merchant
in China at a time when China's trade was among
America's big business. He had been connected
with shipping and with manufactures. He had
the imagination of the great merchant; the
patience and perseverance of the great manu-
facturer; the courage of the seafarer; and the
broad view of the statesman. Bold, but never
reckless; scrupulously careful of other people's
money, he was ready, after due weighing of
chances, to risk his own in enterprises promising
success. He was in the best sense of the term, a
great adventurer. Thus equipped, Mr. Forbes
entered, in 1852, upon those railroad enterprises
which later developed into the Chicago, Burling-
ton & Quincy. Largely with his own money
and that of friends who confided in him, he
built these railroads and carried them through the
panic of '57, when the "great banking houses"
of those days lacked courage to assume the
burdens of a struggling ill-constructed line,
staggering under financial difficulties.
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? A CURSE OF BIGNESS 177
Under his wise management, and that of the
men whom he trained, the little Burlington
became a great system. It was "built on honor,"
and managed honorably. It weathered every
other great financial crisis, as it did that of 1857.
It reached maturity without a reorganization or
the sacrifice of a single stockholder or bondholder.
Investment bankers had no place on the
Burlington Board of Directors; nor had the
banker-practice, of being on both sides of a
bargain. "I am unwilling," said Mr. Forbes,
early in his career, "to run the risk of having
the imputation of buying from a company in
which I am interested. " About twenty years
later he made his greatest fight to rescue the
Burlington from the control of certain contractor-
directors, whom his biographer, Mr. Pearson,
describes as "persons of integrity, who had
conceived that in their twofold capacity as
contractors and directors they were fully able to
deal with themselves justly. " Mr. Forbes
thought otherwise. The stockholders, whom he
had aroused, sided with him and he won.
Mr. Forbes was the pioneer among Boston
railroad-builders. His example and his success
inspired many others, for Boston was not lacking
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? 178 OTHER PEOPLE'S MONEY
then in men who were builders, though some
lacked his wisdom, and some his character. Her
enterprise and capital constructed, in large part,
the Union Pacific, the Atchison, the Mexican
Central, the Wisconsin Central, and 24 other
railroads in the West and South. One by one
these western and southern railroads passed out
of Boston control; the greater part of them into
the control of the Morgan allies. Before the
Burlington was surrendered, Boston had begun
to lose her dominion, even, over the railroads of
New England. In 1900 the Boston & Albany-
was leased to the New York Central,--a Morgan
property; and a few years later, another Morgan
railroad--the New Haven--acquired control of
nearly every other transportation line in New
England. Now nothing is left of Boston's
railroad dominion in the West and South,
except the Eastern Kentucky Railroad--a line
36 miles long; and her control of the railroads of
Massachusetts is limited to the Grafton & Upton
with 19 miles of line and the Boston, Revere
Beach & Lynn,--a passenger road 13 miles long.
THE NEW HAVEN MONOPOLY
The rise of the New Haven Monopoly presents
another striking example of combination as a
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? A CURSE OF BIGNESS 179
developer of financial concentration; and it
illustrates also the use to which "large security
issues" are put.
In 1892, when Mr. Morgan entered the New
Haven directorate, it was a very prosperous
little railroad with capital liabilities of $25,000,000
paying 10 per cent. dividends, and operating
508 miles of line. By 1899 the capitalization
had grown to $80,477,600, but the aggregate
mileage had also grown (mainly through merger
or leases of other lines) to 2017. Fourteen years
later, in 1913, when Mr. Morgan died and Mr.
Mellen resigned, the mileage was 1997, just
20 miles less than in 1899; but the capital lia-
bilities had increased to $425,935,000. Of course
the business of the railroad had grown largely
in those fourteen years; the road-bed was im-
proved, bridges built, additional tracks added,
and much equipment purchased; and for all this,
new capital was needed; and additional issues
were needed, also, because the company paid
out in dividends more than it earned. But
of the capital increase, over $200,000,000 was
expended in the acquisition of the stock or other
securities of some 121 other railroads, steam-
ships, street railway-, electric-light-, gas- and
water-companies. It was these outside proper-
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? 180 OTHER PEOPLE'S MONEY
ties, which made necessary the much discussed
$67,000,000, 6 per cent. bond issue, as well as
other large and expensive security issues. For
in these fourteen years the improvements on
the railroad including new equipment have cost,
on the average, only $10,000,000 a year.
