Dark Genius of Wall Street

by Edward J Renehan Jr

  As early as 1869, Charles Francis Adams, Jr., had complained in public about the Credit Mobilier and the perpetual frauds of what he called the “Pacific Railroad Ring.” During late 1867 and early 1868, Oakes Ames (still serving as a U.S. representative from Massachusetts) worked to forestall federal investigations into these goings-on by bribing his colleagues in the House and Senate. Ames assigned large blocks of Credit Mobilier stock to specially selected colleagues at par, even though the shares were worth twice as much at the time. Speaker of the House Schuyler Colfax took a taste. So did Massachusetts senator Henry Wilson, Ohio representative James A. Garfield (he of the Black Friday investigation), Senator James W. Patterson of New Hampshire, and Representatives Henry Laurens Dawes of Massachusetts, John Bingham of Ohio, John A. Logan of Illinois, and William B. Allison and James F. Wilson of Iowa. Ames also roped in two Pennsylvania representatives: William D. “Pig-Iron” Kelley and G. W. Scofield. Like Ames, most of the participants in the Credit Mobilier payola were Republican. The scheme’s lone Democrat, James Brooks of New York, served as a government director of the UP and was thus prohibited by law from owning company shares. No problem: He bought them in his son’s name.

  The only members of the cabal to eventually get cold feet were Allison and both Wilsons. They returned their holdings in 1869, Ames buying them back at par value plus interest. Other members of Congress whom Ames approached, such as Maine’s James G. Blaine, declined to get involved. Ames kept track of all transactions in a little black ledger book. He wrote his associate Henry S. McComb that he had placed the stock “where it will produce the most good to us.”12 Ames subsequently forwarded to McComb several lists of congressmen who had received or were to receive shares. Later on, friction between Ames and McComb triggered the publication of these letters in Charles A. Dana’s New York Sun during the presidential election campaign of 1872. Two subsequent congressional investigations badly smirched the political reputations of Schuyler Colfax, by then the sitting vice president, and most other participants. Oakes Ames and James Brooks wound up censured. Brooks died of a stroke in April 1873, just one month before the harried and disgraced Oakes Ames did the same.

  Following Oliver Ames’s departure as president and a brief flirtation with Tom Scott of the Pennsylvania Railroad, the UP came under the influence of Cornelius Vanderbilt, who saw the road’s potential as a profitable feeder for his own Lake Shore & Michigan Southern. By 1872, Vanderbilt held enough UP stock to force Horace Clark into the organization as president: a post to which Clark was reelected a year later. During the spring of 1873, Clark–evidently not concerned about what his father-in-law the Commodore might think–moved to involve Gould in the venture.

  Testifying before Congress a number of years after the fact, Jay explained that Clark and Schell–the latter serving as treasurer of the Lake Shore & Michigan Southern–had recommended the UP to him as a good stock. It was sometime in mid-May 1873 that Jay met his partners in the Northwestern corner for dinner at Chicago. Clark and Schell had just finished riding the length of the UP, inspecting the road. “They spoke so highly of the property that it induced me to send an order down to New York to buy the stock, . . . to begin at 35, . . . buy it on a scale down.” In other words, Gould gave his brokers authority to buy virtually any share of the UP priced at 35 or lower. Then he took off with his family for several weeks of holiday in the White Mountains.

  As regards what happened next, here is the version Gould told to congressional investigators. Gould was still in the mountains when Clark suddenly became ill. According to Jay’s testimony, the market for UP shares dried up almost instantaneously once it became clear Clark was going to die. At the same time, in anticipation of Clark’s demise, the dying man’s brokers decided to dispose of all his numerous shares. These two factors–the lack of market for the stock and the dumping of the Clark shares–combined and caused the stock to fall precipitously, at which point “my orders caught it.” Clark was dead by the end of June. Upon Gould’s return from his New Hampshire vacation, he found himself owning 100,000 of the 367,000 UP shares outstanding. “After I got home the stock kept going down, and I got alarmed about it and began to inquire into the condition of the property.”13

