THE CLEARING-HOUSE AS A PREVENTER OF PANICS.
In this panic the boldest and most remarkable instance of self-sacrifice on record was manifested by the Clearing-House banks. The panic of 1884, in its incipient stage, was different to any that had preceded it—at least any of the financial convulsions within my recollection—owing to the influence exercised upon it by the prompt and liberal policy of the banks. In every respect their action was notable, showing that those at the head of their management had largely profited by the lessons of former panics.
It was chiefly due to the masterly management of the banks, together with the magnanimous conduct of Mr. Amos R. Eno and his associate directors of the Second National Bank, that the panic was short-lived and so narrowly circumscribed. Had it not been for the determinate and instantaneous joint action of these parties there would have been a very serious crash, which would have been far-reaching in its results.
The results of the timely action taken on the part of the managers of these institutions in this crisis, proves that panics can be arrested by proper methods, and that quick and determined action is indispensable in the incipient stage of the emergency. If bank presidents could only be relied upon by the business community to act promptly and in unison with the business men, as they did in this instance, threatened panics need have but little terror for the people, who now live constantly in dread that these outbursts of business disaster may be sprung upon them at any time in any decade.
In the past history of panics bank managers, as a rule, have acted without system, without judgment and almost entirely without any well defined plan of action. There has been an astonishing lack of vigor in their methods and purposes, which were weak and vacillating in their character—frequently more like the acts of children than those of business men.
If the panic of 1873 had received the same vigorous treatment in its origin as that of 1884, it could just as easily have been checked as the latter, and the entire country would have been saved a large portion of the depressing effects of that serious collapse and its attendant disasters, which caused a state of general prostration for five or six years succeeding the event. These years, from a business standpoint, appear as a blank in the history of the country’s progress. Indeed, they constitute a black mark.
In 1884 the bears indulged in much adverse criticism in regard to the action of the Clearing-House in taking Mr. Seney’s pictures as collateral. At the time, this method of financiering was without precedent; but the result has fully justified the policy of the Clearing-House Association and its management. Such an exceptionally fine collection of paintings in a country like this, now filled with connoisseurs who have sufficient wealth to gratify their tastes, stimulates the demand for these luxurious articles of value and transforms them into the best collateral to be found in the market. When the Seney pictures were offered for sale at auction they attracted greater competition in the purchase, at good prices, than could have been obtained for almost any class of railroad securities connected with Wall Street for months afterwards. While Mr. Seney seems to have been as much of a virtuoso as the late Mrs. Morgan, he did not permit his love of the beautiful to rise to such a pitch of exaltation as would cause him to pay the extravagant prices which almost ruined that eccentric woman. He never forgot that the picture had a “market” value, and never permitted his enthusiasm for the fine arts to make him a victim of sharp and unconscionable dealers. In fact he appeared to have been more wide-awake in picture buying than banking, and demonstrated that the former, rather than the latter, was his forte. If the bank presidents had not acted in the praiseworthy manner referred to, the financial revulsion of that panic would have been very serious. Several millions of deposits in the Metropolitan and Second National were promptly drawn out, and forthwith entered into circulation. This saved the community from the evil influence of a large number of panic makers in the persons of the depositors of these banks. Instead, therefore, of helping to stir up the excitement—as they would have done by pursuing the selfish policy formerly resorted to in similar circumstances—every person with funds in these two institutions, assisted very effectively to allay suspicion and create confidence, instead of distrust.
It was the disturbing element of panic makers, who generally constitute one of the most potent factors of disruption to be dealt with in seasons of business trouble, that caused the greater part of the trouble at the time of Jay Cooke’s failure. The holders of the Northern Pacific bonds then, finding that the security was no longer equal to that of Government bonds (as they had been taught to believe), but was apparently worthless, became panic-stricken at their losses, and were all transformed into panic-makers, infusing the spirit of distrust into every person with whom they came into contact, until, like a fatal virus, it inoculated the whole country, spreading business disaster far and wide.
G. I. Seney
CHAPTER XIX.
OLD TIME PANICS.
The Panic of 1837.—How it was Brought About.—The State Banks.—How they Expanded their Loans under Government Patronage.—Speculation was Stimulated and Values Became Inflated.—President Jackson’s “Specie Circular” Precipitates the Panic.—Bank Contractions and Consequent Failures.—Mixing up Business and Politics.—A General Collapse, with Intense Suffering.
The first panic of any great importance was that of 1837. This panic had its origin in a misunderstanding between the United States Bank, with headquarters located at Philadelphia, and President Jackson, whose election the officials of the bank had opposed.
The bank had been chartered in 1816, and went into operation in 1817. Its charter had twenty years to run. The bank had been kept in operation with varying success until 1830, when it was considered to be on a very stable footing, so that the Finance Committee of the United States Senate were enabled to testify to its efficiency as follows: “We are satisfied that the country is in the enjoyment of a uniform national currency, not only sound and uniform in itself, but perfectly adapted to the purposes of the Government and the community, and more sound and uniform than that possessed by any other nation.”
This was the second United States Bank; the first had been chartered in 1791.
The bank applied to Congress, in 1832, for a renewal of its charter, which would expire in 1836. A bill was passed by Congress to re-charter the bank. The bill was vetoed by the President for the reason above stated. In the following year the Treasurer announced, by order of the President, that the public funds, amounting to $10,000,000, would be drawn from the custody of the bank because it was an unsafe depository.
The transfer of the Government funds to the State banks created great agitation in political and financial circles. The State banks, under this favorable turn of Government patronage, quickly assumed a thriving condition and began to expand their loans and circulation. This stimulated speculation in all parts of the country, but especially land speculation. Large purchases of land were made from the Government, and payment was made in notes of State banks.
With the rapid sales of its lands the Government was soon able to pay off the public debt, and had still a surplus of $50,000,000 in the Treasury. This apparent prosperity continued for the next year or two, money was plenty and speculation was greatly stimulated and values became inflated.
The crisis came in 1837, and was hastened by the “Specie Circular,” which was the last official act of President Jackson, and which pricked the bubble of inflation. This circular, which was issued from the Treasury in July, 1836, required all collectors of the public revenue to receive nothing but gold and silver in payment. The purpose of the circular was to check the speculation in public lands, but it caused too sudden a contraction in values, and created widespread disturbance in business circles generally.
The public protest against the “Specie Circular” was so strong and universal, that a bill went through both houses of Congress partially repealing it. “Old Hickory” did not yield to Congress, however, and though he did not veto the bill, he delayed signing it until after Congress adjourned, thus preventing it from becoming a law.
The State banks sought to tide over the troubles arising from the Jacksonian method of financiering by loans of public money to certain financial concerns and individuals, but this plan only made matters worse. There was a sudden expansion of paper money, which encouraged a wild spirit of speculation and excessive importations, and imparted an unnatural stimulus to business and commercial affairs. This state of over-trading and reckless speculation was suddenly checked by bank contractions, and in the spring of 1837 there were failures amounting to $100,000,000 in New York city alone.
The shock was communicated to the entire country, and a state of general paralysis in business circles ensued.
In the meantime the Bank of the United States continued in operation, and did not even suspend in 1836, when its charter expired, but obtained another charter from the State of Pennsylvania, which was entitled “An Act to repeal the State taxes on real and personal property, and to continue and extend the improvement of the State by railroads and canals, and to charter a State bank to be called a United States bank.”
This United States bank did not expire until 1839, though it suspended specie payment with the State banks in 1837, when by this method they escaped a general collapse, and dragged through an agonising existence for two years longer. The circulating notes and deposits of the Bank of the United States were paid in full, but the $28,000,000 of capital were a total loss to the stockholders, who never obtained a dividend. Such were the good old times of financiering when General Jackson and his successor, Martin Van Buren, sat in the Executive chair.
The entire capital stock of the bank was $35,000,000, of which $7,000,000 were to be subscribed by the Government.
The real cause at the bottom of the failure of this bank was its error of mixing up its legitimate business of banking with politics and speculation, showing that keeping those matters as distinct as possible is one of the great secrets of success in each of them.
The panic of 1837 was further aggravated by the action of the Bank of England which, in one day, threw out all the paper connected with the United States. The banks on this side refused to discount paper, and as a retaliatory measure in self-defense the business men and speculators withdrew their deposits from the banks. This had a tendency to cripple business still more, and cause utter prostration. In their selfish frenzy bankers and merchants completed the ruin of each other, hastening the catastrophe from their inability to take a broad, cool and generous view of the situation.
There was a general suspension of the New York banks on May 10, 1837, and the banks throughout the country followed in their wake within a week afterwards, producing a financial convulsion unparalleled in the history of the Republic. The country was brought to the verge of bankruptcy from the effects of which a long time was required for recovery.
After two years’ struggle to regain the credit and stability lost through false methods of financiering, the banks suffered a relapse, and underwent a severe process of weeding out the weakest, nearly one-third of which happened to be of this description. Out of 850 banks, 343 closed their doors permanently.
The Sub-Treasury at New York was established the following year, 1840, by an act of Congress which provided that the officers of the Government should keep the public funds in their own custody, that coin alone should be received in payment to the United States, and bank notes were to be no longer received and paid out at the Treasury.
While this short chapter deals with matters which go back beyond my personal recollections of twenty-eight years in Wall Street, still as the panic of 1837 was the first of the great upheavals of its kind, that had a marked effect on Wall Street affairs, it properly falls within the scope of this book to chronicle the chief incidents of that great business convulsion.
For this reason, therefore, I find room for it, in some measure commensurate with its importance, and the space which can be afforded to it, as a matter of financial history, the facts of which were still fresh in the recollection of several speculators, bankers and business men, with whom I had the honor of being acquainted shortly after my advent in Wall Street immediately succeeding the panic of 1857.
Of those who gave me lively descriptions of their vivid recollections of that panic, but few now survive.
I think, therefore, it is well for me to do my part in helping to preserve the leading features of this important episode in the early history of Wall Street, as there will soon be none of those, who took an active part in the exciting events of that period, left to tell the tale.
CHAPTER XX.
THE TRUE STORY OF BLACK FRIDAY TOLD FOR THE FIRST TIME.
The Great Black Friday Scheme originates in patriotic motives.—Advising Boutwell and Grant to sell Gold.—The part Jim Fisk played in the Speculative Drama.-“Gone where the Woodbine Twineth.”—A general state of Chaos in Wall Street.—How the Israelite Fainted.-“What ish the prish now?”—Gould the Head Centre of the Plot to “Corner” Gold.—How he Managed to Draw Ample Means from Erie.—Gould and Fisk Attempt to Manipulate President Grant and Compromise him and his Family in the Plot.—Scenes and Incidents of the Great Speculative Drama.
In the year 1869 this country was blessed with abundant crops, far in excess of our needs, and it was apparent that great good would result from any method that could be devised to stimulate exports of a part, at least, of the surplus.
Letters poured into Washington by the thousand from leading bankers, merchants and business men, urging that the Treasury Department abstain from selling gold, as had been the practice for some time, so that the premium might, as it otherwise would not, advance to a figure that would send our products out of the country, as the cheapest exportable material in place of coin, which, at its then artificially depressed price, was the cheapest of our products, and at the same time the only one undesirable to part with. So the Government decided to suspend gold sales indefinitely.
Jay Gould and others, being satisfied that this was to be the policy of the Administration, commenced at once buying large amounts of gold, actuated, doubtless, by the purest of patriotic motives, namely, to stimulate cotton and cereal exports. They succeeded in accumulating a considerable amount of gold at prices ranging from 135 to 140, covering a period of three months’ steady buying.
This was the honest foundation on which the great Black Friday speculative deal was erected.
The eruption on Black Friday was really caused by the erratic conduct of James Fisk, Jr., who actively joined the movement on Thursday, the day before, and became wild with enthusiasm on the subject of high gold. He began on Friday, early in the morning, to buy large blocks through his own brokers, William Belden and Albert Speyer, running the price up very rapidly.
The original syndicate consisted of Jay Gould, Arthur Kimber, representing Stern Brothers, of London, and W. S. Woodward, of Rock Island corner notoriety. The two latter, however, sold out their interest to Gould, who directed the deal to the end, with the assistance of several able and wicked partners. Their office was located in Broad street, on the present site of the Drexel Building.
When the excitement arising from the above causes was at its height, I sent a telegram to Secretary Boutwell, and one to President Grant, representing the exact condition of affairs in Wall Street, and urging the sale of gold without delay. I also prevailed upon General Butterfield, the New York Sub Treasurer, and Moses H. Grinnell, the Collector of the Port, to send similar telegrams, which they did, and timely action was taken at once by an order coming to sell $5,000,000. The moral effect of this Government action was to strike terror to the holders of gold, and a general rush was made to sell out, thereby driving down the premium from 160, in less than two hours, to 132. The down grade produced an excitement quite equal to the early furore in the up movement. Albert Speyer had from Fisk a verbal carte blanche order to buy, in million lots, all the gold he could get at 160; while he was thus buying millions upon millions at this figure, on the opposite side, and in other sections of the room, sales were freely made in moderate amounts at 140, 145, 147 and 150, almost simultaneously; and even when 135 was reached, which was soon thereafter, Speyer still kept on bidding 160 for a million at a time, making one of the wildest and most ludicrous spectacles ever witnessed among men not idiots. Fisk afterwards repudiated the contracts made on his account by Speyer & Belden, simply denying having given the orders, and as they were not in writing, they could not well be proven, hence both brokers failed, throwing immense losses upon an innumerable number of others. Quite a noted firm sold Speyer some of his million lots, which they bought back at 140, being satisfied with the profit of 20 per cent.; when they had finished buying, the price instantly broke to 132, and the announcement of Speyer’s failure, which was made before the close of the day, caused them also to fail, as well as half the members of the Gold Room. Owing to the serious complications prevailing and the disaster being so widespread, it was found impossible to continue the clearances through the Gold Bank, and the Governing Committee of the Gold Room were at once convened, and passed a resolution to suspend all dealings in gold for one week, in order to enable the members to adjust their difficulties and differences between themselves privately. The Gold Bank also suspended business in the meantime. While Albert Speyer was vigorously buying and continuing to bid 160 for one million after another, the clique were as actively engaged in selling all the market would take at ten points less, and also busy making private settlements with the shorts.
As the transactions were purely phantom in their nature, the great parties in the speculative contest did not really lose much. Contrary to popular opinion about such transactions, they did, virtually, incur heavy losses, but in one way or another they managed to evade them. Gould’s losses were estimated at over four millions. Fisk’s were equally large, but he repudiated all of them. Others were heavily saddled, however, with the burden which he should have borne.
Importing merchants were among the greatest sufferers, and a large number of them were forced to cover at high figures.
The suspension of the Gold Board caused many important failures. Private settlements were made during a period of sixty days following, in many instances on the basis of a compromise.
When Fisk heard that Secretary Boutwell had ordered gold sold, he exclaimed that it would knock spots out of phantom gold, and send him and others with their long stuff “where the woodbine twineth.” The full effect of the disaster became more fully realized when the Gold Board and Gold Bank suspended and the numerous large failures were announced; then it almost seemed that a general state of chaos reigned, and how to unravel the complications was the problem to be solved. No one that had any connection with gold dealings during the eventful day could positively tell how they actually stood, or how to estimate their losses or gains; such was the uncertainty as to future results, and the doubt as to who was, and who was not, going to pay the differences due. The Board Room was crowded almost to suffocation, and the scene just prior to its close partook of the appearance of Bedlam let loose; in fact, it had not been much different during the entire day. Late in the afternoon, a formidable body of enraged sufferers assembled at the doors of Smith, Gould & Martin’s office, and many and boisterous were the threats that were indulged in against the members of the firm, in consequence of which a police guard was detailed for their protection.
The gold furore brought many Israelites to Wall Street, who since, by their numbers and natural shrewdness, have become quite formidable in our midst.
One of them, being very long of the precious metal, on its break from 160 to 140, fainted; water was soon obtained to bathe his feverish brow, and rubbing was also adopted. When, finally, he had sufficiently recovered to raise his head and open his eyes, looking all around he said: “What ish the prish now?” Upon finding it still lower, he closed his eyes again, and fell into another swoon. He was finally carried from the Gold Room a sick and ruined, but a wiser Hebrew, and is now in the “ole cloe” business on the East side.
This is the history in brief, but the scenes and incidents of that day would furnish material for an interesting volume.
Although I am not much given to the sensational, I have collected a few of the leading events in detail, which I think are worth putting in permanent form, if I may presume that this book itself may happily partake of that character.
The inside history of the conspiracy to put up the price of gold is also full of interesting material, and shows how deeply laid the scheme was to take advantage of the circumstances and of the feeling which existed in favor of stimulating our exports at the time. I shall, therefore, give an epitome of the salient points behind the scenes of the great speculative plot, and the bold attempt made to involve President Grant and his family in the conspiracy.
As I have intimated, Jim Fisk, Jr., or Jim Jubilee Junior, as he was then popularly called, was eventually put forth as the active member of the manipulating coterie. The clique made very good use of him, also, at intervals during the period they were concerting their plans.
Fisk had originally been a peddler in New England, as his father had been. He appeared in Wall Street a few years previous to the great gold conspiracy as one of the confidential men of Daniel Drew. Having shown that he was too sharp for some of the people in the broker’s office where Mr. Drew made his headquarters, he received a polite hint that his presence there was undesirable. Mr. Fisk then opened an office of his own, and united his speculative fortunes with those of Mr. William Belden. The name of the firm was Fisk & Belden. It was of but short duration. It seems that they had difficulty in finding bankers to accommodate them to the extent required, and they closed up the business. But though Fisk failed of success in this instance as a broker, his resources were not by any means exhausted. He made himself generally useful to Mr. Drew, who still adhered to him.
