Thursday, June 14, 2012

The Panic of 1907, Lessons Learned from the Market's Perfect Storm, by Robert F. Bruner and Sean D. Carr,

Fall 2007, Museum of American Finance, The Panic of 1907,Lessons Learned from the Market's Perfect Storm, by Robert F. Bruner and Sean D. Carr,

To understand fully the crash and panici of 1907, one must consider its context: it was a time somewhat like the present. A Republican moralist was in the White House. War was fresh in mind. Immigration was fueling dramatic changes in society. New technologies were changing people's everyday lives. Business consolidators and their Wall Street advisers were creating large, new combinations through mergers and acquisitions, while the government was investigating and prosecuting prominent executives-—led by an aggressive young prosecutor from New York. The public's attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society and, in some ways, more intrusive in individual life. Much of this was stimulated by a postwar economic expansion that, with brief interruptions, had lasted about 50 years, although in recent months a major natural disaster had disturbed the equilibrium of the nation's fragile financial system. As Mark Twain supposedly said, "History may not repeat itself, but it occasionally rhymes."

Exactly 100 years ago the United States was teetering on the edge of economic collapse. Markets were in disarray, anxious depositors were forming long lines in front of banks, and Wall Street investors were nervous and distressed. By November 1907 a major market crash had resulted in a 37 percent decline in the value of all listed stocks, affecting nearly every industrial sector. During the sharpest part of this downturn, a banking panic led to the failure of at least 25 banks and 17 trust companies.ii Money was increasingly scarce, brokerages were forced to close, and the City of New York was twice unable to find buyers for its bonds, forcing the municipal government to the brink of bankruptcy.

Despite its severity, the 1907 crisis was mercifully short. Altogether it lasted 15 months, from the market's peak in September 1906 to its through in November 1907. From then until now, many observers have credited the relative brevity of this crisis to the actions of private bankers whose heroic interventions averted absolute catastrophe. In 1907, the United States lacked a central bank and the federal government possessed little authority to address widespread economic distress. Moreover, at the very nadir of the crisis, the trust-busting U.S. President, Theodore Roosevelt, was literally hunting for bear in the canebrakes of Louisiana.

Under these circumstances, as the market crash and banking panic spun wildly out of control, J. Pierpont Morgan, the colossus of American finance, ably asserted himself as the nation's de facto central banker. Using his personal influence among other leading financiers, Morgan and a small circle of his peers raised the funds necessary to relieve the nation's credit anorexia and support her faltering financial institutions – all within the span of a few weeks.

The bold intervention of Morgan, however, does not tell the whole story. The significance of Morgan's leadership is undeniable, and his actions deserve continued consideration as scholars and practitioners draw innumerable lessons from his temerity, judgment, and resolve. However, a thorough understanding of America's first financial crisis of the 20th century would be incomplete were we only to study its remediation. Morgan’s dramatic resolution of the 1907 crisis should not blind us to the lessons that can be learned from a deeper examination of its underlying causes.

Over the years the causes of large and systemic financial crises have been the focus of considerable research-—both directly and through varied intellectual streams: macroeconomics, game theory, group psychology, financial economics, complexity theory, the economics of information, and management theory. A pluralistic interpretation of the panic and crash of 1907 that draws from these diverse intellectual perspectives suggests that financial crises may result from a powerful convergence of seven overlapping and interrelated forces —a "perfect storm"iii in the financial markets. Reflecting on the 1907 crisis, then, let us
consider the elements of the storm and how they may gather force:

System-like architecture. A financial system has two vitally important characteristics that can serve as the foundations for crises. First, various financial institutions maybecontrolledby the same investors, and these intermediaries (banks, trust companies, brokerage firms) may be lenders and creditors to each other by virtue of the cash transfers they facilitate. The very existence of such a network means that trouble can travel quickly, and the difficulties of one financial intermediary can spread to others. Second, the very complexity of a financial system also means that it is difficult for all participants in the financial system to be equally well informed —thus an "information asymmetry" may motivate perverse behavior that can trigger or worsen a financial crisis.iv

In 1907, the financial system in the United States was highly fractionalized, localized, and complex. All told, the system held about 16,000 financial institutions v (compared to about 7,500 in 2007), and the vast majority of them were small “unit” banks having no branches. In 1907, the systemic nature of financial crises can be seen in the chain of linkages as the panic spread, beginning on October 16, from one institution to many others in New York City and beyond (see Figure 1).

As for the effects of information asymmetry, one is struck by how little the average depositor in 1907-—or even J. P. Morgan himself-—could know about the condition of financial institutions. To resolve this asymmetry, Morgan had privately chartered audits of the assets of various institutions and debtors. But he must have known that the more serious asymmetry lay not between him and the institutions, but between the public and the institutions —therefore, Morgan attempted to use the press, and even the pulpits, to shape public perceptions about the safety and soundness of the financial system.

Buoyant growth. As lightning precedes thunder, a volatile environment is a precursor to financial instability. Indeed, volatility in the form of buoyant economic growth may be especially pernicious since it engenders false optimism about the stability of markets and institutions. Every major financial panic has occurred after an episode of rapid economic growth vi though not all panics are associated with recessions. vii Of special interest is not the fact of growth, but rather the cause of the inflection, the downturn from boom to slump. Rapid economic growth creates a demand for money that eventually imposes liquidity strains on the financial system. The crash and panic of 1907 punctuated a period of very rapid economic growth in the United States. This growth created a massive demand for external finance and meant the financial system within the U.S. had a low level of capital relative to the recent rate of demand. viii New capital—nearly $100 million in gold imported in 1907—was obtained from Europe, through borrowings denominated not in U.S. dollars, but in sterling, francs, and marks. Large borrowings denominated in foreign currencies have also been associated with financial crises.iv

Inadequate safety buffers. The business cycle is associated with a process of credit expansion and contraction that significantly amplifies changes in markets and economic growth. The boom part of the credit cycle erodes the shock absorbers that cushion the financial system in the slump. Some banks, eager to make profits, unwisely expand their lending to less and less creditworthy clients as the boom proceeds. Then some external shock occurs and the bank directors awaken to the inadequacy of their capitalization relative to the credit risks they have taken; banks reduce or cut off the new loans available to their clients. This triggers a liquidity crisis that drives both a stock market crash and a depositor panic. The fragility of such a system stems not only from the behavior of some banks. It also grows from the structure of the industry. A system with many small and undiversified banks—such as existed in the United States in 1907-—is more prone to panics.

In addition, the economists Ellis Tallman and Jon Moen (1990) found that the emergence of trust companies—a relatively new and lightly regulated financial institution-—introduced a key source of instability leading up to the panic of 1907. In part, the unequal regulation of banks and trust companies contributed to a concentration of riskier assets in trusts; the trusts took advantage of opportunities from which the banks were restricted. Moreover, the trusts were able to concentrate their portfolios more.xi

Adverse leadership. Adding to the stew of uncertainty that leads up to the financial crisis is the action of political and economic leaders who inadvertently or inadvertently elevate the risk of crisis. Like rapid growth and inadequate safety buffers, the mistakes of leadership can help to foster an environment vulnerable to shocks. In 1907, Theodore Roosevelt was on the warpath against anti-competitive business practices. He wielded the power of the Department of Justice and the Sherman Antitrust Act, and he used the bully pulpit to excoriate the "malefactors of great wealth."

State governments followed suit with new legislation to limit railroad rates; New York State employed a young prosecutor, Charles Evans Hughes, to investigate the insurance industry. The Supreme Court famously imposed a massive fine on Standard Oil for rate fixing.

Should Roosevelt and the Progressives really be implicated in the crash? Financial markets withstand political bluster fairly well-—were Roosevelt’s speeches just empty rhetoric, we might absolve him. But markets are highly sensitive to changes in government policy (such as rate regulation, taxation, and antitrust enforcement) that affect the underlying drivers of value. By late 1906, the radical shift in government policy was apparent. Roosevelt's speeches only confirmed the shift. He was both messenger and message and thus deserves a place among the drivers of these events.

Real economic shock. Research on financial crises acknowledges the role of some triggering event. Financial crises require a spark. The history of 1907 suggests there may be several candidates. Adverse court rulings, rising regulation, and outlandish rhetoric affected the atmosphere of business confidence. But most notably, the San Francisco earthquake and fire in April 1906 triggered a global liquidity crunch. Then, in the summer of 1907, the Bank of England compounded problems by dramatically curtailing the acceptance of American finance bills in London.

These two events, the natural disaster in California and the reduction in American finance bills, stand out for having been real,xii large, costly, unambiguous, and surprising. When they hit the economy and the financial system, they caused a sudden reversal in the outlook of investors and depositors.

Undue fear, greed, and other behavioral aberrations. Beyond a change in the rational economic outlook is a shift from optimism to pessimism that creates a self-reinforcing downward spiral. The more bad news, the more behavior that generates bad news. The events of 1907 suggest an emotional influence on the occurrence and severity of the financial crisis. The history of the panic includes suicides, letters describing overly buoyant or depressed markets, anxiety among depositors and bank executives, animated crowds in the streets of New York's financial district, and the use of public relations and the press in an attempt to build investor confidence-—indeed, the very word "panic" suggests a suspension of rationality.

Failure of collective action. The events of 1907 illustrate how collective action might address a bank panic. Most vividly, we see J.P. Morgan and his circle of influential New York bankers forcing the chief executives of the largest New York banks and trust companies to form their own association to aid their failing institutions. Likewise, throughout the United States in 1907, bank clearing houses functioned to monitor their members and assure depositors of convertibility. If it were necessary to suspend convertibility, the clearing houses issued scrip. Ultimately, the legacy of the crash and panic was to nationalize collective action by means of founding the Federal Reserve System. Several scholars have highlighted the important role of collective action as a brake on the severity of financial crises.xiii

Was the collective action in 1907 a success? The panic of 1907 was among the worst on record, hardly consistent with successful collective action. The major events of the panic were largely guided by a small circle of leaders in the New York City financial community, but the panic extended to all commercial centers in the United States. The true benchmark for collective action is the outcome that might have been. It seems reasonable to guess that the panic of 1907 would have been much worse without the collective action by Morgan and others.

The events of 1907 suggest that these seven factors are mutually reinforcing. Rapid growth leads to optimism that for a time may stimulate more growth. Insufficient information fuels optimism and delays collective action. Imperfect information and optimism promote a tendency to discount the effect of real shocks to the system when they occur. Real shocks, absence of shock absorbers, and lack of collective action may amplify the conditions of instability. These factors come and go in the economy; at any point in time, a few of them are almost certainly present, and their presence individually is insufficient to cause financial market instability. Rather, it is the convergence of some or all of the forces that produces the crisis. The panic of 1907 thus offers us lessons, but also insights for action: the importance of transparency, feedback to decision makers, encouragement of collective action, the establishment of safety buffers in the global financial system, and the duty of leaders to serve their constituencies.

Robert F. Bruner and Sean D. Carr of the University of Virginia's Darden School of Business are the co-authors of The Panic of 1907: Lessons Learned from the Market's Perfect Storm (2007), from which this article was adapted.


Bordo, Michael D., and Christopher M. Meissner. 2005, "Financial Crises, 1880–1913: The Role of Foreign Currency Debt." Cambridge, Mass.: National Bureau of Economic Research, working paper 11173.

Calomiris, Charles W., and Gary Gorton. 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation." In R. Glenn Hubbard (ed.), Financial Markets and Financial Crises. Chicago: Univerin

April 1906 triggered a global liquidity crunch. Then, in the summer of 1907, the Bank of England compounded problems by dramatically curtailing the acceptance of American finance bills in London. These two events, the natural disaster in California and the reduction in American finance bills, stand out for having been real,xii large, costly, unambiguous, and surprising. When they hit the economy and the financial system, they caused a sudden reversal in the outlook of investors and depositors.

Undue fear, greed, and other behavioral aberrations. Beyond a change in the rational economic outlook is a shift from optimism to pessimism that creates a self-reinforcing downward spiral. The more bad news, the more behavior that generates bad news. The events of 1907 suggest an emotional influence on the occurrence and severity of the financial crisis. The history of the panic includes suicides, letters describing overly buoyant or depressed markets, anxiety among depositors and bank executives, animated crowds in the streets of New York's financial district, and the use of public relations and the press in an attempt to build investor confidence-—indeed, the very word "panic" suggests a suspension of rationality.

Failure of collective action. The events of 1907 illustrate how collective action might address a bank panic. Most vividly, we see J.P. Morgan and his circle of influential New York bankers forcing the chief executives of the largest New York banks and trust companies to form their own association to aid their failing institutions. Likewise, throughout the United States in 1907, bank clearing houses functioned to monitor their members and assure depositors of convertibility. If it were necessary to suspend convertibility, the clearing houses issued scrip. Ultimately, the legacy of the crash and panic was to nationalize collective action by means of founding the Federal Reserve System. Several scholars have highlighted the important role of collective action as a brake on the severity of financial crises.xiii

Was the collective action in 1907 a success? The panic of 1907 was among the worst on record, hardly consistent with successful collective action. The major events of the panic were largely guided by a small circle of leaders in the New York City financial community, but the panic extended to all commercial centers in the United States. The true benchmark for collective action is the outcome that might have been. It seems reasonable to guess that the panic of 1907 would have been much worse without the collective action by Morgan and others.

The events of 1907 suggest that these seven factors are mutually reinforcing. Rapid growth leads to optimism that for a time may stimulate more growth. Insufficient information fuels optimism and delays collective action. Imperfect information and optimism promote a tendency to discount the effect of real shocks to the system when they occur. Real shocks, absence of shock absorbers, and lack of collective action may amplify the conditions of instability. These factors come and go in the economy; at any point in time, a few of them are almost certainly present, and their presence individually is insufficient to cause financial market instability. Rather, it is the convergence of some or all of the forces that produces the crisis. The panic of 1907 thus offers us lessons, but also insights for action: the importance of transparency, feedback to decision makers, encouragement of collective action, the establishment of safety buffers in the global financial system, and the duty of leaders to serve their constituencies.

Robert F. Bruner and Sean D. Carr of the University of Virginia's Darden School of Business are the co-authors of The Panic of 1907: Lessons Learned from the Market's Perfect Storm (2007), from which this article was adapted.


Bordo, Michael D., and Christopher M. Meissner. 2005, "Financial Crises, 1880–1913: The Role of Foreign Currency Debt." Cambridge, Mass.: National Bureau of Economic Research, working paper 11173.

Calomiris, Charles W., and Gary Gorton. 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation." In R. Glenn Hubbard (ed.), Financial Markets and Financial Crises. Chicago: University of Chicago Press.

This was also published as a chapter by the same title in Charles W. Calomiris (ed.). 2000. U.S. Bank Regulation in Historical Perspective. Cambridge, U.K.: Cambridge University Press.

Davis, Joseph H. 2004. "A Quantity Based Annual Index of U.S. Industrial Production, 1790–1915," Quarterly Journal of Economics 119:1177–1215.

Donaldson, R. Glenn. 1992. "Sources of Panics: Evidence from the Weekly Data." Journal of Monetary Economics 31:277–305.

Friedman, Milton, and Anna Schwartz. 1963. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press.

Gorton, Gary, and Lixim Huang. 2002. "Banking Panics and the Origin of Central Banking," Cambridge, Mass.: National Bureau of Economic Research, working paper 9137.

Mishkin, Federic S. 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," Cambridge, MA: National Bureau of Economic Research, working paper 3400; and in R. Glenn Hubbard (ed.). 1991. Financial Markets and Financial Crises. Chicago: University of Chicago Press.

Moen, Jon, and Ellis W. Tallman. 1992. "The Bank Panic of 1907: The Role of Trust Companies." Journal of Economic History 52:611–630.

Ranciere, Romain, Aaron Tornell, and Frank Westermann. 2005. "Systemic Crises and Growth." CESifo working paper 1451. Downloaded from

Sprague, O. M. W. 1908. "The American Crisis of 1907," Economic Journal (September):353–372.

Tallman, Ellis W., and Jon R. Moen. 1990."Lessons from the Panic of 1907."

January 10, 1912, Carnegie Disapproves Our Banking System,

January 10, 1912, Amsterdam Evening Recorder, Carnegie Disapproves Our Banking System,
Worst in the World, He Tells Investigators,
Measure Pending in Congress Would Prevent Panics.

Peremptorily Summoned to Washington, Steel Magnate Tells of the Organization and Operation of So-called Trust and Its Domination of an Industry In Which He Was Long a prominent Figure.

Washington, Jan. 10.--Andrew Carnegie was an involuntary witness to-day before the house committee probing the affairs of the United States Steel corporation. Mr. Carnegie, who was first requested to appear, and upon declining that invitation, was peremptorily summoned to Washington, was wanted to elucidate many of the details of the organization and operation of the "steel trust" and i ts domination of an industry in whi ch he was for so many years a predominant figure.

When Mr. Carnegie took the wltness stand he furnished the committee with a statement regarding steel industry conditions, and told of his career in the business from the outset. He was accompanied by J. H. Reed, of Pittsburgh, his counsel. The committee room was crowded with spectators, including many women. He was sworn by Chairman Stanley.

Mr. Carnegie said he began his steel career in November, 1861, with the firm of Miller & Small, and that in 1862 he borrowed $1,500 from the National bank of Pittsburgh to engage in a partnership in the Keystone Bridge company, at Pittsburgh.

"Five or six of us," he said, "were engaged in this. In 1864 we built another mill in Pittsburgh, and in 1864 I was one of the organizers of the Superior ore mill and furnace. In 1866 we built the locomotive works in Pittsburgh, and in 1867 we united two other mills in Pittsburgh. That was the beginning of the Carnegie Steel company, Ltd.

"In Interesting.other men with you in these early days," Chairman Stanley asked, "did you do so by selling stocks in Wall street or other exchanges, or did you get men of experience in the iron business?"

"Oh, no. I did not look for men who had no experience in the iron business. I was one of the youngest of these men. and we had very little capital. At different, times we would put in $20,000 or $30,000 each"

The Panic of 1907: JP Morgan, Trust Companies, and the Impact of the Financial Crisis,

The Panic of 1907:  JP Morgan, Trust Companies, and the Impact of the Financial Crisis,
Carola Frydman, Boston University and NBER,
Eric Hilt, Wellesley College and NBER,
Lily Y. Zhou, Federal Reserve Bank of New York,

Abstract:  The outbreak of the Panic of 1907 occurred following a series of scandalous revelations about the investments of some prominent New York financiers, which triggered widespread runs on trust companies throughout New York City.  The connections between the trust companies that came under severe strain during the crisis, and their client firms, may have transmitted the financial crisis to nonfinancial companies.  Using newly collected data, this paper investigates whether corporations with close ties to trust companies were differentially affected during the panic.   The results indicate that firms connected to trust companies that faced severe runs performed worse in the years following 1907.  The data also suggest that many of the rescue efforts organized by J.P. Morgan may have been motivated by self-interest.

1. Introduction

In 1907 the United States experienced one of its most severe financial crises prior to the Great Depression.  A panic was triggered by a series of bank runs in New York, and quickly spread throughout the financial system.  Over the following year, real GNP declined by 11 percent, industrial production contracted by 16 percent, and the unemployment rate almost doubled (Balke and Gordon, 1986; Davis 2004; Romer, 1983). Although the causes of the Panic of 1907 have been the subject of considerable research, the micro-level consequences of the panic have never been analyzed. In particular, little is known about the channels through which the contraction of financial intermediation may have been transmitted to the real economy, or why particular firms or sectors were differentially affected.  Given the extensive debates on the consequences of financial crises, much of which has focused on the Great Depression, this gap in the literature is significant.
Research on the Panic of 1907 has also taken on renewed importance because of its many parallels to the financial crisis of 2007-08. The Panic of 1907 originated with runs on a type of financial intermediary that was mostly outside the payments system, trust companies.  Similar to modern “shadow” banks, trust companies grew rapidly and became important financial intermediaries in the years prior to the crisis.1

  Less regulated than commercial banks, trust companies were highly levered, held low cash reserve balances, and issued uninsured liabilities. In addition, they did not have direct access to a lender of last resort because they did not belong to the private clearinghouse association that facilitated partial co-insurance of commercial banks at that time. There are of course many important differences between these two crises. Most significantly the Fed, which was created in 1913, injected an enormous amount of liquidity into financial markets in the recent crisis, whereas the Panic of 1907 was at its core a liquidity crisis, resolved only through
a halting series of privately organized rescues and suspensions.  In addition, the solvency of many modern financial intermediaries was threatened by the Panic of 2007-08, whereas all of New York’s trust companies were revealed to be solvent in the 1907 crisis. These differences, however, highlight the importance of learning from historical events, in order to understand how markets function within different institutional contexts.

This paper analyzes the consequences of the Panic of 1907 at the firm level, by studying the effect of relationships with the New York trust companies that came under strain during the crisis on the outcomes of non-financial firms.  The paucity of extant research on the impact of the panic is due largely to the lack of data on individual firms or bank lending patterns. An important contribution of this paper is to construct a firm-level panel dataset with detailed financial information on all NYSEtraded industrials and railroads for the years 1900-1911, and establish their connections to major financial institutions. One of the unique characteristics of bank-firm relationships in the early twentieth century was that banks and trust companies would often place their own directors on their clients’ boards.  By collecting a comprehensive dataset of directors of trust companies, as well as directors of NYSE-traded non-financial corporations, we can identify ties between trust companies and their clients through board interlocks. Using this measure of connections, we investigate whether ties to the trust companies that were most severely affected by the crisis, in the sense that they lost the most deposits, had negative consequences on the performance of non-financial firms. We posit two main channels through which a connection to a trust company that came under acute pressure may have had negative consequences for non-financial firms.  First, ties through the board of directors may have reflected a lending or underwriting relationship, or the provision of other financial services.  In this case, non-financial firms may have experienced a negative shock to the supply of external financing or other financial services.2

  A second possibility is that a relationship with a troubled financial institution may have made other lenders, suppliers, or customers of the firm uneasy about the quality of the firm’s own assets or operations.  This
mechanism may have been important for the Panic of 1907 since the runs on trust companies were partly triggered by associations with individuals involved in a financial scandal.  Regardless of the channel, the negative shock to trust companies may have been transmitted to non-financial firms because of the financial frictions they most likely faced.  In an environment with relatively little financial disclosure and many new industries and enterprises emerging, asymmetries of information were likely significant, and building new relationships with alternative financial institutions would have taken time.  Thus, both mechanisms suggest that the effects should have been worse for smaller and less “established” firms, with assets whose value was more difficult to ascertain for use as collateral.

Our empirical analysis proceeds in three steps.  First, we establish that much of the variation in deposit losses among the New York trust companies at the center of the panic was due to their associations with a handful of men involved in a financial scandal.  Since this scandal did not impact any of the trust companies directly, but instead raised fears among households that their deposits may have been threatened, this characteristic of the panic helps rule out the possibility of “reverse causation”—that concerns regarding the non-financial client firms of the trusts led to runs.  Second, we present an event study of the stock market’s reaction to the onset of the runs, and show that the non-financial companies with ties to at least one of the trust companies most severely affected were discounted more heavily (by about 6.5 percent relative to other firms).  Thus, investors already perceived these connections to negatively affect non-financial firms when the runs started.  Finally, we analyze whether shocks to trust companies had a differential effect on the performance of firms
in the years following the panic.  The results indicate that the firms’ profitability and dividends each fell by an amount equivalent to around 10 percent of a standard deviation.  Moreover, the average interest rates paid by these firms, measured by their interest expense as a fraction of outstanding debt, rose substantially. Consistent with the notion that credit intermediation suffered following the panic, these effects were largest for smaller firms and for industrials, whose collateral was more difficult to value than that of railroads.

