CHAPTER V

THE MORGAN TRUST

Speaking generally, the transatlantic shipping business may be said to consist of three great branches, viz. the cargo, the steerage, and the cabin business. The pool agreements that were concluded between the interested companies covered only the cargo business and the steerage traffic. The condition which alone makes it possible for the owners to work the shipping business on remunerative lines is that all needless waste of material must be strictly banned. The great advantage which was secured by concluding the pool agreement was that it satisfied this condition during the more than twenty years of its existence, to the mutual profit of the associated lines. Each company knew that the addition of new steamers to its fleet would only pay if part of a carefully considered plan, and if, in course of time, such an increase of tonnage would give it a claim to an increase of the percentage of traffic allotted to its services.

Much less satisfactory was the state of things with regard to the third branch of the shipping business, viz. the cabin traffic. A regular "cabin pool," with a _pro rata_ distribution of the traffic, was never established, although the idea had frequently been discussed. All that was achieved was an agreement as to the fares charged by each company which were to be graded according to the quality of the boats it employed in its services. Owing to the absence of any more far-reaching understandings, and to the competition between the various companies--each of which was constantly trying to outdo its competitors as regards the speed and comfort of its boats, in order to attract to its own services as many passengers as possible--the number of first-class boats increased out of all proportion to the actual requirements, and frequent and regular services were maintained by each line throughout the year. There was hardly a day on which first-class steamers did not enter upon voyages across the Atlantic from either side, and the result was that the boats were fully booked during the season only, i.e. in the spring and early part of summer on their East-bound, and in the latter part of summer and in the autumn on their Westbound, voyages. During the remaining months a number of berths were empty, and the fares obtainable were correspondingly unprofitable. Ballin, in 1902, estimated the unnecessary expenditure to which the companies were put in any single year owing to this unbusinesslike state of affairs at not less then 50 million marks. The desire to do away with conditions such as these by extending the pool agreement so as to develop it into a community-of-interest agreement of comprehensive scope was one of the two principal reasons leading to the formation of the Morgan Trust. The other reason was the wish to bring about a system of co-operation between the European and the American interests.

This desire was prompted by the recognition of the cardinal importance to the transatlantic shipping companies of the economic conditions ruling in the United States. The cargo business depended very largely on the importation of European goods into the United States, and on the exportation of American agricultural produce to Europe which varied from season to season according to the size of the crop and to the consuming capacity of Europe. The steerage business, of course, relied in the main on the capacity of the United States for absorbing European immigrants, which capacity, though fluctuating, was practically unlimited. The degree of prosperity of the cabin business, however, was determined by the number of people who travelled from the States to Europe, either on business, or on pleasure, or to recuperate their health at some European watering-place, at the Riviera, etc. Social customs and the attractions which the Paris houses of fashion exercised on the American ladies also formed a considerable factor which had to be relied on for a prosperous season. In the transatlantic shipping business, in fact, America is pre-eminently the giving, and Europe the receiving, partner. Thus it was natural to realize the advisability of entering into direct relations with American business men.

To the Packetfahrt, and especially to Ballin, credit is due for having attempted before anybody else to give practical shape to this idea. His efforts in this direction date far back to the early years of his business career. We possess evidence of this in the form of a letter which he wrote in 1891 to Mr. B. N. Baker, who was at the head of one of the few big American shipping companies, the Atlantic Transport Company, the headquarters of which were at Baltimore, and which ran its services chiefly to Great Britain. Mr. Baker was a personal friend of Ballin's. The letter was written after some direct discussions had taken place between the two men, and its contents were as follows:--

"I replied a few days ago officially to your valued favour of the 4th ult. to the effect that in consonance with your expressed suggestion one of the Directors will proceed to New York in September with a view to conferring with you about the matter at issue.

"Having in the meantime made it a point to go more fully into your communication, I find that the opinions which I have been able to form on your propositions meet your expressed views to a much larger extent than you will probably have supposed. I have not yet had an opportunity of talking the matter over with my colleagues, and I therefore do not know how far they will be prepared to fall in with my views. But in order to enable me to frame and bring forward my ideas more forcibly here, I think it useful to write to you this strictly confidential letter, requesting you to inform me--if feasible by cable--what you think of the following project:

"(1) You take charge of our New York Agency for the freight, and also for the passage business, etc.