As the result of this friendship and his own smartness, in a short time afterwards Mr. Fisk was elected to the directory of the Erie Railroad Company, and Mr. Drew, who had forwarded his interest in that direction, was left out. This is an instance of the way Fisk made the best use of his friends.
As the result of Fisk’s election to the Erie Board, forty thousand shares of new stock were issued. Bold attempts were made to gobble up other railroads through the same instrumentality. Fuller information on these matters is given in my chapters on Drew, Gould, and the struggle with Vanderbilt.
Fisk began to be considered a universal genius at that time, and had acquired the sobriquet of Prince of Erie. Though he had no money to operate with when he made his debut in Wall Street, soon after this large issue of Erie stock, he began to show signs of wealth very rapidly. He had the reputation of being the fortunate owner of several railroads and steamboats, an opera house, at least one bench of judges, an unlimited number of lawyers and a bevy of ballet girls.
The Head Centre of this gold conspiracy needs no introduction here, as I have attempted to do him ample justice in another chapter. He was also the power behind the throne in Erie as well as in the Gold clique. He pulled the wires while Fisk was the imposing factotum who was exhibited to an admiring public. He managed the courts, the judges and the lawyers, while Fisk got the reputation of doing this fine work, but was simply the mechanical executive. He had made himself solid with the Legislature also, and had acquired a hold on Erie that enabled him to use that property just as he pleased for his own personal benefit, ambition and purposes.
Erie was a mighty power at that time, with a wonderful leverage for raising money. When cash was needed to purchase another railroad, a legislature or a court, all that was necessary was to sell a few hundred thousand of Convertible Bonds and turn them into Erie shares. Mr. Gould was thus fortified with ample means of raising money on call at the time he played the heavy role in the events which culminated in the disaster of Black Friday.
Though the circumstances at that time were all in favor of success in such a plot, it required a mind with great grasp and wonderful powers of generalization to take advantage of all the bearings of the situation, and to utilize everything toward the great end in view. Gould did his work as chief of the conspiracy with rare tact and marvellous sagacity.
A resume of the conspicuous points in the situation and the plot will make this clear.
The supply of gold in the New York market then did not exceed 25 millions. The Government held less than 100 millions, and about one-fourth of this was in the form of special deposits represented by gold certificates, part of which were deposited in the banks and the remainder circulating throughout the country. Gold was then being sold by the Treasury at the rate of a million a month, in accordance with a plan that had been adopted as the best financial policy, both for the administration and the prosperity of the country. This had always a tendency to keep the price down, but on account of the circumstances briefly related in the beginning of this chapter, this policy of selling gold, owing to our commercial relations, was no longer considered for the best interests of the country, and Mr. Boutwell, with his coadjutors in the Treasury, were bound to give ear to the opinions of the bankers and business men in the interest of our export trade.
Although the policy of stopping the sale of gold had been agreed upon in deference to the views of the best financiers of the country, yet Mr. Gould and his fellow strategists thought it was best to make assurance doubly sure on this point, in order that nothing might stand in the way of the great speculative intrigue, to get a “corner” in gold. President Grant was conservative on the subject. The conspirators, therefore, conceived the design of arranging things so that Secretary Boutwell could not depart from this policy, no matter what emergency might arise.
This bold and wicked strategy could only be successful by first getting President Grant convinced that the theory of stopping the gold sales was the only commercial salvation for the country in the then condition of business stagnation and the possible panic threatened. The theory was then to impress him with the necessity of giving Secretary Boutwell an absolute order not to sell gold, and afterwards to fix things so that it would be impossible for the President to revoke that order until the brilliant speculative purposes of the clique in cornering gold should be accomplished.
The scheme was but little short of treason, regarded from a patriotic point of view, and it is very questionable if the perpetrators would have stopped short of this dastardly act, had they not been convinced that their purpose was fully compassed by a method less villainous and shocking. It was considered indispensable by the conspirators, for the consummation of their plans, that Grant should be got out of the way by some means or other. Fortunately for him, and for the honor of the nation, the plan succeeded without the necessity of offering him any violence.
Before explaining how this was done it is necessary to describe briefly a few of the preliminary events which formed a portion of the plot.
It was arranged that General Grant should accompany a party, one beautiful evening in the middle of June, who were going to attend the great Peace Jubilee of Patrick Sarsfield Gilmore in Boston. Jim Fisk did the executive work in the arrangement. There was a fine champagne supper on board the Boston boat, and several gentlemen were present who were thoroughly conversant with financial questions, and could talk glibly on the state of the country. The subject of exports and the policy of stopping the sale of gold were thoroughly discussed. It was a feast of reason, and those who have imagined that it was all flow of soul, on that festive occasion, do very scant justice to the intelligence that was at the bottom of the deep design of the nocturnal excursion, planned by Gould, Fisk & Co. General Grant was an eager listener to all that was said on the most interesting subject of that day, but his mind, it would seem, was not then thoroughly made up that the best policy for the prosperity of the country was to stop the sale of gold. He was undecided on that point, and it required well directed reasons to convince him. Mr. Gould observed this and foresaw what was necessary to be done. The drift of the conversation, when this point was brought clearly out, was very succinctly described by Mr. Gould in his testimony before the Garfield Investigating Committee. He said: “The President was a listener. The other gentlemen were discussing. Some were in favor of Boutwell’s selling gold, and some were opposed to it. After they all interchanged their views, some one asked the President what his views were. He remarked that he thought there was a certain amount of fictitiousness about the prosperity of the country and the bubble might as well be tapped in one way as the other. That was the substance of his remark. He asked me what I thought about it. I remarked that I thought if that policy was carried out it would produce great distress and almost lead to civil war; it would produce strikes among the workmen, and the workshops, to a great extent, would have to be closed; the manufactories would have to stop. I took the ground that the Government ought to let gold alone, and let it find its commercial level; that, in fact, it ought to facilitate an upward movement of gold in the fall. The fall and winter is the only time that we have any interest in. That was all that occurred at that time.”
It may be necessary to observe that I am merely quoting Gould from the report, and am not by any means responsible for his confusion of ideas and grammar.
This is sufficient to show how ably Mr. Gould played his part in attempting to get the President into the proper frame of mind to enable him to endorse a policy so vital to the interests of the country and to the success of the gold clique.
“I took the ground,” says Gould, “that the Government ought to let gold alone and let it find its commercial level.”
This reference to “its commercial level” is rich, coming from the head-centre of the plotters who wanted to put the article up to 200. Then, in another afterthought, he says: “It (the Government) ought to facilitate an upward movement of gold in the fall.”
How artfully insinuating was this suggestion in the interest of our foreign commerce! It showed clearly the power the man possesses of rising to the patriotic height of the occasion. This is a characteristic of Mr. Gould that few people know how to appreciate at its true worth. It has stood out conspicuously in his character in many other exigencies. It reminds one of the unkind but vigorous remark of the famous old English critic, Dr. Samuel Johnson: “Patriotism, Sir,” said the old cynic, “is the last refuge of a scoundrel.”
About the time the above events were transpiring, the Assistant Secretary of the Treasury, Mr. H. H. Van Dyck, resigned his office in this city. Mr. Gould’s chief ambition at that time was to name his successor, in order that he might be able to control the Treasury when the time to get a “corner” in gold should be ripe. Mr. Abel R. Corbin came in quite handy at this juncture to help to further the designs of Mr. Gould. He was a man of fair education and considerable experience both in business and politics. He had been a lobbyist in Washington for some years. He was well informed on financial matters, a pretty good writer, and could “talk like a book.” His wife was a sister of Mrs. Grant, and he had good opportunities for reaching the Presidential ear, which he employed to the best advantage.
A gentleman named Robert B. Catherwood, who was married to a step-daughter of Mr. Corbin, was approached by Gould and Corbin on the subject of the assistant-treasuryship. They were anxious that Mr. Catherwood should take the office, and told him he could make a great deal of money in a perfectly legitimate manner if he were once installed.
So Mr. Catherwood stated in his testimony before the Investigating Committee, but he adds, “My ideas differed from theirs in what constituted a legitimate manner, and I declined the office.”
The office then sought another man in the person of General Daniel Butterfield. He received the intimation of his appointment in a very different spirit from Mr. Catherwood, showing that he was fully equal to the occasion. He wrote a letter to Mr. Corbin thanking him kindly for the offer, saying that he was under numerous obligations to him, and expressing a hope that he would be eminently successful in his undertaking. General Butterfield received his commission in due course.
This made perfect another link in the chain of Mr. Gould’s speculative design, as he supposed. It made Corbin “solid” with Gould also, a position which they both highly appreciated. Mr. Gould paid the following tribute of admiration to the true value of Corbin in the enterprise: “He was a very shrewd old gentleman. He saw at a glance the whole case, and said he thought it was the true platform to stand on; that whatever the Government could do legitimately and fairly to facilitate the exportation of breadstuffs and produce good prices for the West, they ought to do so. He was anxious that I should see the President, and communicate to him my views on the subject.” Corbin talked with Grant until he received a positive assurance that Boutwell was not to sell any more gold. At a meeting in Grant’s house, where Gould and Corbin were present, the President said: “Boutwell gave an order to sell gold, and I heard of it, and countermanded the order.”
It was not until Gould had received positive assurance from the President’s own lips, that he considered his scheme perfect. But the links of this strategic chain were now nearly all forged. The bankers and merchants were largely in his favor through commercial necessity, the Sub-Treasury was “fixed,” as he thought, and the Executive fiat had placed the Treasury of the United States itself where it could not spoil the deal if Grant did not change his mind. There were reasons, of course, to apprehend that he would do so in case of an emergency; for he never was privy to the scheme, no matter what his traducers and political enemies may have said.
To ensure perfect safety, then, Grant must be put out of the way temporarily. This was the crowning effort of the conspirators. After the Boston Peace Jubilee, this Cabal spent the remaining part of the summer in maturing its designs. Large enterprises of this nature always require time and patience. I am told that “Billy” Porter, “Sheeny” Mike and other eminent burglars will work assiduously from six to twelve months studying all the ins and outs of a bank or other financial concern before coming to the point of using the “jimmy,” blowing the safe or chloroforming the janitor.
It seemed necessary that all the members of the Cabal should be fully acquainted with the combination to Grant’s purposes as regarded his orders to Boutwell, and that his ideas should remain fixed on the theory of increasing exportation for the country’s safety. Accordingly it was arranged that Jim Fisk should visit the President at Newport, where he was on a visit, some time about the middle of August, a month or so prior to Black Friday. It would seem that Grant at this date was still wavering, and adhering to his policy of selling gold in spite of the order which he had given Boutwell. He may have been suspecting that the anxiety of Gould, Corbin & Co. for the prosperity of the country was not altogether genuine. The necessity of bringing further pressure to bear upon him was therefore clearly manifest.
Referring to the interview at Newport, Fisk said: “I think it was some time in August that General Grant started to go to Newport. I then went down to see him. I had seen him before, but not feeling as thoroughly acquainted as I desired for this purpose, I took a letter of introduction from Mr. Gould, in which it was stated that there were three hundred sail of vessels then on the Mediterranean, from the Black Sea, with grain to supply the Liverpool market. Gold was then about thirty-four. If it continued at that price, we had very little chance of carrying forward the crop during the fall. I know that we felt nervous about it. I talked with General Grant on the subject and endeavored, as far as I could, to convince him that his policy was one that would only bring destruction on us all. He then asked me when we should have an interview, and we agreed upon the time. He said: ‘During that time I will see Mr. Boutwell, or have him there.’”
The President was carefully shadowed after this by the detectives of the clique, and great care was taken to throw men across his path who were fluent talkers on the great financial problem of the day, the absolute necessity of stimulating the export trade and raising the premium upon gold for that patriotic purpose. In this way, President Grant began to think that the opinion of almost everybody he talked with on this subject was on the same side, and must, therefore, be correct.
About the 1st of September it was considered that the opinions of the President had been worked up fairly to the sticking point, and Gould bought $1,500,000 in gold at 132½ for Corbin. Gould, however, was timid in his purchasing at first, as he had heard that a number of operators who were short of gold were making arrangements to give Secretary Boutwell a dinner. On further assurances from Corbin that the President had written Boutwell to sell no gold without consulting him, Gould prepared to go ahead with the execution of his great scheme. Nothing remained to be done in the completion of the plot except to stow away the President in a place of safety until the financial storm should blow over.
Things were so managed that the President was placed in a position that his honor was seriously in danger of being compromised, yet so ably was the matter engineered that he was perfectly unconscious of the designs of the plotters.
He was prevailed upon to go to a then obscure town in Pennsylvania, named Little Washington. The thing was so arranged that his feelings were worked upon to visit that place for the purpose of seeing an old friend who resided there. The town was cut off from telegraphic communication, and the other means of access were not very convenient. There the President was ensconced, to remain for a week or so about the time the Cabal was fully prepared for action.
Sometime about the period of the President’s departure for Little Washington, Fisk bought seven or eight millions of gold. Gould then said to Fisk: “This matter is all fixed up. Butterfield is all right. Corbin has got Butterfield all right, and Corbin has got Grant fixed all right, and in my opinion they are all interested together.”
This was patriotism with a vengeance. Just think of the audacity of it! Gould enters into a scheme to place the President in a position where he could not interfere with the plan of getting a “corner” in gold, and then he turns around and accuses the first Magistrate of the Republic with being privy to a plot that was calculated to create a panic, and cause widespread disaster in business circles, and render him an object of universal contempt.
Gould and Fisk, through Corbin, also attempted to compromise Grant’s family, as well as his private Secretary, General Horace Porter. This intention was fully disclosed through the interview of Fisk with Corbin. Fisk testified: “When I met Corbin he talked very shy about the matter at first, but finally came right out and told me that Mrs. Grant had an interest; that $500,000 in gold had been taken at 31 and 32, which had been sold at 37; that Mr. Corbin held for himself about two millions of gold, $500,000 of which was for Mrs. Grant and $500,000 for Porter. I did not ask whether he was General or not. I remember the name Porter. This was given out very slowly. He let out just as fast as I did when he found that Gould had told me about the same thing. I said: ‘Now, I have had nothing to do with your transactions in one way or the other. We have embarked in a scheme that looks like one of large magnitude. Mr. Gould has lost as the thing stands now. It looks as if it might be a pretty serious business before getting out straight again. The whole success depends on whether the Government will unload on to us or not.’ He said: ‘You need not have the least fear.’ I said: ‘I want to know whether what Mr. Gould told me is true. I want to know whether you have sent this $25,000 to Washington, as he states?’ He then told me that he had sent it, that Mr. Gould had sold $500,000 in gold belonging to Mrs. Grant, which cost 32, for 37 or something in that neighborhood, leaving a balance in her favor of about $27,000, and that a check for $25,000 had been sent. Said I: ‘Mr. Corbin, what can you show me that goes still further than your talk?’ ‘Oh, well,’ the old man said, ‘I can’t show you anything, but,’ said he, ‘this is all right.’ He talked freely and repeated: ‘I tell you it is all right.’ When I went away from there, I had made up my mind that Corbin had told me the truth.”
An attempt was made to prove, before the Garfield Committee, that a package containing $25,000 was sent to Mrs. Grant through the Adams Express Company, but expert testimony failed to decide whether the amount was that or $250, as the two noughts at the extreme right were crowded into the cents column, and it was difficult to determine whether or not a very light “period” was placed between them and the “$250.”
The design of the clique was manifest, however, to implicate the family of the President in some way or other, in order that they might make use of the Executive influence to help accomplish their great speculative purpose. But as the Garfield Committee truly said in its report: “The wicked and cunningly devised attempt of the conspirators to compromise the President of the United States or his family utterly failed.”
The scheme might have succeeded if Fisk had been possessed of the coolness and penetration of his partner, but his impetuosity, anxiety and enthusiasm aroused suspicion and partially spoiled the plot.
Fisk was so eager to be satisfied that Grant was all right that he overdid the thing by urging Corbin to write Grant a letter to stand firm and not to permit the Treasury to sell gold under any consideration. The outcome of this afforded clear proof, if any were wanting, that Grant had no guilty knowledge of the base purposes for which he was being used. Fisk had this letter from Corbin sent by a special messenger from Pittsburgh, who rode twenty-eight miles on horseback, and delivered it in person to the President. He read the letter, and had his suspicions at once aroused. He said laconically to the messenger, “It is satisfactory; there is no answer.” He began to see through the game, and at once desired Mrs. Grant to write to Mrs. Corbin requesting her husband to have nothing more to do with the Gould-Fisk gang.
Mrs. Grant wrote to Mrs. Corbin to say that the President was greatly troubled to learn that her husband had been speculating in Wall Street, and that she should desire him to disconnect himself immediately with the party who were attempting to entrap the President.
Corbin hastened to obey the mandate from Little Washington. He was greatly agitated, but the ruling passion of avarice was strong; in bidding Gould farewell, and before taking his final adieu of the clique, he requested the arch plotter to hand him over his share of the profits. Referring to this incident, Gould said: “I told him I would give $100,000 on account, and that when I sold, if he liked, I would give him the average of my sales. I did not feel like buying any gold of him then.”
This was the denouement of the plot against the President, who immediately hastened to big Washington.
Now, let me again ask the reader to turn his attention for a moment to the concluding scenes in the speculative drama in Wall Street on Black Friday. How the clique tried to manipulate Assistant-Secretary Butterfield was kept as profoundly secret as possible, and as it turned out, he did not have as much power over the events of that great day as was expected. When somebody charged Fisk with tapping the telegraph wires, however, to obtain information from the Government, he replied: “It was only necessary to tap Butterfield to find out all we wanted.”
This was very likely a vain boast of Fisk.