A potential source of concern is that our findings may reflect the selection of particular types of firms into relationships with trust companies.  The empirical framework includes firm fixed effects, and therefore controls for time-invariant unobserved characteristics such as firm ‘quality.’ However, selection would remain a problem if the differentially affected trusts were represented on the boards of firms most vulnerable to a shock or recession.  In order to address this possibility, we analyze the performance of firms with ties to the trust companies that came under severe strain in 1907 during the recession and financial panic of 1903-04.  We find that these firms did not experience worse outcomes during that earlier crisis, which is supporting evidence that our findings are not the result of a selection effect.

Our paper also sheds light on the private lending arrangements organized by J.P. Morgan that eventually halted the runs on trust companies.  Morgan decided against providing an emergency loan to the Knickerbocker Trust, the first trust company to face a deposit run.  On the day after Knickerbocker was forced to close its doors, Morgan began to arrange emergency loans to a similar institution experiencing a run, the Trust Company of America.  Although Morgan was hailed as the savior of the financial system, these particular decisions may have been motivated by self-interest.  Our board-interlock data reveal that The Trust Company of America had ties to many clients of J.P. Morgan & Company, whereas the Knickerbocker Trust did not.

The results of this paper contribute to the growing literature on the channels through which financial crises impact the real economy.  Following the work of Bernanke (1983), recent scholarship has emphasized the consequences of the breakdown of financial intermediation during financial crises as an important transmission mechanism independent of the monetary channel emphasized by Friedman and Schwartz (1963).  Recent contributions to this literature, in the context of the Great Depression, include Calomiris and Mason (1993), Ziebarth (2012) and Mladjan (2012) and in the context of more recent crises include, Kashyap, Lamont and Stein (1994), Khwaja and Mian (2008), Schnabl (2011) and Amiti and Weinstein (2009). Our findings are also closely related to Fernando, May, and Megginson (2012), who document a negative stock market reaction to the investment banking clients of Lehman Brothers when that firm went bankrupt in 2008. We also contribute to the growing literature on the Panic of 1907.  The causes and
macroeconomic context of this crisis have been the focus of a substantial body of research in the years immediately following the crisis (Sprague, 1910; Barnett, 1910) and more recently (Moen and
Tallman, 1992, 2000; Odell and Weidenmier, 2004; Hansen 2011; and Rogers and Wilson, 2011).3

This paper extends this literature by analyzing the microeconomic impact of the crisis, and the consequences of the disruption of the financial system for the real economy.  Finally, some of our findings relate to studies of the role of trust in financial markets (Guiso Sapienza and Zingales, 2008) and, in particular, of the effects of impaired reputations of corporate directors.  This literature mostly focuses on the consequences of a negative reputational shock on directors’ future careers (Agrawal, Jaffe and Karpoff, 1999; Fich and Shivdasani, 2007).  In contrast, our results may indicate that a firm may suffer losses when its directors are perceived to be associated with a scandal not directly connected to the firm.

2. Historical Background

The Panic of 1907 occurred following a series of economic shocks, which precipitated the onset of a recession.4 The San Francisco earthquake and fire of 1906 had had a profound monetary and financial impact, both domestically and internationally (Odell and Weidenmeir, 2004). Gold flowed into the United States as foreign insurers paid claims on their San Francisco policies; New York financial institutions also faced reduced gold reserves resulting from their own transfers to San Francisco.  In response, the Bank of England, followed by the German and French central banks, raised its discount rates in order to reverse the flow of gold. The Bank of England also acted to halt acceptances of American “finance bills,” which were used to finance gold imports into the United States.  This policy resulted in a significant fall in American securities markets, as the collateral for those bills was sold, and led to significant gold outflows from the United States (Sprague, 1910, p. 241).  A relatively weak cotton harvest in 1907 resulted in low export revenues, further aggravating the stress on the financial system (Hanes and Rhode, 2011).  The New York money market thus entered the fall of 1907 low on gold reserves and vulnerable to shocks.

At that time, New York’s banking system had also experienced an important structural change, in the form of the rapid growth of trust companies.  In the ten years ending in 1907, trust company assets in New York State had grown 244 percent (from $396.7 million to $1.364 billion) in comparison to a 97 percent growth (from $915.2 million to $1.8 billion) in the assets of national banks (Barnett, 1910, p. 235).   The impressive growth of these institutions can be explained by the advantages of the trust form. Originally created to serve as fiduciaries, trust companies enjoyed broad powers, including the ability to hold corporate equity and debt, and to underwrite and distribute securities (Smith, 1928; Neal 1971).  Although they were not permitted to issue bank notes, they could make loans, and competed with national banks for deposits.8 Incorporated under permissive state laws, trust companies were not subject to the strict regulations of the National
Banking Act, and often specialized in providing financing for corporate investments and acquisitions.  One observer noted that the industry’s profits were “derived largely from the skill of their officers in financing important combinations and aiding in the creation of new enterprises” (Conant 1904, p. 223).    By the onset of the panic, trust companies played major role in banking and financial markets: They provided lending and underwriting services, were major purchasers of securities, and acted as financial agents for corporations.11
Many prominent private bankers, as well as former U.S. Treasury Secretaries, were among the directors of these enterprises, which enhanced their reputations.12

The rapid proliferation of trust companies may have contributed to the vulnerability of the financial system to crises.  Whereas the national banks located in New York City were required to hold reserves equivalent to 25% of their deposits in specie, New York’s trust companies faced no minimum reserve requirement at all until 1906.13 In 1906, a 15% reserve requirement was imposed, but trust companies were required to hold only one third of it in cash.14 The national banks also effectively excluded trust companies from the New York Clearing House Association (NYCHA), a private organization that facilitated clearing and that could provide emergency lending to its members in times of crisis (Gorton, 1985).  Trust companies were permitted to gain access to the NYCHA by clearing through a member bank, but only if they maintained a minimum level of cash reserves, which most found unacceptably high.15 When the panic arose, there was no established mechanism to facilitate cooperation among New York’s trust companies, or to provide loans to a trust company that faced a liquidity problem.16

Onset of the Panic

The events of the Panic of 1907 that had the most severe consequences for financial markets were the widespread runs on trust companies that began in October.  Importantly, these runs were precipitated by events that had no direct connection to any trust company.  Instead, they were triggered by a failed attempt to corner the shares of United Copper Company, a mining concern, which resulted in significant losses for the speculators involved.  Historical accounts suggest that the runs on trust companies were driven by depositors’ fears that these institutions may have suffered losses in the speculation, which were later proven unfounded.17  This characteristic of the crisis is especially important for establishing an effect of the financial panic on the outcomes of non-financial firms, as it suggests that the runs were not related to revelations about the quality of the trust companies’ corporate clients.  In this section, we provide a brief account of the onset of the crisis, and present an econometric analysis of the determinants of the different trust companies’ deposit
losses during the panic.

Mining entrepreneur Augustus Heinze, along with speculators E. R. Thomas and Charles W. Morse, were at the center of the failed speculation.  These individuals had gained control of a series of small banks and used some portion of their resources to finance their ventures.18  These banks suffered losses when the attempt to corner the shares of United Copper, which was undertaken to engineer a “bear squeeze,” failed spectacularly.19 On October 16, a run began on the Mercantile National Bank, which was under the control of Heinze, Morse and Thomas, who appealed to the NYCHA for aid.  The NYCHA provided a loan to Mercantile, and publicly pledged to support the other member banks connected to those men as well.  As a condition for this aid, the NYCHA required the resignation of the entire board of directors of Mercantile, and demanded that Morse, Thomas and Heinze resign from all other clearing banks where they held directorships.20  The very public support from the NYCHA and the change in management ended the run on Mercantile, although it was liquidated the following January.  It is possible that the expulsions of these individuals from New York’s banking industry contributed to the perception that they had embezzled funds or committed fraud.

No trust company was directly involved in the failed United Copper corner.  However, the well-known financier Charles T. Barney, president of Knickerbocker Trust and director of Trust Company of America, two of the largest trust companies in the city, was known to have been involved in earlier business dealings with Morse, and held a board seat with the National Bank of North America, controlled by Morse. Moreover, Morse, Thomas, and Augustus’ brother Arthur Heinz held directorships with other trust companies.  The business connections among these individuals, and the board seats they held, were widely reported in the press.21 The losses and runs suffered by the Mercantile National Bank and other banks controlled by Morse, Thomas and the Heinzes likely raised concerns among depositors about whether these men had also endangered the solvency of the trust companies with which they or their associates were affiliated.

The connections between the men at the center of the United Copper speculation and various financial institutions are illustrated in Figure 1. Morse, Thomas, Barney and the Heinzes held seats on the boards of five trust companies; we identify these institutions as having a direct connection to these men.  However, those five trust companies were, in turn, closely associated with three other trust companies, because they had at least two directors in common with those three firms.22  These three trust companies are therefore identified as having an indirect connection to Morse, Thomas, Barney and the Heinzes.  The degree to which the different trust companies were associated with those men may have influenced the intensity of the runs they faced during the panic, and we formally test this hypothesis below.

The runs on trust companies began silently around October 16, when Knickerbocker Trust started to face heavy withdrawals. Knickerbocker was one of the few trust companies that chose to maintain sufficient reserves to gain access to the NYCHA through a member of the clearinghouse, National Bank of Commerce.  When Knickerbocker depositors began to withdraw their funds by depositing checks on their accounts in other banks, the National Bank of Commerce was responsible for those checks.  Facing a debit balance at the NYCHA of $7 million and the prospect of even larger debits, on October 21 the National Bank of Commerce announced that it would no longer act as Knickerbocker’s clearing agent.23  On that same day, Knickerbocker Trust announced that it had dismissed Charles T. Barney from the office of its Presidency, because of his “personal position in the directorate of certain institutions recently under criticism,” and “in particular because of his connection with Mr. Morse.”24

These events came as a shock to Knickerbocker’s depositors.  The end of the clearing relationship meant that other banks would no longer cash the trust company’s checks and, more importantly, that the NYCHA would not aid Knickerbocker if the firm encountered liquidity problems.25 The dismissal of Barney, even though it was accompanied by assurances that the firm was in sound condition, may have created the impression that Barney had done something improper or used the funds of Knickerbocker to help finance the speculative schemes of Morse.  A severe run on the Knickerbocker ensued, and the firm could not withstand the heavy withdrawals without receiving external assistance.  It never did, and on October 22, Knickerbocker was forced to close its doors.

Panic quickly spread as “wild rumors circulated” regarding the financial condition of other trust companies.26  These rumors often focused on possible connections between trust companies and the men at the center of the failed corner scheme; the chairman of the Trust Company of America went so far as to issue a public statement that his “company had no business relations, directly or indirectly, with Charles W. Morse, as the rumors had intimated.”27  Within a few days, all of the trust companies where Thomas, the Henizes, or Morse held directorships announced their resignations.28 By October 23, runs had spread to the Trust Company of America and Lincoln Trust, and several other trust companies also faced heavy deposit withdrawals.29  To address the fears of depositors, some trust companies stated that they had no connection to the men associated with the scandal in their advertising.30 All trust companies began to call in loans and liquidate assets to build up their cash reserves.

The total losses of deposits of the 38 trust companies in New York City between August 22 and December 19 of 1907 are depicted in Figure 2.31  All of the trusts either directly or indirectly associated with Morse, the Heinzes, Thomas, or Barney lost substantial amounts of their deposits, although several others with no apparent direct or indirect connection to these men did as well.  It is worth noting that the size of the different trusts prior to the crisis, measured as their total assets as of June 1907, was generally uncorrelated with the percentage decline in deposits.

Table 1 analyzes the determinants of the percentage change in each New York trust company’s deposits between August and December of 1907.  In column (1), we regress the change in deposits on indicator variables for whether the trusts were directly or indirectly connected to Morse, the Heinzes, Thomas or Barney, as defined in Figure 1.  Each variable has large negative effects and they jointly account for about 40 percent of the variation in the dependent variable. Relative to a trust company with no connection to the men at the center of the scandal, one with an indirect connection experienced a loss in deposits that was about 22 percent larger.  The loss for a trust company with a direct connection was even greater, as their deposits declined almost by 34 percent more than for trusts not associated to the scandal.

These results suggest that associations with the scandal triggered the runs on the trusts companies, but it is also possible that they may have been driven by differences in the financial solidity of the trust companies at the time of the crisis.  In column (2), we add several balance sheet ratios calculated from the trust companies’ financial statements of June 1907—measures of net worth, cash reserves relative to deposits, the percentage of their assets invested in securities, and their overall size—as well as the log of the age of the trust.32  The estimated correlations with these variables generally have the expected signs, with the firms’ net worth and cash holdings having particularly large and positive magnitudes, suggesting that more solvent trusts faced fewer withdrawals of deposits.  Controlling for these characteristics in the regression, however, does not diminish the size of the estimated effect of the two indicator variables for association with the tainted
bankers.  The available balance sheet information does not capture differences in the depositor clienteles of the trust companies.  Hansen (2011) notes that New York’s trust companies were divided between those located in the vicinity of Wall Street, which generally received large deposits from corporations and institutions, and those located in uptown Manhattan, which more aggressively solicited deposits from individuals. He argues that the uptown firms experienced greater deposit losses in the panic because small individual depositors were more likely to participate in runs.  In order to address this possibility, in column (3) we include an indicator variable for whether the trust company had an uptown headquarters.33 The results indicate that the uptown firms did indeed lose a greater proportion of their deposits, largely confirming Hansen’s argument.  But importantly, controlling for an uptown location does not substantially diminish the size of the estimated effect of the indicator variables for the strength of the connection with the men associated with the United Copper corner.  Interestingly, the uptown variable does diminish the estimated effect of some of the balance sheet measures, indicating that the effects estimated in column (2) may have resulted partly from correlation between the financial solidity of trust companies and their type of depositor
clientele. In sum, our results indicate that the deposit losses can be regarded in large measure as a response to an association with men involved in a scandal, and thus minimize concerns of reverse causality for the empirical analysis that follows.

Rescues organized by J.P. Morgan

In response to the growing crisis, on October 19 J.P. Morgan began to organize teams of bankers he trusted, and charged them with determining the solvency of the financial institutions that came under pressure.
34  The most powerful and best-connected man in American financial markets, Morgan’s own interests and influence were quite far reaching.35  He had previously organized interventions that benefited markets generally, for example by providing emergency lending to the U.S. Treasury and intervening in foreign exchange markets in 1895 to keep the Dollar on the gold standard.  During the Panic of 1907, Morgan coordinated a series of rescues of trust companies, securities dealers, and the City of New York that were instrumental in resolving the financial crisis.

The first institution to appeal to Morgan for aid was Knickerbocker Trust.  On Monday October 21, Morgan committed to provide aid the following day only if it was determined that the institution was solvent.37 On October 22, with panicked depositors forming long lines outside of its branches, Knickerbocker paid out all of its $8 million in cash.  Morgan’s men, who examined Knickerbocker’s books throughout the morning, said they were unable to determine whether the trust was in fact solvent.  Therefore no aid was provided, and at 12:30 PM Knickerbocker had no choice but to close its doors. The receivers appointed to take over Knickerbocker later determined that the institution was in fact solvent, and its depositors received the amounts owed them in full, although over a period of several months.38 On the afternoon of October 23, Morgan organized emergency loans to the Trust Company of America, after a series of dramatic scenes in which its securities were rushed to Morgan’s offices and evaluated as collateral for loans from the large commercial banks closely associated with him.  These loans, as well as others that Morgan organized the following week, enabled this institution to stay open.  On the night of Sunday November 3, Morgan hosted a meeting of nearly all the city’s trust company presidents in his library, famously locking them inside until they collectively pledged $25 million for the aid of the Trust Company of America and other failing trust companies.

The run on the Trust Company of America was one of the most severe up to that point in American history: the firm paid out more than $34 million in deposits in just a few weeks.  But it never closed, and thanks to the various rescues organized by J.P. Morgan and his associates, the only New York City trust company to fail was Knickerbocker.39  Morgan’s ability to organize these rescues was a consequence of his firm’s resources and credibility, which enabled him to stand behind the emergency loans provided by institutions like National City Bank to the Trust Company of America based solely on his men’s assessment of their collateral.  But it also resulted from his power and influence within financial markets.  In times of panic, it may be contrary to a financial institution’s narrow self-interest to extend a loan to a failing competitor, even if it is in that institution’s interest for the panic to be halted.  Morgan’s power enabled him to “dragoon” other
financial institutions into taking actions that were privately costly, but beneficial for the markets as a whole (Sprague, 1910).40

Morgan cannot be regarded as an entirely disinterested actor in these events.  Among the many rescues he organized was a rescue of the investment bank Moore & Schley, which had used a large block of stock in the Tennessee Coal & Iron Railway as collateral for loans which it suddenly needed to repay.  Morgan helped arrange for U.S. Steel, a firm he had helped create and a competitor of Tennessee Coal & Iron, to purchase that block of its stock. Morgan’s associates even received assurances from President Roosevelt that the transaction would not be held in violation of antitrust laws.  This transaction averted a crisis on the NYSE, but it also benefited U.S. Steel and, therefore, J.P. Morgan.

Morgan’s decision to allow Knickerbocker Trust to fail, while working assiduously to save the Trust Company of America, may also have been motivated by self-interest.41  Morgan himself was a director of the National Bank of Commerce, the institution that stopped clearing for Knickerbocker, so he could have intervened on behalf of Knickerbocker.42  However, our board interlock data suggest that Knickerbocker had few ties to clients of J.P. Morgan, whereas the directors of Trust Company of America served on the boards of several railroads and industrial firms closely associated with Morgan.43  Thus, it is likely that J.P. Morgan & Company underwrote many of the securities held by the Trust Company of America. Morgan’s partners may have been concerned about the consequences of liquidating the trust company’s holdings of those securities, or any other negative consequences that may have resulted from the association between their firms and a failed institution, thereby making them more favorably inclined towards the valuation of those
securities as collateral for loans. Indeed, Morgan’s associates publicly announced they would provide support for the Trust Company of America well before they were able to determine whether it was solvent, whereas aid to Knickerbocker was made contingent on establishing that trust’s solvency.44 On the other hand, Morgan may simply have miscalculated the consequences of permitting Knickerbocker to fail, and acted to save the Trust Company of America the next day in response to deteriorating conditions in banking markets.

Consequences of the Panic

On October 26, in the face of heavy withdrawals from out-of-town banks, the New York Clearing House issued “clearing house loan certificates” in order to provide liquidity to its members, and New York’s banks soon after suspended the convertibility of their deposits into currency.  The banks in the rest of the country soon followed, with some receiving legal sanction of their state governments.  By early November, the trust companies in New York apparently began making payments via certified checks payable at the NYCHA, rather than in cash.45  Full convertibility of deposits by the nation’s banks was not restored until January 1908.  The suspension likely made important transactions more difficult (see James, McAndrews and Weiman, 2011).  On the other hand, the suspension likely halted the spread of the banking panic and averted a total collapse of the banking system, as in 1930-33 (Friedman and Schwartz, 1968).

The contraction of lending that occurred during the panic in New York was heavily concentrated within trust companies.  Prior to the panic, the aggregate volume of New York trust company loans was similar to that of New York’s national banks. However, during the panic total loans at trust companies contracted by $247.6 million, or 37 percent, between August and December (Moen & Tallman, 1992).  During the same period, the loans of national banks in New York fell by only 2 percent.  Contemporary observers noted the consequences:  “It is obvious that every trust company is protecting itself to the full extent of its powers, and the small borrowers, however solvent, necessarily suffer at such a time.”46
The panic occurred at a time when credit markets were already under stress, and produced a significant overall contraction in liquidity.  Yet the crisis was most severe for New York’s trust companies, and for a handful of those in particular.  To determine the effect of the crisis on nonfinancial firms, we use an empirical strategy that exploits the variation in the deposit losses among trust companies, which was largely driven by factors unrelated to the performance of the trusts’ client firms.

3. Data

Board data and ties to financial firms

We identify the connections between a trust company and a non-financial firm by the presence of a director of the trust on the board of the non-financial firm.  To observe these relationships, we collected the names of all directors and managers of all NYSE-listed industrials and railroads as reported in Moody’s Manuals over several years around the panic. To identify directors of trusts, we obtained lists of directors of commercial banks and trust companies from the Rand McNally Bankers’ Directory.  Cross-referencing the names of bankers with those of corporate directors enables us to identify the presence of trust company directors on boards of non-financial firms. We match the names of corporate directors to those of bankers based on last name, first name, second initial, and suffix. A valid concern is that matching on names may lead to erroneous matches.  This procedure may overestimate the degree of interlocking across institutions if, for example, two different people with the same name held a directorship in an industrial company and a trust company.  However, we have implemented this same procedure for subsequent years when sources such as the Pujo
Committee Report, which identified the interlocks of directors of a substantial number of banks and non-financial companies around 1912, is available. Our matching procedure produces a nearly identical outcome to the Pujo report.47
Table 2 displays summary statistics for the data on trust company connections to firm boards in 1907.  From our 77 NYSE-traded railroads, 84% had at least one trust company representative on its board.  From our sample of 109 industrial companies, 70% had a trust company representative among its directors. The prevalence of trust company directors among the directors of non-financials may to some extent reflect the desire of trusts to form alliances with important firms—that is, for the trust to invite an industrialist or a railroad manager to serve on its own board.  But a substantial number of these cases were more likely the trust company directors serving on the non-financial’s board. Moreover, the extraordinarily high rate at which these interlocks occurred indicates that trust companies were indeed very prominent prior to the panic.

 An important feature of our data is that it allows us to identify the connections between specific trust companies and non-financials at the firm level through board linkages.  Figure 3 illustrates the connections between the five trust companies identified as most prominently connected to the scandal of Heinze, Morse, and Barney’s failed cornering scheme (those directly connected to the scandal in Figure 1), and NYSE-traded firms.  Directors of these trust companies held 39 board seats with NYSE-traded firms, including many prominent railroads and industrials.

Stock Price Data

The standard datasets of stock prices, such as CRSP, do not cover the earliest decades of the twentieth century.   For all firms in our sample, we use the New York Times to collect the closing prices of common shares traded on the NYSE at the end of each week from the end of August 1907 to December 1907.

Accounting Data

No readily available dataset of accounting information exists for early twentieth century

F. Augustus Heinze of Montana and the Panic of 1907, by David Fettig,

August 1, 1989, Banking and Policy Issues Magazine, [The Federal Reserve Bank of Minneapolis] F. Augustus Heinze of Montana and the Panic of 1907, by David Fettig, Managing Editor,

August 1989 issue

One of Montana's most colorful early entrepreneurs, F. Augustus Heinze, not only had a major impact on that state's copper mining industry, but he may also be closely linked to events that eventually led to the formation of the Federal Reserve System.

It is generally accepted that the Panic of 1907—a credit crunch that spread from New York to the whole country, closing banks and businesses—was the major impetus for the formation of the Federal Reserve System. While the nation had considered central banking systems in the past, it was the severity of the Panic of 1907 (the fourth in 34 years) that inspired congressional action leading to establishment of the Fed.

The "spark" of the Panic, however—like many economic phenomena—is open to speculation. One Montana historian, Sarah McNelis, in her biography, "Copper King at War," writes that Heinze was at the forefront of a financial battle that resulted in the October 1907 panic within the financial system—a view shared by others.