"(2) You engage those of our officials now attached to our New York branch whom we may desire to retain in the business.

"(3) You take over half of our Baltimore Line in the manner that each party provides two suitable steamers fitted for the transport of emigrants. To this end I propose you should purchase at their cost price the two steamers which are in course of construction in Hamburg at present for our Baltimore Line (320 feet length, 40 feet beam, 27 feet moulded, steerage 8 feet, carrying 3,500 tons on 22 feet and about 450 steeragers, guaranteed to steam 11 knots, ready in October this year), and we to provide two similar steamers for this service. The earnings to be divided under a pool system.

"(4) Your concern takes up one million dollars of our shares with the obligation not to sell them so long as you control our American business. I may remark that just at present our shares are obtainable cheaply in consequence of the general depression prevailing in the European money market, and further, owing to the fact that only a small dividend is expected on account of the very poor return freight ruling from North America. I think you would be able to take the shares out of the market at an average of about 7 per cent. above par. We have paid in the last years since we concluded the pool with the Union Line, viz. in 1886 4 per cent., 1887 6 per cent., 1888 8-1/2 per cent., 1889 11 per cent., 1890 8 per cent. in the way of dividends, and during this time we wrote off for depreciation and added to the reserve funds about 60 per cent.

"The position of our Company is an excellent one, our fleet consisting of modern ships (average age only about five years), and the book values of them being very low.

"I should be obliged to you for thinking the matter over and informing me--if possible by cable--if you would be prepared to enter into negotiations on this basis. I myself start from the assumption that it might be good policy for our Company to obtain in the States a centre of interest and a position similar to that held by the Red Star Line and the Inman Lines in view of their connexion with the Pennsylvania Railroad, etc. It further strikes me that if this project is brought into effect one of your concern should become a member of our Board. I should thank you to return me this letter which, as I think it right expressly to point out to you, contains only what are purely my individual ideas."

It may be assumed that the writing of this letter was prompted not only by the Packetfahrt's desire to strengthen its position in the United States, but also by its wish to obtain a foothold in Great Britain. This would enable it to exercise greater pressure on the competing British lines, which--indirectly, at least--still did a considerable portion of the Continental business. Ballin's suggestion did not lead to any practical result at the time, but was taken up again eight years later, in 1899, on the advice of Mr. (now Lord) Pirrie, of Messrs. Harland and Wolff, of Belfast. Important interests, partly of a financial character, linked his firm to British transatlantic shipping; and his special reason for taking up Ballin's proposal was to prevent an alliance between Mr. Baker's Atlantic Transport Company and the British Leyland Line, a scheme which was pushed forward from another quarter. He induced Mr. Baker to come to Europe so that the matter might be discussed directly. The attractiveness of the idea to Ballin was still further enhanced by the circumstance that the Atlantic Transport Line also controlled the National Line which maintained a service between New York and London, and was, indeed, the decisive factor on the New York-London route. Ballin, accordingly, after obtaining permission from the Board of Trustees, went to London, where he met Mr. Baker and Mr. Pirrie.

It soon became clear, however, that the Board of Trustees did not wish to sanction such far-reaching changes. When Ballin cabled the details of the scheme to Hamburg, it was seen that 25 million marks--half the amount in shares of the Packetfahrt--would be needed to carry it through. Thus the discussions had to be broken off; but the attitude which the Board had taken up was very much resented by Ballin. Subsequent negotiations which were entered into in the early part of 1900 in Hamburg at the suggestion of Mr. Baker also failed to secure agreement, and shortly afterwards the American company was bought up by the Leyland Line.