On Wednesday, the 22d September, two days preceding Black Friday, the clique, it is believed, owned several millions more gold than there was in the city outside the vaults of the Sub-Treasury. Belden bought about eight millions of gold on that day, while Smith, Gould, Martin & Co. were also heavy purchasers. The clique held a caucus in the office of William Heath & Co., in Broad street, and concluded that it had gold enough to put the price to 200, if it could carry the gold without lending and compel the “shorts” to purchase. But the idea of finding a market for over thirty millions of gold was also a gigantic problem, and they felt the risk of being ground between the upper and the nether millstones of their scheme.
On the morning of Thursday another council of war was held in the office of Belden & Co., on Broadway. At this meeting, Gould, Fisk, Henry N. Smith and William Belden were present. The proceedings of this meeting were kept a profound secret, but one result of it was that Belden gave his clerk the famous order to put gold to 144 and keep it there. On that day Belden purchased about twenty millions of gold, the price opening at 141½ and closing at 143½.
The chiefs of the Cabal had another private meeting up town that evening. The great question of closing up the transactions on the following day was the chief topic of discussion. These operators held contracts for over $100,000,000 in gold. Gould said that the “short” interest was $250,000,000. The total amount of gold in the city did not exceed $25,000,000, and the difference between this and the aggregate amount of the contracts of the clique was the enormous amount that would have to be settled in the event of a “corner.”
Fisk proposed that the clique show its hand, publish the state of affairs, and offer to settle with the shorts at 150. His plan was rejected by his brother conspirators.
On the morning of the fatal day, Belden and William Heath had an early breakfast together at the Fifth Avenue Hotel, and repaired immediately to their offices. Belden announced that gold was going to 200. “This will be the last day of the Gold Room,” he added. Moved by Belden’s threat, a large number rushed to cover. In the language of Henry N. Smith, “They came on with a rush to settle.” He was settling in the office of Smith, Gould & Martin, at 150 to 145, while Albert Speyer, acting as broker for Fisk and Gould, was bidding up to 160 for a million at a time. It was only when the price came down to 133 that Speyer realized the humorous absurdity of his position. He had then bought 26 millions since morning at 160.
A voracious demand for margins about midday brought the work to a crisis. The scene at the office of Heath was indescribable when Belden went there to see Gould and his confederates, to find out what was to be done next with the frenzied purchasers. An eye-witness thus describes the scene at Heath’s office: “I went outside while Belden went in. I walked up and down the alley-way waiting for him to come out. Deputy sheriffs, or men appearing to be such, began to arrive and to mount guard at Heath’s office to keep out visitors. After waiting a prodigious long time, as it seemed to me, Jay Gould came creeping out of the back door, and looking round sharply to see if he was watched, slunk off through a private rear passage behind the buildings. Presently came Fisk, steaming hot and shouting. He took the wrong direction at first, nearly ran into Broad street, but soon discovered his error, and followed Gould through the rear passage. Then came Belden, with hair disordered and red eyes, as if he had been crying. He called: ‘Which way have they gone?’ and, upon my pointing the direction, he ran after them. The rear passage led into Wall Street. At its exit the conspirators jumped into a carriage and fled the Street.”
They did not fly the Street, however, but went to the Broad street office of Smith, Gould & Martin, where the crowd assembled, evidently with riotous intent, apparently bent upon an application to Judge Lynch for justice; and had any of the gentlemen appeared outside the confines of the front wall, the chances were that the lamp-post near by would have very soon been decorated with a breathless body. To ensure their safety inside, however, a small police force kept guard outside, which made the barricade complete. These gentlemen remained under this shelter until the small hours of the morning, busily endeavoring to find out where they stood in the result of the gold deal, and the more they pondered over it, the greater grew the doubt in their minds whether they were standing on their heads or their heels.
Although the Black Friday “corner” was a temporary calamity, perhaps it was worth all it cost, in teaching us a useful lesson in financial and speculative affairs. In my chapter on “Panics, and How to Prevent Them,” I think I have made several points clear that can be utilized by financiers, speculators and investors to advantage, in ease of an impending panic or “corner.”
CHAPTER XXI.
CAUSES OF LOSS IN SPECULATION.
Inadequate Information.—False Information.—Defects of News Agencies.—Insufficiency of Margins.—Dangers of Personal Idiosyncrasies.—Operating in Season and out of Season.—Necessity of Intelligence, Judgment and Nerve.—An Ideal Standard.—What Makes a King Among Speculators?
As there is always a class of speculators whose operations, in the long run, leave a net result of loss rather than profit, it may not be amiss if I state what experience has taught me as to the causes of this want of success.
Undoubtedly, many who enter the arena of speculation are in every way unfitted to take the risks against such wily opponents as they must encounter. They are either too ignorant or too wise, too timid or too bold, too pessimistic or too sanguine, too slow or too hasty, too diffident or too conceited, too confiding or too incredulous. These are constitutional defects, any one of which may easily cost an operator a fortune. And yet self-knowledge, with self-control, may prevent these natural disqualifications from seriously interfering with success. There is no mental discipline more severe and exacting than that of speculation. There is no pursuit in which a man can less afford to indulge in whims, or prejudices, or pet theories, than that of staking his money against the prospective changes in financial values. He must be as calm and as impartial as a judge, not less in respect to the risks he incurs than in regard to the integrity of his own judgment. I should lay it down as the first rule necessary to success, that the judgment be not warped by any natural idiosyncrasies; this being secured, a man may succeed in spite of his constitutional defects.
Singular as it may seem, there are no advantages beset with greater dangers than information—the one thing most largely sought after and most highly prized. Very naturally, most men object to taking a risk without possessing some knowledge of the conditions that determine the risk; and yet how few take care that their knowledge is adequate enough or certain enough for the formation of a safe judgment. In some cases, knowledge is unattainable and the operation must be a leap in the dark; and in such instances a man is unwise to step in unless his experience satisfies him that he is uncommonly sagacious in guessing.
Many speculators lose because the information on which they base their operations is insufficient; more because it is false; and others because, while their information is correct, they do not know how to turn it to account.
Between one or other of these difficulties in the use of information must be distributed a very large proportion of the losses incurred in speculation. Incomplete or insufficient information is especially dangerous. One-sided knowledge is nowhere so deceiving as here. A railroad, for instance, may report an increase of gross earnings which is construed as making its stock worth two or three per cent. more than its current price; but the improvement may be due to transient special causes, and the road’s current expenses may be growing at a rate which makes the net increase show a decrease. A financially embarrassed company may announce an assessment of its stockholders, upon which there is a rush to sell the stock; a little further explanation shows that the proceeds of the assessment will so improve the facilities of the company, or so enable it to reduce its fixed charges, as to make the stock intrinsically far more valuable than it was before; this discovery causes a sharp advance in the shares, and the “short” sellers have to cover their sales at a loss. A stock is bought up freely at New York because London is taking large amounts of it; a day or two later, the deliveries show that large holders connected with the management are unloading on the foreign market upon knowledge of facts damaging to the prospects of the property; the late buyers then rush to realize, and pocket a loss instead of a profit. Every day furnishes new instances of speculations undertaken on this incomplete kind of information, and which end disastrously because the operators did not wait to be informed on all sides of the case, but were satisfied to take a pound of assumption with but an ounce of fact.
One of the strongest anomalies of speculation is in the facility with which men are induced to take large risks on false information and manufactured “points.” Considering the readiness with which a numerous class of “outside” operators buy or sell on sensational rumors, it is not surprising that the professional operators should keep the market well supplied with such decoys; and it is not easy to say which most deserves condemnation—the heedless credulity of the dupes, or the deliberate lies of the canard-makers. There is, however, a third party not less blameable than either of the foregoing. I refer to those who make it a part of their business to circulate false information. Principal among these caterers are the financial news agencies and the morning Wall Street news sheet, both specially devoted to the speculative interests that centre at the Stock Exchange. The object of these agencies is a useful one; but the public have a right to expect that when they subscribe for information upon which immense transactions may be undertaken, the utmost caution, scrutiny and fidelity should be exercised in the procurement and publication of the news. Anything that falls short of this is something worse than bad service and bad faith with subscribers; it is dishonest and mischievous. And yet it cannot be denied that much of the so-called news that reaches the public through these instrumentalities must come under this condemnation. The “points,” the “puffs,” the alarms and the canards, put out expressly to deceive and mislead, find a wide circulation through these mediums, with an ease which admits of no possible justification. How far these lapses are due to the haste inseparable from the compilation of news of such a character, how far to a lack of proper sifting and caution, and how far to less culpable reasons, I do not pretend to decide; but this will be admitted by every observer, that the circulation of pseudo news is the frequent cause of incalculable losses. Nor is it alone in the matter of circulating false information that these news vendors are at fault. The habit of retailing “points” in the interest of cliques, the volunteering of advice as to what people should buy and what they should sell, the strong speculative bias that runs through their editorial opinions, these things appear to most people a revolting abuse of the true functions of journalism. But patent as these things are to those educated in the ways of Wall Street, there is a large class who accept such effusions as gospel, and are easily led by them into the clutches of the sharks. It is but just, however, to acknowledge that with these very serious drawbacks, both these classes of news agencies render valuable service to Wall Street interests, and it is to be hoped that experience will convince them that their enterprises would attain a higher success through emulating a higher standard.
Another source of losses in speculation lies in the speculator not holding back a cash reserve sufficient to protect him against an adverse course of prices. Ordinarily, the man who speculates is of a sanguine temperament, and apt to take risks without sufficient provision against contingencies. Hence, it is common with inexperienced operators to use all their available resources in their original margin. The result is that, if prices go against them, they are liable to be closed out and saddled with a loss they can ill afford. Such persons should never pledge more than one-half of their available means at the beginning of a transaction; the remaining half should be kept as a guarantee against their being “sold out,” or to enable them to duplicate the transaction at the changed price, so as to make an average likely to yield a profit. The violation of this rule creates a class of weak holders, who offer a constant inducement to “room-traders” to raid the market; knowing, as they do, that when they have impaired these unsupported margins, there is sure to be a rush of selling orders calculated to break down prices. It is safe to say that if better provisions were made for keeping margins good, the power of the “bears” and the wreckers would be broken; one-half of the losses of “outside” operators would be obviated, and one-half the risks of speculation would be obliterated.
Another class especially exposed to losses are those who always operate in the same direction. Wall Street has its optimists and pessimists; they are such from a constitutional bent; and they are “bull” or “bear” in season and out of season. As a rule, those that follow a natural disposition, rather than the course of the market and the conditions that mould it, are sure to bankrupt themselves sooner or later. I do not mean to maintain that there is no chance for an operator who clings continuously to one side of the market; for in times when conditions favor higher prices there is always some profitable work to be done by the “bear” in checking excesses of a rise; and, when events favor decline, the “bull” may find his chances in intervals of excessive decline. But the man who can thus successfully steer his craft against the winds and the tides must be a thoroughly trained navigator, cool in temperament, capable of reining his natural proclivities, and above all, the possessor of means large enough to control, if necessary, the course of the market by sheer money power. It is needless to say that nine-tenths of this stereotyped class are devoid of these requisites to success. One cannot but pity the man with sallow face and sluggish gait so suggestive of the blue pill, who, when everybody else is feeling the happy impulse of a common prosperity, persists in believing that the country is going to the dogs, and steadily sells stocks while everybody else is buying them. He is simply ruining himself through unconsciousness that he views everything through bilious spectacles. Equally is the man to be commiserated who, from a constitutional intoxication of hope, keeps on buying and holding when it is manifest that the country has passed the summit of an era of prosperity and is destined to a general reaction in trade and values. Of course, such men never remain long in Wall Street; their pockets are soon emptied, and they retire to reflect on the folly of refusing to appreciate and to follow the natural drift of the conditions that regulate values.
A minor source of losses lies in operating at times when the market is so evenly balanced between opposing forces that there is no chance for making profits. At such times, operators get disgusted at the sluggishness of the market; they change their holdings from day to day, with no advantage except to their broker; and their monthly statement shows a heavy list of charges for interest and commissions, with no offset of profits. These intervals of stagnancy sometimes run for weeks, sometimes for months; and at such times a wise speculator would take care to keep out of the market and hold himself in readiness for anything that may turn up.
It is necessary to the avoidance of loss that the operator should maintain an intelligent watch upon the influences that control the market. Those influences are two-fold—such as are intrinsic to the market, and such as are external to it. Of the former class are those that relate to the spirit and tone of the market; the position and disposition of the cliques; the action of the large operators; the overloaded or over-sold state of the market, as indicated by the loaning rates for stocks; the influence exerted by the upward or downward movements in stocks which at the moment are specially active; the possibility of closing out holders on “stop orders” or on the impairment of margins; the unloading of influential cliques and the covering of important lines of short sales, &c., &c. Influences of this kind are very frequently sufficient of themselves to control the market for a considerable period in direct opposition to the tendency indicated by external conditions. It is, however, no easy matter to form a correct conclusion as to the drift resulting from this set of factors. They are so concealed and so changeful, and the symptoms are so vague, that it requires long experience, added to unusual sagacity, to determine what may be the tendency resulting from the complex action and counteraction of this set of conditions. Some exceptional operators enjoy an instinctive faculty for weighing these shadowy indications with almost unerring certainty. Such men usually care little about outside influences, except so far as they may affect the market for the moment. From the nature of the case, their transactions are apt to be brief ones, and follow quickly the momentary course of the market They are reckoned among the most sagacious speculators, and are usually very successful. But their success is the result of a special natural gift, and therefore cannot be won by others.
The second class of influences above alluded to as external to the market are of a very broad and varied character. They embrace almost everything that affects the welfare of the country. Those, however, which are most potent are, the state of the crops; the condition of manufacturing industries; the state and prospects of trade; the earnings of the transportation companies; the course of the imports and exports; the attitude of the foreign markets towards American securities; the movements of the precious metals; the condition of the London and Continental money markets; the position of the New York banks and the course of currency movements; the action of Congress, of the Legislatures and of the Courts on matters affecting the value of investments; the acts of labor unions and the drift of labor agitations, and the course of political and social issues. This may be considered a rather startling list of topics for a man to keep himself well informed upon, but there is not one of them which may not any day become a controlling factor in the condition of the stock market. For a man, therefore, who aims to keep his knowledge abreast with his business, it is necessary that he should be a close observer of events. Undoubtedly few possess this breadth of information, and most men think it sufficient to get their knowledge as best they may when the events happen. The misfortune in such cases is, that those better informed utilize the event while the others are “getting posted.” Considering how many half-informed or wholly ignorant persons engage in speculation with more or less success, it cannot be pretended that to keep informed on the foregoing set of conditions is essential to a fair degree of success. But it must be maintained that such knowledge is of incalculable value and that a man who has it is in a position to act with more intelligence, assurance and success than one without it. To those who desire to turn to account all coming changes, and to stand always prepared for the good or evil events of the future, this intelligent comprehension of the status of all the forces that make or unmake values is absolutely indispensable. And yet it is one thing to possess this information; another to know how to draw correct conclusions from it, and yet another to know how best to use it in the area of speculation. Failure at any one of these points may be fatal to success and result in disaster.
I conclude, then, that for a man to be a thoroughly equipped speculator, it is necessary that he be possessed of extraordinary parts and attainments. He must be an unceasing and intelligent observer of events at large, and a sagacious interpreter of symptoms on the Exchange; his judgment must be sound, not only as to existing conditions, but as to coming tendencies, and he must possess the calmness and nerve to face unflinchingly whatever emergencies may arise. Whoever enjoys these qualities in the highest degree must be the King of Speculators. As to others, their rank must correspond to the degree of their conformity to this ideal standard.
H. Villard
CHAPTER XXII.
VILLARD AND HIS SPECULATIONS.
Return of the Renowned Speculator to Wall Street.—Recalling the Famous “Blind” Pool in Northern Pacific.—How Villard Captured Northern Pacific.—Pursuing the Tactics of Old Vanderbilt.—Raising Twelve Million Dollars on Paper Credit.—Villard Emerges from the “Blind” Pool a Great Railroad Magnate.—He Inflates His Great Scheme from Nothing to One Hundred Million Dollars.—His Unique Methods of Watering Stock as Compared with those of George I. Seney.
The return of Mr. Henry Villard to Wall Street, after two years’ absence in Germany, his native land, renews the public interest in the career of that bold speculator. My reminiscences of Wall Street affairs would be incomplete without a sketch of the daring railroad operations of this gentleman, which so fully illustrate some of the evils to which I have referred in my chapter on “Railroad Methods.”
The culminating point in the speculative history of Mr. Villard, which covered a period of five years, from 1879 to 1884, was the famous blind pool in Northern Pacific.
Instead of taking up the events of his life in detail, and carrying my readers to this point, I shall depart from the usual course of biography, and present the more interesting facts of the career of my hero at the beginning.
In his capture, of Northern Pacific he seems to have followed the methods of the elder Vanderbilt very closely, with the important exception that he failed in the consummation of his purpose. Vanderbilt always, eventually, triumphed.
Villard was the chief agent in forming the Oregon Railway and Navigation Company, which was organized for the purpose of consolidating the business of the Oregon Steam Navigation Company with that of the Oregon Steamship Company, and for the purpose of buying, building and operating railroads, as stated in the circular setting forth the objects of the company. The lines of the Oregon Railway and Navigation Company extended from Portland west to Wallula Junction.
The value of this property was seriously menaced by the project of the Northern Pacific to extend its lines west, with a terminus at Tacoma.
President Billings, of the Northern Pacific, rejected a proposition from Mr. Villard to accommodate the Northern Pacific by permitting it to reach the Pacific coast over the lines of the Oregon Railway Navigation Company.