Heinze, a member of a Montana copper mining family, sold most of his mining shares for $12 million in 1906, moved to New York, bought a bank and became a director in a national financial chain involving banks and trusts—an affiliation that embroiled him in the growing battle between banks and trust companies.

At the turn of the century the banking industry felt threatened by the new trust companies (and their young, wealthy financiers) and decided to sway public and congressional opinion by making an example of a trust company with connections to Heinze, namely, Knickerbocker Trust. If Knickerbocker Trust would falter, then Congress and the public would lose faith in all trust companies and banks would stand to gain, the bankers reasoned.

"Silent runs" began on Heinze's bank and Knickerbocker Trust, and Heinze made a questionable loan to his brothers, who were faltering as owners of a copper company. In October 1907, Heinze's brothers made a failed attempt to corner the copper market on the stock exchange, which allowed a competitor to exploit the Heinze family's financial problems. Heinze was then forced to resign as president of his bank, "scare headlines" appeared in newspapers, runs started on both Heinze's bank and Knickerbocker Trust, and both institutions were initially denied financial aid to keep from failing—each event purposely caused, according to McNelis.

"The panic had long since been decreed and prepared and was inevitably on its way ... The Clearing House refused to help and [Knickerbocker Trust] had to close its doors. Charles Barney, its president, shot and killed himself that night and runs started on nearly every bank and trust company in New York," wrote one of Heinze's brothers.

The financial fires that were intended to ruin Heinze and the trust companies quickly roared out of control and the Panic of 1907 became a nondiscriminatory economic catastrophe for the entire nation. Six years later, partly as a means to quench such fires, the Federal Reserve System was born.

In her analysis, McNelis does not disregard other factors for the cause of the 1907 bank runs—for example, corporate speculation, overextended capital and the general demand for money. Indeed, she says those problems alone were possibly enough to touch off a financial panic that year just as they had in years past—but such a possibility does not eliminate the evidence of a personal vendetta gone awry.

As for Heinze, the events of October 1907 brought a total of 16 counts of financial malfeasance. However, a series of fortunate incidents in the courts led to his complete exoneration in 1909, and on Nov. 7 of that year he returned to Butte, Mont.:

"His arrival was a monumental event. Reception committees met his train ... A lively band and an automobile procession of his followers paraded into town ... A large rope was attached to the wagon tongue so more men could assist in pulling their hero."

Despite full exoneration by the courts and a triumphant return home (Montanans never lost touch with Heinze, having followed his New York exploits in the local press), the events of October 1907 left an indelible mark on his life: his mining ventures collapsed, his relationships with his brothers (former business partners) were destroyed, his marriage failed and his health disintegrated. He became "distraught in appearance"; at 37, his hair was almost completely white.

In 1914, just 44 years old, Heinze suffered a hemorrhage of the stomach caused by cirrhosis of the liver, and died.

"There was discussion of establishing a scholarship or erecting a monument to retain his name and contribution to the city [Butte]," McNelis writes. "After the initial shock of his death faded, however, the talk must have ceased; no such memorial was established."

"Copper King at War," published in 1968 by the University of Montana Press and currently out of print, is based on McNelis' master's thesis completed in 1947. Among her many sources for her thesis was a 72-page collection of correspondence she had with Otto Heinze, F. Augustus' brother, between 1943 and 1947. That collection remains in the author's possession.

McNelis received a bachelor's degree from St. Mary College of Leavenworth, Kan., in 1933. Her 1947 master's degree in history and political science was received from the University of Montana—Missoula. A retired teacher, she lives in Butte.

The Panic of 1907: A Human-Caused Crisis, or a Thunderstorm? by Bonnie Kavoussi,

The Panic of 1907: A Human-Caused Crisis, or a Thunderstorm?
A Comparison Between The New York Times and Wall Street Journal’s Coverage of the United States’ First Modern Panic, by Bonnie Kavoussi,

Before the Panic of 1907 seized the United States’ financial markets, the Knickerbocker Trust Company’s headquarters in midtown Manhattan stood as sedately as a Roman temple. Though completed only three years earlier, the building exuded a sense of seemingly lasting grandeur.1 Four Corinthian columns stood in front, and customers would wait inside at chairs with writing desks, surrounded by walls of white Norwegian marble, bronze detailing, and mahogany.2 It seemed as though nothing could shake the 23-year-old trust company, one of the largest banks in  the country. However, when a growing crowd of depositors lined up outside the bronze doors to reclaim their deposits on the morning of Tuesday, October 22, 1907, the foundations began to crumble. After doling out $8 million to depositors at its four New York offices, the Knickerbocker Trust Company suspended its payments and shuts its doors two and half hours before the end of business hours.3 It would not reopen until March 1908.4

For those who glimpsed the front pages of The Wall Street Journal or New York Times on the morning of October 22, 1907, it may have seemed as though there was little reason to panic. Both their front pages trumpeted that the New York Clearing House had the situation under control and that New York’s financial sector was sound. However, only The New York Times discussed the Knickerbocker Trust’s troubles at all. While it is difficult to draw broad conclusions about the two newspapers’ coverage of the Panic of 1907 from one incident alone, their divergent coverage on that day raises a number of questions. Did both newspapers treat Wall Street favorably? Was the Times more critical of banking circles during the panic than the Journal? How did two newspapers explain the cause of the panic? Did the Panic of 1907 appear in their news pages as a thunderstorm outside human control, or as a human-induced crisis? The picture is not as clear as it may seem.

Once the Knickerbocker Trust—the United States’ second largest trust company—had suspended its operations, a crisis in confidence ensued, and the panic spread throughout the financial system.5 Several other banks suffered from bank runs and failed.6 J.P. Morgan himself, Wall Street’s largest titan, had to step in with his own money and encourage other bankers to help save the New York Stock Exchange from collapse. The United States had already been headed toward an economic downturn due to a severe credit shortage, a long-term dip in the stock market, variable gold supplies from London, and deflation of the dollar.7 In such a fragile financial environment, the banking crisis of October 1907 sent shockwaves throughout the economy. After the full panic had run its course, commodity prices had fallen 21 percent, the dollar volume of bankruptcies had spiked by 47 percent, and unemployment had risen from 2.8 to 8 percent.8 Ultimately, the Panic of 1907—one of the most severe financial crises in the United States’ history—led to increased financial regulation by the government and the creation of the Federal Reserve System in 1913.

The Bank of Commerce had announced on Monday, October 14, 1907, that it would stop clearing the Knickerbocker Trust’s checks, after the revelation that the Knickerbocker Trust’s president, Charles T. Barney, had been associated with two prominent but unsavory Wall Street bankers—Charles W. Morse and F. Augustus Heinze—in various financial schemes. Subsequently, all other national banks refused to cash the Knickerbocker Trust’s checks, for fear that the Knickerbocker Trust would not be able to honor those checks for payment.9 Heinze and Morse’s most recent scheme—an attempted corner of the stock of the United Copper Company, initiated by Otto Heinze, Augustus’ brother—had already sent stocks tumbling on Tuesday, October 15, in a downward spiral that would continue for weeks and signal the beginning of the panic.10 On Sunday, the New York Clearing House had decided to take its most drastic measure to date: it ordered the immediate elimination of Augustus Heinze and Charles Morse from all banking interests in New York City.11 Barney was forced to resign from the Knickerbocker Trust as well as the National Bank of Commerce,12 according to the board’s official statement, “‘because of his connection with Mr. Morse and the Morse companies.’”13 It is in the context of this tumult that the Knickerbocker Trust—the U.S.’ second-largest trust company—suffered from a crippling bank run the following day, with repercussions that would send the United States economy into a financial crisis.

Meanwhile, on October 22—the day of the Knickerbocker’s fateful bank run—The Wall Street Journal and New York Times exuded confidence in the business world. “The [New York] Clearing House has the banking situation so well in hand that no doubt is entertained of its ability to do all that is necessary,” The Wall Street Journal proclaimed on its front page.14 “It has already given a superb demonstration of its power.” “Stocks show the best performance in weeks,” declared the sub-headline of an article on stock performance: “Action of the Bankers Clearing House Restores Confidence.”15 The New York Times also wrote glowingly about the markets. “Brokers came downtown yesterday morning feeling decidedly cheerful and in some cases extremely optimistic with regard to the market,” the reporter wrote in the lead paragraph.16 He then took special aim at the “skeptical souls” who assumed that the Clearing House’s $2 million in aid to national banks was only “day by day.” He argued that the Clearing House was obligated to continue providing aid and that it would not pull its money at such a critical time. In the face of bank runs over the past few days, the New York Clearing House had decided to extend $2 million in aid to two troubled banks: the Mercantile National Bank, which Augustus Heinze headed as president, and the New Amsterdam National Bank, which Charles Morse had also been involved in.

In the midst of their shared optimism, only one of the two newspapers mentioned the Knickerbocker Trust’s troubles on October 22, 1907. While The New York Times’ front page covered Charles Barney’s resignation as president of the Knickerbocker Trust Company and the refusal of the National Bank of Commerce to clear for Knickerbocker—which would ultimately lead to the Panic of 1907—The Wall Street Journal did not mention the Knickerbocker Trust or Charles Barney once. The public had already found out by October 21 that Barney was an associate of Morse and Heinze and may have been involved in their schemes, and they would soon discover that the Heinzes had approached Barney for help with their attempted corner of the copper market—which he ultimately gave.17 However, the Journal refused to acknowledge this news. Instead, their most pertinent front-page headline was outdated—“Clearing House Has Banking Situation Here Well At Hand”—leading to an article that failed to mention that the Clearing House would no longer aid the Knickerbocker Trust. The Times reporter for their front-page story, on the other hand, waited outside J. P. Morgan’s apartment until the 2 a.m. conclusion of a meeting between top trust company and bank officers and Morgan and his own trading partners. He reported on their ultimate decision: that Barney would resign as president, and the Knickerbocker would have to clear its own deals, but Morgan would help fund the Knickerbocker to stay afloat.18 (The next day, Morgan and his lieutenants decided that it would be useless to help the Knickerbocker Trust after all, since they determined it to be insolvent.19)

The New York Times reporter’s determination to get the scoop mimicked the ambitions of the Times’ own publisher. When Adolph S. Ochs, an ambitious small-town newspaper publisher from Knoxville, Tennessee (See Picture 1.), purchased The New York Times in 1896, during the height of yellow journalism, he sought to initiate a new era of rigorous, impartial reporting across the country. However, he became indebted to more powerful interests in the process. Ochs bought the bankrupt newspaper with “only borrowed backing” for $75,000 20 and expanded the Times’ operations by borrowing more. By the time he had bought the Times—which had been “beyond his means” in the first place—“he was by every accounting standard a bankrupt.”21 Ochs was then forced to beseech his creditors for mercy. According to former New York Times reporter Harrison Salisbury, who chronicles the Times’ early history in his book Without Fear or Favor, exactly half of Ochs’ correspondence was devoted to writing excuses to his creditors.22

Ochs found the solution to his fiscal problems in a loan: a $250,000 mortgage from Equitable Life Assurance Society, which gave Equitable indirect ownership of The New York Times’ control stock.23 He borrowed another $2.5 million from creditors including Equitable to build an impressive tower in Longacre Square, which he pressured New York City into renaming Times Square in the newspaper’s honor (See Picture 2).24 While still unable to repay the construction loan, he had to borrow more money to buy new machinery and expand the Times’ operations further.25 When Equitable came under government investigation, The New York Times covered the scandal thoroughly, but Ochs feared the possibility that a Hearst or Pulitzer-owned newspaper could uncover the Times’ financial obligations to the insurance company. Although The New York Times’ reporting about the Equitable scandal did not reveal favoritism, Times editorials were sympathetic to Equitable’s problems.26 In order to avoid scandal, Ochs approached Marcellus Hartley Dodge, who agreed to take ownership of the Equitable loan in 1905 and loaned The New York Times a total of $300,000. 27 It was not until 1916—twenty years after Ochs had first purchased The Times—that Ochs fully owned the control stock of The New York Times.28 According to Salisbury, the late New York Times reporter, Ochs had been operating on borrowed money from the very beginning, and “[h]e felt comfortable that way.” “Nothing more typified The Times in the Ochs era than these private, confidential and long-enduring arrangements among friends,” Salisbury writes.29

Ochs quickly became part of the establishment and was proud of that fact.30 He valued his relations with the Wall Street investors who had helped him purchase The New York Times—including the elder J. P. Morgan.31 He also relished being the “confidant” of presidents and secretaries of state and having quiet entree to Whitehall or 10 Downing Street.32 While Ochs said he did not admire the New Deal, he counted Herbert Hoover as a friend and admired Calvin Coolidge.33 Although he was a Democrat by default since he had been raised in the South, he supported gold and fiscal conservatism rather than free silver.34 Over time, the Times started to reflect his political leanings. New York Times historian Elmer Davis, who was also a Times journalist, noted that the Times was an “independent Democratic newspaper” that admired Teddy Roosevelt, but not William Jennings Bryan.35 Conspiracy theories about the Times abounded for years: some people whispered that J.P. Morgan was the Times’ true owner,36 that other financiers and politicians were the newspaper’s secret masters, or that “the paper was dominated by its bondholders as a group.”37 Davis refuted these claims as unfounded. However, as the Times grew wealthier as circulation and advertising revenue started to flourish, some outside observers became more suspicious about the Times’ financial backing.38

Ochs did not hide the fact that he wanted to reach out to businessmen as an audience when he took over the Times.39 Raising the quality and scope of the Times’ business coverage quickly became one of his main goals. He demanded consistent coverage of financial news market reports and real-estate transactions, among other activities that publications previously had considered too boring to warrant an article.40 According to former New York Times reporter Meyer Berger, Ochs’ managing editor, Henry Loewenthal, “injected new life into his Wall Street reporters, goading them to greater output.”41 Carr Van Anda, who took over as managing editor in 1904, also excelled in spearheading finance coverage during his tenure.42 While general news reporters at the Times and other newspapers assumed that Ochs’ drive for business news would make the Times duller and less appealing, to their astonishment, Ochs was able to bring in thousands of “new, substantial readers and a brisk flow of advertising.”43 Berger claimed that other New York publications did not take any serious measures to compete with the Times in business and financial coverage. Thus, the Times soon earned a second name: the “‘Business Bible.’ ”44

Amidst this success, Ochs found that his intent to make the Times the paper of record for the establishment often presented difficulties for his stated mission to deliver the news impartially.45 He believed in editorial independence, but not crusades that would alienate the elite. He did not wish to set the Times against the establishment—it had been difficult for him, as a Southern Jew, to become part of the establishment in the first place.46 Just as he did not wish to jeopardize his own place in the elite, according to Salisbury, “he did not propose to jeopardize the economic health of The New York Times with unconventional attitudes.”47 Nonetheless, he sought to counteract the sensationalism of yellow journalism during that time not only to make the Times the paper of record, but also ostensibly for more ethical reasons. In his mission statement, he declared in 1896 that he wanted a paper that would "give the news, all the news, in concise and attractive form, in language that is parliamentary in good society, and give it as early, if not earlier, than it can be learned through any other reliable medium; to give the news impartially, without fear or favor, regardless of any party, sect, or interest involved."48 While his reference to “good society” indicated that he wished for the Times to a moderate paper read by the elite, his mission statement is an ode to freedom from all bias. This desire for impartiality stems back to the newspaper’s original prospectus from 1851, which included the declaration that the Times “‘is not established for the advancement of any party, sect or person.’”49 Ochs also took pride in the Times’ unadorned content, preferring a bland editorial page to any shrill or strong statements.50 He believed in the value of communicating facts without any interest in mind, and that is what he sought to achieve as he revolutionized The New York Times.

While Ochs had to reconcile his mission to deliver the news impartially with his desire to remain within the establishment that he had labored to join, Clarence W. Barron—who purchased Dow Jones and Company in 1903 and served as The Wall Street Journal’s publisher during the Panic of 1907—reveled in his longtime position in the Northeastern elite (See Picture 3). During his tenure as publisher, he moved between three patrician residences: a suite at the Waldorf-Astoria in New York, a home in Boston, and a baronial mansion in Cohasset, Massachusetts, where he went fishing, led the yacht club,51 and kept eighteen telephones.52 An excessive eater, he would consume stewed fruit, juice, oatmeal, ham and eggs, fish, beefsteak, fried potatoes, hot rolls, butter, and coffee with cream for breakfast.53 Barron reportedly dictated memos to his secretaries almost incessantly, no matter where he was or what time it was. A coterie of male secretaries followed him around, jotting down his ideas and commentary.54 Barron would sometimes send over 100 memos to editors every day and still write several news articles and editorials himself.55 He ruled over Dow Jones and Company like a king.

Barron believed fiercely in the unbridled free market and was not afraid to use the Journal as a platform to defend it. Over time, both Barron and the Journal grew  increasingly defensive about unregulated business practices. “He [Barron] bullishly asserted that the grand tycoons of his era were performing divine work,” writes Francis Dealy, author of The Power and the Money. 56 Barron once even heralded J. P. Morgan as “the nation’s Prometheus.”57 As the United States government grew warier of Wall Street’s unregulated business practices after the Panic of 1907, The Wall Street Journal under Barron “cast itself more and more in the role of Wall Street’s public defender.”58 In one 1921 editorial, he berated government officials for considering any financial regulations:
“‘Capitalism—the sacred notion of free men and free markets—has enabled our economy to ascend from the third circle of Hell to Halcyon prosperity in fifty short years. But rather than continue the system exactly as is, there are those who would have the government intervene and control Wall Street, as if it were more illegal gamble than legitimate risk…. Like Moscow’s new leaders, these people don’t understand the cornerstones of free enterprise, supply and demand. “‘To the underutilized officials pursuing the regulation of our financial markets, we say, seek some other cause to get reelected or promoted. Wall Street, because it is so free, provides all the information needed by any investor to prosper.’”59
While the argument was harsh and direct, it suggested much revealing subtlety. First, Barron tied free enterprise to religion in order to make its virtues appear self-evident. He described capitalism as “the sacred notion of free men and free markets”—implying that it is a natural instinct, but only for “free men.” By portraying the transition from a post-Civil War economy to the boom years of the 1920s as rising from hell to Halcyon, he furthered the theme of capitalism’s connection to the sacred. Then he connected pro-regulation politicians to the Communists in the Soviet Union, just when the Red Scare had started to subside. He implied that by default, anyone who is against free enterprise is also opposed to democracy, freedom, and perhaps even religion. Nonetheless, the last two sentences are the most revealing of his entire polemic. After insisting that “we say” that government officials should find some other cause to press for their own gain, he switched effortlessly into using “Wall Street” as the subject of the next sentence, claiming that the financial markets provide all the information any investor needs to prosper—very much the way The Wall Street Journal idealized itself. In effect, the subjects “we” and “Wall Street” became interchangeable. The Wall Street Journal was now Wall Street.

The Wall Street Journal—a defender of big business—historically did not write critically about Wall Street. “Barron tended to go easy on these men and their firms,” writes Rutgers Business School Professor Jerry Rosenberg.60 Dow Jones and Company was founded in 1882 as a bulletin news service meant to inform businessmen about the latest investment information; it expanded into a newspaper and ticker with indexes and averages later.61 Creativity was not the highest priority at The Wall Street Journal, which
was still a sideline business at Dow Jones and Company.62 “Life as a Dow Jones reporter was somewhat grubby and not very demanding of a man’s intelligence,” author Edward

House Committee on Investigation of United States Steel Corporation,

United States Steel Corporation Hearings Before the Committee on Investigation of United States Steel Corporation, House of Representatives, Vol. 8. Washington, Government Printing Office, 1912,
By U. S. Congress. House Committee on Investigation of United States Steel Corporation, Augustus Owsley Stanley, Farquhar J. MacRae, U. S. Bureau of Corporations, U. S. Congress. Senate Committee on the Judiciary,



page 156


After acquiring the control of the Lake Superior ores, the Steel Corporation made extended researches and explorations of the ore deposits of Cuba, North and South America.
Mr. Reed. May I suggest a question at that point 1

Mr. Young. Certainly.

Mr. Reed. In regard to these ores in Utah, Cuba, and Brazil, perhaps Mr. Cole could tell us whether the Steel Corporation ever made any effort toacquire ores or to control or get a large part of those ore beds.

Mr. Young. Yes. Do you know anything about that, Mr. Cole?

Mr. Cole. The Steel Corporation through its subsidiary, the Oliver Iron Mining Co., had examinations of ore beds in Utah made, but did not teel justified at this time in buying any at that point. They also had made an examination of the ore beds in Brazil, but did not make any investments there at the time. They have secured some ore in Cuba, but just what tonnage I am unable to say.

Mr. Reed. Relatively small, is it not? (Hearings, pp. 54835484.)

* ******

The Chairman. You spoke of having your engineers go over the country and make a thorough survey of the various ore deposits of New Mexico, Utah, Texas, New York, in the Appalachian region, and elsewhere, and in California. How much ore did they lease or purchase outright after these investigations for the Steel Corporation? How much ore did it obtain as a result of these investigations?

Mr. Cole. They did not secure any ore in the districts referred to.

The Chairman. Why was it they did not?

Mr. Cole. I presume they felt it would be some time in the future before those ores would be available for manufacture.

The Chairman. Those ores, as I understand, as Mr. Sellwood has said, either by virtue of their low degree of ore, the presence of silica, the absenceof a market, or the remoteness of the materials to flux them rendered them unavailable at the present tune?

Mr. Cole. Yes, sir.

The Chairman. Or in the immediate future?

Mr. Cole. In the immediate future. (Hearings, p. 5494.)
The only large deposits of ore at present available for the making and marketing of pig iron and steel in large quantities and at a profit are found in the Lake Superior and Birmingham districts.
The Chairman. Where are the principal ore bodies, workable ores, in the United States? * * * Such ores as can be worked at a profit?

Mr. Perin. The two great ore bodies, of course, are those in the Mesabi Range, and in the Gogebic and the Marquette and Menominee Ranges, andnext in importance in volume of tonnage would be those in the Alabama district, directly in proximity to Birmingham.

The Chairman. The two great ore bodies are those of the Lake Superior region

Mr. Perin (interposing). And the Birmingham (Ala.) region.

The Chairman. Are there any other large ore bodies which ate or can be worked, from which pig iron can be made at a profit in competition with these two ore bodies which you have mentioned?

Mr. Perin. Which can be marketed? I do not think so. At a higher market and as the metallurgic art advances the ores of Uie Adirondack and other regions will become important factors in the production of pig iron. (Hearings, p. 972.)
At the formation of the Steel Corporation the ores of this region seem to have been disregarded, since they were all non-Bessemer, that is,contained exceeding 4 per cent of phosphorus, which prevented their use in a Bessemer converter, and prior to 1906 steel rails were made from Bessemer steel only.

It is only in recent years that the use of steel made from non-Bessemer ores has approached Bessemer steel either in the quantity produced or in the variety of finished materials for which it could be rendered available.

