The streets of practically all American cities, as they appeared in 1870
and as they appear today, present one of the greatest contrasts in our
industrial development. Fifty years ago only a few flickering gas
lamps lighted the most traveled thoroughfares. Only the most prosperous
business houses and homes had even this expensive illumination; most
obtained their artificial light from the new illuminant known as
kerosene. But it was the mechanism of city transportation that would
have looked the strangest in our eyes. New York City had built
the world's first horse-car line in 1832, and since that year this
peculiarly American contrivance has had the most extended development.
In 1870, indeed, practically every city of any importance had one
or more railways of this type. New York possessed thirty different
companies, each operating an independent system. In Philadelphia,
Chicago, St. Louis, and San Francisco the growth of urban transportation
had been equally haphazard. The idea of combining the several street
railways into one comprehensive corporation had apparently occurred to
no one. The passengers, in their peregrinations through the city,
had frequently to pay three or four fares; competition was thus the
universal rule. The mechanical equipment similarly represented a
primitive state of organization. Horses and mules, in many cases hideous
physical specimens of their breeds, furnished the motive power. The
cars were little "bobtailed" receptacles, usually badly painted and more
often than not in a desperate state of disrepair. In many cities the
driver presided as a solitary autocrat; the passengers on entrance
deposited their coins in a little fare box. At night tiny oil lamps
made the darkness visible; in winter time shivering passengers warmed
themselves by pulling their coat collars and furs closely about their
necks and thrusting their lower members into a heap of straw, piled
almost a foot deep on the floor.
Who would have thought, forty years ago, that the lighting of these dark
and dirty streets and the modernization of these local railway systems
would have given rise to one of the most astounding chapters in
our financial history and created hundreds, perhaps thousands, of
millionaires? When Thomas A. Edison invented the incandescent light, and
when Frank J. Sprague in 1887 constructed the first practicable
urban trolley line, in Richmond, Virginia, they liberated forces that
powerfully affected not only our social and economic life but
our political institutions. These two inventions introduced anew
phrase--"Public Utilities." Combined with the great growth and
prosperity of the cities they furnished a fruitful opportunity to
several particularly famous groups of financial adventurers. They led to
the organization of "syndicates" which devoted all their energies, for
a quarter of a century, to exploiting city lighting and transportation
systems. These syndicates made a business of entering city after city,
purchasing the scattered street railway lines and lighting companies,
equipping them with electricity, combining them into unified systems,
organizing large corporations, and floating huge issues of securities.
A single group of six men--Yerkes, Widener, Elkins, Dolan, Whitney,
and Ryan--combined the street railways, and in many cases the lighting
companies, of New York, Philadelphia, Chicago, Pittsburgh, and at least
a hundred towns and cities in Pennsylvania, Connecticut, Rhode Island,
Massachusetts, Ohio, Indiana, New Hampshire, and Maine. Either jointly
or separately they controlled the gas and electric lighting companies
of Philadelphia, Reading, Harrisburg, Atlanta, Vicksburg, St. Augustine,
Minneapolis, Omaha, Des Moines, Kansas City, Sioux City, Syracuse, and
about seventy other communities. A single corporation developed nearly
all the trolley lines and lighting companies of New Jersey; another
controlled similar utilities in San Francisco and other cities on the
Pacific Coast. In practically all instances these syndicates adopted
precisely the same plan of operation. In so far as their activities
resulted in cheap, comfortable, rapid, and comprehensive transit systems
and low-priced illumination, their activities greatly benefited the
public. The future historian of American society will probably attribute
enormous influence to the trolley car in linking urban community with
urban community, in extending the radius of the modern city, in freeing
urban workers from the demoralizing influences of the tenement, in
offering the poorer classes comfortable homes in the surrounding
country, and in extending general enlightenment by bringing about a
closer human intercourse. Indeed, there is probably no single influence
that has contributed so much to the pleasure and comfort of the masses
as the trolley car.
Yet the story that I shall have to tell is not a pleasant one. It is
impossible to write even a brief outline of this development without
plunging deeply into the two phases of American life of which we have
most cause to be ashamed; these are American municipal politics and
the speculative aspects of Wall Street. The predominating influences
in American city life have been the great franchise corporations.
Practically all the men that have had most to do with developing our
public utilities have also had the greatest influence in city politics.
