Still, the forces of skepticism were ascendant. Following government rebuffs and an unsuccessful fund-raising trip to Britain—and possibly demoralized by constant ridicule in the press—Whitney withdrew from the fight in 1852, marrying a wealthy widow and retiring to the life of a gentleman dairy farmer in Maryland. He died in 1872, having lived long enough to see his old dream realized with the pounding of a golden spike into a Utah hilltop.
For the spark Whitney lit had not gone out. With the outbreak of the Civil War, the necessity of moving troops and equipment cross-country endowed his idea with renewed urgency in Congress and inspired a surge of investment interest. A quartet of California business leaders founded the Central Pacific Railroad Company, and another group of eastern investors created the Union Pacific. The former were to run their line eastward from Sacramento, and the latter westward from the Missouri River, both to meet somewhere in the heartland. The government would grant them large swaths of territory on either side of the tracks as they laid the rails, as well as capital from bond financings of $16,000 to $48,000 per mile of completed track (depending on the demands of the topography). Many observers deemed the subsidy lavish; others derided the venture as foolhardy. To some, the entire enterprise looked like an irresistible opportunity for profiteering at public expense. On July 1, 1862, after the Pacific Railroad Act was signed by President Abraham Lincoln, the California group’s principal lobbyist in Washington, Theodore Judah, dispatched a telegram home, reading, “We have drawn the elephant. Now let us see if we can harness it.”
* * *
MEANWHILE, IN THE Northeast, Vanderbilt was wrangling with a different elephant. The builders of the New York & Harlem had tried to take advantage of the potential of rail travel by extending the road north into Westchester County. Then the line fell victim to the common ailments of American railroads of the era—looting by dishonest and incompetent executives, a lack of operating credit, physical decrepitude. Vanderbilt had been providing financial support to the Harlem Railroad—sometimes its only financial support—since about 1857. But starting in 1862 he took a more serious interest in the line, with the goal of becoming its sole proprietor. At that time the stock was trading at three cents a share and finding no takers. To Vanderbilt, however, the shares seemed alluringly priced, the intrinsic value of the line’s right of way down the center of Manhattan unappreciated by the investor community. The burgeoning national interest in railroads spurred by the fledgling transcontinental project may also have sharpened his appetite.
As Vanderbilt’s initial target in the railroad industry, the Harlem would provide him with the opportunity to put into practice a set of precepts for railroad management that his biographer Croffut summarized as follows: “1, buy your railroad; 2, stop the stealing that went on under the other man; 3, improve it in every practicable way within a reasonable expenditure; 4, consolidate it with any other road that can be run with it economically; 5, water its stock; 6, make it pay a large dividend.”
Most of these rules were familiar enough to railroad operators of that early era. The second and third, however, were new. Cornelius Vanderbilt perceived that if one was determined to squeeze every dollar out of a railroad, it would prove more lucrative in the end to first turn it into a going concern. What made this concept revolutionary was that up to then almost no one had conceived the railroad business as anything other than a means to an end—the end being plunder.
There were two chief paths to extracting maximum value from the business with a minimum of the hard work of laying iron rails and operating locomotives and freight cars. The more direct option was to act as both capitalist and contractor—collect investment capital from individuals or the government for the purpose of building a road, and pay the money out to a construction firm in which one was a silent partner. The opportunities to inflate construction costs were almost limitless, the goal being to pocket whatever was not actually needed to lay rail across the territory. (The corollary to Vanderbilt’s sixth rule was that the “large dividend” should be paid chiefly to the promoters themselves.)
The other path to plunder ran through the securities markets. At the time Vanderbilt set his eyes on the Harlem, the actual construction of railroad lines, much less their improvement, seemed to take a backseat to the manipulation of railroad paper. This was natural, in its way. The explosion of railroad building across the West could seldom be justified by existing passenger or freight traffic, for the lines traversed a wasteland. But given the fifth precept of railroad management, as outlined above, a towering edifice of waterlogged stocks and bonds could be easily erected upon a modest pedestal of capital expenditure.
The promoters exploited a popular craze for railroad shares that far outstripped rationality or practicality, but was based instead on the new technology’s supposed potential to transform barren territories into bustling Edens. Wrote historian George Rogers Taylor: “People who had never seen a track, to say nothing of a steam locomotive, invested their savings and gave support to promoters who, even before many of the major technical problems of railroad building had been solved, planned ambitious lines crossing unsettled territory, spanning rivers, and tunneling mountains.”
The issuance of watered railroad stock was so common a practice on Wall Street that it was often forgotten that the putative goal was to improve the transportation network to move people and goods farther and faster. In the early stages of Vanderbilt’s campaign to acquire the Harlem, the manipulators mustered against him in full cry. “The stock was the favorite one of the whole catalogue, and was operated in, boldly, both on the long and short side, in amounts so large that the whole capital stock sometimes changed hands in a single day,” recalled William Worthington Fowler, a veteran broker. “The idea that [Vanderbilt] was buying it for investment seemed intensely funny to the brokers. They sold it right and left, in the most dashing style, amid the laughter of their associates.”