A brief review of the two processes by which pig iron is converted into steel is necessary to a clear apprehension of tho vast and vital change which the gradual substitution of the "basic" or "openhearth process" for the old "Bessemer process" has wrought in the whole status of the steel industry and the relative value of iron prea in this country.
Mr. Roberts. The Bessemer process as known and called such is I >y blowing compressed air through molten pig iron in what is known as a converter. By the blowing through of that air the carbon is eliminated by the oxygen of the air and forms carbon oxide, which burns to carbonic-acid gas. That then becomes steel and is poured into the ingots. The open-hearth process was known as the Seaman's furnace, a reverberatory furnace with gas fuel. The coal is charred in a producer, which forms gas, is then carried to the furnace, which is on regenerative principles, and the flame passes over the bed of the furnace, the open hearth of the furnace, on which either liquid pig iron or cold pig iron is put, melted, and the carbon removed from the pig iron by the contact of the oxygen with the flame passing over it. The lining of the furnace, wnat is known as the basic furnace, is composed of bases instead of acids. The original form of the open-hearth process was acid and was made in a furnace lined with sand or silica, whereas the basic furnace is lined with a base such as alum or magnesia. This enables the introduction of basic material, such as limestone, whichhas an affinity for phosphorus, and eliminates the phosphorus from the pig iron, whereas in the Bessemer process by simply passing air through the pig iron in an acid-lined converter you do not eliminate the phosphorus. I would say that it is a more expensive process to operate an open hearth than it is a Bessemer, due to the fact that in one case your fuel is air and in the other case your fuel is coal. You can not make open-hearth steel ascheaply as you can make Bessemer steel.

Mr. Bartlett. What is the advantage of the one over the other, if any?

Mr. Roberts. You have the opportunity of using all grades of ore in the open hearth, whereas in the Bessemer you are limited to certain special ores which contain a small content of phosphorus. (Hearings, p. 360.)


Mr. Roberts. * * * Basic open-hearth steel admits of the use of any quality of ore irrespective of its phosphorous content, whereas Bessemer steel requires an ore with a low phosphorous content, probably not over 0.04, due to the fact that phosphorus in the Bessemer process is not eliminated; but in the basic openhearth process it makes no difference how much phosphorus you have, because you eliminate it in the process of making your steel. Consequently these plants which originally produced Bessemer steel, due to the fact that the basic open-hearth process was not known at that time and not operated, have now gradually, due to the gradual extension of the Bessemer, or low-phosphorus ores, been compelled to turn overto the manufacture of open-hearth basic rails. The plant at Gary is arranged as an open-hearth basic plant entirely. They have no Bessemer plant.And some of the Pittsburgh plants are using the basic open-hearth process. The others are using both, as they see fit.

Mr. Gardner. Has it been an expensive matter to convert the plants of those companies so that they can use this basic openhearth process insteadof the Bessemer process?

Mr. Roberts. Yes. It means the abandonment of their Bessemer plant, putting it in the scrap heap. The value of all the capital invested in the Bessemer plant disappears and whatever the cost of the open-hearth plant is must be added to then- capital charges. (Hearings, pp. 359-360.)
By the partial locking up of the ore reserves of Lake Superior and by the exaction of an onerous tribute for their transportation, the Steel Corporation unwittingly stimulated the development of the open-hearth process and offered a strong inducement to the bold capitalist and the inventive genius to discover new forms and uses to which it could be applied.
"The growth of basic steel," says Mr. Topping, president of the Republic Iron & Steel Co., "is not necessarily all due to the superior quality of that steel for certain purposes over Bessemer, but is due more largely, in my judgment, to the limited supply of Bessemer ores and to the constantlyincreasing demands for steel in various forms; and the basic-steel process has made available a large amount of ore that otherwise would not have been available, and which, had it not been for the basic process, would not have enabled us to meet this great demand for steel everywhere. There is also, in addition to the reason I have just cited, a demand for a quantity which calls for basic exclusively, on account of specifications andrestrictions placed by certain engineers for roads and structural material, that is all basic necessarily for quality reasons."

The Chairman. What are the advantages of this steel made by the open-hearth process?

Mr. Topping. Well, the general advantage is in this, that you can not reduce by the Bessemer process phosphorus below the percentage at whichyou start in on the ore; in fact, you pick up added quantities of phosphorus in the process of manufacturing with limestone and ccike, whereas in the basic process, it is only a question of time when you can eliminate substantially all the phosphorus; and by the basic process you get a more regularsteel and better quality, due to the fact that phosphorus is not an element that adds to the Quality, but the reverse of that in its general influence. Itmakes it brittle. (Hearings, p. 1234.)
Mr. Roberts, a learned and skillful engineer, speaks of the manufacture of rails from Bessemer steel by the corporation to within the last two or three years as "due to the fact that the basic open-hearth process was not known at the time and not operated." Strictly speaking, while known, it was not developed until recent years to such an extent as to enable steel made by this process to compete with the product of the Bessemer converter. This gradual revolution in the process of manufacture has been due to the rise in price of the corporation's Bessemer ores, the development of the openhearth furnace, and the consequent cheapening of steel produced by that process.

Statistics compiled by the American Iron & Steel Association show that a small amount of open-hearth ingots and castings were made as far back as1869. In recent years the substitution of basic for Bessemer steel has been phenomenal. In 1894 there were produced in the United States 3,571,313 tons of Bessemer ingots and castings, as against 784,936 tons of open hearth. Two years later, the production of Bessemer steel showing no material change, open-hearth ingots and castings increased nearly 200 per cent, viz, 1,298,700 tons, and by 1898 this amount had again been practically doubled— 2,230,292 tons.

At the time of the formation of the Steel Corporation the total production of Bessemer and open-hearth steel, from the date of the introduction ofthe basic process into this country (1869), was 75,366,329 tons and 18,029,741 tons, respectively, while from the time of the formation of the Steel Corporation (1901) to the absorption of the Tennessee Coal & Iron Co. the production of open-hearth steel amounted to 53,583,640 tons, as against 69,188,388 tons of Bessemer steel. In the three years immediately succeeding the absorption of this company, 1908 to 1910, inclusive, the productionof open-hearth steel has exceeded that of Bessemer by approximately 12,000,000 tons, or 38,835,174 tons open-hearth to 24,860,310 tons of Bessemer.

At present the open-hearth process for general purposes bids fair to practically supersede the old Bessemer converter except in a few localities where the scarcer and more costly Bessemer ores can be obtained under especially favorable circumstances. In 1910 the production of open-hearth steel reached a grand total of 16,504,509 tons, as against 9,412,772 tons of Bessemer. The production of Bessemer steel is actually as well asrelatively on the decline, being 2,863,058 tons less hi 1910 than in 1906. Attention is called to table in the appendix to this report, giving the relative annual production of both kinds from 1869 to 1910.

The Steel Corporation, at the time of its organization, sterns to have accepted without question the saying among steel makers that "phosphorus is to iron what the devil is to religion," and to have regarded as unavailable for general purposes the vast ore deposits of the Birmingham district.

As has been shown, the corporation constructed the immense and costly fabric of its ore, crude steel, and transportation monopoly upon the control of Superior ore as a basis, and the strength and perpetuity of that foundation rested upon the continuing supremacy of the Bessemer converter.

When open-hearth steel, produced as cheaply as the Bessemer and in vast quantities, could be placed upon the market by manufacturers owing their own ore and coal reserves, and assembling their raw material without the use of the corporation's roads and steamship lines, then and then only was the perfect and hitherto seemingly invincible control of the manufacture of steel products seriously menaced.

As has been demonstrated, the absolute power to "fix" the price of pig iron enabled the corporation to make and manipulate the price ofsemifinished steel. It is true these "sliding-scale" contracts were usually predicated upon the price of Bessemer pig iron, but in the event the corporation arbitrarily raised the price of Bessemer pig iron above the basic, it would by that means still further stimulate the production of the latter metal by its competitor, since under changed conditions it could be used interchangeably with the Bessemer pig iron.

It is evident that the production of pig iron in large quantities and at a cost no greater than that of the corporation, notwithstanding its advantages derived from the ownership and control of common carriers, meant the certain destruction of the cunning and costly device by which ithad caused so many "shut downs" among its former competitors, dependent upon it for raw material.

Personnel Tennessee Coal & Iron Syndicate.

Expert ore and steel men were not slow to see the infinite possibilities which the development of this process opened to non-Bessemer ores, andgrasped the opportunity to obtain control of vast ore and coal deposits in the southern Appalachian region.

In October, 1905, a syndicate was formed which acquired the properties of the Tennessee Coal, Iron & Railroad Co., the largest concern in the Birmingham district, the members of the original syndicate and their individual shares being as follows:

O. H. Payne 10,300
L. C. Hanna 10,300
G. B. Schley 10,300
J. B. Duke 10,300
E. J. Berwind 10,300
J. W. Gates 10,300
A. N. Brady 10,300
G. A. Kesgler 10,300
O. Thornc 10,300
E. W. Oglebay 5,150
H. S. Black 5,150
F. D. Stout 5,150
J. W. Simpson 5,150
G.W.French 2,500
S. G. Cooper 1,500
J. A. Topping 1,000

Total 118,300

(Hearings, pp. 1124-1125.)

54946°—H. Rept. 1127,62-2 11
This syndicate was formed for the purpose of developing not exploit^ ing the steel industry, as evidenced by the fact that not one single dollarwas ever paid to the syndicate or any individual in it for promoting the scheme or underwriting its securities. The immense financial resources of its members assured the capital necessary for the great undertaking, and among its members were men of skill and experience in every department of the businsss.

Oglebay and Hanna had large holdings in the Lake Superior ore fields, long experience in the value and handling of ores, and in the manufacture ofpig iron.

Topping, the chairman of its board of directors, was expert in every detail of manufacture from the ore up, and John W. Gates, the organizer of the American Steel & Wire Co., was equally familiar with the industrial and financial operations of such concerns on the most extensive scale.
The Chairman. How many practical steel men were in the syndicate—men who understood the business of making steel?

Mr. Hanna. Well, I do not know exactly what you mean when you say "making steel."

The Chairman. I mean handling ore or making pig iron, for instance.

Mr. Hanna. I do not know of any who were not familiar with the iron and steel industry, but as to those actually connected with it I do not know. I should have to look at a list, Mr. Chairman. I should say five or six or seven, perhaps, who had been, and were then, identified with the steelindustry.

The Chairman. You had been interested in it I

Mr. Hanna. Yes, sir.

The Chairman. Mr. Berwind?

Mr. Hanna. No, sir; I do not think so.

The Chairman. Mr. Gates?

Mr. Hanna. Yes, sir.

The Chairman. Mr. Oglebay?

Mr. Hanna. Yes, sir.

The Chairman. And Mr. Stout, Mr. Black, Mr. Simpson, Mr. French, Mr. Cooper, and Mr. Topping?

Mr. Hanna." Mr. French had been interested in the steel business and Mr. Cooper had been identified with the steel business.

The Chairman. What experience had Mr. Topping had?

Mr. Hanna. Mr. Topping had been ail his life in the iron and steel business, actively.

The Chairman. So that from the personnel of this syndicate. I judge you were well equipped, not only as to your financial resources, but you had men in the syndicate who understood from experience—the best school in which to learn things, practical experience, long experience—just how todevelop economically and effectively the great business you contemplated establishing in that region.

Mr. Hanna. Yes, sir; I would say so. (Hearings, pp. 886887.)
The properties of the Tennessee Coal & Iron Co. were located in a region absolutely unparalleled in the close proximity of vast quantities of all the materials essential to the manufacture of iron.

The ore, limestone, dolomite, and coal are assembled by nature within a radius of a few miles.

"I think," says Mr. Gates, "that in the Birmingham district it is possible to assemble a ton of material and make a ton of pig iron cheaper than any other place in the world." (Hearings, p. 7.)
Mr. Perin, the engineer who had prepared a careful survey covering practically every foot of this district, states:
The Chairman. You did not complete your answer as to the Woodward Co. I want to know the number of miles they haul their limestone, coke, andiron?

Mr. Perin. I think the coke is hauled somewhere between 3 and 4 miles and the limestone an average distance of 2$ miles.

The Chairman. So, as a rule, it is the same haul and the same freight within that radius of 25 miles.

Mr. Perin. Yes.

The Chairman. Does that spring from the fact that in the whole region they find within that radius those three essentials in the making of pig iron?

Mr. Perin. Practically so, and so as not to give any one corporation any particular advantage over the other. The rates were established so as toequalize competition in the district.

The Chairman. Now, you have spoken of your experience in locating ore regions in this country and in India. Is there any place on the habitable globe known to the iron industry where that physical condition exists or anything approximating it?

Mr. Perin. The only possible parallel conditions, where the juxtaposition of the raw material is such as exists in the Birmingham district, are in Middlesboro, England. There the iron ores are of a lower grade, and they bring their fuel a distance varying from 10 to 25 miles. That is almost a parallel with the conditions that obtain in Birmingham, but there are no such large single deposits as exist in the Birmingham district. (Hearings, p. 982.)
Mr. Schwab has made practically the same statement to the Ways and Means Committee in 1908:
For example, I know that pig iron can be produced in different parts of Germany at from $9.50 to $12 a ton to-day, depending upon the location andcharacter of the pig.

The Chairman. Against $14 here?

Mr. Schwab. About $14 to $14.50 here.

* * * * * * *

The Chairman. That is in Germany. How about England?

Mr. Schwab. England is probably a little cheaper, though it is not widely different.

The Chairman. What is the main reason for the additional cost of the pig iron here?

Mr. Schwab. Raw material and freights being higher.

The Chairman. Their iron is nearer the coal mines?

Mr. Schwab. Yes. They assemble it cheaper than we do.

The Chairman. I do not suppose they do it any cheaper than we can at Birmingham?

Mr. Schwab. No; we do it cheaper in BirmingJiam than they do in England.

The Chairman. You think the cost of pig iron in Birmingham would be less than the cost in England?

Mr. Schwab. I know it would be.

The Chairman. The cost of converting the steel is about the same?

Mr. Schwab. In Birmingham it is about the same. (Hearings, p. 1133.)
The Tennessee Coal, Iron & Railroad Co. acquired the greater part of all the available ores in this region according to Mr. Perrin, who spent months on these properties in a careful survey intended to determine both the quantity of ore in that district which was economically available and the relative amount held by this and other large concerns.
"Estimating," says Mr. Perin, "the tonnage of the Woodward Co. and of the Birmingham Coal & Iron Co. and the Birmingham Iron Ore Co., I would say that the Tennessee Coal, Iron & Railroad Co. possesses about 70 per cent of Red Ore Mountain.

The Chairman. That is, of the ore-bearing district?

Mr. Perin. The range which is tributary to the fuel at the present time, the area of low-assembling cost.

The Chairman. If the Tennessee Coal & Iron Co. has 70 per cent of the entire region, what per cent of the region is now marketable and can be purchased by any man who goes down there and opens a blast furnace and buys his own coal on the ground?

Mr. Perin. I suppose, outside of the Birmingham Iron Ore Co., there is no merchantable ore for sale in the Birmingham district.

The Chairman. How much have they at their disposal?

Mr. Perin. I have no accurate knowledge.

The Chairman. What per cent?

Mr. Perin. Very small; possibly 1\ per cent to 5 per cent.

The Chairman. Of the whole region?

Mr. Perin. Yes, sir. (Hearings, p. 980.)

* * * * * * * 
Mr. Perin. I should consider this as one of the greatest properties I know of anywhere in the world, take it by and large; that is, considering the proximity of the iron ores to the coal. (Hearings, p. 984.)
On December 31, 1906, Mr. Topping made the following statement to the board of directors of the Tennessee Coal & Iron Co.
The knowledge that your executive committee has acquired as to the tonnage and character of the iron ore, coal, and limestone owned in fee simple by your company satisfies them that, in wealth of raw materials required for the manufacture of iron and steel, your company ranks as second to only one in the world, and is far in advance of any other iron or steel producer in cost of assembling its raw materials for manufacture.

The mineral reserves of coal and iron contained in your lands, as computed by competent authorities, are estimated to be 700,000,000 tons of iron oreand 2,000,000,000 of coal. Approximately, one-half of your coal supply is of a superior coking quality, and your iron ore is largely of a self-fluxingcharacter, analyzing approximately 38 per cent metallic iron. This ore is well suited to the manufacture of high-grade foundry pig iron, and to the production of basic iron pig for use in the manufacture of basic open-hearth steel. (Hearings, p. 1232.)
When before this committee he was interrogated in regard to this report as follows:
Is that the statement prepared by you at the time as the chairman of the board?

Mr. Topping. That is the statement I made to the stockholders.

The Chaikman. Is that a correct statement?

Mr. Topping. So I believe. It was the report of our engineers, and based on their own estimate. I might say hi that connection that that estimate was not based on complete drilling records—the property was not entirely drilled, and is not as yet to-day, so far as I know—but based on the tonnage produced per acre and from the opened-up properties. Our own engineering or mining department believed that that was a conservative statement,and I accepted that statement for my report to the stockholders. (Hearings, p. 1232.)
* ******
The New York Sun, November 7, 1907, said:
"The acquisition of the [Tennessee] company is particularly advantageous to the Steel Corporation,because of the iron ore and coal properties that go wjth it. With the Great Northern and Northern Pacific ore lands acquired last year, together with the previous holdings, the Steel Corporation now has iron-ore deposits estimated at approximately 2,400,000,000 tons, of which approximately 700,000,000 tons come with T. C. & I." (Hearings, p. 1129.
John Moody, in an article in Moody's Magazine for January, 1909, said:
But the most fortunate business stroke of the Steel Corporation, from the viewpoint of its owners, since its organization in 1901, was the acquisition last year of the Tennessee Coal, Iron & Railroad property. The acquisition of this organization has added great potential value to the steel organization and has increased the tangible equity of its common-stock issue to a far greater extent than is commonly realized. The Tennessee coaland iron properties embrace, besides important manufacturing plants, nearly 450,000 acres of mineral lands in the Birmingham section of Alabama.As shown in the report of the Tennessee company in 1904, when an appraisal was made by outside parties, these lands contain approximately 400,000,000 tons of first-class low-grade ore, and more than 1,200,000,000 tons of coal, of which about one-half is coking coal. This estimate indicates that the deposits embraced are even in excess of those of the great Lake Superior properties controlled by the corporation, including the Great Northern ore bodies. This entire property was acquired, as is well known, on very favorable terms for the Steel Corporation, and of course puts it in a position where now it need have no concern regarding a possible future shortage of supply of either iron ore, coal, or coke. Added to this is the fact that the deposits are more favorably located than those of the Lake Superior district and will enable the company to carry on in the years to come a vast economic development of production and manufacture in this section of tie country. The Tennessee ore is of a grade which is better for the making of ordinary pig iron than that of any other known deposits in this countiy. (Hearings, pp. 1129-1130.)
The incalculable advantage of securing coal, ore, and limestone from adjacent hills will be more fully appreciated when it is considered that the ore deposits of the Steel Corporation were located at the head of Lake Superior and its principal coal measures in West Virginia and Pennsylvania, and it is a thousand miles by the course of the traffic from the Mesabi Range to the Connellsville coal fields.

This facility in assembling the raw materials enabled operators to produce pig iron at from three to four dollars per ton less than any other manufacturer in the United States. In other words, an operator at Birmingham can make pig iron for sale hi the vicinity of his furnace at a living profit for less than the actual cost of production to his competitor in Pittsburgh.

Mr. Perm states:
The Chairman. Have you ever had any practical experience in the construction or operation of blast furnaces and other plants for the manufacture ofsteel?

Mr. Perin. I have held every position at a blast furnace from fireman, with a negro partner, to proprietor.

The Chairman. Have you ever constructed any blast furnaces!

Mr. Perin. I have built one and I have reconstructed about eight.

Mr. Young. Which one?

Mr. Peein. I built the Ashland No. 2 blast furnace. I was superintendent of the Norton furnace, the two Middlesboro furnaces, the two furnaces ofthe Londonderry Iron Co. I remodeled their No. 2 furnace. I have held other positions of a subordinate capacity, as well as superintendent andgeneral manager. (Hearings, p. 971.) * * * * * * *

Mr. Perin. Based on to-day's selling prices, which I presume would be a fair approximation of their cost price, there is nearly $4 difference in the costof production between the two districts. Pittsburgh is able to produce at a very low figure, by reason of its large plants, and large production andexcellent equipment. (Hearings, p. 971.)


The Chairman. I wish to show you extracts from this report prepared for the Geological Survey by Mr. Phillips showing the cost of manufacture ofpig iron in 1894,1895, and 1896. This report shows the average cost to manufacture pig iron per ton, as follows: $6.457 for the year 1894, $6.65 for 1895, and $6.464 for the year 1896. Is it a fact that this is the lowest cost of production that pig iron could be manufactured for in the known world?

Mr. Perin. I do not think there is anybody to-day who could come within $3 of that cost. (Hearings, p. 984.)
John W. Gates states:
A ton of pig iron, under the most modern practice, in what is known as the Birmingham district can be produced to-day for less than $9 a ton. There is no other part of the United States that I am acquainted with, however, where it can be produced at less than $11 a ton, based on the freight rates for assembling the raw material. As an illustration, the freight rate on dolomite, which is used for the flux, is perhaps 12£ cents a ton, in some cases possibly 15 cents a ton, freight to the furnace. The freight on the coke in some instances is nothing; the coke is made at the furnaces. The freight on the ore varies, I think, from 10 cents a ton to about a maximum of 25 cents a ton on anything directly in the Birmingham district. When you get out of theTBirmingham district and get to use a richer brown ore, the freight rate runs up to 35 cents and 40 cents, and, I think, 50 cents, a ton; but in the close proximity of Birmingham you can assemble the material and make a ton of pig iron cheaper, in my opinion, than anywhere in the world. (Hearings, pp. 7, 8.)
***** * *
Mr. Given. * * * I do not know of any place on God's green earth—if there is any such place I have never read of it—where they can get the material for making pig iron together as quickly, as cheaply, and as continuously as they can in Birmingham. (Hearings, p. 1011.)
This new and powerful concern prepared to make the most of its unique advantage in the production of pig iron and entered aggressively into its manufacture into steel in its more finished forms, having secured with this huge ore and coal reserve, the Birmingham Southern Railroad and a plant described by the Steel Corporation as follows:
The Steel Corporation, in its corporate capacity, is on record as to this property. In the Sixth AnnuaJI Report of the United States Steel Corporation for the year ending December 31, 1907, the holdings of the Tennessee Co. which were acquired are given as follows (pp. 26, 27):

"Surface and mineral rights acreage of iron ore, coal, and limestone property, owned in fee, 447,423, distributed as follows: In Alabama, 340,263 acres; in Tennessee, 105,740 acres; in Georgia, 1,420 acres. Upon this property there were in operation in the State of Alabama, near Birmingham, 13 active ironore mines, with 2 under construction and at Greeley 3 active iron-ore mines. In Georgia there were 2 active iron-ore mines in operation.

"In Alabama there were in operation 22 active coal mines and 2,800 coke ovens; in Tennessee, 1 coal mine and 174 coke ovens.

"There were 2 active quarries, 1 inactive, and 1 in course of development, all in Alabama.

"There were 14 active blast furnaces in Alabama; 2 in Tennessee.

"All mills, foundries, machine shops, etc., were located at Ensley and Bessemer, Ala., near Birmingham.

"The Tennessee Co. owned the capital stock of the Birmingham Southern Railway Co., a terminal railroad connecting the various mines and plants ofthe company in the Birmingham district, consisting of 31.16 miles of main and branch lines, 1 mile second track, 67.78 miles yard and siding tracks, 35 locomotives, and 725 cars of all descriptions.

"The Tennessee Co. owned the entire issued capital stock of the Tennessee Land Co., the Booker Land Co., and a controlling interest in the stock ofthe Ensley Land Co.—these companies owning various tracts of land adjoining the several properties of the Tennessee Co.

