[CTRL] The Man Who Found The Money

[Kris Millegan]

 -Caveat Lector-

an excerpt from:
The Man Who Found The Money
Saul Engelberg & Leonard Bushkoff©1996
Michigan State University Press
East Lansing. Michigan 48823-5202
ISBN 0-87013-414-0
257 pps. -- First Edition -- In-print
-----
3
KENNEDY AND THE SCOTTISH AMERICAN INVESTMENT COMPANY

FOREIGN INVESTMENT IN THE United States provided billions to an economy that
hungered for capital. The railroads, hungering the most, and offering the
most, received most by far of this capital formation, and could not have been
built without it. The total investment in American railroads came to a
billion dollars or more in 1867, three billion in 1873, five billion in 1880,
and fully ten billion in 1890. The source for some forty percent of this
capital before 1914 was Europe, with Britain (including Scotland) far ahead.

The Scottish contribution to all this was vital. Scottish investment, in
fact, doubled in a mere seventeen years, during 1873-90. And 1873-83 saw
Scotland provide perhaps two-thirds of total British investment in the
American stock market and in mortgages, particularly those of Western grazing
lands.

But the absence of political or judicial strictures made international
investment inherently risky, as European investors learned throughout the
nineteenth century. Witness the bond default by fully nine American states in
the 1840s, and the occasional cheating of British investors in American
cattle ranches, not to mention those injured when the New Haven Railroad
issued fraudulent stock in the 1850s. Witness also the easy "writing
down"—frequently by as much as a quarter or a third-of capital, so often
foreign, during the many railroad reorganizations later in the century.

Foreign investors were fair game to state legislative and judicial attacks,
though federal courts, their presidential appointed judges free from local pre
ssures and more sensitive to the country's need for foreign capital, were
much better. Nevertheless, honesty and legality were not invariably respected
in the new land. And if the victims were unknown Britons, thousands of miles
away, so much the worse for them.

Though British investors were attracted by high rates, they were wary of
bonds that seemed to promise too much. There was no way to verify information
that was limited and often unreliable, if not downright deceitful. Legal and
quasi-legal safeguards for the buyer were almost entirely lacking. Recourse
to American courts would hardly help investors in far-off Europe, who were
confused in any case by the differences between state and federal
jurisdictions. And a vulnerable investor was a fearful one.

How could this fear of the unknown, the unpredictable and unaccountable, be
countered? The way lay clear for a third party, with a reputation for
trustworthiness and competence in international investment, to step into the
breach. And this is precisely what J. S. Kennedy & Co., with its Scots
background and its American presence, connections and experience, could do,
offering peace of mind to hundreds of small investors who desired the goal
but feared the means.

Here was the basis for the winning combination which Kennedy was to pioneer
in 1873 with a new force in the Scottish financial world: the Scottish
American Investment Company, Ltd., the very first investment company in
Scotland (a dozen or so more were to imitate it), and a great success in
focusing exclusively on the United States.

In a capital market of individual investors, here was an innovation attuned
to the needs of the day: an institutional investor, mobilizing small but
regular clients-some 500 in 1875—for long-term investing, rather than
short-term trading, by satisfying their search for higher returns than the
British Isles offered. Capital could, in fact, be obtained in Scotland for
about half its cost in the United States. Starting with £1,000,000 in 1873,
the firm doubled it by 1875, as new investors flocked to the winner's column.
As of 1880, it had invested fully £1,250,000 in the United States, while
prudently holding back a substantial reserve with which to snap up any
targets of opportunity.[1]

Kennedy devoted much of his effort, and that of J. S. Kennedy & Co., to
serving as its New York agent during 1873-83; no other clients were
comparable in size and significance. And he remained on Scottish American's
Advisory Board for fully twenty-five years. In effect, Kennedy was helping
achieve a profitable synthesis between Scots thrift and American opportunity.

He worked in alliance with William John Menzies, the founder and managing dire
ctor of Scottish American. Menzies had a background in law, finance and
investment advising. He knew America from his travels there in 1864, 1867 and
1872, which also strengthened his connections in that tribal brotherhood, the
overseas Scottish business community. Of this Kennedy, a member of various
Scottish organizations in New York and a frequent traveler to the old
country, was very much a part. After the 1872 trip, Menzies decided to form
the company, which involved itself in land, mining, ranching, government
securities, and land and railroad mortgages.[2]

But first an American agent was needed, a man on the spot who could reach
beyond Menzies' limited knowledge to track the latest developments. Menzies
initially approached John Paton, who had been very, helpful during his 1872
trip. Paton was a junior partner in M. K. Jesup, Paton & Co., and also was
the New York representative of the Bank of British North America. But that
Canadian bank, perhaps reasoning that no man can serve two masters, opposed
his connection with Menzies, and later forced Paton to resign from the
Advisory Board of the new enterprise.[3]

Kennedy was the best alternative. He and Menzies conferred regarding the
creation of the new company, and Kennedy publicly threw his weight behind it
in mid-March 1873, as Menzies convened a meeting of prospective investors.
The prospectus he distributed announced that J. S. Kennedy & Co. would act as
agent in conjunction with a three-man Advisory Board-of overseas Scotsmen-in
New York.

