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Jay Gould Returns
JAY GOULD CUSTOMARILY kept his business maneuvers opaque. His takeover of the Union Pacific, that original component of the first transcontinental railroad which Congress’s Wilson Committee said had been rendered so “helpless” by the predatory activities of the Crédit Mobilier, was no exception. To the Pacific Railway Commission, which was established years later to examine the condition of the UP and other roads financed with government bonds, he described the takeover in almost the same terms the historian J. R. Seeley used to recount Britain’s acquisition of empire—as the result of “a fit of absent-mindedness.” Gould explained that in Chicago one day in the spring of 1873 he had run by chance into Horace Clark, then the UP’s president. He became so intrigued by Clark’s description of the road’s possibilities that he “sent an order down, I think, to begin at 35 and buy the stock on a scale down.”
Clark up and died that June, and his brokers dumped his stock. While Gould was on a retreat “off up in the woods,” he claimed, his standing order sucked up more than he expected. Suddenly, he discovered himself to be the owner of one hundred thousand shares, or nearly one-third of the total. At that point, he said, he sent for Sidney Dillon, who had succeeded Clark as president, and they set about to rescue the Union Pacific from its multiple financial crises.
Historians tend not to take Gould’s story seriously. His biographer Julius Grodinsky labeled the yarn “factually correct,” but “not . . . strictly truthful.” A rather different narrative soon emerged. According to this version, Gould had actually hired a banker named David B. Sickels to buy up all the Union Pacific stock he could find, on the sly. Sickels later revealed that he acquired 132,000 shares for Gould, and that Gould then instructed him to bring Dillon to Gould’s home, where they struck a deal in which Dillon would remain president and Gould would serve as a member of the executive committee—a silent partner.
The idea that Jay Gould could now control the storied, if troubled, Union Pacific appalled many in the railroad world and the financial community. Ranked high among their misgivings was Gould’s record as a speculator looking out only for himself. On Wall Street, “various have been the surmises as to what Mr. Gould’s intentions might be . . . , whether he had any idea of applying his shrewd executive capacity to the improving of the road, or whether he had some little game of his own to play which would redound to his personal pecuniary advantage,” the New York Times reported.
There was a further moral component to their doubts: The better class of financial merchants felt that “the elevation of Mr. Gould to a social and commercial recognition, following upon the heels of an infamous career, is far from a good example to the rising generation,” the Times continued. There was no confidence in him as “a man of honor,” but rather a conviction that he was “a very shaky individual with no fixed policy of action beyond self-advantage.”
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DOUBTS ABOUT GOULD’S morality stemmed chiefly from his most spectacular escapade, his attempt to corner the gold market in 1869.
The gold corner had been an outgrowth of Gould’s investment in the Erie Railroad. Like many of his schemes, this one had been born of a combination of necessity and opportunity. The necessity arose from the Erie’s position as a link between midwestern grain farmers and East Coast ports. The higher gold rose in price, the easier it was for American farmers to sell their wheat overseas, and therefore the more robust the traffic on the Erie. The Erie’s stock price rose with those shipments, which was crucial for Gould because he had pledged his stock as collateral for loans financing his efforts to acquire a network of connecting railroads.
The opportunity originated in the federal government’s plans for reversing its wartime inflation. This had been spurred by the Lincoln administration’s issuance of greenbacks, which were dollars whose value was based purely on the government’s credit, rather than their convertibility to specie, or gold. Under Lincoln’s successor, Andrew Johnson, the government began to drain this ocean of excess currency with the goal of returning the dollar to full convertibility to specie. The resulting contraction in the money supply caused a mild recession, felt most severely in the rural agricultural belt of the Midwest. The government’s program also created an opportunity to speculate on the price of gold, which bobbed up and down on waves of rumors about government policy.
Rumormongering thrives on uncertainty, and the prime uncertainty in 1869, when Ulysses S. Grant took office as president, was whether he would continue Johnson’s policy. Desperate to know the president’s mind, Gould befriended one Abel Rathbone Corbin, the hapless husband of Grant’s younger sister, Virginia (known as Jennie).
