The First Tycoon

by T. J. Stiles

  Perhaps no other example better demonstrates the symbiotic relationship between railroads and industry. In part, the demands of the railroads themselves invigorated production. They consumed huge amounts of pig iron and coal, for instance; production of those commodities more than doubled in the decade after the Civil War. When Andrew Carnegie left the Pennsylvania Railroad in 1865, he invested in an iron mill, a bridge-building concern, a sleeping-car company, and other businesses that fed his former employer's voracious appetites—and helped turn Pittsburgh into a smoke-shrouded manufacturing center.3 In addition, the railroads' craving for freight led them to radically cut rates, which encouraged new industries by lowering shipping costs. When petroleum took off in the 1860s, new lines sprang into existence to serve remote wellheads; trains clacked into the mushrooming drilling towns bearing iron, lumber, foodstuffs, and other supplies, and chuffed out hauling barrels of oil. Cleveland boomed with more than fifty refineries that clustered outside of town amid a forest of wooden tanks, pouring a waste product called gasoline into the Cuyahoga River, which caught fire regularly. The city began as a Lake Erie port, but now refiners could choose from the Pennsylvania, Erie, or Lake Shore railways to move their product for export.

  When Vanderbilt took over the New York Central, he immediately inquired into its relations with the smaller lines being built into the oil region. That investigation naturally brought Rockefeller to his attention. Rockefeller and Flagler were to oil what the Commodore was to the rails: the great consolidators. They fought aggressively to bring their burgeoning industry under their own control; in so doing, they also worked to elevate Cleveland over Pittsburgh as a refining center (which they accomplished in 1869). That suited Vanderbilt's interests. Pittsburgh was the special preserve of the Pennsylvania, which currently carried the bulk of the oil traffic, but the Central connected to Cleveland through the standard-gauge Lake Shore Railway4

  Young Rockefeller often attended to his company's interests in New York at an office on Pearl Street, where he received the Commodore's request for a meeting at noon on April 18. He refused to go. “We sent our card by the messenger,” Rockefeller wrote to his wife in Cleveland, “that Van might know where to find our office.” The response showed Rockefeller's confidence; with so many routes to port, he knew the strength of his bargaining position. But the Commodore's gravity was too powerful to escape. In the afternoon, Rockefeller stopped by the St. Nicholas Hotel and saw his card in the hand of Amasa Stone Jr., a New York Central director from Cleveland. Stone explained that the Commodore had assigned him to secure the oil traffic. “We talked business to Amasa & guess he thinks we are rather prompt young men,” Rockefeller wrote. At Stone's urging, he met with Vanderbilt that evening in the Manhattan Club, where they began a long, frustrating, but fruitful relationship.

  The power of attraction worked both ways. Vanderbilt could be solicitous as well as commanding; Rockefeller himself wrote, “He is anxious to get our business, and said thought he could meet us on the terms.”5 Within the railroad industry, too, business logic demanded that the Commodore build close relationships with lines to the west. Previously freight from Chicago, Detroit, or Cleveland went by boat over the Great Lakes to Buffalo; now trains hauled most of it. The connecting lines needed to cooperate to coordinate schedules, set rates, divide costs, and allow freight to move without breaking bulk if at all possible. As early as May, William wrote to James F. Joy, chief executive of the Michigan Central and a broad network known as “the Joy roads,” and asked him to meet with the Commodore. William assured Joy, “There is not the least disposition to make exactions.… You will find the right spirit here.” On December 17, after months of negotiations, the Vanderbilts secured a comprehensive agreement for through traffic from the major western cities—Chicago, St. Louis, and Cincinnati—to New York and Boston. The signators met in the Commodore's office on West Fourth Street; they included Joy, for the North Shore lines (Michigan Central and Great Western of Canada), Chester W. Chapin for the Western (soon to be known as the Boston & Albany), and executives of the South Shore lines, as well as Vanderbilt himself. Diplomacy, cooperation, and consolidation were emerging as themes of his reign.6

  As in business, so too in his personal life. When his sister Phebe stepped into his household after Sophia's death, she brought company. They were two visitors—reportedly his cousins—from Mobile, Alabama: a widow named Martha Crawford and her daughter, the twenty-nine-year-old Frank.7 William H. Vanderbilt remembered meeting them on a Sunday evening in 1868 at Phebe's house, where they stayed as guests. The curiously named Frank was especially close to her mother; years before, Frank had married a John Elliott in Mobile, but refused to move out of her mother's house, and a divorce soon followed. Martha Crawford had brought her daughter north during Alabama's brutal summer to improve her health.

