by T. J. Stiles
For critics, the issue was not fairness, but the very nature of the corporate economy as envisioned on January 1, 1869—the date when the North American Review published “Railroad Inflation,” by Charles F. Adams Jr. Though written prior to the December 19 meeting at Clark's house, this essay made an argument against stock watering that reveals the persistence of a tangible understanding of the economic universe and a continuing resistance to abstractions.
To Adams, if a thing wasn't a thing, it was nothing. Wealth consisted only of physical objects—goods, not services. “Transportation cannot add to wealth,” he wrote. For all the merchandise the railroad system carried, “it never makes one ton two.” Therefore, railroad revenue “constitutes a tax on consumption”—essential, perhaps, but to be jealously watched.
Adams saw railroad dividends as a necessary evil. Like virtually everyone else, he did not consider them the simple division of profits among stockholders. Rather, they were “interest on capital,” a due return on the amount originally invested in construction. Americans discussed the par value of a railroad share as if it were money deposited in a savings account, an account from which all interest must be drawn, and never allowed to compound. Even the market value of the railroad's physical assets—its “book value,” or what it would bring if its property were sold—did not enter into it; only the cost of construction mattered. And on this capital an interest of about 6 to 10 percent was politically acceptable—indeed, expected by investors and the broader public alike.
In this light, any increase of stock was a fraud unless it directly reflected money expended on new construction, and any dividend paid on those fraudulent shares was theft, fake interest paid on “fictitious capital.” It was widely believed that stock watering caused railroad companies to raise their rates to pay the expected dividends on the excess stock, bleeding the public for the benefit of those who were in on this paper-certificate magic trick. Many railroad men feared that stock watering would call into question the validity of all corporate shares. Henry V. Poor, the leading chronicler of the industry, wrote, “Such enormous additions to the capital of companies, without any increase of facilities… threaten more than anything else to destroy the value of railway property as well as to prove most oppressive to the public.”21
Did Vanderbilt argue against this logic? Did he make a case that share price should reflect earnings or growth or other factors, rather than initial construction costs? Did he declare that dividends should represent a division of profits—that competition determined his rates, not his need to pay dividends on “fictitious capital”? No, he emphatically did not. He did believe that the Central was worth far more than its existing par value; but he justified his actions by releasing a letter from major stockholders (ranging from Frank Work to John Jacob Astor II) that pleaded with him to increase the stock in order to represent prior real estate purchases and construction, made with money that should have been paid out as dividends. Whether Vanderbilt created the letter himself as political cover is irrelevant; the point is, he defended himself in terms that matched those of his critics. Indeed, Worcester testified that, at Vanderbilt's request, he had indeed conducted a six-month investigation of such prior expenditures. The Commodore pronounced himself “astonished” at how large a figure Worcester found. His insistence on the justice of all this would lead him into a bitter fight with the U.S. Treasury, in which his sincerity would become all too apparent.22
The future is made by those in the present. The acts that Vanderbilt performed out of the orthodox logic of his times undermined that very logic. A day was coming when the economic mind would relinquish the physical basis of stock price, the insistence on par value. A day was coming when the price of a share would be released to flap into the air, its height determined strictly by the market—the uplifts and downdrafts created by millions of buyers and sellers. A day was coming when dividends simply would mean the division of profits. Vanderbilt prepared the way for this time, and in practice he operated on many of its principles, though only on a subconscious level. He did not “concoct” a justification of the stock dividend, as one writer claims; he believed it. But sometimes actions really are more potent than words.23
The second dramatic step that the Commodore took as president of the Central needed more time to mature, but its significance would be far more apparent to the public and historians alike. It would give his name to an era—the era of consolidations.
ON MARCH 3, 1869, a committee of the New York State Assembly settled into chairs in a private parlor on the third floor of the Fifth Avenue Hotel in Manhattan. They gathered to hear testimony regarding the New York Central's stock dividend. But the proceedings seemed peculiar to Hudson C. Tanner, the stenographer. “Everything was on the dead quiet,” he wrote. No one was allowed in except the witnesses. They heard from Edwin Worcester, then Horace Clark. During Clark's testimony, the Commodore strode in, “wearing his traditional white choker, and appearing as innocent as a little, white lamb,” Tanner snidely recorded. “All the members of the Committee were introduced to him, instead of his being introduced to the members of the Committee. That was, of course, due entirely to the respect which the Committee had for an old steamboat captain.”