They were chosen, not only for their influence, inside information and
analytical skills, but also to counter any impression that Scottish American
would depend exclusively on Kennedy's advice-though he, as an ex officio
member, clearly would be first among equals. Finding appropriate insiders was
not easy: the demand in the booming New York financial economy was far
greater than the supply. Nevertheless, the Board members at first received
only a modest $500 annually, though they benefited indirectly in terms of
business and connections.[4]

The first Board comprised Kennedy, William Butler Duncan and John A. Stewart,
the elected chairman. Stewart was president of the United States Trust
Company of New York, a highly regarded fiduciary institution that he had
founded some two decades before. Certainly it was no coincidence that 1874
saw Scottish American deposit funds in Stewart's company.[5]

Duncan was the senior partner in Duncan, Sherman & Co. of New York, a private
bank which Scottish American utilized. But this bank ran aground after the
panic of 1873, and closed down in July 1875, with a $18,365 deposit from
Scottish American on its books. Duncan himself quit the Advisory Board, while
J. S. Kennedy & Co. took legal action to retrieve the money. A settlement was
not reached until 1880, but Kennedy had demonstrated how important it was to
have strong representation on the American side of the water.

Duncan's failure was Kennedy's opportunity. He increasingly became the
dominant force on the Advisory Board, where he remained until 1898, long
after he had chosen to retire from his own firm. And his partners, first
Henry M. Baker, then John S. Barnes, and finally John Kennedy Tod, served
successively as secretaries of the Board, which two further "Kennedy men"
joined in 1875. One, James Alfred Roosevelt, a senior partner in the private
banking firm of Roosevelt & Son, symbolized New York's wealthy old Dutch
elite. The other, Robert Lenox Kennedy, was of Scots ancestry though
unrelated to John S. Kennedy, and was a private banker and president of the
city's National Bank of Commerce; this institution succeeded the failed
Duncan, Sherman firm as Scottish American's bank in the United States. J.
Kennedy Tod & Co., the successor to J. S. Kennedy & Co. in 1883, continued as
Scottish American's agent until 1902.[6]

All this shapes a clear conclusion. For a quarter century, from 1873 to 1898,
John Stewart Kennedy would play an important, perhaps a decisive, role in the
export of Scots capital to the American economy, and particularly to its most
dynamic component, the railroads. For Scottish American had an impact beyond
its own shareholders, often disposing of American bonds with other Scottish
financial institutions. What Scottish American had set in motion thus rippled
through the entire Scottish financial system. What part did Kennedy play in
this process, how did he play it, and how did he benefit from it?

Before all else, of course, he drew on information from both private and
public sources to advise the Scottish American headquarters in Edinburgh on
securities transactions. This process was not simple, however. It required
constant involvement with his business friends, and a certain skepticism
regarding press information, which could be patchy and unreliable in an era
when unregulated entrepreneurs often played fast and loose with the facts. So
Kennedy had to rely on his own sources, and on his first-hand experience of
business men, their capabilities, ambitions and especially their honesty.

Kennedy also had more specific responsibilities, which Menzies defined in May
1873: "Your duties as agent will I suppose be to purchase securities, to
transmit them to us, to collect our coupons, and to advise us as to anything
going on your side of which we ought to be aware. "[7] What was meant by
"anything going on your side" soon appeared in that panicky year. A month
before, Menzies had urged Kennedy to watch the market carefully, against
rumors of an impending panic.[8] It says much for the skill of Menzies and
especially Kennedy that the Scottish American not only weathered it, but—as
we shall see-—actually profited by grabbing some splendid bargains.

His abilities gained investors a return both safer and higher than those
available elsewhere. There were clear advantages for them in such
centrally-managed pools as Scottish American represented. First, information
costs were lower in analyzing both individual enterprises and the economy as
a whole. Second, transaction costs were cut, for large-scale purchasing was
cheaper than buys by individual investors. Finally, diversified portfolios
lessened the risk for such investors. Scottish American proclaimed that it
invested no more than one-tenth of its total capital in any single security.
There were, to be sure, occasions when the opportunity for profit meant
violating the spirit of this doctrine, though the letter might be maintained.
But this was rare.[9]

Naturally, Kennedy advised on investments. Immediately after Scottish
American's birth, Menzies asked him to prepare an investment plan for about
$1,000,000. Later that year, Kennedy was instructed to invest $500,000 in a
diversified portfolio, with emphasis on fully eleven railroads.[10] Here he
drew on inside information from his long-standing interest in several Texas
lines, as well as in the Dubuque & Sioux City, the Cedar Falls & Minnesota,
and the Indianapolis, Cincinnati & Lafayette. Menzies was very pleased; in
November 1873 he observed that "the best thing we ever did was to appoint
Kennedy our agent."[11]

This was an understatement. Kennedy and Menzies, J. S. Kennedy & Co. and the
Scottish American Investment Co., were enjoying major successes that autumn,
bottom fishing on a panicky market that was dropping precipitously. Rumors of
trouble had been circulating in New York financial circles. Kennedy no doubt
informed Menzies, who-with impeccable timingarrived there in September. It
was barely four days before Jay Cooke & Co., lacking liquidity as the economy
softened, suddenly suspended operations. The stock market plummeted in what
was then the worst panic in American history, and the Stock Exchange actually
closed for ten days.