It was at this juncture that Villard resorted to the old Vanderbilt tactics, by attempting to purchase stock enough of the Northern Pacific to enable him to control the property. For this purpose he formed a blind pool, in which Messrs. Woerishoffer, Pullman and Endicott, and a host of other solid men, were the original members. A fund of $8,000,000 was subscribed to purchase Northern Pacific stock. During the spring of 1881 the pool kept on buying steadily, and continued their operations until the middle of summer, when it was discovered that the treasury of the pool was almost exhausted without having effected its purpose of acquiring control of the Northern Pacific property.
Mr. Villard then called a meeting, explained matters, proposed to extend the scope of the pool’s operations, and to increase its membership. By showing the enormous profits to be gleaned in the future, he succeeded in getting $12,000,000 more subscribed. This secured the control of the road, and in September, 1881, Mr. Villard was elected President of Northern Pacific.
Villard at once emerged from this blind pool into a great railroad magnate, in a manner, to the eye of the general public, as miraculous as the springing forth of Minerva fully armed from the brain of Jupiter.
The stock of Northern Pacific advanced rapidly in price, and Villard and his friends were supposed to be accumulating millions with unprecedented celerity. Villard appeared to have realized all the financial dreams of Monte Cristo, and he was fast looming up into a proud and dangerous rival of Gould, Vanderbilt and Huntington.
He went forward with the building of the Northern Pacific road, which was finished two years after his success in capturing it through the medium of his blind pool. His phenomenal success induced him to enter largely into the extension of other investments. He became lavish in his personal expenses also, although he had formerly been accustomed to the closest economy in his mode of living, and he built a palace at Madison Avenue and Fiftieth street.
When seemingly on the highest tide of prosperity, Villard suddenly became embarrassed, and when an accounting of the cost of finishing the road was made, he was found to be away behind. There was a miscalculation of $20,000,000 somewhere. Villard explained it by declaring that the estimate of the engineers for finishing the road was $20,000,000, whereas the real cost reached $40,000,000.
For the $20,000,000 subscribed by the blind pool the subscribers received the stock of the Oregon & Transcontinental. This company had been organized to build branch lines to the Northern Pacific, as the charter of the latter did not permit it to build such lines.
This is the speculative history, in brief, of Mr. Villard from the time he took hold of the Oregon & California Railroad up to the juncture of his grand collapse. There were several incidents, however, of more than ordinary interest in his railroad history prior to the time he set his heart upon Northern Pacific. As a stock-waterer he had, probably, no superior, and was only equalled by Mr. George I. Seney, in that important department of railroad management. His methods in obtaining control of the Oregon Steam Navigation Company and the Oregon Steamship Company amply illustrate his remarkable ability in this respect. When Villard proposed to purchase these two companies he had no money, but he had unlimited confidence in his own ability. He asked each company to give him an option to run a year for $100,000. They agreed to do this, and Villard forthwith consulted a number of capitalists, who came together and filed articles of incorporation of the Oregon Railway & Navigation Company, a consolidation of the two companies above-named. When this company, with such a high sounding name, was organized, it had no assets, and the prospects of acquiring any seemed exceedingly blue. The names of the incorporators were as follows: Henry Villard, James H. Fry, Artemus H. Holmes, Christian Bors, W. H. Starbuck and Charles E. Brotherton, all of the city and State of New York, and W. H. Corbett, C. N. Lewis, J. N. Dolph, Paul Schulze and N. Thielson, all of Portland, Oregon. The capital was nominally six million dollars, divided into 60,000 shares. This arrangement was made in June, 1879.
The next problem to be solved after the reorganization was how to raise money to run the concern.
The Board of Directors, under the management of Mr. Villard, were equal to the occasion. They met at Portland a few days after the organization and executed a mortgage to the Farmers’ Loan and Trust Company of New York, and under this mortgage issued 6,000 bonds of $1,000 each, payable in thirty years after July 1, 1879, with interest at 6 per cent.
Mr. Villard then paid the $100,000 bonus money to the companies which had been incorporated, took his option, stock and bonds and came East to negotiate his securities. It is said he presented them to Jay Gould, who refused to touch them, as he believed there was not much stamina in the scheme, and he wished to avoid trouble with the Northern Pacific, which he plainly saw the project involved. Villard was more fortunate with Mr. Endicott, Jr., of Boston, Mr. George Pullman and others whom they interested in the enterprise.
The property of the two companies, out of which the new company had been formed, whose securities were so boldly placed upon the market, was not in reality purchased until March of the following year.
After the organization was complete, the visible assets of the Oregon Railway and Navigation Company did not exceed $3,500,000, while the total liabilities amounted to $21,000,000. This was made up as follows:
| Original stock | $6,000,000 |
| Water | 3,000,000 |
| Water | 6,000,000 |
| Mortgage bonds | 6,000,000 |
It will thus be seen that there were seven dollars of liabilities for every dollar of assets, and the intrinsic value of the stock was represented by a minus quantity of 20 per cent., having no positive value at all. In other words, it was 20 per cent. worse than nothing.
In spite of these facts, however, Mr. Villard had the stock listed at the Stock Exchange, and through a carefully prepared report, showing immense and unprecedented earnings, he had the stock bulled up to 200. It was when it reached this high figure that the $9,000,000 of water (noted before) were thrown in to prevent it from becoming top-heavy.
This was the preparatory and successful process of watering which preceded the transactions of Mr. Villard on a more magnificent scale in his manipulation of Northern Pacific, as described at the opening of this chapter. Mr. Villard excelled Mr. Seney in one respect which is noteworthy. As I have shown in a former chapter, Mr. Seney poured the water in lavishly at the reorganization, and prior to having his properties listed on the Stock Exchange.
Villard improved upon this process by employing Seney’s method liberally in the first instance, and also by a free and copious dilution after the stocks had been inflated to the very point of bursting.
There is probably no instance in the whole history of railway manipulation in which a man has presented to the public, and with such amazing success, such a specious appearance of possessing solid capital where so little existed in reality.
He began with nothing in 1879 and succeeded in the course of a year in possessing himself, by various adroit methods, as described, of $3,500,000 of assets in railroad securities. With this as a basis of operation, in five years he managed to obtain temporary control of property aggregating in value over $1,000,000,000.
CHAPTER XXIII.
FERDINAND WARD.
Peculiar Power and Methods of the Prince of Swindlers.—How he Duped Astute Financiers and Business Men of all Sorts, and Secured the Support of Eminent Statesmen and Leading Bank Officers, whom he Robbed of Millions of Money.—The most Artful Dodger of Modern Times.—The Truth of the Swindle Practiced upon General Grant and his Family.
In making a fair estimate of the part that Ferdinand Ward, of the firm of Grant & Ward, played in the panic of 1884, I can only say that Ward’s methods, taken altogether in their conception and execution, constituted a huge confidence game. He built up confidence by deceiving a few eminent men in financial and social circles, who, from his insinuating and plausible demeanor, were induced to place reliance upon his representations.
His presence was magnetic, and his manner deceitfully unassuming. He had the art of dissembling in great perfection and was possessed of extraordinarily persuasive powers, without appearing to have any selfish object in view. So highly developed in him were these social gifts, through the power of cultivation, that he could convince his unhappy victims that he was actuated with a single purpose for their welfare.
By practicing in this way on the credulity of certain people, Ward managed to get into his hands, for his own personal use, sums of money aggregating millions. Some of the richest financiers became his victims, chiefly induced by promises of high rates of interest and large profits on various ventures.
Ward would ascertain the names and circumstances of certain people who had large balances in their banks and were unable to make satisfactory and paying investments with them. He would bring certain influences to bear upon them to take their money out of the bank and invest it through him in “Government contracts,” which he said afforded immense returns, but were of a delicate character, and required some secrecy in the manipulation. This circumstance naturally prevented him from going into an explanation of the details of the enterprise, which it was not necessary for the investors to know when their profits were secured through such a stable investment. It was sufficient for them to be assured that the returns would be very large.
As an instance of the successful manner in which Ward’s specious pretences worked, I will relate the experience of one gentleman who deposited $50,000 with him, on the strength of these representations—just as an experiment.
This gentleman was going on a trip to Europe and he left the amount stated in the possession of Mr. Ward to be used to the best possible advantage during his absence, and invested in his own way.
About six months after the date of this deposit, the gentleman returned from Europe and called at the office of Grant & Ward to learn what progress had been made with his investment. He saw Ward, and called his attention to the fact.
The young Napoleon of finance recollected the appearance of his customer at a glance, for he is admirably developed in what phrenologists term individuality, and never forgets a face, but in the immense rush of his speculative business he had forgotten the circumstance until he referred to his books. He was but a few minutes absent in the interior office when he returned and informed the gentleman that his $50,000 had been invested with the ordinary turn of luck that usually accrued under his management, and he was very happy to be able to hand him a check for $250,000, after deducting the ordinary commission, as the result of the investment.
The man was overpowered with this unexpected turn of luck, and the enormous profits taxed his credulity to its utmost capacity. This was a speculative mine that he had never dreamed of, and instead of sleeping any that night he set his entire mind to calculate the profits on $250,000 in the same ratio that his $50,000 investment had been transformed into this amount.
It required very little mathematical knowledge to arrive at the conclusion that with such another turn of speculative prosperity, he would, within the next six months, be a millionaire and have the original investment left intact. Then if he should make this on three turns, which seemed not unlikely, when he should be present to look after his own business, he might pile up millions by the dozen.
The mind of this fortunate speculator being filled with such thoughts as these, he lost no time after breakfast in taking the train on the elevated road and arrived at Ward’s office before business had begun. When Ward arrived he met his customer with a gracious smile, took the check in the most handsome manner and made a note of it in his book.
The investor had not very long to wait this time before he knew the result of his venture. It was only a few days prior to the 12th of May, 1884, at which date the failures of Grant & Ward and the Marine Bank were announced in Wall Street, as the avant courier of a sudden panic. So, the only thing that interfered with the second check producing similar results to those of the first, was the unfortunate panic, but of course Mr. Ward could tell his customer that he was not responsible for that.
In this connection an important financial question arises. Would there have been any panic had it not been for Ward, Fish, Eno & Co.? However this may be, there is one thing very evident, namely, that Mr. Ward must be accorded the power of ability to control men with whom he came in contact in a remarkable manner, and of being able to get the best of them in all financial matters. Old and astute financiers, who were considered experts in every method of speculation, and who knew all the artifices of making a sharp bargain, became helpless in the mystical presence of Ward, and were completely non-plussed by his superior acumen in taking advantage of every situation that offered the least opportunity of practicing his peculiar methods of chicanery and fraud.
Ward seems to have been very much of a mind reader. He knew when he passed that check over to the gentleman referred to, for $250,000, that it would come back again, that it would keep burning that man’s pocket while he kept it there, and that sooner or later he was bound to return it to the mysterious place of its issue. Doubtless this was not the first case that Ward had experimented upon in this way. He had evidently made a regular practice of it, and could calculate the proportion of his victims with as much accuracy as tables of mortality are made out for insurance companies. There was no blind chance about Ferdinand’s methods. He worked according to a rule, having calculated to a nicety the exceptions that proved it, and his success showed that he had not wasted much time over stubborn cases.
Ward displayed marvellous tact in discovering, at a glance, those who were sufficiently credulous to be entrapped into acquiescence with his schemes, and manifested great executive ability in pouncing upon his prey at the proper moment. His methods of operation were admirably suited to his purposes. He saw, for instance, that this man would not put the money in any other kind of investment, and would not be likely to operate, except through Ward himself, as no other man could be found anywhere who could make himself the instrument of realizing such stupendous returns for the money invested.
It is marvellous how the idea of large profits, when presented to the mind in a plausible light, has the effect of stifling suspicion.
The specious pretexts of Ward appeared equal to the task of overcoming the most obdurate cases of incredulity. So, it is not so singular, after all, that men utterly unacquainted with business methods and sharp practice in speculation, were so easily victimized by the sinister methods, conciliatory manners and seductive schemes of this consummate imposter.
Ward was so successful in his arts of persuasion that he could not only succeed in getting possession of all the available capital, for his own practical use, of many eminent financiers, but he had the power of transforming them into walking advertisements for the promotion of his nefarious designs, and turned them to the best account in drumming up business and customers for him while they were blissfully ignorant that they were all the time the subservient mediums of swindling projects. In fact, they made themselves the willing instruments of “roping” in others for Ward’s purposes, inspired by the purest motives of gratitude toward him as their confidential broker and benefactor.
In this way General Grant and his sons became the helpless victims of Ward’s deeply designing duplicity.
People who have blamed General Grant fail to reflect on the fact that the famous soldier and able tactician was no better than a raw recruit in the hands of a disciplined warrior when he was placed in contact with Ferdinand Ward’s superior financial tactics.
One great point in the confidence game worked on joint account between Fish and Ward was to obtain men of well known reputation to vouch for the genuineness of the enterprises in which they were engaged. This enabled them to solidify and extend their credit. It was for this purpose that General Grant was inveigled into signing the well-known letter No. 2, addressed to Fish, which has been the subject of so much criticism and comment. Following is a copy of this letter:
No. 2 Wall Street, }
Room 6, }
New York, July 6, 1882.
My Dear Mr. Fish:—In relation to the matter of discounts, kindly made by you for account of Grant & Ward, I would say that I think the investments are safe, and I am willing that Mr. Ward should derive what profit he can for the firm that the use of my name and influence may bring.
Yours very truly,
U. S. Grant.
This letter was written in answer to one from Jas. D. Fish, President of the Marine Bank, saying he had negotiated notes for the benefit of Grant & Ward, to the amount of $200,000. He said in explanation: “Those notes, as I understand it, are given for no other purpose than to raise money for the payment of grain, &c., to fill the Government contracts.”
This letter, signed by General Grant was designated by his counsel as “only an ordinary letter in the course of business,” and that is all it is where a man placed confidence in another as General Grant did in Ward and Fish.
It was Ward who wrote the letter, through the instruction of Fish, and got General Grant to sign it.
In an interview with a reporter of the New York World, in July last, Ward explained the circumstances under which the letter was signed, as follows:
“Do you know anything about that letter addressed to Mr. Fish and signed by Gen. Grant, regarding the Government contracts?” asked the reporter.
“Of course I do,” quickly replied Ward. “I made the original draft. It was by Mr. Fish’s direction, and he asked me to do it, suggesting what I should write. He had had some trouble in getting Grant & Ward’s paper discounted, for he attended to that and raised millions of dollars. He wanted something to show to Mr. Cox, President of the Mechanic’s Bank, and others from whom he tried to get money for the firm. The contract business was the great thing, and he said if he only had something from the General to show that he knew about the contracts, it would be easier for him to go to these men. I distinctly remember the circumstances under which this letter was prepared. Fish gave me an idea what it ought to be like and I wrote it. Then Mr. Fish went over it and made some corrections in his own handwriting. It was scrawled on a piece of paper that happened to be handy in the office, and after he had it to suit him he handed it to me and I gave it to Spencer, our cashier, to copy. I am not sure but that I have got that draft somewhere among my papers. I think I have seen it since the failure, and if it is still in existence it can plainly be seen that Mr. Fish knew all about it before it received Gen. Grant’s signature. The General was in the habit of signing papers I asked him to without paying much attention to what they were. So when I asked him to sign this one he did so without much if any questioning. I understood well enough what Fish wanted it for, because he told me, and I have no doubt that Mr. Cox and other gentlemen from whom he borrowed money saw the letter.”
CHAPTER XXIV.
HENRY N. SMITH.
How Mr. Smith Started in Life and became a Successful Operator.—His connection with the Tweed “Ring,” and how he and the Famous “Boss” made Lucky Speculations, through the use of the City Funds, in Making a Tight Money Market.—On the Verge of Ruin in a Pool with W. K. Vanderbilt.—He is Converted to the Bear Side by Woerishoffer, and Again Makes Money, but by Persistence in his Bearish Policy Ruins Himself and Drags Wm. Heath & Co. down also.
I have already had occasion to speak of Henry N. Smith, who was a member of the firm of Smith, Gould & Martin, but I consider him of sufficient importance, speculatively speaking, for a separate biographical sketch. pi This gentleman is a native of Buffalo, and had been in the mercantile business there before coming to Wall Street. He was familiarly known as the young man from Buffalo. He had then a decidedly Hebrew aspect; was a strawberry blonde, with full beard of auburn hue, sharp, piercing eyes, and an air of self-confidence. He had made some money in Buffalo, and was lucky in his first ventures in Wall Street, being one of the few who emerged from the panic of 1864 on the winning side. Smith became a bold operator, and accumulated considerable money. He was invariably successful in his transactions whenever he was governed by his own judgment. The first disaster overtook him in the panic of 1873. Immediately prior to that he had been under the influence of Commodore Vanderbilt, who put him into Western Union, and the loss which he sustained by its terrible fall in that year almost ruined him. He lost all his ready money, being left without anything but his New York residence and a stock farm.
He did not lose courage, however, by this speculative blow, but picked himself up again and soon became quite a power in the Street, and in spite of the ups and downs of speculation and the various panics, Smith kept clearly ahead of the market for many years, and became a successful and comparatively wealthy operator.
He always managed to ingratiate himself with wealthy connections in his various operations, and was able to command an enormous amount of credit in comparison with his actual means.
A few years ago, on his return from Europe, he met W. K. Vanderbilt, and they began to discuss the probable future of the market. Vanderbilt had been a bull for some time previously. They entered into an agreement to operate on the bull side together. The result was that Vanderbilt lost several millions, and came pretty near running the risk of exhausting a large part of his then anticipated share of his father’s estate. The deal was disastrous to Smith also.