In New York, Thomas F. Ryan and William C. Whitney were the powerful,
though invisible, powers in Tammany Hall. In Chicago, Charles T. Yerkes
controlled mayors and city councils; he even extended his influence
into the state government, controlling governors and legislatures. In
Philadelphia, Widener and Elkins dominated the City Hall and also became
part of the Quay machine of Pennsylvania. Mark Hanna, the most active
force in Cleveland railways, was also the political boss of the State.
Roswell P. Flower, chief agent in developing Brooklyn Rapid Transit,
had been Governor of New York; Patrick Calhoun, who monopolized the
utilities of San Francisco and other cities, presided likewise over the
city's inner politics. The Public Service Corporation of New Jersey
also comprised a large political power in city and state politics. It is
hardly an exaggeration to say that in the most active period, that
from 1880 to 1905, the powers that developed city railway and lighting
companies in American cities were identically the same owners that had
the most to do with city government. In the minds of these men politics
was necessarily as much a part of their business as trolley poles
and steel rails. This type of capitalist existed only on public
franchises--the right to occupy the public streets with their trolley
cars, gas mains, and electric light conduits; they could obtain these
privileges only from complaisant city governments, and the simplest way
to obtain them was to control these governments themselves. Herein we
have the simple formula which made possible one of the most profitable
and one of the most adventurous undertakings of our time.
An attempt to relate the history of all these syndicates would involve
endless repetition. If we have the history of one we have the history of
practically all. I have therefore selected, as typical, the operations
of the group that developed the street railways and, to a certain
extent, the public lighting companies, in our three greatest American
cities--New York, Chicago, and Philadelphia.
One of the men who started these enterprises actually had a criminal
record. William H. Kemble, an early member of the Philadelphia group,
had been indicted for attempting to bribe the Pennsylvania Legislature;
he had been convicted and sentenced to one year in the county jail and
had escaped imprisonment only by virtue of a pardon obtained through
political influence. Charles T. Yerkes, one of his partners in politics
and street railway enterprises, had been less fortunate, for he had
served seven months for assisting in the embezzlement of Philadelphia
funds in 1873. It was this circumstance in Yerkes's career which
impelled him to leave Philadelphia and settle in Chicago where, starting
as a small broker, he ultimately acquired sufficient resources and
influence to embark in that street railway business at which he had
already served an extensive apprenticeship. Under his domination, the
Chicago aldermen attained a gravity that made them notorious all over
the world. They openly sold Yerkes the use of the streets for cash and
constantly blocked the efforts which an infuriated populace made for
reform. Yerkes purchased the old street railway lines, lined his pockets
by making contracts for their reconstruction, issued large flotations of
watered stock, heaped securities upon securities and reorganization
upon reorganization and diverted their assets to business in a hundred
ingenious ways.
In spite of the crimes which Yerkes perpetrated in American cities,
there was something refreshing and ingratiating about the man.
Possibly this is because he did not associate any hypocrisy with his
depredations. "The secret of success in my business," he once frankly
said, "is to buy old junk, fix it up a little, and unload it upon other
fellows." Certain of his epigrams--such as, "It is the strap-hanger who
pays the dividends"--have likewise given him a genial immortality.
The fact that, after having reduced the railway system of Chicago to
financial pulp and physical dissolution, he finally unloaded the whole
useless mass, at a handsome personal profit, upon his old New York
friends, Whitney and Ryan, and decamped to London, where he carried
through huge transit enterprises, clearly demonstrated that Yerkes was a
buccaneer of no ordinary caliber.