Kennedy was a money manager, neither a broker nor a member of the Exchange.
But he was in his element, providing the advice on which Menzies acted to
grab good, i.e., substantial and inherently valuable, securities at low
prices. Menzies' brother, Charles, the secretary of Scottish American,
conflated God with Mammon when he gloated in October that "the present crisis
was a state of things evidently sent providentially for the Company's
interests." He reported William Menzies' remark that "not one security which
we have taken through Kennedy is in any way suspicious." And Scottish
American's minutes for November reported that "the agents [J. S. Kennedy &
Co.], having no anxiety on account of the state of their own affairs had been
able to devote their whole time and attention to the affairs of the
Company."[12]

Kennedy was indeed buying heavily for the Scots-more than $2,000,000 in
all-as security prices dropped further toward the end of 1873. Some older,
better-established banking firms were devastated by the panic. But Kennedy,
at age forty-three an independent entrepreneur for barely five years,
thrived, achieving a great deal for Scottish American as well. From such
victories are great reputations made-and with them still greater
opportunities for gain.

All this brought Kennedy a substantial income from Scottish American, in
fixed fees, expenses and a commission-of half a per cent on the total amount
of money invested at any given time-which raised his income with every new
investor joining the company. Some fees were for such routine, yet essential,
services as ensuring the collection of interest on bond coupons, and
therefore were quite small: one-eighth of a percent.[13] After April 1878,
Scottish American added a flat $1,000 annually to Kennedy's payments received.

Certainly this income raised Kennedy's already substantial wealth. But there
was an indirect gain, incalculable yet enormously important. As a point man
in the westward movement of Scottish capital, Kennedy had become a major
player in the New York financial world. He had grown up near the bottom in
Scotland. Now it was the wealth of Scotland which helped him climb to the top
in the new world.[14]

*      *      *

The depression of 1873-78 saw a great shake-out of railroad securities.
Anticipating demand, optimistic entrepreneurs had built—and
overbuilt–thousands of miles of developmental lines during 1865-73. Now busine
ss was declining and defaults spread as some lines failed to meet their
interest payments. Here was Scottish American's opportunity. Each line's
bonds generally were spread among a few hundred buyers, thus ensuring price
stability. This was particularly attractive to Scottish American, always
concerned about its image of prudence and stability.

In seizing these openings, Kennedy dealt occasionally with the Equitable
Trust Company of New London, Connecticut. This was a new, relatively small
enterprise which eventually failed in its hopes of becoming an intermediary
between the railroads and likely investors. But Kennedy, who ordinarily
avoided intermediaries—they added to costs—made an exception here, for the
Equitable's board of trustees included James Roosevelt and Robert Lenox
Kennedy, men whom he trusted to deal honestly and provide reliable
information. Hence the praise which the Scottish American Advisory Board
bestowed upon the Equitable: "the high character of the present board of
directors [and] the management of the concern."[15]

The question of reputation surfaced again in March 1878, when Kennedy and the
Advisory Board discussed some bonds the Equitable hoped Scottish American
would buy. He was laudatory, yet hesitant. "[He] expressed a favorable
opinion of the Bonds, and of the management, which he believed to be
conservative, careful, and responsible." But was that of itself sufficient to
clinch a sale? Kennedy "expressed a preference for good railroad first
mortgage bonds." Better to save money by buying railroad bonds directly,
rather than by buying bonds sold by the Equitable itself. The Advisory Board
accepted his judgment-as usual.[16]

The Equitable was simply one of many balls that Kennedy was juggling. There
was, for example, an Illinois Central bond issue during January 1875 in which
Kennedy—and Scottish American—were to play a big role. The southward
expansion of the Illinois Central offered profitable possibilities, with
which Kennedy's long involvement in the neighboring Dubuque & Sioux City made
him quite familiar. So his offer to Scottish American of a share in the new
bond issue carried a certain authority.

But the directors in Edinburgh, worried about the continuing depression, had
doubts. They would buy, but only one-fifth of the original offer, i.e.,
£100,000 rather than £500,000, and then only if other subscribers could be
found to share the risk. This Menzies agreed to do; he was, after all, very
well connected in the Scottish investment network, and there was a profit,
albeit small, to be made in serving as an intermediary. There was also a tiny
commission for J. S. Kennedy & Co., as the Scottish American board chose to
reward it with a fee of one-eighth of a percent, i.e., $120. This sum was
credited, however—perhaps to conceal it from critical stockholders—to a
so-called "Insurance Account." (This the independent auditors used later were
to criticize as "irregular." Menzies cavalierly told them, in effect, to
forget it.)[17]

What do these tiny ripples in a very tiny pool signify? First, that business
relations between close associates in a non-regulatory age could bring an
sorts of hidden gains. Second, that a chain of intermediaries and connections
multiplied Kennedy's influence in funneling Scots capital to American
railroads, as individual Scottish investors may have joined Scottish American
in buying securities.

And Kennedy benefited personally in many ways. In the summer of 1875, for
example, he showed the advantage of good connections at a moment when he was
over-extended and short of the cash needed to save the St. Paul & Pacific
railroad, with which-as we shall see below-he was deeply involved. Of course
he could borrow in New York or London. But the news would most likely leak
out. It was vital to maintain a strong image. Otherwise the speculators,
smelling blood in the water, might attack and force the price of his
securities down.