"The net profits of the Tennessee Co. for the year 1907, after charging on $437,666.84 for depreciation and extraordinary replacements, and$885,552.31 for net interest charge on bonded and floating debt, were $1,426,684.58 (a little more than 4} per cent on the capital stock).

"The company spent during 1907 for extensions, additions, and betterments the sum of $6,589,116.99." (Hearings, p. 1132.)
Mr. Schley, the syndicate manager, in speaking of the personnel of the owners of this company and the character of the improvements which were being made up to the very hour it was absorbed, says:
The Chairman. This property that you men had taken hold of had already been unproved, as I understand, by the expenditures of six or seven million dollars, and that expenditure had been made under the supervision of Mr. Topping, had it not!

Mr. Schley. Yes; and a half a dozen other most capable men.

The Chairman. And every dollar they put into that business was put where it would "burn," to use a slang expression, was it not?

Mr. Schlet. Yes.

The Chairman. And where you would get the best results 1

Mr. Schley. Yes.

The Chairman. Was there a steel plant on the continent more skillfully constructed, more capable of bringing to the men who constructed it ample returns, than the steel plant at Ensley?

Mr. Schley. I do not think there is any better. The Steel Co. carried it out on exactly that same plan. They could not improve on it. (Hearings, pp. 1114-1115.)
The character of improvements, completed and in contemplation, is taken from the last report made by this company and reproduced in the Sixth Annual Report of the United States Steel Corporation:

"As compared with previous years, your earnings may be favorably regarded with operating profits hi excess of 20 per cent on your volume ofbusiness. This result, considering the almost unlimited tonnage of your mineral reserves and their great potential value, should suggest no delay in providing the necessary facilities to meet your income opportunity. Your executive committee, recognizing the inadequacy of your present facilities,has authorized substantial expenditures to increase your volume of business and income; but further expenditures could be advantageously made" (p. 7).

"But, as heretofore stated, the maximum possibilities with your present manufacturing and mining facilities are not sufficient for the most favorable results. The extensive improvements now under way, both in your mining and manufacturing departments, will greatly strengthen your operations when completed and in running order" (p. 18).

"The physical condition of your mills during the past year (steel works and rolling mills)has been improved by liberal expenditures" (p. 28).

"While a general rehabilitation of old equipment has been taken care of oy liberal maintenance, your executive committee have realized the necessityof increasea steel and rail productive capacity and have authorized the construction of a modern steel works and rail mill. These extensive improvements are expected to Double Your Steel Output and Rail Capacity (capitals ana italic in text) and radically reduce your cost of production.The benefits expected from these additions to plant will not be operative until the last half of 1907" (p. 28).

"The same policy as applied to your steel works and rolling mills, in respect to betterments and maintenance, has also been applied in building up your blast-furnace department" (p. 29).

"These extensions (iron mines and quarries) are all under way and substantially increased production will be realized during the year 1907" (p. 30). (Hearings, pp. 1127-1128.)
And this was the work of a real competitor. John W. Gates, the active and controlling spirit of both the Tennessee and the Republic Iron & Steel Cos., did not subscribe to the doctrine of "cooperation" and displayed no fear of "destructive competition." Before this committee he stated:
Mr. Gates. * * * My theory is that I would rather have an open market and be able to run full and not be hampered by any competitors saying: "You are selling goods too low, than to "have a fictitious market where I could only run 40 or 50 or 60 per cent. That has always been my idea, (Hearings, p. 43.)
As a result of the putting into actual practice of this wholesome theory the business of the Tennessee Co. advanced by leaps and bounds as evidenced by its minutes during the last year of ite industrial independence:
On May 21, 1907—

Meeting of board of directors.

The chairman presented condensed comparative statement of earnings and of all products for four months ending April 30,

1907, as compared with the same period in 1906. Net earnings above all fixed charges, interest, and depreciation amounted to $611,247.17, a gain of 35 per cent over last year, and surplus, after paying dividends, interest on common stock, subscriptions, and all special charges, amounted to$335,638.61, a gain of 37J per cent.

Production showed the following percentages of increase over last year: Ingots, 4 per cent; pig iron, 11 per cent; merchants' steel, 18 per cent; coal, 24 per cent; coke, 5 per cent; iron ore, 12 per cent; limestone and dolomite, 2 per cent. Price for iron, $20 to $21 per ton Birmingham. Sales thereof for first quarter 1908, at $18.50.

The chairman reported on the subject of a revaluation of the mineral properties of the company that the chartered accountants had agreed to the proposition that it would be in line with proper procedure to establish a higher valuation in view of the large appreciation which has taken place in the value of raw materials during the past few years; the purpose of such revaluation being in the present instance the creation of a surplus value sufficient to cover the depreciation which must inevitably be provided for in carrying out the policy established of rebui ding our manufacturing department.

The chairman presented a statement showing a condition of rail sales for 1906-7 indicating a tonnage booked for delivery to January 1, 1908, of327,199 tons. The chairman stated that the extension to the steel works, if promptly authorized along the lines suggested by detail plans to besubmitted by the next meeting of the board, on June 12, and which, if adopted and authorized, it was thought would enable the management to bring into service the new equipment of the steel works extension oy the 1st of May, 1907, would add an increase in the output to our present capacity estimated at from 15,000 to 20,000 tons per month. Based on this estimate, he further stated that the estimated output of rails prior to January 1, 1908, would be approximately 425,000 tons. He desired to know whether it would be advisable, in the judgment of the board, to sell the surplus rail outputof approximately 100,000 tons. After discussion, it was, on motion—

"(27) Resolved, That the management be authorized to sell 100,000 tons of steel rails at the present market for such delivering in 1907 as the companv can make."

(Min. board of dir. T. C., I. & R. R. Co., May 23, 1908; MacRae Rept., p. 4290.)
The chairman presented a complete monthly statement of operations for the month of August, showing net earnings of $72,241.50, improvement over preceding month of approximately $40,000; also showing a material increase in the production and shipments in all departments. (Min. board ofdir.T.C., I. & R. R. Co., Sept. 18, 1906; MacRae Rept., p. 4293.) The chairman presented the regular statements covering the operations of the company for the month of December ana the 12 months ending December 31, 1906, comprising the following individual reports: (1) Income account; (2) analysis of earnings; (3) orders on hand, pig iron and steel; (4) production cost, shipments and prices, December; (5) production cost, shipments and prices, year; (6) general balance sheet; available assets.

Income account showed net earnings after interest charges and depreciation of $95,241.89 for the month and 81,145,006.81 for the year; dividends of4 per cent on common stock and 8 per cent on preferred stock amounted to $912,080; sinking fund on general mortgage bonds to $47,760; interest on subscriptions to new common stock to $48,376.21.

The chairman also presented a letter from Mr. L. Hoover, treasurer, accompanying the statements, summarizing the results for the year in comparative form with those of the previous year, together with a statement which is filed with the executive record papers of this meeting.
"Resolved, That the investment of this company in the stock of the Potter Ore Co. be valued at 8400.000, same representing the cash investment of$50 000 plus the liability of the company to its proportion of $700,000 of guaranteed bonds."
Attention was called by the chairman to the fact that this valuation was equivalent to 10 cents per ton on 40,000,000 tons of ore, which our interest in the tract is estimated to contain, and that based upon a 5 per cent royalty the operation of the sinking fund will retire the bonded debt and vest absolute title to the property in the company upon the payment of a less sum hi the aggregate as interest than would have been paid to the owner ofthe property upon the same tonnage as royalty based upon an average price of pig iron.

The chairman presented statements of sales and production, both for the period ending December 31, 1906, and for the month of January to date. From the former it appeared that the orders for pig iron on the books amounted to 142,000 tons of foundry grades and 62,000 of basic, which, allowing for our own requirements, indicated that upon our estimated output the company was sold up on all grades for the first half of 1907 and for aoout 25 per cent of its make on the last half. (Min. ex. com., Jan. 30, 1907; MacRae Rept., p. 4296.)

The chairman submitted the customary statements, showing all operations for the month of April and for the four months ending April 30. Net earnings for the month amounted to $191,147.84, a gain over the preceding month and the best record since 1904, and for the four months amountedto $611,247.17, a gain of 35 per cent over the corresponding period last year. The chairman stated that on pig iron the company was sold up practically for the year 1907, the surplus of unsold iron being estimated at only about 30,000 tons. (Min. ex. com., May 21, 1907; MacRae Kept., p. 4299.)

Income account showed balance above all charges and depreciation amounting to $221,998.58, a gain of nearly $31,000, as compared with April, andthe best month recorded since 1903; surplus for the five months ending May 31 amounted to $838,245.75, as compared with $558,513.28 for the same period in 1906. The report was ordered on file.

As a matter of information, the chairman presented a comparison of earnings with the Sloss-Shemeld Steel & Iron Co. for the quarter comprising the months of March, April, May, 1907 and

1906, showing an increase in net earnings for the Tennessee Co. of 65 per cent, as compared with 56 per cent for Sloss. (Min. ex. com., June 25, 1907, p. 4302.)


Total tonnage on the books June 1, 416,846 tons, average price, $28.93, including both first and second quality. Based on the estimated productionto the end of the year 1908, an apparent surplus is available for sale of upward of $30,000. The chairman stated that it might be safe to consider we had from 40,000 to 50,000 tons to sell for 1908 delivery. He advised that we are holding the price of rails at $30 for standard sections to trunk lines,and at $32 for street car use. (Min. ex. com., June 25, 1907, p. 4304.)

The Sixth Annual Report of the Steel Corporation summarized the phenomenal development of this company as follows:

Comparative statement of income (p. SO).

Gross profits—
For 1904 $1,862,631.21
For 1905 2,484,139.26
For 1906 2,753,159.85
For 1907 (p. 27, U. S. S. C. Kept.) 2,749,903.73

Gross sales and earnings (p. 19)
For 1904 9,607,578.74
For 1905 10,951,979.02
For 1906 13,265,970.66

New construction and development of land (pp. t4, t5).
For 1906... $1,355,632.28
For 1907 (p. 27, U. S. S. C., 6th Ann. Rep.) 6,589,116.99

In this connection note that the total costs of the plants of the Tennessee Co., excluding land, was, on the date of this report (p. 21), $11,211,872.30, and that of the $6,589,116.99 expended for new construction in 1907 only about $72,000 was expended for land, leaving the balance ofover $6,500,000 expended for enlargement of its manufacturing capacity, or an increase of about 60 per cent.


"The unfilled orders now on your books represent the largest tonnage in the history of your company. The business is well distributed and indicatesbroadening markets for all products. This is particularly true of coal and coke. The prospects for the future, as suggested by business on hand, shows no sign of business recession, and the outlook for the year 1907 is most encouraging" (p. 37).

Memorandum of unfilled orders at of January 1, 1907.

Tom. Manufactured iron and steel products .............................. 467, 114
Coal .............................................................. 1,200,000
Coke ............................................................. 201,000

(p. 37.)


Rails, billets, steel bars, and plates (p. 28): Tons.
For 1904 ..................................................... 155, 266
For 1905 ..................................................... 402,318
For 1906 ..................................................... 401,882
For 1907 (p. 27, U. S. S. C., 6th Ann. R.) ....................... 477,624

Pig iron (p. 29):
For 1904. . . . ................................................. 475, 314
For 1905 ..................................................... 529, 036
For 1906 ..................................................... 641, 887
For 1907 (p. 27, U. S. S. C., 6th Ann. R.) ....................... 602,827

Iron ore (p. 30):
For 1904 ..................................................... 1, 208,038
For 1905 ...................................................... 1,436,282
For 1906 ..................................................... 1, 483, 476
For 1907 (p. 27, U. 8. S. C., 6th Ann. R.) ....................... 1,576,757

(P. 32.)

"The knowledge that your executive committee has acquired as to the tonnage and character of the iron ore, coal, and limestone owned in fee simple by your company satisfies them that, in wealth of raw materials required for the manufacture of iron and steel, your company ranks as second to only one in the world, and is far in advance of any other iron or steel producer in cost of assembling its raw materials for manufacture.

"The mineral reserves of coal and iron contained in your lands, as computed by competent authorities, are estimated to be 700,000,000 tons of iron ore and 2,000,000,000 tons of .coal. Approximately one-half of your coal supply is of a superior coking quality, and your iron ore is largely of a self-fluxing character, analyzing approximately 38 per cent metallic iron. This ore is well suited to the manufacture of high-grade foundry pig and to the production of basic pig iron for use in the manufacture of basic open-hearth steel" (p. 32).

"The financial statement shows your company to be in a sound financial condition, with current assets of $3,004,480.09 in excess of your current liabilities" (p. 9). (Hearings, pp. 1126-28-29.)
No product in a steel mill promises a more certain or lucrative return than steel rails. The close relations existing between the makers of steel railsand the users of them have maintained the price without change for more than 10 years at $28 a ton.

At the tune this syndicate secured control of the Tennessee Coal & Iron Co. steel rails were made from Bessemer pig iron. The only open-hearth rails produced up to that time had been practically for experimental purposes.
"I think," said Mr. Roberts, "other rail makers had rolled from time to time open-hearth steel rails in an experimental way—not very large orders. But the Tennessee Co. were not a manufacturer of Bessemer steel, due to the fact that the ores in Alabama were not Bessemer ores; it was therefore necessary for them to enter into the manufacture of open-hearth steel rails when they built their rail plant, as they were unable to make Bessemer steel. They, therefore, were one of the earliest, or the earliest, of openhearth steel-rail plants in the country." (Hearings, p. 353.)
"Whatever steel rails were made prior to the time Gates and his associates took charge of the Tennessee Co.'s property were certainly, as Mr. Roberts says, "in an experimental way." The total production of Bessemer steel rails between 1897 and 1905 was 22,358,729 tons, and of open-hearth rails 385,899 tons. (Annual Statistical Report American Iron & Steel Association, 1906, p. 67.) Gates testifies that his company erected and operated the first and only open-hearth steel-rail mill in the United States, and so successful was this concern in the manufacture of rails from its cheap material that it soon became manifest that their product was superior to the rails made by the Steel Corporation from its high-priced Bessemer ore. As stated in the New York Press of November 7, 1907:
"The Tennessee is one of the two steel companies in the United States which manufacture open-hearth rails, now so greatly in favor with the railroads. When Harriman bought 160,000 tons of rails of the Tennessee Co. a few months ago it brought the steel company to a realization that ithad a strong competitor in the steel-rail field." (Hearings, p. 1129.)
This, was due in great measure to the toughness and ductility of the open-hearth steel.

Referring to the time just prior to the absorption of this company by the Steel Corporation, Mr. Gates says, "Why, we had just taken a very large order for rails—I think 150,000 tons of rails—from Mr. E. H. Harriman, at $2 per ton advance over the price of Bessemer steel rails."
Mr. Beall. What kind of rail were you making I

Mr. Gates. We were making a Bessemer open-hearth rail. We took the contract, 1 think, for the Southern Pacific and the Union Pacific roads for an open-hearth rail. Whether they were actually making the rails at the time the company was taken over by the corporation I do not remember, but we were preparing to make the open-hearth rail and had sold 150,000 tons.

The Chairman*. What was the reason for this excess in the price of your rail over the Bessemer rail?

Mr. Gates. We thought it was a better rail and we convinced Mr. Harriman. (Hearings, p. 8.)
Mr. Harriman was not the only great railroad official who was convinced that steel rails could be made from the product of openhearth furnaces which were in every way superior to the Bessemer rails of the Steel Corporation, and it was evident from the records of the Steel Corporation that they fully appreciated the effect of the entry of this newly organized company into the rail business. The superior excellence of this rail had been impressed upon the superintendent of the Pittsburgh & Lake Erie Railroad. Mr. Morgan himself was a director in this great railroad. It had terminals in Pittsburgh and was bound to the Steel Corporation by the closest financial relations. Mr. Bope, the general sales agent of the Steel Corporation, on March 19, 1906, states:
The general superintendent of the Pittsburgh & Lake Erie told us the other day that after testing open-hearth rails furnished them by the Tennessee Coal & Iron Co. and our Bessemer rails they have decided that open-hearth are twice as good as Bessemer rails. He wanted to know when we would be able to make openhearth rails and said they would be willing to pay a little more for open-hearth than for Bessemer. The same thing hascome to us from two or three other people, indicating that the railroads are paying a little attention to the matter. At the time when they were buying rails we could not make open hearth, and of course they took Bessemer, and they will not be able to get open hearth anywhere in this country for the next year and a half j but I imagine that when the demand for rails falls off, which will probably be in 1907, on account of the heavy purchases made last year and this, then we will be up against the open-hearth proposition good and hard. (Hearings, p. 4077.)
This statement by the man best qualified to know, the general sales agent of the Steel Corporation, shows that it was the opinion of this great railroad, of which J. Pierpont Morgan was a director and closely allied with the New York Central Railroad system, that this openhearth rail was twice as good by actual test as the Bessemer rail of the Steel Corporation, and other railroads were of the same opinion, that the Steel Corporation was not prepared to make these rails, and that by 1907 they would be up agninst the open-hearth proposition "good and strong." The apprehension of the Steel Corporation that the Tennessee Coal & Iron Co.'s rail, superior in quality, manufactured at a less cost, and sold at a higher price than their own, would in a short time supersede the Bessemer, was indeed well founded, as is evident from the subsequent history of the developmentand growth of the manufacture of open-hearth rails. In 1908 of all rails manufactured in the United States 1,349,153 tons were rolled from Bessemer steel, while 571,791 tons were the product of open-hearth furnaces. In 1909 the production of Bessemer and open-hearth steel rails was 1,767,171 tons and 1,256,674 tons, respectively. By 1910 the production of Bessemer and open-hearth rails was 1,884,442 tons and 1,751,359 tons, respectively. (Herbert Knox Smith, Pt. I, pp. 362363.)

It is also apparent from the. records of the Tennessee Coal & Iron Co. that this syndicate, backed by great wealth and controlled by practical steel men, who, without regard to cost, were working with feverish energy and the most sanguine hopes to meet this growing demand and to enter boldly into this most coveted and lucrative department of the steel business. The Steel Corporation was indeed "up against it good and strong." Nothing since the threat of Carnegie to build a tube mill at Conneaut had put them "up against it" to the same extent or in the same way, and this company could not be reached by any of the methods which the Steel Corporation had hitherto used so successfully against competitors. There were no interlocking directorates, and for that reason it was impossible to make those secret arrangements so mutually beneficial which for years had characterized transactions between the Steel Corporation and the Standard Oil and similar interests.

It appears that, absolutely secure in the ownership of vast ore reserves, in no way dependent upon the Steel Corporation for facilities either toassemble its ores or to sell its finished product, in no way affected by any manipulation in the price of raw materials, it was apparently impregnable. More than that, the strength of the Tennessee Coal & Iron Co. can not be measured by its wealth or by its resources, natural and financial, immenseas they are. The Republic Iron & Steel Co., located in the same region, and holding 50,000,000 tons of iron ore and over 173,000,000 tons of coal (hearings, p. 1040), was closely allied with the Tennessee Coal & Iron Co. In fact, the two properties were owned practically by the same men, who had placed their holdings in two separate corporations. The board of directors of both companies was identical and both were operating in perfect harmony with other steel and iron companies in that region. The Steel Corporation had no hold whatever in southern territory. From Ashland, Ky., toEl Paso, Tex., it was unable to sell one pound of pig iron in competition with the Birmingham furnaces. With this vast and rapidly developing region secure to it by virtue of its natural advantages, the Tennessee Coal & Iron Co. was prepared and preparing to invade the domain and to contend for a share in the markets hitherto preempted by the Steel Corporation and other northern markets in their own territory.

Since it was impossible to cajole or coerce the men in charge of this new and virile competitor, the only remaining means of eliminating it was by securing in some way the control of its stock. It appears that the directors of the Tennessee Coal & Iron Co. realized that the nature of their operations would render the securities of this company a coveted morsel to their great competitor, and for that reason they took every precaution toretain their control by locking up in their own strong boxes a safe majority of the stock. The peril to the Tennessee Coal, Iron & Railroad Co. was not open competition in the markets, but secret operations in the stock exchange. Carnegie, it will be remembered, put the stock of his company in sharesof a thousand dollars each to prevent speculation in them. The directors of the Tennessee Co. took even more effective measures. Utterly indifferentto the quotations on the stock market and determined not to sell it, they deliberately destroyed its value for speculative purposes by "pegging" it.That is, they entered into an agreement not to sell this stock except under certain circumstances, and then it could only be marketed under certain conditions by the syndicate managers, Messrs. Schley and Hanna.
"There was probably," said Mr. Gates, "no floating stock; it was so closely held by the people who had bought it for an investment. There was practically no stock in the hands of brokers." (Hearings, p. 16.)

"I thought," says Mr. Schley, "that by bringing the company out to its earning capacity, that the future of it would be one of considerable prosperity, something to hang on to." (Hearings, p. 1047.)
Mr. Bartlett. Mr. Schley, talking about the value of the Tennessee Coal & Iron Co. with reference to its property in Alabama, it was valuable as a manufacturing plant and much more valuable after you had spent $5,000,000 or $6,000,000 in improvements on it?
Mr. Schley. Indeed it was. We had great hopes for it.

Mr. Bartlett. As a promoter of the scheme to buy stock and put it into this syndicate you had the idea that it was very valuable, and you promoted it for the purpose not of selling the securities upon the market, but of increasing its value by improvement, as a permanent investment?

Mr. Schley. Yes, sir.

Mr. Bartlett. You had no idea of organizing the company for speculative purposes?

Mr. Schley. No, sir; not at all. (Hearings, p. 1104.)

The Chairman. When jou spoke of these men putting their stock in strong boxes, is it not true that Mr. Gates and Mr. Topping and Mr. Oglebay andMr. Hanna—is it not true that the wealth, the power, the effectiveness, the future of this property was in the hands of strong men who had conducted a productive and not a speculative business, and who were comparatively indifferent, until this sudden hour of disaster, as to the market price of the stock of the Tennessee Coal & Iron Co.? 54946°—H. Kept. 1127, 62-2 12

Mr. Sohlet. They were entirely indifferent as to ite market value.

The Chairman. They did not care whether it was current or uncurrent, because they were not setting; is not that true?

Mr. Schley. That is true. (Hearings, pp. 1113-1114.)
The chairman of the board of directors, Mr. Topping, states:
The stock was tied up by a so-called syndicate agreement, which in itself "pegged the stock. It withdrew it from the market as a speculative securityand left a very small amount, as you know from previous witnesses, of so-called free stock.

The Chairman. In its general provisions did this agreement prevent a sale of a majority of the stock without the concurrence of both the syndicate managers, Mr. Schley and Mr. Hanna '.

Mr. Topping. It did. So far as my stock was concerned. I felt I was under a moral obligation not to sell, and I did not sell; and so all the others felt who were in that syndicate. It was simply an agreement, substantially, based on honor, with gentlemen who were in it, to keep out of the market.

Mr. Bartleit. That was one of the purposes of the agreement, to keep it out of the market 1

Mr. Topping. The purpose was to keep it out of the market so at to maintain the control of it, naturally.

The Chairman. You were indifferent about what they did with that stock so lone as a clear majority of it was locked up in the strong boxes of the men operating this property I

Mr. Topping. That was the purpose of the syndicate, Mr. Chairman, as I understood it.