Yerkes's difficulties in Philadelphia indirectly made possible the
career of Peter A. B. Widener. For Yerkes had become involved in the
defalcation of the City Treasurer, Joseph P. Mercer, whose translation
to the Eastern Penitentiary left vacant a municipal office into which
Mr. Widener now promptly stepped. Thus Mr. Widener, as is practically
the case with all these street railway magnates, was a municipal
politician before he became a financier. The fact that he attained the
city treasurership shows that he had already gone far, for it was the
most powerful office in Philadelphia. He had all those qualities of
suavity, joviality, firmness, and personal domination that made possible
success in American local politics a generation ago. His occupation
contributed to his advancement. In recent years Mr. Widener, as the
owner of great art galleries and the patron of philanthropic and
industrial institutions, has been a national figure of the utmost
dignity. Had you dropped into the Spring Garden Market in Philadelphia
forty years ago, you would have found a portly gentleman, clad in a
white apron, and armed with a cleaver, presiding over a shop decorated
with the design--"Peter A. B. Widener, Butcher." He was constantly
joking with his customers and visitors, and in the evening he was
accustomed to foregather with a group of well-chosen spirits who had
been long famous in Philadelphia as the "all-night poker players." A
successful butcher shop in Philadelphia in those days played about the
same part in local politics as did the saloon in New York City. Such
a station became the headquarters of political gossip and the meeting
ground of a political clique; and so Widener, the son of a poor German
bricklayer, rapidly became a political leader in the Twentieth Ward,
and soon found his power extending even to Harrisburg. A few years ago
Widener presided over a turbulent meeting of Metropolitan shareholders
in Newark, New Jersey. The proposal under consideration was the
transference of all the Metropolitan's visible assets to a company of
which the stockholders knew nothing. When several of these stockholders
arose and demanded that they be given an opportunity to discuss the
projected lease, Widener turned to them and said, in his politest and
blandest manner: "You can vote first and discuss afterward." Widener
displayed precisely these same qualities of ingratiating arrogance and
good-natured contempt as a Philadelphia politician. He was a man of
big frame, alert and decisive in his movements, and a ready talker;
in business he was given much to living in the clouds--a born
speculator--emphatically a "boomer." His sympathies were generous, at
times emotional; it is said that he has even been known to weep when
discussing his fine collection of Madonnas. He showed this personal
side in his lifelong friendship and business association with William
L. Elkins, a man much inferior to him in ability. Indeed, Elkins's great
fortune was little more than a free gift from Widener, who carried him
as a partner in all his deals. Elkins became Widener's bondsman when the
latter entered the City Treasurer's office; the two men lived near
each other on the same street, and this association was cemented when
Widener's oldest son married Elkins's daughter. Elkins had started life
as an entry clerk in a grocery store, had made money in the butter and
egg business, had "struck oil" at Titusville in 1862, and had succeeded
in exchanging his holdings for a block of Standard Oil stock. He too
became a Philadelphia politician, but he had certain hard qualities--he
was close-fisted, slow, plodding--that prevented him from achieving much
success.
For the other members of this group we must now change the scene to New
York City. In the early eighties certain powerful interests had formed
plans for controlling the New York transit fields. Prominent among
them was William Collins Whitney, a very different type of man from the
Philadelphians. Born in Conway, Massachusetts, in 1841, he came from a
long line of distinguished and intellectual New Englanders. At Yale his
wonderful mental gifts raised him far above his fellows; he divided
all scholastic honors there with his classmate, William Graham Sumner,
afterwards Yale's great political economist. Soon after graduation
Whitney came to New York and rapidly forged ahead as a lawyer.
Brilliant, polished, suave, he early displayed those qualities which
afterward made him the master mind of presidential Cabinets and the
maker of American Presidents. Physically handsome, loved by most men and
all women, he soon acquired a social standing that amounted almost to a
dictatorship. His early political activities had greatly benefited New
York. He became a member of that group which, under the leadership of
Joseph H. Choate and Samuel J. Tilden, accomplished the downfall of
William M. Tweed. Whitney remained Tilden's political protege for
several years. Though highbred and luxury-loving, as a young man he was
not averse to hard political work, and many old-timers still remember
the days when "Bill" Whitney delivered cart-tail harangues on the lower
east side. By 1884 he had become the most prominent Democrat in New
York--always a foe to Tammany--and as such he contributed largely to
Cleveland's first election, became Secretary of the Navy in Cleveland's
cabinet and that great President's close friend and adviser. As
Secretary of the Navy, Whitney, who found the fleet composed of a few
useless hulks left over from the days of Farragut, created the fighting
force that did such efficient service in the Spanish War. The fact that
the United States is now the third naval power is largely owing to these
early activities of Whitney.
Certainly all this national service forms a strange prelude to Whitney's
activities in the public utilities of New York and other cities. Had he
died, indeed, in his fiftieth year, his name would be renowned today as
a worker for the highest ideals of American citizenship. What suddenly
made him turn his back upon his past, join his former enemies in Tammany
Hall, and engage in these great speculative enterprises? The simplest
explanation is that, with his ability and ambition, Whitney had the
luxurious tastes of a Medici. At the height of his career his financial
success found expression in a magnificent house which he established
on Fifth Avenue. Its furnishings were one of the wonders of New York.
