The Age of Big Business Part 2

The champions of Bell and Gray may dispute the question of priority to their heart's content; the historic fact is that the telephone dates from a dramatic moment in the year 1876. Sanders and Hubbard, much annoyed that Bell had abandoned his harmonic telegraph for so visionary an idea as a long distance talking machine, refused to finance him further unless he returned to his original quest. Disappointed and disconsolate, Bell and his a.s.sistant, Thomas A. Watson, had started work on the top floor of the Williams Manufacturing Company's shop in Boston.

And now another chance happening turned Bell back once more to the telephone. His magnetized telegraph wire stretched from one room to another located in a remote part of the building. One day Watson accidentally plucked a piece of clock wire that lay near this telegraph wire, and Bell, working in another room, heard the tw.a.n.g. A few seconds later Watson was startled when an excited and somewhat disheveled figure burst into his room. "What was that?" shouted Bell. What had happened was clearly manifest; a sound had been sent distinctly over an electric wire. Bell's harmonic telegraph immediately went into the discard, and the young inventor--Bell was then only twenty-nine--became a man of one pa.s.sionate idea. Yet final success did not come easily; the inventor worked day and night for forty weeks before he had obtained satisfactory results. It was on March 10, 1876, that Watson, in a distant room, picked up the first telephone receiver and heard these words, the first that had ever pa.s.sed over a magnetized wire, "Come here, Watson; I want you." The speaking instrument had become a reality, and the foundation of the telephone, in all its present development, had been laid.

When the New York and San Francisco line was opened in January, 1915, Alexander Graham Bell spoke these same words to his old a.s.sociate, Thomas Watson, located in San Francisco, both men using the same instruments that had served so well on that historic occasion forty years before.

Though Bell's first invention comprehended the great basic idea that made it a success, the instrument itself bore few external resemblances to that which has become so commonplace today. If one could transport himself back to this early period and undergo the torture of using this primitive telephone, he would appreciate somewhat the labor, the patience, the inventive skill, and the business organization that have produced the modern telephone. In the first place you would have no separate transmitter and receiver. You would talk into a funnel-shaped contrivance and then place it against your ear to get the returning message. In order to make yourself heard, you would have to shout like a Gloucester sea captain at the height of a storm. More than the speakers'

voices would come over the wire. It seemed to have become the playground of a million devils; moanings, shriekings, mutterings, and noises of all kinds would constantly interrupt the flow of speech. To call up your "party" you would not merely lift the receiver as today; you would tap with a lead pencil, or some other appliance, upon the diaphragm of your transmitter. There were no separate telephone wires. The talking at first was done over the telegraph lines. The earliest "centrals"

reminded most persons of madhouses, for the day of the polite, soft-spoken telephone girl had not arrived. Instead, boys were rushing around with the ends of wires which they were frantically attempting to peg into the holes of the primitive switchboard and so establish "connections." When not knocking down and fighting each other, these boys were swearing into transmitters at the customers; and it is said that the incurable profanity of these early "telephone boys" had much to do with their supersession by girls. In the early days of the telephone, each instrument had to carry its own battery, usually installed in a little box under the transmitter. The early telephone wires, even in the largest cities, were strung on poles, as they are in country and suburban districts today. In places like New York and Chicago, these thousands of overhanging wires not only destroyed the attractiveness of the thoroughfare, but constantly interfered with the fire department and proved to be public nuisances in other ways. A telephone wire, however, loses much of its transmitting power when placed under ground, and it took many years of experimenting before the engineers perfected these subways. In these early days, of course, the telephone was purely a local matter. Certain visionary enthusiasts had foreseen the possibility of a national, long distance system, but a large amount of labor, both in the laboratory and out, was to be expended before these aspirations could become realities.

The transformation of this rudimentary means of communication into the beautiful mechanism which we have today forms a splendid chapter in the history of American invention. Of all the details in Bell's apparatus the receiver is almost the only one that remains now what it was forty years ago. The story of the transmitter in itself would fill a volume.

Edison's success in devising a transmitter which permitted talk in ordinary conversational tones--an invention that became the property of the Western Union Telegraph Company, which early embarked in the telephone business--at one time seemed likely to force the Bell Company out of business. But Emile Berliner and Francis Blake finally came to the rescue with an excellent instrument, and the suggestion of an English clergyman, the Reverend Henry Hummings, that carbon granules be used on the diaphragm, made possible the present perfect instrument. The magneto call bell--still used in certain backward districts--for many years gave fair results for calling purposes, but the automatic switch, which enables us to get central by merely picking up the receiver, has made possible our great urban service. It was several years before the telephone makers developed so essential a thing as a satisfactory wire.

