The COVID-19 pandemic has caused a global economic recession (if not depression). Many people have lost their jobs. Stores are closing. Governments are facing huge reductions in tax collections and thus big reductions in expenditures or large deficits.
In the U.S. alone, as of April 18, 33 million people recently have filed applications for unemployment insurance benefits. Moreover, “Some economists expect a fresh surge of claims in future weeks as workers who were previously unable to file because of backlogged state systems are counted, and as states begin to accept applications from people who are newly eligible.” Economists believe that the national unemployment rate for April could reach 20%.[1]
On April 24, the U.S. Congressional Budget Office forecasted a $3.7 trillion federal government deficit, a 5.6% U.S. economic contraction and an unemployment rate of nearly 12% by year’s end.[2]
“Laid-off workers need money quickly so that they can continue to pay rent, and credit card bills and for groceries. If they can’t, the hole that the larger economy has fallen into ‘gets deeper and deeper, and more difficult to crawl out of.’” As a result, many banks are confronting defaults on loans and mortgages.
“Pain is everywhere, but it is most widespread among the most vulnerable. For example, 52 percent of low-income households — below $37,500 a year for a family of three — said someone in the household had lost a job because of the coronavirus, compared with 32 percent of upper-income ones (with earnings over $112,600) [while] forty-two percent of families in the middle have been affected as well. Those without a college education have taken a disproportionate hit, as have Hispanics and African-Americans.”
J.P. Morgan “sees GDP in the U.S. falling at an annualized rate of 40% in the three months through June, the eurozone tumbling 45%, with the U.K. economy expected to contract by 59.3% and Japan by 35%. Some forecasts are for a relatively quick rebound, though the outlook depends on how quickly and thoroughly the coronavirus can be contained.”[3]
On April 24, President Trump signed into law for $484 billion of relief for small businesses and hospitals and for expansion of coronavirus testing capacity.[4]
Here is local bit of good news. On April 27, the State of Minnesota will be allowing the opening of manufacturers and offices that don’t have face-to-face interaction with clients and weren’t deemed critical industries that were exempt from the stay-at-home order. Roughly 20,000 companies in this category with 100,000 employees now have the option to reopen if they complete and publicize plans to maintain social distancing, worker hygiene and workspace cleanliness. On the other hand, HealthPartners, a Minnesota-based nonprofit group operating seven hospitals, dozens of clinics and a large health insurance business, announced that it was furloughing 2,600 workers due to suspension of nonemergency surgeries.[5]
Bill Gates, the wealthy co-founder of Microsoft and now co-chair of the Bill & Melinda Gates Foundation, has said that the U.S. and other countries would be aided in returning to normal if we were able to make the following innovations. Create coronavirus tests that are self-administered. Adopt consistent standards about who gets tested. Implement consistent, reliable means for contact tracing. Voluntary adoption of digital tools that help one remember where you have been and whom you have contacted. Develop drugs for treating the virus. Develop a vaccine and a fair, effective way for its distribution and use.[6]
Conclusion
While I worry about all of the unemployed, their families and the general condition of the U.S. (and global) economies, I am grateful that I am retired and thus not personally involved in these wrenching struggles.
The COVID-19 pandemic has caused a global economic depression. Many people have lost their jobs. Stores are closing. Governments are facing huge reductions in tax collections and large deficits.
In the U.S. alone, as of April 18, 33 million people recently have filed applications for unemployment insurance benefits. Moreover, “Some economists expect a fresh surge of claims in future weeks as workers who were previously unable to file because of backlogged state systems are counted, and as states begin to accept applications from people who are newly eligible.” Economists believe that the national unemployment rate for April could reach 20%.[1]
On April 24, the U.S. Congressional Budget Office forecasted a $3.7 trillion federal government deficit, a 5.6% U.S. economic contraction and an unemployment rate of nearly 12% by year’s end.[2]
“Laid-off workers need money quickly so that they can continue to pay rent, and credit card bills and for groceries. If they can’t, the hole that the larger economy has fallen into ‘gets deeper and deeper, and more difficult to crawl out of.’” As a result, many banks are confronting defaults on loans and mortgages.
“Pain is everywhere, but it is most widespread among the most vulnerable. For example, 52 percent of low-income households — below $37,500 a year for a family of three — said someone in the household had lost a job because of the coronavirus, compared with 32 percent of upper-income ones (with earnings over $112,600) [while] forty-two percent of families in the middle have been affected as well. Those without a college education have taken a disproportionate hit, as have Hispanics and African-Americans.”
J.P. Morgan “sees GDP in the U.S. falling at an annualized rate of 40% in the three months through June, the eurozone tumbling 45%, with the U.K. economy expected to contract by 59.3% and Japan by 35%. Some forecasts are for a relatively quick rebound, though the outlook depends on how quickly and thoroughly the coronavirus can be contained.”[3]
On April 24, President Trump signed into law for $484 billion of relief for small businesses and hospitals and for expansion of coronavirus testing capacity.[4]
Here is local bit of good news. On April 27, the State of Minnesota will be allowing the opening of manufacturers and offices that don’t have face-to-face interaction with clients and weren’t deemed critical industries that were exempt from the stay-at-home order. Roughly 20,000 companies in this category with 100,000 employees now have the option to reopen if they complete and publicize plans to maintain social distancing, worker hygiene and workspace cleanliness. On the other hand, HealthPartners, a Minnesota-based nonprofit group operating seven hospitals, dozens of clinics and a large health insurance business, announced that it was furloughing 2,600 workers due to suspension of nonemergency surgeries.[5]
Bill Gates, the wealthy co-founder of Microsoft and now co-chair of the Bill & Melinda Gates Foundation, has said that the U.S. and other countries would be aided in returning to normal if we were able to make the following innovations. Create coronavirus tests that are self-administered. Adopt consistent standards about who gets tested. Implement consistent, reliable means for contact tracing. Voluntary adoption of digital tools that help one remember where you have been and whom you have contacted. Develop drugs for treating the virus. Develop a vaccine and a fair, effective way for its distribution and use.[6]
Conclusion
While I worry about all of the unemployed, their families and the general condition of the U.S. (and global) economies, I am grateful that I am retired and thus not personally involved in these wrenching struggles.
In the midst of the national political debate over railroad freight rates of 1907, the New York Central Railroad and William C. Brown, its Senior Vice President and my great-great uncle, had to confront the tragic human, legal, financial, political and public relations problems presented by the February 16, 1907, crash of one of its trains in the Woodlawn section of the Bronx. The train with one of the new type of engines (electrical) left the tracks, killing 24 people and injuring another 143.[1]
Remember that this occurred during the construction of the Grand Central Terminal in midtown Manhattan, which would require the replacement of steam-powered locomotives with electric-powered ones that previously had not been designed, manufactured and used. [2]
The Central’s Chief Engineer, William J. Wilgus, was in charge of designing the new electric engines, and General Electric Company was manufacturing them. The initial test run in September 1906 had been successful.