Menzies and Scottish American offered a solution. In December, Kennedy "sold"
them bonds from his longtime holdings in the International Railroad in east
Texas, acquiring $162,000 in return. Scottish American received, not simply
collateral, but actual bonds, which Kennedy was obligated to repurchase by a
set date, at the original selling price plus interest. Here was a very quiet
gentlemen's agreement, with discretion the rule. It was extended for six
months in January 1876. In July, Kennedy repaid about $65,000, and Scottish
American carried the balance for another six months. Thus, Kennedy got his
money, Scottish American made a small profit, and no one was the wiser.[18]

The railroad investment market knew little of boundaries. Scottish American
had bought bonds in the Canada Southern Railway, which began operating
through southern Ontario in the fateful year of 1873, between Windsor and
Niagara Falls. The line was in financial difficulties by September, just as
the great panic began: by 1 January 1875, it had missed an interest payment.
Should Scottish American sell its holdings? The Advisory Board was opposed,
considering how low the market price had sunk. Fortunately for the investors,
the Vanderbilt interests brought in new capital, purchasing the line in June
1876 and attaching it to their Michigan Central line from-Buffalo to Detroit.

Despite their fluctuations, railroads continued to be highly attractive
investments. The Advisory Board favored selling bonds in the mid-1870s from
the New York Central & Hudson River, and also the New York Central &
Harlem—which the Board assumed had peaked—if they achieved a profit of seven
per cent. The money then could be applied to other, lower-priced investments.
In 1876, Kennedy reported on a bond offering by the Albany & Susquehanna
railroad, which connected Albany and Binghamton, New York. The Scottish
American directors were favorably inclined. They agreed "to subscribe to the
full amount of this loan within the powers of this Company, at the same price
as Mr. R[obert] L[enox] Kennedy agrees to pay." Kennedy therefore bought
$500,000 of these bonds for Scottish American, plus $200,000 in Cincinnati,
Hamilton & Dayton bonds.[19] J. S. Kennedy & Co. became involved during
November 1879 in the Nashville, Chattanooga & St. Louis line, of which it
bought $100,000 in bonds. It offered $50,000 to Scottish American, which
apparently accepted.[20]

In his relentless quest for gain, Menzies proposed one strategy which brought
sharp criticism from the normally acquiescent Advisory Board. After the
Resumption Act of 1875 ended the threat of inflation through the further
issue of greenbacks, he and Kennedy toured the West, seeking to invest in
real estate loans and farm mortgages, particularly in large grazing holdings.
The Advisory Board and Kennedy as well were dubious. Not only were such
investments perceived as "extra hazardous," as compared to railroad ventures,
but the information costs involved were greater. In December 1886, the Board
again discussed this issue. Roosevelt, Stewart, Thomas Denny (a New York
broker), and Kennedy himself all were opposed. That resolved matters:
Scottish American did continue land ventures, but on a tiny scale.[21]

So railroads remained the heart of Scottish American's operations. In 1876,
Kennedy brought the firm into the complex—and troubled—affairs of the Central
Railroad of New Jersey, an anthracite coal carrier in which he had a personal
interest. Anthracite production in northeastern Pennsylvania had slumped
badly since the 1873 panic; the carriers were suffering as a result. Now the
Jersey Central, burdened with an overload of short-term debt, was struggling
to survive by reorganizing and issuing $3,000,000 in bonds.

Should Scottish American bet on the railroad's future by taking some of this
issue? Or should the Scots get out? There was much disagreement. On the one
hand, Robert Lenox Kennedy withdrew in October 1876 from his personal
agreement on the Jersey Central with the private bankers, Brown, Shipley &
Co. And the Advisory Board recommended that Scottish American, try though it
might for the best terms, also sell its investments and get out. The
directors hesitated, but finally agreed in January 1877.[22]

On the other hand, John Stewart Kennedy continued his involvement with the
Jersey Central, even as it stumbled into receivership; in October 1878, for
example, he received a half per cent for collecting its bond coupons. And he
submitted its reorganization plan to Scottish American, which still held some
bonds.

But anthracite prospects continued poor, and, in December, the Advisory Board
proposed that Scottish American rid itself of the anthracite lines by selling
all their bonds. The directors agreed, and J. S. Kennedy & Co. followed up by
selling $300,000 worth of Jersey Central bonds in January and February of
1879. And the directors accepted Kennedy's suggestion in June 1881 that they
sell Jersey Central bonds in the London market. It appeared that Scottish
American was now, finally and conclusively, united in withdrawing from Jersey
Central.