At the same time a movement was being set on foot in the United States which aimed at a strengthening of the American mercantile marine by means of Government subsidies. This circumstance suggested to Mr. Baker the possibility of setting up an American shipping concern consisting of the combined Leyland and Atlantic Transport Company lines together with the British White Star Line, which was to profit by the expected legislation concerning shipping subsidies. Neither the latter idea, however, nor Mr. Baker's project assumed practical shape; but the Atlantic Transport-Leyland concern was enlarged by the addition of a number of other British lines, viz. the National Line, the Wilson-Furness-Leyland Line, and the West Indian and Pacific Line, all of which were managed by the owner of the Leyland Line, Mr. Ellerman, the well-known British shipping man of German descent. The tonnage represented by these combined interests amounted to half a million tons, and the new combine was looked upon as an undesirable competitor, by both the Packetfahrt and the British lines. The dissatisfaction felt by the latter showed itself, among other things, in their refusal to come to any mutual understanding regarding the passenger business. In the end, Mr. Baker himself was so little pleased with the way things turned out in practice that he severed his connexion with the other lines shortly afterwards, and once more the question became urgent whether it would be advisable for the Packetfahrt--either alone, or in conjunction with the White Star Line and the firm of Messrs. Harland and Wolff--to purchase the Atlantic Transport Line.

That was the time when Mr. Pierpont Morgan's endeavours to create the combine, which has since then become known as the Morgan Trust, first attracted public attention. Ballin's notes give an exhaustive description of the course of the negotiations which lasted nearly eighteen months and were entered into in order to take precautions against the danger threatening from America, whilst at the same time they aimed at some understanding with Mr. Morgan, because the opportunity thus presented of setting up an all-embracing organization promoting the interests of all the transatlantic steamship concerns seemed too good to be lost. Ballin's notes for August, 1901, contain the following entry:

"The grave economic depression from which Germany is suffering is assuming a more dangerous character every day. It is now spreading to other countries as well, and only the United States seem to have escaped so far. In addition to our other misfortunes, there is the unsatisfactory maize-crop in the States which, together with the other factors, has demoralized the whole freight business within an incredibly short space of time. For a concern of the huge size of our own such a situation is fraught with the greatest danger, and our position is made still worse by another circumstance. In the States, a country whose natural resources are wellnigh inexhaustible, and whose enterprising population has immensely increased its wealth, the creation of trusts is an event of everyday occurrence. The banker, Pierpont Morgan--a man of whom it is said that he combines the possession of an enormous fortune with an intelligence which is simply astounding--has already created the Steel Trust, the biggest combination the world has ever seen, and he has now set about to lay the foundations for an American mercantile marine."

A short report on the position then existing which Ballin made for Prince Henckell-Donnersmarck, who had himself called into being some big industrial combinations, is of interest even now, although the situation has entirely changed. But if we want to understand the position as it then was we must try to appreciate the views held at that time, and this the report helps us to do. Ballin had been referred to Prince Henckell-Donnersmarck by the Kaiser, who had a high opinion of the latter's business abilities, and who had watched with lively interest the American shipping projects from the start, because he anticipated that they would produce an adverse effect on the future development of the German shipping companies. The report is given below:--

"In 1830 about 90 per cent. of the United States sea-borne trade was still carried by vessels flying the American flag. By 1862 this percentage had gone down to 50 per cent., and it has shown a constant decrease ever since. In 1880 it had dwindled down to 16 per cent., and in 1890 to as low a figure as 9 per cent. During recent years this falling off, which is a corollary of the customs policy pursued by the United States, has given rise to a number of legislative measures intended to promote the interests of American shipping by the granting of Government subsidies. No practical steps of importance, however, have been taken so far; all that has been done is that subsidies have been granted to run a North Atlantic mail service maintained by means of four steamers, but no success worth mentioning has been achieved until now.

"Quite recently the well-known American banker, Mr. J. Pierpont Morgan, conjointly with some other big American capitalists, has taken an interest in the plan. The following facts have become known so far in connexion with his efforts:

"Morgan has acquired the Leyland Line, of Liverpool, which, according to the latest register, owns a fleet of 54 vessels, totalling 155,489 gross register tons. This purchase includes the West India and Pacific Line, which was absorbed into the Leyland Line as recently as a twelvemonth ago. The Mediterranean service formerly carried on by the Leyland Line has not been acquired by Morgan. He has, however, added the Atlantic Transport Company. Morgan's evident intention is to form a big American shipping trust, and I have received absolutely reliable information to the effect that the American Line and the Red Star Line are also going to join the combine. The shares of the two last-named lines are already for the most part in American hands, and both companies are being managed from New York. Both lines together own 23 steamers representing 86,811 tons.