If the new engines were outlawed, the Railroad faced financial ruin. If the Railroad were deemed to be negligent in any way, that too presented many problems. For example, an assistant district attorney called for an investigation of the Central’s executives for possible indictment for manslaughter.[3]
Dr. Kurt C. Schlichting’s Hypotheses Regarding the Crash
Some of the documents about the Crash have been analyzed by Dr. Kurt C. Schlichting, the holder of the E. Gerald Corrigan Endowed Chair in the Humanities and Social Sciences and a professor of sociology and anthropology at Fairfield University (Fairfield, CT). Here are his conclusions from that investigation:[4]
In testimony before the New York State Railroad Commission, the Central’s President, William H. Newman, and Senior Vice President, William Carlos Brown, testified that the fault was Wilgus’ design of the engines.
Wilgus, however, proud of his design work and his professional reputation, strenuously disagreed with this assessment. Therefore, Wilgus did his own investigation and concluded that the cause of the wreck was a track defect at the point of the wreck and a widening (or “nosing”) of the track due to the heavier weight of the electric engines. This would make the Central’s Operating Division liable.
Wilgus thought Newman and Brown agreed with him, but Brown in an April 1907 memo told Wilgus that the engine design by Wilgus was flawed and thus the cause of the wreck.
In response Wilgus prepared an April 9th detailed report defending the design and instead arguing that the cause was a spreading of the track (nosing) due to the extra weight of the engine. This was seen as a “time bomb” for the Central and its top executives for liability for putting the new engine into service without adequate testing and for possible perjury in their testimony to the Commission.
On April 12th, the Central’s vice president and chief general counsel, Ira Place, visited Wilgus and explained how his memo would damage the Railroad and that Newman and Brown could go to jail if the report were made public. Therefore, Place instructed Wilgus to burn the report, and Wilgus agreed to do so.
The Central’s lawyer delivered the same message to Newman and Brown, and they obeyed the instruction and destroyed the report.
Under the direction of Brown, the Railroad then proceeded to made significant changes to the design of the engines without Wilgus’ knowledge and consent. Wilgus felt double-crossed and told the Central’s lawyer that he had re-created the report.
Wilgus put a copy of the re-created report in a box of records given to the New York Public Library with instructions that it was not to be opened without his permission until after his death.
This collection of papers also included testimonial letters about Wilgus from J. P. Morgan, William K. Vanderbilt, Ira Place and W.C. Brown. A letter by Brown before the crash, for example, stated, “The great work undertaken and practically completed by you, of changing the power within the so-called electric zone and the reconstruction of Grand Central Station, was the most stupendous work of engineering I have ever known; and it has gone forward practically without a halt, certainly without a failure in any essential feature.”
Wilgus resigned from the Railroad on September 20, 1907.
No criminal charges were ever brought against the Railroad or any of its executives regarding the Woodlawn Wreck.
Reaction to Schlichting’s Analysis
I have not seen or reviewed the documents that Dr. Schlichting has and I am not an engineer. Thus, I am not in a position, as Mr. Brown’s descendant, to refute the above analysis. But I do have the following points:
Wilgus was out to protect his professional reputation as an engineer and thus has an interest in casting blame elsewhere. Moreover, he was never subjected to cross-examination on his criticisms of Mr. Brown and the others.
According to Schlichting, Wilgus went to great pains in designing and testing the new engine. A good argument can be made that this was reasonable care, not negligence.
Yet after the Crash, the railroad at the direction of Mr. Brown and without Wilgus’ participation successfully redesigned the engine and eliminated the problem. (Presumably this involved reducing the weight of the engine.) Thus, Wilgus was not essential to designing the engine, and the redesign suggests that he had not done all that he could have done on the initial design.
Brown and the other railroad officials had not had an opportunity to defend themselves against these charges.
[2] See Grand Central Terminal’s Centennial, dwkcommentaries.com (Feb. 2, 2013); Another Report on Grand Central Terminal’s Centennial, dwkcommentaries.com (April 7, 2014); Sam Roberts, Grand Central: How a Train Station Transformed America at 110 (Grand Central Pub; New York 2013).
[3] In early March 1907 the New York Central was held “culpably negligent” by the Coroner’s jury and the Coroner held the company, its President Newman and its Board of Directors for the grand Jury. (Company Blamed for Bronx Wreck, N.Y. Times ( Mar. 5, 1907). Later that month the New York Central and two lower-level officials were indicted for manslaughter in the second degree by a New York State grand jury. (Central Indicted for Manslaughter, N.Y. Times (March 28, 1907).)
[4] Kurt C. Schlichting, Grand Central Terminal: Railroads, Engineering and Architecture in New York City at 82-106 (Johns Hopkins Univ. Press; Baltimore, MD; 2001); Kurt C. Schlichting, William J. Wilgus and the planning of modern Manhattan at 63-66 (Johns Hopkins Univ. Press; Baltimore, MD; 2012). Dr. Schlichting based his conclusions on documents in Box 7 of the Wilgus Papers at the New York Public Library.
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
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.”
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.”
[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.
As discussed in a prior post, the Hepburn Act, which became law on June 29, 1906, empowered the Interstate Commerce Commission (ICC), upon complaint, to replace a railroad’s increased freight rates if the ICC determined found them to be “unreasonable” with what the ICC decided were “just and reasonable” rates.
This statute presented a new problem for the railroads. How could they justify any such increase in freight rates to the public at large, including major shippers, and thereby deter any complaint and, if challenged, justify the new rates to the ICC? In addition, various state laws imposed other restraints on the railroads.
A prior post examined the reactions to the new Hepburn Act in the last half of 1906 and President Roosevelt’s Annual Message to the Congress on December 3, 1906 while another post reviewed the general economic and securities markets conditions in 1906-1907. Now we look at additional public debate on this issue and the broader issue of federal and state regulation of the railroads in the first five months of 1907 before President Theodore Roosevelt made a major speech on railroad regulation in Indianapolis on Decoration Day (May 30, 1907).
Discussion
Frederick A. Delano
In a January 6, 1907, article, Frederick A. Delano, the President of the Wabash Railroad, said that railroad business “has been very good” and promises to continue to do so, but their costs are increasing along with demands for many improvements. But where will the railroads get the money? Investors are finding more remunerative returns than railroads. “Reducing passenger fares and freight rates will not help” the railroads raise the necessary capital.[1]
James J. Hill
A week later, James J. Hill, the President of the Great Northern Railway, reentered the public debate with a January 14, 1907, letter to the Governor of the State of Minnesota, John A. Johnson that was covered by the press.[2] The letter reiterated the main points of his previously discussed November 10, 1906, speech. Hill complained about the inadequacy of railroad trackage and terminals and said railroads needed to spend $5 billion over five years for such equipment, but that they had difficulty raising the necessary capital because investors decline “to put [their] money into enterprises under bias of unpopularity, and even threatened by individuals and political parties with confiscation or transfer to the State. This feeling must be removed and greater confidence be mutually established if any considerable portion of the vast sum necessary is to be available.”