Corbin was given to bold talk about his influence with his brother-in-law. To onlookers, he indeed appeared to be well settled within the Grant family circle. In mid-June, when Grant was visiting the Corbins at their town house, Corbin even managed to secure an invitation for Gould to a face-to-face meeting with the president. Throughout the summer Gould urged Corbin to impress upon the president that a higher gold price would benefit farmers by strengthening their overseas sales. He paid Corbin generously for his ostensible entrée into the Grant administration, opening an account for him with $1.5 million in gold on September 2. Corbin specified that the account was to be opened in his wife’s name, and the written notification of the account opening to be addressed to “Mr.— —,” creating what Henry Adams called “a transaction worthy of the French stage.”
That very day Grant, visiting the Corbins at home, showed Corbin a letter he had addressed to Treasury Secretary George S. Boutwell advising him to cease all government sales of gold, thereby supporting the price. Corbin tipped off Gould, who, privy to this nugget of information even before most government officials, ordered his brokers to plunge into the market the next morning. Meanwhile, his partner Jim Fisk browbeat his cronies into buying by informing them that whatever they failed to buy on one day would only be more expensive on the next. Gold moved inexorably higher.
But then Gould overplayed his hand. In mid-September he prevailed on Corbin to write once more to Grant, reiterating the wisdom of keeping the gold price high. This was one message too many, for it finally awakened the president to the intrigue that had been going on in the bosom of his own family. Finding his wife at her writing desk with an unfinished letter to his sister Jennie, he dictated a postscript advising his sister to tell Corbin “to have nothing whatever to do with—[presumably Gould]. If he does, he will be ruined, for come what may, he (your brother) will do his duty to the country and the trusts in his keeping.” The letter went out by the first mail and was in Jennie Corbin’s hands, and therefore her husband’s, before nightfall on September 22. In a full-scale panic, Corbin sent for Gould.
Reading the letter over Corbin’s shoulder, Gould “saw the whole extent of the danger,” congressional investigators later reported. “New victims were prepared and a new scheme devised to save himself.” This scheme required Fisk to keep buying while Gould himself quietly sold as much gold as he could without raising suspicions in the Gold Room, a sumptuous chamber in the financial district where gold trades were reached and finalized around an indoor fountain featuring a gilded statue of Cupid cavorting with a dolphin.
The machinations of Gould and Fisk culminated on September 24, 1869, a day that would become known as Black Friday. Gould and Fisk traveled downtown together and stationed a line of burly guards in front of their office door. But the pair was working at cross purposes, almost certainly unbeknownst to Fisk—Gould selling, Fisk buying. Gold opened strong at $145 and ran up to $150, then $155.
The night before, however, Grant and Boutwell had decided to sell $4 million in government gold. Exactly as expected, word of the sale fell upon the Gold Room like a thunderbolt. The floor was gripped in pandemonium, shrieks and wails and shouts drowning out the bids of brokers trying to save their skins as the price almost instantaneously collapsed.
Fisk’s candidate for
a scapegoat in the disaster was Corbin. During the panic selling, Fisk sped uptown to Corbin’s town house and roundly cursed him out as a “damned old scoundrel” for failing to deliver Grant as he had promised; the truth was that Corbin’s influence over his brother-in-law had largely been a figment of his own imagination. Corbin “was weeping and wailing,” Fisk later testified, “and I was gnashing my teeth.” Corbin agreed to make an overnight trip to the White House for one final appeal to Grant, but returned to New York empty-handed.
“Of course matters took such a turn that it was no use,” Fisk reflected. “It was each man drag out his own corpse.”
