by H. W. Brands
AS VANDERBILT RETURNED his attention to the United States, he couldn’t ignore a growing threat to his steamboat empire. For decades the “Commodore”—a nom de guerre reflecting his exploits on water—had derided “them things that go on land,” as he called railroad trains. It didn’t help matters that one of his first experiences of trains ended in a wreck that nearly killed him. But despite Vanderbilt’s scornful antipathy, the new technology of transport advanced. Steam-powered railcars were introduced in England’s coalfields in the second decade of the nineteenth century; in the mid-1820s they began carrying passengers. The technology crossed the Atlantic a few years later, and in 1830 the Baltimore & Ohio Railroad started moving passengers and freight from the Chesapeake to points west. During the three decades till the Civil War, railroads short and longer ramified across the country from northeast to west and gradually south. Because their iron (later steel) rails could support cargoes much heavier than the mostly dirt roads of the era could accommodate, and because their steam engines outperformed horses, mules, and oxen, they soon captured most of the freight traffic on the routes they served. And because they were largely—though not completely—immune to disruptions by weather and afforded a smoother, faster ride than horse-drawn coaches, they became the technology of choice for paying passengers. The Erie Canal, which in 1825 opened the interior of the continent to inexpensive freight transport, had been operating hardly a decade when the Erie Railroad and other lines from the Atlantic to the Lakes began stealing its traffic. Railroads reached Chicago in the early 1850s and made that city the gateway to the upper Midwest. Steamboats on the Ohio and Mississippi held out against the railroads for a while longer, enjoying the advantage of natural rights-of-way. But by the Civil War the convenience of rail lines (which didn’t clog with ice during the winter or know the difference between upstream and down) was prompting the shrewder among steamboat men to look for alternative employment. (Pilot Samuel Clemens, for one, went into journalism in silver-bonanza Nevada before settling on fiction as Mark Twain. In the latter guise he gave the steamboats an extended lease on life in the American imagination.)
By 1865 the railroad was a comparatively mature technology. Steam-driven locomotives pulled (occasionally pushed) heavy cars along steel rails. Coal (or, less and less frequently, wood) boiled the water that became the steam. The very rich could afford private passenger cars; others made do with less sumptuous accommodations. Change continued in track and rolling stock, but not as rapidly as before.14
The technique of railroads—in contrast to their technology—changed dramatically, however. Railroads were the first really large corporations in American history, employing thousands of persons spread over entire regions. They were the first to develop the methods of corporate administration that would characterize modern enterprise. Other businesses—mercantile houses, plantations, factories—had typically set supervisors over workers, but the railroad corporations set supervisors over supervisors (over supervisors) in multilayered administrations. Railroads pioneered the kind of precise management of operations that other firms would follow. Initially this was a matter of safety: more than a few early trains collided, causing injuries and death, when their schedules overlapped. Later it became a matter of corporate survival, as competition compelled the roads to utilize their personnel and rolling stock with maximum efficiency. Railroads were the first industry to evolve a cadre of professional managers—men who specialized in railroad administration, developed standards for measuring performance, shared and debated new ideas, and published journals. “By an arrangement now perfected, the superintendent can tell at any hour in the day the precise location of every car and engine on the line of the road, and the duty it is performing,” the American Railroad Journal reported, regarding recent innovations on the Erie Railroad. “Formerly, the utmost confusion prevailed in this department, so much so that in the greatest press of business, cars in perfect order have stood for months upon switches without being put to the least service, and without its being known where they were. All these reforms are being steadily carried out as fast as the ground gained can be held.”15
Railroads were also the first large corporations to be publicly traded. The capital demands of the railroads required expanding the pool from which that capital might be drawn. One way of acquiring capital was to borrow it from banks or other lenders. Railroads did borrow, but often their business plans were too risky, their collateral assets too meager, or the banks too cautious to cover all the roads’ investment needs. The other technique was to sell partial ownership—that is, shares of the railroad corporation. This spread the risk among the many owners and allowed for more-rapid expansion than borrowing alone did. In the process it forced the blossoming of the financial markets of New York. On one day in 1830 the New York Stock Exchange reported a total of thirty-one shares traded; by the 1850s, after railroads discovered the stock market, tens of thousands of shares were traded each day. After the Civil War, as other industries learned from the railroads, hundreds of thousands of shares changed hands daily.16
The massive sale of shares led to something new in American economic history: the divorce of ownership from management. Previously, owners typically managed their firms, leaving little distance between the interests of ownership and the interests of management. But as ownership spread to hundreds and then thousands of people, the vast majority of whom had no responsibility for day-to-day management of the firm, owners and managers could develop interests that diverged and occasionally collided. In particular, owners might come to consider their shares simply a commodity to be bought and sold as prices fell and rose, regardless of the effect of such transactions on the operation of the firm. If a trader could speculate in cattle and cotton, as traders had for decades, why not in railroad stocks?