But Vanderbilt was deadly serious. “The Commodore did not believe in buying or selling invisible things,” Croffut reported. “He bought opportunities, and sold achievements. . . . So now he went into Harlem stock, in the winter of ’62–’63, in the honest conviction that it was a good thing to buy and own.”
Bringing in as vice president his son William, who by then had proved his mettle by turning a decrepit Staten Island rail line into a profitable business, Vanderbilt repaired the deteriorating Harlem and upgraded its rolling stock of locomotives and carriages. The shares began to gain value, chiefly on rumors that the Harlem was about to be awarded a new franchise from the Common Council of New York, a rumor seemingly confirmed by vigorous buying of its shares by city aldermen. Sure enough, the council in April 1863 awarded Vanderbilt the authority to build a second Manhattan line along Broadway between Fourteenth Street and the Battery.
But the brokers and the politicians were not finished with him. Scarcely a month later, even as Vanderbilt’s crews were ripping up Broadway’s cobblestoned pavement to lay rail, a wave of short selling struck the Harlem—investors selling shares they had borrowed in the expectation that they would fall in price, which would allow them to buy them back more cheaply, return them to their original owners, and pocket the difference. “Something was in the wind,” recalled Fowler. The “something” was a plot to rescind the franchise, evidenced this time by the appearance of numerous aldermen among the short sellers.
Vanderbilt was learning the hard lesson that politicians and their compatriots on Wall Street regarded railroads less as public utilities than as entities to manipulate for their own gain. He had profited from the first phase, when the council approved his franchise, and now he was going to pay. Legislators in New York City, in Albany, and in almost every other statehouse and city hall along the Eastern Seaboard would play this game for years, until the advent of a new generation of tycoons, men with a determination to professionalize the railroad industry, put an end to it.
When the council canceled Vanderbilt’s franchise at the end of Jun
e 1863, the short sellers, including the politicians, prepared to reap their reward. Yet the Harlem’s shares stubbornly refused to fall; mysteriously, they rose sharply, eroding the fortunes of the shorts with every surge skyward. The operators had failed to reckon with the obstinacy of Cornelius Vanderbilt, who had taken his adversaries’ manipulation of his railroad shares personally. Vanderbilt dipped deep into his own fortune to buy every share offered by the shorts. Under normal conditions, the short sellers would be saddled with massive losses, for they had to pay much more for stock to deliver than they had collected by selling it. But these circumstances were even worse, for Vanderbilt was intent on cornering the stock—owning such a commanding stake (preferably, all the shares) that short sellers could not buy shares to cover their positions, leaving them exposed to Vanderbilt’s pitiless vengeance. In the end the short-selling brokers were driven to the verge of bankruptcy or beyond. Vanderbilt let the aldermen off with a deal on his own terms: restoration of his Broadway franchise.
The Harlem corner was Vanderbilt’s first corner. It would not be his last, or the last on the rails. The carnage led to a catchphrase: “When any one desired to say that an operator was irretrievably ruined,” reported Fowler, it was merely said: “He went short of Harlem.”
But not every participant in the short-selling scheme went bust. Among those who narrowly escaped was a man whom Vanderbilt had personally brought into the Harlem as a fellow director, but who had promptly become the leader of the short sellers and played their tribulations for his own gain: Daniel Drew.
The aging pirate had helped facilitate the short sales by selling call options on Harlem stock. Put simply, he sold others the right to buy Harlem shares from him at a set price over a period of thirty or sixty days. If the shares fell below that price, the options would expire unexercised, for no one would bother buying shares from Drew if they could be had for less on the open market. If the shares rose above the strike price, the shorts had insurance against their losses to the extent they owned the calls (and Drew had the resources to cover them). In the event, Drew’s potential losses were magnified by the calls he had sold into a rising market; his exposure was estimated to be as much as $1.7 million.
Staring ruin in the face, Drew threw himself on Vanderbilt’s mercies. Vanderbilt, however, disinclined to cut a break for a purported partner who had traded against him, refused to offer terms. Drew then declared that he had been conspired against, and flatly refused to make good on his calls: “These contracts merely say you may call upon me for so much stock; they say nothing about my delivering the stock.” The prospect of prolonged litigation with Drew brought Vanderbilt and his brokers reluctantly to the table. According to Fowler, they eventually agreed to settle with him for $1 million.
Vanderbilt prevailed in his campaign to win control of the Harlem, and soon would add to his growing network the Hudson River Railroad, which paralleled and competed with the Harlem line, and subsequently the greater prize, the New York Central. Together these made him the first great organizer of the railroad industry—“The first tycoon,” as he was dubbed by the biographer T. J. Stiles in 2009.
Vanderbilt’s public esteem would endure until he replicated the monopolistic tactics of his adversaries on the river to create his own monopoly on land. That would happen during his 1867 campaign for control of the New York Central, which ran between Albany and Buffalo. The Central’s owners made a deal with Drew, who had reemerged in the steamboat business. From spring through the fall, as long as the Hudson remained navigable, the Central carried passengers and freight from Buffalo to Albany, then transferred them to Drew’s river craft for the southbound leg to New York City—thus denying the connecting business to Vanderbilt’s Hudson River rail line.
