Category Archives: Business History

Penn Central Crash

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In City Journal, a look back at the collapse of the Penn Central Railroad (hat tip: Instapundit), which provides some salutary lessons on how not to run a business:

After the merger [of the Pennsylvania and the New York Central], the railroads discovered that they had incompatible computer systems, which threw railyards into chaos and angered customers. The Penn Central’s three top officials, too, were incompatible. They “scarcely spoke to one another,” write Daughen and Binzen. Stuart Saunders, the board chairman, was a political guy. Alfred Perlman, the president, was a trains guy. These different outlooks could have complemented each other, but personalities got in the way. Rounding out this dysfunctional triumvirate was Penn vet David Bevan, the top financial official, perpetually “angry and humiliated” at not being picked for the top job.

Bevan had two ideas for keeping the cash-bleeding Penn Central alive: corporate diversification and financial trickery. If a railroad couldn’t make money, he thought, perhaps it could invest its cash in entities that could make money. The Penn had a head start in this; it already owned vast swathes of real estate around Grand Central Terminal and Penn Station, including five hotels and a share in Madison Square Garden, as well as the New York Rangers and Knicks.

Bevan added to this conservative legacy portfolio a bizarre array of new business interests, from an executive-jet company (he was its best customer) to pipelines, speculative land tracts in the southern U.S., and a travel agency. “Nobody . . . could name the 186 different companies . . . under the Penn Central’s umbrella,” Daughen and Binzen write. Under Bevan’s stewardship, these companies often sold stakes of themselves to one another, generating illusory paper profits. The Penn also had touchingly optimistic views about the future, booking years’ worth of profits, for example, when a third party agreed to buy a tract of real estate for which it wouldn’t actually be able to pay for years. Bevan was also determined to take some of the supposed profits of these deals for himself, setting up an “investment club” with several associates to buy and sell shares in these side companies before the much bigger Penn Central did, thus benefiting from the subsequent price changes.

These innovative methods didn’t generate the money that the Penn Central needed to balance the books, however. So Bevan turned to straightforward borrowing. With $1.5 billion in annual revenue, the Penn borrowed hundreds of millions of dollars from the nation’s largest banks, including more than $100 million in the nascent “commercial paper” market. This market of short-term loans was meant not for permanent operating deficits but to cover temporary shortfalls like meeting payroll just before a customer paid for a big order. The banks didn’t ask questions, though, because Penn Central had such a solid reputation—and because it was such a good fee-payer.

This three-card monte game lasted—until it didn’t. At First National City, the predecessor of Citigroup, chief Walter Wriston was “furious at his loan officers for getting his bank so deeply involved”—$300 million in loans—“without knowing what a hole the Penn Central was in.” Members of the Penn Central’s august board were also mad—though many of them perhaps never thought to ask questions because they headed companies that were themselves customers of or vendors for the railroad.

The banks’ and the board members’ big idea was to ask the federal government for a bailout. President Richard Nixon vacillated but ultimately said no, on the basis of the now-quaint idea that Congress would have to agree, which it did not.

The railroad then declared bankruptcy in June 1970, having lasted just 871 days. “Never before had there been a cataclysm as stunning as this,” write Daughen and Binzen. “What had been conceived of as the most awesome transportation machine in the world had ended as the most monumental business failure in United States history . . . How the mighty fell: Stuart Saunders, businessman of the year in 1968, business bankrupt of the year in 1970.” Saunders had a rejoinder: “I didn’t have anything to do with the concept of the Penn Central.”

Read the whole thing. 

The Hunt for Silver

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From Priceonomics (hat tip: Instapundit), a bit of interesting business history:

Until his dying day in 2014, Nelson Bunker Hunt, who had once been the world’s wealthiest man, denied that he and his brother plotted to corner the global silver market.

Sure, back in 1980, Bunker, his younger brother Herbert, and other members of the Hunt clan owned roughly two-thirds of all the privately held silver on earth. But the historic stockpiling of bullion hadn’t been a ploy to manipulate the market, they and their sizable legal team would insist in the following years. Instead, it was a strategy to hedge against the voracious inflation of the 1970s—a monumental bet against the U.S. dollar.

Whatever the motive, it was a bet that went historically sour. The debt-fueled boom and bust of the global silver market not only decimated the Hunt fortune, but threatened to take down the U.S. financial system.

The panic of “Silver Thursday” took place over 35 years ago, but it still raises questions about the nature of financial manipulation. While many view the Hunt brothers as members of a long succession of white collar crooks, from Charles Ponzi to Bernie Madoff, others see the endearingly eccentric Texans as the victims of overstepping regulators and vindictive insiders who couldn’t stand the thought of being played by a couple of southern yokels.

In either case, the story of the Hunt brothers just goes to show how difficult it can be to distinguish illegal market manipulation from the old fashioned wheeling and dealing that make our markets work.

More at the link. Stephen Green comments that: “Anyone ‘smart’ enough to try to get rich cornering the market for a natural resource ought to have a long talk with these guys. In the long run, it never works, as high prices cause people to find substitutes or new sources.”

