A well-told Wall Street history covering the key figures of the railroad industry boom, from just before the Civil War until the late 1800s. This is a period of Wall Street history that isn't discussed often enough today. It's our loss: there are surprising insights readers (and investors!) can draw from this era.
The giant of those days was "Commodore" Cornelius Vanderbilt: shrewd, sophisticated, and an absolute master of an investor. With his massive railroad stockholdings, Vanderbilt had a significant insight: in an industry like the rails, with high fixed costs and low marginal costs, cutting prices drives more profits.[*] Vanderbilt applied this insight relentlessly, cutting both freight rates and passenger ticket prices, driving more volume, and enriching his shareholders (and himself) enormously.
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We also learn the other key figures of this era:
* Daniel Drew, a barely educated, Bible-thumping Methodist who came to be known as the "architect of panic" for his short selling attacks, repeatedly making (and losing) fortunes. Sadly, Drew stayed in the game too long: once he lost a step, he lost everything.
* Jim Fisk, the gregarious speculator, who had a gift for using (and abusing) the media, a gift for plundering the ladies, and an even better gift for plundering his companies.
* And finally, Jay Gould, Fisk's long-time partner and polar opposite: cerebral, remote, machiavellian and tubercular. He was the brains of the Fisk/Gould partnership, and some of his maneuvers to steal away control of the railroads were so audacious they have to be read to be believed.
Readers get to see the boom/bust cycle of the railroad industry, a useful analogy for any technology cycle, including today's cryptocurrency era. It's also worth mentioning this era's astonishing level of corruption: throughout the courts, city governments, even state legislatures. Everyone from a state judge to a state legislator could be bought and sold. And with no clear legal or political rules of the road, the battles for control of some railroad companies involved henchmen, thugs, and even the occasional cannon. Even the worst modern proxy wars of today look pale and lifeless by comparison.
Investors with an eye for market history will see, sadly, that there's nothing new whatsoever about how people get screwed or rugged today: it's all been done before, usually with a lot more style. It's actually heartening to learn this: with all of the corruption and incompetence of our system today, it's actually nowhere near as bad or blatant as it was then.
Finally, a few heuristics I drew from this book:
* Never make threats unless you can really, really back them up. Better yet: Never make threats. Just carry them out.
* Don't keep trading and "operating" in investments after you've lost your touch; you have to know when you've lost a step and know to walk away. As we will see, Daniel Drew failed to do this and it destroyed him. Stay meta about your skills as they decline.
* Remember that Wall Street is a small community (yes, even today) and everyone knows everyone else. Fuck someone over and it'll come back to bite you.
* Note how lawfare and media strategies were used in that era as well as in today's era: court cases sometimes have nothing to do with the actual case; sometimes they are peripheral moves in a broader strategy (we'll read how investor Jim Fisk managed to get newspaper editor Samuel Bowles put in jail for a libel case Fisk never actually pursued). Likewise, see how the media is often used as metastrategy to achieve ulterior motives, say in obtaining control of a company or favors from regulators or legislators.
* If you think today's era is corrupt (which it is), it is nothing compared to the era covered in this book. Judges, legislators, regulators could all be easily bought, and frequently were. Read it to feel a bit better about the comparatively lightweight corrupt scumbags we have screwing everything up today.
* Finally, most of the men profiled in this book took a while to get started. Most had major or even catastrophic setbacks on their way to becoming wealthy beyond imagination. Keep the faith and keep going.
Footnote:
[*] As a thought experiment, consider a railroad line with huge fixed costs, but where the incremental cost of adding another passenger is essentially zero. Most transport industries tend to have these characteristics. A modern example might be a large semiconductor fab which might cost billions, but where the variable cost of making one more incremental wafer (which yields 300-400 chips) might be only a few hundred dollars. In all of these cases, the more volume you drive through the business the more money you can make.
[Readers, as always, read no further. Value your lives and your time! Below is a long list of notes and reactions to the book, which are just to help me order and remember what I read. It is way too long. It might be worth skimming the bolded parts. Might be.]