“Mr. Clark said it as he should say it,” Vanderbilt told the committee when his turn to speak came. “I can do no better than he has done on that subject, only he talks a little too much! That is all the trouble. That is a general fault with lawyers.” Obviously comfortable in front of his inquisitors—if not in outright command—he defended the $20 million scrip issue at length, engaged in banter with Clark, turned aside to question Worcester, and digressed into the tale of how he and Daniel Drew had saved the Harlem in 1857—all testimony that the committee politely struck from the published record, along with his occasional “damn.”24
The committee duly reported a bill to the assembly to authorize the conversion of the scrip into stock. At the same time, a bill advanced to allow Vanderbilt to consolidate the Central with the Hudson River, to create a unified railroad from St. John's Park in Manhattan to the shores of Lake Erie. This second act would prove even more momentous than the enormous scrip dividend, for it would create a corporation on an unprecedented scale. Long envisioned as a practical matter (Dean Richmond had proposed the same thing years earlier), it promised to end the most troublesome fragmentation of the railroad system in New York, introduce greater efficiency, and reduce costs to shippers and consumers. More broadly, it represented the abandonment of the older, local purposes which had first brought railways into existence, as a truly national network emerged. No longer semipublic bodies, railroads now functioned entirely as business enterprises, operated for maximum profit, bought and sold in the market, managed as business logic would dictate. That logic led inexorably to consolidation. The day of the giant corporation had arrived.
On May 20, Governor Hoffman signed both bills into law. In one day Vanderbilt nearly doubled the capitalization of his largest company and opened the door to increase it another 50 percent by annexing the Hudson River. It would take the rest of the year before the consolidation would be complete, but the most difficult step—the political step—had been taken. And Hoffman signed another bill that would help Vanderbilt to make his mark in history: an act authorizing the Harlem Railroad to build, at Forty-second Street and Fourth Avenue, a grand, central depot.25
Vanderbilt immediately convened boards of directors and meetings of stockholders to approve the scrip dividend and the consolidation. He cast votes in his own name on 23,600 Central shares (one-tenth of the total voted). His son William voted seventeen thousand; his grandson Cornelius Vanderbilt Jr. seventeen thousand; and his grandson William K. Vanderbilt another ten thousand. Already the Commodore was laying the foundation for his dynasty, settling a large portion of his still-growing estate on the heirs of his heir.26 Indeed, his family in general prospered. Another favorite grandson, Vanderbilt Allen, went into the railroad supply business at this time, forming th
e partnership Haven & Allen. Even Corneil partially righted himself that spring. On March 5, Horace Greeley approached the incoming administration of President Ulysses S. Grant to request a job for Corneil in the Internal Revenue Bureau. Corneil himself went to Washington to press his case (borrowing money from Greeley of course). On May 1, he began work as superintendent of the bureau's Bonded Warehouse in New York under the collector, Joshua F. Bailey, with a salary of $175 a month.27
Everything seemed to go Vanderbilt's way. On February 1, the Harlem achieved such prosperity that he ceased to subsidize it with noncompetition payments from the Hudson River. In April, he closed a very old wound: the last reminder of Joseph L. White. Strong informed his diary “‘Settlement’ of the ancient suit of Nicaragua Transit Co. stockholders against that nefarious old Cornelius Vanderbilt, much talked of.” The lawyers who had nursed the case for a dozen years absorbed most of the more than $400,000 that Vanderbilt agreed to pay; much of the rest went to speculators who had bought stockholders' claims for a penny on the dollar.28
His social life, too, took pleasurable turns. On May 25, he and his brother Jacob attended the opening day of the spring races at the Prospect Park Fairground in Brooklyn. They drove together through the gate, between carts piled with oranges, oysters, and other treats for sale, and made their way to the clubhouse, “its verandahs crowded with the beauty and fashion of the city and from one of which the Fourteenth Regiment Band discoursed sweet music,” the Brooklyn Eagle reported. Jake remained close to Cornelius; he often brought his trotters across from Staten Island on the ferry to race on Harlem Lane or Bloomingdale Road against his brother, snorting at the brokers who tried to curry favor with the Commodore by letting him win.29