DANIEL DREW ASKED himself that question, and decided that railroad stocks were at least as promising as livestock. The New York & Harlem Railroad allowed an early test of the theory. Chartered to operate entirely on Manhattan Island, the Harlem, as it was called, later extended its lines north to Albany. Besides providing competition for steamboats on the Hudson (including Cornelius Vanderbilt’s), the road for the first time allowed people who worked in Manhattan to live outside the city and commute on a daily basis. Drew purchased enough shares to have himself named to the board of directors. From this position he could influence the operation of the road; he could also manipulate the price of its shares.
Vanderbilt bought into the Harlem not long after Drew did. But where Drew, as matters soon proved, saw the road as a speculation, Vanderbilt perceived it as an investment—a property to be held and improved rather than pillaged and sold.
Vanderbilt’s interest in the Harlem helped drive the share price up. The price rose further when Vanderbilt persuaded—probably through bribery, the commonest mode of persuasion in the New York politics of Tammany Hall—the city council to let the Harlem extend its line south from Union Square, its previous terminus, to Wall Street and the Battery.
As a director, Drew applauded Vanderbilt’s coup, for it increased the likely profits of the Harlem considerably. As a shareholder he should have been similarly pleased, for the promise of future profits enhanced the value of his own holdings. But it was as a speculator that Drew perceived the greatest benefit, for with everyone else bidding the Harlem up, he decided to bet on a fall. He sold the company short (that is, took present payment for future delivery of shares he didn’t yet own but hoped to purchase at a lower price before the delivery date). To prompt a fall in the price, he employed some persuasion of his own—again, almost certainly bribes—causing the city council to rescind the approval it had just given Vanderbilt.
The stock indeed began to fall, and Drew began counting his profits. But Vanderbilt, though new to railroads, was no innocent in the ways of speculators, and he snatched the falling Harlem stock before Drew could make good his short contracts. This left Drew in the lurch, as he had promised to deliver more shares than were
now available, and reminded him of the peculiar risk in short selling: that while a person who owns stock can lose no more than the purchase price of the stock, a person who has promised to deliver stock not yet purchased can lose an indefinite amount (as there is no upper limit on how high the stock price can climb before the short seller buys it). At this point or later Drew composed a couplet intended as warning to short sellers:
He that sells what isn’t his’n
Must buy it back or go to pris’n.
Drew avoided prison in this case by throwing himself on Vanderbilt’s mercy. So convincing was Uncle Daniel, who didn’t hesitate to cry when circumstances suggested that tears might soften a rival’s heart or at least blur the ink on a troublesome contract, that Vanderbilt offered him a private settlement.17
———
HAVING WON CONTROL of the Harlem, Vanderbilt proved himself a good manager. He invested heavily in track, cars, and locomotives, till the line became a model of efficient passenger service. Even Horace Greeley, no flack for capitalists, remarked the favorable change in the operation of the road. “We lived on this road when it was poor and feebly managed, with rotten cars and wheezy old engines that could not make schedule time,” Greeley wrote in 1867. “And the improvement since realized is gratifying.”18
But the Harlem was simply a start for Vanderbilt. He purchased the Hudson River Railroad, whose tracks paralleled those of the Harlem, and turned his gaze on the New York Central, which ran from Albany to Buffalo. The directors of the Central sought the help of Drew, notwithstanding his recent defeat at Vanderbilt’s hands and his longer record of double-dealing. Drew ran a steamboat line that ferried Central passengers from Albany to New York City, except when extreme weather made river travel risky. During these periods, the Central passengers switched to the railcars of the Hudson line, by a preexisting agreement. Vanderbilt waited till January 1867 and then abruptly canceled the agreement, leaving the Central shivering far from its Manhattan market. The directors shortly accepted Vanderbilt’s terms, yielding him the dominant railroad position in the Empire State.