THE NEW HAVEN BANKERS
Few, if any, of those 121 companies which the
New Haven acquired had, prior to their absorp-
tion by it, been financed by J. P. Morgan &
Co. The needs of the Boston & Maine and
Maine Central--the largest group--had, for
generations, been met mainly through their
own stockholders or through Boston banking
houses. No investment banker had been a
member of the Board of Directors of either of
those companies. The New York, Ontario &
Western--the next largest of the acquired rail-
roads--had been financed in New York, but by
persons apparently entirely independent of the
Morgan allies. The smaller Connecticut rail-
roads, now combined in the Central New Eng-
land, had been financed mainly in Connecticut,
or by independent New York bankers. The
financing of the street railway companies had
been done largely by individual financiers, or
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? A CURSE OF BIGNESS 181
by small and independent bankers in the states
or cities where the companies operate. Some of
the steamship companies had been financed by
their owners, some through independent bankers.
As the result of the absorption of these 121 com-
panies into the New Haven system, the financing
of all these railroads, steamship companies,
street railways, and other corporations, was
made tributary to J. P. Morgan & Co. ; and the
independent bankers were eliminated or became
satellites. And this financial concentration was
proceeded with, although practically every one
of these 121 companies was acquired by the New
Haven in violation either of the state or federal
law, or of both. Enforcement of the Sherman
Act will doubtless result in dissolving this
unwieldy illegal combination.
THE COAL MONOPOLY
Proof of the "cooperation" of the anthracite
railroads is furnished by the ubiquitous presence
of George F. Baker on the Board of Directors
of the Reading, the Jersey Central, the Lacka-
wanna, the Lehigh, the Erie, and the New York,
Susquehanna & Western railroads, which to-
gether control nearly all the unmined anthracite
as well as the actual tonnage. These roads have
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? 182 OTHER PEOPLE'S MONEY
been an important factor in the development of
the Money Trust. They are charged by the De-
partment of Justice with fundamental violations
both of the Sherman Law and of the Commodity
clause of the Hepburn Act, which prohibits a
railroad from carrying, in interstate trade, any
commodity in which it has an interest, direct or
indirect. Nearly every large issue of securities
made in the last 14 years by any of these rail-
roads (except the Erie), has been in connection
with some act of combination. The combina-
tion of the anthracite railroads to suppress the
construction, through the Temple Iron Company,
of a competing coal road, has already been de-
clared illegal by the Supreme Court of the United
States. And in the bituminous coal field--the
Kanawha District--the United States Circuit
Court of Appeals has recently decreed that a
similar combination by the Lake Shore, the
Chesapeake & Ohio, and the Hocking Valley,
be dissolved.
OTHER RAILROAD COMBINATIONS
The cases of the Union Pacific and of the New
Haven are typical--not exceptional. Our rail-
road history presents numerous instances of large
security issues made wholly or mainly to effect
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? A CURSE OF BIGNESS 183
combinations. Some of these combinations have
been proper as a means of securing natural
feeders or extensions of main lines. But far more
of them have been dictated by the desire to
suppress active or potential competition; or by
personal ambition or greed; or by the mistaken
belief that efficiency grows with size.
Thus the monstrous combination of the Rock
Island and the St. Louis and San Francisco with
over 14,000 miles of line is recognized now to
have been obviously inefficient. It was severed
voluntarily; but, had it not been, must have
crumbled soon from inherent defects, if not as a
result of proceedings under the Sherman law.
Both systems are suffering now from the effects
of this unwise combination; the Frisco, itself
greatly overcombined, has paid the penalty in
receivership. The Rock Island--a name once
expressive of railroad efficiency and stability--
has, through its excessive recapitalizations and
combinations, become a football of speculators,
and a source of great apprehension to confiding
investors. The combination of the Cincinnati,
Hamilton and Dayton, and the Pdre Marquette
led to several receiverships.
There are, of course, other combinationa
which have not been disastrous to the owners of
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? 184 OTHER PEOPLE'S MONEY
the railroads. But the fact that a railroad
combination has not been disastrous does not
necessarily justify it. The evil of the concentra-
tion of power is obvious; and as combination
necessarily involves such concentration of power,
the burden of justifying a combination should
be placed upon those who seek to effect it.
For instance, what public good has been
subserved by allowing the Atlantic Coast Line
Railroad Company to issue $50,000,000 of securi-
ties to acquire control of the Louisville & Nash-
ville Railroad--a widely extended, self-sufficient
system of 5000 miles, which, under the wise
management of President Milton H. Smith had
prospered continuously for many years before the
acquisition; and which has gross earnings nearly
twice as large as those of the Atlantic Coast Line.
The legality of this combination has been
recently challenged by Senator Lea; and an
investigation by the Interstate Commerce Com-
mission has been ordered.
