Gentlemen's Agreements

One of the most important episodes leading to the split between Taft and Roosevelt occurred over "gentlemen's agreements."

After the establishment of the Bureau of Corporations in the new Department of Commerce and Labor, and after the Court's decision in the Northern Securities case, a series of "gentlemen's agreements" developed between Wall Street financiers and the Roosevelt administration.

• The Bureau of Corporations collected and analyzed investment and market information about companies and industries.
• Wall Street financiers, especially those associated with J.P. Morgan and his "House of Morgan," met in friendly settings with Bureau of Corporations officials to obtain prior government approval before engineering significant mergers or "take-overs."

The most famous of these "gentlemen's agreements" occurred during the stock market panic of 1907.  This agreement involved the President personally, and high officials in the U.S. Steel Corporation.  Morgan had engineered the construction of U.S. Steel in 1901 as the world's first billion dollar corporation (and still, at the end of the twentieth century, the largest merger deal in American history).  U.S. Steel combined the world's largest steel company, Carnegie Steel, with some of its competitors.

• In 1907 there was a stock market "panic" that threatened to topple important New York investment banks and reverberate through the economy, triggering a depression.   President Roosevelt worked closely with J.P. Morgan during this panic to have Morgan make strategic investments to stave off fears of collapse.
• In 1907, the Tennessee Coal and Iron Company was U.S. Steel's most significant competitors.  The rival firm was second only to U.S. Steel in the amount of American iron ore.  The officers of U.S. Steel wanted to acquire the Tennessee Coal and Iron Company, control its iron ore reserves, and thus extend its power over competition in the American steel industry.

During the panic, the head of U.S. Steel and a high representative of the House of Morgan met privately with President Roosevelt.  They told the President that one important step in controlling the panic was to have U.S. Steel acquire Tennessee Coal and Iron, explaining that the action would shore up a big investment bank that owned a substantial share of the firm.  Roosevelt agreed, and the deal went through.

The implication of this meeting was that the federal government would not file suit under the Sherman Act against U.S. Steel for its acquisition of Tennessee Coal and Iron.   This was a "gentlemen's agreement," an unstated (and unwritten) political deal between the nation's most powerful politician and its most powerful banking house. This episode, important in itself in the nation's business history, was critical in the eventual split between Taft and Roosevelt.