On February 1, 1907, a Wall Street Journal editorial came to the aid of the railroads. It said they need “material and moral encouragement.” They need coal. They need cars and engines. They need more trackage. They need money. They need mercy. “They have been hammered and hammered by their critics from all directions and for so long that the time [has come for a] . . . sense of human appreciation . . . . Criticism . . . should not be carried to the point of abuse. The morale of the railroad service can be maintained at a high level only by the feeling that it is receiving and deserving a reasonable measure of public encouragement.”[3]
William C. Brown
The next day (February 2nd) William C. Brown, the Senior Vice President of the New York Central Railroad (and my maternal great-great uncle), after privately supporting the Wall Street Journal editorial,[4] made public a letter he had sent to a friend in Washington, D.C. about these issues.[5] Brown asserted that no prudent investor would invest in railroads, “against which every man’s hand, from the President down, seems to be raised, and in the defense of which few men hoping for political preferment dare raise their hand.” Indeed, said Brown, “the spirit of hostility against the railroads which seems to be felt by members of both parties and by the Administration . . . is rapidly creating a feeling of distrust, and is discrediting the railroads of this country . . . as to make it very difficult . . . to secure any money for needed improvements and promises to make it almost impossible to do so in the near future. The President [must make] . . . an appeal for fair and reasonable treatment for [the railroads in order to] restore confidence.”[6]
By February 6th it had become apparent that at least the railroads headquartered in New York City agreed with James J. Hill of the Great Northern that an increase in freight rates would soon be necessary. W.C. Brown made it emphatic in a New York Times article: an increase in freight rates “will have to come.”[7]
As mentioned in a prior post, on March 12th after a meeting with President Roosevelt, J. P. Morgan told reporters that the President had agreed to meet with four leading railroad executives to discuss these issues. This supposed meeting between Roosevelt and the four railroad presidents, however, never happened. Instead, Roosevelt met separately with railroad presidents: B. F. Yoakum of the Rock Island Railroad; E. H. Harriman of the Union Pacific; A.B. Stickney of the Chicago Great Western Railroad, who opined that the unrest in the financial world was not due to Roosevelt’s policies, but rather to hostile state legislation; Charles S. Mellen of the New York, New Haven & Hartford; Marvin Hughitt of the Chicago & Northwestern; and Edward R. Bacon of the Baltimore & Ohio Southwestern. Other prominent individuals and representatives of shipping interests were also consulted in this time period on railroad issues by Roosevelt.[8]
Andrew Carnegie
After a White House luncheon meeting on March 27th, Andrew Carnegie said, “The President is the best friend the railroads have. . . . [T]he President’s railroad measures are moderate, and that if the railroads do not accept them they may be confronted by some other President very much more radical . . . . I indorse the President’s position on the railroad question without reservation. His influence on that subject I regard as entirely wholesome and conservative.”
Apparently the railroad men were urging Roosevelt to make a statement about his position regarding the railroads while Roosevelt was learning all he could about the railroads and a possible federal requirement for appraisals of the value of their physical assets in preparing a speech about railroad issues that he in fact delivered in Indianapolis, Indiana on Decoration Day, May 30th and that will be covered in a subsequent post. In late March the White House let it be known that the President did not intend to have any appraisal of railroad assets would not affect previously issued securities.
One idea that received a lot of coverage was put forward in late March by Jacob H. Schiff, the head of banking-house Kuhn, Loeb & Co. Responding to financial markets turmoil, he said steps must be taken “to allay the anxiety which exists among all classes of investors and business interests over the agitation against railroads.” Therefore, he proposed (1) the Interstate Commerce Commission host a conference with representatives of the railroads; (2) such a conference to review all legislative proposals affecting railroads and recommend some for new federal laws making further state laws unnecessary. ICC commissioners and J.P. Morgan liked the idea.[9]
On April 18th William C. Brown reentered the public arena as a featured speaker at a banquet held for 1,000 guests by the Buffalo, New York Chamber of Commerce. Brown said “Money for the great improvement and extension of our transportation facilities . . . must be provided . . . by private capital; and, in order to secure the vast amount of money required, the investment must be made reasonably attractive and secure. . . . But unless assurances can be had . . . of friendly co-operation, of protection, and aid, in every fair and legitimate manner against oppression and injustice; of such guarantee as the government can give of protection against [unjust] legislation . . . it is going to be impossible for the railroads to obtain the money necessary for such improvements.”[10]
Brown added, “the great business interests of the country should unite with the railroads in an appeal for a cessation of agitation looking to the enactment of further restrictive legislation.” Nevertheless, Brown said, President Roosevelt has exerted his “powerful influence . . . fearlessly and forcefully in correcting abuses by the railroads and I believe it will be exerted just as fearlessly and effectively in protecting the railroads from injustice.” Moreover, Brown admitted he was “firmly and unalterably in favor of the regulation of railroads and all other corporations by the Nation and by the States. . . . I would not, if I could, materially change the laws thus far enacted by the Congress.”
The New York Times article about Brown’s speech came to the attention of Roosevelt, and on April 29th, Brown had an extended meeting with the President about the railroad situation.[11]
The debate about railroad regulation continued that May with the President meeting with the general counsels of two railroads and the revelation that the President would be seeking legislation authorizing the federal government to undertake appraisals of railroads’ assets.[12]
On May 29th, the day before the President’s Indianapolis speech on railroad issues, the stock market prices were up, and a journalist opined that this strength was due “to the belief and in fact to the knowledge prevalent in the Street that Mr. Roosevelt’s Indianapolis address to-day will be at least so evenly balanced in its treatment of the railroad question that no harm to stocks will result from it.”[13]
Conclusion
From documents available from the Roosevelt archives, details about Brown’s meeting with Roosevelt and their 1907 correspondence on these issues have been obtained for discussion in a subsequent post. Another post will then examine the President’s May 30th speech in Indianapolis on railroad issues.
==============================================
[1] Delano, The Solution for Problems, N.Y. Times (Jan. 6, 1907).
[2]Must Spend Billions for Tracks, Says Hill, N. Y. Times (Jan. 15, 1907). Hill repeated these contentions the next day at a meeting in Minneapolis and added, “The railroads today are blamed for everything, practically that is wrong.” (Slow Paralysis, Says Hill, N.Y. Times (Jan. 16, 1907).)
[3] Editorial, Railroads Need Encouragement, W.S.J. (Feb. 1, 1907).
[4] Brown expressed his appreciation for this editorial in a letter to the newspaper. Brown said, “these words of kindly commendation are appreciated by all railroad men. . . . [Railroads] are not, even taken as a whole, entirely without virtue and merit” and “some roads are entitled to a very great deal of credit for the manner in which they have been operated, and their contribution to the growth and prosperity of the country. . . . Nothing can be more discouraging and disheartening than the wholesale, indiscriminate censure and criticism (which, in many instances, as you say, may almost be characterized as abuse) to which railroads as a whole have been subjected during the last two years.” (Letter, Brown to Dow, Jones & Co. (Feb. 1, 1907) (Image # 71-0626 provided courtesy of the Library of Congress Prints and Photographs Divisions and Theodore Roosevelt Center at Dickinson State University, www.theodorerooseveltcenter.org.). As we will see in a subsequent post, Brown privately provided President Roosevelt with copies of this correspondence with the Wall Street Journal.
[5]Says Railway Whacking Menaces the Country, N.Y. Times (Feb. 3, 1907). As we will see in a subsequent post, a copy of this letter from Brown to a friend (T.P. Schonts) was privately made available to President Roosevelt.