But Kennedy saw things differently. The industry's serious financial problems
spurred the companies to try again in 1886 what they had unsuccessfully
attempted earlier: combine to achieve profitability by limiting production
and fixing prices. Yet they were unsuccessful, and Kennedy became a receiver
of a Jersey Central that was in default. Here he faced a delicate situation,
confronting several categories of creditors-including Scottish American-each
eager to get as much for itself as possible. As an insider, Kennedy doubtless
gained the information that sustained his optimism about the Jersey Central;
the Advisory Board accepted his judgment by deciding to defer selling this
security.[23]

The International Railroad—now retitled the International & Great Northern
Railroad—of eastern Texas was yet another problem child. It long had been a
Kennedy interest, but it followed many developmental railroads downward
during the 1870s depression, entering receivership in 1878. As president and
chairman of its reorganization committee, Kennedy led an attempted revival by
dispatching a reorganization plan to Scottish American in October. The
directors were satisfied. They gave Menzies the power to approve it, and
Scottish American began buying the line's bonds in 1880. J. S. Kennedy & Co.
also bought bonds of the Colorado Bridge Company, a subsidiary of the
International & Great Northern, which guaranteed them. Kennedy bought still
more in June 1881 for Scottish American.

With several such buys, Scottish American had become involved so deeply as to
violate its own doctrine about never investing more than one-tenth of its
capital in a single enterprise. In April 1884, the Advisory Board, perhaps
recognizing this fact, proposed taking advantage of favorable prices to sell
$125,000 of the International & Great Northern bonds. But the railroad's
future looked bright, and the Board reversed course in November 1887,
postponing a sale.

That brightness dimmed, however, and the Advisory Board was considering yet
another reorganization by February 1892. By then, the line was in the
unfriendly hands of Jay Gould, whose presence transformed the situationfor
the worse, Kennedy felt. He criticized the latest plan as unfair to the
second mortgage bondholders, Scottish American among them. But there was a
deeper criticism as well: "He placed no reliance upon the obligation of Jay
Gould to carry out the plan in good faith." Gould's reputation in certain
circles, after all, was that of absolute ruthlessness. To rid themselves of
Gould, Kennedy favored a foreclosure sale or the replacement of the
stockholders as owners by the bondholders. His fellow Board members
disagreed. Roosevelt, Stewart and Denny were prepared to tolerate Gould,
simply because he was too unscrupulous an opponent to battle. Kennedy,
however, felt differently.[24]

He also played a role in the early stages—summer 1874—of a struggle then
brewing between the New York Central and the Rome, Watertown & Ogdensburg of
northern New York. The latter was essentially blocked in reaching profitable
cities by its much more powerful rival, which enjoyed virtually complete
freedom in allowing other lines to build across its own, and to use its track
or terminals. So the Rome, Watertown & Ogdensburg could only try to build its
way out of its isolation. For this, capital was needed, and Kennedy therefore
negotiated the sale of $2,000,000 in bonds, evenly split between the United
States and London. In August, Scottish American took a full fifth, $400,000,
that figure "being the utmost that the Company can hold." Anyone who could
dispose of such amounts would have no small influence on Wall Street.

The troubled Rome, Watertown & Ogdensburg reappeared on Kennedy's docket some
five years later. Not having reached New York or Buffalo, it still lay within
the New York Central's clutches. So Kennedy convened the Advisory Board in
May 1879 to discuss getting out altogether by selling the $129,000 in bonds
which Scottish American still owned. But how to do so without depressing the
price of what was, after all, widely regarded as a serious failure? We have
no conclusive answer regarding Kennedy's tactics, but there are hints of how
he "made a market." By mixing selling with occasional buying, and by
splitting thirteen or so installments of $10,000 each among various brokers,
J. S. Kennedy & Co. managed to get rid of all the bonds in a mere three
months, by the end of July.[25] And this action was vindicated by events: the
Rome, Watertown & Ogdensburg line eventually disappeared, gobbled up by the
New York Central.

Kennedy and Scottish American also became inadvertently involved in the
Chicago, Milwaukee & St. Paul. This was linked to the collapse in October
1878 of the City of Glasgow Bank, an event which (see Chapter 7) brought
broad reforms to the Scottish banking system. The Bank's liquidators
appointed J. S. Kennedy & Co. as the agent to save what could be saved by
selling its American securities; Scottish American entered the picture by
buying liquidator's coupons. There followed a controversy regarding prices,
involving Kennedy for the liquidators-and the Chicago, Milwaukee & St. Paul.
The City of Glasgow Bank had had holdings of Western Union Railroad bonds;
these he exchanged for Chicago, Milwaukee & St. Paul bonds. The liquidators
then sold these newly-issued bonds through a syndicate in which Kennedy's
firm, Scottish American, and others all participated. So in September 1879,
Menzies secured $250,000 of these bonds for Scottish American.[26]

None of these many railroads had a bigger place in Kennedy's career than the
St. Paul, Minneapolis & Manitoba, which he and four others-including James J.
Hill-organized in 1878-79 (see Chapter 5) from the wreckage of several
distressed Minnesota railroads. This road, ultimately renamed the Great
Northern, became one of the great trans-Mississippi lines, reaching the
Pacific in 1893. And Kennedy was intimately associated with it for a decade.

Inevitably, he brought in Scottish American, to the benefit of both sides:
the Manitoba, which soon began pushing across the Great Plains, needed a
consistent source of long-term capital. And that the Scotsmen would provide
only if they had a shrewd man on the spot to watch over their interests.
Kennedy could help in both roles, and the directors of Scottish American
agreed in July 1879 to accept his recommendation that they get in on the
ground floor by buying $100,000 of a new bond issue, purchasable-thanks to
Kennedy's presence on both sides of the transaction—at the very advantageous
syndicate price.