THE PENNSYLVANIA
The reports from the Pennsylvania suggest the
inquiry whether even this generally well-managed
railroad is not suffering from excessive bigness.
After 1898 it, too, bought, in large amounts,
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? A CURSE OF BIGNESS 185
?
stocks in other railroads, including the Chesa-
peake & Ohio, the Baltimore & Ohio, and the
Norfolk & Western. In 1906 it sold all its
Chesapeake & Ohio stock, and a majority of its
Baltimore & Ohio and Norfolk & Western
holdings. Later it reversed its policy and re-
sumed stock purchases, acquiring, among others,
more Norfolk & Western and New York, New
Haven & Hartford; and on Dec. 31, 1912, held
securities valued at $331,909,154. 32; of which,
however, a large part represents Pennsylvania
System securities. These securities (mostly
stocks) constitute about one-third of the total
assets of the Pennsylvania Railroad. The in-
come on these securities in 1912 averaged only
4. 30 per cent. on their valuation, while the Penn-
sylvania paid 6 per cent. on its stock. But the
cost of carrying these foreign stocks is not limited
to the difference between this income and outgo.
To raise money on these stocks the Pennsylvania
had to issue its own securities; and there is such
a thing as an over-supply even of Pennsylvania
securities. Over-supply of any stock depresses
market values, and increases the cost to the Pen-
nsylvania of raising new money. Recently came
the welcome announcement of the management
that it will dispose of its stocks in the anthracite
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? 186 OTHER PEOPLE'S MONEY
coal mines; and it is intimated that it will divest
itself also of other holdings in companies (like
the Cambria Steel Company) extraneous to the
business of railroading. This policy should be
extended to include the disposition also of all
stock in other railroads (like the Norfolk & West-
ern, the Southern Pacific and the New Haven)
which are not a part of the Pennsylvania System.
RECOMMENDATIONS
Six years ago the Interstate Commerce Com-
mission, after investigating the Union Pacific
transaction above referred to, recommended
legislation to remedy the evils there disclosed.
Upon concluding recently its investigation of the
New Haven, the Commission repeated and
amplified those recommendations, saying:
"No student of the railroad problem can
doubt that a most prolific source of financial
disaster and complication to railroads in the past
has been the desire and ability of railroad man-
agers to engage in enterprises outside the legiti-
mate operation of their railroads, especially by
the acquisition of other railroads and their
securities. The evil which results, first, to the
investing public, and, finally, to the general
public, cannot be corrected after the transaction
? ?
large banks and the cooperation of bankers,"
said:
"The Attorney-General's recent approval of
the Union Pacific settlement calls for a single com-
mitment on the part of bankers of $126,000,000. "
This $126,000,000 "commitment" was not
made to enable the Union Pacific to secure
capital. On the contrary it was a guaranty that
it would succeed in disposing of its Southern
Pacific stock to that amount. And when it had
disposed of that stock, it was confronted with the
serious problem--what to do with the proceeds?
This huge underwriting became necessary solely
because the Union Pacific had violated the
Sherman Law. It had acquired that amount of
Southern Pacific stock illegally; and the Supreme
Court of the United States finally decreed that
the illegality cease. This same illegal purchase
had been the occasion, twelve years earlier, of
another "great transaction,"--the issue of a
$100,000,000 of Union Pacific bonds, which were
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? A CURSE OF BIGNESS 165
sold to provide funds for acquiring this Southern
Pacific and other stocks in violation of law.
Bankers "cooperated" also to accomplish that.
UNION PACIFIC IMPROVEMENTS
The Union Pacific and its auxiliary lines (the
Oregon Short Line, the Oregon Railway and
Navigation and the Oregon-Washington Railroad)
made, in the fourteen years, ending June 30,1912,
issues of securities aggregating $375,158,183 (of
which $46,500,000 were refunded or redeemed);
but the large security issues served mainly to sup-
ply funds for engaging in illegal combinations or
stock speculation. The extraordinary improve-
ments and additions that raised the Union Pacific
Railroad to a high state of efficiency were
provided mainly by the net earnings from the
operation of its railroads. And note how great
the improvements and additions were: Tracks
were straightened, grades were lowered, bridges
were rebuilt, heavy rails were laid, old equipment
was replaced by new; and the cost of these was
charged largely as operating expense. Additional
equipment was added, new lines were built
or acquired, increasing the system by 3524
miles of fine, and still other improvements and
betterments were made and charged to capital
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? 186 OTHER PEOPLE'S MONEY
account. These expenditures aggregated $191,-
512,328. But it needed no "large security
issues" to provide the capital thus wisely ex-
pended. The net earnings from the operations
of these railroads were so large that nearly all
these improvements and additions could have
been made without issuing on the average more
than $1,000,000 a year of additional securities for
"new money," and the company still could have
paid six per cent. dividends after 1906 (when that
rate was adopted). For while $13,679,452 a
year, on the average, was charged to Cost
of Road and Equipment, the surplus net
earnings and other funds would have yielded, on
the average, $12,750,982 a year available for
improvements and additions, without raising
money on new security issues.