Yet Vanderbilt had a larger empire in mind. If he could add the Erie Railroad to his network, it would give him control of a corridor from America’s primary port to its agricultural heartland. But the Erie was an elusive target, having earned a reputation as the “scarlet woman of Wall Street” for being bought and sold so promiscuously. And her main consort was Daniel Drew, who perfected his speculative gifts driving her shares prices this way and that. As the wisdom of the street put it:
Daniel says “up”: Erie goes up.
Daniel says “down”: Erie goes down.
Daniel says “wiggle-waggle”: it bobs both ways.19
Drew had allies, more formidable this time than in his previous bouts with Vanderbilt. James Fisk Jr. (“Jubilee Jim,” the “Barnum of Wall Street”) was hard to take seriously but impossible to ignore. “He is first, last, and always a man of theatrical effects, of grand transformations, and blue fire,” William Fowler wrote. “All the world is to him literally a stage, and he the best fellow who can shift the scenes the fastest, dance the longest, jump the highest, and rake up the biggest pile.” Fisk had been a peddler in New England, from a family of peddlers. “His wagon was magnificent, his four horses sleek and mettlesome,” Fowler explained. “At different points in his triumphal progress through the rural districts, he was met by a train of his subalterns, who filled the sheds of the country inns with their wagons, held audience with their chief, and obeyed his orders.” From peddling Fisk turned to dry goods, and from dry goods to paper products—that is, stocks and bonds. He opened a brokerage in New York, where he fell in with Daniel Drew, who taught him the arts of speculation—by swindling him out of everything he owned. “James saw his pile growing small by degrees and beautifully less,” Fowler related. “And early in 1868, as he told a friend, he was worth not a dollar in the world.”
Yet even in his poverty Fisk was magnificent. “The strong point of this man is his physique, so robust, so hale, so free from the shadow of every peptic derangement,” Fowler marveled. “His boldness, nerve, and business capacity are supplied by this physique, which also supplies him with animal spirits beyond measure. He is continually boiling over with jokes—good, bad and indifferent.” Fisk liked to recount how his father had been accused by an elderly woman of cheating her on a piece of calico worth twelve and a half cents. The son defended the old man to the woman. “I don’t think father would tell a lie for twelve and one-half cents,” Fisk said, “though he might tell eight of ’em for a dollar.” The grammatically fastidious Fowler was reduced to fragments to characterize Fisk: “Boldness! boldness! twice, thrice, and four times. Impudence! Cheek! Brass! Unparalleled, unapproachable, sublime!”20
Drew’s other ally in the Erie struggle was a different sort entirely. Jay Gould was as silent as Fisk was noisy, as thin as Fisk was full, as pallid as Fisk was florid. He had lost his mother at four, his first stepmother in the same year, a second stepmother not long after that. His father was a difficult man addicted to drink, whose angered neighbors took out their anger on his son. Jay fled home as soon as close calls with typhoid and pneumonia allowed. He taught himself surveying, then bought an interest in a tannery. His partner committed suicide, causing some of the customers to wonder whether Gould’s increasingly evident ambition—“Look at Gould; isn’t he a driver?” one said—speeded the self-destruction.21
Gould arrived in New York in time for the Civil War. He learned the ways of the speculators but distinguished himself for particular talents. He mastered the arcana of finance and displayed a preternatural single-mindedness. “When intensely interested in any matter,” a contemporary remarked of Gould, “he devoted his whole concentration of thought upon that one thing, and would seem to lose interest in things often of greater pecuniary importance but of not so much commercial fascination. He loved the intricacies and perplexities of financial problems.” His associates recognized his financial reveries by his unconscious habit of tearing paper into tiny bits, which piled around his chair like indoor drifts of snow.22
THE FIRST FEW years after Appomattox were a slow time for American journalism. Correspondents accustomed to reporting the victories and defeats of the battlefield found themselves—and their readers—hungry for similarly dramatic fare. New York alone had several dailies competing for the public’s penny (James Gordon Bennett in the 1830s had exploited the power of steam to produce the first penny paper, the New York Herald, and other publishers had followed suit). Politics provided intermittent entertainment, but nothing like the daily drama of war.