[6] Brown on February 7th reiterated that “the agitation which is going on all over the country makes it impossible to raise money [for necessary railroad improvements] by the sale of bonds.” (Billions Needed for Roads, N. Y. Times (Feb. 8, 1907).) As discussed in a prior post, on March 14th, in reaction to the huge declines in the securities markets the prior day, W.C. Brown issued a public statement that talked about the problems railroads had in selling new issues of stock or debt.
[7] Railways in Dilemma Over Rate Problems, N.Y. Times (Feb. 7, 1907); Freight Rates going Up? N.Y. Times (Feb. 5, 1907) (Hill said, “{W]ith the present advances in cost the railroads will soon be forced to consider an advance in rates instead of a reduction” ).
[8]Yoakum Favors Federal Control, N.Y. Times (Mar. 12, 1907); Mr. Harriman in the Times, N.Y. Times (Mar. 13, 1907); Roosevelt Refuge of Railroad Men, N.Y. Times (Mar. 13, 1907); Stickney Fears a Panic, N. Y. Times (Mar. 13, 1907); Speyer Hastily Sees Roosevelt, N.Y. Times (Mar. 14, 1907); Railroad Heads Meet in New York, N.Y. Times (Mar. 15, 1907); Plan Meeting of Governors, N. Y. Times (Mar. 15, 1907); Did Not Invite Presidents, N. Y. Times (Mar. 15, 1907); [Mellen Announcement], N.Y. Times (Mar. 15, 1907); Washington’s View of It, N.Y. Times (Mar. 16, 1907); Roosevelt To Ask Hughes To Confer, N.Y. Times (Mar. 17, 1907); Mellen Going alone To See Roosevelt, N.Y. Times (Mar. 17, 1907); Yoakum To See Roosevelt, N.Y. Times (Mar. 18, 1907); Mellen Confers Just 25 Minutes, N.Y. Times (Mar. 20, 1907); President Is Receptive, N.Y. Times (Mar. 27, 1907); Roosevelt Confers on Railway Speech, N.Y. Times (Mar. 28, 1907); President May Modify Plans, N.Y. Times (Mar. 30, 1907);
[9]Get Together Says Schiff, N.Y. Times (Mar. 26, 1907); President Is Receptive, N.Y. Times (Mar. 27, 1907); Morgan Cables Roosevelt, N.Y. Times (Mar. 27, 1907); “Schiff’s Flag of Truce,” N.Y. Times (Mar. 30, 1907).
[10] William C. Brown, Address to the Buffalo Chamber of Commerce (April 18, 1907); Hughes Tells of Republic’s Foes, N.Y. Times (April 19, 1907). Brown also gave a speech on May 13, 1907, to the Syracuse, New York Chamber of Commerce that made many of the same points as the Buffalo speech. He again supported federal and state regulation of railroads so long as it was “undertaken in a spirit of the most liberal conservatism; the radical, the agitator, the reactionist on both sides should be suppressed.” (For Government Control, N. Y. Times (May 15, 1907).)
[11]W.C. Brown at the White House, N.Y. Times (Apr. 30, 1907).
[12]Roosevelt Favors Appraisals of Roads, N.Y. Times (May 17, 1907); Putting Value on Country’s Roads, N.Y. Times (May 20, 1907).
Our last stop on the issues of railroad regulation during President Theodore Roosevelt’s Second Term focused on the June 29, 1906, adoption of the Hepburn Act regarding limits on railroad freight rates and the subsequent reactions that year to this statute. Before we look at the continued controversy over these issues in 1907, we need to review what was happening in 1906 and 1907 in the economy and securities markets and their increasing intertwining with the railroad issues.[1]
1906
In 1906 the economy and securities markets were adversely affected by April’s major San Francisco earthquake destroying two-thirds of the city and leaving over 200,000 residents homeless and by the subsequent increase of interest rates by the Bank of England responding to the outflow of English funds paying earthquake insurance claims. From a peak in January stock market prices had fallen by 18% by July of that year, and after the adoption of the Hepburn Act railroad securities were especially hard hit. By late September stocks generally had recovered about one-half of their losses.
January-February 1907
At the start of 1907, however, the U.S. appeared to be prosperous. Railroads had difficulty finding enough freight cars to meet demand. Banks had a lot of cash. Wages and prices were rising. This redounded to the credit of President Theodore Roosevelt, who had just been awarded the Nobel Peace Prize for ending the Japanese-Russian war.
The U.S. stock market, however, was sending contrary signals. Between September 1906 and March 8, 1907, the stock market slid, losing 7.7% of its capitalization. Indeed, in January John D. Rockefeller predicted that Roosevelt’s policies would result in a depression.
March-May 1907
On March 12th, reacting to the troubled securities markets and to rumors that President Theodore Roosevelt was planning some new measures against the railroads, J.P. Morgan, the major Wall Street financier and New York Central Railroad Director, met with the President to discuss “the present business situation, particularly as affecting railroads.” According to Morgan, he urged Roosevelt to take some action “to allay the public anxiety now threatening to obstruct railroad investments and construction” and advised the President that “the financial interests of the country are greatly alarmed at the attitude of the Administration towards corporations, and particularly the railroads.” Afterwards Morgan told the press that Roosevelt would soon meet with the heads of four leading railroads to see what might be done to “allay public anxiety.”[2]
This news did not calm the securities markets. The next day (March 13th) New York Stock Exchange prices collapsed. And on March 14th, the Dow Jones Industrial Average dropped by another 25%. These two days were sometimes referred to as “the Rich Man’s Panic” since most ordinary people were not stock market investors.
At the markets close that day, the 25 most active stocks on the New York Stock Exchange had a total shrinkage in value since the first of the year of $ 970 million. This was especially true for the following railroad stocks:
Railroad
ShrinkageMillion $
ShrinkagePercentage
A.T. & S.F.
$ 23.5
22.8%
Baltimore & Ohio
$ 30.5
20.0%
Canadian Pacific
$ 34.0
28.1%
Chesapeake & Ohio
$ 11.0
17.5%
M. & St. Paul
$ 21.0
25.3%
Great. Northern. (Pfd.)
$ 87.0
58.2%
Missouri Pacific
$ 21.5
27.8%
N.Y. Central
$ 35.5
19.9%
Norfolk & Western
$ 13.0
19.7%
Northern. Pacific
$113.0
72.9%
Pennsylvania RR
$ 62.5
20.0%
Reading
$ 31.0
44.3%
Southern Pacific
$ 47.0
23.8%
Union Pacific
$117.0
59.9%
After the close of the markets on the 14th, the U.S. Treasury injected $25 million of cash into New York City banks by buying some of their holdings of U.S. bonds, which calmed the markets for the moment.
Reacting to the market developments of the 14th, William C. Brown, Senior Vice President of the New York Central Railroad (and my maternal great-great uncle) issued a public statement that said, “The diminishing net earnings of railroads, while alarming, are overshadowed by the apparent hostility as evinced by recently enacted or introduced Federal and state legislation. The growth and development of the country will soon be at a standstill unless transportation facilities can be tremendously increased. Hundreds of millions of dollars should be expended in this direction as rapidly as material can be assembled and men employed. On account of the above conditions confidence has been so shaken that investments of this character are regarded as so hazardous and unattractive as to make it impossible to sell any kind of railroad security except at such discount and rate of interest as to make it prohibitive; and these improvements, so vital to the prosperity of the country, are being greatly curtailed or entirely dropped.”