Whitney ransacked the art treasures of Europe, stripped medieval castles
of their carvings and tapestries, ripped whole staircases and ceilings
from the repose of centuries, and relaid them in this abode of splendor,
and here he entertained with a lavishness that astounded New York. This
single exploit pictures the man. Everything that Whitney did and was
his house, his financial transactions, his Wall Street speculations, the
rewards which he gave his friends assumed heroic proportions. But these
things all demanded money. The dilapidated horse railways of New York
offered him his most convenient opportunity for amassing it.
But Whitney had not proceeded far when he came face to face with a quiet
and energetic young man who had already made considerable progress in
the New York transit field. This was a Virginian of South Irish descent
who had started life as a humble broker's clerk twelve or fourteen years
before. His name was Thomas Fortune Ryan. Few men have wielded greater
power in American finance, but in 1884 Ryan was merely a ruddy-faced,
cleancut, and clean-living Irishman of thirty-three, who could be
depended on to execute quickly and faithfully orders on the New
York Stock Exchange--even though they were small ones--and who, in
unostentatious fashion, had already acquired much influence in Tammany
Hall. With his six feet of stature, his extremely slender figure, his
long legs, his long arms, his raiment--which always represented the
height of fashion and tended slightly toward the flashy--Ryan made a
conspicuous figure wherever he went. He was born in 1851, on a small
farm in Nelson County, Virginia. The Civil War, which broke out when
Ryan was a boy of ten, destroyed the family fortune and in 1868, when
seventeen, he began life as a dry-goods clerk in Baltimore, fulfilling
the tradition of the successful country boy in the large city by
marrying his employer's daughter. When his father-in-law failed, in
1870, Ryan came to New York, went to work in a broker's office, and
succeeded so well that, in a few years, he was able to purchase a seat
on the Stock Exchange. He was sufficiently skillful as a broker to
number Jay Gould among his customers and to inspire a prophecy by
William C. Whitney that, if he retained his health, he would become one
of the richest men in the country. Afterwards, when he knew him more
intimately, Whitney elaborated this estimate by saying that Ryan was
"the most adroit, suave, and noiseless man he had ever known." Ryan had
two compelling traits that soon won for him these influential admirers.
First of all was his marvelous industry. His genius was not spasmodic.
He worked steadily, regularly, never losing a moment, never getting
excited, going, day after day, the same monotonous dog-trot, easily
outdistancing scores of apparently stronger men. He also had the
indispensable faculty of silence. He has always been the least talkative
man in Wall Street, but, with all his reserve, he has remained the soul
of courtesy and outward good nature.
Here, then, we have the characters of this great impending drama--Yerkes
in Chicago, Widener and Elkins in Philadelphia, Whitney and Ryan in New
York. These five men did not invariably work as a unit. Yerkes, though
he had considerable interest in Philadelphia, which had been the scene
of his earliest exploits, limited his activities largely to Chicago.
Widener and Elkins, however, not only dominated Philadelphia traction
but participated in all of Yerkes's enterprises in Chicago and held
an equal interest with Whitney and Ryan in New York. The latter
Metropolitan pair, though they confined their interest chiefly to their
own city, at times transferred their attention to Chicago. Thus, for
nearly thirty years, these five men found their oyster in the transit
systems of America's three greatest cities--and, for that matter, in
many others also.
An attempt to trace the convolutions of America's street railway and
public lighting finance would involve a puzzling array of statistics and
an inextricable complexity of stocks, bonds, leases, holding companies,
operating companies, construction companies, reorganizations, and the
like. Difficult and apparently impenetrable as is this financial
morass, the essential facts still stand out plainly enough. As already
indicated, the fundamental basis upon which the whole system rested
was the control of municipal politics. The story of the Metropolitan's
manipulation of the New York street railways starts with one of the
most sordid episodes in the municipal annals of America's largest city.
Somewhat more than thirty years ago, a group of New York city fathers
acquired an international fame as the "boodle aldermen." These men had
finally given way to the importunities of a certain Jacob Sharp, an
eccentric New York character, who had for many years operated New
York City railways, and granted a franchise for the construction of
a horse-car line on lower Broadway. Soon after voting this franchise,
regarded as perhaps the most valuable in the world, these same aldermen
had begun to wear diamonds, to purchase real estate, and give other
outward evidences of unexpected prosperity. Presently, however, these
city fathers started a migration to Canada, Mexico, Spain, and other
countries where the processes of extradition did not work smoothly.