The Chairman. Did you desire to have Schley sell this stock f

Mr. Topping. I did not. (Hearings, pp. 1237, 1238, 1239.)
Mr. Lewis Cass Ledyard, the attorney through whom Schley negotiated with Morgan, and who thoroughly understood the attitude of the syndicate, says:
It appears that in spite of the precaution and the vigilance exercised by the directors of the Tennessee Co. that the syndicate manager, Mr. Scliley,and a New York wine merchant by the name of Kessler, who had secured control of about 40,000 or 50,000 shares of the " free" stock in this company, did speculate in these securities as well as other stock which was "pegged" and could be sold by Schley alone. In 1907 the syndicate manager, Grant B. Schley, became seriously involved; and in order tosecure loans from various banks in New York, aggregating about $38,000,000, he hypothecated large blocks of this stock. No one loan was secured in this way nor could it have been, on account of the fact that those in control of it had "pegged" it for the purpose of destroying its value for speculative purposes and had rendered it to a certain extent "uncurrent," notwithstanding the great intrinsic value which it represented.
About 90 days before the acquisition of this company, and while in the midst of his pressing needs, the manager of the syndicate applied to Messrs. Frick, Ream, and Gary for financial aid, and suggested that they examine his securities—he had stocks of all kinds, "current" and "uncurrent," $40,000,000 up as collateral at that time— and he offered these gentlemen their choice in all this mass of securities in order to obtain the funds for which he had such urgent necessity at that time. What they did, in the light of what subsequently transpired, is significant.
Mr. Schley. Mr. Frick and Mr. Ream and Mr. Gary some time before that saw me, or I saw those three gentlemen, and told them I would like to have them examine some securities that I had. I had a list of securities. They picked the Tennessee. I said if they would take it for 60 I would take their bonds in exchange, for six months. That was an exchange of securities. It was an agreement, absolutely, that if they were not paid for at the end ofsix months it would be a sale.

Mr. Littleton. If not paid for at the end of six months, it would become a sale of the stock?

Mr. Schley. Yes.

Mr. Littleton. What securities did they pick out?

Mr. Schley. Tennessee Coal & Iron.

Mr. Littleton. Did they take aU of the security in Tennessee Coal & Iron?

Mr. Schley. Nothing but Tennessee Coal & Iron; and I took their bonds.

Mr. Littleton. $1,200,000?

Mr. Schley. Yes, sir.

Mr. Littleton. Did you put up any other collateral except Tennessee Coal & Iron?

Mr. Schley. That is all.

Mr. Littleton. Did you offer them other collateral?

Mr. Schley. 7 gave inem their choice and they accepted that.

Mr. Littleton. You gave them their choice between what stocks?

Mr. Sohley. Tobacco was on the list, and Guggenheim Exploration, and perhaps four or five others. I have forgotten. There was quite a list of them.

Mr. Littleton. And having their choice of the securities which they would take for that loan, they picked out wholly Tennessee Coal & Ironf

Mr. Schley. Yes.

Mr. Littleton. And they took it

Mr. Schlet. At 60. (Hearings, pp. 1090-1091.)
In the course of this transaction it was apparent that Schley, the syndicate manager of the Tennessee Coal Iron Co., holding large amounts of its stock, was willing to dispose of it to meet his urgent necessities—-stock which he had hitherto prized so dearly, "something to hold on to," and which his associates in the enterprise had locked in their strong boxes. It might reasonably be apprehended that as his financial condition grew more desperate his hold upon the stock would be loosened. To save himself from ruin Schley might be induced to disregard his agreement as syndicate manager, or to appeal to his associates to permit him to disregard it, and when he did the Steel Corporation was necessarily the only purchaser of this immense property.

Be that as it may, one thing is certain: From the day the three directors of the Steel Corporation discovered his condition and his control of this stock, his troubles multiplied, and the only ray of hope ever held out to this broker on the verge of bankruptcy was the release to the Steel Corporation of his control of the stock of the Tennessee Coal & Iron Co.

In the event the stock of this company became "uncurrent"—not desirable as a collateral upon which to borrow money—at a time when Schley had to have money, then the only possible way he could get it would be to sell the stock outright. It is not clear that the financial interests back of the Steel Corporation made a deliberate "drive" at this stock for that purpose. It seems more probable that they simply took advantage of the financial distress of Moore & Schley.

Before the Senate committee investigating this merger, Mr. Schley said:
Senator Overman. So you approached Mr. Ledyar^d, who was attorney for Morgan, was he not?

Mr. Schley. I don't know that he was attorney for him; he was a friend.

Senator Overman. I want to ask you whether or not you had any interest in the United States Steel Co. yourself? Mr. Schley. Not a dollar.

Senator Overman. Did any of the gentlemen named here? Mr. Schley. I don't think so. They may have. Senator Overman. Were they interested asstockholders or otherwise; do you know? Mr. Schley. I doubt it. I don't think so. Senator Culberson. Mr. Schley, I understand you to say that although calls had been made upon your firm, you had always responded up to the 4th of November, 1907?

Mr. Schley. Yes. When it developed everyone I talked to in connection with his holdings was willing, under the pressure that was brought upon all,to sell that stock at par, and when 1 went to Mr. Ledyard and asked him to make these negotiations, it began. Then Air. Frick and Mr. Gary came tome in the course of it, and it developed so that in the following days it was known to the public. I can't tell what would have happened to Moore & Schley or to anybody else in that street, because we were oppressed by rumors, some of them untrue, but Moore & Schley were the subject ofattack, serious attack, and their credit, which is the life of the business, was being destroyed. It was a matter of serious import. It had to be disposedof if it could be. I don't mean for Moore & Schley, but for people about them, others interested, not those particular individuals of great wealth.

Senator Dillingham. What was the effect of the purchase of the stock by the Steel Co. upon the market?

Mr. Schlet. It relieved the situation most decidedly, not only with M. & S., but with everybody about. The rumors were flying tremendously about,and nobody can escape those, you know. They may be true or untrue, and they affect the credit of this institution or that. It was especially so with us at that time, after this negotiation started, and it took a week. Why, there was $7,000,000 of loans-called on us hi three days.

Senator Culberson. Was it generally known on the Street, as you call it, that your firm, in the relationship that you have suggested, was dealing in the Tennessee Coal & Iron?

Mr. Schley. Yes; for some time it had been talked that Moore & Schley were holding that stock—a wrongly based rumor, because these facts I tell you are absolutely true. But the pressure was there, and I don't know of any panic in a great many years when they have not been pounded a little,and other houses that have real basis behind them.

Senator Culberson. You say your relationship to this stock was generally known in the Street?

Mr. Schley. Yes.

Senator Culberson. And you say there was special pressure, as I remember your testimony, on your firm?

Mr. Schley. Yes. (Hearings, p. 1126.)
Before the same committee, George W. Perkins testified as follows:
Senator Overman. Why were these special securities mentioned? That was only a drop in the bucket. There were a tremendous amount of securities up.

Mr. Perkins. Yes, sir.

Senator Overman. Why were those securities mentioned?

Mr. Perkins. Why does a man call "fire" in a theater?

Senator Overman. I do not know any special reason why these stocks were mentioned.

Mr. Perkins. I have not the slightest idea. You can never tell why such things occur.

Senator Overman. Were these specially mentioned more than any others?

Mr. Perkins. At this period of the panic?

Senator Overman. Yes; these particular stocks.

Mr. Perkins. Yes; it became centered at that particular stage of the panic, which covered three weeks. (Hearings, pp. 1126-1127.)
John W. Gates accounts for his loss of control of this property as follows:
The Chairman. To what extent was this sale forced, and if you know anything about who did the forcing, I wish you would let me know.
Mr. Gates. I regarded it as a forced sale. I had no accounts myself with Moore & Schley's office. He was not borrowing any money for me on any securities that he was holding as agent for me; I had no account with him. I had taken up my securities at the time the transaction took place.

The Chairman. What influences, what financial power was it, that forced this sale or that necessitated it? I will not say "forced it."

Mr. Gates. I do not know the facts, but my surmise would be that the finding of a large amount of Tennessee Coal & Iron as collateral in one of the banks or trust companies.

The Chairman. Did Mr. Morgan have any decided influence over the attitude of this bank and trust company toward the Tennessee Coal & Iron Co.stock?
Mr. Gates. I do not know. It is pretty hard to tell where a man's influence starts or ends on Wall Street.

Mr. McGillicuddy. At the time this deal was consummated, in November, 1907, whereby the stock of the Tennessee Coal & Iron Works was transferred in exchange for the steel seconds, what, in your opinion, was the total value of the property of the Tennessee Coal & Iron Works?

Mr. Gates. I think I stated that that was problematical.<

Mr. McGillicuddy. I want your opinion on it.

Mr. Gates. My opinion is that it was bought at a bargain sale; it was a forced sale on the part of the owners of the Tennessee. (Hearings, pp. 12, 13.)

Mr. Young. And it was true also, was it not, that during the panic the stock of the Tennessee Coal & Iron Co. greatly depreciated because of the situation?

Mr. Gates. Well, I think the stock of the Tennessee Coal & Iron Co., if it had not been unduly depressed, would not have gone down much, becauseit was held Jyy a syndicate of men who I thought, and we all thought, could go through any panic and carry their securities.

Mr. Young. Unless you were mistaken about that, why did they not carry it through instead of selling it at a loss?

Mr. Gates. They discovered a lot of it up as collateral in a bank or trust company.

Mr. Young. What bank was it? I forget the name; it is a matter of public knowledge.

Mr. Gates. The Trust Co. of America. Mr. Thorne was one of the syndicate. The bank is solvent, strong, and the stock selling at $300 or $400 a share.

Mr. Young. But you say this bank had made application to the clearing house for help?

Mr. Gates. There was a run on them then by the brokers. (Hearings, p. 15.)
The "run" on the trust company of which Mr. Gates speaks, was the result of the activities of Mr. George W. Perkins, at that time a member of the finance committee of the United States Steel Corporation and a member of the firm of J. P. Morgan & Co.

On the morning of October 23, 1907, there appeared in the New York Times an article headed "Aid to the Trust Co. of America." This article recites that—
It has twelve millions, and as much as may be needed is pledged. J. P. Morgan is to help. With other financiers he acts at night meeting with Secretary Cortelyou. The situation clearing. Government aid pledged, and Cortelyou will supervise for the Treasury.

At a conference between Secretary Cortelyou, who came on from Washington in response to a hurry call, and the chief bankers of the city,headed by J. P. Morgan, at the Hotel Manhattan last night, it was formally decided that the point needing buttressing now is the Trust Co. of America, the third largest institution of its kind in the city, and of which Oakleigh Thorne is president.

Earnest attention was given to this new problem, and the result was the formation of a powerful syndicate to stand by the company at its openingto-day.

This determination was announced at 1 a. m. in the following official statement, after Mr. Perkins and President Thorne had been in conference at the Union League Club subsequent to the Hotel Manhattan gathering:

"The chief sore point is the Trust Co. of America. The conferees feel that the situation there is such that the company is sound. Provision has been made to supply all the cash needed this morning. The conferees feel sure the company will be able to pull through. The company has $12,000,000 cash and as much more as needed has been pledged for this purpose. It is safe to assume that J. P. Morgan & Co. will be leaders in this movement tofurnish funds.

"A committee has been named, including a representative of Morgan & Co. and others, to look over the accounts of the Trust Co. of America with the idea of definitely determining its position.

"The guaranties of cash made last night are for the purpose of meeting any demands upon the Trust Co. of America, pending the completion of this examination."

After the close of the Manhattan conference one of the chief conferees, a clearing-house committeeman, said:

"I think it safe to say now that no other financial institution of the least importance will have to undergo the experiences of the Knickerbocker Trust Co. I feel optimistic for the first time since these troubles began."

It was also said there was no thought that the Trust Co. of America was in anything like the position of the Knickerbocker Trust Co., but these steps were taken with the intention of making an authoritative statement before noon to-day that the Trust Co. will be taken care of in any eventuality, providing conditions are found as sound as there is every reason to believe them to be.

That these interests have agreed, pending final examination of its accounts, to supply the Trust Co. of America with any cash needed was pointed to as proving the confidence of all interests in the soundness of the company.

Those who were at the Hotel Manhattan conference with Mr. Cprtelyou were J. P. Morgan, George F. Baker, George W. Perkins, Frank A. Vanderlip,A. B. Hepburn, of the Chase National Bank; President Stillman, of the City National Bank; J. G. Cannon, vice president of the Fourth National Bank,and State Comptroller Glynn.

Most of them stayed an hour or more, and Mr. Perkins was the last to leave, not getting away until nearly 12 o'clock. (Hearings, pp. 1663, 1664.)
In a letter to Mr. Thome of date of March 18, 1907, Mr. Chas. H. Boynton gives a detailed account of how and by whom the Trust Co. of Americawas declared to be "the chief sore point" among New York's financial institutions. The letter is as follows:
Charles H. Boynton, 7 Watt Street, New York, November 18,1907. Oakleioh Thorne, Esq.,
President Trust Co. of America,
35 Watt Street, New York.

My Dear Mr. Thorne: My recollection as to the statement given out in the early morning hours of Wednesday, October 23, is quite distinct. About 1 a. m. I went to the Hotel Manhattan for the purpose of having a word with Secretary Cortelyou. The Secretary was standing at one side of the corridor, ana I started toward him, but at that instant one of the newspaper men said "Mr. Perkins is about to give out a statement." The newspaper men had gathered about a gentleman who began to dictate to them the announcement which began: "Attention had been directed mainly on Mr. Oakleigh Thome's Trust Co. of America." This gentleman I afterwards learned was Mr. Phillips, of the Times. As he began one of the reporters asked,"Is this statement to be credited to Mr. Perkins?" Mr. Phillips replied, "Don't put it that way, say it comes from one of those who was present at to-night's conference."

Knowing that Mr. Stanley, whom I had left at the Lotos Club, was extremely interested in the outcome of the conference, I copied the statement as itwas given out for my own purposes, and upon its completion hastened to the Lotos Club, where I met Mr. Stanley, and he asked me if I would begood enough to read the statement to you over the telephone. You were unable to come to the telephone, and in your place I read the announcement to Mr. Perry.

As I came out of the booth Mr. Stanley awaited me; and I started to read the statement to him. I had just begun it when Mr. Perkins came down thestairway, at the foot of which I was standing. I greeted him and renewed the reading of the statement, saying to Mr. Perkins: "You will not beinterested in hearing this. He replied: "Yes; read it to me, I wish to see if I can recognize it." Mr. Perkins listened to my reading and made no dissent or correction.

Let me add that I was distinctly of the impression, and I think the newspaper men present also felt, that the statement given out by Mr. Phillips to the newspaper men emanated from Mr. George W. Perkins.

Yours, very truly, Chas. H. Boynton, (Hearings, p. 1700.)
Mr. Thome has stated to this committee that this injurious statement was utterly without any foundation in fact and has described its immediate effect upon his bank, the Trust Co. of America.
Mr. Littleton. Were you at the conference at the Manhattan Hotel?

Mr. Thorne. I was not.

Mr. Littleton. Were you invited?

Mr. Thorne. No, sir.

Mr. Littleton. Did you know there was such a conference?

Mr. Thorne. No, sir.

Mr. Littleton. Did you know that the Trust Co. of America was being discussed there?

Mr. Thorne. No, sir.

Mr. Littleton. Had you been told that the Trust Co. of America would be discussed there?

Mr. Thorne. No, sir.

Mr. Littleton. Had anybody suggested to you that its condition was regarded as critical?

Mr. Thorne. No.

Mr. Littleton. You say you saw this at half past 8 on the morning of the 23d, when it was brought to your attention by Mr. Hilton. How soon after that was it that you opened the doors?

Mr. Thorne. An hour and a half. We opened at 10 o'clock.

Mr. Littleton. On ordinary days, what provision had you for the paying out of money? That is, what physical convenience did you have in the shape of windows—how many?

Mr. Thorne. One.

Mr. Littleton. A pay window and a

Mr. Thorne. A receiving window.

Mr. Littleton. What happened when you opened the Trust Co. at 10 o'clock?

Mr. Thorne. Prior to opening the Trust Co. on that morning a line had formed; and the moment we opened, of course, there was a rush to the window.

Mr. Littleton. A line had formed on Wall Street?

Mr. Thorne. Yes, sir.

Mr. Littleton. Reaching in what direction—toward Broad Street?

Mr. Thorne. No; as I remember, it was turned down toward William Street.

Mr. Littleton. Down toward the river?

Mr. Thorne. Yes, sir.

Mr. Littleton. Did you see the formation of the line before the company opened?

Mr. Thorne. I saw the line.

Mr. Littleton. How extensive was it?

Mr. Thorne. I should think there were two or three or four hundred people there.

Mr. Littleton. And they were in the order in which people are who must follow one the other?

Mr. Thorne. Yes; they were in line.

Mr. Littleton. Having seen the formation of this line prior to the opening, did you make any provision to accommodate them?

Mr. Thorne. I do not remember whether we made provision prior to the opening or not—that is, prior to 10 o'clock; but by 11 o'clock or half past 10 we had seven paying windows open.

Mr. Littleton. In other words you increased sevenfold the physical conveniences of paying out money in order to accommodate this line?

Mr. Thorne. Endeavoring to get rid of them.

Mr. Littleton. Yes.

Mr. Thorne. Knowing what a line meant, we were endeavoring to get rid of the line.

Mr. Littleton. In other words, if you could have melted up the line, absorbed it once, you felt that the alarm which is infectious and more or less unreasoning would not be likely to spread to other people and draw attention to the company?

Mr. Thorne. Exactly.

Mr. Littleton. What happened in the shape of the absorption or diminution of the line?

Mr. Thorne. It increased.

Mr. Littleton. It increased; and by 12 o'clock what had it amounted to?

Mr. Thorne. It is impossible to say. It extended away down the street. The street was full of people.

Mr. Littleton It was besieging the doors for payment?

Mr. Thorne. Surely.

Mr. Littleton. How much money did you pay out that forenoon?

Mr. Thorne. I could not divide it between noon and 3 o'clock. We paid out $13,500,000. (Hearings, pp. 1664-1666.)
It is not proposed to analyze the motives of Mr. Perkins in giving currency in the midst of a panic to the statement which ended in a disastrous run on this bank, which was, and even under this strain proved to be, absolutely sound and solvent.

There can be no doubt, however, as to one of the effects of a successful run upon the Trust Co. of America and the bankruptcy of Oakleigh Thorne. His assets would have passed into the hands of his creditors, and among these assets was a large block of the securities of the Tennessee Coal & Iron Co. It is scarcely credible that Perkins could have intended the ruin of the trust company, and yet we can not surely interpret his meaning. We leave it where the record leave it—unexplained.

Thorne weathered the storm without the surrender of the stock. Schley at last consented to throw overboard his securities in this company and with them his associates in the syndicate as the last and only hope of saving his financial craft. After considerable negotiation through Lewis Cass Ledyard with J. P. Morgan, H. C. Frick, Judge Gary, and George W. Perkins, the Steel Corporation agreed to exchange its second-mortgage bonds for the stock of the Tennessee Coal & Iron Co., giving $11,904.76 par value of said bonds for each 100 shares of stock of the par value of $10,000 so delivered. No money changed hands—the bonds aggregating $34,648,977.64. (Hearings, pp. 1123, MacRae Kept., p. 4308.)

It is not surprising that the gentlemen who engineered this deal and who reaped a rich harvest "from the strained condition then existing in financial circles in New York, whether they produced that condition or not, did not feel absolutely secure or certain about the ultimate action ofthose intrusted with the enforcement of the law against combinations in restraint of trade.

This, under the circumstances, most natural apprehension is evidenced by the hurried and unheralded journey from New York to Washington of Judge Gary and Mr. Frick for the purpose of interviewing the President of the United States and ascertaining the probable action of the Department of Justice with reference to the contemplated merger before its final consummation. Mr. Perkins describes the circumstances attending this "hurry call" upon the President:
Mr. Bartlett. He left New York at midnight on Sunday night?

Mr. Perkins. I got the telephone to the White House opened about 9.30 o'clock on Monday morning, and talked with Mr. Loeb, and found that Judge Gary had just come in, and that he and Mr. Frick were with the President. I asked him if he could not find out before time for the trustcompanies to open and the exchange opened what the President's view was likely to be. Judge Gary came on the phone about a quarter of 10 andsaid that the President was considering it, and that he would call me again in a few minutes. At five minutes of 10, as I remember it, he came back tothe phone and said that the President felt that under all the circumstances he had no right to interfere, and that therefore he and Mr. Frick were willing to report to us that they would come back to New York and vote with the committee to acquire that stock. I immediately let that be known—itwas just three or four minutes of 10 o'clock—for the effect that was to have on the trust companies opening and on Moore & Schley's loans. I simply state that to snow you how close, to almost minutes, this thing had resolved itself to.

Mr. Babtlett. You got into communication with the Executive Office at about 9.30 a. m.?

Mr. Perkins. Yes, sir.

Mr. Bartlett. And you were informed that Judge Gary and Mr. Frick were in conference with the President?

Mr. Perkins. Had just come in to see him.

Mr. Bartlett. And about 10 minutes to 10, 20 minutes thereafter, you got this message that loosened up this whole matter?

Mr. Perkins. It was very close to 10 o'clock. How long they had been with the President at that time I do not know.

Mr. Bartlett. This question, which had troubled your lawyers and eminent counsel, was decided by the Chief Executive in less than 20 minutes? (Hearings, pp. 1605, 1606.)
After 20 minutes' consultation with Messrs. Gary and Frick, the President penned the following communication to the Attorney General:
The White House, Washington, November 4, 1907.

My Dear Mr. Attorney General: Judge E. H. Gary and Mr. H. C. Frick, on behalf of the Steel Corporation, have just called upon me. They state that there is a certain business firm (the names of which I have not been told, but which is of real importance in New York business circles) which will undoubtedly fail this week if help is not given. Among its assets are a majority of the securities of the Tennessee Coal Co. Application has been urgently made to the Steel Corporation to purchase this stock as the only means of avoiding a failure. Judge Gary and Mr. Frick inform me that as a mere business transaction they do not care to purchase the stock; that under ordinary circumstances they would not consider purchasing the stock, because but little benefit will come to the Steel Corporation from the purchase; that they are aware that the purchase will be used as a handle for attack upon them on the ground that they are striving to secure a monopoly of the business and prevent competition—not that this would representwhat could honestly be said, but what might recklessly and untruthfully be said.

They further inform me that as a matter of fact the policy of the company has been to decline to acquire more than 60 per cent of the steel properties,and that this purpose has been persevered in for several years past, with the object of preventing these accusations, and as a matter of fact their proportion of steel properties has slightly decreased, so that it is below this 60 per cent, and the acquisition of the property in question will not raiseit above 60 per cent. But they feel that it is immensely to their interest, as to the interest of every responsible business man, to try to prevent a panicand general industrial smash up at this time, and that they are willing to go into this transaction, which they would not otherwise go into, because it seems the opinion of those best fitted to express judgment in New York that it will be an important factor in preventing a break that might be ruinous; and that this has been urged upon them by the combination of the most responsible bankers in New York who are now thus engaged in endeavoring to save the situation. But they asserted they did not wish to do this if I stated that it ought not to be done. I answered that while of course I could not advise them to take the action proposed, I felt it no public duty of mine to interpose any objection.

Sincerely, yours,
Theodore Roosevelt.

Hon. Charles J. Bonaparte,
Attorney General.