Soon after this discomfiture, one day, on his way to Long Branch, Mr. Smith met the late Mr. Woerishoffer, who was the great bear on the market, while Smith and Vanderbilt were still then the leading bulls. Woerishoffer succeeded in convincing Smith that his position on the market was wrong—that he had better make a clean sweep of it in selling out the stocks which he held, and join hands with him on the bear side.
Smith was impressed with Woerishoffer’s advice, earnestness and personality.
The great bear was also in a position to back up his theory by examples of his success, the best and most convincing argument that could possibly be employed, especially by a Wall Street speculator. As the result of this bearish counsel, Smith soon recuperated from the effect of his former losses, and, in consequence, got bearish notions so badly on the brain that he was prepared to swear by Woerishoffer’s judgment, and considered his own equally infallible. He could see nothing but disaster ahead any more than his general, and was recklessly prepared to follow wherever the champion bear should lead in the destruction of values.
Smith seemed to have the same abiding faith in Woerishoffer that Ignatius Loyola reposed in the Pope of his day. “If the Holy Father,” said that eminent Jesuit, “should command me to row several leagues into the ocean in an open boat, in the midst of a terrific gale, I should straightway obey his mandate without asking why or wherefore.”
Such is hardly an exaggerated illustration of the thorough appreciation which Smith entertained of the perfection of Woerishoffer’s bearish discipline, and the exact certitude of his judgment in all matters of a speculative character. It is almost impossible for a man who has had no experience in Wall Street matters to estimate the extremes of fanaticism in speculation to which a man is prepared to go when he is seized with a monomania either on the bull or the bear side, but especially on the latter.
The evidence of his senses counts for nothing, and the evidence of other people’s senses, if possible, goes for less. He is a consistent bull or bear, as the case may be, and that settles it. He is Sir Oracle on the stock market and when he speaks let no dog bark.
This inveterate combination of egotism and fanaticism has ruined many hundreds, to my own knowledge. The disease is contagious, and Smith had a very obstinate form of it. His symptoms were even worse than those of Woerishoffer, by whom he was smitten, a peculiarity that very often occurs in the recipient of this financial malady.
Like Woerishoffer, Smith fought the market with desperation on every advance. He adhered steadily to the policy of attacking prices on every rally during the summer of 1885, while values were constantly advancing, with occasional healthy reactions. When his own money was exhausted he began to incur cumulative liabilities with the house of Wm. Heath & Co., until that famous firm had become almost depleted of its available resources in replacing margins as fast as they were wiped out by the persistent tide of advancing prices in speculation.
Thus Mr. Smith proceeded, in obedience to the spirit of bearish fanaticism, until his loss became so great that he not only had to pay out all his own money, but was in debt to the firm of Wm. Heath & Co. in a million dollars, which was the cause of their failure, and which crippled or caused to collapse several smaller houses.
When Mr. Smith appeared before the Governing Committee of the Stock Exchange to make application for the extension of time on his seat, he made the following extraordinary statement: “On January 1, 1885, I was worth $1,400,000. I had $1,100,000 in money, and the balance, $300,000, in good real estate. On the following January I had lost the whole amount, and was $1,200,000 in debt, a million of which I owed to Wm. Heath & Co.”
Many people were surprised that Mr. Smith was enabled to obtain such an enormous and unlimited amount of credit in one house. I took the ground at the time, and I am still of the same opinion, that the animal magnetism or psychologic power of Henry N. Smith over the elder Heath was the real cause of all the trouble.
Mr. Heath had been in bad health for some time, consequently he left the general management of the business to Mr. McCanless, the head clerk and general manager of the firm, through whom the orders of Mr. Heath were strictly executed.
Mr. Heath being weak in both body and mind, yielded his opinions to those of Mr. Smith, by virtue of the superior mental force of the latter.
In conducting a large Wall Street business it is necessary that a man should have the mental stamina to say “no” firmly, and stand to it. In order to be able to do this he must be backed up by a vigorous, healthy physique.
The power to utter a negative in a determined manner requires, generally, a fair degree of physical force, and it is absolutely necessary to the success of a Wall Street broker that he should be able to do it when occasion requires. A deficiency either in will power or physical force to pronounce this small negative distinctly and firmly may result in financial ruin, as it did in the case of Wm. Heath & Co.
Henry Nelson Smith made many successful turns in speculation during the Tweed regime, owing to the facilities which the municipal bankers belonging to that famous coterie afforded him for manipulating the money market.
There were great fluctuations in stocks while William Marcy Tweed was the power behind the throne in the government of the city of New York. Mr. Tweed contributed largely towards these fluctuations. He and his trusty companions pulled the wires at the City Hall while the puppets in several of the brokers’ offices in the vicinity of Wall Street danced to the sweet will of the managers in the municipal building.
One of Tweed’s three famous maxims was, “The way to have power is to take it.” The other two were, “He is human,” and “What are you going to do about it?” In conformity with the first maxim, Mr. Tweed took control of the city funds, besides a number of the city savings banks, and other financial institutions, which he had organized through special charters from the Legislature, which he also owned during the period of his Boss-ship.
These funds were so managed that a very tight squeeze could, at almost any time, be effected in the money market. The city funds on hand were, at that time, usually about from six to eight millions of dollars, and were deposited in the banking institutions of the “Boss.” They were ostensibly under the control of the City Chamberlain, who was under the control of Tweed.
Henry N. Smith and a few other favorite members of the syndicate would draw their balances from these banks, making money scarce to the general public, and the money market would suffer a sudden squeeze, and consequently the stock market would break, sometimes with such rapidity as to produce disastrous results to a number of brokers, business houses and other financial concerns outside the Tweed Ring.
On one of these occasions Mr. Smith drove up to the Tenth National Bank, the Black Friday ring institution, in a cab, and drew his balance therefrom, amounting to $4,100,000. He took it home and kept it there several days under lock and key. In the meantime Mr. Tweed and his companions withdrew from circulation the greater portion of the amount under their immediate control, making a tie-up, on the whole, of nearly twenty millions of dollars. At that time this was an amount sufficient to make a very stringent money market, and cause Wall Street operators to feel very uncomfortable. It was then a mighty power to be wielded by a few unscrupulous men. At that time Mr. Smith considered himself worth at least five million dollars. He lost most of this in the panic of 1873, largely in Western Union stock, as above stated, into which Commodore Vanderbilt had kindly put him.
I have referred to the prominent part which Mr. Smith played in the great speculative drama of Black Friday, in the scenes and incidents of my chapter on that ever-to-be-remembered day in Wall Street
I shall, in another chapter, briefly review some of the methods to which the Tweed Ring resorted to make speculation and politics play into each other’s hands, and show how a bold attempt was made to add the control of the National Treasury to that of New York.
CHAPTER XXV.
KEENE’S CAREER.
He Starts in Speculation as a California Broker.—A Lucky Hit in a Mining Stock Puts Him on the Road to be a Millionaire.—His Speculative Encounter with the Bonanza Kings.—He Makes Four Millions, Starts for Europe and Stops at Wall Street, Where He Forms an Alliance With Gould, Who “Euchres” Him and Others.—Selover Drops Gould in an Area Way.—Keene Goes Alone and Adds Nine Millions More to His Fortune.—He Then Speculates Recklessly in Everything.—Suffers a Sudden Reversal and Gets Swamped.—Overwhelming Disaster in a Bear Campaign, Led by Gould and Cammack, in Which Keene Loses Seven Millions.—His Desperate Attempts to Recover a Part Entail Further Losses, and He Approaches the End of His Thirteen Millions.—His Princely Liberality and Social Relations with Sam Ward.
One of the most remarkable up-and-down lives known to Wall Street is that of James R. Keene. His rise and fall are both of recent date.
Mr. Keene is of English parentage, and was born in London, about 48 years ago. He came to this country at the age of 17, lived in the South and studied law there. He removed to San Francisco in 1853, and became well informed in mining matters through several mining cases that were put into his hands while practising at the bar in that city. I am told he was also connected with a Western newspaper for some time. He caught the speculative fever shortly after his arrival in California, and, as it seems, abandoned both law and journalism to become a broker.
Keene had hard work for some time to make both ends meet, and his struggle for existence in the wild West made serious inroads on his health. His physician told him he must give up work, and advised him to take a long sea voyage if he intended to prolong his life. Acting on this advice, he secured his passage to the East. This was the turning point in both his health and fortune.
Prior to his departure, Mr. Keene was urged to invest a few hundred dollars in a mining stock then selling very low. The length of his journey and the change of scene caused him almost to forget about his investment, and the methods of communication between the far West and the far East in those days were so very slow that he had hardly any chance of being informed of his lucky venture until his return. As an illustration of this slow transit of news at that time, it may be stated that gold was discovered January 19, 1848, but the news did not reach the Eastern States until the following December. It was authoritatively announced in the President’s annual message, and created great excitement. Mr. Alfred Robinson, with about twenty companions, were the first to leave New York for the scene of the new El Dorado, on the bark “John Benton.”
After nearly a year’s absence Keene was surprised to find, on his return, that mining stocks had taken a prodigious bound upward and carried the one in which he had invested with them. The mine had turned out to be a veritable bonanza, and the stock which had cost him only a few hundred dollars was then worth over $200,000.
Had Mr. Keene’s health not required his absence from the scene of speculation the chances are that he would have disposed of his stock as soon as it should have realized a few thousand dollars.
This was a wonderful realization for one who had been comparatively poor, and was sufficient to turn the head of any ordinary man; but it only made Keene more anxious for greater success, which he set himself diligently to achieve.
The speculative craze was then intense and epidemic. Waiters and chambermaids bloomed into millionaires with the rapidity of mushroom growth. Mr. Keene secured a seat in the Board, and began to do an immense business.
Flood, Mackay, Fair and O’Brien were then the prominent operators. The speculative contagion spread rapidly over the coast, and soon imparted its influence to the entire continent. Keene’s further investments were crowned with similar success to that of his first venture, and even in a greater ratio of profit.
Seeing the great and rapid advance in the stocks of the Comstock mines, he naturally reasoned, like old Daniel Drew, that what had gone up so high and so fast was bound to come down. There were but few people on the coast at that time, however, in a mood to reason so soberly, and it required more than ordinary nerve to make the experiment of selling “short.” Mr. Keene, however, had the courage of his convictions, and made an onslaught upon the market.
There Was a strong contingent to oppose him, for the wealthy syndicate just named, with the Bank of California behind them, were his bitter foes, and they did their best to crush him. In spite of their efforts, however, the market began to yield under the pressure of Keene’s “short” sales. In a little while the list gave way and stocks began to topple from their dizzy eminence, even quicker than they had climbed to that unprecedented height. Keene netted millions in their fall. He cleared two and a-half millions in the Belcher and Crown Point mines, and over half a million in Ophir.
So, in a few years, this poor lawyer, journalist, curbstone broker and invalid, found himself the happy possessor of millions, his name covered with speculative glory, and the fame of his fabulous fortune heralded in every city, town, hamlet and mining camp between the two oceans.
Keene was still found on the right side of the market when the great bubble burst, when the Bank of California went under, and its president, Mr. Ralston, committed suicide while pretending to take a bath in the Pacific Ocean.
In 1877 Mr. Keene started on a voyage for Europe for the good of his health, and made a friendly call in Wall Street to see how business was transacted there. He found the speculative attraction irresistible. Mahomet had come to the mountain and was held by its magnetic power.
Although Mr. Keene had been a grand success in California, he had a good deal to learn when he came to Wall Street. He soon discovered that California tactics would not do here. He began to sell “short,” but found the market failed to yield to the touch of his bearish wand as it had done in San Francisco. When he sold ten thousand shares of a certain stock the decline, instead of being a slump, as he expected, was only an insignificant fraction, and the market soon reacted. Mr. Keene quickly discovered that he was throwing water into a sieve, and stopped sacrificing his California gold so lavishly.
A pool was then formed by Mr. Keene and Jay Gould to put down Western Union. Keene and Selover sold the stock in large blocks, but it was absorbed by some party or parties unknown as fast as it was thrown out. It was gravely suspected that Mr. Gould was the wicked partner who was playing this absorbing game behind the scenes. Major Selover brooded over the matter so seriously that his suspicions began to take tangible form and “body themselves forth” in violence.
The Major and Keene met one morning at the rear entrance of the Stock Exchange, in New street, and interchanged intelligent glances on the subject, after the fashion of those passed between Bill Nye and his companion at the card table with the Heathen Chinee. Selover walked down the street with blood in his eye, and meeting Mr. Gould on the corner of New street and Exchange Place, caught him up by the collar of the coat and a part of his pants and dropped him in the area way of a barber’s shop.
The little man promptly picked himself up, went quietly to his office, and made a transaction by which Selover lost $15,000 more. This was his method of retaliation.
Mr. Keene next went into the Atlantic and Pacific Telegraph pool, and was again fortunate. It has been frequently asserted that he lost heavily in this deal, but I have it on good authority that he came out ahead. In the deal with Gould in Western Union, he and Gould netted on joint account $1,300,000. It is popularly believed that Gould “euchred” Keene in this pool, but these are the bare facts.
Keene looked over the speculative field, and found that there had been great depreciation in values prevailing here since the panic of 1873. He had arrived in the nick of time to take advantage of the situation. He was backed by four millions of money, and the few losses which he at first sustained were not felt by him, and only seemed to initiate him properly.
This new blood was just what Wall Street then wanted to put the wheels of speculation in motion. Mr. Keene informed himself about the principal stocks dealt in at the Exchange. He did so with remarkable rapidity. They were all down to panic prices, and seeing that most of them were intrinsically cheap, he bought heavily. Soon the turn came which resulted in the high tide of speculation which continued with but slight reactions all through 1879-80.
The advance was immense, as can be seen in the tabular statement at the end of this book, and the profits were enormous.
Keene’s millions were doubled and trebled. He must have felt himself a modern Crœsus.
Fully nine millions were added to the four which he brought from California. He stood in the centre of that great pile, figuratively speaking, the cynosure of all eyes from Maine to California, and his fame was noised abroad in Europe.
Gould and other old speculators began to grow green with envy at Keene’s unprecedented success. He seemed likely to exceed the wildest dreams that ever the avarice of Monte Cristo or Daniel Drew had conjured up, and with him the imaginary profits of Col. Sellers had become material realities. His investments were nearly all in good, reliable securities. No dubious paper acceptances nor rotten railroad items were mixed up with his tangible fortune, which was without parallel in Wall Street for its size and rapidity of accumulation.
The history of speculation was ransacked in vain for an illustration of such amazing success in so short a period. But here, I regret to say, this marvellous prosperity ends.
In an evil hour Mr. Keene was induced to spread himself out all over creation, while he still retained his immense interest in stocks. He was so flushed with successive victories that he began to regard failure impossible, and thought he was a man of destiny in speculation, such as Napoleon considered himself in war. He speculated in everything that came along—in wheat, lard, opium and fast horses.
Keene’s attempt to get a corner in all the grain in the country, however, was a signal failure. The very week that Foxhall won the Grand Prix in Paris he himself was sadly beaten in the speculative race by the steady going farmers of the West, who sent their wheat to market quicker than he could purchase it with his thirteen million dollars, and all the credit which that implied.
All of a sudden, reversal in the tide of speculation set in. Mr. Cammack was quick to perceive that Mr. Keene was extending his lines and his ventures. He had a conversation with Mr. Gould. They became convinced that the Californian must soon be obliged to leave some of his enterprises in a weak and unguarded position. It was impossible that he could take care of them all. These two champion bears united their efforts to upset the market, and each day brought additional force to their aid. By dint of perseverance their efforts commenced to bear fruit, and it was apparent that they would soon be rewarded with success. The bears began to multiply while the bulls diminished, and the remnant of the latter that were left were anything but rampant at that time.
The bankers became timid. The brokers were inspired with the same spirit and were still calling out for more margin. Loans were called in as a part of the programme of a bear campaign, and all the machinery of depression was put in active motion. Prices were torn to pieces. Properties that had been considered good as solid investments for a long turn, were mercilessly raided, and some of them shattered to fragments. In fact, there was a regular panic. In the general slaughter, many of the brokers sold Mr. Keene’s stocks out. His wheat was also sold in immense quantities at great sacrifice, and his load was lightened all around, even more quickly than it had been heaped up.
His losses are said to have amounted to seven millions of dollars at this time.
The manly efforts of Mr. Keene to recover these losses, as is usually the case in such instances, only resulted in further misfortune. Disaster followed disaster, and as he became desperate in his efforts to get back something, his losses became constantly greater, until nearly the whole of his immense pile was buried in fruitless efforts to recover a portion of it.
Great sympathy has been felt in Wall Street for Keene since his failure, for the Street had never before found such a liberal man. By general consent he decidedly took the palm in this respect, not only from all his speculative contemporaries, but the archives of Wall Street since the days of the first meetings of the brokers in the Tontine Coffee House, opposite the sycamore tree, early in the century, can furnish no such parallel of princely liberality as that of James R. Keene during the period of his matchless prosperity.
The parasites that waxed fat on his bounty and business are numerous. At least a score of Wall Street brokers were raised from penury to wealth by the commissions which they made out of him. Many of them are to-day living in luxury who started with a desk and a few plain office chairs to do business for the California millionaire, and now he is comparatively poor, and thrown on the slender resources of his wife.
Keene arose from nil to be worth thirteen millions. He is now back where he started.
A full and correct history of Keene’s beneficences would fill this volume, and however much I admire him, I cannot afford to give him so much space.
I shall relate one remarkable instance of his unbounded generosity, however, as the object has been so universally known, and was himself such a popular society man.
Long prior to Mr. Keene’s advent in Wall Street, Sam Ward had been a conspicuous figure in Washington and Wall Street, and had acquired a society reputation in Europe.