Brown concluded this statement with a plea for the railroads and the President to cooperate in stopping evils and abuse. In addition, “the President and the press should co-operate with the railroads and with all food citizens in working for a restoration of public confidence, based upon the widest publicity of corporation affairs and absolute fairness, equality, and stability of rates.”
June-September 1907
Troubles, however, were not over. In June the stock of the Union Pacific Railroad—among the most common stocks used as collateral for bank loans—fell 50 points. That same month an offering of New York City bonds failed. In July the copper market collapsed. In August the Standard Oil Company was fined $29 million for antitrust violations. That same month commodity prices declined, Another negative factor that summer was the Bank of England’s imposing a prohibition of English banks buying U.S. finance bills, thereby closing a major source of refinancing for U.S. debtors. In September industrial production also went down. In the first nine months of 1907, stocks were lower by 24.4%.
October-November 1907 (Financial Panic)
The Financial Panic of 1907 started on October 9th with the failure of two speculators to take over the United Copper Company and the resulting bankruptcies of two brokerage houses, another mining company and a bank. On October 15th stocks started to tumble, and on October 21st and 22nd a run started on New York City’s third largest and supposedly solid trust, the Knickerbocker Trust Company, causing its bankruptcy.This in turn created fear throughout the U.S. and numerous bankruptcies of state and local banks and other businesses. On October 23rd money was almost unobtainable on Wall Street, call-loan rates had spiked to 125% and the entire U.S. financial system was nearing collapse. To the left is a photo of a crowd of people in front of Manhattan’s Federal Hall, at the corner of Wall and Broad Streets; the New York Stock Exchange is outside the photo to the left.
In response to this crisis, Roosevelt had the U.S. Treasury deposit $25 million in national banks.
The “savior” of the financial system from the Panic, however, was J. P. Morgan, the wealthy Wall Street financier and a New York Central Director. He and other plutocrats (E.H. Harriman, Henry Clay Frick and John D. Rockefeller, Sr.) pledged large sums of their own money, to shore up the U.S. financial system. These efforts had apparently succeeded by October 24th when the New York Stock Exchange did not have to shut down and stock prices started to rebound.
The next week, however, the panic returned when a major brokerage house threatened to cease operations and the City of New York was on the verge of defaulting on its obligations. J.P. Morgan and his colleagues again came to the rescue with a plan for U.S. Steel to buy the shares of Tennessee Coal and Iron Company then held as collateral by the failing brokerage firm. This plan, however, would go forward only if it had President Roosevelt’s approval. That approval was obtained on November 4th at a White House breakfast meeting with U.S. Steel’s Chairman (Elbert H. Gary) and one of its founders (Henry Clay Frick). News of this approval immediately was released, and stock prices began to rally.
Additional support for the financial system and stock market was supplied in November when Roosevelt authorized the U.S. Treasury to increase its injection of funds into the banks to $69 million and to sell $150 million of U.S. and Panama bonds.
All of this occurred in the midst of an economic contraction that had started in May 1907 and that did not end until June 1908. The interrelated contraction, falling stock market and financial panic resulted in significant economic disruption. Industrial production dropped more than after any previous bank run, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%.
Analysis of the Financial Panic of 1907
100 years later (September 2007) two distinguished professors at the University of Virginia’s Darden School of Business (Robert F. Bruner and Sean D. Carr) concluded that the Panic of 1907 “resulted from a powerful convergence of [the following] seven overlapping and interrelated forces—a ‘perfect storm’ in the financial markets:”
The financial system’s architecture was “highly fractionalized, localized, and complex” with networks that allowed quick spread of news and rumors while it also was difficult for all actors to be equally well informed.
Strong economic growth in the U.S. had created a massive demand for external finance, which was met with a significant amount of capital borrowed from European sources.
There were inadequate safety buffers for a system with many small and undiversified banks plus new and lightly regulated trust companies holding riskier assets.
Roosevelt was “on the warpath against anticompetitive business practices” as were many state governments.
Real economic shock from the San Francisco earthquake of April 1906 and the summer 1907 curtailment of acceptance of U.S. finance paper by the Bank of England.
Undue fear, greed and other behavioral aberrations causing a sharp and self-reinforcing shift from optimism to pessimism.
Failure of collective action. Yes, J.P. Morgan led a collective effort that helped dampen the worst of the Panic, but it was insufficient in the overall economy and financial system.
Below is a graph comparing the Dow-Jones Industrial Average for January 1906-October 1907 with the same Average for the Financial Panic of 2008:
[2] As we will see in a subsequent post, the proposed meeting between the President and the four leading railroad executives never happened, and instead the President held meetings individually with quite few such executives in March through May 1907.
The presidential and vice presidential candidates for the Republican Party in 1904 were President Theodore Roosevelt and Charles W. Fairbanks and for the Democratic Party, Alton B. Parker and Henry Davis.
Republican Party’s Nomination of Roosevelt (and Fairbanks)
At the Republicans’ June convention in Chicago, Roosevelt was unanimously nominated on the first ballot, and the leaders of the conservative wing of the Party selected Fairbanks, a conservative Senator from Indiana with close ties to the railroad industry, for the running mate. Roosevelt was not pleased with Fairbanks, but did not think it was worth fighting about.
Sagamore Hill
On July 27th, 54 solemn Republicans went to Roosevelt’s home, Sagamore Hill, in Oyster Bay, New York on the north shore of Long Island,[1] to enact their party’s “most hallowed ritual: a formal notification of nomination to its presidential candidate.” [2]
Roosevelt in a 12-minute speech that day accepted the nomination. He, of course, praised the Republican Party and slammed the Democrats. He had two comments regarding business issues. He stated, “In dealing with the great organizations known as trusts, we [need] . . . to point out that [the laws] . . . actually have been enforced, and that legislation has been enacted to increase the effectiveness of their enforcement.” Roosevelt added, “The problems with which we have to deal in our modern industrial and social life are manifold; but the spirit in which it is necessary to approach their solution is simply the spirit of honesty, of courage, and of common-sense.”
His more formal letter of acceptance of September 12th reiterated these points and praised the previously mentioned “successful suit against the Northern Securities Company merger,” the enforcement of “the anti-trust and interstate commerce laws, and the action of the last Congress in enlarging the scope of the interstate commerce law [in the Elkins Act], and in creating the Department of Commerce and Labor, with a Bureau of Corporations, [that] have for the first time opened a chance for the National Government to deal intelligently and adequately with the questions affecting society, whether for good or for evil, because of the accumulation of capital in great corporations.”
The Campaign
Roosevelt’s Secretary of State, John Hay, in a letter to American historian and author, Henry Adams, called this campaign “the most absurd political campaign of our time.” Roosevelt did not actively campaign. Instead he issued statements form his front porch at Sagamore Hill, and the Republican Party received large campaign contributions from wealthy capitalists, including J.P. Morgan, the financial leader of Wall Street and a director of the New York Central Railroad; Edward H. Harriman, the president of the Union Pacific Railroad and also a director of the New York Central; and Henry C. Frick, the steel baron.
