J.P. Morgan, Railroad Referee

By John Steele Gordon

Bankers do a lot more than just accept deposits, make loans and underwrite securities. They give advice, warn clients against dangerous strategies—and even sometimes act as referees.

Such was the case of the Pennsylvania and New York Central Railroads, two of the largest railroads in the country in 1885. They competed fiercely on the trunk routes, such as between New York and Chicago, while enjoying monopolies—with tariffs to match—on their branch lines.

The customers on these branch lines naturally resented being gouged, and two of the Pennsylvania Railroad’s biggest customers, Andrew Carnegie and John D. Rockefeller, were in a position to do something about it. They began building a new line called the South Pennsylvania to run from Harrisburg to Pittsburgh and compete with the Pennsylvania Railroad. One of the investors in the South Pennsylvania was William H. Vanderbilt, the majority shareholder of the New York Central.

In retaliation, when a small road on the west side of the Hudson River went bankrupt, control was bought up by the Pennsylvania Railroad, in order to compete with the New York Central’s line on the east side of the river. Vanderbilt was outraged. “There is not a dollar’s worth of new business” in that railroad, he fumed. “All the business the road does is stolen from the Central.” Of course, the railroad he was building in Pennsylvania was intended to do the same thing.

J.P. Morgan sat on the Central’s board. His partners in New York, the Philadelphia banking firm of Drexel and Co., had financed the Pennsylvania Railroad for years. They both wanted to end this beggar-thy-neighbor competition that was mutually hurting the two roads. The stock of the New York Central had declined from $131 to $82 per share.

In the summer of 1884, Morgan and Vanderbilt agreed to try to negotiate a peace treaty with the Pennsylvania. Morgan invited top Pennsylvania executives George B. Roberts and Frank Thompson to meet with the New York Central’s president, Chauncey Depew, on board Morgan’s yacht, Corsair. He picked them up at the Jersey City pier, near the Pennsylvania Railroad’s terminal, on a hot July morning. They headed north up the river as far as Garrison, 50 miles north, and then back down as far as Sandy Hook at the entrance to New York harbor.

Depew urged the Pennsylvania men to end what he called the “ruinous” competition of building parallel lines and endless rate wars. These tactics added nothing to the bottom line of either railroad, Depew argued, and badly affected stock prices.

Lunch was served as Corsair sailed up and down the river. Morgan argued that this sort of competition was not only bad for business; it was adversely affecting the flow of European, and especially British, capital into American railroads as they continued their expansion across the continent. No agreement, Morgan implied, meant no further European investment.

Thompson came around to Morgan’s way of thinking, but as the afternoon wore on, George Roberts remained adamant. Only when Corsair tied up in Jersey City at 7 p.m. did Roberts, shaking hands with Morgan on the dock, say, “I will agree to your plan and do my part.” The West Shore road, leased to the Central, became little more than a local passenger line. The construction of the South Pennsylvania was stopped. The stock prices of the two roads rose immediately.

But the partial construction of the South Pennsylvania was not a total loss. In the 1930s, the abandoned tunnels were incorporated into the Pennsylvania Turnpike—the first long-distance, limited-access U.S. highway, which would in time usher in a wholly different way of American life.

JOHN STEELE GORDON is an acclaimed economic historian. His books include An Empire of Wealth, Hamilton’s Blessing and The Great Game.