In the end, both Gould and Fisk managed to escape the crash with their carcasses largely intact. Fisk simply repudiated his contracts for gold purchases, claiming that they were made on behalf of his broker, William Belden; it was a move reminiscent of Drew’s repudiation of his Harlem calls during Vanderbilt’s campaign to corner that railroad. Fisk and Gould were both protected from the consequences of their gold-market intrigue by the intervention of their wholly owned judges, George Barnard and Albert Cardozo (the father of future Supreme Court justice Benjamin Cardozo, whose reputation for probity would outweigh Albert’s corruption). Barnard and Cardozo issued no fewer than twelve injunctions the week after the crash, preventing the Gold Exchange and its clearinghouse from enforcing their rules to compel Gould and Fisk to settle their contracts with their counterparties. Gould was said to have profited by as much as $11 million from his timely sales.
The real impact of the gold crash fell upon innocent bystanders, in part because the recession it produced sowed considerable economic destruction. “Hundreds of firms engaged in legitimate business were wholly ruined or seriously crippled,” congressional investigators observed. “For many weeks the business of the whole country was paralyzed—a vast volume of currency was drawn from the great channels of industry and held in the grasp of the conspirators. Hundreds of active, ambitious men were lured from the honest pursuit of wealth by the delusive vision of sudden fortune”—perhaps as concise a description of the temptations of easy, disreputable gain as any financial scandal has yet produced.
The scheme further “dealt a heavy blow to our credit abroad by shaking the faith of foreign capitalists in the stability of our trade and the honesty of our people,” the investigators lamented. As banker George Opdyke had testified, the affair “produced an impression . . . not only in this country but all over the world, that we here are a set of gamblers, and it is not safe to enter into any contracts with us when it is possible for a small combination of speculators to monopolize one branch of our currency.”
Henry Adams deplored the escape of Gould and Fisk from retribution. He expressed hopefulness that “Messrs. Gould and Fisk will at last be obliged to yield to the force of moral and economical laws,” which was unduly optimistic. More pessimistically—and astutely—he observed that for the first time an enormous corporate entity had “proved itself able to override and trample on law, custom, decency, and every restraint known to society, and as yet without check.” The belief already was common among the public, he added, that the “system of quiet but irresistible corruption” created by Vanderbilt, Fisk, and Gould “will ultimately succeed in directing government itself.” The “clever” machinations underlying the gold scheme, he wrote, seemed to have had “the single fault of requiring that some one, somewhere, must be swindled.” There would be more swindles, and more victims.
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UNION PACIFIC INSIDERS had separate grounds for concern about Gould’s takeover than the gold scheme, for his appearance on the scene revived memories of the “Fisk Raid,” a notorious episode in the railroad’s history. The event dated to 1867, when Thomas C. Durant, one of the organizers of the Union Pacific (and an architect of the Crédit Mobilier) became embroiled in a leadership challenge with the brothers Oakes and Oliver Ames. Durant enlisted Fisk to play the role of paper owner of twenty thousand shares, which were to be voted on Durant’s behalf. The issue was eventually resolved without the need of Fisk’s votes, and that’s where matters rested until about a year and a half later, when Fisk resurfaced. Irked that Durant had reneged on paying a $3,200 bill for his expenses, he threatened to file a lawsuit to block the Union Pacific from transacting any business unless he was paid a bounty of $75,000.
To the railroad’s management this smacked of blackmail, but it was no idle threat, since Fisk had New York judge George Barnard in his pocket. The Union Pacific was at a critical pass, as it was still racing frantically toward Promontory while struggling to cover a debt of almost $14 million. “Fisk had told us, ‘I will break you up so that you cannot pay your obligations, and the first one you default on I will buy it up, until I get control of the road, the same as with Erie,’” UP shareholder Cornelius Bushnell later testified to a congressional committee. “He bragged that he would do that.”
When his demand was refused, Fisk followed through on his threat. His lawsuit loomed over the Union Pacific for eight months, finally coming to a head in March 1869, when Judge Barnard issued the injunction Fisk sought and brazenly appointed William M. Tweed Jr., the son of Tammany’s “Boss” Tweed, as the railroad’s receiver. The uncompleted road’s entire existence hung in the balance.