Roosevelt’s campaign slogan “The Square Deal” reiterated his comment on the settlement of the 1902 coal miners’ strike. He promised to “see it that every man has a square deal, no less and no more.” This pledge summed up Roosevelt’s belief in balancing the interests of business, consumers, and labor. The Square Deal called for limiting the power of trusts (a person having control of a large corporation so that no others can succeed in the economy), promoting public health and safety, and improving working conditions.
The Election Results
The results of the November 8thelection were not close. Roosevelt and Fairbanks had 7,626,000 votes (56.4%); Parker and Davis, 5,084,000 (37.6%). The Electoral College margin for Roosevelt and Fairbanks was even wider: 336 (70.6%) vs. 140 (29.4%); the following map shows the geographical distribution of the electoral votes (Republican in red; Democrat in blue):
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[1]Sagamore Hill is now a National Historic Site, currently closed for renovation.
[2] Edmund Morris, Theodore Rex at 343-64 (Random House; New York, 2001).
As mentioned in an earlier post, one of President Theodore Roosevelt’s major efforts to enhance federal regulation of railroads in his first term was his Administration’s commencement of an antitrust lawsuit under the Sherman Act against the Northern Securities Company, which combined the stocks of two competing railroads from the Great Lakes and the Mississippi River to Puget Sound on the Pacific Coast.
These two roads were the Great Northern Railway running from St. Paul, Minnesota to Seattle, Washington while the Northern Pacific Railway ran from St. Paul (and separately from Ashland, Wisconsin and Duluth, Minnesota) to Seattle and Tacoma, Washington and Portland, Oregon. In addition, the two of them jointly owned the Chicago, Burlington & Quincy Railroad, which connected St. Paul with Chicago. [1]
Great Northern RailwayNorthern Pacific Railway
The Legal Background
The late 19th century was an era of “trusts” and of “combinations” of businesses and of capital organized and directed to control of the market by suppression of competition in the marketing of goods and services, the monopolistic tendency of which had become a matter of public concern.
To meet this problem, the U.S. in 1890 enacted “An act to protect trade and commerce against unlawful restraints and monopolies,” 26 Stat. 209, ch. 647 (1890). The statute is commonly referred to as the Sherman Act in recognition of its principal author or sponsor, Senator John Sherman, Republican of Ohio. The statute provided, in part, as follows:
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states . . . is hereby declared to be illegal. Every person who shall make any such contract, or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor . . . .” (Section 1)
“Every person who shall 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 . . . shall be deemed guilty of a misdemeanor . . . . ” (Section 2)
The prescribed penalty for such misdemeanors was a fine up to $5,000 or imprisonment not exceeding one year or both. In addition, the circuit courts (n/k/a district courts) were “invested with jurisdiction to prevent and restrain violations” of the statute (Section 4), and persons injured in their business or property by any violations could sue the perpetrators for treble damages and attorneys’ fees (Section 7).
The goal of the Sherman Act was to prevent restraints of free competition in business and commercial transactions that tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services.
The Formation of Northern Securities
On November 13, 1901 (only two months after Roosevelt became President), J. P. Morgan, who controlled 21 railroads, including the Northern Pacific, and James J. Hill of the Great Northern [2] announced the formation of the Northern Securities Company to be a holding company for the common stock of the two competing railroads, This new combination was the second largest company in the world with annual revenues of $100 million and covering commerce from Chicago to Seattle and extending to China over Mr. Hill’s shipping lines.
A New York newspaper saw the new company as another step toward universal monopoly.
The Commencement of the Lawsuit
On February 19, 1902 (only three months after the formation of the Northern Securities Company), the Roosevelt Administration announced plans to commence the antitrust case alleging that the formation and operation of Northern Securities constituted a restraint of interstate commerce in violation of the Sherman Antitrust Act. In addition to the two railroads, the U.S. planned to sue James J. Hill of the Great Northern and seven directors of the Northern Pacific, including J. P. Morgan and George F. Baker. [3]
James J. HillJ. P. MorganGeorge F. Baker
The U.S. stock market immediately registered significant declines with similar reactions in London, Paris and Berlin markets. In response, J. P. Morgan starting buying stocks in great quantities and helped to stop a panic.
The next evening Morgan and 12 other wealthy men met with Roosevelt at the White House without discussing the lawsuit, i.e., the elephant in the room. The next morning, however, the subject was broached when Morgan returned alone to the White House for a meeting with Roosevelt and the Attorney General, Philander Chase Knox. Morgan asked why the Government had not just called and asked him to correct any irregularities with the charter of Northern Securities, but Knox merely said the Government wanted to stop the company, not to fix it up. Afterwards Roosevelt said, “Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or could be induced to come to an agreement to ruin none.”
Theodore RooseveltPhilander Chase Knox
The Case in the Circuit Court
The bill in equity (or “complaint” in today’s terminology) thereafter was filed with the U.S. Circuit Court for the District of Minnesota.[4] The complaint charged that the Northern Securities was an illegal “combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states” (Sherman Act § 1).
The next April 9th (1903), the Circuit Court’s four Circuit Judges unanimously upheld the validity of the Government’s complaint (United States v. Northern Securities Co., 120 Fed. 721 (Cir. Ct., Dist. Minn. 1903)) . The court in an opinion by Judge Thayer first entered the following findings of fact as established by the pleadings and evidence:
The Great Northern and Northern Pacific owned railroad lines from Minnesota to Puget Sound that are parallel and competing lines.
These two railroads in 1901 jointly acquired 98% of the capital stock of the Chicago, Burlington & Quincy Railway.
Thereafter in 1901 James J. Hill, J. P. Morgan and six other men, all of whom were defendants in the case and collectively had practical control of the two principal railroads, arranged to place a large majority of the stock of the two railroads in a holding company, Northern Securities, and that was done.
As a result, the control of these two railroads was put into a single person and thereby “destroyed every motive for competition” between them.
Those “who conceived and executed this plan . . . intended . . . to accomplish these objects.”
The court then concluded that the Congress “deliberately employed words of such general import [in section 1 of the Sherman Act] as, in its opinion, would comprehend every scheme that might be devised to accomplish that end.” In addition, the U.S. Supreme Court had held that the Act “applies to interstate carriers of freight and passengers . . .; that [the Act does] not mean in unreasonable or partial restraint of trade or commerce, but any direct restraint thereof; that an agreement between competing railroads . . . [to fix their rates is] a contract in direct restraint of commerce . . .; and [that the Act is constitutional].”
Therefore, the court entered a decree that the defendants had violated section 1 of The Sherman Act and that Northern Securities was enjoined from acquiring additional stock of the two railroads, from voting its holdings of those shares and from exercising or attempting to exercise any control or direction over the two railroads. Northern Securities, however, was permitted to rescind its acquisitions of the stock of the two railroads.
The Case in the Supreme Court
The case then went directly to the U.S. Supreme Court, [4] which on December 14, 1903, heard arguments. Attorney General Knox appeared for the Government and made what many thought was a brilliant argument without any questions from the Justices.
In March 1904, the U.S. Supreme Court, 5 to 4, affirmed the Eighth Circuit and ordered the company dismantled. (Northern Securities Co. v. United States, 193 U.S. 197 (1904).) The Court’s plurality opinion by Mr. Justice John Marshall Harlan and supported by only three of the other Justices concluded that “the evidence . . . shows a violation of the . . . [Sherman Act, which] declares illegal every combination or conspiracy in restraint of commerce among the several states . . . and forbids attempts to monopolize such commerce or any part of it.”