After sending this letter I was advised orally by the Attorney General that, in his opinion, no sufficient ground existed for legal proceedings against the Steel Corporation, and that the situation had been in no way changed by its acquisition of the Tennessee Coal & Iron Co.

I have thus given to the Senate all the information in the possession of the executive department which appears to me to be material or relevant on the subject of the resolution. I feel bound, however, to add that I have instructed the Attorney General not to respond to that portion of the resolution which calls for a statement of his reasons for nonaction. I have done so because I do not conceive it to be within the authority of the Senate to give directions of this character to the head of an executive department or demand from him reasons for his action. Heads of the executive departments are subject to the Constitution and to the laws passed by the Congress in pursuance of the Constitution and to the directions of the President of the United States, but to no other direction whatever.

Theodore Roosevelt.
The White House, January 6, 1909.
(Hearings, p. 1122.)
This letter contains the following alleged statements of fact:
(1) A certain business firm of real importance hi New York, having among its assets a majority of the stock of the Tennessee Coal & Iron Co., was about to fail if help was not forthcoming from the Steel Corporation.

(2) Some unknown concern was urgently pressing the Steel Corporation to take over its assets.

(3) The Steel Corporation hesitated to take this stock, since it would derive no benefit from the purchase and would be unjustly attacked if it did so and accused of endeavoring to secure a monopoly as a result of the purchase, which accusation is untrue and unwarranted.

(4) That the corporation had been for years refusing to acquire any more steel property for fear it might get more than 60 per cent of the business.

(5) That the responsible bankers of New York, acting in concert, were imploring the Steel Corporation to take over this property even at a loss toprevent a "general industrial smash up."
Such were the representations made by Messrs. Frick and Gary to the President of the United States during this brief 20-minute interview.

As to the existence of this unknown business of great importance which was alleged to have had a majority of the assets of the Tennessee Coal & Iron Co.:

There was no concern in the city of New York of any importance which had among its assets a majority of the stock of the Tennessee Coal & IronCo. or which would in any way have been affected by the exchange of such stock as it did have for any other stock. The President was evidently laboring under the impression that some great financial institution burdened with its load of Tennessee Coal & Iron securities was tottering to its ruin and about to "smash up" other concerns by its fall.

Now the evidence before this committee shows that the majority of this stock was locked up in the strong boxes of Oglebay, Hanna, Gates, and others, no one of whom was in any way involved.

"There was probably no floating stock," says Gates, "it was so closely held by the people who had bought it for an investment. There was practically no stock in the hands of the brokers." (Hearings, p. 16.)

Out of over 300,000 shares, Kessler and Schley held only about 40,000 or 50,000 shares that had not been "pegged" by the men who were eagerly and vainly endeavoring to keep it out of the hands of speculators and jobbers whose misfortunes or greed might render them a prey to the Steel Corporation or some other concern bent on securing control of a property which the syndicate considered almost invaluable. Even the firm of Moore & Schley which was the only concern affected by this deal, never owned a share of this stock.
Mr. Littleton. Did Kessler or any other customer who had bought stock through Moore & Schley so default in the payment of their margins or the calls made on them that Moore & Schley had to take the stock?

Mr. Sohlet. Moore & Schley never owned any.


Mr. Littleton. Just prior to the panic, how much stock did you have of the Tennessee Coal & Iron Co. f

Mr. Sohlet. In 1907?

Mr. Littleton. Yes. I understand Moore & Schley never had any stock of the Tennessee Coal & Iron Co.

Mr. Sohlet. Moore & Schley never owned any stock of the Tennessee Coal & Iron Co.

Mr. Littleton. I say I understand that to be the fact.

Mr. Sohlet. Moore & Schley are not speculators. They do not own securities. (Hearings, p. 1059.)
Schley as an individual speculator in stocks had become involved, and having $6,000,000 or $7,000,000 of current securities, the property of O. H. Payne, in his possession, had hypothecated them to save his imperiled credit, and had afterwards given Payne "uncurrent" securities in their stead. He had also a large amount of the stock of the Tennessee Coal & Iron Co. which he was obligated not to dispose of except under the terms of a syndicate agreement designed to keep those stocks from becoming a speculative security. The Trust Co. of America did not then and never did hold a majority of the securities of the Tennessee Coal & Iron Co., and was in no way, directly or indirectly, affected by this proposed merger, except that the president of the company had obtained 12,500 shares of stock which he had purchased as an investment and which he was not attempting to sellto the Steel Corporation or anybody else.
Mr. Littleton. Did you pay for your stock?

Mr. Thorne. I did.

Mr. Littleton. Did you take it away from Moore & Schley?

Mr. Thorne. I did.

Mr. Littleton. And put it among your securities?

Mr. Thorne. I distributed it—practically 7,000 shares—and kept the balance—distributed it among the people who took it and paid for it.

Mr. Littleton. But so far as Moore & Schley were concerned the transaction was clean-cut, was it not?

Mr. Thorne. Yes, sir.

Mr. Littleton. You owed them nothing, and they owed you nothing?

Mr. Thorne. That is correct. The stock had been delivered and paid for.

Mr. Littleton. The purchase of that stock was entirely a personal matter of your own?

Mr. Thorne. Absolutely.

Mr. Littleton. And the Trust Co. of America had nothing to do with it?

Mr. Thorne. It never owned a share.

Mr. Littleton. At the tune of or a little before the panic of 1907, did Moore & Schley owe the Trust Co. of America a loan of some sort?

Mr. Thorne. Yes—in 1906, if I remember correctly; and their loan was paid in 1907.

Mr. Littleton. Do you know the amount of their loan in 1907?

Mr. Thorne. I do not. It was either $250,000 or $500,000; I do not remember which.

Mr. Littleton. Do you know in what way their loan was secured?

Mr. Thorne. Yes; it was secured principally by American Tobacco securities. I do not know whether there was any Tennessee Coal & Iron in it or not.

Mr. Littleton. Just prior to the panic, was there a loan with your Trust Co. to support which there were put up a considerable number of shares ofthe Tennessee Coal & Iron Co.?

Mr. Thorne. May I ask you this—do you mean whether there was a loan with the Trust Co. that additional collaterals were put up to strengthen?

Mr. Littleton. Yes; any way in which the Tennessee Coal & Iron stock was concerned.

Mr. Thorne. That is not correct. The loan that we made to Moore & Schley was made and was paid off, and there never was any change in the collateral during the time we held it. In other words, we never asked them for any additional collateral, and never needed any additional collateral.

Mr. Littleton. To clear up that question finally, was there any obligation of Moore & Schley to your Trust Co. prior to the panic, or prior to your difficulties, in which you either acquired or demanded additional securities?

Mr. Thorne. No, sir.

Air. Littleton. Was there among your loans, prior to the panic, some of the Tennessee Coal & Iron stock?

Mr. Thorne. There was.

Mr. Littleton. Were those loans of Moore & Schley?

Mr. Thorne. No, sir.

Mr. Littleton. They were other loans?

Mr. Thorne. Other loans.

Mr. Littleton. How much of the Tennessee Coal & Iron stock was there among the collaterals of your Trust Co.?

Mr. Thorne. There was no Tennessee Coal & Iron stock among the collaterals of the Trust Co., other than as collaterals to loans.

Mr. Littleton. That is what I mean.

Mr. Thorne. I testified to that in detail before the Senate committee, and I have forgotten the exact figures.

Mr. Gardner. Your testimony was that $482,700 was loaned to six individuals.

Mr. Thorne. That is correct. (Hearings, pp. 1654 and 1655.)
Schley states he could not borrow money on this "pegged" stock as a sole collateral and that it was simply used as the "sweetener" in some of his loans aggregating $38,000,000 on stocks of every description. He used other industrials in the same way and at this time had up about as much American Tobacco Co. stock as Tennessee Coal & Iron.
Mr. Littleton. Do you think that in those loans that Moore & Schley had with the various banks there was any more Tennessee Coal & Iron up than there was Tobacco?

Mr. Schley. I do not think there was as much in the total. Yes; there was more. I should think about the same, or perhaps a little more Tennessee than Tobacco.

Mr. Littleton. Substantially the same?

Mr. Schley. Yes. (Hearings, p. 1088.)
Out of an indebtedness of $38,000,000 he had secured not to exceed $6,000,000 or $7,000,000 on this Tennessee Coal & Iron. "I calculated," says Schley, "50 per cent; 50 per cent was about all that we could average." (Hearings, p. 1054.)

Even such loans as were "sweetened" with Tennessee Coal & Iron stock at the rate of 50 cents on the dollar had not endangered to any extent the stability of the Trust Co. of America.

Neither the solvency of the Trust Co. of America nor of any other bank in New York was in anyway affected by the presence of Tennessee Coal & Iron stock, sprinkled through its collateral as a sort of "sweetener." It appears from the testimony of Schley, the only man who was using this stockas a basis of credit, that it was in no instance the sole security for a single loan in all his thirty-eight or forty million dollars of indebtedness. Yet the President of the United States was led to believe that a great bank, its assets gorged with these indigestible securities, was about to collapse if the steel company did not immediately exchange them for its bonds.
"Mr. Frick and Judge Gary both spoke to me," says Col. Kooseyelt, "I can not of course remember who it was that made any given statement, and I can not pretend at this time, the events being nearly lour years ill the past, to give with verbal accuracy what they said—to this effect: That they were urged by various representatives of the big business interests in New York to acquire the Tennessee Coal & Iron property, because the Tennessee Coal & Iron securities were assets in, I think they only told me, one big trust company—but I had previously been informed that there were two such trust companies, but that the Tennessee Coal & Iron properties were assets, and a very large proportion of the assets, of a certain big company which was threatened with failure—and they were firmly convinced that it would fail if nothing were done, because those securities had no market value at the moment." (Hearings, p. 1373.)
The run on the Trust Co. of America had occurred in October, and at the time Judge Gary and Mr. Frick visited the President was, as is testified by Mr. Thome, in no danger or trouble whatever.

The President was advised that some unknown concern was urgently pressing the Steel Corporation to take over its assets. After the most thoroughand exhaustive examination of every witness thought to be cognizant of the details of this transaction subject to the subpoena of this committee, it has been unable to ascertain any bank or trust company in the city of New York which ever urged the Steel Corporation to take over the Tennessee Coal & Iron Co. as its only salvation or that was embarrassed by the presence of the Tennessee Coal & Iron Co. securities among its assets. Thome expressly stated that his bank was neither helped nor hurt by this merger. It was neither a bank nor a firm, but a single individual, a stock broker in New York who had become involved by using in the stocks of O. H. Payne which had been purchased outright and left in his keeping, and in the stocks of the Tennessee Coal & Iron Co., which had been "pegged" and tied up for the purpose of preventing the very speculation in which he was indulging. 64946°—H. Kept 1127, 62-2 13

It appears that Schley had never borrowed a dollar upon this stock as the sole security and that he could not borrow one dollar.
Mr. Littleton. In 1905 and 1906 was there any loan wholly supported by Tennessee Coal & Iron?

Mr. Schley. With Moore & Schley?

Mr. Littleton. Yes.

Mr. Schley. I do not know of any.

Mr. Littleton. You do not know of any?

Mr. Schley. No.

Mr. Littleton. And was it your practice in 1905 and 1906 to put in the Tennessee Coal & Iron stock substantially in the manner you have described already, as a part of the 30 per cent of industrial stock?

Mr. Schley. Yes.

Mr. Littleton. That was true long before the panic ever came on?

Mr. Schley. That was true of all our industrials. (Hearings, pp. 1063-1064.)
Even if it had been necessary for Mr. Schley to realize immediately upon the Tennessee Coal & Iron stock which he had hypothecated, his financial distress could easily have been relieved by the United States Steel Corporation without the absorption of the Tennessee Coal & Iron Co. This Schley unequivocally admits. What Mr. Schley needed was not the removal of Tennessee Coal & Iron stock from his loans, but money to pay his debts. He states that he had other stocks, American Tobacco Co. stocks, Republic Iron & Steel, and any number of other industrials which were to a greater or less degree unsalable, just as the Tennessee Coal & Iron stocks were, and th« exchange of the steel company's bonds for any of these stocks would have served the purpose just as well.
Mr. Littleton. Why was it any more necessary to exchange the stock of the Tennessee Coal & Iron Co. for the sinking-fund bonds of the Steel Corporation than it was to exchange the stock of the Republic Co. or any other of the industrials which formed the 30 per cent of these loans, and get in exchange something like the United States sinking-fund bonds, as you did to negotiate the sale of the Tennessee Coal & Iron stock for those bonds?

Mr. Schley. It was not. (Hearings, p. 1073.)

The Steel Corporation had already loaned Schley over a million dollars on these very same stocks, and they had the same authority to exchange six for seven millions as they had to exchange for one.

The loan of four or five millions of the steel company's bonds, says Mr. Schley, would have served the purpose quite as well as the merger of the company of which he was syndicate manager.

Mr. Littleton. If the steel company would lend you the $5,000,000 or $6,000,000 which it is said in the record they would have loaned, and which you said would have made you happy; that would have made you happy?

Mr. Schley. Yes, sir. (Hearings, p. 1089.)
Judge Gary admits this could be done, and, what is more, admits it could have been done without embarrassment to the Steel Corporation. It is easy to understand how little embarrassment it would have caused the Steel Corporation since the second-mortgage bonds which were exchanged for Tennessee Coal & Iron stock were treasury stock in the vaults of the Steel Corporation, and by the exchange of these securities the Steel Corporation was out not a single, dollar by this transaction.
Mr. Littleton. You could have loaned the bonds without any embarrassment to the Steel Corporation, could you not?

Mr. Gary. We could.

Mr. Littleton. And if the bonds when exchanged were the means of saving Moore & Schley they would have been just as efficient means when loaned, would they not?

Mr. Gary. They would.

Mr. Littleton. And therefore the purchase of the Tennessee Coal & Iron Co. would have been wholly unnecessary in that particular view of it?

Mr. Gary. I should think so. (Hearings, p. 170.)
If, as Mr. Frick maintained, Tennessee Coal & Iron stock was not worth more than 60, it is inconceivable that the United States Steel Corporation would exchange its bonds for over three hundred thousand shares of Tennessee Coal & Iron stock at par, incurring loss to their stockholders ofover twelve millions of dollars, when the same result could have been obtained by a loan of five million, secured by the same stock, especially in view of the fact that Judge Gary said they had the authority to make this loan and that they could have made it without embarrassment, and that they had already turned over to Schley over a million dollars of bonds, and had selected these securities out of all the stocks of Schley as the most desirable indemnity against any loss resulting from the exchange. Judge Gary maintains that the steel company, in the hope of staying a disastrous panic and securing the return of confidence and peace to the community, incurred a financial loss and submitted to unjust persecution, which they anticipated as a result of this merger.

The value of the Tennessee Coal & Iron Co.'s stock is the crux of the whole controversy. If the securities of this company were not worth more than thirty-five or forty millions of dollars to the Steel Corporation, then it had no motive in refusing to relieve the necessities of Schley without the surrender of his stock in this company; and it might reasonably be maintained that the "hammering" of his firm in the street and that the run on the bank of Oakleigh Thorne were in no way inspired or encouraged by the powerful interests behind the Steel Corporation. If, however, this concern was a formidable competitor, if its existence threatened the supremacy of the Steel Corporation in the South, and if its vast holdings were infinitely more valuable than the second mortgage bonds by which they were obtained, then the Steel Corporation was the immediate beneficiary of Schley's embarrassment and would have been an eager bidder had the securities of Oakleigh Thorne gone under the hammer.

Nobody knew better than the directors of the Steel Corporation the actual value of these properties to the Steel Corporation. In a statement to their stockholders they frankly admit the great value of this property.

At page 29 of this report the following is found:
In November, 1907, the corporation acquired a majority of the common stock of the Tennessee Coal, iron & Railroad Co., as is set forth in detail on page 25 of this report. The purchase was made during the financial panic of October, 1907. The parties owning or controlling a majority of the Tennessee Co.'s stock offered the same to the corporation on terms which were satisfactory both as to price and manner of payment. The purchase of the property promises benefit to the corporation and also aided promptly and materially in relieving the financial stress at the time existing. The Tennessee property is very valuable. Its mineral resources are large. The location of the iron-ore and coal deposits in the immediate proximity of the manufacturing plants enables the production of iron at reasonable cost. It is believed the lines of business of the Tennessee Co. can be materially extended. (Hearings, p. 1133.)
At the time of this transaction Mr. Gates in a published interview said:
As to the purchase of the Tennessee Coal, Iron & Railroad Co. by the United States Steel Corporation, the steel men got the best property in the country, and at a bargain price. I regard it as a sacrifice of stock worth a great deal more than the purchase price. I did not want to sell my stock, but had to follow the crowd. Had Tennessee stock been thrown on the market, I would have been better off, as I could have increased my holdings at a low price. The iron-ore and coal deposits of the Tennessee Co. are worth many times more than the entire cost of the property to the Steel Corporation. (Hearings, p. 10.)
When questioned as to the accuracy of this statement, Mr. Gates replied:

That I would be willing to make an affidavit to to-day, in my opinion; it is purely an opinion.

If Col. Roosevelt believed that this property was purchased at» loss to the Steel Corporation, it could only have been due to an absolute lack ofany accurate information with reference to the extent or value of the Tennessee Coal & Iron Co.'s holdings.

The New York Sun, on November 7, 1907, said:
The acquisition of the (Tennessee) company is particularly advantageous to the Steel Corporation, because of the iron ore and coal properties that go with it. With the Great Northern and Northern Pacific ore lands acquired last year, together with the previous holdings, the Steel Corporation nowhas iron-ore deposits estimated at approximately 2,400,000,000 tons, of which approximately 700,000,000 tons come with T. C. & I. (Hearings, p. 1129.)
Mr. John Moody, writing for Public Opinion, October 16, 1908, said:
The possibilities of the Tennessee property and the value of its raw materials are so gigantic that even if it were producing nothing at the present time it would have been the best bargain at $45,000,000 that the Steel Corporation or any other concern or individual ever made in the purchase of a piece of property.

The Steel Corporation, 15 months ago, entered into a lease with the Great Northern Railway interests whereby it has the right to mine at so much per ton the vast ore deposits of the Great Northern properties. The Steel Corporation agreed to pay to the Great Northern people $1.65 per ton for this ore, and transport a portion of the ore over the Great Northern tracks at a specified rate. The Great Northern ore bodies are estimated to contain about 500,000,000 tons of good ore, which, if all mined and taken by the Steel Corporation at $1.65 per ton. would make an ultimate cost to the Steel Corporation of about $850,000,000, without considering cost of transportation, etc, As stated in the Steel Corporation report for the year 1906, this contract was looked upon as a good one from the standpoint of the Steel Corporation.

The object in giving the foregoing details is to bring out a vivid comparison of the Great Northern deal with that made last, winter in the acquisitionof the Tennessee Coal & Iron Co. The Great Northern properties, containing probably 500,000,000 tons of ore, will ultimately cost the Steel Corporation about $850,000,000; but the Tennessee Coal & Iron properties, which are of far more value than the Great Northern properties probably ever can be, cost the Steel Corporation only 345,000,000.

To demonstrate the foregoing statements, let reference be had to the following from the annual report of the Tennessee Coal & Iron Co. for the year ending December 31, 1904. In that report Mr. Bacon, the chairman or the board, said:

"Early in the summer of 1904 a committee of appraisers was appointed, representing the Sloss-Sheffield Steel & Iron Co., the Republic Iron & SteelCo., and this company, to estimate the amount and quality of the coal and iron ore owned by each company. An examination covering several months was conducted, as the result of which a report signed by every member of the committee was submitted, showing that this company owns in fee over 395,000,000 tons of red ore, of which 381,000,000 tons are graded as first class, 10,177,000 tons of brown ore, and over 1,623,000,000 tons ofcoal, of which 809,112,000 tons are coking coal. In the coking coal is included 300,000,000 tons of Cahaba coal, which is unexcelled in the South for steam and domestic purposes, and commands the highest market price of any grade of coal in the district. The men in charge of our iron mines estimate the holdings of iron ore of the company to be still larger, viz, of first-class red ore, over 450,000,000 tons; of second-class red ore, over 95,000,000 tons; and of brown ore, 16,900,000 tons."

From the above it will be seen, figuring the first-class ore at as low an amount as $1 per ton, that the valuation for that alone is $395,000,000. If we disregard the aggregate estimate of coal and simply take the estimate for coking coal at as low a figure as 50 cents per ton, we get a valuation of $400,000,000 more. A very conservative estimate of the values of the ore and coal deposits of the Tennessee Coal & Steel Co. at the present time ishardly less, in all probability, than $1,000,000,000.

Now, as far back as 1901 Mr. Schwab made the statement that the coking coal deposits of the Steel Corporation were of vast value, because of the fact that coking coal of the kind needed for blast furnaces was rapidly growing scarce, and that in a few years there would probably be no more. lie disregarded the Tennessee properties, undoubtedly, but by this great acquisition the Steel Corporation has been put in a position where it need have no concern for the future as far as coking coal is concerned. In fact, the acquisition of the Tennessee Coal & Iron Co., aside from being a business stroke of enormous direct profit, has had the effect of rounding out and completing the control by the corporation of the ore and coking-coal supplies of the country.

That acquisition is of more value to the Steel Trust, and will be in the future in many ways, than its holdings of Lake Superior ores, both because oflocation and because of general character and quality of the deposits.

It is well known that the Tennessee iron-ore deposits are the best in the world for making pig ironj and the cost of production and manufacture ofiron products in that section is considerably less than is the case in the Great Northern ore bodies. Therefore it can be easily demonstrated that theacquisition of this property for $45,000,000 added an almost unheard of value to the equity back of the Steel Corporation stocks.

Many people have wondered and are still wondering why, in the face of temporarily poor earnings and in the face of tariff agitation, the Steel Corporation stocks, both common and preferred, have been steadily rising since last December, and are now almost at the highest figures of theirhistory. The foregoing demonstration certainly accounts for it.

If it were not for the danger involved in tariff agitation, the Steel Corporation common stock would probably be selling to-day at nearly double itspresent value. In other words, instead of having a market price of $45 per share, a total market value of about $220,000,000, it would be selling in the neighborhood of $90 per share, with a total market value of $450,000,000. It coula easily reach this point in spite of the fact that the corporation maynot pay any larger dividends for several years to come.

The appraised value in 1904 of the Tennessee company's properties, as quoted above, was that of a thoroughly impartial and unanimous board. Thisappraisal must have been known to Mr. Morgan and the rest of his party when the property was taken over by the Steel Trust at the absurdly low price they paid. If they checked the panic by this transaction, they did it by taking a few dollars out of one pocket and putting millions into another. (Hearings, pp. 1130-1131.)
It appears that the Steel Corporation was anxious, not without cause, that the public should know the extent to which the actual values of its own inflated stocks had been increased by the acquisition of its great competitor. Mr. Frank A. Munsey, editor of Munsey's Magazine, was given accessto the records of the Steel Corporation in order that he might publish a full and accurate inventory of its vast properties. When before the Ways and Means Committee Judge Gary was questioned as to the accuracy of this article. Judge Gary said:
This is the result of an independent examination by Mr. Munsey concerning the value of our properties. He gives the properties in detail, and his valuation, and if anything 1 would say that it is a little too high, but it is not very much too high, and certainly properties could not be reproduced for anything like that; in fact, it would be impossible to reproduce them at any price, perhaps some of them. (Hearings, p. 1132.)