Silver, which gave excellent results, was obviously too costly, and copper, the other metal which had many desirable qualities, was too soft. Thomas B. Doolittle solved this problem by inventing a hard-drawn copper wire. A young man of twenty-two, John J. Carty, suggested a simple device for exorcising the hundreds of "mysterious noises" that had made the use of the telephone so agonizing. It was caused, Carty pointed out, by the circ.u.mstance that the telephone, like the telegraph, used a ground circuit for the return wire; the resultant sc.r.a.pings and moanings and howlings were merely the mult.i.tudinous voices of mother earth herself. Mr. Carty began installing the metallic circuit in his lines that is, he used wire, instead of the ground, to complete the circuit. As a result of this improvement the telephone was immediately cleared of these annoying interruptions. Mr. Carty, who is now Chief Engineer of the American Telephone and Telegraph Company, and the man who has superintended all its extensions in recent years, is one of the three or four men who have done most to create the present system.

Another is Charles E. Scribner, who, by his invention of that intricate device, the multiple switchboard, has converted the telephone exchange into a smoothly working, orderly place. Scribner's multiple switchboard dates from about 1890. It was Mr. Scribner also who replaced the individual system of dry cells with one common battery located at the central exchange, an improvement which saved the Company 4,000,000 dry cells a year. Then Barrett discovered a method of twisting fifty pairs of wires--since grown to 2400 pairs-into a cable, wrapping them in paper and molding them in lead, and the wires were now taken from poles and placed in conduits underground.

But perhaps the most romantic figure in telephone history, next to Bell, is that of a humble Servian immigrant who came to this country as a boy and obtained his first employment as a rubber in a Turkish bath. Michael I. Pupin was graduated from Columbia, studied afterward in Germany, and became absorbed in the new subject of electromechanics. In particular he became interested in a telephone problem that had bothered the greatest experts for years. One thing that had prevented the great extension of the telephone, especially for long distance work, was the size of the wire. Long distance lines up to 1900 demanded wire about one-eighth of an inch thick--as thick as a fairsized lead pencil; and, for this reason, the New York-Chicago line, built in 1893, consumed 870,000 pounds of copper wire of this size. Naturally the enormous expense stood in the way of any extended development. The same thickness also interfered with cable extension. Only about a hundred wires could be squeezed into one cable, against the eighteen hundred now compressed in the same area. Because of these shortcomings, telephone progress, about 1900, was marking time, awaiting the arrival of a thin wire that would do the work of a thick one. The importance of the problem is shown by the fact that one-fourth of all the capital invested in the telephone has been spent in copper. Professor Pupin, who had been a member of the faculty of Columbia University since 1888, solved this problem in his quiet laboratory and, by doing so, won the greatest prize in modern telephone art. His researches resulted in the famous "Pupin coil" by the expedient now known as "loading." When the scientists attempt to explain this invention, they have to use all kinds of mathematical formulas and curves and, in fact, they usually get to quarreling among themselves over the points involved. What Professor Pupin has apparently done is to free the wire from those miscellaneous disturbances known as "induction." This Pupin invention involved another improvement unsuspected by the inventor, which shows us the telephone in all its mystery and beauty and even its sublimity. Soon after the Pupin coil was introduced, it was discovered that, by crossing the wires of two circuits at regular intervals, another unexplainable circuit was induced. Because this third circuit travels apparently without wires, in some manner which the scientists have not yet discovered, it is appropriately known as the phantom circuit. The practical result is that it is now possible to send three telephone messages and eight telegraph messages over two pairs of wires--all at the same time. Professor Pupin's invention has resulted in economies that amount to millions of dollars, and has made possible long distance lines to practically every part of the United States.

Thus many great inventive minds have produced the physical telephone.

We can point to several men--Bell, Blake, Carty, Scribner, Barrett, Pupin--and say of each one, "Without his work the present telephone system could not exist." But business genius, as well as mechanical genius, explains this achievement. For the first four or five years of its existence, the new invention had hard sailing. Bell and Thomas Watson, in order to fortify their finances, were forced to travel around the country, giving a kind of vaudeville entertainment. Bell made a speech explaining the new invention, while a cornet player, located in another part of the town, played solos, the music reaching the audience through several telephone instruments placed against the walls. Watson, also located at a distance, varied the program by singing songs via telephone. These lecture tours not only gave Bell the money which he sorely needed but advertised the innovation. There followed a few scattering attempts to introduce the telephone into every-day use and telephone exchanges were established in New York, Boston, Bridgeport, and New Haven. But these pioneers had the hostility of the most powerful corporation of the day--the Western Union Telegraph Company--and they lacked aggressive leaders.

