America's Railroad Titans Banked On Jacob Schiff
When Forbes recently reprinted its first list of the richest Americans, for its 100th Anniversary Issue, Jacob Schiff’s name stood out as one that seems to be forgotten.
That list for 1918, headed by John D. Rockefeller, consisted of well-known captains of industry or their heirs. Schiff was tied for 23rd with a net worth of $50 million (equivalent to $875 million today), alongside tobacco tycoon James Duke, photography pioneer George Eastman, Sears & Roebuck founder Julius Rosenwald, and Pierre S. Du Pont, who created the chemicals empire.
Schiff was one of Wall Street’s leading investment bankers from 1880 to 1920, with his Kuhn, Loeb & Co. enabling railroads to reach every corner of the continent, helping insurance companies grow, and lending Japan the money it needed to defeat Russia in their 1904-05 war (his revenge for the czar’s pogroms against the Jews).
“Many Jews were forced to flee Russia, and Schiff, an immigrant from Germany, helped encourage these and other immigrants to be proud of their heritage and fight bigotry and hatred,” Jeffrey Podoshen, associate professor of marketing at Franklin & Marshall College in Lancaster, Pa., told IBD. “He was instrumental in instilling the beliefs that they had to depend on themselves and their own hard work to achieve success in the face of perpetual propaganda from racists and anti-Semites. Schiff was confident, bold, unapologetic, and very successful.”
Schiff (1847-1920) was born in Frankfurt into a distinguished family that traced its lineage in the city back five centuries. His father was a broker for the Rothschilds and at 14 Schiff began working as an apprentice at a mercantile house and then a bank.
At the end of the American Civil War in 1865, Schiff, 18, decided the United States would provide greater opportunity and boarded a ship for New York City. After a few months of unemployment, he was hired as a clerk at a brokerage and within two years formed a partnership, Budge, Schiff & Co. In 1874, Abraham Kuhn of Kuhn, Loeb invited him to join the investment bank and Schiff contributed his valuable European connections. The following year, he married Theresa Loeb, daughter of co-founder Solomon, and they would have a son and daughter.
“The partners had prospered in wholesale clothing in Cincinnati and during the Civil War because of the Union’s demand for army blankets,” wrote Naomi Cohen in “Jacob H. Schiff: A Study in American Jewish Leadership.” “In 1867, they established Kuhn, Loeb & Co. in New York, a banking firm that dealt primarily in government bonds. Jewish investment bankers … created opportunities for Jews who, because of their Jewishness, were barred from gentile firms, collectively providing a base for cooperation in new investments. … Their kinship network that spanned two continents played a pivotal role in their achievements.”
Rapidly Expanding Railroads
By 1875, the other partners were following Schiff’s lead in aggressively pursuing new business, in contrast to the prior attitude that the respectable thing to do was to wait for proposals. Well before Schiff was made head of the firm in 1885, he was seen as the strategist and spokesman for Kuhn, Loeb and would remain so for over four decades.
“The older members of the firm recognized his financial genius … and Kuhn, Loeb became one of the two most influential private international banking houses in the Western Hemisphere,” wrote Cyrus Adler in “Jacob Henry Schiff: A Biographical Sketch.” “It was characteristic of him as a banker that his activities were all creative, looking to the development of the resources and the extension of the commerce of the United States, particularly concerned in the financing of railway enterprises. … He was swift to recognize the genius of Edward H. Harriman, and the Harriman-Schiff railway combination became the most powerful, the most aggressive, and the most successful that America had ever known.”
Kuhn, Loeb financed many railways, including providing the Pennsylvania Railroad with $500 million over a quarter century. By the mid-1880s, Schiff had a strong relationship with railroad baron James J. Hill, who controlled the Great Northern Railroad, giving Schiff a seat on the board, while Hill sent his son to be trained by the banker. But the economic panic of 1893 exposed corruption and inefficiencies in many railroads, and Schiff pressured Hill to consolidate Great Northern with his troubled client, Northern Pacific. Hill refused and turned to J.P. Morgan to fund his ambitions.
“Schiff formed a reorganization committee for another client in debt, Union Pacific (UNP), that included the National City Bank and Rockefeller money, but he assumed the all-consuming task of hands-on manager,” wrote Cohen. “A partner observed, ‘He could conceive financial transactions of gigantic lines, but at the same time no business detail escaped his attention.’ “
But a year later, Schiff heard that Harriman was trying to block the reorganization in order to add the Union Pacific to his own railroad empire. They struck an agreement that would give Harriman a position on the executive board and Kuhn, Loeb would have access to his credit reserves. In 1897, Schiff convinced the U.S. government to provide $87 million to allow his investment group to take full possession of the line, which prospered.
In 1900, Schiff tried to acquire the Chicago, Burlington, & Quincy Railroad for Union Pacific and went up against Hill and Morgan, who wanted to add it to Northern Pacific, which they now owned. Northern Pacific won the bid, but Schiff and Harriman began buying its stock, and on May 9, 1901, the price of a share shot up to $1,000 before the two sides brokered a truce and the price fell back to $150. The agreement gave board seats to the non-owners and promised to minimize competition between the lines, but this later had to be modified under the new antitrust laws.
Kuhn, Loeb was now in control of 22,000 miles of railway and held stock worth $321 million (equal to $9.3 billion now), while Schiff was regarded as second only to Morgan in the investment banking world.
But Schiff’s most high-profile loans were to Japan, starting in 1904, when it faced a much stronger Russia and needed to purchase munitions. Eventually, Kuhn, Loeb floated $200 million (worth $33 billion today), half its entire war needs. Schiff had also done everything he could over the decades to hinder Russia’s ability to get the backing of Wall Street, because of that nation’s persecution of Jews. During World War I, Schiff arranged funding for the Allies, as long as none of the money went to Russia.
Schiff was as well-known for his philanthropy as for his business success, giving to every kind of Jewish charity and school, but also to benefit the general public, ranging from the Boy Scouts to the National Geographic Society and Red Cross.
Newspapers around the world reported his death in 1920 and he was declared “the greatest Jewish leader of the age.”
Kuhn, Loeb was merged with Lehman Bros. in 1977 and the combined firm was acquired in 1984 by American Express (AXP), forming Shearson Lehman/American Express. Kuhn Loeb was spun off in 1994 as Lehman Bros. Holdings, which filed for bankruptcy in 2008 (an event that may have helped trigger that year’s global financial crisis).
“I began studying the history of Wall Street when I worked there and came across Jacob Schiff’s story,” said Michael Driskoll, clinical professor at the Willumstad School of Business at Adelphi University in Garden City, N.Y. “Going up against some of the white-shoe firms, he had to be bare-knuckled at times to succeed in a world where racism was rampant, conspiracy theories were rife that Jews ruled the world, and foreigners were under suspicion. Schiff was able to gain respect beyond his own group by advocating assimilation for immigrants, socializing with a wide variety of people, sharing risks with anyone who had the same values and vision, and giving to causes that benefited society at large. There are lessons for those who have to climb the professional ladder without certain advantages.”
Leading Jewish banker and philanthropist on Wall Street in the late 19th and early 20th century.
Overcame: Anti-Semitism on Wall Street.
Lesson: Produce results no one can deny by focusing on getting the details right.
“We are only the temporary custodians of our fortunes, and let us be careful that no just complaint can be made against our stewardship.”