Sharp's enemies had succeeded in precipitating a legislative
investigation under the very capable leadership of Roscoe Conkling, who
had little difficulty in showing that Sharp had purchased his aldermen
for $500,000 cash. In a short time, such of the aldermen as were
accessible to the police were languishing in prison, and Sharp had been
arrested on twenty-one indictments for bribery and sentenced to four
years' hard labor--a sentence which he was saved from serving by his
lonely and miserable death in Ludlow Street Jail. In the delirium
preceding his dissolution Sharp raved constantly about his Broadway
railroad and his enemies; it was apparently his belief that the
investigation which had uncovered his rascality and the subsequent
"persecutions" had been engineered by certain of his rivals, either
to compel Sharp to disgorge his franchise or to produce the facts that
would justify the legislature in annulling it on the ground of fraud.
Though the complete history of this transaction can never be written, we
do possess certain facts that lend some color to this diagnosis. Up to
the time that Sharp had captured this franchise, Ryan, Whitney, and the
Philadelphians--not as partners, but as rivals--had competed with him
for this prize. At the trial of Arthur J. McQuade in 1886, a fellow
conspirator, who bore the somewhat suggestive name of Fullgraff, related
certain details which, if true, would indicate that Sharp's methods
differed from those of his rivals only in that they had proved more
successful. Thirteen members of the Board of Aldermen, said Fullgraff,
had formed a close corporation, elected a chairman, and adopted a policy
of "business unity in all important matters," which meant that they
proposed to keep together in order to secure the highest price for the
Broadway franchise. The cable railroad, which was the one with which Mr.
Ryan was identified, offered $750,000, half in bonds and half in cash.
Mr. Sharp, however, offered $500,000 all in cash. The aldermen voted in
favor of Sharp because cash was not only a more valuable commodity
than the bonds but, to use Alderman Fullgraff's own words--"less easily
traced." That Whitney financed lawsuits against the validity of Sharp's
franchise appears upon the record, and that Ryan was actively promoting
the Conkling investigation, is likewise a matter of evidence.
Sharp's victory had the great result of bringing together the three
forces--Ryan, Whitney, and the Philadelphians--who had hitherto combated
one another as rivals; that is, it caused the organization of the famous
Whitney-Ryan-Widener-Elkins syndicate. If these men had inspired all
those attacks on Sharp, their maneuver proved successful; for when the
investigation had attained its climax and public indignation against
Sharp had reached its most furious stage, that venerable corruptionist,
worn down by ill health, and almost crazed by the popular outcry, sold
his Broadway railroad to Peter A. B. Widener, William L. Elkins,
and William H. Kemble. Thomas F. Ryan became secretary of the new
corporation, and William C. Whitney an active participant in its
affairs.
This Broadway franchise formed the vertebral column of the New
York transit system; with it as a basis, the operators formed the
Metropolitan Street Railway Company in 1893, commonly known as the
"Metropolitan." They organized also the Metropolitan Traction Company,
an organization which enjoys an historic position as the first "holding
company" ever created in this country. Its peculiar attribute was that
it did not construct and operate street railways itself, but merely
owned other corporations that did so. Its only assets, that is, were
paper securities representing the ownership and control of other
companies. This "holding company," which has since become almost a
standardized form of corporation control in this country, was the
invention of Mr. Francis Lynde Stetson, one of America's greatest
corporation lawyers. "Mr. Stetson," Ryan is said to have remarked, "do
you know what you did when you drew up the papers of the Metropolitan
Traction Company? You made us a great big tin box."
The plan which Whitney and his associates now followed was to obtain
control, in various ways, of all the surface railways in New York and
place them under the leadership of the Metropolitan. Through their
political influences they obtained franchises of priceless value,
organized subsidiary street railway companies, and exchanged the stock
of these subsidiary companies for that of the Metropolitan. A few
illustrations will show the character of these transactions. They thus
acquired, practically as a free gift, a franchise to build a cable
railroad on Lexington Avenue. At an extremely liberal estimate, this
line cost perhaps $2,500,000 to construct, yet the syndicate turned this
over to the Metropolitan for $10,000,000 of Metropolitan securities.