In 1878, Mr. Gardiner Hubbard, Bell's earliest backer, and now his father-in-law, became acquainted with a young man who was then serving in Washington as General Superintendent of the Railway Mail Service.

This young man was Theodore N. Vail. His energy and enterprise so impressed Hubbard that he immediately asked Vail to become General Manager of the company which he was then forming to exploit the telephone. Viewed from the retrospection of forty years this offer certainly looks like one of the greatest prizes in American business.

What it signified at that time, however, is apparent from the fact that the office paid a salary of $3500 a year and that for the first ten years Vail did not succeed in collecting a dollar of this princely remuneration. Yet it was a happy fortune, not only for the Bell Company but for the nation, that placed Vail at the head of this struggling enterprise. There was a certain appropriateness in his selection, even then. His granduncle, Stephen Vail, had built the engines for the first steamship to cross the Atlantic. A cousin had worked with Morse while he was inventing the telegraph. Vail, who was born in Carroll County, Ohio, in 1845, after spending two years as a medical student, suddenly shifted his plans and became a telegraph operator. Then he entered the Railway Mail service; in this service he completely revolutionized the system and introduced reforms that exist at the present time. A natural bent had apparently directed Vail's mind towards methods of communication, a fact that may perhaps explain the youthful enthusiasm with which he took up the new venture and the vision with which he foresaw and planned its future. For the chief fact about Vail is that he was a business man with an imagination. The crazy little machine which he now undertook to exploit did not interest him as a means of collecting tolls, floating stock, and paying dividends. He saw in it a new method of spreading American civilization and of contributing to the happiness and comfort of millions of people. Indeed Vail had hardly seen the telephone when a picture portraying the development which we are familiar with today unfolded before his eyes. That the telephone has had a greater development in America than elsewhere and that the United States has avoided all those mistakes of organization that have so greatly hampered its growth in other lands, is owing to the fact that Vail, when he first took charge, mapped out the comprehensive policies which have guided his corporation since.

Vail early adopted the "slogan" which has directed the Bell activities for forty years--"One System! One Policy! Universal Service." In his mind a telephone company was not a city affair, or even a state affair; it was a national affair. His aim has been from the first a universal, national service, all under one head, and reaching every hamlet, every business house, factory, and home in the nation. The idea that any man, anywhere, should be able to take down a receiver and talk to anyone, anywhere else in the United States, was the conception which guided Vail's labors from the first. He did not believe that a ma.s.s of unrelated companies could give a satisfactory service; if circ.u.mstances had ever made a national monopoly, that monopoly was certainly the telephone. Having in view this national, universal, articulating monopoly, Vail insisted on his second great principle, the standardization of equipment. Every man's telephone must be precisely like every other man's, and that must be the best which mechanical skill and inventive genius could produce. To make this a reality and to secure perfect supervision and upkeep, it was necessary that telephones should not be sold but leased. By enforcing these ideas Vail saved the United States from the chaos which exists in certain other countries, such as France, where each subscriber purchases his own instrument, making his selection from about forty different varieties. That certain dangers were inherent in this universal system Vail understood. Monopoly all too likely brings in excessive charges, poor service, and inside speculation; but it was Vail's plan to justify his system by its works.

To this end he established a great engineering department which should study all imaginable mechanical improvements, with the results which have been described. He gave the greatest attention to every detail of the service and particularly insisted on the fairest and most courteous treatment of the public. The "please" which invariably accompanies the telephone girl's request for a number--the familiar "number, please"--is a trifle, but it epitomizes the whole spirit which Vail inspired throughout his entire organization. Though there are plenty of people who think that the existing telephone charges are too high, the fact remains that the rate has steadily declined with the extension of the business. Vail has also kept his company clear from the financial scandals that have disgraced so many other great corporations. He has never received any reward himself except his salary, such fortune as he possesses being the result of personal business ventures in South America during the twenty years from 1887 to 1907 that he was not a.s.sociated with the Bell interests.

