HISTORY OF THE GREAT AMERICAN FORTUNESCHAPTER II
MORE DETAILS OF THE SAGE FORTUNE
In the preceding chapter we have seen how, by corruption and fraud, Congress, in 1854, passed an act the wording of which was so surreptitiously altered as to give nearly nine hundred thousand acres of public land in Minnesota direct to the Minnesota and Northwestern Railroad company. Composed of a combination of Eastern and Western capitalists, lobbyists and politicians, this company proceeded to regale the country with sonorous prospectuses of the great things that it intended to do in developing the wilderness of the Northwest. Could the nation doubt the veracity and noble intentions of its charterers, all solid men of capital ? Was the good faith of its projectors, headed by that eminent capitalist, Erastus Corning, of Albany, New York, to be questioned ? For once the sweet song failed to charm the public, which rose in angry protest against the corruption used, and Congress hastily backslid and repealed the act.1
It was not often that Congress repealed such corrupt acts ; when it did so, astonishment was general.
GIFTS OF FOURTEEN MILLION ACRES.
But the good behavior of Congress was of the briefest duration ; a mere ebullition serving duty as something with which to blind the nation. The milling of land-grant bills went on busily ; the repealing of that one particular act produced an effect which distracted public attention and which allowed the unscrutinized passage of many other acts. Among these were measures giving six millions of acres of public lands eventually to expand into fourteen millions in all to the Territory of Minnesota (soon to become a State) for the benefit of railroad corporations. The proprieties of the usual form of procedure were now scrupulously observed ; the lands were donated to the individual States, to be granted by them to railroad companies. Congress had learned its lesson of the necessity of sticking to outward forms ; henceforth in the case of State grants the bribery had to be dually done, part at Washington and part at the various State capitals.
During the session of 1857 a modest little bill went gurgling through, tranquilly making the rounds of the committees and becoming a law. At that precise time many another act was being dragged out to daylight as having been passed by bribery, but this especial bill wended its way unobtrusively, entirely shielded from the searching blaze of publicity. It was an act incorporating the Minnesota and Pacific Railway Company to build a line from St. Paul to St. Anthonys Falls (now the city of Minneapolis) and authorizing various extensions in different directions.
The second part of the program was as successfully accomplished as the first. The Minnesota Legislature was applied to for the wherewithal to carry this enterprising project into execution, and most generously did it respond. Sundry legislative acts gave to the railroad company a grant of ten sections to the mile, six hundred and forty acres to the section, the title to successive grants to vest in the company as fast as every twenty miles were completed. But these were not the only benefactions. In dulcet appeals the company informed the citizens of the State that it needed cash also. Many of these aforesaid citizens, hardy pioneers with a rough way of looking at affairs, were not overcome with emotion at reading these tender appeals. They thought that the land grant was quite enough of an encouragement. But the Minnesota Legislature during the corrupt ad ministration of Governor Sibley, as contemporary writers in Minnesota put it was of an extremely susceptible nature, incapable of refusing a request.2 An act was passed authorizing a $5,000,000 issue of bonds called the Minnesota State Railroad Bonds to be handed over to the railroad companies in that State. Not all of this amount was issued ; the total sum turned over to the railroad companies under this special act was about $2,750,000. Large additional sums of money were then contributed by counties and municipalities, and a smart business was done in persuading farmers and merchants to invest their money in the railroad.
Whose master mind was behind all of this ? Russell Sages. Rarely did he appear too prominently in the foreground, but he was the soft-treading man who, as was later revealed, chiefly profited from the transactions of the Minnesota and Pacific Railroad Company. After getting the charter, franchises, rights, land grants, funds and exemptions what did he and his partners next do ? Valiantly and seductively had they argued for inducements enough to make it possible for them to open up the primitive Northwest. But the moment that the primary object was obtained of securing these diverse inducements, talk ceased and the work of filling their capacious pockets began with a grim and silent earnestness.
ROBBED INTO INSOLVENCY.