They similarly acquired a franchise for a line on Columbus Avenue,
spending perhaps $500,000 in construction, and handing the completed
property over to the Metropolitan for $6,000,000. In exchange for these
two properties, representing a real investment, it has been maintained,
of $3,000,000, the inside syndicates received securities which had a
face value of $16,000,000 and which, as will appear subsequently, had
a market cash value of not far from $25,000,000. They purchased an
old horse-car line on Fulton Street, a line whose assets consisted of
one-third of a mile of tracks, ten little box cars, thirty horses, and
an operating deficit of $40,000 a year. At auction, its visible assets
might have brought $15,000; yet the syndicate turned this over to the
Metropolitan for $1,000,000. They spent $50,000 in constructing and
equipping a horse railroad on Twenty-eighth and Twenty-ninth Streets and
turned this over to the Metropolitan for $3,000,000. For two and a half
miles of railroad on Thirty-fourth Street, which represented a
cash expenditure of perhaps $100,000, they received $2,000,000 of
Metropolitan stock. But it is hardly necessary to catalogue more
instances; the plan of operations must now be fairly evident. It was
for the members of the syndicate, as individuals, to collect all the
properties and new franchises that were available and to transfer them
to the Metropolitan at enormously inflated values. So far, all these
deals were purely stock transactions--no cash had yet changed hands.
When the amalgamation was complete, the insiders found themselves in
possession of large amounts of Metropolitan stock. Their scheme for
transforming this paper into more tangible property forms the concluding
chapter of this Metropolitan story. *
* In 1897 the Traction Company dissolved, after distributing
$6,000,000 as "a voluntary dividend" among its stockholders.
Nearly all the properties actually purchased and transferred in the
manner described above, had little earning capacity, and therefore
little value; they were decrepit horse-car lines in unprofitable
territory. The really valuable roads were those that traversed the great
north and south thoroughfares--Lenox, Third, Fourth, Sixth, Eighth, and
Ninth Avenues. Many old New York families and estates had held these
properties for years and had collected large annual dividends from
them. Naturally they had no desire to sell, yet their acquisition was
essential to the monopoly which the Whitney-Ryan syndicate aspired to
construct. They finally leased all these roads, under agreements which
guaranteed large annual rentals. In practically all these cases the
Metropolitan, in order to secure physical possession, agreed to pay
rentals that far exceeded the earning capacity of the road. What is the
explanation of such insane finance? We do not have the precise facts in
the matter of the New York railways; but similar operations in Chicago,
which have been officially made public, shed the utmost light upon
the situation. In order to get possession of a single road in Chicago,
Widener and Elkins guaranteed a thirty-five per cent dividend; to get
one Philadelphia line, they guaranteed 65 1/2 per cent on capital
paid in. This, of course, was not business; the motives actuating
the syndicate were purely speculative. In Chicago, Widener and Elkins
quietly made large purchases of the stock in these roads before they
leased them to the parent company. The exceedingly profitable lease
naturally gave such stocks a high value, in case they preferred to sell;
if they held them, they reaped huge rewards from the leases which they
had themselves decreed. Perhaps their most remarkable exploit was
the lease of the West Division Railway Company of Chicago to the West
Chicago Street Railroad. Widener and Elkins controlled the West Division
Railway; their partner, Charles T. Yerkes, controlled the latter
corporation. The negotiation of a lease, therefore, was a purely
informal matter; the partners were merely dealing with one another; yet
Widener and Elkins received a fee of $5,000,000 as personal compensation
for negotiating this lease!
But this whole leasing system, both in New York and Chicago, entailed
scandals perhaps even more reprehensible. All these leased properties,
when taken over, were horse-car lines, and their transformation into
electrically propelled systems involved reconstruction operations on an
extensive scale. It seems perfectly clear that the chief motive
which inspired these extravagant leases was the determination of the
individuals who made up the syndicate to obtain physical possession and
to make huge profits on construction. The "construction accounts" of the
Metropolitan in New York form the most mysterious and incredible chapter
in its history. The Metropolitan reports show that they spent anywhere
from $500,000 to $600,000 a mile building underground trolley lines
which, at their own extravagant estimate, should have cost only
$150,000. In a few years untold millions, wasted in this way,
disappeared from the Metropolitan treasury. In 1907 the Public
Service Commission of New York began investigating these "construction
accounts," but it had not proceeded far when the discovery was made that
all the Metropolitan books containing the information desired had been
destroyed. All the ledgers, journals, checks, and vouchers containing
the financial history of the Metropolitan since its organization in 1893
had been sold for $117 to a junkman, who had agreed in writing to grind
them into pulp, so that they would be safe from "prying eyes." We shall
therefore never know precisely how this money was spent. But here again
the Chicago transactions help us to an understanding. In 1898 Charles T.
