represented a German syndicate that invested $6 mllion to $8 million in
Northern Pacific bonds.^35 Upon joining Kuhn, Loeb, Schiff plunged the
firm into the business of financing new or expanding railway systems. The
boom in railroad construction reached its peak in the 1880s, but Kuhn,
Loeb had raised funds even earlier for the Chicago & North Western Rail-
road. The transaction was followed by many similar ventures that eventu-
ally involved the firm in the affairs of more than a dozen major lines. The
volume of business grew by leaps and bounds. Kuhn, Loeb’s dealings with
but one old and valued client, the Pennsylvania Railroad, amounted, over a
period of twenty-six years, to more than half a billion dollars.^36
The ties between bankers and the railroads grew closer when the de-
pression of the 1890s exposed the financial irregularities of the roads. Since
many had reached the verge of collapse, if not actual bankruptcy, the bank-
ers stepped in with plans of reorganization. Developed into an art by the
House of Morgan, reorganization, or “Morganization,” attempted to es-
tablish and maintain the solvency of a particular railroad and to devise
sound ways for railroad fund-raising. To tighten up management and ad-
ministrative policies, representatives of the banking firms responsible for
reorganization were usually placed on the railroads’ boards of directors.
Not only did reorganization bring the bankers enormous profits, but the
rate of railroad consolidation rose dramatically.^37
Kuhn, Loeb became prominent in reorganization some years after Mor-
gan had. In testimony to the Pujo committee, the firm admitted to its reor-
ganization of six major roads, four completed and two pending, and to
seats for Kuhn, Loeb partners on the boards of the first four. Credited for
originating the phrase “directors who don’t direct” (the idea behind the
phrase became an issue in the 1905 investigation of insurance companies
[see below]), Schiff usually refused directorships for himself unless he
could supervise policy making. But over the years he sat on more than a
score of boards—of industrial corporations as well as railroads—that allied
him at times with Morgan and other bankers in a grand scheme of inter-
locking directorates.^38
By the mid-1880s, Schiff had established ties to James J. Hill, whose
control of the Great Northern Railroad made him a serious competitor of
Schiff’s earlier client, the Northern Pacific. A warm friendship developed
between the banker and the railroad man. Hill, a frequent guest at the
Schiff home and a bearer of lavish gifts, valued Schiff’s “unparalleled en-
tree” into European investment circles, and he found a trusted ally in the
banker. Schiff in turn admired Hill—a “great genius,” he said. The banker
was elected to the board of the Great Northern, and he sent his son to be
trained by Hill.^39 Schiff was a critic of wasteful competition among rail-
roads, and with the backing of European associates who were heavily in-
vested in the northwestern lines, he mobilized pressure on Hill in 1894–95
The Making of a Leader 13