Mark Cooper’s Friendship Monument

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Attendance at the Cartersville Bluegrass and Folk Festival yesterday allowed me to take these pictures of a monument to an event in local history. Mark A. Cooper of the nineteenth-century Etowah Iron Works was apparently a popular fellow, so much so that some thirty-eight people pooled their resources to bail him out after the panic of 1857. He was able to repay his creditors three years later, and in thanks paid for a monument to their generosity, which stands in downtown Cartersville, flanked by two Georgia historical markers.

More information may be read at the Visit Cartersville website:

In 1831 Mark Cooper and a friend, Charles P. Gordon, called the first convention to publicly consider building a railroad in Georgia. Cooper and Gordon were from Eatonton, Georgia and both were elected to the Georgia Legislature in 1833 where they continued their efforts. As a result, the state owned Western & Atlantic (W&A) Railroad was completed in 1850 connecting Atlanta and Chattanooga.

Cooper had moved here in the early 1840’s and established a thriving iron production and manufacturing enterprise just south of Cartersville at the town of Etowah called the Etowah Iron and Manufacturing Company. But the iron and other goods produced at Etowah were about two miles from the newly completed W&A Railroad. So in 1847 the Etowah Railroad Company was incorporated to transport the goods to the main railroad. Cooper’s business partner couldn’t pay his share of the tracks and Cooper bought him out. In 1857 Cooper was $100,000 in debt and the Etowah Iron and Manufacturing Company was auctioned. Cooper bought the company back with a $200,000 note to be paid in three years. The 38 friends whose names appear on the Friendship Monument today endorsed the note. By 1859 Cooper paid off note and in 1860 paid tribute to his friends with the erection of the Friendship Monument on the Etowah Town Square.

Along came the Civil War, and Etowah gained prominence as a manufacturing center for the Confederacy. Eventually the Confederate Government bought and operated the iron works. A major target of the Atlanta Campaign, in May, 1864 troops under General William T. Sherman destroyed everything there except the Friendship Monument. It stood a silent sentinel to a lost cause for sixty-seven years. Then a movement began to dam the Etowah River and build a lake for flood control. The town that was Etowah would be flooded by Lake Allatoona. In 1927 the Friendship Monument was moved to downtown Cartersville to escape. Cartersville hosted a grand ceremony, and the Friendship Monument was unveiled by Mark A. Cooper’s great-great grandson Mark Cooper Pope, then three years old. By the 1960’s the town of Cartersville decided it needed more parking spaces and no longer wanted the monument. The Corps of Engineers said they had a lovely place for it on a knoll overlooking Lake Allatoona where Cooper’s Etowah used to be. So the monument was moved again.

In the mid-1990s people started talking about moving the monument back to Cartersville and the talk spread to Atlanta where Mark Cooper Pope lives. Pope wanted the monument back in Cartersville, too, and generously lent resources to make it possible. In 1999, in conjunction with the Cartersville Sesquicentennial Celebration, the Cartersville City council approved moving the Friendship Monument back downtown and named the square where the monument would be placed “Friendship Plaza.”

Colonels of Truth

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Apparently Col. Harlan Sanders, of Kentucky Fried Chicken fame, had rather tumultuous early life. From Damn Interesting, via Ed Driscoll:

The seventh of May 1931 was a hot, dusty day in the mountain town of Corbin, Kentucky. Alongside a dirt road, a service station manager named Matt Stewart stood on a ladder painting a cement railroad wall. His application of a fresh coat of paint was gradually obscuring the sign that had been painted there previously. Stewart paused when he heard an automobile approaching at high speed—or what counted for high speed in 1931.

It was coming from the north—from the swath of backcountry known among locals as “Hell’s Half-Acre.” The area was so named for its primary exports: bootleg booze, bullets, and bodies. The neighborhood was also commonly referred to as “the asshole of creation.”

Stewart probably squinted through the dust at the approaching car, and he probably wiped sweat from his brow with the back of a paint-flecked wrist. He probably knew that the driver would be armed, angry, and about to skid to a stop nearby. Stewart set down his paint brush and picked up his pistol. The car skidded to a stop nearby. But it was not an armed man that emerged—it was three armed men. “Well, you son of a bitch!” the driver shouted at the painter, “I see you done it again.” The driver of the car had been using this particular railroad wall to advertise his service station in town, and this was not the first time that the painter—the manager of a competing station—had installed an ad blocker.

Stewart leapt from his ladder, firing his pistol wildly as he dove for cover behind the railroad wall. One of the driver’s two companions collapsed to the ground. The driver picked up his fallen comrade’s pistol and returned fire. Amid a hail of bullets from his pair of adversaries, the painter finally shouted, “Don’t shoot, Sanders! You’ve killed me!” The dusty roadside shootout fell silent, and indeed the former painter was bleeding from his shoulder and hip. But he would live, unlike the Shell Oil executive lying nearby with a bullet wound to the chest.

