America’s Money Machine

THE EVENT THAT MADE the money system the dominant public issue and brought the Federal Reserve System into being was the Panic of 1907. It occurred during the second term of Theodore Roosevelt. It is known as the “rich man’s panic.” It was essentially a credit crisis. It may have been sparked by Roosevelt’s attacks on big business (his “trust-busting”) which unsettled confidence and the security markets; if so, it was fired by an ardent public speculation founded on business expansion and prosperity, and a number of spectacular security manipulations and failures that shook investor confidence.

To understand these events we must recognize the quality of the times—different, but perhaps in degree only, from our own. It was a time of immense individualism in American life—an era in which the destiny of the nation depended more upon the character of men than upon their institutions, more upon private decisions than upon the fiat of law and regulation; more upon the integrity of leaders than upon the force of custom and tradition. It was an era when men took large chances and demanded equivalent rewards, when they assumed large responsibilities and exercised large liberties. For better or worse it was a time of the “moguls” of industry, finance, and enterprise, rather than of the minions of bureaucracy and administration. Upon this characterization of the epoch, all historians seem agreed.1

An incident may be as revealing as a volume, just as a droplet serves for the analysis of a blood stream. The break-up of the Harriman-Fish entente in 1906 serves as an excellent introduction to a larger tale. Indeed these two men and their affairs are inextricably a part of the larger tale. For both are involved in the Roosevelt story and the Roosevelt-big business antagonism. In fact, the Roosevelt ferocity toward big business may have been influenced by happenings flowing from the Damon-Pythias relationship of Harriman and Fish, the rupture of that relationship, and its various consequences.

Edward H. Harriman and Stuyvesant Fish had been business acquaintances for nearly thirty years. Harriman, son of an Episcopalian rector, had begun life in Wall Street as a stockbroker’s clerk, and was rising in the world as an investment banker. Stuyvesant Fish was the distinguished-looking son of a distinguished father2 and protégé of William Henry Osborne, chief stockholder of the Illinois Central Railroad. Starting as a clerk in the general office of the railroad, he became secretary to the president the following year; after a turn at banking, he returned to his first interest and in 1877 was elected a director. In 1881, the railroad was having difficulties in selling its bonds following the assassination of President Garfield. Fish may have discussed this with Harriman. Harriman undertook to find a market in Europe and admirably succeeded. For that service he was elected to the railroad’s board of directors on Fish’s nomination. This was the beginning of an intimate business association. It lasted for a quarter century before it was ruptured with reverberations that shook the financial world.

Harriman was no novice in railway securities. He had married the daughter of a railroad president and had gone on his honeymoon in a special train provided by his father-in-law, with a locomotive painted with the Harriman name. In those days ownership of a railroad, however short or long, was somewhat equivalent to owning one’s private plane today and every man of means had one or two. With his father-in-law’s help Harriman purchased a small, run-down road of thirty miles with strategic possibilities in its Lake Ontario harbor. He rehabilitated it, and sold it to the Pennsylvania System. Now he had begun to take an interest in the Illinois Central, and after his election to the board in 1883 this was to become his plaything and obsession. Fish meantime had become vice-president, and a little later was elected president.

The Illinois Central had the reputation of being a “Society” road because of the conservatism of its management and the prominence of its directorate; its securities were highly popular abroad, particularly in the Netherlands. Under Harriman’s influence, the road began a bold policy of improvements and expansion, and within five years increased its length by a thousand miles.

To be president of a road like Illinois Central was no little thing and Stuyvesant Fish continued as president longer than any other man—for twenty-three years before the final break with his long time associate and partner. He was a fine, aristocratic looking man—a tall, broad-shouldered figure whose bearing and distinction immediately attracted attention and cast into the shade his slight, bowed, bespectacled, and almost shabbily dressed associate.3 In contrast to Harriman, who had the unfortunate faculty of arousing antagonisms, Stuyvesant Fish appears to have been universally liked. As Harriman more and more emerged in the public eye as a cold-blooded manipulator of high finance, and as the “Colossus of Roads,” Stuyvesant Fish appeared as the genteel, strait-laced aristocrat, the image of financial conservatism.

Certainly Stuyvesant Fish had no need to seek the bubble reputation. His own was of the highest. When, for instance, the affairs of the Mutual Insurance Company came under question in 1905 on charges of loose lending for railway speculations, Fish, though a railway president himself, was named a member of a select investigation committee of three. And when he found himself at odds with his fellow members over their reticence, he resigned and issued his charges of malfeasance to the press. Unfortunately, Stuyvesant Fish enjoyed his position and prestige too fondly, and did not complain at the expensive and lavish parties which his socially ambitious wife Marian was fond of giving: some of them were enough to strain the purse of even a railroad president.

