John Herzog’s Penn Central Talk published in Scripophily No. 93 – December 2013
“The IBSS Breakfast held on Saturday morning at the Wall Street Collectibles Show last October 2013 had a special treat as John Herzog shared with members the story of the great Penn Central Transportation Co stock and bond hoard dispersed by RM Smythe over the years. This was something most of the members had heard about, but John provided the rest of the story.
Thoughts on the Pennsylvania Railroad and the New York Central Railroad; The Penn Central and the Bankruptcy; Collecting the Certificates of the Many Railroads Owned by Both Railroads
By John Herzog
As background, I graduated from Cornell in 1957 and went into the brokerage business. I worked in the cage (operations department) of New York Stock Exchange firm Eastman Dillon Union Securities. We took physical securities which had been sold by the company’s customers and delivered them to the brokers whose customers had bought them, so I saw what the physical securities looked like.
During previous summers I had worked for my father’s small firm and found a few old certificates and did some research on them. I struck it rich with one share of Anglo-Lautaro Nitrate Co that we realized was worth $8. I remember that my father and I went to 120 Broadway to redeem this share of stock, and it was a big event. We celebrated with a frankfurter at Chock-Full-O’Nuts. I became acquainted with that part of the securities market, and joined my father in 1959.
I was young, impressionable, and not really watching the news carefully, but I remember that in 1957 merger discussions between the Pennsylvania Railroad Co and the New York Central Railroad Co began. In the Eisenhower administration in 1956 the Federal Interstate Highway Act was passed, and what was shaping up was a tremendous battle between the truckers and the railroads. The railroads were burdened with difficult Interstate Commerce Commission regulation. The Pennsylvania and New York Central continued their discussions for eleven years until 1968 when the shareholders agreed to merge into the Penn Central Transportation Co. These two systems were very large businesses, employing many thousands with a tremendous fixed asset base throughout the northeast quarter of America. In 1920 there were 2,000,000 people employed in the railroad industry, which gives some idea of the magnitude of the industry. At the peak of the track miles in America, which is 3000 miles from coast to coast, there were 254,000 miles of railroad track in the country. These are big numbers!
It took the ICC four years to come back with an “OK” and conditions. During that time the truckers were lobbying Congress and the railroads were caught in this terrible competition. The western railroads had long hauls of commodities, but the eastern roads were susceptible to competition from trucks and cars so they had a terrible time. The management of the railroads was entrenched and not forward looking, a textbook case.
The New York Central had new management in Alfred E. Pearlman and I went to the New York Society of Security Analysts to hear him speak about the company. He mentioned they had the industrial psychologists come in and when they left, they did business the right way and started selling assets and so on. I bought 25 shares of New York Central stock at around $12 if I remember correctly, and a couple of years later it was selling at 60, but that was the last bright spot in a long decline.
When I joined my father in 1959 I didn’t know anything about trading. I was wondering how I was going to do business. Walking around in Greenwich Village, I saw an 1865 certificate of the New York and Harlem Railroad Co in a shop window marked $5, and it looked interesting to me. I decided to buy it and frame it, and when a friend would come to my office, I’d show the certificate, talk about investing now, and open a new account. I got home, looked at the certificate and noticed it was signed by William H. Vanderbilt. It was “all over” for me in an instant. I immediately sent an ad to Collectors News and began corresponding with people around the country who had certificates for sale, and so began my collection.
Time passed, and my firm did well, and in 1976 we acquired a firm called Heine Fishbein & Co, a NYSE member firm, and became Herzog, Heine, Geduld, Inc. We gained a retail client business and had an advanced securities clearing capability. Max Heine and his colleague Hans Jacobson had specialized in trading the bonds of the Penn Central, then in bankruptcy since 1970. The firm cleared all these transactions, and I was able to see the certificates first hand. As the bankruptcy progressed, I realized that it would eventually conclude, and the securities which I had seen in our operations department would cease to have any trading value. I then wrote to the Penn Central management and suggested that the firm my wife Diana was managing, RM Smythe & Co, would liquidate these certificates to the collectors market.
This certificate from the hoard was issued to Thomas Scott of the Pennsylvania Railroad
It was necessary to be persistent, but at last, in 1984, Penn Central agreed. We then began periodic trips to the large Records Center facility in a Philadelphia warehouse and looked in boxes for items of interest, taking them on consignment. This was a tedious, dirty job, but it was also unusual and we enjoyed these excursions. We kept 25% of the realizations and the rest went to Penn Central Corporation. Our activities were audited by Penn Central from time to time, and all went well. Diana, Steve Goldsmith and I did most of this work, and we were very happy to get home to a warm place and a shower after these days.
The Records Center was not very well organized, and it often took several tries to locate a box with interesting material. The place was not very clean, and it was cold in winter and very hot in summer. There were some work tables, but it was not a wonderful environment, though we found it fascinating to see this large piece of railroad history in one place, and also to locate the occasional sensational piece which we would save for the next Smythe auction.
The material we discovered was included in nine price lists and appeared in most of the Smythe auctions between 1985 and 2002, when the last quantity items were sold so that Penn Central could move out of the warehouse. This seventeen year project came at the moment collectors were eager for new material, and these pieces had never been seen before.
The Memphis Paper Money Show and the Strasburg Shows were the major venues for offering these stocks and bonds. They had been kept after acquisitions by both the Pennsylvania and the New York Central during more than a century, when railroads were the way people traveled. The archive was fascinating and some of the pieces are truly outstanding, visually and for their autograph or historic value.
There was great excitement when we came upon the only certificate made out to and signed by Andrew Carnegie. Vanderbilt signatures were also numerous, and the various combinations of their signatures on attractive certificates made wonderful auction lots. The later sales of the American Bank Note archives which contained specimens of many of the pieces we found in quantity in the Penn Central archive made splendid companions for dedicated collectors. We also found some very good annual reports from early in the twentieth century published in French, with excellent maps of the system. There was not a lot of other general paper, as that was not part of our contract, and Penn Central had other plans for that material.
The last of the material we handled directly was sold in Smythe auction 205 in 2002. This sale contained many lots with thousands of items. One series contained over 5,000 Cleveland, Cincinnati, Chicago and St Louis Railway Co $1000 General Mortgage bonds, with the Reaper vignette. Another had more than 83,000 Pennsylvania Railroad Co stock certificates from the 1950s and 1960s with the famous Horseshoe Curve. In total over seventeen years we sold nearly a million stocks and bonds from the constituent railroads.
When this project was finally over, and we had liquidated all the certificates we were able to find, there was a great sense of accomplishment, and a job well done. After that, and because of other developments in the financial markets, as well as the sale of the Smythe business including its inventory, prices in the collectors market retreated from the highs of the frothy market days. Time heals all wounds, however, and now that a large portion of the old Penn Central hoard held by a number of different dealers has been assimilated, prices have begun to rise again. It is the Centennial of Grand Central Terminal this year, and celebrating such anniversaries will surely bring new collectors to the field, and encourage the older collectors as well. Eminently collectible, this material should not be overlooked by collectors.”