  Vanderbilt found himself intrigued by Frank's Southernness, and much else. The child of a once-aristocratic family, she boasted the musical accomplishments expected of her social status, with a fine voice and skill at the piano. One observer described her as “quite a good-looking, though by no means beautiful, woman.” Rather, Vanderbilt admired her immense dignity (“queenly,” by one account) and her body (as much as could be seen under the dirigible dresses of the era).8 He missed her when she and her mother went home in October. On the 24th, he received a letter from her, and put everything else aside to dictate a reply:

  I am happy to hear that you and your dear mother arrived at home all straight, after so long a visit amongst—as it were—almost entire strangers to you previous to your leaving home. I hope you may continue to improve all the time—you in particular, until you will turn the scale when 125 pounds is on the opposite balance. This is weight enough for your beautiful figure. Please… accept of the kind wishes of Miss Phebe, Mrs. Osgood, Mrs. Dustan and family, William & all the rest as well as the subscriber.9

  The haste of the letter, of course, spoke to his romantic interest—as did the way he turned the topic of her health into praise for her figure. She gave this grieving old man hope for the future.

  What he intended to do in the future remained a mystery to those around him. Vanderbilt had more than one surprise in store for his family, and the world.

  VANDERBILT RATHER LIKED his enemies. For decades, he had deftly switched from enmity to friendship, embracing Drew, Morgan, Garrison, Corning, and others once their wars ended. He never took business disputes personally. He made an exception for Jay Gould and Jim Fisk. He had admitted to them directly that they were the ones who had ensured his personal humiliation in the Erie War. Even worse, they broke the gentlemen's code of business combat. His other foes kept silent about secret business battles, but Fisk and Gould freely told the press every grimy detail, which infuriated the Commodore. He regarded Fisk as reckless, and didn't like the looks of Gould. “God Almighty has stamped every man's character upon his face. I read Mr. Gould like an open book the first time I saw him,” Vanderbilt later said. “No man could have such a countenance as his, and still be honest.”10

  On November 15, 1868, Gould called on Vanderbilt. The younger man had taken office as the Erie's president, and it had strained his considerable capabilities to keep the troubled railroad afloat. The company had borrowed heavily against its own stock to pay off Vanderbilt; knowing this, Vanderbilt had sold his remaining fifty thousand shares in small batches on seller's option (retaining the right to decide when to deliver the stock). Then he delivered the entire lot on a single day, staggering the share price and nearly forcing the Erie into bankruptcy. Gould narrowly steered the Erie through this flood, but he now viewed Vanderbilt with deep suspicion.11

  Gould asked the Commodore if he had anything to do with a lawsuit that would be filed the next morning by August Belmont, who represented foreign investors, demanding that the Erie be placed in receivership. Vanderbilt dismissed the notion. It was obvious he had nothing to do with it, he said; if he had a stake in the lawsuit, he would have sent the attorney Charle
s O'Conor into court.12

  Unfortunately for Vanderbilt, O'Conor had more than one client. The next morning, he showed up at the courthouse as Belmont's counsel. Taking this as confirmation of Vanderbilt's role in the lawsuit, Gould and Fisk crafted a plan to undo the grand settlement of the Erie War. On December 5, Fisk rode a carriage through a howling storm to 10 Washington Place, and produced a carpetbag stuffed with fifty thousand Erie shares. Take them back, he demanded, and return the money paid for them—along with the $1 million “bonus” paid for the sixty-day call on the other fifty thousand shares. Vanderbilt threw him out. Gould then filed a lawsuit with the same demands.13

  Vanderbilt had faced worse insults than those made in Gould's affidavits and Fisk's flamboyant orations, but these two men irritated him as no one ever had. On December 6, he sent a carefully worded letter to the New York Times, declaring all the assertions in the lawsuit to be false. “I have no dealings with the Erie Railway Company, nor have I ever sold that Company any stock or received from them any bonus,” he wrote. Even the best historians have treated this as nonsense; Maury Klein, for example, calls it “a lame denial.” In fact, it was literally accurate. Vanderbilt had insisted during the settlement that his sale of stock technically be to Drew, who contributed $500,000 to the purchase price; and Erie had paid $1 million not as a bonus, but for the sixty-day call. (Gould was not a party to the settlement talks, so his allegations may have been sincere.) But Vanderbilt walked a twisted path in trying to defend his honor without revealing the full story, and it led to a dead end. Fisk showed the press the two checks that comprised the $1 million payment, which seemed to prove his case. Rather than argue and fully expose the secret deal, Vanderbilt fell silent.14