This opened a long string of purchases. In September, Scottish American
bought $100,000 more first mortgage bonds; in December, yet another $100,000,
though in second mortgage bonds. In April 1880, Scottish American's directors
instructed Kennedy to sell $50,000 in first mortgage bonds and buy that
amount in second mortgage bonds instead; he successfully opposed the sale.

Here was the issue of appearance, image and reality. From his point of view,
every buy was a blessing, not only because it provided much-needed cash, but
also because it demonstrated to the financial world that the new Manitoba was
a likely success, a security-grade investment. Contrarily, every sale damaged
the image of success, a setback that might raise doubts among the great,
uncommitted investment public.

The buys, quite substantial for their day, continued. In June 1881, J. S.
Kennedy & Co. purchased still more second mortgage bonds, of which it soon
offered Scottish American a $100,000 portion; Menzies and the Advisory Board
accepted. The following January, J. S. Kennedy & Co. bought $100,000 in
bonds, and February saw it present to Scottish American $1,500,000 in bonds
of the Minneapolis Union Railroad Company, a proprietary of the Manitoba,
which guaranteed the principal and interest. The Scottish American directors
agreed to subscribe to $500,000 of the issue, and to try to place more with
the Dundee Investment Company in Scotland.

In May 1883, Scottish American accepted Kennedy's suggestion that it
subscribe $500,000 to a Manitoba bond syndicate, though the men in Edinburgh
drew the line there, rejecting the chance to buy another $250,000. Still,
Kennedy prevailed upon them to buy $70,000 of these offerings in October. In
April 1884, the Advisory Board recommended that $200,000 of Manitoba bonds be
sold (nearly a year passed before $170,000 were disposed of). The market
price was favorable, and Scottish American's policy against excessive
commitment mandated action. This policy, though ordinarily justifiable,
lessened the profits that all-out investment in the Manitoba would have
brought. No one, of course, could predict how consistently prosperous the
Manitoba would become.[27]

Kennedy's successful attempts to bring Scottish American together with the
St. Paul, Minneapolis & Manitoba brought him to the very brink of what a
later generation might regard as conflict of interest. He was, in effect,
representing both buyer and seller, though his actions were quite public; in
that sense he never dealt from the bottom of the deck. And he was quite
fortunate, for the Manitoba's success was clearly emerging by 1882, so all
was well. The question diminished in 1883, when he closed his company, and
his connection to Scottish American weakened. Although Kennedy increased his
value to both Scottish American and the Manitoba through his multiple roles,
the fundamental incompatibility nevertheless remained—as it still does on
occasion.

Scottish American was not averse to occasional short-term trading, where
buying and selling alternated at some speed. In April 1880, for example, J.
S. Kennedy & Co. informed Scottish American about the formation of a
$3,000,000 bond issue syndicate for the Chicago & North Western Railroad.
Scottish American honored its one-tenth rule by subscribing to $300,000, of
which they retained $100,000 and sold $50,000 to clients; $150,000 remained
in the bond syndicate, to be sold to outsiders.[28]

Other investments, though nominally intended for a permanent portfolio,
sometimes were sold if the price was right. Having bought heavily at the
trough of the 1873 depression and gained spectacularly from the rising market
of the late 1870s, Scottish American disposed selectively of various
securities in 1880, fearing that a market downturn was due. The proceeds
would go to short-term investment; better opportunities were expected in the
fall. This benefited Kennedy, for the directors agreed to temporarily lend
him some uninvested funds. Though he paid interest slightly above the market
rate, he avoided having to approach the bankers, with the damage to his image
this would entail.[29]

Kennedy continued to represent Scottish American, usually successfully, but
sometimes not. One losing battle occurred in August 1880, when he had to
fight a former associate, George Bliss of Morton, Bliss & Co., who was linked
with Melville Ingalls, head of the Cincinnati, Indianapolis, St. Louis &
Chicago railroad, in controlling a line—the Indianapolis, Cincinnati &
Lafayette—in which Scottish American held bonds. Predictably, Bliss and
Ingalls used their power to favor the bonds which they personally owned,
while undervaluing those held by others. This hurt Scottish American, and its
Advisory Board naturally backed Kennedy's struggle to get recompense, but to
no avail; Bliss and Ingalls prevailed.[30]

To invest in so many railroads inevitably meant risking the occasional
failure. Consider, for example, the question of the New York, Chicago & St.
Louis-commonly known as the Nickel Plate-which had fallen into default in the
early 1880s, after having been built by a speculative syndicate as a "raider
road," its purpose being to threaten a profitable neighbor. Perhaps unwisely,
Scottish American had obtained some of its bonds, and was understandably
upset when the Nickel Plate failed to pay interest. Kennedy became involved
through his position as a trustee of the Central Trust Company of New York,
which, as the trustee of the Nickel Plate's first mortgage bonds, was the
watchdog for the bondholders. The outcome is obscure, but it is clear that
the investors whom Kennedy represented lost."