"A correct estimate of the size of the undertaking can only be formed if the steamers now building for the various companies, and those that have been added to their fleets since the publication of the register from which the above figures are taken, are also taken into account. These vessels represent a total tonnage of about 200,000 tons, so that the new American concern would possess a fleet representing 430,000 gross register tons. The corresponding figures for the Hamburg-Amerika Linie and for the Lloyd, including steamers building, are 650,000 and 600,000 tons respectively.

"The proper method of rightly appreciating the importance of the American coalition is to restrict the comparison, as far as the two German companies are concerned, to the amount of tonnage which they employ in their services to and from United States ports. If this is borne in mind, we arrive at the following figures: German lines--390,000 G.R.T.; American concern--about 430,000 G.R.T. These figures show that, as regards the amount of tonnage employed, the Morgan Trust is superior to the two German companies on the North Atlantic route. It can also challenge comparison with the regular British lines--grand total, 438,566 G.R.T.

"In all the steps he has taken, Morgan, no doubt, has been guided by his confidence in his ability to enforce the passing of a Subsidy Act by Congress in favour of his undertaking. So long as he does not succeed in these efforts of his he will, of course, be obliged to operate the lines of which he has secured control under foreign flags. Up to the present only four steamers of the American Line, viz. the _New York_, _Philadelphia_, _St. Louis_, and _St. Paul_, are flying the United States flag, whereas the remaining vessels of the American Line, and those of the Leyland, the West India and Pacific, the American Transport, the National, and the Furness-Boston lines, are sailing under the British, and those of the Red Star Line under the Belgian flag.

"The organization which Mr. Morgan either has created, or is creating, is not in itself a danger to the two German shipping companies; neither can it be said that the Government subsidies--provided they do not exceed an amount that is justified by the conditions actually existing--are in themselves detrimental to the German interests. The real danger, however, threatens from the amalgamation of the American railway interests with those of American shipping.

"It is no secret that Morgan is pursuing his far-reaching plans as the head of a syndicate which comprises a number of the most important and most enterprising business men in the United States, and that the railway interests are particularly well represented in it. Morgan himself, during his stay in London a few months ago, stated to some British shipping men that, according to his estimates, nearly 70 per cent. of the goods which are shipped to Europe from the North Atlantic ports are carried to the latter by the railroads on Through Bills of Lading, and that their further transport is entrusted to foreign shipping companies. He and his friends, Morgan added, did not see any reason why the railroad companies should leave it to foreign-owned companies to carry those American goods across the Atlantic. It would be much more logical to bring about an amalgamation of the American railroad and shipping interests for the purpose of securing the whole profits for American capital.

"This projected combination of the railroad and sea-borne traffic is, as I have pointed out, a great source of danger to the foreign shipping companies, as it will expose them to the possibility of finding their supplies from the United States _hinterland_ cut off. This latter traffic is indispensable to the remunerative working of our North American services, and it is quite likely that Morgan's statement that they amount to about 70 per cent. of the total sea-borne traffic is essentially correct."

The negotiations which Ballin carried on in this connexion are described as follows in his notes:--

"When I was in London in July (1901), I had an opportunity of discussing this American business with Mr. Pirrie. Pirrie had already informed me some time ago that he would like to talk to me on this subject, but he had never indicated until then that Morgan had actually instructed him to discuss matters with me. A second meeting took place at which Ismay (the chairman of the White Star Line) was present in addition to Pirrie and myself, and it was agreed that Pirrie should go to New York and find out from Morgan himself what were his plans regarding the White Star Line and the Hamburg-Amerika Linie.

