ABA Banking Journal - November/December 2017 - 50

> FROM THE VAULT

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
50

ABA BANKING JOURNAL | NOVEMBER/DECEMBER 2017

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.



Table of Contents for the Digital Edition of ABA Banking Journal - November/December 2017

Chairman’s View
Upfront
Legal Briefs
Economic Outlook
Power Up Profile
Pitching In
Choices and Options Down on the Farm
Eager or Not, Every Board Needs an M&A Strategy
Adapting to Survive
More Than Just a Drink
Operations
Payments
Small Business Lending
Human Resources
ABA Compliance Center Inbox
From the States
Corporate Social Responsibility
Index of Advertisers
From the Vault
ABA Banking Journal - November/December 2017 - Intro
ABA Banking Journal - November/December 2017 - ebelly1
ABA Banking Journal - November/December 2017 - ebelly2
ABA Banking Journal - November/December 2017 - cover1
ABA Banking Journal - November/December 2017 - cover2
ABA Banking Journal - November/December 2017 - 3
ABA Banking Journal - November/December 2017 - 4
ABA Banking Journal - November/December 2017 - 5
ABA Banking Journal - November/December 2017 - 6
ABA Banking Journal - November/December 2017 - 7
ABA Banking Journal - November/December 2017 - Chairman’s View
ABA Banking Journal - November/December 2017 - 9
ABA Banking Journal - November/December 2017 - Upfront
ABA Banking Journal - November/December 2017 - 11
ABA Banking Journal - November/December 2017 - 12
ABA Banking Journal - November/December 2017 - 13
ABA Banking Journal - November/December 2017 - 14
ABA Banking Journal - November/December 2017 - 15
ABA Banking Journal - November/December 2017 - Legal Briefs
ABA Banking Journal - November/December 2017 - 17
ABA Banking Journal - November/December 2017 - Economic Outlook
ABA Banking Journal - November/December 2017 - Power Up Profile
ABA Banking Journal - November/December 2017 - Pitching In
ABA Banking Journal - November/December 2017 - 21
ABA Banking Journal - November/December 2017 - 22
ABA Banking Journal - November/December 2017 - 23
ABA Banking Journal - November/December 2017 - 24
ABA Banking Journal - November/December 2017 - 25
ABA Banking Journal - November/December 2017 - Choices and Options Down on the Farm
ABA Banking Journal - November/December 2017 - 27
ABA Banking Journal - November/December 2017 - Eager or Not, Every Board Needs an M&A Strategy
ABA Banking Journal - November/December 2017 - 29
ABA Banking Journal - November/December 2017 - Adapting to Survive
ABA Banking Journal - November/December 2017 - 31
ABA Banking Journal - November/December 2017 - 32
ABA Banking Journal - November/December 2017 - 33
ABA Banking Journal - November/December 2017 - More Than Just a Drink
ABA Banking Journal - November/December 2017 - 35
ABA Banking Journal - November/December 2017 - Operations
ABA Banking Journal - November/December 2017 - 37
ABA Banking Journal - November/December 2017 - Payments
ABA Banking Journal - November/December 2017 - 39
ABA Banking Journal - November/December 2017 - Small Business Lending
ABA Banking Journal - November/December 2017 - 41
ABA Banking Journal - November/December 2017 - Human Resources
ABA Banking Journal - November/December 2017 - 43
ABA Banking Journal - November/December 2017 - 44
ABA Banking Journal - November/December 2017 - ABA Compliance Center Inbox
ABA Banking Journal - November/December 2017 - From the States
ABA Banking Journal - November/December 2017 - 47
ABA Banking Journal - November/December 2017 - Corporate Social Responsibility
ABA Banking Journal - November/December 2017 - Index of Advertisers
ABA Banking Journal - November/December 2017 - From the Vault
ABA Banking Journal - November/December 2017 - cover3
ABA Banking Journal - November/December 2017 - cover4
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