The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany
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Gould was drawn into the “Erie wars,” as they came to be known, in 1867 when some of the railroad’s shares that his brokerage held on behalf of English investors were solicited during a struggle for control of the company. There were three warring factions: Daniel Drew, Cornelius Vanderbilt, and a consortium of Boston investors, which included the then-president of the Erie.
Vanderbilt and Drew went way back. Both were in their seventies—rough, unlettered men, who had made their first fortunes in the Hudson River steamboat trade. Neither was a paragon of personal behavior. Vanderbilt was a crude bully—forcing the maids was part of his normal routine, and he once clapped his wife into an insane asylum when she protested a house move. Drew was a whiner and groveler, a vicious enemy and treacherous ally. While Vanderbilt was a gifted businessman and railroad manager, Drew preferred to make money by cheating his own shareholders. A few years before, Drew had tried to trap Vanderbilt in one of his patented Erie bear raids,* but the wily Commodore had caught him out. Perhaps out of deference to their years of steamboat rivalry, Vanderbilt let Drew keep his Erie board seat on the understanding that he would help out in Vanderbilt’s drive to take over the Erie—he wanted its Great Lake connections for the collection of railroads he was consolidating under the banner of the New York Central. The Boston group were looking for a similar connection for their New England road, and, besides, were desperate for the Erie’s financial assistance. Drew’s reasons for quietly opposing Vanderbilt after accepting his favor are obscure; keeping his word, perhaps, was too much of a break with the habits of a lifetime, especially when he could make money by trading against Vanderbilt’s strategy.
The first approach to Gould came from Drew through the agency of Jim Fisk. Fisk was a New England farmboy, a year younger than Gould, who had worked as a peddler and circus roustabout before striking it rich as a cotton smuggler during the war. Drew was impressed with Fisk’s boldness when he barged into his office one day with a business opportunity, and after executing the deal, helped set him up as a stockbroker. Fisk was an entertainer and a clown—generous, funny, and loyal. A womanizer, a trencherman, a fop, he spent prodigiously in good times and bad. Utterly unscrupulous, he was an artist of good-natured rascality; any law or social convention became a chance for uproarious transgression. There have been few less congruent pairs than Fisk and Gould, but they bonded almost immediately—Gould must have spotted the shrewd intelligence and appetite for hard work behind the buffoonish presentation. Fisk brought the touch of humor to their joint enterprises. Once during an Erie–New York Central price war on cattle shipping, Vanderbilt slashed rates to an absurd penny a head, chortling victoriously as his trains filled up with steers, until he discovered that Fisk and Gould had cornered the cattle market and were making a fortune from his shipping losses—Fisk’s idea of course.
Drew had reached out to Gould merely for the shares he controlled. He knew that sooner or later Vanderbilt would discover his treachery and launch a stock market battle for control of the Erie. It is striking, however, that as soon as Gould signed on, he seems to have become the field general in the Drew camp. When Vanderbilt, as expected, declared war on Drew in early 1868 and started buying up Erie in the open market, Gould quietly created $10 million in convertible bonds (bonds that could be traded in for stock), which he deposited in his and Fisk’s brokerages. As Vanderbilt bought Erie shares, they would convert their bonds and leak the new shares into the market. So the more stock Vanderbilt bought, the more stock seemed to be available, and the more the price dropped. Vanderbilt was the richest man in America, with a fortune estimated at $100 million, but his wealth was tied up in his enterprises, and as his margin calls mounted,* the Commodore’s knees visibly buckled. Just the thought of Vanderbilt failing sent quiet shudders through Wall Street.
Belatedly, Vanderbilt realized Gould’s ruse and solicited a friendly judge, the Tammany stalwart George Barnard, for an injunction against the convertible bond issuances. (The legislation creating the Erie meticulously specified its allowable capital structure, but Gould could make a good case that the bonds were legal.) Drew, Gould, and Fisk were in the meantime scrambling to other judges for injunctions of their own. But Vanderbilt was the quicker to court, and finally got a contempt order for the arrest of the entire Erie board, prompting the late-night flight to Jersey City. The boating adventure on the Hudson was quite unnecessary—Drew left by public ferry earlier in the day—but Fisk insisted that he and Gould first have a lavish dinner at Delmonico’s so he could entertain his friends with stories of Vanderbilt’s discomfiture. Sheriff’s officers were hot on their heels when they finally ran for the harbor and commandeered the first boat they found.