Yerkes, with that cynical frankness which some people have regarded as
a redeeming trait in his character, opened his books for the preceding
twenty-five years to the Civic Federation of Chicago. These books
disclosed that Mr. Yerkes and his associates, Widener and Elkins, had
made many millions in reconstructing the Chicago lines at prices which
represented gross overcharges to the stockholders. For this purpose
Yerkes, Widener, and Elkins organized the United States Construction
Company and made contracts for installing the new electric systems on
the lines which they controlled by lease or stock ownership. It seems a
not unnatural suspicion that the vanished Metropolitan books would have
disclosed similar performances in New York.
The concluding chapter of this tragedy has its setting in the Stock
Exchange. These inside gentlemen, as already said, received no cash as
their profits from these manipulations--only stock. But in the eyes
of the public this stock represented an enormous value. Metropolitan
securities, for example, represented the control and ownership of all
the surface transit business in the city of New York. Naturally, it had
a great investment value. When it began to pay regularly seven per cent
dividends, the public appetite for Metropolitan became insatiable. The
eager purchasers did not know, what we know now, that the Metropolitan
did not earn these dividends and never could have earned them. The mere
fact that it was paying, as rentals on its leased lines, annual sums far
in excess of their earning capacity, necessarily prevented anything in
the nature of profitable operation. The unpleasant fact is that these
dividends were paid with borrowed money merely to make the stock
marketable. It is not unlikely that the padded construction accounts,
already described, may have concealed large disbursements of money
for unearned dividends. When the Metropolitan was listed in 1897, it
immediately went beyond par. The excitement that followed forms one of
the most memorable chapters in the history of Wall Street. The investing
public, egged on by daring and skillful stock manipulators, simply went
mad and purchased not only Metropolitan but street railway shares
that were then even more speculative. It was in these bubble days that
Brooklyn Rapid Transit soared to heights from which it subsequently
descended precipitately. Under this stimulus, Metropolitan stock
ultimately sold at $269 a share. While the whole investing public was
scrambling for Metropolitan, the members of the exploiting syndicate
found ample opportunity to sell. The real situation became apparent when
William C. Whitney died in 1904 leaving an estate valued at $40,000,000.
Not a single share of Metropolitan was found among his assets! The
final crash came in 1907, when the Metropolitan, a wrecked and plundered
shell, confessed insolvency and went into a receivership. Those who had
purchased its stock found their holdings as worthless as the traditional
western gold mine. The story of the Chicago and Philadelphia systems,
as well as that of numerous other cities, had been essentially the same.
The transit facilities of millions of Americans had merely become
the instruments of a group of speculators who had made huge personal
fortunes and had left, as a monument of their labors, street railway
lines whose gross overcapitalization was apparent to all and whose
physical dilapidation in many cases revealed the character of their
management.
It seems perhaps an exaggeration to say that the enterprises which have
resulted in equipping our American cities and suburbs with trolley lines
and electric lighting facilities have followed the plan of campaign
sketched above. Perhaps not all have repeated the worst excesses of
the syndicate that so remorselessly exploited New York, Chicago, and
Philadelphia. Yet in most cases these elaborate undertakings have been
largely speculative in character. Huge issues of fictitious stock,
created purely for the benefit of inner rings, have been almost the
prevailing rule. Stock speculation and municipal corruption have
constantly gone hand in hand everywhere with the development of
the public utilities. The relation of franchise corporations to
municipalities is probably the thing which has chiefly opened the
eyes of Americans to certain glaring defects in their democratic
organization. The popular agitation which has resulted has led to great
political reforms. The one satisfaction which we can derive from such a
relation as that given above is that, after all, it is representative
of a past era in our political and economic life. No new "Metropolitan
syndicate" can ever repeat the operations of its predecessors.
Practically every State now has utility commissions which regulate
the granting of franchises, the issue of securities, the details of
construction and equipment and service. An awakened public conscience
has effectively ended the alliance between politics and franchise
corporations and the type of syndicate described in the foregoing pages
belongs as much to our American past as that rude frontier civilization
with which, after all, it had many characteristics in common.