Eventually, however, the New York papers perceived in the stock market a substitute for the battlefield, and when Vanderbilt tangled with Drew, Fisk, and Gould, the press promptly labeled the conflict the “Erie War.” The opening salvo was a preemptive purchase by Vanderbilt and some allies of what seemed a majority of Erie stock; this was followed by a putsch against the board of directors, including Drew.
Drew again threw himself on Vanderbilt’s mercy, portraying himself as an old man (he was nearly seventy, but three years younger than Vanderbilt) who required his income from the Erie directorship to keep the wolf from the door. Again Vanderbilt relented. He let Drew remain with the Erie as treasurer and added him to the Vanderbilt alliance.
Drew avowed his gratitude—but almost immediately returned to his usual tricks. “Daniel Drew could no more refrain from playing his old games in Erie than the veteran gamester can withhold his hand from cards and dice,” William Fowler said. “It was play to him, but death to others.” Soon Drew was speculating in Erie stock against the interests of his new sponsor. Vanderbilt’s group was bulling Erie stock—conniving to push its price upward—and Drew exploited his inside knowledge of the scheme to unload some of his own shares on the group, adding to their burden but profiting at their expense. He also sold the stock short, hoping to reverse the price rise and profit still further at their expense.23
/> When Vanderbilt discovered Drew’s double cross, the battle escalated. He petitioned the New York supreme court (which, despite the name, was—and is—not the august court of final appeal in the state but a modest court of original jurisdiction) to remove Drew as treasurer of the Erie and, by means similar to those he had employed with the New York city council, obtained an injunction barring Drew from issuing any new shares in the company. Drew’s habit of doing precisely this was what had linked his name to the practice of stock watering, and Vanderbilt expected more of the same.
He didn’t move fast enough. Drew gathered Gould and Fisk and some other Erie bears—short sellers—and all worked to drive the price down. They spread evil rumors about the company’s prospects and the liquidity of its sponsors. When these efforts failed to stem the rise in Erie shares, Drew got an injunction staying Vanderbilt’s injunction, and he and Gould and Fisk, operating as the executive committee of the corporation, proceeded to issue fifty thousand new shares of Erie stock. Vanderbilt discovered that the more shares he purchased, the more hit the market. Fisk, directing the production of the new stock certificates, reveled in Vanderbilt’s discomfiture. “If this printing press don’t break down,” he said, “I’ll be damned if I don’t give the old hog all he wants of Erie.” (Fisk later called the outcome of the Erie War a victory for the First Amendment—for “freedom of the press.”)24
Vanderbilt summoned fresh allies, including a sheriff with a warrant to arrest the Erie trio and seize the corporate offices. But word of the lawman’s approach preceded him. “There were hurryings to and fro in the Erie Railroad Office,” William Fowler recorded. “A few moments later and the policeman on that beat observed a squad of respectably dressed but terrified looking men, loaded down with packages of greenbacks, account books, bundles of papers tied up with red tape, emerge in haste and disorder from the Erie building. Thinking perhaps that something illicit had been taking place, and these individuals might be plunderers playing a bold game in open daylight, he approached them. But he soon found out his mistake; they were only the executive committee of the Erie Company, flying the wrath of the Commodore and laden with the spoils of their recent campaign.”25