HOW THE SECUBITT PROCEEDS WERE SPENT
The $375,000,000 securities (except to the
extent of about $13,000,000 required for im-
provements, and the amounts applied for refund-
ing and redemptions) were available to buy
stocks and bonds of other companies. And some
of the stocks so acquired were sold at large
profits, providing further sums to be employed
in stock purchases.
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? A CURSE OF BIGNESS 167
The $375,000,000 Union Pacific Lines security-
issues, therefore, were not needed to supply
funds for Union Pacific improvements; nor did
these issues supply funds for the improvement of
any of the companies in which the Union Pacific
invested (except that certain amounts were
advanced later to aid in financing the Southern
Pacific). They served, substantially, no purpose
save to transfer the ownership of railroad stocks
from one set of persons to another.
Here are some of the principal investments:
1. $91,657,500, in acquiring and financing the Southern
Pacific.
2. $89,391,401, in acquiring the Northern Pacific stock and
stock of the Northern Securities Co.
3. $45,466,960, in acquiring Baltimore & Ohio stock.
4. $37,692,256, in acquiring Illinois Central stock.
5. $23,205,679, in acquiring New York Central stock.
6. $10,395,000, in acquiring Atchison, Topeka & Santa Fe
stock.
7. $8,946,781, in acquiring Chicago & Alton stock.
8. $11,610,187, in acquiring Chicago, Milwaukee & St. Paul
stock.
9. $6,750,423, in acquiring Chicago & Northwestern stock.
10. $6,936,696, in acquiring Railroad Securities Co. stock
(Illinois Central stock. )
The immediate effect of these stock acquisi-
tions, as stated by the Interstate Commerce
Commission in 1907, was merely this:
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? 168 OTHER PEOPLE'S MONEY
"Mr. Harriman may journey by steamship
from New York to New Orleans, thence by rail
to San Francisco, across the Pacific Ocean to
China, and, returning by another route to the
United States, may go to Ogden by any one of
three rail lines, and thence to Kansas City or
Omaha, without leaving the deck or platform
of a carrier which he controls, and without
duplicating any part of his journey.
"He has further what appears to be a dominant
control in the Illinois Central Railroad running
directly north from the Gulf of Mexico to the
Great Lakes, parallel to the Mississippi River;
and two thousand miles west of the Mississippi
he controls the only line of railroad parallel to
the Pacific Coast, and running from the Colorado
River to the Mexican border. . . .
"The testimony taken at this hearing shows
that about fifty thousand square miles of terri-
tory in the State of Oregon, surrounded by the
lines of the Oregon Short Line Railroad Com-
pany, the Oregon Railroad and Navigation
Company, and the Southern Pacific Company,
is not developed. While the funds of those
companies which could be used for that purpose
are being invested in stocks like the New York
Central and other lines having only a remote
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? A CURSE OF BIGNESS 169
relation to the territory in which the Union Pacific
System is located. "
Mr. Harriman succeeded in becoming director
in 27 railroads with 39,354 miles of line; and they
extended from the Atlantic to the Pacific; from
the Great Lakes to the Gulf of Mexico.
THE AFTERMATH
On September 9, 1909, less than twelve years
after Mr. Harriman first became a director in the
Union Pacific, he died from overwork at the age
of 61. But it was not death only that had
set a limit to his achievements. The multiplicity
of his interests prevented him from performing
for his other railroads the great services that had
won him a world-wide reputation as manager
and rehabilitator of the Union Pacific and the
Southern Pacific. Within a few months after
Mr. Harriman's death the serious equipment
scandal on the Illinois Central became public,
culminating in the probable suicide of one of the
vice-presidents of that company. The Chicago
& Alton (in the management of which Mr.
Harriman was prominent from 1899 to 1907, as
President, Chairman of the Board, or Executive
Committeeman), has never regained the pros-
perity it enjoyed before he and his associates
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? 170 OTHER PEOPLE'S MONEY
acquired control. The Pere Marquette has
passed again into receiver's hands. Long before
Mr. Harriman's death the Union Pacific had
disposed of its Northern Pacific stock, because
the Supreme Court of the United States declared
the Northern Securities Company illegal, and
dissolved the Northern Pacific-Great Northern
merger. Three years after his death, the Su-
preme Court of the United States ordered the
Union Pacific-Southern Pacific merger dissolved.