In so concluding, the Harlan opinion emphasized that the Court’s prior decisions had established that “every contract, combination, or conspiracy in whatever form, of whatever nature, and whoever may be parties to it, [that] directly or necessarily operates in restraint of [interstate] . . . commerce” is illegal. Those prior decisions, said the Harlan opinion, also determined that the statute is not limited to unreasonable restraints of trade; that railroads operating in interstate trade are covered by the statute; and that every contract, combination or conspiracy that would extinguish such competition is illegal. (Emphasis added.)
Mr. Justice David Josiah Brewer concurred in the judgment affirming the lower court’s conclusion of antitrust violations, but disagreed with the rationale of the Harlan opinion because of fear that it “might tend to unsettle legitimate business enterprises, stifle or retard wholesome business activities, encourage improper disregard of reasonable contracts, and invite unnecessary litigation.” Instead, said Justice Brewer, the statute only covered “contracts which were in direct restraint of trade, unreasonable, and against public policy.” (Emphasis added.)
A dissenting opinion was filed by Mr. Justice Edward Douglas White and joined by Chief Justice Melville Fuller and Justices Rufus Wheeler Peckham and Oliver Wendell Holmes. This opinion concluded that the constitutional power of the federal government over interstate commerce did not extend to cover Northern Securities Company’s acquisition of the common stock of the two railroads.
Holmes also filed a separate dissenting opinion that was joined by the other three dissenters. Holmes asserted that the antitrust statute only outlawed combinations in restraint of trade, not of competition and that he saw no evidence of an attempt to monopolize some portion of U.S. trade or commerce. He also expressed relief that “only a minority of my brethren [the four Justices who subscribed to the opinion of Mr. Justice Harlan] adopt an interpretation of the [statute] . . . which . . . would make eternal the bellum omnium contra omnes [the war of all against all], and disintegrate society so far as it could into individual atoms . . . . [Such an interpretation] would be an attempt to reorganize society . . . . I believe Congress was not entrusted by the Constitution with the power to make . . . [such a law], and I am deeply persuaded that it has not tried.”
The high court’s action was a major victory for the administration and put the business community on notice that although this was a Republican administration, it would not give business free rein to operate without regard for the public welfare.
W. C. Brown’s Reaction to the Supreme Court’s Decision
W. C. Brown
Soon thereafter (May 24, 1904), W.C. Brown, my maternal great-great-uncle, in a speech to the Illinois Manufacturers Association that was covered by the New York Times commented on the Supreme Court’s decision. He said, “Propositions looking to the betterment of [railroad] service, having no other object, and impossible of any other result, have been misunderstood and have been fought inch by inch with a perseverance and zeal worthy a better cause.” As a result, Brown continued, it was “not impossible that the language of the majority of the Supreme Court [in the Northern Securities case] may . . . seem to reflect the clamor of the public, rather than the calm, judicial review of a great question.” [5]
Brown added that by “amendment or by judicial interpretation the question of reasonable restraint of commerce, as against any restraint whatever, must become part of the Sherman . . . [Act], and must be considered in its enforcement, or obstacles to commercial and industrial progress are likely to be interposed the gravity of which no one can foresee.” (Emphasis added.)
This commentary was preceded by Brown’s proclaiming that “[e]xcept for the birth of Christ, no event has meant so much to humanity as the U.S. Declaration of Independence;” that the recent U.S. war with Spain was “as holy, as high and unselfish in purpose as ever inspired a people;” and that the U.S. had the “satisfaction of having borne its share of the burden of carrying Christianity, civilization and education to those who sit in the darkness of ignorance and superstition.”
Brown also issued a stern warning that apparently emerged from his growing up in thinly populated Iowa and Illinois and that ignored his presumably elegant life in New York City (and earlier in Chicago). Brown said, “The most serious menace that clouds our national horizon today, ominous now and increasing in size and anger and portent, is the rapid growth of our cities . . . . No man can regard the growth of the great centers of population, with their sinister, dangerous, preponderantly influence in the politics of the State and Nation, without alarm.” He added, “The remedy for this evil and the safety of the Nation was building up, encouraging, and increasing our agricultural population.”
It should also be noted that at the time of this speech, Brown was a Vice President of the New York Central Railway, two of whose directors were defendants in the case: J. P. Morgan, a principal architect and beneficiary of the formation of the Northern Securities Company, and George F. Baker.
Subsequent Supreme Court’s Interpretations of the Sherman Act
Seven years later, in 1911, the approach to interpreting the Sherman act advocated by Justice Brewer and W. C. Brown was in fact adopted by the U.S. Supreme Court. In Standard Oil Co. v. United States, 221 U.S. 1 (1911), the Court, 8 to 1, stated that only combinations and contracts unreasonably restraining interstate or foreign commerce were illegal under the Sherman Act. Justice John Marshall Harlan, the lone dissenter in this case and the author of the Court’s opinion in Northern Securities, said the Rule of Reason was a departure from previous Sherman Act case law, which purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced ill effects.
Thereafter the Court unanimously reaffirmed the Rule of Reason in two cases: United States v. American Tobacco Co., 221 U.S. 106 (1911) (section 2 of the Sherman Act did not ban the mere possession of a monopoly but only the unreasonable acquisition and/or maintenance of monopoly); Chicago Board of Trade v. United States, 246 U.S. 231 (1918) (agreement between rivals limiting rivalry on price after an exchange was closed was reasonable and thus legal).
Subsequent Supreme Court cases established the concept of per se violations of Section 1 of the Sherman Act. These are “agreements, conspiracies or trusts in restraint of trade” that have been found to have a “pernicious effect on competition” or “lack any redeeming virtue” and include competitors’ agreements to fix their prices or divide markets between them and concerted refusals to deal.
For other alleged violations of section 1 of the Sherman Act, the courts engage in a “rule of reason” analysis to evaluate the intent and purpose of the conduct, the facts peculiar to the business and industry, the history of the conduct and its effect on competition. If the result of this judicial analysis is the conduct unreasonably restrains trade, it is a violation of section 1.
[1] This post is based upon Edmund Morris, Theodore Rex at 59-65, 87-95, 219, 304-05, 313-16 (Random House; New York; 2001); MIller Center, Theodore Roosevelt: Domestic Affairs; and the other sources cited below.
[2] The James J. Hill House is a St. Paul mansion now open to the public and operated by the Minnesota Historical Society.
[4] As of 1903 nine U.S. circuit courts had jurisdiction over trials of all civil suits initiated by the U. S. Government in different parts of the country, and the circuit court that covered the State of Minnesota (the Eighth Circuit) had four Circuit Judges (Henry C. Caldwell, Walter H. Sanborn, Amos M. Thayer and Willis Van Devanter). As of January 1, 1912, these courts were abolished, and the previously established U. S. district courts assumed jurisdiction over all civil and criminal cases in the federal courts.
[5] W.C. Brown, Address before the Meeting of the Illinois Manufacturers Association, Chicago, Illinois (May 23, 1904); Supreme Court Influenced, N.Y. Times (May 24, 1904).