There was also the matter of the New York, Lake Erie & Western-the Erie-in
which Scottish American held bonds, and which Kennedy therefore supported in
its campaign for primacy during 1886 against the Chicago & Atlantic. As part
of this offensive, Kennedy, John Stewart and Robert Lenox Kennedy joined
forces to urge the Farmers' Loan and Trust Company of New York to initiate
foreclosure proceedings as trustees against the Chicago & Atlantic. The
latter ultimately lost, and was swallowed by the Erie.[32]

Kennedy generally had things his own way with his principals in Edinburgh.
But not always. He suffered, for example, a rebuff during the war in the
early 1880s between the New York Central & Hudson River, and its new
competitor, the New York, West Shore & Buffalo, which was building along the
Hudson's west bank to undercut the high freight rates of the New York
Central. In November 1882, Kennedy and Stewart urged Scottish American to
back the new competitors by entering the West Shore bond syndicate. The
directors were opposed, however, to what seemed a very risky venture. And
they were right. The New York Central was too strong. The West Shore was
placed in receivership in June 1884.[33]

But this rebuff constituted an exception. More typical was the situation in
May 1883, when Kennedy offered a new Northern Pacific bond issue of $100,000
to Scottish American, which had no objection to taking half of it. And
Scottish American, functioning yet again as Kennedy's personal banker,
satisfied his request for the loan of $200,000 in Northern Pacific bonds .[34]

Kennedy served Scottish American dutifully and resourcefully from the panic
of 1873 to the prosperity of the early 1880s, when, having dissolved J. S.
Kennedy & Co. in 1883, he transferred the account to its successor, J.
Kennedy Tod & Co. Nevertheless, Kennedy continued to wield much influence in
the Advisory Board for another fifteen years. In 1885, for example, his
suggestion-was accepted regarding the sale of St. Paul & Northern bonds. So
was his proposal during November that Scottish American accept an offer for
St. Paul Gas Light Company bonds. And so it was in December, when J. Kennedy
Tod & Co. offered bonds to Scottish American from the New Brunswick & Canada
Railway Company.[35]

V   V   V

Kennedy had helped shepherd the Scottish firm through a chaotic financial
decade, filled with expansion, setbacks, and reorganization-and aggressive
competitors like Jay Gould, George Bliss, William H. Vanderbilt and others.
How can his relationship with the men in Edinburgh be assessed? First, it
helped enhance his fortune. From fees, commissions and payments, he derived
an estimated $10,000 annually from Scottish American, whose portfolio stood
at about $2,000,000. Perhaps half of his income was indirectly attributable
to this relationship. And he had strong additional earnings as a commission
merchant, private banker, railroad officer, director and reorganizer. By
1875-76, his net worth was about $500,000, down considerably from the million
figure he had put on it in 1870, but nevertheless quite significant in light
of the 1873 panic and the depression that followed.

Second, he helped make their fortune. By 1882, after a decade of operation,
Scottish American had acquired securities in some forty railroads. The
smallest holding was only $5,000, the largest almost a hundred times more. By
1885, the combined borrowed capital and paid share capital of the company far
outstripped that of any other Scottish investment enterprise.[36]

All this was based on unique inside information regarding a property—its
physical and financial condition, its senior management and its prospects—all
derived from Kennedy's contacts, for accurate public information hardly
existed. In the interaction between agent and principal, Kennedy functioned
as an analyst and money manager with substantial discretion, rather than as a
broker following specific instructions. He collected and evaluated investment
intelligence and offered recommendations, as well as buying and selling
investments. He exercised broad latitude, due to his position as agent and
his prestigious place in the New York financial community, which provided him
with knowledge lacking to Menzies in far-off Edinburgh. And Kennedy bolstered
his claim to autonomy with one success after another.[37]

NOTES

1. Ronald B. Weir, "William John Menzies," Scottish Dictionary of Business
Biography, 1860-1960 (Aberdeen: Aberdeen University Press, 1986), 2: 414-15;
George Glasgow, The Scottish Investment Trust Companies (London: Eyre and
Spottiswoode, 1932), 5; W. Turrentine Jackson, The Enterprising Scot.
Investors in the American West after 1873 (Edinburgh: Edinburgh University
Press, 1968), 13-14, 16-17, 297-98, 300, 302.

2. Ronald B. Weir, A History of the Scottish American Investment Company
Limited, 1873-1973 (Edinburgh: Scottish American Investment Co., Ltd., 1973),
3-5; Jackson, The Enterprising Scot, 13; William G. Kerr, Scottish Capital on
the American Credit Frontier (Austin: Texas State Historical Assoc., 1976),
62, 89.

3. Weir, Scottish American Investment Co., 8, 30; William Adams Brown, Morris
Ketchum Jesup (New York: Charles Scribner's Sons, 1910), 36; W. J. Menzies to
J. S. Kennedy, 5 May 1873, extracts, Letter Book No. 1, Scottish American
Investment Co. [hereafter cited as extracts, Letter Book No. 11. 1 owe these
extracts to R. B. Weir who used them in the preparation of his historical
brochure on the Scottish American Investment Company; I should like to
express my appreciation to the Scottish American Investment Company for
furnishing me with a photocopy of the relevant documents; Mira Wilkins, The
History of Foreign Investment in the United States to 1914 (Cambridge:
Harvard University Press, 1989), 65, 99, 855n. 92.