By a strange irony, the law has permitted the
Union Pacific to reap large profits from its illegal
transactions in Northern Pacific and Southern
Pacific stocks. But many other stocks held
"as investments" have entailed large losses.
Stocks in the Illinois Central and other com-
panies which cost the Union Pacific $129,894,-
991. 72, had on November 15, 1913, a market
value of only $87,851,500; showing a shrinkage
of $42,043,491. 72 and the average income from
them, while held, was only about 4. 30 per cent.
on their cost.
A bankers' paradise
Kuhn, Loeb & Co. were the Union Pacific
bankers. It was in pursuance of a promise which
Mr. Jacob H. Schiff--the senior partner--had
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? A CURSE OF BIGNESS 171
given, pending the reorganization, that Mr.
Harriman first became a member of the Executive
Committee in 1897. Thereafter combinations
grew and crumbled, and there were vicissi-
tudes in stock speculations. But the investment
bankers prospered amazingly; and financial con-
centration proceeded without abatement. The
bankers and their associates received the com-
missions paid for purchasing the stocks which
the Supreme Court holds to have been acquired
illegally--and have retained them. The bankers
received commissions for underwriting the securi-
ties issued to raise the money with which to buy
the stocks which the Supreme Court holds to have
been illegally acquired, and have retained them.
The bankers received commissions paid for floating
securities of the controlled companies--while
they were thus controlled in violation of law--and
have, of course, retained them. Finally when,
after years, a decree is entered to end the illegal
combination, these same bankers are on hand
to perform the services of undertaker"--and
receive further commissions for their banker-aid
in enabling the law-breaking corporation to end
its wrong doing and to comply with the decree of
the Supreme Court. And yet, throughout nearly
all this long period, both before and after Mr.
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? 172 OTHER PEOPLE'S MONEY
Harriman's death, two partners in Kuhn, Loeb <k
Co. were directors or members of the executive
committee of the Union Pacific; and as such
must be deemed responsible with others for the
illegal acts.
Indeed, these bankers have not only received
commissions for the underwritings of transactions
accomplished, though illegal; they have re-
ceived commissions also for merely agreeing to
underwrite a "great transaction" which the
authorities would not permit to be accomplished.
The $126,000,000 underwriting (that "single
commitment on the part of bankers" to which
J. P. Morgan & Co. refer as being called for by
"the Attorney General's approval of the Union
Pacific settlement") never became effective;
because the Public Service Commission of Cali-
fornia refused to approve the terms of settlement.
But the Union Pacific, nevertheless, paid the
Kuhn Loeb Syndicate a large underwriting fee for
having been ready and willing "to serve," should
the opportunity arise: and another underwriting
commission was paid when the Southern Pacific
stock was finally distributed, with the approval
of Attorney General McReynolds, under the
Court's decree. Thus the illegal purchase of
Southern Pacific stock yielded directly four
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? A CURSE OF BIGNESS 178
crops of commissions; two when it was acquired,
and two when it was disposed of. And during
the intervening period the illegally controlled
Southern Pacific yielded many more commissions
to the bankers. For the schedules filed with the
Pujo Committee show that Kuhn, Loeb & Co.
marketed, in addition to the Union Pacific
securities above referred to, $334,000,000 of
Southern Pacific and Central Pacific securities
between 1903 and 1911.
The aggregate amount of the commissions paid
to these bankers in connection with Union
Pacific-Southern Pacific transactions is not dis-
closed. It must have been very large; for not
only were the transactions "great"; but the
commissions were liberal. The Interstate Com-
merce Commission finds that bankers received
about 5 per cent. on the purchase price for buying
the first 750,000 shares of Southern Pacific stock;
and the underwriting commission on the first
$100,000,000 Union Pacific bonds issued to make
that and other purchases was $5,000,000. How
large the two underwriting commissions were
which the Union Pacific paid in effecting the
severance of this illegal merger, both the company
and the bankers have declined to disclose.
Furthermore the Interstate Commerce Com-
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? 174 OTHER PEOPLE'S MONEY
mission showed, clearly, while investigating the
Union Pacific's purchase of the Chicago & Alton
stock, that the bankers' profits were by no means
confined to commissions.
THE BURLINGTON
Such railroad combinations produce injury
to the public far more serious than the heavy tax
of bankers' commissions and profits. For in
nearly every case the absorption into a great
system of a theretofore independent railroad has
involved the loss of financial independence to
some community, property or men, who thereby
become subjects or satellites of the Money Trust.