At the start of the 20th century the New York Central Railroad was one of the most important and powerful railroads in the U.S., and because of the importance of railroading at the time, it was one of the country’s most powerful corporations. Its lines stretched from Boston in the east to Chicago and St. Louis in the west and from New York City in the south to the Canadian border in the north.
20th Century Limited
Starting in 1902, its flagship operation was the luxurious first-class Twentieth Century Limited, operating on a fast schedule between New York’s Grand Central Terminal and Chicago’s LaSalle Street Station. Here are an image of an early Twentieth Century Limited train and a map of the Central’s lines in 1914.
The Central’s Board of Directors
From its headquarters in New York City, the Central’s board of directors during the first decade of the century included men (all white and no women, sorry) who were wealthy and powerful in their own right and who are important in American history. Here are profiles of some of these figures.
William K. Vanderbilt
William K. Vanderbilt, a grandson of Cornelius “Commodore Vanderbilt, [1] had been active in the day-to-day operations of the Central from 1863 until 1903. He was a yachtsman who won the America’s Cup in 1895, an owner of many race horses, an active supporter of the Metropolitan Opera and an owner of fine paintings which he eventually bequeathed to the Metropolitan Museum of Art. His mansion on Fifth Avenue was regarded as one of Manhattan’s most magnificent residences. When he died in 1920 his estate publicly was estimated at $100 million.
Frederick K. Vanderbilt was another grandson of the Commodore who also had been active in the Central.
Hamlton McKown Twombly
Hamilton McKown Twombly was married to the Commodore’s granddaughter, Florence Adele Vanderbilt, and through wise investment of her inheritance and his own money became very wealthy.
Chauncey Depew
Chauncey M. Depew was the Vanderbilts’ lawyer, a “glib raconteur, master of ceremonies and after-dinner speaker” who used his legal talents in “an essentially public relations role for the [Central] and other Vanderbilt properties.”
Depew also was a prominent Republican Party politician. He was one of the organizers of the Party in 1858; a delegate to every Party convention from 1860 to 1920; a member of the New York legislature, 1861-62; New York’s Secretary of State, 1864-65; a candidate for the Party’s presidential nomination in 1888; President Harrison’s choice for U.S. Secretary of State, which Depew declined; and a U.S. Senator from New York, 1899-1911 (while he was a Director of the Central). During the Civil War he was a confidant of President Lincoln, which lead to Depew’s being New York’s official escort for President Lincoln’s funeral train on its way to Illinois.
In 1866 Depew as the principal speaker at the dedication of the Statue of Liberty said,“We dedicate this statue to the friendship of nations and the peace of the world. The spirit of liberty embraces all races in common; it voices in all languages the same needs and aspirations. The full power of its expansive and progressive influence cannot be reached until wars cease, armies are disbanded, and international disputes are settled by lawful tribunals and the principles of justice. Then the people of every nation, secure from invasion and free from the burden and menace of great armaments, can calmly and dispassionately promote their own happiness and prosperity.” This sounds like the post-World War II Universal Declaration of Human Rights.
J. P. Morgan
John Pierpont (“J.P.”) Morgan, of course, was the famous Wall Street financier of the robber barons in the late 19th century. He reorganized major industrial companies and railroads and was one of the most powerful figures in railroading. J.P. also helped to halt financial panics in 1893 and 1907.
George S. Bowdoin was a wealthy partner of J. P. Morgan.[2]
William Rockefeller
William Rockefeller with his older brother, John D. Rockefeller, established and was active in the Standard Oil Company. William also was part of the “Standard Oil Gang” that engaged in various financial promotions. William was a jovial man who liked good living with little taste for philanthropy.
George F. Baker
George F. Baker was another Wall Street financier, an ally of the Rockefellers and a founder of the First National Bank of New York. During the Civil War he was consulted by members of the Lincoln Cabinet on financial matters. He endowed the Harvard Business School and made large contributions to the Metropolitan Museum of Art and the Red Cross.[3]
James Stillman
James Stillman was the President of the National City Bank of New York City (now known as Citibank), and his two daughters married sons of William Rockefeller. Stillman was considered to be one of the 100 wealthiest Americans of his time.
Edward H. Harriman
Edward H. Harriman was the President of the Union Pacific Railroad and an ally of William Rockefeller and James Stillman.[4]
Marvin Hughitt
Marvin Hughitt was the President of the Chicago & Northwestern Railroad.
Lewis Cass Ledyard
Lewis Cass Ledyard, a Wall Street lawyer, co-founder of the law firm of Carter, Ledyard & Milburn and counsel for the New York Stock Exchange and noted corporations. Ledyard was the executor of the J.P. Morgan estate.
Darius O. Mills
Darius O. Mills was a Gold Rush adventurer who turned to finance and banking. For a time he was the wealthiest person in California.
William H. Newman was the Central’s President at the start of the 20th century until he was succeeded by W. C. Brown. Newman was from Virginia and started his railroad career at age 23 in 1869 as a station agent to become in 1898 the president of two Central subsidiaries–the Lake Shore & Michigan Southern and the Lake Erie & Western Railroads.
Conclusion
This was the world that in 1902 welcomed into its senior executive ranks William Carlos Brown, a man of modest background from the State of Iowa.
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[1]“Commodore” Vanderbilt through a shipping fortune and stock manipulations gained control of the Central in the 1860’s. His grand ball in 1883 is often seen as the epitome of the gilded age. The Commodore gave $1 million to Tennessee’s Central University in exchange for its being renamed as Vanderbilt University. A contemporary descendant of the “Commodore” is CNN’s Anderson Cooper.
[2] One of George S. Bowdoin’s ancestors, James Bowdoin, was a Governor of Massachusetts, and the latter’s son, James Bowdoin III, was an early benefactor of Bowdoin College in Brunswick, Maine. The College was chartered in 1794 by Massachusetts Governor Samuel Adams when Maine was part of Massachusetts and was named for Governor Bowdoin.
[3] Baker’s son, George F. Baker, Jr., was another Wall Street financier whose trust established a college scholarship program, of which I was a beneficiary as a George F. Baker Scholar at Grinnell College.
[4] Edward Harriman’s son, W. Averell Harriman (1891 – 1986), was a special envoy to Europe for President Franklin D. Roosevelt, U.S. Secretary of Commerce under President Truman, Governor of New York and U.S. Ambassador to the Soviet Union and later to Great Britain. He was a candidate for the Democratic presidential nomination in 1952, and again in 1956, but lost to Adlai Stevenson both times.
ancial Panic of 1907 started on October 9th with the failure of two speculators to take over the United Copper Company and the resulting bankruptcies of two brokerage houses, another mining company and a bank. On October 15th stocks started to tumble, and on October 21st and 22nd a run started on New York City’s third largest and supposedly solid trust, the Knickerbocker Trust Company, causing its bankruptcy.This in turn created fear throughout the U.S. and numerous bankruptcies of state and local banks and other businesses. On October 23rd money was almost unobtainable on Wall Street, call-loan rates had spiked to 125% and the entire U.S. financial system was nearing collapse. To the left is a photo of a crowd of people in front of Manhattan’s Federal Hall, at the corner of Wall and Broad Streets; the New York Stock Exchange is outside the photo to the left.