Mrs. Fish was tall, florid faced, with black eyes under high, arched brows; she had an imperious manner, was capricious and demanding. She was a highly successful hostess, partly no doubt because she was indifferent to caste or wealth; people, to amuse her, and gain her invitations, had to be either funny or handsome or brilliant or arrogant. She enjoyed entertaining actors, authors, and other celebrities. She was rivalled as a society leader only by Mrs. William Waldorf Astor of the “Four Hundred” legend; and when Mrs. Astor voluntarily abdicated as Society matriarch in 1908 following the famous ball in which that legend originated, the sceptre was seized and held by Mrs. Fish. Up to her death in 1915, it is said, her dicta were even more absolute than those of her predecessor.

By contrast to Stuyvesant Fish’s opulence of manner and association, the diffident-mannered Harriman had established his domicile on a country place near Tuxedo, where Mary Averill Harriman devoted most of her time to rearing her five children. Still, it must not be assumed that they lived as recluses, or avoided their status as leading citizens.

Fish’s fall may perhaps be traced to the pursuit of social distinction and Mrs. Fish’s heavy entertainment involvements. Mrs. Fish, not content with dominating New York society, had successfully invaded the Washington scene. When Stuyvesant Fish attended the international railroad convention in Washington in 1905 she rented a house near the White House to which she brought all her servants, and gave a party for a reported thousand guests, serving delicacies such as pheasant, transparent aspic, beflowered salads, caviar, and tinted ices, without the aid of a caterer and with her own household staff.

We must conjecture that Stuyvesant Fish’s intimacy with Theodore Roosevelt had its influence in the intense hostility that Roosevelt later showed toward Harriman, and which began after the break-up between the two railroad executives.

While Fish had been content with the rewards of a railway presidency—its immense powers and emoluments and the opportunities it gave for side deals—Harriman’s ambitions had been on a vaster scale. A master of the intricacies of finance, he was also an able and conscientious administrator with a fine sense of good public relations. Beginning with the Illinois Central he had acquired strategic stockholdings in a number of systems with potentials for interconnection and expansion. During the financial crisis of 1893 he had gained control of the vast Union Pacific system. The road was in a shambles of neglect—“twin streaks of rust” it was called—with great stretches of worn, sun-warped, frost-bitten rails, stretching over small, rotten ties, on creaky trestles and hair-raising curves. The powerful firm of J. P. Morgan & Co. had refused to touch it and it was sinking into bankruptcy when Harriman, with the aid of Kuhn, Loeb & Co., acquired enough stock to take control.

We may ask how a man, starting in life as a stockbroker’s clerk, and with no more assets than his wit, could acquire control of assets of such dimensions. In particular, how was it possible without chicanery, fraud, or corruption—or practices approaching such? While there may have been elements of sharp dealing, or worse—ethics then being what they were—the actual explanation of how fortunes were amassed lies on another plane. It is to be found in the practice of capitalizing earnings. To illustrate: assume a shop with annual sales of $10,000, annual costs of $9,000 with a net to the proprietor of $1,000, and buyers who are willing to purchase at $10,000, or 10 times the net earnings (formerly a rule of thumb in buying stocks). Assume that the new purchaser is able to reduce expenses to $8,000, or to increase sales to $12,000 with an increase of costs to only $10,000, then the net is doubled, and the value of the business accordingly doubled, with a gain of $10,000 to the entrepreneur. With these new values he is now able to buy another shop, either by mortgaging the increment in value, or by selling the shop and investing in a larger one.

Behind this financial process, it is obvious, must be the capacity to increase earnings of an enterprise, which is the basis of capitalization. Where earnings are rising, a shrewd and careful business man can multiply his capital many times. This is more apt to follow in the case of an expanding industry enjoying a steadily growing demand for its goods and services. This was the situation of the railroad industry during the years down to World War I.

These may not be all the factors that made Harriman rich and powerful as a railroad “mogul,” but they must be accounted as the principal.

By 1905, Harriman had achieved what no financier or enterprise has done since—control of a network of railroads stretching across the continent. He had gone even further. He held control of ocean steamship lines and was dreaming of—nay, planning; more, actually negotiating for—a ’round-the-world transportation system of railways and connecting steamship lines.

A main link in this enterprise would be the South Manchurian Railway which had just come under Japanese control as a result of the Russo-Japanese War. Harriman went to Japan and made attractive offers to the Japanese. The railway was in disrepair and the Japanese needed money. Premier Katsura was impressed. Unfortunately, Baron Komura, the minister for foreign affairs, had come home from the Portsmouth treaty negotiations with suspicions of U. S. policy and resentful at being frustrated in his pursuit of the fruits of victory by Roosevelt’s mediation of the settlement. He interposed legal pretexts, and the negotiations were suspended—though never abandoned by Harriman.