The Tennessee Coal & Iron Co.," says Mr. Munsey, "is entered as a separate item in this inventory. Its ore and coal and mills and furnaces andother properties are not included in the other classifications. This company is put in at an estimated value of $50,000,000. which is somewhat more than the Steel Corporation paid for it, but probably a much smaller sum than it is worth to the Steel Corporation. Its chief value lies in its coal and ore properties. • Its ore is estimated at 700,000,000 tons. It is not as high-grade ore as the northern ore; but assuming that it is worth 15 cents per ton, italone would amount to $105,000,000. Its coal is estimated at about a billion tons, which at 10 cents a ton would be $100,000,000. From the fact that the known supply of ore in the country is limited, it may be worth two or three times this price. There is no way of telling just what it is worth. But as a guide to the value of ores, we may take the price fixed upon for the Great Northern ores between James J. Hill and the Steel Corporation. The Great Northern Railroad and the Northern Pacific had vast holdings of iron ore in the Messabe Range, and after many months of negotiation the Steel Corporation entered into a contract a year ago to take all this ore at a certain price per ton, the price to be advanced each year over the preceding year 3.4 cents. The first year's price, which covered the year 1907, was 85 cents a ton. This year it is 88.4 cents a ton. On this basis the price will soonbe over a dollar a ton, and the average cost for the entire supply will be considerably in excess of that figure. And this ore is supposed to be of a lower grade, as a whole, than the ore owned by the United States Steel Corporation, which in this inventory has been conservatively—ultraconservatively—figured at 60 cents a ton. If the Hill ore is worth over a dollar a ton, the ore of the Steel Corporation is worth quite as much, and even more, as it is of a better grade. And these prices of this Northern Pacific ore have an important bearing on the ore properties of the Tennessee Coal & Iron Co. I should think that Mr. Charles M. Schwab is as good an authority as there is in the world on the value of iron ore. He said to me two or three days ago that the ore holdings of the Steel Corporation were easily worth a dollar a ton, and, in fact, might safely andconservatively be regarded as worth still more, for the reason that they can not be duplicated. (Hearings, pp. 1131 and 1132.)
It is the opinion of a majority of the Senate committee, to which reference has previously been made, that—
To sum the matter up briefly, we think the property is very valuable, worth probably several hundred million dollars, and that among the larger benefits which the Steel Corporation derives from the merger are the control of the open-heartn output of steel rails, the ultimate control of the iron-ore supply of the country, the practical monopoly of the iron and steel trade of the South, and the elimination of a strong and growing competitor. (Hearings, p. 1134).
Judge Gary maintains that the ores in the Birmingham region are incomparably less valuable than the ores of the Lake Superior region. It is true that the Lake Superior ores contain a much higher percentage of iron than the southern ores, Superior ores running from 50 to 60 per cent of iron. The value of iron ores, however, can not be determined arbitrarily by the per cent of iron which they contain. The facility for assembling them and the percentage of lime in the ores is as essential a factor in determining value as the iron content. An expert knowledge of the subject is not necessary to an understanding of the uselessness of such an arbitrary classification.

Ores have no other value than the production of iron, and that ore is most valuable, of course, which can be most easily and cheaply converted into pig iron at some point where there is a market for it.

All Lake Superior ores must be mixed with limestone before they can be smelted. Roughly speaking, 25 parts of limestone must be quarried andtransported to the blast furnace and there mixed with each 100 parts of iron ore before the same can be "fluxed" properly. The percentage of iron in this "fluxable mixture" is necessarily reduced in proportion to the amount of limestone that is added to it. The Lake Superior ores contain no limestone. In the Birmingham district nature has to a great extent relieved the furnace man of the labor and expense incident to the mining and mixingof limestone with iron ores. A great part of the Birmingham ores are known as "self-fluxing" ores. This is explained by Mr. Perrin and Prof. Grasty in their testimony before this committee.
The Chairman. Are any of these ores self-fluxing ores?

Mr. Perin. Most of the ores of the second and third class are self-fluxing.

The Chairman. What do you mean by self-fluxing ores?

Mr. Perin. In my previous dissertion on iron smelting, I referred to this sandy material, this siliceous material, which is known as an acid, andwhich has to have added to it a base. These ores carry a base in the shape of limestone which will take care of the acid material which the ores carry with it. In other words, when you mine a ton of iron ore you also mine enough limestone to take care of the earthy material contained in we iron.

The Chairman. And where they are found mixed together by nature, you mine both at the same time; and if they are not mixed together by nature, you must mine them at separate times?

Mr. Perin. Yes.

The Chairman. Now, for example, say you have the highest grade Bessemer ore—60 per cent iron—now much limestone do you put with that—25 per cent approximately?

Mr. Perin. Assuming the same type of fuel is used

The Chairman (interposing). Yes; I mean taking the same character of fuel.

Mr. Perin. Suppose we take standard Connellsville coke in each case, you use approximately a quarter of a ton of limestone.

The Chairman. Using the same smelting material, the same coke, in 2,000 pounds or material, you would have 1,500 pounds of ore and 500 pounds oflimestone?

Mr. Perin. Approximately. (Hearings, p. 982.)

Mr. Grastt. You mean, as I understand you, that the Lake Superior ore, while much higher in metallic content than the southern ore, when the limestone is added for fluxing it, as a matter of fact you really reduce the percentages of iron, because you add two things, you mix it together, andyou consequently reduce the percentage of iron.

The Chairman. In other words, it is not scientifically correct to say, for the purpose of making iron, that those limy ores in this district are 33 J per cent iron and leaving the. furnace there is 66§ per cent of useless material in the making of iron?

Mr. Grasty. No.

The Chairman. If you have to have 20 per cent of limestone put in the furnace to fuse the Superior ore, it is just as much an essential part of the iron-making material as the iron itself, or the coke?

Mr. Grasty. It is; yes. That point is well taken, I think.

The Chairman. And, if I understand you, you have to miy this iron artificially with Superior ores?

Mr. Grasty. Yes.

The Chairman. How much limestone do you have to put in the furnace with a ton of Superior ore?

Mr. Grasty. I don't know about that; I think about onequarter. I am not positive at all. I can not tell you exactly.

The Chairman. About 25 per cent.

Mr. Grasty. Yes.

The Chairman. How much do you have to put with your limy ore?

Mr. Grasty. Sometimes a very small quantity; sometimes none at all.

The Chairman. Over 10 per cent?

Mr. Grasty. No; I should say not.

The Chairman. Then you can put in 15 per cent more ore into the furnace of the same size when using Birmingham ore than you can a furnace of the same size where you use Superior ores?

Mr. Ghasty. Roughly; yes. (Hearings, p. 5320.)
It will be seen from the testimony of these experts that a "fluxible mixture," artificially made by the commingling of 50 per cent Superior ore and limestone, is in its iron content the exact equivalent of the "self-fluxing" Birmingham ore containing 40 per cent of iron.

As has been shown, these ores meet a still more practical test. That is, the raw materials essential to the making of a ton of pig iron can be assembled and smelted at Birmingham for from three to four dollars less per ton than at Pittsburgh. The Steel Corporation has capitalized its ore deposits at a valuation of $700,000,000. It maintains that these ores are worth from 40 to 60 cents a ton at the lowest estimate. The committee places no such value upon the Lake Superior ore. Assuming that the estimates made by Nelson and other disinterested holders of iron ore in the Lake Superior region are correct, that Superior ores containing 50 per cent of iron are worth not to exceed 10 cents per ton, then the Birmingham ores, containing 40 per cent of iron, are as valuable for all practical purposes. Assuming that the Tennessee Coal & Iron Co.'s holdings are only worth half that amount, even at 5 cents per ton the 700,000,000 tons of ore held by this company are worth all that the entire property cost the Steel Corporation, to say nothing of 1,600,000,000 tons of coal, the Birmingham Southern Railroad, and $11,000,000 in blast furnaces, steel mills, and other improvements. The contention of the Steel Corporation that it took over this property at a distinct loss is absolutely untenable.

The President was advised that the Steel Corporation controlled not exceeding 60 per cent of the business and was determined not to increase that control.

The President seems to have regarded the United States Steel Corporation simply in the light of a manufacturer of finished material and never to have considered the extent of its holdings of raw material or the effect of that holding upon the steel industry.
The Chairman. Col. Roosevelt, you say they told you that it would not increase their output, their control of finished and semi-finished product, over 4 or 5 per cent. Did I understand you correctly?

Mr. Roosevelt. I would be unable to say whether they used the words "output" or "finished product." Exactly what was the expression that I used in my letter to Mr. Bonaparte as to the proportion of the holdings?

Mr. Bartlett. "Control," I think it was.

Mr. Roosevelt. The statement was made generally that their policy had been to have less than 60 per cent of the total steel holdings in the country. I am a little doubtful. You see it is four years ago, Mr. Stanley. My memory is that they said this would not increase their holdings to more than 60 per cent; and that some other information at the time was given me to the effect that it would change it from 58 to 62 per cent, but the difference was trival.

The Chairman. Four or five per cent?

Mr. Roosevelt. Four or five per cent; something like that.

The Chairman. Was it your impression from what they said that they were buying some steel mills in Alabama belonging to the Tennessee Coal & Iron Co.—plants 1

Mr. Roosevelt. That they were buying the Tennessee Coal & Iron plant.

The Chairman. Plant. Did they say anything to you about the ore properties that they were buying at that time?

Mr. Roosevelt. They did not go into detail at all. (Hearings, p. 1379.)
The corporation's control over the iron and steel industry can not be measured by its output of finished material. If this corporation with its present ore holdings and its transportation facilities should divest itself of all the finishing mills it now holds, its mastery of the business and its control of prices would not be appreciably affected. In any effort to ascertain the effect upon the iron and steel industry by the absorption of the Tennessee Coal & Iron Co., it is as futile to discuss the value of its blast furnaces and rolling mills as it would be to make an inventory of the approximate costof the blacksmith shops on the Mesabi Range. Ah1 the raw material in the Birmingham district, with the exception of from 2 to 5 per cent, were held by steel companies. The only way to get a foothold in this district was to absorb some existing concern. The Steel Corporation had no holdings in that whole southern region. It was the ore and the coal that the Steel Corporation needed and it was the ore and the coal that it was after, and yet in their conference with the President the real transaction was never mentioned, and after his interview with Messrs. Gary and Frick, as evidenced by Col. Roosevelt's statement before this committee, he was still under the impression that the Steel Corporation had bought some "plants" in the Birmingham district.

It is surprising that the Steel Corporation's rapid and extended control over natural resources had up to this time entirely escaped the attention ofthe President. Any investigation of this corporation's affairs, however casual, would have revealed it. In the report recently issued by the Commissioner of Corporations this company is expressly charged with a monopoly of the ores and transportation facilities in the Lake Superior district, and the use made of that monopoly is unequivocally condemned.

Mr. F. J. MacRae, in his report to this committee, has filed a list of documents furnished by the Steel Corporation to the Commissioner ofCorporations covering over 70 printed pages. Judge Gary testifies that the Government was furnished with tons of data covering every detail of their business and at an expense of several hundred thousand dollars. Among other things, it is manifest that the Bureau of Corporations was advised as to the location and extent of the mines and ore holdings of the Steel Corporation It appears that the Commissioner of Corporations had been investigating this company since 1896. On June 26, 1906, at a meeting of the executive committee, at which Messrs. Gary, Frick, Rogers, Morrison, Perkins, Converse, Gayley, Hughitt, J. D. Rockefeller, jr., Corey, Baker, Nathaniel Thayer, and Griscom were present, Judge Gary made the following statement:
At the last session of Congress a resolution was passed by both Houses asking the commissioner to investigate the United States Steel Corporation. The commissioner did not pay any attention to that resolution; but soon after Congress adjourned he appeared at this office and stated that he believed it was his duty to know the general purposes in detail of our business, about our corporation, its capital stock, its liabilities, its assets, the amount of its business, the costs of production, and its methods generally. After considering the question very carefully our finance committee seemed to think that it was good policy, and, perhaps, advisable, to aid the commissioner in making his investigation; and the investigation has been going on more or less since that time. As stated, however, by the deputy commissioner, we decided to furnish the information that was requested at our own expense and by our own labor. The questions which have been asked are very numerous, very searching,and very comprehensive, and we have undertaken to answer these questions in detail. They involve a great deal of labor on the part of our officials,and of the subsidiary companies particularly—so much so that, with respect to many subjects, the representatives of the department have said that they would not have the time to go over it if we went further into detail or covered a longer period.

I am making tnis explanation because you are interested in it and because you may be more or less disturbed without reason. The finance committee has been in close touch with the matter all the time. We have been in frequent and almost constant communication with Commissioner Garfield, and more or less with the President himself, concerning these matters. Up to date they have made no complaint of us whatever; but we do not know any better than you do what may be the future. We are trying to be frank and accommodating to the department, and we suppose we have an understanding that we will not be unnecessarily injured and that we will not be wrongfully charged without having an opportunity to show the facts. We have seen nothing to show us that we need anticipate any trouble. Quite likely in some respects we may be traveling very near the line between propriety and impropriety. (Hearings, pp. 3885-3886.)
Having already obtained control of the Lake Superior ores, it was vitally important that this concern above all others should not preempt the only other supply of available ores on the continent. In this case, however, the President did not ask nor did the Commissioner of Corporations proffer any information whatever.

As to the contention that the President and the Steel Corporation prevented "a general industrial 'smash-up,'" it is stoutly maintained by Col. Roosevelt and by Judge Gary that the advantage in the "sweetening" of Grant B. Schley's obligations—that is, the substitution of steel bonds for Tennessee Coal & Iron stock in about six or seven million out of thirty-eight million dollars of loans—prevented the most disastrous panic of recent times. Col. Roosevelt when before this committee graphically describes the terrific financial cataclysm in which he played so conspicuous a part:
Mr. Littleton. I am endeavoring to find out how accurately and truthfully the real situation in the Street was represented to you, and how truthful itwas, that it was necessary to have these exchanges of stock in order to save that situation.

Mr. Roosevelt. Now, Mr. Littleton, I can answer you right away that I was then thoroughly satisfied, and the after events made me even more thoroughly satisfied, that what was done was necessary to save the situation; that the panic would have spread and very great disaster occurred if exactly what was done had not been done. A good many of the questions, Mr. Littleton and Mr. Stanley, that you are offering are requiring me tosearch the hidden domain of motive of Mr. Frick and Mr. Gary. I never supposed that they were going to take action that would be damaging to themselves, for I would have been exceedingly sure they would have gotten no gratitude for taking such action if they had taken it. My feeling toward them was—I can illustrate it by two similies. I have spoken of a sailboat already. If it is necessary to haul on a rope on a boat in order toprevent the boat from going over, I welcome the help of any husky individual that hauls and I do not care whether he is hauling from altruistic motives about me or to save his own skin. I want him to pull hard on the rope. That is all I want.

Again, if a fire is coming down a row of buildings, I expect the man on the end of the row to join in and help put out the fire farther up the row, partly,I hope, because he feels kindly toward the threatened people, and also because if the fire spreads it will burn his own building. But I do not ask himto analyze the extremely mixed motives which made him come forward and help put out that fire. I want him to help put out the fire. That is all.

Mr. Littleton. Taking the first similie, Col. Roosevelt, the only apprehension that the evidence would create in the minds of any persons hearing andreading regarding the pulling on the rope would be this: Whether or not the pulling was on a rope which was actually attached to the sail or whetherit was one of the guy ropes attached to the mast. [Laughter.] And if you were to pull the wrong rope, the question is not what you would have done, not what you did, as to whether your motives were good, because I would not question those for a moment. My question is as to whether or not you were rightly advised on the situation and encouraged with them to pull a rope which was really attached to the sneet against which the storm was blowing.

Mr. Roosevelt. Mr. Littleton, no man during the storm was capable of making any such error as that of which you speak. Not until all danger was passed would any human being of knowledge have ventured to suggest that we were not pulling on a rope that was attached to the sail. The supposition was preposterous. We were pulling on a rope that we thought was attached to the one sail that was in danger. No human being who knew the facts doubted it, and the result showed it so clearly that it is not possible to be in error about it. (Hearings, pp. 1383-1384.)
How a panic which had persistently resisted the combined efforts of the Federal Government and John D. Rockefeller and J. P. Morgan & Co., and remained in unabated fury after Morgan and Rockefeller had turned loose $60,000,000 and the Federal Treasury $25,000,000 more should suddenly be stilled by this manipulation of Grant B. Schley's loans has not been explained either by Mr. Roosevelt or by any other witness. Yet it is urgently maintained that the panic continued prior to this magical scoop of securities and that the instant the Steel Corporation acquired the Tennessee Coal & Iron Co.'s stock it subsided instantly and permanently.
Mr. Littleton. Let me ask you this question: When or how did these bonds, which were the curative remedy for the difficulty in Wall Street, reach the point that needed to be cured?

Mr. Gary. The announcement from Washington, immediately after the conference with the President, that the trade would be consummated

Mr. Littleton. "All is woll?"

Mr. Gary. That certainly, I have no doubt, produced a great feeling of relief immediately in New York. Of course the banks knew then that thepurchase would be made and the bonds would be delivered and that everyone would be relieved.

Mr. Littleton. Then the men who were saying "Take out Tennessee," "Take out Tennessee" heard the word from Washington that the Tennessee had been sold now, and that the security which was necessary to protect their loans would come to to take the place of the Tennessee Coal & Iron stock I

Mr. Gary. There is no doubt of it. (Hearings, p. 176.)
That Col. Roosevelt distinctly heard ominous rumblings in Wall Street at the time he consented to this remarkable merger can not be doubted. In the light of subsequent events, it is equally certain that it was the receding and not an approaching storm which disturbed him. In an editorial on June 7, 1911, published in the New York World, it was clearly demonstrated that the panic was over prior to the interview between Col. Roosevelt and the representatives of the Steel Corporation:
Let the record of the panic testify as to whether this action on the part of Mr. Roosevelt was actually necessary "if a financial cataclysm was to be averted:"

October 19, 1907, it was announced that Charles W. Morse had resigned from all the banks and trust companies with which he was connected.

October 20 the clearing house committee stated that the Heinze-Morse-Thomas interests had been eliminated from the banking situation. The committee issued the following statement:

"A committee of the clearing house have examined the several banks of the association that have been under criticism and. finding them solvent, the clearing-house committee have decided to render them such assistance to meet their deposits as the committee may think necessary."

October 21 the National Bank of Commerce, controlled ,by Thomas F. Ryan, suddenly notified the other clearing-house banks that it would cease toact as clearing-house agents for the Knickerbocker Trust Co.

October 22 there was a run on the Knickerbocker Trust Co., which closed its doors, and the panic was in full swing. That evening J. Pierpont Morgansaid:

"We are doing everything we can as fast as we can, but nothing has yet crystallized."

October 23 something "crystallized," for the New York Tunes printed a statement inspired by George W. Perkins, one of Mr. Morgan's partners,saying, "The chief sore point is the Trust Co. of America." A run immediately began on the Trust Co. of America. This same day George B. Cortelyou, Secretary of the Treasury, dumped $25,000,000 of Government money into Wall Street.

October 24 the Morgan-Rockefeller interests advanced $60.000.000 to steady the stock market.

October 25 stocks advanced, and Clark Williams, State superintendent of banks, said the situation was improving. The Trust Co. of America was steadily paying off its depositors, but under difficulties.

October 26 Mr. Roosevelt issued a statement congratulating Mr. Cortelyou "on the admirable way you have handled the present crisis." Mr. Roosevelt also congratulated "those conservative, substantial business men" who did "invaluable service in checking the panic."

Apparently the panic was over. The newspapers ceased to publish the news or it on the first page. (Hearings, p. 247.)
Up until the time of this interview the Steel Corporation owed its success and its permanency to the power and the skill of the financiers who had created and the iron masters who had directed its operations. Since that time its dominance has been due in no small measure to the sudden, ill-considered, and arbitrary fiat of the Chief Executive.

The President's refusal to interfere was an absolute warrant to proceed. A suggestion from him to the Attorney General was equivalent to a command; and upon a refusal of the Attorney General to act, the corporation was immune. This is admitted by Col. Roosevelt, and he unhesitatingly assumes full responsibility in the matter.

In transmitting his letter of November 4, 1907, to the Senate, the President states:
As to the transaction in question, I was personally cognizant of and responsible for its every detail. (Hearings, p. 1122.)
Before this committee Col. Roosevelt stated:
Mr. Littleton. I call your attention to what it is only necessary to call your attention to, because you undoubtedly have it in mind, that the Sherman antitrust law, whether wisely or unwisely remains to be seen, provides in section 4 that the Attorney General or the district attorneys could, if they chose to do so, invoke the courts of equity to enjoin certain powers.

Mr. Roosevelt. Certainly.

Mr. Littleton. And that remedy has been held to be an exclusive remedy; that is, they are the sole authorities who could invoke the courts of equityto enjoin such powers?

Mr. Roosevelt. Yes.

Mr. Littleton. I suppose you naturally understood Mr. Gary and Mr. Frick were coming to you because of a distressing situation in New York, because if they undertook to do this thing without apprising the Government fully what they intended to do, and they were enjoined in the proceeding by the Attorney General, it would make the difficulty all the worse.

Mr. Roosevelt. My own belief was—of course again I am now giving my impression of their acts, Mr. Littleton.

Mr. Littleton. Yes.

Mr. Roosevelt. But my belief was that they knew that even if I did not direct an injunction against them, that if I merely stated that it ought not to bedone, they could not do it.

Mr. Littleton. Yes. In other words, the adverse attitude of the Government, whether in a distinct direction to your Department of Justice, or the announcement of your position

Mr. Roosevelt. Would have been conclusive against it.

Mr. Littleton. Would have been conclusive against it.

Mr. Roosevelt. As I said there, my responsibility was complete and absolute. I can not state it any stronger, Mr. Littleton. (Hearings, p. 1387.)
If the Steel Corporation could have absorbed the Tennessee Coal & Iron Co. without a semblance of injury to the steel industry or without the violation of existing law it would not have been necessary for Judge Gary and Mr Frick, on a special car "rigged" up at midnight, to make that hurried run to Washington or to confer with the President before breakfast. If the merger was in violation of the law it is equally clear that the President had no right to condone or encourage its violation, or to prevent the Attorney General from performing his duty, even though the prosperity of a dozen bankers in New York had depended upon it, much less the fate of a single stock broker, whose reckless transactions had involved him in financial disaster. As stated by Senators Culberson, Kittredge, Overman, Rayner, Bacon, Nelson, and Foraker, in a report touching this transaction, filed March 2, 1909:
Assuming, therefore, for present purposes, that the absorption of the Tennessee Co. by the United States Steel Corporation was in violation of the act of Congress approved July 2, 1890, commonly known as the Sherman antitrust law. we are of the opinion that the President was not authorized topermit the absorption. The proposition is self-evident, needing neither argument nor judicial authority to support it, for manifestly the President iswithout authority to annul or suspend a law or to direct its nonenforcement either generally or in a particular case. The principle involved, in its broadest sense, is inherent in our form of government and is essential hi the preservation of the rights and liberties of the people. This view is strengthened, if such were necessary, by the fact that the President is the one official who is by the Federal Constitution expressly enjoined to "take care that the laws be faithfully executed." Whatever may be the supposed emergency, no discretion is lodged in the President as to the enforcementof the law. This is a government of law and not of men, of law universal in its application, as to which none are immune. It is imperative that this principle be preserved in such a case as this, lest in time we revive the despotic prerogative of kings to create and license monopolies. (Hearings, p. 1135.)