  Gould likely saw no direct profit in his lawsuit. Rather, it gave him leverage in future negotiations, and put stress on his enemy. The real fighting consisted of a rate war that had flared up in October, when Gould introduced what the press called “starvation prices.” He also announced a planned line to the Niagara Suspension Bridge (to gain access to the North Shore route) and, most important, he opened secret talks with the South Shore lines for a connection to Chicago.15

  In the end, the latter intrigue would prove to be the most consequential aspect of these hostilities, for it would force Vanderbilt into yet another war of conquest. In the meantime, the public spat announced to the world that he had survived the Erie War merely to acquire a new set of enemies—the most cunning and dangerous of his career.

  BESET BY EXTERNAL FOES, Vanderbilt surely felt pressure to adopt a conservative domestic policy at the end of his first year as president of the New York Central. He did not. Instead he took two bold steps that startled contemporaries, and helped lay the foundation for the modern corporate economy.

  The first revolved around the seemingly dry question of capitalization. Rumors had long circulated that he would issue new shares to existing stockholders. As early as January 9, John M. Davidson had told Corning, “I think certain sure, a stock dividend will be made on Central.” But months had passed without one. In early December, brokers barely blinked at whispers that John Morrissey, Vanderbilt's prizefighting friend, was madly buying Central.16

  On Friday, December 18, Central treasurer Edwin D. Worcester handed Vanderbilt a report. Its contents surprised him. He consulted his trusted son-in-law Horace Clark and began to track down directors for an immediate meeting. On Saturday evening, they assembled at Clark's house. The Commodore announced that Worcester had finished a six-month review of the line's construction accounts, which showed a remarkable increase in property over the previous several years. To represent it, Vanderbilt proposed an 80 percent stock dividend. For each one hundred shares held, a stockholder would receive scrip representing eighty new shares. (Stock was customarily bought or sold in blocks of one hundred shares.) Once converted into stock, the scrip would add $20 million at par value to the Central's existing $25 million stock capitalization. Vanderbilt recused himself from the vote, but his proposal passed without opposition.

  Why issue scrip, and not actual stock? As Clark later explained, they were trying to distinguish themselves from the Erie by acting lawfully. The Central treated the scrip as if it were identical to stock, but the board would await explicit authorization from the legislature before converting it into shares. The scrip served another purpose as well: Judge Barnard recently had enjoined the board from issuing new stock; the use of this instrument dodged the order but performed the same function.17

  The news drove the financial community into a frenzy. Not only did the Central prepare the way for nearly doubling its stock, from $25 million to $45 million, it also declared a semiannual dividend of 4 percent on both shares and scrip (amounting to $1.8 million). On Monday morning, Central shot up from 133 to 165. But not everyone in Vanderbilt's circle was pleased. He had given no prior warning to the board, except to Clark and Chester W. Chapin, who had designed and printed the scrip in advance. Many of his closest friends and one of his sons-in-law (most likely Osgood) complained about the secrecy. Vanderbilt replied, “You shan't speculate on us.” He believed that some of his own directors had gone short on the stock; as he later explained, “I would not trust many of them.” The surprise stock dividend caught them out, and delivered a sharp lesson in trying to profit off Vanderbilt's company18

  The sheer size of the issue aroused intense emotion, even among leading railroad men. James F. Joy and John M. Forbes considered it a “rascally abuse of stock dividends.”19 But why should a simple financial transaction, conducted between the railroad and its existing shareholders, arouse such outrage? The answer is that stock watering occupied the center of the national debate over the emerging new economy.

  In part, the argument was pragmatic. The New York Sun wrote, “If the road can really earn dividends on $45,000,000, it is all right to water the stock.” But the Chicago Tribune countered, “Its practical effect is to swindle honest people who hold the stock as an investment.… The stock has been watered to the point where no dividends can be made.”20 The Central immediately declared a dividend, though, which seemed to refute that complaint. Furthermore, Vanderbilt apportioned the new shares evenly among the shareholders. By contrast, the Erie during its eponymous war had thrown convertible bonds on the market; when these were converted into stock, they diluted the stake of existing shareholders by reducing the relative proportion of their holdings. And yet, the Commodore suffered equally severe criticism.

  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 incr
ease 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