For a while, the Jersey City strategy looked almost successful. Vanderbilt was groaning under the weight of his margin calls as the Erie stock price went into free fall. The legal process was frozen in place—the two sides’ competing judges had each appointed receivers—but Gould, Fisk, and Drew had the money and all the corporate instruments. Fisk, of course, with his Josie installed at the hotel, was hugely enjoying life on an unlimited expense account; but Drew pined for Wall Street and Gould missed his family. After a month had passed, Gould packed up a suitcase of money and entrained for Albany. He was briefly arrested, but with the help of sweeteners from the suitcase, stayed out of jail and set up shop in a hotel room to receive legislators. (Vanderbilt’s agents opened their offices on another floor of the hotel.)
“Gentleman Jim” Fisk was an uproarious scoundrel, a fop, a trencherman, and a womanizer, but he was also very intelligent and loyal to Jay Gould.
Gould and his suitcase were wonderfully persuasive. Within barely a week, the legislature passed a law retroactively authorizing the Erie’s financial maneuvers, and he had bought off the Vanderbilt judge who had issued the contempt citation, allowing him to return to the city both triumphant and a free man. A journal maintained by the Erie auditor, a long-time retainer of Gould, shows that Gould and Fisk dispensed almost $600,000 during the spring and summer of 1868, or some $7–8 million in today’s money, on “legal expenses” and related items. Important beneficiaries included William M. “Boss” Tweed, who was also a state senator, and Peter Sweeney, Tweed’s number two. Forced to sue for peace, Vanderbilt finally exacted a package of cash and stock buybacks worth about $9 million, denuding the Erie treasury. An impecunious Erie was of no interest to Drew, so he resigned his directorship along with Vanderbilt and the Boston group. Elections in the fall returned a Gould board, including both Tweed and Sweeney. Gould was appointed president, and promptly named Fisk comptroller. Fisk, Gould, and a compliant lawyer, Franklin Lane, constituted a majority of the executive committee, leaving Gould, in effect, in total control of the Erie. In the seven years since Jay Gould had arrived in New York, nearly broke, and a failed tanner, he had done very well indeed. He was thirty-two years old.
Gould and Fisk quickly ratcheted up the scale of their embezzlements. Erie’s headquarters were moved from a convenient location on the lower Manhattan waterfront to uptown rented offices in a marble Opera House, owned by Fisk and Gould, who had bought it with Erie cash. For Fisk, it was an adolescent’s dream of heaven. He lavished some $2 million on redecorations, disported with the downstairs chorus girls, and tapped Erie money to support his new part-time role as an impresario. A house for Josie Mansfield, located conveniently down the street, was part of the package.
Unlike Fisk, however, Gould was actually interested in running the Erie. More important, he had a strategy. Even in its gravely wounded state, the Erie was all the platform he needed to set about teaching the rest of the northeastern roads, including Vanderbilt’s New York Central and the vaunted Pennsylvania, what their business was really about.
Railroad Privateer
“Airplane-seat pricing” is the reason a modern business traveler may find herself squeezed into a middle seat next to a grandparent who paid a fifth as much for the same ticket. Almost all the costs of a commercial flight are
incurred when the plane takes off, regardless of how many passengers are aboard. Since any additional revenue is almost pure margin, it makes sense to fill empty seats for almost any price at all, and airlines use elaborate pricing models that continually adjust fares to ensure maximum loading. After fare regulation ended in the 1970s, prices plummeted, passenger miles soared, and most lines constantly skitter on the edge of bankruptcy.
The economics of railroads are the same as for airlines, and Jay Gould may have grasped them more quickly and clearly than anyone else. The favored contemporary response to price wars was to form pools, or industry rate agreements, which inevitably collapsed because of cheating. Instead, Gould hoped to control pricing by establishing monopolies over natural regions of commerce. Almost as soon as he won control of the Erie he began an aggressive series of probes aimed at establishing Erie control over a huge swathe of territory stretching from New York City westward, sweeping in the coal, oil, and iron districts of northern and western Pennsylvania and the agriculture and food processing regions west and south of Chicago.