Vanderbilt endured the slight for a single winter. The following year, as soon as the river froze solid, he retaliated by cutting the Central off. The next train he sent north along the river stopped a half mile from the railroad bridge into Albany, stranding cargo and passengers—some of them members of the state legislature—for the night, under a frigid sky.
“No more through freight came over the Central,” reported Croffut. “Its stock went down fifteen per cent at a blow.” The Commodore was summoned before a legislative commission. Asked why he did not respond to the pleas of passengers and shippers shivering in the cold, he explained, “I was at home, gentlemen, playing a rubber at whist, and I never allow anything to interfere with me when I am playing that game. It requires, as you know, undivided attention.” The Central’s owners yielded, and within two years would merge the Central with Vanderbilt’s Hudson River line, giving him monopoly control of traffic from Lake Erie all the way to New York City.
Vanderbilt had won, but he and his old compatriot Drew would find themselves on opposite sides of one more encounter. This time, it was Vanderbilt who would suffer.
2
Chapters of Erie
THE ERIE RAILROAD was a beleaguered upstate New York road that had been expected to be a paragon of advanced engineering and high commercial potential when it was first conceived in 1833. Its founders made innovative technological choices in designing the road, but almost always the wrong ones. They decreed a gauge (that is, the span between the rails) six feet wide, even though other railroads were standardizing at four feet eight and a half inches. Their reasoning was that this would allow the Erie’s engines to negotiate the route’s steep grades while the company held off competitors by preventing them from interconnecting with its tracks. The inability to link up with neighboring roads, however, turned out to harm the Erie’s competitiveness for forty years, until the tracks were finally realigned at enormous cost. The founders also opted to build their tracks on pilings rather than a graded roadbed; before recognizing the folly of their decision they drove more than a hundred miles of these oaken stilts on which no track would ever be laid.
In financial terms, the Erie’s history would be marked by a series of defaults followed by hairbreadth rescues staged by the New York legislature, by municipalities located along the expected route, and by private investors, including not a few with hopes of profiting by selling goods and equipment to the revived road. But these efforts failed to save the Erie from foreclosure in 1845. At that point, what originally had been mapped out as an 800-mile line traversing New York’s southern tier and skirting the south shore of Lake Erie between the Hudson River and Chicago instead amounted to nothing but a “jerkwater affair of 40 miles” running from the Hudson barely to the Catskill foothills. When at long last the railroad became fully operational with 773 miles of track in 1868, the cost of construction had soared to $50 million from its original estimate of $3 million. By then the Erie had fallen into receivership twice more and been so repeatedly and unchastely bought and sold by profiteers of one variety or another, it was known as “the Scarlet Woman of Wall Street.”
The period of its most wanton manhandling was still ahead of it. That chapter would be written by Drew and Vanderbilt, along with two equally unprincipled figures, operating out of Boston: Jay Gould and Jim Fisk.
These four would come to symbolize for the public the emergence of capital as a driver of American power in the world. Their crass unscrupulousness became part of the mystique of the new phenomenon of Wall Street. The enterprise of building the first American big business would not be completed in their lifetimes, nor would it finish in the style with which they began it. But it would originate in an epic contest over the ill-starred, spectacularly lootable Erie.
* * *
IN 1866 CORNELIUS VANDERBILT—newly in command of the Harlem Railroad and Hudson River Railroad, and beginning to plot his seizure of the New York Central—launched a greater plan for a railway network even more ambitious than his existing regional system. He aimed to cobble together a single railroad connecting Chicago with the Atlantic seaboard.
At seventy-three, Vanderbilt was still in the empire-building business. He had already employed his railroad strategy—stop the stea
ling and improve the line—to make going concerns of the Harlem and the Hudson, the latter of which he had acquired to shut down the rate war it had waged against the former. “I tell Billy,” the Commodore said, referring to his son William, now a trusted lieutenant, “that if these railroads can be weeded out, cleaned up and made shipshape, they’ll both pay dividends.”
Vanderbilt’s acquisition of the New York Central would extend his rail empire from Albany west to Buffalo. By November 1867, partially through his strangulation of cross-river freight and passenger traffic during the winter, he had forced the Central’s shareholders—among them Edward Cunard and John Jacob Astor III—to place its management in his hands.
Then it was the Erie’s turn. The railroad had been playing the same role in the fortunes of the Central that the Hudson had played in the Harlem’s: as a competitive, rate-cutting spoiler. It had not always been so. Despite her difficult history, in earlier days the Erie had reigned as queen of the New York railroads, running along the state’s southern tier “between the ocean and the lakes”—that is, from the Atlantic seaboard to Lake Erie. The underlying reality, however, was that the route was badly chosen, for it traversed sparsely settled, mountainous land less suited to agricultural development than that along the Central’s more northern route, which roughly paralleled the Erie Canal through New York’s midsection.
Iron Empires Page 4