Vanderbilt had hardly forgotten about Frank Crawford. No evidence speaks to when she came north again from Alabama; most likely it was not until the summer heat made Mobile unbearable. In the meantime, he acquainted himself with two most unusual sisters, Victoria Woodhull and Tennessee Claflin.30 In late 1868, the pair appeared at 17 Great Jones Street, not far from Vanderbilt's home, and began to advertise themselves as “magnetic physicians and clairvoyants,” according to the New York Times. “They charged $25 in advance for their services, advertised largely and guaranteed wonderful cures.” They attracted many clients, and for good reason. Emetics, bleeding, blistering, and mercury remained in the conventional doctor's arsenal; when fired at patients, they felt it. The role of unconventional healer, like that of spiritualist medium (or “clairvoyant”), remained one of the few professional roles largely reserved for women. Since femininity was seen as passive, women were thought to better serve as vessels for voices from the beyond, or invisible magnetic rays that passed through their hands into the patient.31
Victoria, at thirty-one, was a few years older than Tennessee (or Tennie C, as she preferred to be called). Both boasted striking features, with large eyes, dark hair, and full lips, though Tennie's face was softer, rounder, less angular. Victoria's marital status remained vague. At fifteen she had married Dr. Calvin Woodhull, whom she divorced, and had remarried a Union army veteran named James Harvey Blood (whom she later may have divorced and married again). Tennie, voluptuous and single, exuded sexuality On one occasion, the Herald interrupted an account of a trial to observe “that Tenny C. displayed in the most aggravating way A WONDROUS SHIRT FRONT.” In an age of strict social standards, her sensuality was an explosive weapon that she wielded as she chose, flirting with influential men in letters and conversation.32
Vanderbilt liked and trusted his primary doctor, Jared Linsly but he didn't always like his treatments. Though he generally enjoyed abundant good health—he ate sparingly, drank little, and remained fit, alert, and active—he was an old man. He had been severely injured over the years in railroad and driving accidents, and felt the aches and pains that come with one's eighth decade. His daughter Mary La Bau obtained a “prescription” for him from a spiritualist healer named Tafts. Vanderbilt showed it to Linsly. “I think he was a believer in the efficacy of the medicine, and thought that the person [Tafts] could do him good,” Linsly said. “He was relieved in his sufferings by being rubbed; that was as far as I supposed that he believed in magnetism.”33
How and when Vanderbilt met Woodhull and Claflin remains unclear. Even less certain is his knowledge of their mysterious past. It does seem, though, that he felt particularly relieved when Tennie rubbed him. Soon the names of Woodhull and Claflin would be very publicly intertwined with that of Vanderbilt.34
ON FEBRUARY 24, 1869, the New York Herald reported that Vanderbilt had developed a “plan for a consolidation of all the railways connecting the Central with Chicago, thus… making but one corporation between New York City and the metropolis of the West.” This project was to be carried out in the year ahead.35
The Herald's account struck many as obvious. The Commodore's seizure of the Harlem, the Hudson River, and the New York Central—and his announced plans for amalgamating the latter two lines—made it seem as if he would buy up and consolidate every connecting line between St. John's Park and Chicago. And reaching Chicago made all the difference. With a population soaring toward 300,000, this metropolis teemed with stinking stockyards, slaughterhouses, and factories. All this put it on the leading edge of changes in the economy. “Although Chicago lagged far behind Philadelphia and New York, the nation's leading manufacturing centers, in investment and output,” notes historian Eric Foner, “a larger proportion of its labor force worked for firms with fifty or more employees.” It was big in the biggest new thing: bigness.