There were three eastern trunk line contenders for his targeted Midwest-to-East Coast traffic corridor: the Erie, the Pennsylvania, and Vanderbilt’s New York Central, each of which controlled routes covering roughly half the journey from the coast to Chicago. The second leg could be cobbled together from any one of four lines, one of which already had a close working relationship with the Erie. Of the remaining three, all of them pastiches of smaller routes, one was under the loose sway of the New York Central, while the other two were Pennsylvania allies. If all four routes were arrayed on a map, they laddered in four parallel lines, with the most northern running along the Great Lakes and the most southern through central Pennsylvania; but by one means or another, they all offered serviceable connections to Chicago and the western grain fields for whichever one of the three eastern lines controlled them.
Strikingly, although their western connections were crucial for both the Pennsylvania and the New York Central, neither had taken any special steps to defend them; the Pennsylvania had actually been divesting its ownership interests in its western connections. Its executives prided themselves on keeping debt low, extending lines cautiously, and conserving cash. In the pre–Gould days, this was the epitome of good management; the railroad bosses were like peacetime generals who keep the troops fed and equipment working, but haven’t a clue about strategic maneuver or positional advantage.
Gould decided to go after all four western legs at the same time. Since he did not trust contracts or working agreements, he needed executive control through leases or outright purchases. His problem was that he had no money. He had agreed to the Erie’s settlement with Vanderbilt only weeks before, and injunctions and lawsuits were still whizzing around like spitballs. But mere lack of money never fazed Gould. He could, for example, just buy proxies, which was possible in the nineteenth century. For a small price, Gould would then be entitled to vote the stock for a limited period. A second trick was to use his brokerage firm to borrow quantities of stock in time for a board election, and vote the stock through the brokerage account. There would be many others, ploy upon ploy, as Gould effortlessly churned out new market wrinkles as occasion demanded. His consistent pattern was to move very quietly, assemble stock through a host of dummy accounts, then suddenly emerge in a control position, usually just before a crucial board election.
He almost pulled it off. His first step was to lock up the already-established Erie western route, the Atlantic & Great Western, with a long-term lease. Then, in just a few months, a series of lightning, but well-disguised, stock raids on nearly a dozen different roads put him within an eyelash of erecting a solid wall across all Vanderbilt and Pennsylvania access to the west. He had won outright control over both of the Pennsylvania’s western routes; he also controlled about half of the lines in the New York Central’s western connections, and was poised to take over almost all the others. A little more time, and all mainline rail service to and from the heart of the American grain, iron, steel, and oil sectors would have been in Gould’s hands. Vanderbilt and the Pennsylvania could build more roads, of course, but that would be the work of years; until then they would owe Gould tribute.
Almost as an afterthought amid his blitzkrieg against Vanderbilt and the Pennsylvania, Gould also made a stock play for a small anthracite line, the Albany & Susquehanna. It marked one of Pierpont Morgan’s first appearances as a railroad banker. Pierpoint managed to fight off the Gould forces in a picaresque battle involving dubious share issuances, the usual war of injunctions, Jim Fisk and a troupe of thugs getting tossed out of a shareholders’ meeting, and a dramatic crash of locomotives in the middle of contested territory. (It is remarkable that Junius had high praise for his son’s efforts, for J. S. Morgan & Co. was the Erie’s investment banker, while Pierpont’s firm, of course, was an integral part of Junius’s network.)
One wonders if Gould might have succeeded against Vanderbilt and the Pennsylvania if he had moved somewhat less deftly, or without quite the blinding speed and dazzling strokes. As it was, incumbent managements felt assaulted; even the Pennsylvania was shocked out of its torpor. Tom Scott led the Pennsylvania’s charge in its home-state legislature, which, in the words of one historian, always practiced “state mercantilism” when it came to its favorite company. Pennsylvania money flowed thick and fast to secure anti-Gould shareholder votes and to induce the legislature, in effect, to outlaw Gould’s takeovers. It was the same story in Ohio, where courts and the legislature linked arms to block his westernmost takeovers. As Gould had amply demonstrated in New York, in the absence of a national framework of security law, home-state legislatures could skew outcomes however they pleased.
