Jacob Schiff And The Northern Pacific Corner

Because of his imperial lifestyle and personality—and perhaps also because of the herd instincts of journalists —J. P. Morgan in the first decade of this century seemed to many the only important investment banker in the country. Certainly today he is the only one of that era who is still a household name. But of course there were many others of considerable importance on Wall Street, including George F. Baker of the First National Bank and James Stillman of the National City. (In later years these two institutions merged to form today’s giant Citibank.)

But most on Wall Street would have agreed that if Morgan had an equal, it was Jacob Schiff, senior partner of Kuhn, Loeb and Company. Like Morgan, Schiff came from an old and affluent family, but from a different country and a different religion. Born in Frank-furt-am-Main, Germany, on January 10, 1847, Schiff could trace his Jewish ancestry back to the 137Os. Also like Morgan, Schiff never had any doubt what he wanted to do in life. In 1875 he moved permanently to New York and became a partner in Kuhn, Loeb, soon marrying Therese Loeb, the senior partner’s daughter. Within a few years he was running the firm and doing much profitable international business with his extensive connections in Europe.

In the 1880s and 1890s he, again like Morgan, was heavily involved in reorganizing railroads, giving them a rational capital structure and seeing that management adhered to the new standards of conduct. Schiff was much more interested in the minutiae of railroading than Morgan, and in 1898 Kuhn, Loeb reorganized the Union Pacific Railroad. Morgan was not involved because he did not trust E. H. Harriman, its leading stockholder, but Schiff thought he discerned a real railroad man, and he was right. Harriman may not have been Morgan’s idea of a gentleman, but he was a genius at running railroads and soon turned the nearly derelict Union Pacific into one of the most profitable railroads in the country.

In 1901 James J. Hill, who controlled the Great Northern Railroad and was the largest stockholder in the Northern Pacific, used the latter to seize control of the Chicago, Burlington and Quincy, a smaller road that threatened the Union Pacific’s territory. When Hill refused to address Harriman’s concerns, Harriman determined to get control of the Burlington by seizing control of the Northern Pacific. Morgan was Hill’s banker, so an attack on Hill was a direct attack on Morgan. Before long Schiff had quietly purchased a majority of the preferred stock (which had equal voting rights) in Northern Pacific and held enough common stock to have an overall majority. Morgan and Hill had been caught napping.

Morgan was in Europe and received a frantic cable asking for authority to buy 150,000 common shares of Northern Pacific at the opening of the market on Monday morning, May 6, 1901. If Hill could get a majority of the common, he might be able to delay things until he could retire the preferred and retain control. The cost, at the very least, would be well in excess of fifteen million dollars. Morgan cabled his immediate approval, and the battle was joined between the titans. Those caught in the middle would have to look out for themselves.

On Monday morning Harriman and Morgan held between them 630,000 of the 800,000 shares of Northern Pacific common in existence. By the close of the market on Tuesday, the Morgan bank had purchased 124,000 shares more. That left only 46,000 shares un- accounted for. But the volume of Northern Pacific for those two days totaled 539,000 shares. The vast majority of these, of course, had been sold “short.” When, too late, the short sellers realized what was really happening, panic swept the Street.

Suddenly the shorts were desperate to close out their positions and willing to pay whatever price was necessary. As they liquidated their other assets to buy Northern Pacific, stocks and bonds plunged. Morgan’s new U.S. Steel, which had been at 54¾ only a few days earlier, skidded from 40 to 26 on Thursday morning, while Northern Pacific ratcheted upward minute by minute. One broker hired a special train just to bring a single certificate for 500 shares down from Albany. Another, incautiously admitting he had 10,000 shares to sell, was stripped virtually naked on the floor of the Exchange itself as the shorts clawed at him in their desperation to buy at any price. That morning the firm of Street and Norton sold 300 shares to one of the shorts at one thousand dollars a share, ten times what the price had been a week earlier.

By noon the panic was threatening to engulf in ruin not just the shorts but the Street itself. The Morgan bank and Kuhn, Loeb called a hasty truce. They would buy no more Northern Pacific for their own accounts or for those of their customers and would allow the shorts to settle at $150 a share. Calm began to return to Wall Street.

Kuhhn, Loeb had fought the Morgan bank to a standstill. This allowed Harriman to get what he really wanted, which was not control of the Northern Pacific but attention to his interests from the Northern Pacific and its newly acquired subsidiary, the Chicago, Burlington and Quincy Railroad. Harriman was soon on the board.

The New York Times likened the affair to so many “cowboys on a spree, shooting wildly at each other in entire disregard of the safety of the bystanders.” It is ironic that Morgan and Schiff, so instrumental in reforming the bad old ways of American business, were among the principal antagonists in Wall Street’s last great railroad war, so reminiscent of the wild and woolly days of the Civil War era.

—J.S.G.