The 1901 Contest for Control of the Northern Pacific Railway

A previous post discussed the November 13, 1901, formation of the Northern Securities Company by J. P. Morgan and James J. Hill to be a holding company for the common stock of two competing railroads (the Great Northern and the Northern Pacific) and the subsequent successful lawsuit by the President Theodore Roosevelt Administration alleging that this combination violated the Sherman Act’s prohibition of combinations in restraint of interstate trade and commerce.

The prequel to all of that was first the battle for control of the Chicago, Burlington and Quincy Railroad that provided access to Chicago. The contestants were (a) the Great Northern/Northern Pacific Railways, which were controlled by Hill and Morgan, and (b) the Union Pacific Railroad, which was controlled by Edward H. Harriman and Jacob Schiff. Hill and Morgan won that round, in April 1901, and they put the Quincy stock into the Northern Pacific.[1]

Harriman with the backing of Schiff of the Wall Street banking firm of Kuehn Loeb in April-May 1901 then surreptitiously started to buy Northern Pacific common and preferred stock on the open market in an effort to gain control of the Northern Pacific and thereby the Quincy. Once Hill and Morgan realized what was happening, they started to buy Northern Pacific shares. This buying activity resulted in large and continued increases in the price of the stock.

Others in the stock market obviously noticed this activity and the upward jumps in price. Many started to sell Northern Pacific stock ‘short,” i.e., selling more shares than they owned at what many believed to be unsustainable high prices with the expectation they could buy the stock later at a lower price and thereby make a profit. That did not happen. The market was ‘cornered” with more shares committed to be sold than could be delivered. This forced speculators to sell other stocks to raise cash to buy Northern Pacific shares, resulting in the destabilization of the entire stock market.

This Wall Street Panic ended on May 9, 1901, when Harriman and Schiff capitulated to the victory of Hill and Morgan over Northern Pacific with an agreement for Hill and Morgan to bail out the shorts and thus restore market stability in return for Harriman and Schiff ‘s agreeing to end their effort to gain control of the Northern Pacific.

George F. Baker
George F. Baker

Larry Haeg’s book—Harriman vs. Hill—is the most comprehensive telling of this remarkable story. It reads like a novel, and his descriptions of the participants in this stock market contest make the reader feel like an actual observer of the events. I was especially fascinated by the book’s following description of George F. Baker, a financial backer of Hill and Morgan: [2]

  • Baker then was 61 years old “and the unquestioned dean of New York banking [as the] president of the First National Bank of New York [which] he has helped found in 1863 as a mere twenty-three year old and had become its president in 1877. Also, as a venture capitalist he had bought and rejuvenated several railroads, and now, among America’s half dozen wealthiest men, served on the finance committee of Morgan’s new U.S. Steel, on the board of the Northern Pacific, and on the boards of some thirty banks, railways and insurance companies.”
  • “At a word from Baker, it was later said, ‘the 20th century would halt on its tracks. Indeed, the railroad came to Baker’s door. When he built a mansion further north at Ninety-Third and Park he had his own underground railroad siding in the basement where a train could stop to attach his private car.”
  • Baker had a “four-story, double row-house mansion at 256-258 Madison Avenue between Thirty-Eighth and Thirty-Ninth.” The “dark-paneled mansion [contained] eighteenth-century tapestries, paintings of the Barbizon school, Persian rugs, cabinets glistening with jade and Japanese enamel [and a] library with its hefty, upholstered chairs.”

Haeg book

The Wall Street Journal carried a favorable review of the Haeg book by Roger Lowenstein, the author of “The End of Wall Street” and “Buffett: The Making of an American Capitalist.” The review said Haeg’s book covered “a corporate dust-up that takes us back to the beginning of the 20th century, when tycoons who traveled by private rail merrily raided each other’s empires while the world around them cringed.” The book “conveys a vivid picture of the Gilded Age in splendor and in turmoil. Champagne still flowed in Peacock Alley in the Waldorf-Astoria, but fistfights erupted on the floor of the exchange, and a young trader named Bernard Baruch skirted disaster with the help of an inside tip, then perfectly legal. There were scant rules governing stock trading, the author reminds us—no taxes, either. ‘If you won in the market, you kept it all.’”

Warren Buffett added his praise for Haeg’s book with these words. “I first read about the Northern Pacific Corner when I was ten years old. When I opened my office on January 1, 1962, I put on the wall a framed copy of the New York Times of May 10, 1901, describing the fateful prior day. Larry Haeg now tells the full story, and I enjoyed every word of it.”

Haeg set out to write this book as “a character study of Hill and the businessmen known as the ‘robber barons.’ As he advanced in his research, however, [Haeg] found the true test of their character came during what is known today as the Northern Pacific Corner, a four-day run on the railroad company’s stock that roiled Wall Street and set off the country’s first stock market panic.”

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[1] This post is based upon Larry Haeg, Harriman vs. Hill: Wall Street’s Great Railroad War (Univ. Minn. Press; Minneapolis, MN; 2013); Michael P. Malone, James J. Hill: Empire Builder of the Northwest, ch. 6 (Univ. Okla. Press; Norman OK; 1996); Albro Martin, James J. Hill & the Opening of the Northwest , ch. 17 ((MN. Historical Soc’y Press; St. Paul MN; 1976).

[2] Haeg at 79-80, 106. Baker is of particular interest for me because I wan awarded a George F. Baker Scholarship for my four years at Grinnell College in Iowa.

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dwkcommentaries

As a retired lawyer and adjunct law professor, Duane W. Krohnke has developed strong interests in U.S. and international law, politics and history. He also is a Christian and an active member of Minneapolis’ Westminster Presbyterian Church. His blog draws from these and other interests. He delights in the writing freedom of blogging that does not follow a preordained logical structure. The ex post facto logical organization of the posts and comments is set forth in the continually being revised “List of Posts and Comments–Topical” in the Pages section on the right side of the blog.

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