The railroad simply ignored Barnard’s injunction, at which point the judge ordered the seizure of its Manhattan offices. Tipped off, the railroad’s officers managed to gather up all its books and securities and decamp with them one step ahead of a sheriff’s posse to New Jersey, safely out of Barnard’s jurisdiction—replicating, perhaps unwittingly, the flight of Fisk, Gould, and Drew to “Fort Taylor” the year before. There followed a comic-opera denouement in which the sheriff’s men battered in the doors of the corporate safe—“the most infamous thing I ever saw in my life,” recalled John Pondir, who witnessed the event as the railroad’s newly appointed fiscal agent—only to find it empty. In due course, the Union Pacific relocated its headquarters, and its papers, to the safe haven of Boston. But according to Bushnell the Fisk raid cost the company $7 million from the depreciation of its bonds during the event. Another $50,000 was quietly paid to Fisk, Oliver Ames later testified, to get him to slink away.
For Union Pacific officers and shareholders struggling to bring the Union Pacific through the Panic of 1873 and its aftermath, the Fisk Raid reflected horribly on Gould—not merely because Gould and Fisk had been partners in so many financial misadventures, but because it was generally suspected that Gould was more than an innocent bystander in the episode. Pondir, for example, testified that Gould personally had been present during the attack on the safe. If Gould were so willing to connive in the blackmailing of the Union Pacific in the past, it was thought, what reason could there be to trust him now?
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NOTWITHSTANDING THE INSIDERS’ suspicions of Gould’s faithlessness, his tenure as the power behind the throne at the Union Pacific got off to an auspicious start. His own expectations, as he described them later, were not great. The railroad “was in rather a blue condition,” he told a Senate committee in 1883. The road was on the verge of receivership, with a large floating debt and $10 million in bonds due within a month. “I made up my mind that I would carry it through,” Gould said. “I immediately went to work to bring the road up. I went out over it, started coal mines, and to the surprise of everybody it soon began to pay dividends.”
This version, retailed by Gould’s defenders to this day, portrays him as almost single-handedly saving the railroad from failure. It is too simple by half. On the plus side, he restructured the road’s crushing debt, saving thousands of dollars in annual interest; on the other hand, he failed to address the UP’s pending debt to the US government. That debt would become payable starting in 1895, when it would amount to some $70 million.
Placing the road on a dividend-paying basis had been Gould’s explicit goal from the outset. This policy, of course, stood to benefit him greatly, for he was the owner of between one-third and
one-half of its outstanding stock. Starting its own coal mines facilitated a spurt of profiteering that made the road’s government directors exceedingly uneasy, for it produced gains for the road at the expense of its own customers. Under Gould, the road charged independent mines 10 to 35 percent more per ton to carry their coal than the price at which it sold its own mine production to customers, placing the independents at a hopeless disadvantage in the marketplace. The government directors labeled this an “odious” policy that was “without justification or excuse; injurious to the true interests of the company” and a detriment to “the development of the country through which the line passes, and on which it depends for traffic.”
The strong increase in traffic and earnings the UP experienced after Gould’s arrival was to a great extent the product of luck. The West, that barren territory across which its rails had been thrown, was filling up with settlers. The territory traversed by the Union Pacific had been condemned as a “perfect waste” by a government committee investigating Asa Whitney’s brainstorm in the 1840s; by 1876, however, the same landscape was teeming “with farms and villages, and herds of cattle and flocks of sheep, and embraces mineral wealth . . . beyond computation and almost too great for human belief,” in the words of the government directors’ report to the interior secretary that year. The population of the four states and territories through which the railroad passed—Nebraska, Colorado, Wyoming, and Utah—more than tripled in the decade after its completion, from 270,430 in 1870 to 830,970 in 1880. Some of its most important cities evolved from mud holes in the years before the railroad’s construction into metropolises after its completion—for example, Omaha grew from 1,883 souls in 1860 to 30,518 in 1880, Denver from 4,749 to 35,629 in the same time span.
Iron Empires Page 12