  Gould was being coy. That Clark died without much warning in June 1873 is quite true. That Gould issued his scale-down buy order, and then left town, before Clark became sick is also true. But that Gould was surprised by the sharp drop in the price of the UP, and likewise surprised by his own sudden equity in the firm, seems quite unlikely for so cunning and detail-oriented an operator, just as it does not ring true that only after Gould found himself with a substantial interest in the UP did he become familiar with the firm’s affairs. For starters, the record shows that Clark’s brokers did not sell off his shares in anticipation of his death. Furthermore, the evidence indicates that Clark’s sickness and death did not depress the price at all. As Grodinsky noted: “A week after [Clark’s] death, the stock after moving down from 26 1/8 to 24 1/2, returned to 26 1/8, but two weeks later it sold at 29. The price declined because of the general market trend, and the threat of legal action by the government. In the midst of [Gould’s] buying program, the attorney-general filed a bill against the Union Pacific, its construction company, and a large number of individuals, suggesting that the court, among other things, declare that the Land Grant bonds and the Income bonds had been unlawfully issued.”14

  This action–of which Gould might well have had advance word–influenced the UP pricing, and nothing else. As regards the poor financial condition of the road, this was highly publicized. By simply reading the newspapers Gould would have known about the firm’s floating debt and other problems well before buying his 100,000 shares.

  At first, Gould, his reputation preceding him, was eyed with significant skepticism by the citizens of the UP board. Men like Oliver Ames and Sidney Dillon–even though they’d already had extensive dealings with the Credit Mobilier, Oakes Ames, and Durant–viewed Gould as something unique: the looter of the Erie. Receiving an initial cold shoulder, Gould was nevertheless able to make peace with a substantial majority of the board over time. Soon Gould included in his camp not only Ames but Ames’s son Frederick and other board members, including Elisha Atkins, Ezra Baker, F. Gordon Dexter, and Dillon. (The latter, a onetime farmboy born in 1812 in rural Montgomery County, New York, would–like Sage–become an especially close friend and ally of Gould’s through the next nineteen years. Both Gould and Dillon would die in 1892.) Writing after the turn of the century, a banker associated with Gould, David B. Sickels, recalled buying outright control of the road for Jay during the winter of 1873–1874 “by a secret combination with Messrs. Dillon & Atkins, after we had purchased in the open market all the stock available.”15 (Gould eventually came to control some 200,000 shares of the UP.) At about this same time, Gould assured General Grenville M. Dodge, chief construction engineer for the UP, that he intended to stay with the railroad for the long haul and “make it a big thing.”16

  The bulk of Gould’s back-end buying of UP during November 1873 and February 1874 was done amid a financial panic that had begun in Europe several months earlier. The turbulence in London and Paris eventually spread across the Atlantic and caused the failure of Jay Cooke and Company of Philadelphia, the country’s preeminent investment banking concern. A principal backer of the Northern Pacific Railroad, then still in the early stages of construction between Lake Superior and Puget Sound, Jay Cooke had also handled most of the government’s wartime loans. Thus the collapse of his organization touched off a financial domino effect. The New York Stock Exchange closed for ten days. Credit dried up. Foreclosures were common. Banks and investment bankers (among them Wall Street’s prominent Fisk & Hatch) failed as factories closed their doors, costing thousands of workers their jobs. Over the course of the two years between autumn 1873 and autumn 1875, approximately 18,000 American businesses would go under. At the same time, 89 of the country’s 364 railroads would go bankrup
t, and by 1876 unemployment would rise to a staggering 14 percent. Analysts later argued that, more than any other single factor, the extreme overbuilding of the nation’s railways had laid the groundwork for the American end of the panic, and for the depression that followed. Full recovery would not come until 1878. In this environment, when Sickels orchestrated the final stock purchases that ultimately sewed up the UP for Gould, he did so at a sliver of the line’s actual value.

  Along with four of his brokers, Jay joined the UP board in March 1874. During the same meeting, Sidney Dillon, holder of 26,000 shares, became president, a post he would hold for ten years. Atkins stepped in as vice president. In the course of the next twelve months, Gould protected the UP from the fate then being endured by so many other railroads, even though it cost him personally in the short term. As Morosini would recall, the panic left Gould “comparatively a poor man. . . . I doubt if any man parted with more cash and securities than did Mr. Gould by reason of the catastrophe.”17 In one of his first steps after taking control, Gould transformed the UP’s floating debt, due to mature that August, into a longer-term bond issue. He also masterminded a refunding of the firm’s $10 million in income bonds as new, lower-interest, sinking-fund bonds (issues in which most or part of the issuer’s long-term debt is redeemed, according to a strict schedule, prior to maturity). Concurrently, Gould brought suit against the federal government, which, since March 1873, had withheld payments on the movement of government freight–this to recoup partial payment of interest owed on U.S. bonds loaned to help finance the UP’s construction. Simultaneously, Gould virtually walked away from another, smaller, unfinished railroad in which he’d been interested since 1872, the New Jersey Southern, selling his interest at a loss of more than $1 million. He apparently felt that he could not shore up two roads at once in the face of the depression, and that he had a larger game to play in the UP.

  Once free of the New Jersey Southern, Jay moved to take control of, and thereby suppress, the Pacific Mail Steamship Company’s competition with the Central Pacific–Union Pacific interchange. Providing transport between the West Coast docks and the Isthmus of Panama, the Pacific Mail offered the only real alternative to the UP and the Central Pacific for the transcontinental shipment of freight. (Most important in this equation were imports from the Orient arriving at West Coast ports for transshipping to eastern markets, and eastern manufactured goods bound for California and the Orient.) During December 1873 the independent-minded Russell Sage–who’d previously joined Gould in manipulating the stock of the Pacific Mail and served on the company’s board–stepped into the Pacific Mail as president. Once installed, he continued the previous management’s program of an aggressive price war against the railroads, despite his friend Jay’s ascendance at the UP. Throughout the summer and autumn of 1874, the amount of business Sage attracted became frighteningly large.

  Early that December, when verifiable revelations of Sage’s short-selling of Pacific Mail stock forced his resignation as president, Gould was widely presumed to be the source of the news. Subsequent publicity advertised not only Sage but also several additional board members, along with Gould, as prominent bears in the stock. Accordingly, through early 1875, the price of Pacific Mail slumped to near panic-level prices. Over these same months Gould, though publicly identified as a bear, quietly bought into Pacific Mail through a dozen or more brokers until he’d acquired a controlling interest in the firm at a good rate. On 3 March 1875, Gould and two associates, Ames and Dillon, joined the board of the Pacific Mail. Dillon, already president of the UP, took on the same position with the Pacific Mail, and the rate wars ceased at once. “The Union Pacific, in control of the Pacific Mail, was now free to increase its rates without fear of competition from the steamship route,” commented Grodinsky. “With the volume at high levels and moving at monopolistic rates, the earnings picture of the Union Pacific was bright.”18 UP stock, which had stood at 15 in November 1873, soared to 78 by June 1875, despite the ongoing depression.

  Profitable news about the taming of the Pacific Mail aside, the Central Pacific’s dominant force, fifty-four-year-old Collis P. Huntington, remained uneasy. Shortly before his acquisition of the Pacific Mail, Gould had quite publicly engaged with Huntington in the creation of a railroad-controlled steamship line, the Occidental & Oriental Steamship Company. In retrospect, Huntington realized that mere talk of his and Gould’s idea for the new steamship firm had done a great deal to drive down the price Gould had had to pay for the Pacific Mail. When the dust settled, Huntington came away feeling he’d been played as a pawn, though it is not clear he should have felt that way. Gould, Dillon, and Ames owned $2.5 million, $2 million, and $500,000 stakes, respectively, in Huntington’s Occidental. What was more, Gould assured Huntington that both steamship lines, not to mention each cooperative end of the transcontinental railroad, could and would be run as one harmonious monopoly. Still, Huntington remained leery of Gould’s quiet inscrutability and his penchant for Byzantine endgames. Thus Huntington declined when Gould, in an effort to demonstrate good faith, offered him a seat on the board of the Pacific Mail. He would insist, until proven wrong, on believing that Gould’s ambition with the UP and its associated firms was purely speculative, just as it had been with the Erie. In the future, Huntington fully expected Gould to bull up the stock of the UP, sell out, and then go short. Given this assumption, Huntington devised a simple strategy for dealing with Gould in the near term: “Avoid a quarrel with him, and watch for the time when we are ready to control the UP, and then go in and get control of it.”19 But Huntington, along with the rest of Wall Street, was in for an education.

  Chapter 24

  CONSOLIDATION

  FROM THE SPRING OF 1874 onward, Gould’s primary personal focus was not stock speculation–although he certainly did some of this, since it always came easily enough–but the management of the Union Pacific as a business. He was the supreme ruler of the UP even though he preferred anonymity and officially held no positions other than his seats on the board and executive committee. Taking authority over President Sidney Dillon, Gould not only strengthened the firm’s financial structure but also served as chief strategist in the UP’s competitive and political battles. In the course of just a few years he would restructure the UP’s chain of management, realign its rates for maximum competitive advantage, and work for the development of properties and resources along the UP corridor. In taking on all these tasks, Jay necessarily immersed himself in the minutiae of the UP’s operations, coming to know the UP’s road, resources, strengths, and shortcomings every bit as intimately as he had those of the old Rutland & Washington a decade earlier.

  Twice a year, Gould would ride the length of the UP’s track–as well as tracks controlled by competitors–together with Dillon, Fred Ames, Morosini, and others. His private railroad car, the Convoy, traveled behind its own locomotive, coal tender, and baggage car. Gould insisted on a clip of fifty miles per hour, which was quite fast at the time, and he did not permit any slowing over uneven grades. “During such a trip,” reported a correspondent for the New York Times, “[Gould] has been known to change seats–from one side of the car to another–not of his own volition, but without changing countenance.”1 As Gould rode, a male stenographer sat at his side jotting down the mogul’s running thoughts on maintenance initiatives, possible cost economies, and recommended improvements. All these ideas would later be taken up with Silas H. H. Clark, Gould’s chief operational lieutenant for the UP after Dillon. (The man who managed the road in the West as of 1874, Clark was just a few months younger than Gould. He’d been raised on a farm in New Jersey and had spent his entire professional life in railroading. Clark knew Wall Street not at all, but he understood locomotives and freight forwarding intimately. He and Gould shared two traits: They were both workaholics and they both loved books. Gould was to make Clark a rich man.) In the evenings, after Gould’s train pulled up onto a siding to rest both the machine and the men driving it, Jay would walk t
he lonely western towns, make small talk with whoever happened to be about, and quiz local UP employees for their views concerning what the company might do better in that particular neighborhood. “Our men on the ground have intelligence we need. They are our agents, and we fail to know their minds at our own peril,” Gould wrote Dillon.2

  Gould’s twice-yearly sojourns led to friendships with various UP customers. For example, the proprietors of the Keith & Barton Ranch in Nebraska came to know Gould well. “For a home ranch they had headquarters at Dexter, a siding near the present town of Sutherland,” recalled the editor of the Lincoln State Journal in 1930. “Here Jay Gould and Sidney Dillon, of New York, and Fred Ames, of Boston, made their annual visit to the Keith & Barton ranch on their usual tour of inspection over the Union Pacific Railroad. . . . Mr. Barton, knowing of their coming, would send word to his foreman to round up the herd at a certain time and have saddle horses in readiness. He joined the party in their special train at North Platte and accompanied them to Dexter, where all preparations were made for the guests. Gentle horses, with California saddles, stood before them, and, mounting, the party rode among the cattle, crossing hills and valleys, commenting on colors, ages, and beef steer, watching the frolics of the calves jumping around their mothers, and forgetful of Wall Street and the stock market. Later they boarded their train, happy and joyous at the free life of the cattleman, and for miles on each side of the track the big herd would be visible from their car window.”3