This gentleman was originally forced into prominence by his marriage with Miss Astor.
Mr. Ward had changed from one thing to another until finally he took up his abode in Washington, and became a lobbyist.
When Mr. Keene came to New York with his four millions of dollars, which he had made when the majority of New York investors had been on the losing side, dropping their money almost as fast as water runs down hill, through the unprecedented shrinkage in values, there was a wide field for profitable investment. This shrinkage had been going on from the panic of 1873, step by step downward until 1878, when society had reached a stratum by dint of levelling down that placed almost everybody upon an equality. Property, in many instances, became a serious encumbrance instead of a benefit, and many were glad to be rid of the responsibility of their holdings for what was sufficient to settle the mortgage. Everybody felt poor, and was really so, with a few fortunate exceptions.
Mr. Keene arrived here at the most fortunate moment for investment. Everything was down to bed-rock prices. He, therefore, became an object of actual curiosity, and was as much of a lion in our midst as he had been in San Francisco.
He was not only the favorite of fortune, but a favorite of society, which generally go together with curious inconsistency in our social democracy.
One of the first acquaintances Mr. Keene made on his arrival was this great society man, the celebrated Sam Ward, who at once recognized his social worth, not only in dollars and cents, but in considerable liabilities, genuine representatives of dollars and cents. The more tangibly he realized this fact the more tenacious was his attachment, until Mr. Keene found Mr. Ward the very beau ideal of Scriptural fraternity, namely, “a friend that sticketh closer than a brother.”
Wherever Keene appeared, though apparently alone, it was safe to bet that Ward’s shadow could soon be seen.
It is said of Seneca, when he observed a house falling, and nobody near it, that he asked: “Where is the woman?” So Keene’s presence naturally suggested Ward to the mental vision of every Wall Street man and every sporting man.
Whether it was up-town or down-town, at Newport, or in London, at the Derby, or the Grand Prix, it was all the same, where Keene was, there Ward soon appeared with the promptitude of the genius that stood before Aladdin when he touched his wonderful lamp or rubbed his magic ring.
This self-sacrificing friendship and ardent devotion on the part of Mr. Ward was recognized by Mr. Keene in the most tangible manner. He made an investment for his protege, of $50,000 in solid securities, placing them in the hands of trustees, so that his ward received the income therefrom of three thousand dollars, as an annuity, for life.
Mr. Keene bestowed numerous benefits on other newly made acquaintances, of which this is a fair sample.
A Pacific coast biographer draws the following graphic sketch of Keene, some time after his departure from California, which is curious reading in the light of the events which I have related:
“No series of sketches of men, prominently identified with the stock interests of the Pacific coast, would be complete without a pen portrait of James R. Keene, the free lance operator of the San Francisco stock market, who dared to beard the Bonanza Kings in their den, and came off victorious with many shekels of gold and silver. Mr. Keene is no longer with us. Some time since, after having realized largely on his stock ventures, he concluded to take a trip East, to be extended to Europe, unless on the Atlantic seashore he regained the health which too active exertions on the Pacific had impaired. And so he went with his family. Those who bade him God-speed expected to see him return within a few months, certainly within a year, with recovered health, new ambitions, new conquests to make. But he comes not. New York has presented more attractions than his old love, San Francisco. Railroad stocks, Jay Gould, Sam Ward, Rufus Hatch, Long Branch, Trenor W. Park, Newport, have been too many attractions for Jim Keene. He fell into the New York market as easily as any man generally falls among thieves—but he seems to have got the best of the thieves in every issue. When it was rumored that Keene contemplated making Wall Street his headquarters, his old San Francisco friends generally wrote out their calendars, and figured up when ‘Jim’ would be back, bursted out and out, looking for a job. A few who had abiding faith in Keene, who knew his pluck, who had gauged his capacities, who had measured his horse sense, consulted their calendars and said: ‘Jim is gone! He never will come back to couch his lance in such a narrow field as ours. New York is big, Wall Street is big—just about the size of institutions that Keene wants to tackle.’ The few were right. Keene hasn’t come back to look for a job. He has tried conclusions with the smartest of the Wall Street operators, and, novice that he was, came out triumphant. The California goose that was to be plucked wasn’t plucked. Even Jay Gould, with all his shrewdness, gave it up as a bad job; and Vanderbilt condescends to confer with Keene on momentous occasions.
“Keene started in his career as a stock operator years ago in San Francisco. He first was conspicuous as an impulsive, dare-devil sort of a street broker, acting for big firms, with an occasional dash for liberty and himself. Gradually he worked his way from steerage to cabin, from the private’s ranks to the position of the lieutenant of the watch, then to officer of the day, and finally, boss of the stock concern. No man in the stock market exercised so much influence as Mr. Keene. He had hosts of friends, friends whom he grappled with hooks of steel, ready to swear by him on any and every occasion. Generous to a fault, brusque in manner at times, but with the heart of a woman, ready to melt at a moment’s notice, open-handed and open-hearted to the appeal of even an acquaintance, no wonder that Jim Keene was the ideal of the market.”
It is not generally known that Keene was chiefly instrumental in rehabilitating the Bank of California after the death of Ralston. He raised a large subscription in the Stock Board, and got the Hon. William Sharon, D. O. Mills and “Lucky” Baldwin to subscribe a million each, and he put in a million himself. The bank was thus enabled to meet all immediate demands, and a threatened panic was averted.
At the time of Keene’s failure he was chief of a syndicate which had purchased 25,000,000 bushels of wheat, which would soon have netted many million dollars of profit, if it had been firmly held, but one or two of his partners in the pool became timid and sold out. The syndicate went to pieces, and both profits and capital vanished. He laid his misfortune mainly to the newspapers which raised such a universal cry about the immense “corner” that was being manipulated in wheat, threatening a famine in the great staple of human life.
Keene was next shaken out of his stocks. This was done chiefly by an ably concocted scheme of the bears, and he had the mortification of seeing the stocks which he had held advance within a few months’ time to a point that would have enabled him to realize ten million dollars, if he had been able to hold them.
CHAPTER XXVI.
OUR RAILROAD METHODS.
Deceptive Financiering.—Over-Capitalization.—Stock “Watering.”—Financial Reconstructions.—Losses to the Public.—Profits of Constructors.—Bad Reputation of our Railroad Securities.—Unjust and Dangerous Distribution of the Public Wealth.
The following chapter, on the subject of “Our Railroad Methods,” was delivered by me as a Fourth of July address at Mr. H. C. Bowen’s Annual Symposium at Woodstock, Conn., to an assemblage of over 3,000 people. It was so favorably received by the press and the public in general, that I have been encouraged to publish it in this book without any material changes:
In the whole range of our law-making there is no one branch in which there has been such an utter lack of judgment, foresight and just regard for the rights of the citizen, as in the legislation provided for our railroads and railroad companies. For the most part, the statutes relating to this class of corporations are a set of general enactments, loosely defining the large powers granted to the incorporators, comparatively silent on the duties and obligations of the companies to the public, and conferring upon them a virtual carte blanche as to their methods of finance and of conducting their business.
In a country whose products are mainly bulky, and have to be carried to markets hundreds or thousands of miles distant, it is of the first moment that its railroads should be built with the strictest economy and on the lowest possible capitalization. The low cost of land and the cheapness of material for road-bed are especially favorable to our securing this advantage; but the laws have permitted a system of inflated financiering which neutralizes these natural adaptations and immensely increases the cost of transportation.
As railroads have to be largely built with borrowed money, their construction in this country afforded an opportunity for establishing credit relations with the great lending centres of Europe, which might have been of incalculable value in promoting the development of our vast resources in various directions. England, Holland and Germany have indeed loaned us very large amounts for railroad enterprises; but the law has permitted these undertakings to be conducted with so much concealment, misrepresentation and actual fraud, and has so disregarded the rights of the bondholders, that American credit has become a scandal and a by-word on the European bourses. The result is, that foreign capitalists are seeking other fields of investment; and their respective Governments are encouraging them by opening up new colonies, and thus getting fresh sources for the supply of products which otherwise would have continued to be readily taken from the United States. Such are the rewards of immoral financiering; and these bad methods are directly traceable to the encouragements afforded by our negligently constructed railroad laws.
Perhaps I may best succeed in making myself understood on this subject by illustrating the way in which our railroads are usually built. Under the laws of the State of New York—which are a fair sample of the laws of most other States—a number of persons form a company under the general railroad laws, registering at Albany the proposed route of the road, the amount of capital stock and bonds to be issued, and a few other particulars required in the papers of incorporation. The incorporators then proceed to form themselves into a syndicate or company, for the purpose of contracting to build and equip the road. Here comes the first step in the system of “crooked” financiering. In their capacity of incorporators, the same men make a contract with themselves, in the capacity of constructors. Of course, they do not fail to make a bargain to suit their own interests. They would be more than human if they did. Usually, the bargain is that the construction company undertakes to build the road for 80 to 100 per cent. of the face value of the first mortgage bonds, with an equal amount of stock, and sometimes also a certain amount of second mortgages thrown in, virtually without consideration. The first mortgages are supposed to represent the real cash outlay on the construction and equipment; but, as a matter of fact, the true cash cost of the work done and materials furnished ranges from 60 to 80 per cent. of the amount of first lien transferred to the constructors. The Construction Company disposes of the bonds, partly by negotiating their sale to the public through bankers, at an advance upon the valuation at which they had received them, and partly by using them in payment for rails and equipment. Beyond the profits made from building the road for the first mortgage bonds, there remains in the hands of the constructors the entire capital stock and any second mortgage bonds they may have received, as a clear bonus, to be held for future appreciation, and to keep control of the Company and be ultimately sold on a market deftly manipulated for that purpose.
This is the way in which a large majority of our railroads have been and others are still constructed. It will thus be seen that the actual cash cost of a railroad is ordinarily less than 60 per cent. of the stock and bonds issued against the property, and that its first mortgage exceeds the amount of the legitimate actual cost of the road.
The basis of all the discredit, the embarrassments, the bankruptcies and the robberies of our railroad system is thus laid at the inception of the enterprises. They rest upon an intrinsically rotten and dishonest foundation; and the evil is far from having reached the end of its mischief to the financial, political and social interests of the country. In some few cases, railroads thus exorbitantly capitalized have proved able to earn the interest on their debt, provide for additional outlays on construction and betterments, and even to pay dividends on their stock; but, in a large majority of cases, they have had to undergo a process of financial reconstruction, in order to bring the debts of the Company within its ability to meet its fixed charges. It is not a risky estimate to suppose that of our present 125,000 miles of railroad, with its $7,500,000,000 of stock and debts, 60 per cent. has undergone this process of debt-scaling and rehabilitation. Were it not that the new roads have opened up new country for settlement, which has become an immediate source of traffic, these bad financial results would have been more general and worse than they have proved to be. The risks attending the building of lines into unsettled regions ought to have been a reason why they should be constructed upon conservative principles; but, in reality, the prospects of settling new populations and of tapping new sources of wealth, have been so magnified to the eyes of distant and credulous lenders as to enable the speculative constructors to easily consummate their illegitimate schemes.
The general result of this system of financiering has been to deprive the legitimate original investors of their chances of making a fair return out of their investment. As a rule, the bondholders have provided all the capital expended, and the stockholders have invested nothing. The bondholders incur all the risks; the stockholders have no responsibilities. If the enterprise proves a success, the bondholders get their interest, while the stockholders, without a dollar of original outlay, get vastly more than ever falls to the mortgage creditors through the stock becoming an instrument of profitable speculation. If the enterprise is a failure, the bondholder has to forego interest and finally to accept a new mortgage for a less amount and at a lower rate of interest; whilst the original stockholder has, in the meantime, made money out of artificially “booming” the shares in Wall Street.
The profits realized on these speculative constructions are enormous, and have constituted the chief source of the phenomenal fortunes piled up by our railroad millionaires within the last twenty years. It is no exaggeration to characterize these transactions as direct frauds upon the public. They may not be such in a sense recognized by the law, for legislation has strangely neglected to provide against their perpetration; but, morally, they are nothing less, for they are essentially deceptive and unjust, and involve an oppressive taxation of the public at large for the benefit of a few individuals, who have given no equivalent for what they get. The result of this system is that, on an average, the railroads of the country are capitalized at probably fully 50 per cent. in excess of their actual cost. The managers of the roads claim the right to earn dividends upon this fictitious capital, and it is their constant effort to accomplish that object. So far as they succeed, they exercise an utterly unjust taxation upon the public, by exacting a compensation in excess of a fair return upon the capital actually invested. This unjust exaction amounts to a direct charge and burthen on the trade of the country, which limits the ability of the American producer and merchant to compete with those of foreign nations, and checks the development of our vast natural resources. In a country of “magnificent distances,” like ours, the cost of transportation is one of the foremost factors affecting its capacity for progress; and the artificial enhancement of freight and passenger rates due to this false capitalization has been a far more serious bar to our material development than public opinion has yet realized. The hundreds of millions of wealth so suddenly accumulated by our railroad monarchs is the measure of this iniquitous taxation, this perverted distribution of wealth.
This creation of a powerful aristocracy of wealth, which originated in a diseased system of finance, must ultimately become a source of very serious social and political disorder. The descendants of the mushroom millionaires of the present generation will consolidate into a broad and almost omnipotent money power, whose sympathies and influence will conflict with our political institutions at every point of contact. They will exercise a vast control over the larger organizations and movements of capital; monopolies will seek protection under their wing; and, by the ascendancy which wealth always confers, they will steadily broaden their grasp upon the legislation, the banking and the commerce of the nation.
The illegitimate methods by which the wealth of this class has been accumulated cannot always remain a mystery to the masses. The time will come when every citizen will clearly perceive how his interests have been sacrificed for the creation of this abnormal class; and, when that time comes, a series of public questions will arise that will strain our political institutions to their very foundations. Already the working masses begin to see the dim outline of the gigantic wrong that has been inflicted upon them in common with all other classes. If they do not understand the exact method by which a portion of the rewards of labor has thus been diverted from them, they clearly comprehend which is the class responsible. The labor troubles that have so seriously shaken confidence during the spring of this year have been largely stimulated by an idea that a serious wrong has been done to the workman in the creation of these abnormal fortunes. It is not surprising—although it may lead to disappointing results—if workingmen should reason that, if railroads can afford to make a few men so wonderfully rich, they can afford to pay their employees higher wages and for shorter hours. Nor can we wonder if, when capitalists are on every hand piling up their wealth by the tens of millions, the laborer should conclude that he ought to be able to get a few dollars a week more, or deduct an hour or two off his day’s work, without very seriously hurting the employing class. This may be and is very fallacious reasoning; but it is what might very naturally be expected under these circumstances, from a class who are not trained to think beyond surface depth. It will be of no avail to tell the workmen that this unjust distribution of wealth is final and irrevocable; that there is no power of redress by which a wrong of this nature can be righted; or that, as voting citizens, they are as much responsible as anybody else for permitting the neglects and defects of legislation that have made these inequalities possible. This class never reason either calmly or logically, and it will take a great deal of fruitless agitation to satisfy them of the hopelessness of their methods of seeking reparation.
The Socialistic seductions which have captivated such large masses of the working population of Europe will all the more readily find acceptance among our millions of laborers because they have before their eyes such conspicuous instances of the unequal division of wealth and of the overwhelming power of organized capital. Certainly, if any facts could be supposed to justify the doctrines of Socialism and Communism, it would be the sudden creation of such fortunes as those which, within a very few years, have come into the hands of our railroad magnates. A few years later, the public will understand much better than it now does how facts like these have contributed to the raising of questions of government which will dangerously test the cohesion and endurance of our political institutions.
Artificial methods of establishing our railroad corporations have naturally led to artificial methods of regulating their operations. Over-capitalization incapacitates the roads for competition; for it necessarily holds out a temptation to parallel existing roads by others at a lower capitalization. As roads running between the same points were multiplied, competition for “through” business became more active, until not only were dividends threatened on some of the best lines, but some roads were driven into default on their mortgages. At this point the “pool” was introduced—a device by which all lines running between the same points agree to put their business from through traffic into a common aggregate, to be distributed among the several members according to certain accepted percentages. It was hoped that, in this way, uniformity of charges could be maintained, at such rates as were necessary to make the business satisfactory to each member. This, however, was soon found to be a step “from the mud into the mire.” The pool was discovered to operate as a premium on the construction of new parallels.
Speculators were quick to perceive that they could build new lines on the same routes for much less cost than the old ones, and that, with a lower capitalization, they could easily compel the pool to admit them to membership, with all the privileges of a ready-made traffic and with all the guarantees the pool could afford of exemption from competition, and of ample charges. Thus, the pools that, in the first instance, were made necessary through the evils of speculative methods of construction, became, in turn, the source of a new and even worse form of the same evil. New roads were built, or sets of old detached ones were connected, so as to afford additional parallels to the existing trunk lines, with no other object than to compel the latter to support them by dividing with them a portion of their traffic, or to accept the alternative of a reckless cutting down of rates. The end to this viciously excessive system of construction can only come when the pools have been reduced to such a low condition that they will no longer care to take newcomers into their co-partnership; in which case speculative builders will see no chance for profit in such ventures. The fate of the “Nickel Plate” and of the West Shore speculations, by which nearly 1,000 miles of needless road was built to divide traffic with the Vanderbilt system, serves as a warning against the danger of building roads to live upon pool support; but, nevertheless, the Eastern trunk pool still stands exposed to a great deal of harassing outside competition from possible and contemplated new combinations of existing detached links. Routes of the latter kind are even more formidable competitors than new lines, because they can be provided at a lower capitalization, and have already the support of an established way traffic. It would not be surprising if, within the next three or four years, several new routes should in this way be established between New York and Chicago.