Then, in the summer of 1869, with his railroad wars raging on every side, and the outcome still hanging in the balance, Gould launched, or was swept up in, the infamous Fisk–Gould “Gold Corner.” It is one of the most notorious episodes in American financial history, one that demonstrates not only Gould’s own self-destructive streak but also the fragility of America’s postwar financial markets and the openness of the corruption. The Gold Corner forever fixed the image of Gould as the evil genius of Wall Street; even worse from Gould’s perspective, it destroyed an important ally in his railroad wars, fatally tipping the balance against him.
The Gold Corner
Gould’s mind ran in labyrinthine channels, and he turned to the gold markets as part of a strategy to improve Erie’s freights. Grain was America’s largest export in 1869. Merchants purchased grain from farmers on credit, shipped it overseas, and paid off the farmers when they received their remittances from abroad. Their debt to the farmers was in greenbacks, but their receipts from abroad came in gold, for the greenback was not legal tender overseas. It could take weeks, or even months, to complete a transaction, so the merchant was exposed to changes in the gold/greenback exchange rate during that time. If gold fell (or the greenback rose), the merchant’s gold proceeds might not cover his greenback debts. The New York Gold Exchange was created to help merchants protect against that risk. Using the Exchange, a merchant could borrow gold when he made his contract, convert it to greenbacks, and pay off his suppliers right away. Then he would pay off the gold loan when his gold payment came in some weeks later; since it was gold for gold, exchange rates didn’t matter. To protect against default, the Exchange required full cash collateral to borrow gold. But that was an opening for speculations by clever traders like Gould. If a trader bought gold and then immediately lent it, he could finance his purchase with the cash collateral and thereby acquire large positions while using very little of his own cash.
Gould reasoned that if he could force up the price of gold, he might improve the Erie’s freight revenues. If gold bought more greenbacks, greenback-priced wheat would look cheaper to overseas buyers, so exports, and freights, would rise. And because of the fledgling status of the new Gold Exchange, gold prices looked eminently manipulable, since only about $20 million in
gold was usually available in New York. He discussed the idea with Fisk, who was skeptical. The Grant administration, which had just taken office in March, was sitting on $100 million in gold reserves. If gold started suddenly rising, it would hurt merchant importers, who could be expected to clamor for government gold sales.
So Gould decided to probe the government’s intentions. He made friends with Abel Corbin, a somewhat tremulous retired gentleman who had recently become the president’s brother-in-law, and who claimed to exercise substantial family influence. In June, when Grant traveled through New York on his way to Boston, Corbin helped arrange a meeting with Gould and Fisk. The president was Fisk’s guest at the private Erie box at the Opera House, and the following evening, the two, along with Gould’s friend Cyrus Field, the entrepreneur of the transatlantic cable, entertained Grant and other leading men at a late supper on an Erie river steamer. (How far and fast these two farm boys had traveled!) In Gould’s account, he delicately steered the conversation to monetary policy, evoking only grumbles from Grant on the “fictitiousness about the prosperity of the country and that the bubble might be tapped in one way as well as another.” That was discouraging: popping a bubble meant tighter money and lower gold.*
Corbin, nostrils quivering with the scent of money, beat nervous attendance on Gould throughout the summer and made several more introductions. On September 2, Gould, in a transaction Henry Adams calls “worthy of the French stage,” purchased $1.5 million in gold for Corbin, which was delicately accepted “only for the sake of a lady, my wife,” in Corbin’s words, gallantly positioning her to make more than $11,000 on each one dollar rise in gold. That payment is often taken as illustrating Gould’s naïve acceptance of Corbin’s blather, but it was well earned. Corbin actually seems to have talked Grant into calling off a planned gold sale in early September, and also arranged at least two separate tête-à-têtes between Gould and Grant. As political payoffs go, that was solid value for the money. As a further hedge, Gould made comparable purchases for a senior New York treasury official, Daniel Butterfield, who had been introduced to him by Corbin. When a congressional panel later quizzed him on the purpose of these transactions, Gould was characteristically forthright: