The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany

by Charles R. Morris

  Vanderbilt detested him, and Gould crowded him from every side. In 1879, under heavy pressure from Gould on his westward routes, Vanderbilt decided to sell a large block of New York Central stock through Drexel, Morgan. Gould demanded that he be a part of the underwriting syndicate—i.e., get an insider’s price and pick up investment banking fees besides. It looks like an intentionally humiliating exercise of power. Gould, of course, could justify taking a position in the New York Central, although he did not keep much of the stock, and there was reputational value from being a co-underwriter with Drexel, Morgan, but he was also training Vanderbilt in the proper degree of fear. That Vanderbilt let it happen must have earned Gould’s scorn.

  At the same time, Gould was using his railroad empire to attack Western Union, the crown jewel of the Vanderbilt holdings. Railroads and telegraphs were symbiotic businesses. Track rights of way were ideal for stringing lines, and stationmasters could double as the local telegrapher, since the roads all used telegraphy for traffic management. Gould, who always had an eye for collateral revenues, was attracted to telegraphy from his days at the Erie. His acquisition of the Western Union was completed in 1881, and is a classic illustration of the inexorability of a Gould offensive.

  When Gould gained control of the Union Pacific, it possessed a telegraph company shell, the Atlantic & Pacific, but leased its lines to the Western Union. Gould and a few other directors purchased the A&P for a song, infused a small amount of cash, and began to compete with Western Union for railroad contracts. A few years before, Carnegie had also bought a small telegraph company and made a quick profit by “flipping” it to Western Union. Gould repeated the process with the A&P, getting a better price by throwing in a railroad that Vanderbilt coveted. But that was just a practice scrimmage. He waited a bit, and then after the Supreme Court had ruled against exclusive railroad contracts with telegraphy vendors, and he had built a bigger war chest and a much bigger portfolio of railroads, Gould created another telegraph company, the American Union.

  Very quickly, all of the important Gould lines proceeded to sign up with the American Union, on terms the Western Union found ruinous. Gould then attacked Western Union’s eastern stronghold by executing a contract to operate the independent Baltimore & Ohio telegraph company, which was owned by John Garrett, a longtime Vanderbilt opponent. Gould’s railroads began to cut down Western Union connections and replace them with the American Union’s. (This was pure vandalism, and directly violated the “no exclusivity” court decision Gould had celebrated.) Gould newspapers—by now he owned the New York World and had cultivated other friendly editors—publicized his statements about the evils of the telegraph monopoly, just as a mysterious bear attack materialized on Western Union stock. The stock dove further when it was revealed how much the American Union price war had damaged Western Union’s profits. Gould, of course, used the price fall to amass a large position. The coup de grâce was Gould’s announcement that the Pennsylvania would cancel its contract with Western Union and sign on with the American Union. The terms were outrageously in the Pennsylvania’s favor, but who cared?

  At that point it was over. Vanderbilt’s board was reeling; they were mostly passive investors who just wanted their old dividends. A board contingent called on Gould and found him all sweet reason, as hopeful for peace and concord as they were. (Like Rockefeller, Gould never jeopardized a good deal by trying to squeeze out the last penny of advantage.) All flowed according to script. Western Union bought the American Union in a stock deal that made Gould the largest shareholder, with control of the board. Vanderbilt said he was happy with the outcome—as one scholar put it, happy to “hand over a large part of the value which his father had created, to his father’s arch-foe—Gould.”

  Investors had no reason to be disappointed. Gould quickly disciplined transatlantic cable companies who had been whipsawing Western Union on connection rates by launching his own cable company and forcing a much more favorable arrangement. A few years later, Robert Garrett, John’s son, who succeeded to the B&O and its telegraph business on his father’s death, launched a price war to leverage Western Union into a buyout. Gould made no statement and engaged in no negotiations; instead, he impassively underpriced Garrett step by step, forced him into insolvency, and picked up the property on the cheap. In Klein’s words, Garrett, unfortunately, “was no Gould, and the man on the other side of the table was.” From that point, Western Union was secure at the top of its industry, and Gould maintained control of the company for the rest of his life.

  Gould never achieved his objectives in railroads, although his influence was enormous. As much as any other individual he determined the final shape of the national system; the many thousands of rail miles built after he left the scene were mostly filling in the basic map as settlement thickened. In the process he also defined the pitfalls and potentials of securities markets, pitilessly exposing careless specifications of rights and priorities, putting a high degree of polish on the oldest methods of market manipulation, and inventing a host of new ones besides. There is hardly any securities wrinkle, even in the most recent market booms and busts, that was not limned in some way by Jay Gould. Pierpont Morgan was among those who learned those lessons well: in his financial restructuring of the railroad industry in the 1890s, his bonds and mortgages were crafted, almost point for point, to eliminate the hidden traps that were always so obvious to Gould.

  After the Western Union takeover, a rather impish-looking Puck Magazine version of Jay Gould enjoys his stranglehold over commerce and the press.

  Perversely, it was Gould’s genius as a market manipulator that undermined his achievements. His core strategy was to align coherent properties by obtaining control through the security markets, but he never wielded his empire into a consolidated entity. At Western Union, he could wage localized struggles with the resources of the whole company; but each unit of his sprawling railroad empire was owned by a separate coterie of investors. If one road was made a loss-leader to secure traffic for a broader array of properties, traders would attack its stock, and investor suits would fly. A market-based strategy, moreover, is always at the mercy of market movements. A fall in one stock might jeopardize share-collateral supporting some other holding. A serious market downturn in 1883, just as he reached the peak of his power, left him scrambling for cash, rushing from one collapsing dike to another. Few observers thought he could survive that episode. That he did so, more or less handily, and even returned to the control of the Union Pacific in 1890, is testimony to his extraordinary intelligence and determination. But by then he was already dying, although he kept it secret, trying to push his son, George, to the head of his enterprises. George, like Willie Vanderbilt, seems to have been a perfectly capable, intelligent, and reasonably hard-working man, but with no spark of his father’s genius.

  The economist Joseph Schumpeter once wrote that the American railroad boom meant “building ahead of demand in the boldest acceptance of the phrase,” a strategy that was widely understood to entail “operating deficits for a period which it was impossible to estimate with any precision.” One could quarrel with how wide the understanding was. A British journal commented on one of Gould’s bond issuances in 1881:

  The brokers’ circulars, which find their way through the post into every country house and rectory, were at one time full of the Wabash. Not one person in a thousand had the least idea where the road was, or whence it drew its traffic, or what sort of men conducted its affairs. . . . People rushed in to buy the shares with their eyes shut.

  The perennial gullibility of the small investor aside, Schumpeter’s basic point is surely right, at least with respect to western railroads.* Postwar railroad investments were typically of the “If you build it, they will come” variety. It is extraordinary to consider that such a vast assemblage of investment capital—at the time probably the largest and most concentrated in world history—was made for enterprises that mostly had no customers. The large land grants that typically acc
ompanied western railroad charters, after all, were expressly designed to induce demand; western settlers sometimes got better deals on railroad land than under the Homestead Act. Market crazes, however, are usually based on fundamental truths, the occasional tulip mania to the contrary. Railroad promoters, just like Internet entrepreneurs in the 1990s, were correct in their perception that a business and consumer revolution was afoot—and were correct as well that the biggest gains would go to the first-movers. It’s when the revolution has been absorbed into daily routines that sober second thoughts focus on the wastefulness. For railroads, the transition came sometime in the 1880s. A good milestone is Charles Perkins’s 1882 comment that the entrepreneurial phase of railroad development was essentially over; from that point the main challenge would be the “economical maintenance of the machine.” Another way to put it was that the age of Gould was ending, and the age of Morgan—and under his protective umbrella also the age of corporate management—was about to begin.

  Rockefeller’s Machine

  Railroads, and especially the Pennsylvania, are often credited with being the forerunners of modern corporate management. But Standard Oil bears comparison with any of them. It was as large and complex as any railroad, its operations were spread throughout the globe, and it may have been the only big business to control its entire value chain from production and processing of raw materials down through distribution to wholesalers and in many areas even to retailers.

  Few consumer products have spread as rapidly as kerosene for lighting. Hardly a decade after Colonel Drake’s well came home in Titusville it was the world’s lighting choice. Hamlin Garland, in his tales of a hardscrabble childhood on a remote Great Plains farm, tells of the evening he came home from the fields in 1869 to the amazing transformation from a kerosene lamp on the dining room table, and how soon daily schedules reorganized themselves to take advantage of the longer day. That was the same year that the Stowe sisters, Harriet Beecher and Catherine, instructed readers of their America’s Woman’s Home that kerosene gives “as good a light as can be desired,” suggesting a “student lamp” for late-night studying. Kerosene lamps—plain ones for ordinary people and elaborately decorated ones for the better off—were ubiquitous, as was kerosene, which was sold through pharmacies and grocery stores. The Standard’s bright blue five-gallon cans were known throughout the world, with market shares in Europe, Russia, and China similar to those in America.

  Rockefeller had completed his Cleveland takeover before the 1873 financial collapse. Financial markets, in any case, had minimal impact on the oil industry, and even less on Rockefeller’s continuing drive toward consolidation. Since the Standard was already serving a world market, it was relatively insulated from temporary jags and bumps in America. Personally, Rockefeller was very wealthy,* and was moving with his usual deftness on a national expansion almost as soon as his Cleveland acquisitions were digested. Within a half dozen years, Rockefeller had acquired more or less the whole of the national refinery capacity, and by the mid-1880s controlled petroleum distribution, and was moving into production as well.

  The national acquisitions were accomplished with extraordinary speed and smoothness. The first stage came in 1874 and 1875, when Rockefeller quietly bought out the major players in each refining center—Charles Pratt’s refinery in New York; the Warden interests (Atlantic Refining) in Philadelphia; Lockhart, Waring, and Frew in Pittsburgh; and the largest refineries in the oil region, including John Archbold’s. Those transactions were remarkably strife-free, as if they happened by consensus. His initial targets were the most powerful and technically advanced in the industry; their executives had each won the top-dog role in an important region of the country and were not used to taking orders. Yet they all seem to have bought into his quiet insistence that consolidation was the path to salvation; that the Standard would be the entity that survived the mergers; and that he was the man to lead them. Warden’s son recalled that his father was invited to examine the Standard’s books and was astonished at its profitability, just as Oliver Payne had been in Cleveland a few years before. Each of the acquisitions was executed with Standard stock, which, for deal pricing purposes, was valued at almost three times what it had been in the Cleveland takeovers. The entire sequence is testimony to the mesmeric personal power of Tarbell’s “bookkeeper.”

  The rollup was also managed with great stealth. An express condition of the first round of acquisitions is that they were to be kept secret. All of the acquired companies retained their management teams and their names, and, at least nominally, their own stock. Each of them then pursued a regional acquisition strategy in its own name and with its own stock or cash. The process in each region varied little from that in Cleveland; once the first couple of deals were done, the momentum for joining became irresistible. Almost everyone was in the fold by the end of 1878, with some trailing deals stretching on into 1879. Rockefeller’s name was still not widely known, and even industry experts didn’t know for sure what had happened until a Rockefeller lieutenant, Henry Rogers, who had himself come to the Standard with the Pratt acquisition, testified in 1879 that the Standard controlled “from 90 to 95 per cent of the refiners of the country.”

  Did the secrecy give the Standard an unfair advantage? Without question, although Rockefeller never apologized for it. It certainly made business sense, since even in Cleveland worthless companies had popped out of the woodwork as word spread that the Standard was making a clean sweep. An instance where “unfair” clearly tipped into “unethical” was in Baltimore. John Garrett of the Baltimore & Ohio undertook to organize his own local refinery interest in opposition to both the Pennsylvania Railroad and the Standard. He forged an alliance with the Camden refineries, the largest of the local players, and made elaborate anti-Standard plans without knowing that the Camden had long since become a Standard property. There were, of course, no disclosure rules governing corporate acquisitions, so no laws were violated, but Garrett almost certainly had a winnable common-law action against Camden and the Standard for deception.

  For the most part, Rockefeller appears to have paid reasonable prices. John Archbold, who had been one of the most pugnacious of Rockefeller’s critics before joining the fold, was point man in the oil region. (He eventually rose to president of the Standard and, true to form, was the most belligerent, indeed disrespectful, of all Standard executives in dealing with the government.) During a whirlwind of buyouts in 1877 and 1878, Archbold’s letters to Rockefeller clearly suggest that speed was more important than price: over one stretch of several weeks he reported a deal almost every other day. He also obviously had a great deal of authority to close transactions.

  For example, Archbold called the Valley Oil Works a “pretty well located small concern.” He opened the bidding at $8,000 to $10,000 and closed a deal at $11,000, which he admitted was a “large price for the property + do not doubt” that he could have waited them out. “[W]hether the difference is worth the aggravation is the question,” which accorded exactly with Rockefeller’s usual approach. Another works estimated their book value at $15,000 and asked $25,000. Archbold reported that they claimed to be making “a fair profit” and would “prefer to take their chances on [going it alone]. . . . I doubt we can trade with them much under the figure named.” In two other deals, he seems worried that he had gone too high: “As I telegraphed yesterday, completed the purchase of a Refinery + property at that point, for a consideration of . . . Twelve thousand dollars. I found it a very difficult trade to make + was compelled to make some concessions to the parties that I disliked very much to make.” And in yet another: “I am quite sure that in view of all the circumstances attending the case you will agree with me as to the fairness of the transaction.” Archbold also complained about continuing refinery start-ups: “The Fools as you see are not all dead,” but later decided that they were “pure black-mailing operators.”

  The takeover of distribution was much noisier, but was over by about 1883; the clashes, such as
they were, were the last in the American oil industry for a long time. The most spectacular, in 1877, pitted the Standard against Tom Scott, who had been watching Rockefeller’s advance with growing fear and envy. Rockefeller’s natural transportation allies were the Erie and the New York Central, who both shipped from Cleveland. In the early 1870s, he took over both railroads’ oil loading and shipping operations in New Jersey and Brooklyn and invested heavily in their expansion and modernization. Most oil was exported, and under William Rockefeller’s leadership, the Standard’s dominance of the international market was even greater than at home. Scott saw a direct threat to his own Philadelphia-based shipping facilities, which he controlled through a subsidiary, the Empire Transportation Co.