It will thus be seen that the very contrivance intended to stave off the vicious effects of artificial capitalization is contributing, by a sort of punitive process, towards the end of reducing earnings to a just ratio to the true value of the properties. The weakness of the pool, arising from its temptations to new competitors to enter the field, is not the only cause of its failure. Up to this time it has been found impossible to find a form of pool stringent enough to restrain the members from cutting rates against each other. The modes of possible evasion are so numerous, the sacrifices of special advantages that each member has to make are so galling, the small share that remains to each road in a numerously divided business is so small, and the temptations of agents to get freight “by hook or by crook,” in dull times are so irresistible, that the strictest watching and the severest penalties fail to secure a faithful observance of the pool agreements. Much forbearance is shown towards transgressions, and deliberate violations have to be condoned or connived at; but, all the time, the pools are in imminent danger of jealousies and breaches of faith causing their disruption. No sooner have they won public confidence by maintaining harmony through a period of prosperous business, than the public wake up to find that some member has been secretly “cutting,” and the agreements are torn to pieces.
The result is, that the public have lost all confidence in the ability of the pool to regulate competition; and, still worse for the railroads, their managers are losing faith in them also. The great crucial test of this expedient so far as respects the Eastern lines, is likely to come when the number of smaller outside competitors, of the character just alluded to, comes to be increased. The pool will not be likely to admit them into its fold, which already includes too many diverse interests to permit of harmony; and if it did, the danger of disagreements and disruption would be only thereby increased. And yet, if those routes are shut out, they will act as so many free lances, attacking the older lines in every direction, and doing business at rates which will leave the pool companies no alternative but to follow suit. In this dilemma, the outlook for some time ahead is not an encouraging one for the older companies. To my view, it seems very probable that their original sins of construction and their subsequent transgressions of stock “watering” are about to find them out. The natural law of competition is a terrible foe to the violators of commercial justice. It is the inevitable police power of trade. Its working may be evaded for a time; its final conquest over wrongs and monopolies may sometimes be delayed beyond the limits of human patience, and men may at such times lose confidence in its power to right the wrongs of society; but its ultimate success in the restoration of equity and fair-play is as certain as the rising of the sun.
My absolute confidence in the ultimate triumph of this principle prompts me to venture the assertion that, at no very distant period, the wrongs practised in the original construction of our railroads and in the subsequent “waterings” of their stocks, will be compensated through competition adjusting the profits of the companies to the equivalent of a fair return upon a true valuation of the properties; that is, a value measured by what they are able to earn under the conditions of free competition and the now current cash cost of providing like facilities. That, it appears to me, is the solution towards which our railroad problem is now steadily working; and neither Congressional legislation, nor State regulation, nor the resistance of organized capital, can be expected much longer to stave off that result.
It may, however, be very properly asked, whether legislation has no duty in the premises? To me, it appears that it has a very weighty one. The consequences of the original neglect to prescribe proper regulations for the construction, capitalization and financial management of railroads has been so fully exposed by their past history, that the Legislatures will greatly err if they neglect to impose restrictions upon future corporations that will prevent farther repetition or perpetuation of the evils. When the Government bestows upon railroads important privileges and franchises, under which fundamental private rights are held in abeyance for the common good, it is due to the public protection that the recipients of these favors should be held under restrictions which will prevent them from abusing the privilege to the public disadvantage.
When a railroad company capitalizes its property at double its actual cost, and seeks to collect charges calculated to yield dividends upon such false capital, it grossly perverts and abuses the privileges conferred by its charter, and virtually perpetrates a public robbery. This appears to be a perfectly plain proposition, and yet this glaring wrong has been so long tolerated that not only the railroads, but a portion of the public even, have come to regard it as a sort of right inherent in these corporations. One of the first duties of the State Legislatures, therefore, is to enact laws requiring that the stocks and bonds issued against any railroad hereafter built shall, in no case, exceed in the aggregate the true cash cost of the property; the penalty for the violation of this restriction to be forfeiture of charter. The responsibility of managers should be definitely fixed. All extensions, betterments or improvements should be provided for by issues of stock or bonds on like conditions. The issue of mortgages should be restricted within 60 per cent. of the true cost of the property.
In order to prevent wrongful speculative profits being realized by the incorporators, they should be prevented from becoming the constructors of their road, directly or indirectly; and all contracts for construction, equipment, extensions or improvements should be made upon open competitive bids, the lowest bid to be accepted, with substantial guarantees for the faithful performance of the contract. Also, it should be made the duty of a board of State railroad commissioners to see to it that all these conditions are strictly complied with. Regulations should be provided prohibiting issues of stock for any other than construction or equipment purposes, forbidding the payment of dividends not actually earned, and enforcing the amplest publicity of details relating to current traffic and the financial affairs of the companies.
Had our original railroad laws incorporated provisions of this character, our railroads would have all along ranked as the safest and most stable investments of the country; the discredit that hangs over our corporate enterprises would have been averted; transportation would have been done at lower rates with steadier charges, and we should have been saved the social and political excrescence of an aristocracy based upon ill-gotten wealth. After our bitter experience of the dangerous results of neglecting to guard the railroad interest by some such restraints as the foregoing it surely is not too early now to apply these safer methods to all future enterprises of this character. Not only is such legislation due as a measure necessary for the protection of our commerce and investors, but it would go very far towards remedying the evils that have grown up under the old and badly regulated system. To a man of business it is hardly necessary to point out what would be the competitive advantages of roads constructed under the proposed regulations. As a rule, their capitalization would not exceed 50 to 60 per cent. of that of the older companies, and they could, therefore, be run upon a much lower rate of charges.
The thoroughly conservative nature of their organization would bespeak fer them a degree of public confidence which would enable them to get all the capital needed for really legitimate undertakings, whilst purely speculative ventures would be put under conservative check. Under these circumstances new roads could do a profitable business, and yet compete disastrously with the old excessively capitalized companies. The ultimate result of this competition from the new order of roads would inevitably be to reduce the earnings of the older class to a point which would admit of interest and dividends being earned only on the same rate of capitalization as existed among the new-system companies. In other words, the effect of the honest method of capitalization here suggested would be to squeeze all the “water” out of the old companies, and to bring them in effect, though possibly not in form, to the same financial level as the new.
If my reasoning here is correct, there is cause for our great railroad capitalists to look out for the security of their investments. The basis for their wealth may prove far less certain than they have imagined it to be. With the prevailing and steadily increasing public feeling against the methods of railroad capitalists and the working of our railroad system, what assurance can there be that, when a remedy for these corporate wrongs comes to be clearly propounded, it will not be eagerly urged upon the attention of the Legislatures and adopted without much ceremony? The dash of a Governor’s pen is, therefore, all that stands between the railroad millionaire and the sudden extinction of a large portion of his inflated paper wealth. Is this a chimerical conclusion? The question, it seems to me, deserves a far more serious consideration than those most vitally concerned have yet bestowed upon it. No man can confidently deny the possibility of such a result as is here indicated. No one familiar with the present public temper on the subject of railroad monopoly can reasonably question the probability even of a settlement of this kind being ere long resorted to. Under these circumstances, it is a question very pertinent to the times, whether the foundation of our railroad aristocracy is as broad or as firm as it has been supposed to be, and whether a healthy solution of the great railroad problem is as difficult and as remote as some despondent people have represented it to be.
A ONE THOUSAND DOLLAR BOND OF THE STATE OF GEORGIA.
Repudiated.
CHAPTER XXVII.
GEORGIA REPUDIATION BONDS.
How a Sovereign Southern State Cheated the Northern Men who Helped Her in Distress.—A New Way to Pay Old Debts.—Cancellation by Repudiation of Just Claims for Cash Loaned to Sustain the State Government, Build Public Schools and Make Needed Improvements.—Bottom Facts of the Outrage.—The Recent Attempt to Place a New Issue of Georgia Bonds on the Market, while the Old Ones Remain Unpaid.—The Case Before the Attorney-General of the State of New York.—He Examines the Legal Status of the Bonds in Connection with the Savings Banks.—His Decision Prohibits these Institutions from Investing the Hard Earnings of the Working People in these Doubtful and Dangerous Securities.—A Bold Effort to have the Fresh Issue of Georgia Paper Put Upon the List of Legitimate Securities of the New York Stock Exchange Firmly Opposed and Eventually Frustrated.—Reflections on the Bad Policy which Advocated Repudiation and Has Injured Georgia Credit in the Eyes of the World.—General Observations upon the Nature of Repudiation of States’ Debts, and the Moral Influence on the General Credit of the United States.—Successful Appeal of Bondholders of the Repudiated Bonds to the Stock Exchange.
One of the saddest events of my business experience arose from the purest motives on my part, to aid the South in the work of reconstruction, in the way of which, as I have stated in the previous chapter, President Johnson threw the greatest obstacles.
I ventured my money and offered my friendship at a time when that section of the country stood in need of both money and friendship, and used my best efforts to bring about the return of such feelings of fraternal harmony as should exist among all the citizens of this great country. For these kindly offices I was treated with the basest ingratitude by some of the Southern States.
I held a large amount of Southern securities, all issued for full value received, which went into the internal improvements of that section, enhancing the taxable value of its property. These securities bore the great seals of the Sovereign States of Georgia and Alabama.
The dishonor attaching to repudiation in these instances has been brought out in more glaring colors, from the fact that these States have long since become abundantly able to liquidate their obligations, and to erase the black spot from the escutcheons of their chivalrous people.
The people themselves are not so much to blame as the disreputable politicians into whose hands the management of their affairs had fallen.
It is of the sovereign and high-toned State of Georgia that I have most occasion to complain. On account of the bad faith of that State, through her political managers, I suffered a terrible reverse in my fortune, which came near crushing out my financial existence.
It is not, therefore, surprising, I think, that having placed my faith in the integrity of that State and the promises of its officials and governing power, and having been so basely deceived, that I should now be aroused to act in self defence, fight for my rights and do all in my power to cause the bonds or securities for which I paid good money to be redeemed, and to have my just claims satisfied. It has therefore, been incumbent upon me to leave no stone unturned in fighting this battle, with the hope of recovering the money, or a part of it, that was filched from me through the ostensible defalcations of these sovereign and chivalrous States.
About thirteen years ago the repudiation which has reflected such disgrace upon the South became prevalent in that section, and took the character, for a time, of a severe financial epidemic.
It was for this reason that the Legislature of the State of New York, as well as the legislatures of several other States, considered it necessary for the protection of the savings banks, which are the custodians of many hundreds of millions, chiefly of the hard earnings of the working people, to prohibit these institutions from investing in, or loaning upon, the securities of any State in the Union that had within ten years previously repudiated any of its lawful obligations.
The laws of the State of New York, in chapter 409, section 260, of the laws of 1882, provides that savings banks shall be prohibited from investing money in stocks or bonds of any State which, in the language of the statute, “has within ten years previous to making such investment by such corporation defaulted in the payment of any part of either principal or interest of any debt authorized by any legislature of such State to be contracted.”
It was for this reason that the newly issued securities of some of the Southern States have been unable to find a resting place in the monied institutions of the North.
The State of Georgia, recently finding that she had some obligations becoming due, and seeing that money was cheap in the North, and that more than ten years had expired since she repudiated her former obligations, thought there was a good opportunity of issuing a fresh batch of these so-called securities, similar to those that had been dishonored in 1873.
The politicians of Georgia thought there was a good opening in the State of New York to remove the restriction placed upon the savings banks in 1882. They saw that the Governor and the Legislature were both Democratic, with a Democratic Attorney-General also, and therefore determined to take advantage of this political condition, which they supposed was highly favorable to their scheme of stealing a march upon the holders of the old repudiated bonds of Georgia, who had been chiefly instrumental in getting the act passed for the safety of savings banks’ depositors in the State of New York.
The Georgia politicians aimed at having the restriction of the savings banks removed, so far as it related to their State, in order to afford them an opportunity of issuing several millions of 4½ per cent. bonds for the purpose of taking up an old issue of the 7 per cent. bonds, thus effecting a considerable saving to the taxpayers of their State in this reduction of interest.
With the purpose of having this matter arranged as quietly as possible, two of the ablest lawyers of the State of Georgia were surreptitiously sent to Albany to make argument before the Attorney-General, Mr. Denis O’Brien, and to attempt to convince that official, in a very plausible manner, why the restriction should be removed from the savings banks in the case of Georgia. No opposition was expected, and the enthusiastic hope was indulged by those who were engineering the scheme that upon this ex-parte statement of these astute Georgia lawyers a favorable opinion would be elicited from the Attorney-General of this State, which would justify the Superintendent of the Bank Department in issuing an order to remove the restriction which precluded the savings banks of New York from investing in Georgia bonds, on the ground that the State had not repudiated within ten years. The repudiation could be traced back thirteen years, instead of ten.
Pursuant to this application, a small item of a few lines appeared in one of the Atlanta papers, which stated that Mr. Calhoun had just returned from Albany, having made a very strong and forcible appeal to the Attorney-General there, urging him that the restriction on the part of the savings banks be removed so far as Georgia was concerned.
This item was telegraphed to me, and on receiving the despatch I notified the holders of the repudiated bonds, and wired the Attorney-General asking him when a hearing of the other side could be had.
When the day arrived for the hearing before the Attorney-General, Mr. Calhoun was surprised to find that there was any opposition to his application, as the business had been so quietly managed that it was supposed by the Georgia members of the Bar that the bondholders would hardly be apprised of it until everything should be fixed according to the pre-arranged programme, and in favor of the repudiating State obtaining fresh and unlimited credit without settling up the old score. Mr. Calhoun was assisted in his able argument on the sovereign right of repudiation by the Hon. N. J. Hammond, Member of Congress and ex-Attorney-General of Georgia.
In reply to these great lights of the Southern Bar, whose genius would have shone more brilliantly in an honest cause, I made the following address:
Henry Clews’ speech before the Attorney-General of the State of New York, June 20, 1885:
The original act of repudiation by the State of Georgia has been repeated each six months since that period to the present date, by the refusal of the State to recognize and pay the coupons on said bonds as they matured. This alone repeats the repudiation of that State twice each year for the past ten years at least, and therefore is a continuance of the repudiation from the time of the original vile act up to the present date; besides which, the bonds repudiated had twenty years to run. The maturity of said bonds does not expire until 1890. The repudiation should be considered, therefore, as continuous during the entire period, from the date of the issue of said bonds until 1890, five years hence. If it is to be accepted that the test of a State’s credit is to be able to show a record free from fresh repudiation for a period of ten years, and that repudiation is not a continuous repudiation until such obligations are fully settled and provided for, what is to prevent a State from negotiating a fabulously large amount of bonds, and thereby place an amount sufficiently large in her treasury to admit of bridging over for the required ten years, and, after making such ample provision, then pass an act, as heretofore, repudiating the bonds issued, and keep repeating it each decade? Supposing the same rule held good with a bank robber—and there is, as far as integrity goes, really no great difference between the two, only one seeks protection in Canada and the other behind her sovereign rights, which is her Canada refuge. The robber breaks into a savings bank, guts it of several millions of dollars, flees to Canada, and there lives in affluence for ten years. How silly it would appear if, after ten years, provided he could show a record free from thieving during that time, he had the legal right then to come back, and thereby be entitled to a clean record as an honest man, and in consequence be accorded a high credit. The position of the State of Georgia in assuming such a role, in coming here at this time to ask our savings banks to aid her in such a nefarious business, simply lacks a parallel for audacity. The management of savings banks must be conducted so as to inspire confidence with the depositors and with the entire community also. It is necessary, especially at panic periods, for full confidence to be felt in the investments of such institutions. If the prohibition is removed, as is now sought to be, and savings banks be permitted to invest in Georgia securities, and one of them should buy $500,000 of the bonds, I venture the prediction that such an investment will sooner or later form the basis of a rumor which will cause a panic among its depositors and break that institution. This would result in a most serious disaster to probably thousands of poor people whose money had been lodged there for safe-keeping. The mere whisper during a panic that a certain institution had $500,000 of Georgia bonds, and they were about to be repudiated, would bring about just such a disaster as I have stated.
I ask your Honor if it would be wise for any savings bank to be permitted by the Superintendent of the Banking Department to become thus exposed to ruin? A State that is abundantly able to meet her obligations and dishonors them is too despicable for either credit or tolerance in a civilized community, and it is a disgrace to the nation that States comprising it have the power to make such obligations and repudiate them at will and screen themselves behind their sovereign rights, whereby they cannot be sued, and in consequence leave the outrageously wronged innocent bondholders without means of redress whatsoever. If the United States Government ever expects to obtain that permanent high credit in the money markets of the world to which the immense resources of this magnificent country justly entitle her, the great and growing evil of State repudiation must be remedied. For States to repudiate with impunity, as the State of Georgia has done, leaving no means whatever for redress on the part of the victimized creditors, is a blot upon the escutcheon of the whole country. This is not a fight, your Honor, on the battle field against the South; it is a fight on the financial field, and, as it is second only in importance to the other, it must be settled, and now is the time to strike the blow, as it will do the most good in that direction. We, the creditors of Georgia, have not only borne the loss and hardship of having our securities made valueless by a legislative body, and many of us ruined thereby, but we have also been vilely defamed—being branded as conspirators to rob the State—simply because we were found to be holders of these dishonored bonds. This has been done by the State to cover up her own infamy, and make it appear that we were the guilty parties and not the State. The attitude of the State of Georgia, your Honor, is not unlike that of a pickpocket, who, after rifling his neighbor’s pockets, is the first to cry “stop thief” to elude detection. All that the bondholders ask and claim is to have the entire case submitted to a proper judicial tribunal. This right we have been denied by the State, and the Constitution leaves us powerless to enforce it. The State simply says, the bonds are fraudulent and we will not pay them. It is a very remarkable circumstance, however, that there has not been a single one of the numerous officials, from ex-Governor Bullock down, who were connected with the issue of these so-called fraudulent bonds, prosecuted to conviction in the thirteen years that have intervened since their issue. Still these bonds are all repudiated on the ground of being fraudulently issued, and the innocent bondholders alone are made to suffer the harsh penalty imposed for having staked their money on their belief in the honor and integrity of the people of Georgia, which it is quite apparent are now non est.