This encounter might have been as commonplace as any other gunfight around Hell’s Half-Acre were it not for the identity of the driver. The “Sanders” who put two bullets in Matt Stewart was none other than Harland Sanders, the man who would go on to become the world-famous Colonel Sanders. He was dark-haired and clean-shaven at the time, but his future likeness would one day appear on Kentucky Fried Chicken billboards, buildings, and buckets worldwide. In contrast to most other famous food icons, Colonel Sanders was once a living, breathing person, and his life story is considerably more tumultuous than the white-washed corporate biography suggests.

Much more at the link – read the whole thing.

Drugs

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An interesting observation from Niall Ferguson, Empire: The Rise and Demise of the British World Order and the Lessons for Global Power (2002), 12-13:

As Defoe observed in his Complete English Tradesman: ‘The tea-table among the ladies and the coffee house among the men seem to be the places of new invention…’ What people liked most about these new drugs was that they offered a very different kind of stimulus from the traditional European drug, alcohol. Alcohol is, technically, a depressant. Glucose, caffeine, and nicotine, by contrast, were the eighteenth-century equivalent of uppers. Taken together, the new drugs gave English society an almighty hit; the Empire, it might be said, was built on a huge sugar, caffeine, and nicotine rush – a rush that everyone could experience.

I once wrote a paper in grad school about the advent of coffee in Europe. They posted it online, and I discover that it is still there! An excerpt:

Why did coffee become so popular, and come to fulfill a “progressive” social function? Why not tea or chocolate, or, as alcohol was never banned in Christendom as it was under Islam, wine or beer? One suspects that coffee may have become “fashionable” somewhat randomly. It was cheaper than tea and more caffeinated than chocolate (as contemporaries observed, it tended to be more caffeinated than tea as well). It is of course a stimulant rather than a depressant, which makes it more conducive to conversation (and some regulars at coffeehouses, like Voltaire, would consume up to fifty cups a day), and does not leave one with an alcoholic hangover. Coffee did have its detractors (who claimed it was nothing more than a slow poison), but its proponents were equally willing to extol its benefits, such as its ability to ward off plague or to dispel noxious odors.

Pallets

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From my friend Matt Lungerhausen, a fascinating article on shipping pallets. I like the Georgia angle! If “whitewood” ever becomes obsolete, one thing to do with it is to turn it into mulch, as does Bo’s Pallets, a local business I drive by from time to time.

Excerpts:

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Although the technology was in place by the mid-1920s, pallets didn’t see widespread adoption until World War II, when the challenge of keeping eight million G.I.s supplied—“the most enormous single task of distribution ever accomplished anywhere,” according to one historian—gave new urgency to the science of materials handling. During the summer of 1941, at Fort Wayne, Indiana, the army staged a field test of various materials-handling contraptions, and the pallet–forklift combo trounced the competition. The Quartermaster General ordered a million pallets, and the domestic pallet industry was effectively born.

Military depots began by palletizing heavy, regularly shaped objects, such as tins of K-rations. But over the course of the war, these depots, facing shortages of time, space, and labor, brought more and more items under the regime of the pallet. The Quartermaster Depot in Jeffersonville, Indiana, which occupied ten city blocks, was particularly aggressive in this regard; during a six-month stretch in 1943, workers there discovered novel methods of palletizing mattresses, saddles, baled goods, pyramidal tents, and tanned cowhide, among other items. By the end of the war, Jeffersonville had palletized 98 percent of its stock.

…

The pallet industry boomed after the war, along with interstate highways, long-haul trucking, and the rise of a national consumer culture. The canneries of the Salinas Valley were early palletizers, followed by other grocery sectors, then the auto industry, then everything. In 1954, pallet manufacturers left the country’s wooden box association and founded their own trade group, the National Wooden Pallet and Container Association, or NWPCA. Its slogan: “Pallets move the world.” Sometime in the early 1970s, on a CBS news broadcast, John Kenneth Galbraith informed Dan Rather that pallets were the second-fastest-growing industry in America. “What are those?” Rather asked. Or so the legend goes.

The boom ultimately created a problem, because all of these pallets did not disappear when they reached their destinations. They piled up: on loading docks, in stockrooms, in landfills. Beginning in the late 1970s, people realized these used pallets might have value, and the pallet recycling industry was born. There was good money in recycling, especially in the early days. The supply of raw material was cheap, if not free, the capital investment was minimal, and the whole thing had an appealing simplicity: acquire pallets from wherever they end up, fix them up, sell them back to manufacturers. The service this new generation of recyclers provided was called “reverse logistics.”

…

CHEP, a subsidiary of Brambles Limited, an Australia-based multinational corporation, is the largest pallet business in the world. The company earned $3.5 billion in pallet-related revenues during fiscal year 2013, and in many markets has achieved pallet monopoly. CHEP’s roots stretch back to World War II, when the American military shipped millions of palletized loads to Australia. At the end of the war, those pallets were abandoned, and CHEP was formed out of this accumulation. After four decades of growth and expansion, the company entered the US market in 1990, in what amounted to an obscure case of military blowback.

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Read the whole thing.