The year 1905 may be said to mark both the high tide in the Harriman affairs and in those of Wall Street, and from then on the drift was toward decay and demoralization. The Harriman fortunes and the tenor of the securities markets were moving in harmony. The market took its tone from the “Harriman rails.” When they moved up the market improved; when they fell the market declined.

In 1906, the Union Pacific unexpectedly raised its dividend from 6 to 10 per cent and the stock promptly shot up, making fortunes for many holders, but causing at the same time certain winds of dissatisfaction to blow in the Street, carrying gossip of insiders’ profits.

In October of 1906 Fish circularized the Illinois Central stockholders seeking proxies for the annual meeting of shareholders. The purpose of the solicitation was not made public, but rumors gathered that there had been a falling-out between the two financiers. The effect was a sensation in Wall Street that was promptly felt on the floor of the Exchange. The year that had started with such promise ended on a note of gloom.

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4Titles like Age of the Moguls by Stewart H. Holbrook (New York. 1953); The Masters of Capital by John Moody (New Haven. 1919), and The Robber Barons by Matthew Josephson (New York. 1934), are illustrative.

5Hamilton Fish, who had been Grant’s Secretary of State.

6The New York Times for November 19, 1906, reports that “Edward H. Harriman, master of 20,000 miles of railroad, valued at more than $2,000,000,000, was in Chicago for nearly an hour and a half this morning, and he worked hard most of the time. He had traveled as an ordinary passenger [but in his private car] . . . Mr. Harriman who is small and slightly built, was buried in the capacious folds of a rough steamer overcoat of loud pattern, such as can be bought for $15 to $16. He wore a derby hat well down over his forehead, and under it appeared his keen eyes looking through his spectacles.”

• 1The Constitution gave Congress the power to coin money and “to regulate the value thereof.” Actually, the question is relevant whether, regardless of the Constitution, or any other authoritarian decree, government is able to regulate the value of money. Certainly the early experience with coinage would dispute that view (and the later experience with paper money will be examined in the pages to follow). The first coinage act provided for silver dollars weighing 416 grains, .89243 fine* and they were given a legal tender parity with the current Spanish milled dollar, which then formed the bulk of the circulation. However, as the silver was undervalued at this rate, U. S. dollars began to disappear into the melting pot, and the government was compelled to suspend the coinage of dollars in 1805.
• 2*Hamilton Fish, who had been Grant’s Secretary of State.
• 3*The New York Times for November 19, 1906, reports that “Edward H. Harriman, master of 20,000 miles of railroad, valued at more than $2,000,000,000, was in Chicago for nearly an hour and a half this morning, and he worked hard most of the time. He had traveled as an ordinary passenger [but in his private car] . . . Mr. Harriman who is small and slightly built, was buried in the capacious folds of a rough steamer overcoat of loud pattern, such as can be bought for $15 to $16. He wore a derby hat well down over his forehead, and under it appeared his keen eyes looking through his spectacles.”
• 4*89,243/100,000 pure silver, with a fine silver content of 371 1/4 grains. Act of April 2, 1792. Actually, it appears that the first mintings were at a fineness of .900, giving them 374.4 grains of pure metal.
• 5Edward H. Harriman and Stuyvesant Fish had been business acquaintances for nearly thirty years. Harriman, son of an Episcopalian rector, had begun life in Wall Street as a stockbroker’s clerk, and was rising in the world as an investment banker. Stuyvesant Fish was the distinguished-looking son of a distinguished father* and protégé of William Henry Osborne, chief stockholder of the Illinois Central Railroad. Starting as a clerk in the general office of the railroad, he became secretary to the president the following year; after a turn at banking, he returned to his first interest and in 1877 was elected a director. In 1881, the railroad was having difficulties in selling its bonds following the assassination of President Garfield. Fish may have discussed this with Harriman. Harriman undertook to find a market in Europe and admirably succeeded. For that service he was elected to the railroad’s board of directors on Fish’s nomination. This was the beginning of an intimate business association. It lasted for a quarter century before it was ruptured with reverberations that shook the financial world.
• 6To be president of a road like Illinois Central was no little thing and Stuyvesant Fish continued as president longer than any other man—for twenty-three years before the final break with his long time associate and partner. He was a fine, aristocratic looking man—a tall, broad-shouldered figure whose bearing and distinction immediately attracted attention and cast into the shade his slight, bowed, bespectacled, and almost shabbily dressed associate.* In contrast to Harriman, who had the unfortunate faculty of arousing antagonisms, Stuyvesant Fish appears to have been universally liked. As Harriman more and more emerged in the public eye as a cold-blooded manipulator of high finance, and as the “Colossus of Roads,” Stuyvesant Fish appeared as the genteel, strait-laced aristocrat, the image of financial conservatism.