Vail's first achievement was to rescue this invention from the greatest calamity which would have befallen it. The Western Union Telegraph Company, which in the early days had looked upon the telephone as negligible, suddenly awoke one morning to a realization of its importance. This Corporation had recently introduced its "printing telegraph," a device that made it possible to communicate without the intermediary operator. When news reached headquarters that subscribers were dropping this new contrivance and subscribing to telephones, the Western Union first understood that a compet.i.tor had entered their field. Promptly organizing the American Speaking Telephone Company, the Western Union, with all its wealth and prestige, proceeded to destroy this insolent pigmy. Its methods of attack were unscrupulous and underhanded, the least discreditable one being the use of its political influence to prevent communities from giving franchises to the Bell Company. But this corporation mainly relied for success upon the wholesale manner in which it infringed the Bell patents. It raked together all possible claimants to priority, from Philip Reis to Elisha Gray, in its attempts to discredit Bell as the inventor. The Western Union had only one legitimate advantage--the Edison transmitter--which was unquestionably much superior to anything which the Bell Company then possessed. Many Bell stockholders were discouraged in face of this fierce opposition and wished to abandon the fight. Not so Vail. The mere circ.u.mstance that the great capitalists of the Western Union had taken up the telephone gave the public a confidence in its value which otherwise it would not have had, a fact which Vail skillfully used in attracting influential financial support. He boldly sued the Western Union in 1878 for infringement of the Bell patents. The case was a famous one; the whole history of the telephone was reviewed from the earliest days, and the evidence as to rival claimants was placed on record for all time. After about a year, Mr. George Clifford, perhaps the best patent attorney of the day, who was conducting the case for the Western Union, quietly informed his clients that they could never win, for the records showed that Bell was the inventor. He advised the Western Union to settle the case out of court and his advice was taken.

This great corporation war was concluded by a treaty (November 10, 1879) in which the Western Union acknowledged that Bell was the inventor, that his patents were valid, and agreed to retire from the telephone business. The Bell Company, on its part, agreed to buy the Western Union Telephone System, to pay the Western Union a royalty of twenty per cent on all telephone rentals, and not to engage in the telegraph business.

Had this case been decided against the Bell Company it is almost certain that the telephone would have been smothered in the interest of the telegraph and its development delayed for many years.

Soon after the settlement of the Western Union suit, the original group which had created the telephone withdrew from the scene. Bell went back to teaching deaf-mutes. He has since busied himself with the study of airplanes and wireless, and has invented an instrument for transmitting sound by light. The new telephone company offered him $10,000 a year as chief inventor, but he replied that he could not invent to order. Thomas Sanders received somewhat less than $1,000,000 and lost most of it exploiting a Colorado gold mine. Gardiner Hubbard withdrew from business and devoted the last years of his life to the National Geographic Society. Thomas Watson, after retiring from the telephone business, bought a ship-building yard near Boston, which has been successful.

In making this settlement with the Western Union, the Bell interests not only eliminated a compet.i.tor but gained great material advantages.

They took over about 56,000 telephone stations located in 55 cities and towns. They also soon acquired the Western Electric Manufacturing Company, which under the control of the Western Union had developed into an important concern for the manufacture of telephone supplies. Under the management of the Bell Company this corporation, which now has extensive factories in Hawthorne, Ill., produces two-thirds of the world's telephone apparatus. With the Western Electric Vail has realized the fundamental conception underlying his ideal telephone system--the standardization of equipment. For the accomplishment of his idea of a national telephone system, instead of a parochial one, Mr. Vail organized, in 1881, the American Bell Telephone Company, a corporation that really represented the federalization of all the telephone activities of the subsidiary companies. The United States was divided into several sections, in each of which a separate company was organized to develop the telephone possibilities of that particular area. In 1899 the American Telephone and Telegraph Company took over the business and properties of the American Bell Company. The larger corporation built toll lines, connected these smaller systems with one another, and thus made it possible for Washington to talk to New York, New York to Chicago, and ultimately--Boston to San Francisco. An enlightened policy led the Bell Company frequently to establish exchanges in places where there was little chance of immediate profit. Under this stimulation the use of this instrument extended rapidly, yet it is in the last twenty years that the telephone has grown with accelerated momentum. In 1887 there were 170,000 subscribers in the United States, and in 1900 there were 610,000; but in 1906 the American Telephone and Telegraph Company was furnishing its service to 2,550,000 stations, and in 1916 to 10,000,000. Clearly it is only since 1900 that the telephone has become a commonplace of American existence. Up to 1900 it had grown at the rate of about 13,000 a year; whereas since 1900 it has grown at the rate of 700,000 a year. The explanation is that charges have been so reduced that the telephone has been brought within the reach of practically every business house and every family. Until the year 1900 every telephone subscriber had to pay $240 a year, and manifestly only families in affluent circ.u.mstances could afford such a luxury. About that time a new system of charges known as the "message rate" plan was introduced, according to which the subscriber paid a moderate price for a stipulated number of calls, and a pro rata charge for all calls in excess of that number. Probably no single change in any business has had such an instantaneous effect. The telephone, which had hitherto been an external symbol of prosperity, suddenly became the possession of almost every citizen.