The passing of thu Chicago, Burlington & Quincy,
in 1901, to the Morgan associates, presents a
striking example of this process.
After the Union Pacific acquired the Southern
Pacific stock in 1901, it sought control, also, of
the Chicago, Burlington & Quincy,--a most
prosperous railroad, having then 7912 miles of
line. The Great Northern and Northern Pacific
recognized that Union Pacific control of the
Burlington would exclude them from much of
Illinois, Missouri, Wisconsin, Kansas, Nebraska,
Iowa, and South Dakota. The two northern
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? A CURSE OF BIGNESS 175
roads, which were already closely allied with
each other and with J. P. Morgan & Co.
, there-
upon purchased for $215,227,000, of their joint
4 per cent. bonds, nearly all of the $109,324,000
(par value) outstanding Burlington stock. A
struggle with the Union Pacific ensued which
yielded soon to "harmonious cooperation. " The
Northern Securities Company was formed with
$400,000,000 capital, thereby merging the Great
Northern, the Northern Pacific and the Burling-
ton, and joining the Harriman, Kuhn-Loeb, with
the Morgan-Hill interests. Obviously neither
the issue of $215,000,000 joint 4's, nor the issue
of the $400,000,000 Northern Securities stock
supplied one dollar of funds for improvements of,
or additions to, any of the four great railroad
systems concerned in these "large transactions. "
The sole effect of issuing $615,000,000 of securities
was to transfer stock from one set of persons to
another. And the resulting "harmonious co-
operation" was soon interrupted by the govern-
ment proceedings, which ended with the dissolu-
tion of the Northern Securities Company. But
the evil done outlived the combination. The
Burlington had passed forever from its inde-
pendent Boston owners to the Morgan allies,
who remain in control.
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? 176 OTHER PEOPLE'S MONEY
The Burlington--one of Boston's finest achieve-
ments--was the creation of John M. Forbes.
He was a builder; not a combiner, or banker, or
wizard of finance. He was a simple, hard-
working business man. He had been a merchant
in China at a time when China's trade was among
America's big business. He had been connected
with shipping and with manufactures. He had
the imagination of the great merchant; the
patience and perseverance of the great manu-
facturer; the courage of the seafarer; and the
broad view of the statesman. Bold, but never
reckless; scrupulously careful of other people's
money, he was ready, after due weighing of
chances, to risk his own in enterprises promising
success. He was in the best sense of the term, a
great adventurer. Thus equipped, Mr. Forbes
entered, in 1852, upon those railroad enterprises
which later developed into the Chicago, Burling-
ton & Quincy. Largely with his own money
and that of friends who confided in him, he
built these railroads and carried them through the
panic of '57, when the "great banking houses"
of those days lacked courage to assume the
burdens of a struggling ill-constructed line,
staggering under financial difficulties.
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? A CURSE OF BIGNESS 177
Under his wise management, and that of the
men whom he trained, the little Burlington
became a great system. It was "built on honor,"
and managed honorably. It weathered every
other great financial crisis, as it did that of 1857.
It reached maturity without a reorganization or
the sacrifice of a single stockholder or bondholder.
Investment bankers had no place on the
Burlington Board of Directors; nor had the
banker-practice, of being on both sides of a
bargain. "I am unwilling," said Mr. Forbes,
early in his career, "to run the risk of having
the imputation of buying from a company in
which I am interested. " About twenty years
later he made his greatest fight to rescue the
Burlington from the control of certain contractor-
directors, whom his biographer, Mr. Pearson,
describes as "persons of integrity, who had
conceived that in their twofold capacity as
contractors and directors they were fully able to
deal with themselves justly. " Mr. Forbes
thought otherwise. The stockholders, whom he
had aroused, sided with him and he won.
Mr. Forbes was the pioneer among Boston
railroad-builders. His example and his success
inspired many others, for Boston was not lacking
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? 178 OTHER PEOPLE'S MONEY
then in men who were builders, though some
lacked his wisdom, and some his character. Her
enterprise and capital constructed, in large part,
the Union Pacific, the Atchison, the Mexican
Central, the Wisconsin Central, and 24 other
railroads in the West and South. One by one
these western and southern railroads passed out
of Boston control; the greater part of them into
the control of the Morgan allies. Before the
Burlington was surrendered, Boston had begun
to lose her dominion, even, over the railroads of
New England. In 1900 the Boston & Albany-
was leased to the New York Central,--a Morgan
property; and a few years later, another Morgan
railroad--the New Haven--acquired control of
nearly every other transportation line in New
England. Now nothing is left of Boston's
railroad dominion in the West and South,
except the Eastern Kentucky Railroad--a line
36 miles long; and her control of the railroads of
Massachusetts is limited to the Grafton & Upton
with 19 miles of line and the Boston, Revere
Beach & Lynn,--a passenger road 13 miles long.