Notes:
Preface:
xvff On Watts' innovations on the steam engine and the technological change and economic change it unleashed: "To the Victorians it was a new and profoundly unsettling phenomenon." "Shattering the centuries-long dominance of land and agriculture."
xvii "Luckily, the Victorians faced just such an economic revolution before us and have much to teach us about how to deal with it." The author is talking here about the technology and computer revolution of his day, obviously today we can think about the internet revolution or the current cryptocurrency revolution. Also interesting to note that during the Victorian era words like entrepreneur and millionaire were coined. (!)
xix "Until very recently the history of Wall Street, indeed capitalism itself, was largely written by its enemies... I have sought to look at the Wall Street of the 1860s and its inhabitants through the books, periodicals and engravings by which the Victorians themselves perceive those portions of the world that lay beyond their own ken. I believe that this is the only way for us to comprehend, in however small degree, the world as it really was." [God bless this author: a rare example of an intellectually honest historian of stock market history who doesn't harbor rage or resentment towards his subjects.]
xix-xx The author talks about his grandfather, Richard H. Gordon, who had a Wall Street career dating from 1898 as a runner to two years before his death in 1976. "I have never worked on Wall Street, for it was my fate to inherit my grandfather's love of history, not his financial acumen."
A Note on Money and Time
xxi An interesting few pages here, discussing how to think about inflation when you're looking at a period where there was rapidly rising real wealth, rapidly increasing median income, and where you can't really compare the prices of certain things (like the cost of ship passage from London to New York in 1869, which cost of fraction of an airfare from New York to London but it took four weeks rather than hours); also see the for example of recorded music compared to live performance, which was the only way to listen to music in the mid-1800s. So many of these things are simply not comparable, but it does also illustrate how horribly our money has been viciously debauched over the century and a half since this era. Note also that "a thousand dollars in mid-Victorian times was a skilled worker's annual wage, sufficient to allow him and his family to live in dignity. A hundred thousand dollars, prudently invested (in government bonds, for instance), was enough to provide an income that would have maintained a family in upper-middle-class comfort, while a million dollars would have made that family a very rich one indeed in the eyes of its contemporaries... The more than one hundred million dollars that Commodore Vanderbilt left at his death in 1877 made him incomparably the richest man in America and the richest self-made man in the world... No man on the Street today approaches that sort of power with his own assets."
Prologue: The Great Game
3ff On Daniel Drew, one of the key early figures in this book, "his day was nearly done on the Street and that a new breed and new rules were taking over." He moved in the highest business circles, but affected still the behavior of a country bumpkin, and loudly espoused Bible-thumping Methodism.
6 On pre-Civil War Wall Street as basically a small club where everybody knew everybody else. "Then, almost overnight, Wall Street had become the second-biggest financial market on earth and by the late 1860s the whole world watched its every move via the telegraph, the newspapers, and the new undersea cable." Also interesting comment here how the Civil War, largely financed with borrowed money, expanded the national debt by a factor of ten [!!] in just four years [no wonder this money ended up flooding the stock market, and it makes you wonder about the post-2020 COVID monetary expansion as well, or the post GFC monetary expansion that also found its way into stocks.]
7 On the post-Civil War environment being sort of like the 1920s "eat, drink and be merry" vibe that followed World War I; this vibe was strongest in New York, also New York become completely corrupt at this point [the reader will see throughout this book many horrifying examples of corrupt judges and corrupt politicians at the highest level, routine bribery of politicians, etc.]
8 On the so-called "Erie Wars," the battle for control for the Erie Railway; Daniel Drew was treasurer of the Erie Railway; on the many investors in Erie's securities, some lured in by the mostly illusory speculative charms of the stock, some lured in by the very real economic potential; ultimately the effects of the battles over this company were so devastating to so many peoples' fortunes that the Erie Railway came to be known to history as the "Scarlet Woman of Wall Street."
Chapter 1: The Rise of Wall Street
10ff History of Wall Street under the Dutch; their surrender to the British in 1664 without a shot fired; then onto the 1780s when George Washington was inaugurated and Hamilton regularized the coinage of the country, and also assumed state debt incurred during the Revolution, exchanging it for new Federal bonds paying 6%. Secondary markets emerged for this debt as well as other state debt in various places in the Wall Street area or on Pearl Street, but specifically the Buttonwood tree on 68 Wall was a favorite spot for brokers to meet.