4. Minutes, 25 April, 9 May, 14 November 1873; W. J. Menzies to J. S.
Kennedy, extracts, Letter Book No. 1.

5. Minutes, 5 March 1873, extracts, Minute Book No. 1, Minutes, 14 November
1873, 6 January, 14 April 1874; Weir, Scottish American Investment Company,
7-8; Weir, "Menzies"; Alvin F. Harlow, "John A. Stewart," Dictionary of Americ
an Biography, 13: 11.

6. Prospectus, 1873; W. J. Menzies to J. S. Kennedy, 5 April 1873, extracts,
Letter Book No. 1; Who's Who in America, 1912-1913, 605; New York Times, 28,
29 July 1875, 21 June 1912; Minutes, 14 November 1873, 31 July, 11, 31 August
1875, 12 January 1880; Weir, Scottish American Investment Company, 7.

7. W. J. Menzies to J. S. Kennedy, 10 May 1873, extracts, Letter Book No. 1.

8. W. J. Menzies to J. S. Kennedy, 5 April 1879, extracts, Letter Book No. 1.

9. Prospectus, Scottish American Investment Co. 1873 [hereafter cited as
Prospectus].

10. Minutes, 25 April, 9 May 1873; W. J. Menzies to J. S. Kennedy, 10 May
1873, extracts, Letter Book No. 1.

11. Minutes, 23 May, 20, 27 June, 4, 15, 22 July, I August, 25 September, 4
October, 14 November 1873.

12. Minutes, 14 November 1873; Weir, Scottish American Investment Company,
8-9; C.D. Menzies to W. J. Menzies, 4 October 1873, extracts, Letter Book No.
1; C.D. Menzies to A. R. Duncan, 6 October 1873, extracts, Letter Book No. 1.

13. Weir, Scottish American Investment Company, 8; [date unknown] November
1873, extracts, Letter Book No. 1; Minutes, 14 November 1873, 3 June 1884.

14. "J. S. Kennedy & Co.," 15 October 1875, New York City, v. 348, p. 900
sub-p. A22. R. G. Dun & Co. Collection, Baker Library, Harvard Graduate
School of Business Administration; W. J. Menzies to J. S. Kennedy, 3 May
1873, extracts, Letter Book No. 1; Minutes, 30 April, 27 August 1878.

15. Minutes, 18 August 1874.

16. Minutes, 19 January 1875; 5 March, 30 April 1878; Alvin F. Harlow, The
Road of the Century (New York: Creative Age Press, 1947), 237; Commercial &
Financial Chronicle 16 (1 March 1873): 292; 17 (6 September 1873): 324; 17
(20 September 1873): 387; 19 (25 July 1874): 103; 22 (1 January 1876): 16; 22
(10 June 1876): 567; R. Carlyle Buley, Equitable Life Assurance Society of the
 United States, 1859-1964 (New York: Appleton-Century-Crofts, 1967), 1: 123,
207n, 208-9.

17. Prospectus, 1873; Minutes, 11, 26 January, 25 May 1875.

18. Minutes, 29 June, 9 July, 14 December 1875, 11 January, 4 July 1876.

19. Minutes, 4, 25 January, 7 March 1876.

20. Minutes, 18 November 1879.

21. Jackson, Enterprising Scot, 16; Weir, Scottish American Investment
Company, 8, 12; Minutes, 5 November 1875, 1 March 1876; 24 June 1879,
[undated 18861.

22. Minutes, 4 July, 17 October 1876, 30 January 1877.

23. Minutes, 11 May, 13 November 1877, 15 October, 31 December 1878, 21
January, 4, 18 February 1879, 28 June 1881, [undated 1887].

24. Minutes, 15 October 1878, 15 June, 23 August 1880, 28 June 1881, [undated
1884] 3 June 1884, [undated 1887], [undated 18921.

25. Minutes, 3, 24 June, 1, 15, 29 July 1879.

26. Minutes, 30 September 1879.

27. Minutes, 9 April, 8, 9 July, 16 September, 16 December 1879, 27 April, I
I May, 15 June 1880, 28 June, 19 July 1881, 17 January, 21 February 1882, 1,
23 May, 16 October 1883, [undated 1884], 3 June 1884, [undated 1885], 5 March
1885.

28. Minutes, 27 April 1880.

29. Jackson, Enterprising Scot, 46; Minutes, I I May, 15 June 1880.

30. Minutes, 23 August 1880; Dolores Greenberg, Financiers and Railroads, 1869
-1889: A Study of Morton, Bliss & Company (Newark: University of Delaware
Press, 1980), 94, 179.

31. Minutes, 11 March, 3 June 1884, [undated 1885], 21 December 1885, 29
January 1886.

32. Minutes, [undated 1885], [undated 1886].

33. Minutes, 30 November 1882; Albro Martin, "Crisis of Rugged Individualism:
The West Shore-South Pennsylvania Railroad Affair, 1880-1885," Pennsylvania Ma
gazine of History and Biography 93 (April 1969): 218-43.

34. Minutes, 1, 23 May 1883.

35. Minutes, 30 September, 12 November, 7, 21 December 1885.

36. Minutes, 3 January 1882.

37. Kerr, Scottish Capital on the American Credit Frontier, 91; Jackson, Enter
prising Scot, 46, 298.

pps.21-37
-----
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