I addressed a letter to your Honor on May 27th last, which contains important information in connection with these repudiated bonds. I ask permission to read this letter at the present time, so that it may become a part of the evidence in this case.
The following circular letter contains a variety of opinions analyzing the true relations of the State of Georgia to her creditors, and clearly setting forth the nature of her liability in the matter of the repudiated bonds in connection with the house of which I was the head:
REPUDIATION ROBBERY BY THE “SOVEREIGN” STATE OF GEORGIA.
“The divine doctrine of State Sovereignty, which makes a State
too dignified to be sued for its debts, ought to make
it also too respectable to cheat its creditors”
Notice.—Managers of Insurance Companies or Savings Banks should be and are likely to be held responsible, by stockholders and depositors, for any losses incurred in the event of their buying or loaning upon any bonds issued hereafter by States which are under the cloud of repudiation.
New York, May 27, 1885.
Hon. Wm. A. Post, Deputy Attorney-General, Albany, N. Y.:
Dear Sir:—I deferred answering your telegram of Saturday until this morning for the purpose of ascertaining whether the bondholders’ counsel would be in readiness to meet you at the time proposed, and only ascertained the fact this morning that he would, so I wired you accordingly. I presume that this Georgia repudiation question comes before you for the purpose of removing the prohibition from the savings banks of this State to their buying or loaning upon Georgia State bonds, owing to that State being under the cloud of repudiation. The prohibition of the savings banks, issued by Mr. A. B. Hepburn, the former Superintendent of the Banking Department, was based upon a thorough and exhaustive examination in reference to all matters appertaining thereto. This I have reason to know, as that gentleman visited New York and took my testimony and others in the case. The State of Georgia has always charged, as the justification for repudiation, that R. B. Bullock, Governor at the time of the issue of said bonds, had issued the bonds without proper legislative authority, and besides had stolen or misappropriated most of the avails. About three years since Governor Bullock visited Atlanta, Ga., and demanded his trial under the several indictments against him. The trial came up soon thereafter, and he was acquitted on all the charges. This gentleman is now a resident of Atlanta, Ga., and is to-day one of its most prominent citizens. It has been also charged that as he was a Northern born man, that he was a “carpet-bag” Governor, and for that reason the bonds were not a legal issue. That attitude is also unwarrantable, as the ex-Governor remained South during the period of the entire war, and took a prominent part on the Confederate side, in giving aid and comfort, and thereby can justly be considered as being a Southerner and not a Northerner in his interests and feelings. Most of the bonds repudiated were passed upon as legally issued and properly signed, by our best lawyers, such as Messrs. Evarts, Southmayd & Choate, ex-Judge Emott, Abbott Bros., E. Randolph Robinson, the brother of Judge Sedgwick, of this city, and others.
Some of these repudiated bonds were also passed upon by the New York Stock Exchange, and because repudiated were afterwards stricken from the list of securities to be dealt in. The face of these securities were worth par a few days prior to their repudiation, and immediately after that Act was passed were reduced to no more than the value of the paper upon which they were engraved. The same may at any time be the fate of any new securities to be issued by that State. Those who had these bonds were and are innocent parties, and among the sufferers are Trust Companies and savings banks. The Metropolitan Savings Bank holds $100,000 of the 7 per cent. Georgia gold bonds, bought about par; the Brooklyn Trust Trust Co. holds $100,000; the Union Trust Co. holds $100,000; the Commercial Warehouse Co. held between $300,000 and $400,000 of the bonds, and their repudiation caused the failure of that institution. The New York State Loan and Trust Co., Henry A. Smyth, President, also had $100,000 of the bonds, which loss was largely instrumental in causing the collapse of that concern. The Broadway National Bank holds $200,000 of these bonds as collateral, upon which they loaned $160,000; Morton, Bliss & Co., Morris K. Jesup, Drexel, Morgan & Co., Ezra A. Boody, George Morgan, son-in-law of J. S. Morgan, of London; J. Bowman Johnson & Co., Richard Irvin & Co., L. Von Hoffman & Co., Russell Sage and many other first-class parties that I can name are prominent sufferers resulting from Georgia’s repudiation; besides which, my firm in 1873 held over $2,500,000 State of Georgia securities, all of which had been paid for or advanced upon, and my firm’s suspension at that time was attributable thereto.
The only way to do, in my judgment, is to make the Southern States which are now under the serious cloud of repudiation, understand that their credit is impaired and facilities for obtaining money materially lessened because of it. Then, realizing that as their position, and finding that they are shut out of the financial markets of the world owing thereto, they will soon make a compromise with their lenient creditors, and remove the blot from their escutcheons. The Federal Government is comprised of the various States of the Union, and to-day enjoys as high a credit as any nation in the world. If the various States comprising the United States are permitted, however, to repudiate with impunity and screen themselves behind their sovereign rights so that creditors have no recourse, the odium will soon fall upon the General Government, and its credit will finally become tarnished if not crippled in consequence. The State of Georgia, as can be proven, received full value. The internal improvements in Georgia bear testimony of this. The taxable property of the State has been immensely enhanced by these improvements, and the debt repudiated is a mere bagatelle as compared with the ability of the State of Georgia to provide for it. She has become rich in late years, and if the stain of repudiation should be wiped out, would stand an excellent chance of becoming a favorite resort for emigration and for the flow of capital. Emigrants from other countries to this, in locating, first look to the credit enjoyed by the State their attention is called to, and if found high, their conclusion is that there is safety for property, and if so, corresponding safety for life; but they will not go to a repudiating State, and in this way the South is held in check in the development of her resources, owing to the want of new blood. The bondholders of the State of Georgia have frequently offered to leave all points at issue in reference to Georgia’s repudiation to the Courts of that State, to the United States District Judge, or to arbitration, the parties to be selected by both sides, all of which has been denied, the reply being the “bonds are repudiated, and we simply will not take any steps to provide for their recognition or payment, and what are you going to do about it?” Under the circumstances, creditors are powerless, of course, to do anything, as the State cannot be sued. If you desire it, I will send you a sample bond of some of the issues repudiated, so that you may see how beautifully the signatures are written, and how firmly fixed the seal of the Commonwealth is placed upon them, besides the magnificent steel engraved workmanship of the Continental Bank Note Company of this city. If there was not a prospect of the State of Georgia being forced by public opinion to provide for these bonds at some future time, they would be worthy to be framed and hung up in our parlors as a complete and fine work of art.
Judge Lochrane, former Chief-Justice of the State of Georgia, has wired me that he will appear before you on Wednesday; Colonel R. A. Crawford, of Georgia, will also do so; Messrs. Abbott Brothers, of this city, and others will appear before you.
You will please append this communication as a part of the testimony, and should you desire more on the subject, call upon me therefor.
I have the honor to remain,
Your obedient servant,
Henry Clews.
Edward Brandon, Esq., Chairman of the Committee on the Admission of Securities to the N. Y. Stock Exchange:
Dear Sir:—It is currently reported that the State of Georgia is about to apply to your Committee to list a new issue of bonds. In behalf of myself and others who have suffered most seriously by that State’s unwarrantable repudiation of bonds, which have as full a right to an equal standing as representing the credit of the State of Georgia as possessed by the new bonds to be issued, and fully realizing that the cruel fate of the former merely represents what may be that of the latter, I claim the right, as a member of the New York Stock Exchange, as a sufferer to the extent of several millions of dollars by the State of Georgia’s bad faith, to protest against the admission of any new securities hereafter to be issued by that State until her repudiated bonds are recognized and provided for.
Yours very truly,
Henry Clews.
Ex-Governor Bullock’s Democratic successor, soon after he was elected to that position, appointed as Attorney and Agent for the State of Georgia, one of the State’s ablest lawyers, a gentleman distinguished as having been a member of the Confederate Congress, to investigate all the business transactions between Henry Clews & Co. and the State of Georgia. Under his signature as Attorney and Agent for the State, he makes the following statement: “I would say, with a great deal of pleasure, that after a very thorough and complete examination of the books of account, papers and correspondence of Messrs. Clews & Co., so far as they relate to transactions of that house with the State of Georgia during Governor Bullock’s administration, I am satisfied that in all the dealings of that firm with the State of Georgia, they have acted with both fairness and liberality, and I am convinced that in all these matters Mr. Clews did nothing that would not bear the closest scrutiny, and he did nothing, in my opinion, to affect his character for integrity and fair dealing. I make this statement with the more pleasure because I began this examination of accounts of Clews & Co. under impressions very unfavorable to Mr. Clews.”
The opinion of ex-Governor Brown, now our able senior United States Senator, was asked by thirty-five members of the Legislature of 1873. In the course of a comprehensive and exhaustive argument, the distinguished Senator says: “The State will be driven to abandon this position (legislative repudiation) and to permit a case to be made by her creditors to test the validity of these bonds in the courts of the country, or she must stand dishonored in the estimation of all good men, and her credit must sink to a ruinous depth.”
The late ex-Governor Alexander H. Stephens, ex-Vice-President of the Southern Confederacy, is on record as saying, in reference to this repudiation, that it is “nothing short of public swindling. Not less infamous than obtaining money under false pretences.” But the partisan feeling was then so intense that even the lamented ex-Governor Jenkins was hardly accorded a respectful hearing in the Constitutional Convention, of which he was president, when he plead against sweeping repudiation without granting the holders a judicial hearing. Ex-Governor Jenkins said on that memorable occasion: “Now, sir, I take this ground: that for the proper examination and investigation oi these claims, neither the Legislature nor this Convention, nor the people themselves, are a proper tribunal to decide these matters. They ought to be examined and determined judicially. It will now, I presume, be admitted that the five years’ time between legislative and constitutional convention repudiation was not allowed to pass unnoticed by the parties having these bond claims against the State. Having waived our sovereignty in the past to allow the State to be sued in every county in the State on claims for small-pox expenses, I submit that our sovereignty ought not to be plead to bar so important an issue as that now under consideration. The State can, in no event, be put to loss. The whole State has been largely benefited by the legislation and by the executive action which was subsequently repudiated. We have been for fifteen years past collecting annual taxes on fifty millions of enhanced value of our taxable property; an increase which is directly traceable to the good effects of the new railroads built under that legislative and executive authority. Shall we—can we honestly receive these benefits and repudiate our liabilities?”
An interview with ex-Governor Rufus B. Bullock, of Georgia, May 29th, 1885:
A reporter called upon ex-Governor Bullock at his rooms, Fifth Avenue Hotel, and obtained the following interview:
Governor Bullock: “Any information in my possession is at your service. I have published from time to time, over my own signature, my views on this subject, and I have no objections to repeating them. I desire to say, however, that I am in no wise a party to the recent proceedings which have been had before the Attorney-General of New York. I was in the city on private business and without any previous knowledge of the proposed hearing. I attended the hearing out of curiosity, expecting to hear an argument by ex-Chief Justice Lochrane, and while there was invited by the Acting Attorney-General to respond to his inquiries. This I did with the result as reported in your valuable paper. During my administration in 1868-’69-’70 and ’71, bonds of the State were issued for State purposes, and the endorsement of the State was placed upon certain railroad bonds under the authority of law.
During the wild excitement that resulted in and followed the overthrow of the Republican government in Georgia, nearly all the acts of Republican administration were repudiated, among them its financial transactions, and up to this day and hour the questions of fact have never been permitted to reach any judicial tribunal.
The people of New York State are fair-minded, law-abiding and honest, and whenever they can be informed of the truth will fearlessly follow it; but with regard to the real merits of this repudiation, no light has reached them because our courts have been closed.
It is asserted by the holders of these repudiated obligations—and in this assertion I concur—that every bond was issued in accordance with law, and that the State is now in the enjoyment of the benefits resulting therefrom. In the exciting times to which I have referred, a majority of the then Legislature decided that the State was not bound by the acts of its predecessors, and therefore these obligations were null and void.
This is, of course, a question of law, and not of legislation. I am sure that now, when partisan passion has subsided, both parties to this controversy would cheerfully acquiesce in any decision reached by our Supreme Court, and that the holders of these defaulted securities would accept whatever is awarded them in a long term bond at a low rate of interest, and on such an adjustment all parties, at home and abroad, could unite in maintaining the high financial credit to which the Empire State of the South would then be entitled.
In December of last year the Atlanta Constitution, discussing this subject, used the following language: “The burden of his complaint is, that the bonds have never had a hearing in court. This comes with poor grace from the ex-Governor, who, when the validity of the bonds issued under his administration was being discussed by the legislative committee, was absent from this country, his whereabouts unknown, and his testimony not procurable. The bonds were ‘in court’ then, and as Governor Bullock was not present with his evidence when it was needed, he should not complain that a new hearing is not had for his benefit.” To this I made reply, which the Constitution kindly published, and I will thank you to copy as follows: “I desire to say that I was not absent from the country. My whereabouts were known, and my testimony was before the committee in the full and complete report of the financial condition of the State which I made to my successor, sustained by the official records of the Executive and State Departments. I never received a request from that committee to come before them in person, and my presence would not have added to the information in their possession. Every request received by me from my successors, to aid in their investigations, has been promptly complied with. In accordance with such request I met Dr. Bozeman, financial agent, Attorney-General Hammond and Governor Smith, in New York, and also subsequently, Colonel Snead, Attorney for the State, and Colonel Kibbe, chairman of committee. No fact within my knowledge has ever been withheld, nor have I ever neglected any proper opportunity to contradict the statement that any of the bonds issued during my administration and reported to my successor were ‘bogus.’ But, Mr. Editor, the question is, shall a debtor pass on the validity and enforce judgment against his own indebtedness? I submit that a legislative investigating committee is not ‘a court’ in the sense that its findings are conclusive on questions of law. To hold a question so decided to be res adjudicata, is to sustain a legislative usurpation of the judicial functions of the government. If your position be well taken, that because the Legislature has decided against the bonds, the case is res adjudicata, and the judiciary is precluded—of what avail is our constitutional guarantee that the executive, legislative, and judicial branches of the government shall be separate and distinct, and that neither shall encroach upon the functions of the other? What protection has a citizen for his property if a legislative decision upon a legal question must be regarded as final res adjudicata?
Does not the taking of other people’s money to build up our railroads, and refusing those people a hearing in courts of our own creation, before judges of our own election, indicate a want of confidence in the justice of our cause? The Territory and State of Minnesota used other people’s money to open up her lands by the construction of railroads, just as Georgia did, pledged the faith of the State for repayment, and then repudiated, just as Georgia did. After twenty years’ delay, justice has been done, and her obligations, as ascertained through her court, have been paid. I have faith to believe that the Empire State of the South will eventually keep pace with her sister States in the Union in meting out exact justice through her courts to every man, come from whence he may.
Hon. Wm. A. Post, Deputy Attorney-General of this State, by appointment, visited this city last Friday to take evidence on the Georgia repudiated bond question, the object being to determine the legal status of a new issue of bonds by the State of Georgia in connection with the savings banks of this State. Owing to the repudiation of that State, at present these institutions are debarred from investing in bonds of any repudiating State, and the effort now is being made by the representatives of the State of Georgia to remove that barrier, so that the savings banks can be gutted of their surplus means and filled up with the bonds issued by that State, which are more than likely to share the wicked fate of repudiation, as previous issues to the extent of $8,000,000 have done. The savings banks managers, even in the event of obtaining a decision authorizing them to take Georgia bonds for investment, should be held personally liable for any losses that may fall upon such institutions if they hereafter invest the funds of widows and orphans in a security which, judging from past experience, is almost sure to be wiped out and made worthless. Mr. Clews charged that Mr. Calhoun’s appearance in representing the State before the Attorney-General at Albany was a surreptitious proceeding, and was only heard of by mere chance by the holders of the repudiated bonds through a squib in a Georgia paper. He also stated that the bondholders had patiently waited twelve years for their money, and no body of creditors had ever been so lenient as those of the State of Georgia, and justice demanded that these long-suffering and much-defamed creditors should be settled with prior to the financial world according to the State of Georgia a sufficiently high credit to admit of her floating any new issues of bonds. A motion was made to adjourn the meeting until the 20th, which Mr. Post said he would accede to after asking ex-Governor Bullock a few questions in relation to the connection of the firm of Henry Clews & Co. and the State of Georgia during the time he was its Governor. He desired to make these inquiries now, as the ex-Governor was present and might not be at the adjourned meeting. Mr. Clews requested permission to state that his firm—Henry Clews & Co.—had never been agents for the State of Georgia, but merely acted for her as bankers and brokers. The agent of the State during the entire period of Governor Bullock’s term of office was the Fourth National Bank of this city. He stated that his firm received no bonds, excepting by purchase or as collateral, and advanced money to the State as it was needed. At one time the State owed for said advances as much as $1,650,000; the money so advanced was stated by Georgia’s officials as required to meet the expenses of the government of the State. Ex-Governor Bullock fully ratified Mr. Clews’ statement. He admitted that the Fourth National Bank was the State financial agent, and that he had placed a large quantity of bonds with Henry Clews & Co. to market and as collateral for advances. “I will say,” said the Governor, “that every dollar secured on the sale or pledge of these bonds was received by the State, and it was expressly agreed that the firm of Henry Clews & Co. should hold all the bonds in their hands as security for the indebtedness due them by the State of Georgia.”