Other companies than the Bell interests have partic.i.p.ated in this development. The only time the Bell Company has had no compet.i.tor, Mr.

Vail has said, was at the Philadelphia Centennial in 1876. Some of this compet.i.tion has benefited the public but much of it has accomplished little except to enrich many not over-scrupulous promoters. Groups of farmers who frequently started companies to furnish service at cost did much to extend the use of the telephone. Many of the companies which, when the Bell patents expired in 1895, sprang up in the Middle West, also manifested great enterprise and gave excellent service. These companies have made valuable contributions, of which perhaps the automatic telephone, an instrument which enables a subscriber to call up his "party" directly, without the mediation of "central," is the most ingenious. Although due acknowledgment must be made of the honesty and enterprise with which hundreds of the independents are managed, the fact remains that they are a great economic waste. Most of them give only a local service, no company having yet arisen which aims to duplicate the comprehensive national plans of the greater corporation. As soon as an independent obtains a foothold, the natural consequence is that every business house and private household must either be contented with half service, or double the cost of the telephone by subscribing to two companies. It is not unlikely that the "independents" have exercised a wholesome influence upon the Bell Corporation, but, as the principle of government regulation rather than individual compet.i.tion has now become the established method of controlling monopoly, this influence will possess less virtue in the future. In addition to these independent enterprises, the telephone has unfortunately furnished an opportunity for stockjobbing schemes on a considerable scale. The years from 1895 to 1905 witnessed the growth of many bubbles of this kind; one group of men organized not far from two hundred telephone companies. They would go into selected communities, promise a superior service at half the current rates, enlist the cooperation of "leading" business men, sell the stock largely in the city or town to be benefited, make large profits in the construction of the lines and the sale of equipment--and then decamp for pastures new. The mult.i.tudinous bankruptcies that followed in the wake of such exploiters at length brought their activities to an end.

CHAPTER V. THE DEVELOPMENT OF PUBLIC UTILITIES

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 pa.s.sengers, in their peregrinations through the city, had frequently to pay three or four fares; compet.i.tion 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 pa.s.sengers on entrance deposited their coins in a little fare box. At night tiny oil lamps made the darkness visible; in winter time shivering pa.s.sengers 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 inst.i.tutions. 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, Ma.s.sachusetts, 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 cla.s.ses 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 ma.s.ses 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 munic.i.p.al 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 repet.i.tion. 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 a.s.sisting in the embezzlement of Philadelphia funds in 1873. It was this circ.u.mstance 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 a.s.sets 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 a.s.sociate 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 ma.s.s, 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 munic.i.p.al office into which Mr. Widener now promptly stepped. Thus Mr. Widener, as is practically the case with all these street railway magnates, was a munic.i.p.al 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 inst.i.tutions, 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 ap.r.o.n, 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 a.s.sets 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 a.s.sociation 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 a.s.sociation 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 b.u.t.ter and egg business, had "struck oil" at t.i.tusville 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, Ma.s.sachusetts, 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 cla.s.smate, 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 a.s.sumed heroic proportions. But these things all demanded money. The dilapidated horse railways of New York offered him his most convenient opportunity for ama.s.sing 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 partic.i.p.ated 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 mora.s.s, the essential facts still stand out plainly enough. As already indicated, the fundamental basis upon which the whole system rested was the control of munic.i.p.al politics. The story of the Metropolitan's manipulation of the New York street railways starts with one of the most sordid episodes in the munic.i.p.al 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 partic.i.p.ant 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 a.s.sets, 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 a.s.sociates 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 ill.u.s.trations 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 a.s.sets 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 a.s.sets 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 a.s.sociates, 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 appet.i.te 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 disburs.e.m.e.nts 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 a.s.sets! The final crash came in 1907, when the Metropolitan, a wrecked and plundered sh.e.l.l, 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.