"Shortly after Pirrie's return from the States I went to London to talk things over with him. He had already sent me a wire to say that he had also asked Mr. Wilding to take part in our meeting; and this circumstance induced me to call on Mr. Wilding when I passed through Southampton _en route_ for London. What he told me filled me with as much concern as surprise. He informed me that the syndicate intended to acquire the White Star Line, but that, owing to my relations with the Kaiser, the acquisition of the Hamburg-Amerika Linie was not contemplated. Morgan, he further told me, was willing to work on the most friendly terms with us, as far as this could be done without endangering the interests of the syndicate; but the fact was that the biggest American railroad companies had already approached the syndicate, and that they had offered terms of co-operation which were practically identical with a combination between themselves and the syndicate.

"In the course of the discussions then proceeding between Pirrie, Wilding, and myself the situation changed to our advantage, and I was successful in seeing my own proposals accepted, the essence of which was that, on the one hand, our independence should be respected, that the nationality of our company should not be interfered with, and that no American members should be added to our Board of Trustees; whilst, on the other hand, a fairly close contact was to be established between the two concerns, and competition between them was to be eliminated."

The draft agreement, which was discussed at these meetings in London (and which was considerably altered later on), provided that it should run for ten years, and that a mutual interchange of shares between the two concerns should be effected, the amount of shares thus exchanged to represent a value of 20 million marks (equivalent to 25 per cent. of the joint-stock capital of the Hamburg-Amerika Linie). Mutual participation was provided for in case of any future increase in the capital of either company; but the American concern was prohibited from purchasing any additional shares of the Hamburg-Amerika Linie. The voting rights for the Hamburg shares should be assigned to Ballin for life, and those for the American shares to Morgan on the same terms. Instead of actually parting with its shares, the Hamburg company was to have the option of paying their equivalent in steamers. The agreement emphasized that, whilst recognizing the desirability of as far-reaching a financial participation as possible, Ballin did not believe that, with due regard to German public opinion and to the wishes of the Imperial Government, he was justified in recommending an interchange of shares exceeding the amount agreed upon. The American concern was prohibited from calling at any German ports, and the Hamburg company agreed not to run any services to such European ports as were served by the other party. A pool agreement covering the cabin business was entered into; and with respect to the steerage and cargo business it was agreed that the existing understandings should be maintained until they expired, and that afterwards a special understanding should be concluded between both contracting parties.

Immediately after Ballin's return to Hamburg the Board of Trustees unanimously expressed its agreement in principle with the proposals.

"For my own part," Ballin says in his notes on these matters, "I declared that I could only regard the practical execution of these proposals as possible if they receive the unequivocal assent of the Kaiser and of the Imperial Chancellor. Next evening I was surprised to receive two telegrams, one from the Lord Chamberlain's office, and one from the Kaiser, commanding my presence on the following day for dinner at the Hubertusstock hunting lodge of the Kaiser, where I was invited to stay until the afternoon of the second day following. I left for Berlin on the same evening, October 16th (1901); and, together with the Chancellor, I continued my journey the following day to Eberswalde. At that town a special carriage conveyed us to Hubertusstock, where we arrived after a two-hours' drive, and where I was privileged to spend two unforgettable days in most intimate intercourse with the Kaiser. The Chancellor had previously informed me that the Kaiser did not like the terms of the agreement, because Metternich had told him that the Americans would have the right to acquire 20 million marks' worth of our shares. During an after-dinner walk with the Kaiser, on which we were accompanied by the Chancellor and the Kaiser's A.D.C., Captain v. Grumme, I explained the whole proposals in detail. I pointed out to the Kaiser that whereas the British lines engaged in the North Atlantic business were simply absorbed by the trust, the proposed agreement would leave the independence of the German lines intact. This made the Kaiser inquire what was to become of the North German Lloyd, and I had to promise that I would see to it that the Lloyd would not be exposed to any immediate danger arising out of our agreement, and that it would be given an opportunity of becoming a partner to it as well. The Kaiser then wanted to see the actual text of the agreement as drafted in London. When I produced it from my pocket we entered the room adjacent to the entrance of the lodge, which happened to be the small bedroom of Captain v. Grumme; and there a meeting, which lasted several hours, was held, the Kaiser reading out aloud every article of the agreement, and discussing every single item. The Kaiser himself was sitting on Captain