THE NEW HAVEN MONOPOLY
The rise of the New Haven Monopoly presents
another striking example of combination as a
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? A CURSE OF BIGNESS 179
developer of financial concentration; and it
illustrates also the use to which "large security
issues" are put.
In 1892, when Mr. Morgan entered the New
Haven directorate, it was a very prosperous
little railroad with capital liabilities of $25,000,000
paying 10 per cent. dividends, and operating
508 miles of line. By 1899 the capitalization
had grown to $80,477,600, but the aggregate
mileage had also grown (mainly through merger
or leases of other lines) to 2017. Fourteen years
later, in 1913, when Mr. Morgan died and Mr.
Mellen resigned, the mileage was 1997, just
20 miles less than in 1899; but the capital lia-
bilities had increased to $425,935,000. Of course
the business of the railroad had grown largely
in those fourteen years; the road-bed was im-
proved, bridges built, additional tracks added,
and much equipment purchased; and for all this,
new capital was needed; and additional issues
were needed, also, because the company paid
out in dividends more than it earned. But
of the capital increase, over $200,000,000 was
expended in the acquisition of the stock or other
securities of some 121 other railroads, steam-
ships, street railway-, electric-light-, gas- and
water-companies. It was these outside proper-
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? 180 OTHER PEOPLE'S MONEY
ties, which made necessary the much discussed
$67,000,000, 6 per cent. bond issue, as well as
other large and expensive security issues. For
in these fourteen years the improvements on
the railroad including new equipment have cost,
on the average, only $10,000,000 a year.
THE NEW HAVEN BANKERS
Few, if any, of those 121 companies which the
New Haven acquired had, prior to their absorp-
tion by it, been financed by J. P. Morgan &
Co. The needs of the Boston & Maine and
Maine Central--the largest group--had, for
generations, been met mainly through their
own stockholders or through Boston banking
houses. No investment banker had been a
member of the Board of Directors of either of
those companies. The New York, Ontario &
Western--the next largest of the acquired rail-
roads--had been financed in New York, but by
persons apparently entirely independent of the
Morgan allies. The smaller Connecticut rail-
roads, now combined in the Central New Eng-
land, had been financed mainly in Connecticut,
or by independent New York bankers. The
financing of the street railway companies had
been done largely by individual financiers, or
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? A CURSE OF BIGNESS 181
by small and independent bankers in the states
or cities where the companies operate. Some of
the steamship companies had been financed by
their owners, some through independent bankers.
As the result of the absorption of these 121 com-
panies into the New Haven system, the financing
of all these railroads, steamship companies,
street railways, and other corporations, was
made tributary to J. P. Morgan & Co. ; and the
independent bankers were eliminated or became
satellites. And this financial concentration was
proceeded with, although practically every one
of these 121 companies was acquired by the New
Haven in violation either of the state or federal
law, or of both. Enforcement of the Sherman
Act will doubtless result in dissolving this
unwieldy illegal combination.
THE COAL MONOPOLY
Proof of the "cooperation" of the anthracite
railroads is furnished by the ubiquitous presence
of George F. Baker on the Board of Directors
of the Reading, the Jersey Central, the Lacka-
wanna, the Lehigh, the Erie, and the New York,
Susquehanna & Western railroads, which to-
gether control nearly all the unmined anthracite
as well as the actual tonnage. These roads have
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? 182 OTHER PEOPLE'S MONEY
been an important factor in the development of
the Money Trust. They are charged by the De-
partment of Justice with fundamental violations
both of the Sherman Law and of the Commodity
clause of the Hepburn Act, which prohibits a
railroad from carrying, in interstate trade, any
commodity in which it has an interest, direct or
indirect. Nearly every large issue of securities
made in the last 14 years by any of these rail-
roads (except the Erie), has been in connection
with some act of combination. The combina-
tion of the anthracite railroads to suppress the
construction, through the Temple Iron Company,
of a competing coal road, has already been de-
clared illegal by the Supreme Court of the United
States. And in the bituminous coal field--the
Kanawha District--the United States Circuit
Court of Appeals has recently decreed that a
similar combination by the Lake Shore, the
Chesapeake & Ohio, and the Hocking Valley,
be dissolved.