12 1792: A group of the more important brokers drew up minimum commission rates and other agreements beneath the Buttonwood tree. Formation of the Tontine Coffee House, the first brokers' organization in the country, with others to follow; the first real stock exchange opened in 1800 in Philadelphia, which was then the country's largest city; Philadelphia was also where Hamilton established the first Bank of the United States, designed to function as a central bank.
13ff 1817: the formation of the New York Stock Exchange Board, so named until the 1860s when it became the New York Stock Exchange; this was more like a private club in a brokerage trust. Note that in this era most of the securities traded were government bonds.
14 Interesting factoid here where the low point in exchange activity was March 16th, 1830, when just 31 shares changed hands.
14ff Back to Daniel Drew, born in 1797, in what would today be Putnam County, five years after the Buttonwood agreement. "Free public schools were still years in the future, so Drew was not well educated he never learned more than reading, writing and simple math." [Which is all you need to make money as an investor to be honest!]
16ff Drew serves as a substitute in the War of 1812, although he never saw action because the British never attacked New York; Drew would turn the $100 he was paid into a fortune over the next 50 years: first trading cattle and driving them to market in New York City (this was before the canals and railroads, so a trip from Putnam County to New York could take a week), Drew was famous for an apocryphal (and probably not true) story that he gave a cattle all the salt they could lick, then let them drink right before he drove them into town; this story is credited for bringing the term "watered stock" to Wall Street.
19 "Asked if he had trouble sleeping at night he replied, 'Sir, I have never lost a night's rest on account of business in my life.'"
20 Next Drew transitions to catering to the needs of other drovers; he finds it more profitable than being a drover himself; and so he provides services like being an innkeeper for them, even acting as an informal banker for them, this informal banking activity first got him acquainted with Wall Street in the 1830s. [Note that many businesses are not as profitable as they appear: often it's better to sell "picks and shovels" for that business rather than perform the business itself.]
21-2 On how people failed to understand that stock certificates represented fractional ownership of businesses [something that is just as true today as it was then]; the whole game was seen as mysterious to people in these days, when these little pieces of paper would fluctuate in value so violently. The author comments on how the early historians of this era had willful ignorance as well as deep prejudice against the markets because of this and it colored their history.
24 On the various steamboat cartels around the New York area; Drew sold out to a cartel and joined its board of directors after investing in some ships; then he started a dummy company and sold that to the same cartel that had earlier bought him out, basically negotiating a high price to himself.
26 Story here about how Drew got back at some people who had earlier pummeled him in the stock of Chicago and Northwestern Railroad: he pretended to drop a piece of paper instructing to buy Oshkosh stock, he was operating in that stock, the people that found the piece of paper formed a buying pool and bought a large stake in the company, and then Drew operated the price down after they bought in.
27 Drew's nickname the "Great Bear" as he made money through other people's misfortunes; also he was an "architect of panic."
Chapter 2: The Great Boom Town
28ff On the huge changes in New York starting in the first half of the 19th century; the "immediate and enormous" effect the Erie Canal (completed in 1825) had on the city; New York's share of the USA's foreign commerce went from 9% in 1800 to 62% in 1860; also during this period its population grew 20x. (!!!)
32 Interesting blurb here on people speculating on lots and land as New York City "moved" northward; see John Jacob Astor [yes, this is the fur trapping entrepreneur from Throne of Grace] who would buy building lots north of where the city was then developed and later sell them at huge premiums, and then rinse and repeat "until he died the richest man in America in 1848." [This is one of the reasons ticker JOE is such an interesting stock to me in this era. Not financial advice!]
38ff On the development of railroads in England: the first effective locomotive ran in 1804, and in 1825 George Stevenson completed the first true commercial railroad, between Liverpool and Manchester; on development of a railroad industry in the United States; no more canals were planned. Interesting comments here also on how the railroad enabled travel at triple the speed for a man say on a horse or walking, "annihilating both time and distance in a way inconceivable to anyone living even a quarter of a century earlier. It is little wonder that the railroad almost immediately acquired a symbolic role for the Victorians. It seemed to them the epitome of their new-found technological prowess and of the progress that they regarded, with every good reason, as the hallmark of their civilization."