Chicago had emerged as the commercial hub of the West. The wartime closing of the Mississippi had crimped the trade of its primary rival, St. Louis, which lacked a bridge across the great river. But Chicago captured the commerce of the region through a spider's web of rails that spread out from Cook County Between 1860 and 1873, more than ten thousand miles of track were laid in the upper Mississippi states, putting 98.5 percent of all land in Illinois within fifteen miles of a railroad. Farmers in all but the most remote tracts of Minnesota, Wisconsin, Iowa, Missouri, Nebraska, and Kansas gained access to railheads, integrating them into national and international markets. The agricultural products of this region—the nation's primary export—moved to Chicago first on their way east for consumption or shipment overseas. To the trunk lines, nothing was more important than an untroubled connection to the Windy City.36
And yet, it is a mistake to assume that Vanderbilt thought it necessary to own the lines that connected the Central to Chicago if he were to capture their traffic. Admittedly there were great advantages to having a continuous line under one management: lower overhead, for example, and greater efficiency in routing trains and handling freight. Still, the inefficiencies could be limited under agreements such as those signed by Vanderbilt and Joy in December 1868. Indeed, throughout Vanderbilt's reign much of the Central's freight would come over Joy's Michigan Central (via the Great Western of Canada), which was largely owned by New England investors and maintained consistently healthy relations with the Commodore.
More important, the New York Central had joined with its connecting railroads to establish cooperative fast-freight lines. In proportion to mileage, member companies contributed cars, which were painted a uniform color. Each fast-freight line had its own management that solicited freight, issued waybills, and fixed rates, but its profits were distributed to the participating railroads. Often overlooked by historians, fast-freight lines reduced the costs of through freight, even across separate railroads, by eliminating the need to break bulk (that is, transfer freight from one car to another) and increasing managerial efficiency. Finally, the Central offered the best access to the nation's most important port (and to Boston). It was at least as necessary to western railroads as they were to it. In a world without enemies, Vanderbilt would have felt no need to buy control of his connections.37
But then there was Jay Gould. As Alfred D. Chandler Jr. wrote, “No man had a greater impact on the st
rategy of American railroads.” An ambitious and farsighted chief executive, he embarked on an aggressive effort to break the isolation of the Erie—with its unusual six-foot gauge—by seizing connecting lines. He would fail in the end, but his campaign forced his competitors, including Vanderbilt, to begin the process of constructing interregional railroad systems of mammoth proportions.38
Gould began by leasing the broad-gauge Atlantic & Great Western, which added hundreds of miles to the Erie's network. Next he purchased stock and proxies to get control of the Pittsburgh, Fort Wayne & Chicago (the “Fort Wayne”)—which happened to be the Pennsylvania Railroad's primary connection to Chicago. This move jarred the Pennsylvania's president and vice president, J. Edgar Thomson and Thomas A. Scott, out of their complacency. Scott quickly secured a classification act from the Pennsylvania legislature that rigged elections to the Fort Wayne board. (As an indication of how thoroughly Scott dominated the state government, the bill was signed by the governor thirty-four minutes after it was introduced.) On June 21, the Pennsylvania leased the Fort Wayne to forestall any further trouble.39
Gould turned to the fragmented South Shore lines, in which no one party exerted dominance. This route had entered a turbulent period of rapid consolidation, offering him the perfect opportunity to align it with the Erie. In March, the Cleveland & Toledo merged with the Lake Shore Railway; in May, that line merged with the Michigan Southern & Northern Indiana, forming the Lake Shore & Michigan Southern Railway Company; in August, that line merged with the Buffalo & Erie (itself the product of an earlier consolidation). That made the Lake Shore (as it will now be called) a continuous line from Chicago to Buffalo, with branches to Detroit, Grand Rapids, and the oil regions of Pennsylvania.40
On May 31, Horace Clark and James Banker boarded a train to Cleveland for the Lake Shore & Michigan Southern's first stockholders' meeting. They had in their care the Commodore's interest in the new company—an interest, they soon learned, that faced strong opposition from LeGrand Lockwood. A banker, broker, and onetime treasurer of the New York Stock and Exchange Board, Lockwood wielded immense power in Wall Street. Short and rather fat, he had come to New York from Norwalk, Connecticut, at the age of eighteen, married a New York belle, and rapidly rose to riches—prominently displayed in a mansion he built in Norwalk for a reputed $750,000. With the half a million or more he earned each year, he traveled to Europe to purchase fine art and won acceptance in the most aristocratic parlors. He was also a close ally of Henry Keep and had suffered in Vanderbilt's blockade of the Central in January 1867.41