The thefts were carried on with such rapid assiduity that in about a year after the company had been chartered, its treasury had become a vacancy, and the railroad was plunged into insolvency and, in 1858, foreclosed. Who bought it in ? The selfsame men who had looted it ; as the chiefs of the construction company they had taken care to fortify themselves with enough bonds to put them in the legal position of majority creditors. Some of them, such as Sage, did their work generally through dummies ; others appeared in the open. They might complain, as they did, that the cause of the companys failure was the difficulty in raising money during the panic of 1857 ; but this was a flimsy, although plausible, excuse.
Presently a unique development turned up. They caused the railroad corporation to be dubbed with two new names ; by an act slipped through the Minnesota Legislature, the Minnesota and Pacific Railroad Company was reorganized into two divisions, one called the St. Paul and Pacific, the other the First Division of the St. Paul and Pacific Railroad Company.
Why these separate titles for a single railroad project ? Why this confusing arrangement ? The reason became obvious a little later. It was an adroit artifice to entrench them in a strong legal vantage to loot and bankrupt the road still further ; the same coterie, in reality, directed both companies, and as constructors of a railroad which they themselves directed, they could hand over to themselves bonds making them unassailable creditors of the whole line. An astute piece of ingenuity ; whose was the deft brain that conceived the device ? It was that of the great reformer, that evangel of pure and uncorrupted Democracy Samuel J. Tilden. He wove his legal tangles so well, so very, very well, that the small bondholders and the manufacturers who had furnished materials, found themselves before long entirely cheated out of their claims, and with no chance of legal redress.
One of these bondholders, Edward C. Hopkins, with a wonderful trust in the equity of law, bestirred himself to see whether he could not collect on some coupons of bonds that he owned of the old Minnesota and Pacific Railroad. Was not the St. Paul and Pacific, he claimed, the successor of the original company, and thereby bound to respect, and pay, its debts ? Was it not a case of an old corporation acting under a new name ? The case came up for trial at St. Paul in the United States Circuit Court. The eminent and erudite judge was John F. Dillon the very Dillon, fittingly enough, who subsequently left the bench to become pleader for corporations in which Gould and Sage were the principal directing spirits.
HUGE SUBSIDIES STOLEN.
While the projectors were cheating out this crowd of dupes what were they doing with the huge subsidies that they had received in one form or another with which to build the railroad ? The money had certainly vanished. Where ? Little of railroad construction was there to show for the alleged expenditure except some hundred miles of graded prairie. Even the short stretch of ten miles of main line from St. Paul to Minneapolis had not been put into operation by 1862 as required by law. Why not ? The rapidity with which such fortunes as Sages were being amassed was the answer. The money was stolen.
When the professional corrupters who had looted this railroad had originally applied to Congress and to Minnesota for gifts of land and money, they had represented themselves as capitalists having ample resources with which to carry on the project. All that they needed, was their plea, was State encouragement in some form, because the undertaking was so expensive. After they had robbed the railroad into bankruptcy, a special committee of the Minnesota Senate began to investigate their antecedents and methods. The sequel, it reported, demonstrated that the companies had no cash capital at command, and scarcely credit sufficient to insure prompt location of their lines of road.4 The committee went on :
So far as your committee can discover, the companies, since the passage of the loan amendment, have not furnished one dollar of capital to aid in carrying on their gigantic enterprise. They have sold and hypothecated large portions of these bonds at a ruinous discount. They have paid extravagant salaries to incompetent or inefficient officers. With the exception of about fifty of well-built superstructureincomplete, fragmenitary and disjointed portions of grading, costing on the average less than three thousand dollars per mileare all that these companies can show in return for the munificent issue of bonds made to them by the State.5
A vivid picture this gives of the original constructive ability of the capitalists an ability conspicuously displayed in perpetrating the most enormous frauds. But where in the United States was it not likewise so ?
The successive events now following in the history of this company are dryly incorporated in the records of the case of John S. Kennedy and Company vs. the St. Paul and Pacific Railroad Company, including the First Division, the Northern Pacific Railroad Company, Russell Sage, Samuel J. Tilden, et al.6 Although the full details are not by any means spread out in these records, some authentic particulars can, at any rate, be gleaned.
By 1871 Sage and his associates had completed certain of the railroad extensions, and had mortgaged them for a total of $13,380,000. Nearly all, of this money had been advanced by banking houses in Holland. But sixty miles of main line were still in an uncompleted state, and the people of the State were getting dangerously curious to know why. Millions of dollars had disappeared ; all of the gifts in land and money made to the company had been sunk thus far in building only some disconnected and semi-worthless sections of the projected railroad. The directors had to make a move ; they did so by evolving a new scheme for bleeding the too eager and credulous Holland capitalists.
DUTCH CAPITALISTS SWINDLED.
And this is what they did : A group of men comprising the First Division of the St. Paul and Pacific, corporatively met and issued bonds for $15,000,000. The same men, or their tools, then met as directors of the St. Paul and Pacific (it is hard to keep these fine distinctions in mind) and mortgaged the rights, franchises, and property, including the land grants, to the First Division for ninety-nine years. Then the First Division corporation, as construction company, bound itself to complete the railroad extensions before March 1, 1873, on which date, by a recent legislative enactment, the land grant was to be forfeited in case the extensions were not built.
The terms of the mortgage were explicit and enticing. The whole of the $15,000,000 was to be applied to building the extensions. On the strength of this agreement about $8,000,000 more was raised in Holland in 1871. But there was one bit of information the Sage clique carefully kept from the Holland capitalists. They did not tell the Hollanders that a large part of the money raised was to be applied to the main line, in violation of the express terms of the mortgage.7
What was done with the $8,000,000 raised in Holland ? This sum, which the borrowers swore on solemn oath to the Hollanders, was to be used entirely for constructing the extension lines, was immediately distributed in various plundering ways. About $3,000,000 of it was fraudulently diverted to the completion of the main line ; large sums were grabbed to pay interest on the main line mortgage bonds, and other millions were used for what ? For the purchase of iron material and the payment of contractors for work on the extension line. And who sold the iron ? The First Division Company. The operation was simple ; Sage, etc., sold to themselves the rails, and charged the account against the money advanced by the Dutch capitalists.8
Those were, indeed, halcyon times of bold graft ; the robbery was so large and openhanded that naturally enough the First Division, the treasury of which was sacked as fast as it was filled, went into insolvency in 1872. In less than a year more than $8,000,000 had been scattered ; we should say, concentrated, for the great bulk of it went into the pockets of a few, and remained there. Nor was this all. When the First Division suspended work in October, 1872, it owed its contractors subordinate firms who really did the constructing work about $700,000, although it later reduced this debt to $500,000 by paying part in supplies of iron. It also heaved under large floating debts, and its interest coupons were under protest.
THEY APPEAL TO COURT.
Tricked and stripped, the Dutch capitalists now fully realized their predicament ; the money that they had skinned from native peoples at home, had been plucked from them. How could they recover it ? They took the only step that they could possibly take, which was to apply for a receiver. Hence the suit brought by John S. Kennedy and Company, acting for them and for other bondholders. In cold legal phraseology they set forth their plaint ; they had been lied to and defrauded. They [the bondholders] also claim, reads the formal court statement, that by reason of the insolvency of said First Division Company, and of various fraudulent and improper acts of its managing officers which are not here recited because the court does not deem it material to the real merits of the application - that a receiver should be appointed, etc., etc.9
Judge Dillon concurred that a receiver should be appointed. Urgent reasons, he said, compelled it. The company had a great land grant valued at $6 an acre ; and this was the only adequate security for the $15,000,000 mortgage. But it happened that these lands, or a large part of them, were to be forfeited if certain extensions were not completed by a certain time. It was imperative, Dillon said, to save that land grant, and as the directors of the road admitted that there was no money in the treasury, it was to the best interests of the bondholders to have a receiver appointed. The receiver would have authority to complete the extensions. Dillon, thereupon, on September 1, 1875, appointed one Jesse P. Farley as receiver.
The next developments were revealed in the second suit of John S. Kennedy and Company against the St. Paul and Pacific Railroad.10
Farley, it seems, made a great ado about the constructing work he was doing, but as a matter of fact, he spent only about $100,000 in the work of constructing and repair.11 However, he kept up the pretense enough to save for a time that part of the land grant threatened with forfeiture. But by 1878 the people of Minnesota were again ablaze. Twenty-one years had passed since the company had been chartered ; it had received vast subsidies in money and land not only from the National Government, the State, cities and counties, but from individuals. All along its route, both completed and projected, farmers and merchants had subscribed for its stock, only, they found, to hold worthless bits of paper which produced neither railroad nor returns. The company had looted itself twice into insolvency ; it had, by repeated sleight-of-hand process, defrauded not only native capitalists, farmers and merchants, but it had done away with the many millions poured in by the Dutch capitalists.
THE LEGISLATURE WAKES UP.
Now it was still deep in bankruptcy. The Legislature could not hold out against this overwhelming expression of popular indignation. On March 9, 1878, it passed an act declaring that unless a specified number of miles should be built by certain dates, then the uncompleted portions, together with the land grants, rights, franchises, immunities and appertaining property shall at once be and become absolutely forfeited to the State of Minnesota, without any act or ceremony whatsoever.12
It was a drastic law, and some action had to be taken at once, if the State was to be thwarted. Who would furnish the money necessary to build the uncompleted sections, and thus prevent the forfeiture of franchises and land grants ? Sage and others, after getting out of the road all the plunder that they could see in sight, had retired to use the proceeds of that piracy in repeating their transactions in other directions. The railroad itself was in a deplorably bad shape, thoroughly disorganized, and very dangerous to travel on. It had little equipment and few stations or depots worth considering. This was the splendid railroad system that Sage and his clique were to build ; this was the result of their vast constructive ability ! How much Sage took out of the project in spoils we are unable to say ; there is no record stating the sum either absolutely or approximately ; it amounted, most certainly, to many millions of dollars.
With forfeiture of much of the possessions and many of the rights of the railroad in imminent danger, four men, who became noteworthy among the great capitalists of our time, stepped forward to get control of the St. Paul and Pacific system. These were James J. Hill, yclept the Jay Gould of the Northwest, and three other Canadians, two of whom attained elevation to the British peerage. How they secured control, and what they did thereafter, forms a story not connected with the Sage fortune ; it will be found in full in the chapter on the Hill fortune.
Meanwhile Sage had met Gould in Troy, and had removed to New York city. The two men, says the effusive biographer heretofore quoted, made an impression upon each other, which afterward deepened into a friendship famous in financial history. Famous or infamous whichever way you prefer to view it. A valuable working pair the twain made ; Sage, crafty, somber and reclusive ; Gould supplying the public audacity ; both equal in inscrutable wiles and stratagems. The one overcautious, the other overreckless, each counterbalancing the other. A prodigious respect Gould learned to entertain for Sage ; the one associate was Sage whom Gould could not overreach or fleece.
Subsequently and appropriately enough, Sage hied himself to New York city early in the course of the Civil War. There, in Wall street, was the headquarters of many of the railroad corporations which had been, and were, bribing and plundering. The office of the LaCrosse and Milwaukee Railroad Company, for instance, was there ; whoever might be the actual physical builders of the railroads, the owners were either Wall street men or kindred capitalists men who by some species of fraud or theft had pushed themselves into control.
And there also in New York was the scene of the greatest activity in the current widespread despoilation ; from there radiated the plans and plots which later resolved themselves into colossal swindles. Had the center of this deviltry been elsewhere, there Sage and all the others of the brood indubitably would have flown.
STOLEN MILLIONS LOANED IN USURY.
A money lender on a great scale Sage became ; he invented a special system of usury the put and call system, the intricacies of which we shall not attempt to describe. Now could be seen what he was doing with the millions that he was stealing in Wiscunsin and Minnesota.13 Ordinarily he would loan money at high enough rates, but in times of panic and Wall street squeezes he demanded and received as much as two per cent. a day or sixty per cent. a month. Friends or enemies, it did not matter ; all alike had to pay the enormous interest that he exacted if they desired a supply of ready money (which he always kept on hand) and thus save themselves from defaulting on contracts, and so going into bankruptcy. He was one of that eminent constellation of patriots who hoarded gold when it was most needed to carry on the Civil War, and refused to loan it except at the most incredibly extortionate rates.
At this time little attention was given in the East to railroad operations in the West ; the newspapers were almost wholly filled with reports of events of the great Civil War. Few knew of the gigantic thefts and frauds that Sage was carrying on out in the Northwest ; and when he suddenly became known as a multimillionaire, glowing accounts were published of him as a wonderful financier. This praise was always modified, of course, by derision of his extraordinary stinginess, and detestation of his hard qualities. But there were those who had been associated with him who smiled at the stories of his wizard-like performances in heaping up millions ; they knew what his attributed necromancy really was ; of the series of briberies, frauds and thefts. The particulars of at least one more transaction in which he was engaged at this time are accessible, however much many of his other dealings are beyond historical reach.
THE PACIFIC MAIL SUBSIDY.
One of the many corporations in which Sage became a large stockholder was the Pacific Mail Steamship Company. This corporation, as we have noted in the Vanderbilt chapters, long corrupted Congress to get predatory mail subsidies from the Government. By an additional act passed by Congress on February 17, 1865, it received another heavy Government subsidy for carrying the mails between San Francisco and Asia via Honolulu.
The booty was so rich that different factions of capitalists continually fought one another to get control of the companys treasury. We find from law suit records that in 1867 that fine, old, massively respectable banking firm of Brown Brothers and Company was one of the heaviest stockholders. In its own name, and acting for authorizing parties, it held 77,839 shares of a total of the Pacific Mail Steamship Companys 200,000 shares of capital stock.
Like the firm of Phelps, Dodge and Company, the banking firm of Brown Brothers and Company was preeminently reputed (as it has been since) to be one of the old-fashioned firms of strict integrity. To be sure, it officially knew nothing of the subsidy bribing incessantly going on ; owners of enterprises must cultivate ignorance of such embarrassing details. And could it be, as William Swinton, a noted writer, charged in a pamphlet, that the eminently respectable Alexander Brown and his associates were (in our modern phraseology) grafting on the very company in which they were stockholders ? Swinton charged that they held a controlling lien which amounted to ownership on boiler, iron and other factories which supplied the equipment of the Pacific Mail Steamship Companys line. A faction in December, 1867, was seeking hard to dislodge them, and they were successfully fighting back. A pretty mess it made in the courts.
Finding that Congress was as ever in the bargaining mood, the owners of this line opened fresh negotiations, and, with such brilliant success, that another act was passed in 1872 granting an additional mail subsidy of $500,000 a year for ten years. The subsidy plunder was now so much larger than before that the contest for its possession, or rather its handling, precipitated a still more violent row among its owners. With some ulterior end in view, Le Grand Lockwood, one of its stockholders, publicly charged that bribery had been used to get the act through Congress ; Lockwood was certainly not prompted by moral motives ; he had been a large beneficiary of the Credit Mobilier swindle. The House of Representatives took on a look of pained and injured surprise, bristled up with indignation, and on February 20, 1873, ordered the Ways and Means Committee to investigate.
Congress did not, of course, expect that the investigation would really disclose any damaging facts ; it was sanguinely anticipated that the inquiry could easily be diverted to harmless channels. But the testimony given shattered these blithe expectations.
A MILLION DOLLARS IN BRIBES.
The committee was not elated at the testimony ; it found itself compelled to report that a sum of nearly one million dollars appears to have been disbursed in some sort of connection with the passage of the act,14 and that the results of the evidence are that $565,000 was paid out to lobbyists ; the disposition of the remaining $335,000 remains in doubt upon the evidence presented.15 Russell Sage was president of the Pacific Mail Steamship Company at this time ; he was haled up to testify, which he did with a very aggrieved air. He denied having been connected with the company at the time that the subsidy was granted, and avowed that he knew nothing of the alleged bribery. If we are to accept his word that he was not concerned in the bribery a doubtful acceptation, since in other matters he was a proved perjurer16 then what he probably had done was to wait until after the $5,000,000 subsidy had been granted, and then had manipulated matters to get in control himself. No doubt he knew full well of the bribery, and it is a possible supposition that he had urged Lockwood to make the charges, in order to raise a public stew, and discredit and overthrow the clique in power.
At all events, whatever the ins and outs, there was the Pacific Mail Steamship Company with its large subsidies obtained by bribery, and Sage the head of it all in 1873. So far as the identity of bribers and bribed was concerned, the committee professed to know nothing. One lobbyist, Richard L. Irwin, testified that he had paid out $750,000 to other persons,17 but who those persons were the committee said that it did not know ; it had exhausted every resource in trying to find out, but in vain. As usual, it was the unregulated lobby which was to be blamed and which should be purged.
So much for Sages career up to the time when he and Gould conjoined in the Union Pacific manipulation and other transactions. What they and other capitalists associated with them did in these operations will now be related.
1 Notwithstanding its repeal, the Minnesota and Northwestern Railroad Company influenced the United States District Attorney for Minnesota to bring a trumped-up suit in order to get a favorable court decision on the validity of its title. That official was summarily dismissed from office by President Pierce when the facts became known.House Executive Documents Thirty-third Congress, Second Session, 1854-55, Vol. v, Doc No. 35.
2 Legislative corruption was almost continuous. The numerous charters, complained Governor W.A. Gorman to the Minnesota Legislature, in 1856, already granted in Minnesota for ferries, lumbering, manufacturing, mining, etc., is enough to arouse your vigilance on this subject. Many of those charters, he pointed out, must become sources of immense revenue to the corporators.Minnesota Council journal, 1856:91.
3 Edward C. Hopkins vs. St. Paul and Pacific Railroad Company, Dillons Circuit Court Reports, 1871-71, ii:396-398.
4 Report of Special Committee on Railroads and Railroad Grants. February 3, 1860, Minnesota Senate Journal, 1859-60:343.
5 Minnesota Senate Journal, 1859-60:344.
6 Dillons Circuit Court Reports, 1871-73, ii :448-527.
7 In its dry terminology the Court expressed the fact thus : But this part of the scheme as contemplated a diversion of a portion of said proceeds to the main line not being made public or announced to the persons who subsequently purchased said bonds. Dillon, v:459.
8 Dillons Circuit Court Reports, 1879-80, v:451-459.
9 Dillons Circuit Court Reports, 1879-80, v : 451-459.
10 Dillons Circuit Court Reports, 1879-80, v:519-536. Kennedy, however, betrayed the interests of the Dutch stockholders, colluded with the receiver, and made a fraudulent arrangement by which he (Kennedy) profited enormously. Kennedy thus obtained many of the millions, the donation of some of which later enabled him to blossom out as a great philanthropist. See the chapter on the Hill fortune.
11 Dillons Circuit Court Reports, 1879-80, v: 519-536.
12 Minnesota Special Laws, 1878:344.
13 And also in Iowa, in the railroads in which State he was extensively concerned. The capitalists owning the Sioux City and St. Paul Railroad had caused it to be built in such a zigzag fashion that they could fraudulently grab even larger land grants than the accommodating acts of Congress intended. By edging this railroad in Osceola, Dickinson and OBrien Counties, Iowa, this company made claim to 189,184.54 extra acres of public land in those counties, and prevailed upon the State officials to grant a patent. Sage, however, had become president of a railroad company called the McGregor Western, and had constructed his line through this very territory. He demanded a share of those 189,000 acres, and, upon refusal, sued the St. Paul and Pacific Railroad Company. The case finally came up in the United States Circuit Court in Iowa, on January 20, 1882, when Judge Love amiably decided, with fine judicial impartiality, that each of the two companies was entitled to an undivided half of the land in dispute. Federal Reporter, x:435:450.
14 House Report No. 269, Forty-third Congress, Second Session, 1874-75 ii : xvii. Henry Clews, that exalted banker and moralizer, was one of the directors during this period.
15 Ibid., xviii.
16 A proved perjurer. For years Sage swore that his taxable personal property did not exceed $2,000,000, and even this amount he sought to have reduced or wiped off the tax books. After his death the New York City Tax Department prepared to assess taxes on at least $50,000,000 personal property inherited by his widow, but the amount of assessment was greatly reduced when the executor of his will submitted an affidavit claiming that $10,000,000 of the Sage cash was invested in non-taxable securities.
17 House Report, No. 269, etc., 1874-75, ii: 123.