OTHER RAILROAD COMBINATIONS
The cases of the Union Pacific and of the New
Haven are typical--not exceptional. Our rail-
road history presents numerous instances of large
security issues made wholly or mainly to effect
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? A CURSE OF BIGNESS 183
combinations. Some of these combinations have
been proper as a means of securing natural
feeders or extensions of main lines. But far more
of them have been dictated by the desire to
suppress active or potential competition; or by
personal ambition or greed; or by the mistaken
belief that efficiency grows with size.
Thus the monstrous combination of the Rock
Island and the St. Louis and San Francisco with
over 14,000 miles of line is recognized now to
have been obviously inefficient. It was severed
voluntarily; but, had it not been, must have
crumbled soon from inherent defects, if not as a
result of proceedings under the Sherman law.
Both systems are suffering now from the effects
of this unwise combination; the Frisco, itself
greatly overcombined, has paid the penalty in
receivership. The Rock Island--a name once
expressive of railroad efficiency and stability--
has, through its excessive recapitalizations and
combinations, become a football of speculators,
and a source of great apprehension to confiding
investors. The combination of the Cincinnati,
Hamilton and Dayton, and the Pdre Marquette
led to several receiverships.
There are, of course, other combinationa
which have not been disastrous to the owners of
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? 184 OTHER PEOPLE'S MONEY
the railroads. But the fact that a railroad
combination has not been disastrous does not
necessarily justify it. The evil of the concentra-
tion of power is obvious; and as combination
necessarily involves such concentration of power,
the burden of justifying a combination should
be placed upon those who seek to effect it.
For instance, what public good has been
subserved by allowing the Atlantic Coast Line
Railroad Company to issue $50,000,000 of securi-
ties to acquire control of the Louisville & Nash-
ville Railroad--a widely extended, self-sufficient
system of 5000 miles, which, under the wise
management of President Milton H. Smith had
prospered continuously for many years before the
acquisition; and which has gross earnings nearly
twice as large as those of the Atlantic Coast Line.
The legality of this combination has been
recently challenged by Senator Lea; and an
investigation by the Interstate Commerce Com-
mission has been ordered.
THE PENNSYLVANIA
The reports from the Pennsylvania suggest the
inquiry whether even this generally well-managed
railroad is not suffering from excessive bigness.
After 1898 it, too, bought, in large amounts,
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? A CURSE OF BIGNESS 185
?
stocks in other railroads, including the Chesa-
peake & Ohio, the Baltimore & Ohio, and the
Norfolk & Western. In 1906 it sold all its
Chesapeake & Ohio stock, and a majority of its
Baltimore & Ohio and Norfolk & Western
holdings. Later it reversed its policy and re-
sumed stock purchases, acquiring, among others,
more Norfolk & Western and New York, New
Haven & Hartford; and on Dec. 31, 1912, held
securities valued at $331,909,154. 32; of which,
however, a large part represents Pennsylvania
System securities. These securities (mostly
stocks) constitute about one-third of the total
assets of the Pennsylvania Railroad. The in-
come on these securities in 1912 averaged only
4. 30 per cent. on their valuation, while the Penn-
sylvania paid 6 per cent. on its stock. But the
cost of carrying these foreign stocks is not limited
to the difference between this income and outgo.
To raise money on these stocks the Pennsylvania
had to issue its own securities; and there is such
a thing as an over-supply even of Pennsylvania
securities. Over-supply of any stock depresses
market values, and increases the cost to the Pen-
nsylvania of raising new money. Recently came
the welcome announcement of the management
that it will dispose of its stocks in the anthracite
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? 186 OTHER PEOPLE'S MONEY
coal mines; and it is intimated that it will divest
itself also of other holdings in companies (like
the Cambria Steel Company) extraneous to the
business of railroading. This policy should be
extended to include the disposition also of all
stock in other railroads (like the Norfolk & West-
ern, the Southern Pacific and the New Haven)
which are not a part of the Pennsylvania System.
RECOMMENDATIONS
Six years ago the Interstate Commerce Com-
mission, after investigating the Union Pacific
transaction above referred to, recommended
legislation to remedy the evils there disclosed.
Upon concluding recently its investigation of the
New Haven, the Commission repeated and
amplified those recommendations, saying:
"No student of the railroad problem can
doubt that a most prolific source of financial
disaster and complication to railroads in the past
has been the desire and ability of railroad man-
agers to engage in enterprises outside the legiti-
mate operation of their railroads, especially by
the acquisition of other railroads and their
securities. The evil which results, first, to the
investing public, and, finally, to the general
public, cannot be corrected after the transaction
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