40 On railroads and transport costs in general as a tremendous deflationary force, as it brought wheat from anywhere in the world, even as far away as Russia, in competition with any farmer anywhere; prior to this wheat (quoting Arthur T. Hadley's classic work "Railroad Transportation") "had to be consumed within two hundred miles of where it was grown." [Basically railroads Amazoned and Walmarted the world back in their day.]
41 The 1840s, during which railroad securities became very important on Wall Street; by the mid 1850s railroad debt and stocks were half the securities in the country; note that volumes were ten times what they were twenty years earlier in the 1830s.
42ff Growth of a new wealthy class in New York; also cleaning up the city drinking water as the Croton River water was brought into the city by aqueduct in 1842; this brought running water into most homes built thereafter, leading to sewer and water main construction and a drop in the use of (often contaminated) well water, etc.
45 With the availability of central heating, ice boxes, cast iron stoves, running water, "technologically housing had advanced half a millennium in a single generation."
46ff On James Gordon Bennett who created The New York Herald in 1835, one of the greatest newspapers in its day, selling it on the newsstand for a penny a copy; he made extensive use for the first time of the new telegraph and "often printed news of the Civil War before the War Department learned of it."
Chapter 3: The Commodore
50ff On Cornelius Vanderbilt, who died in 1877 leaving and estate worth $105 million dollars: "the greatest fortune yet created in the burgeoning American economy." On his upbringing, his father Cornelius Sr.'s idea to offer a regular ferry service from Staten Island to Manhattan, on Cornelius Jr.'s swearing habit which he failed to break ("Oh, Goddamn it, I've been a-swearing again, and I'm sorry.")
52ff Cute story here on how Cornelius Jr. borrowed $100 from his mom and bought a catboat, was known as a punctual, careful sailor, returning at the end of the first season the $100 plus $1,000 more. He expanded this mini-ferry business and it became very profitable during the war of 1812.
55 At age 19 he marries his first cousin on his mother's side (who was also his first cousin once removed on his father's side), "a degree of consanguinity that was unusual, perhaps, but by no means unheard of in those days." Wild.
55ff He was early in recognizing the importance of shipping belong to the steamboats; he sold off his sailing vessels, went to work as a captain for $60 a month plus half the profits from Thomas Gibbon's steamboat the Stoudinger. Note here also how he fought the New York monopoly on steamboat operators by playing cat and mouse with authorities, docking it surprise docks;it was a David-vs-Goliath situation that New York and New Jersey residents considered vastly entertaining. Gibbon actually fought this in the courts all the way to Federal Court, hiring Daniel Webster, who made "one of the most dazzling and brilliant legal arguments ever delivered" in Gibbon v. Ogden, 1824.
58ff Vanderbilt strikes out of his own; he has a technique of looking for routes for steamboat businesses where the rate of return was the highest; usually this would be in a cartel region, and often he would get paid by the cartel to stop competing with them; he'd happily take the deal and go compete somewhere else. "Steamboats, unlike canals and railroads, could operate anywhere there was water enough to float them. If he was paid to leave the Hudson, his boats could operate on Long Island Sound."
62-3 On Vanderbilt's children, 13 of them; on his sham marriage and "considerable sexual appetite."
64ff On the 1849 California Gold Rush, which transformed Vanderbilt to rich beyond comprehension, as he set up a steamboat service across Lake Nicaragua, which saved two days and 600 miles off the Panama route from the East Coast to California, supposedly this steamboat route netted him a million dollars a year by 1854.
66 Vanderbilt hires some guys to run his Nicaraguan interests, and they end up betraying him; he writes his famous letter:
"Gentleman:
You have undertaken to cheat me. I won't sue you, for the law is too slow. I'll ruin you.
Yours truly,
Cornelius Vanderbilt"
Chapter 4: The Early Skirmishes
68-9 Vanderbilt pivots to railroads; he buys shares at $10-15 of the New York and Harlem, gets on the board, then buys a lot more at $3 during the panic of 1857.
69 Sidebar here on buyer and seller panics, mostly psychological phenomena per the author, who says they happen roughly every 20 years [most likely he is talking about a type of credit cycle related sell-off if I had to guess], citing the panic of 1837 which caused a depression until well into the 1840s; note also that the 1837 panic actually caused the state government of Pennsylvania to default. [!!]
70 On Samuel Morse and the telegraph; telegraph adoption in the 18th century in some ways brought about a disintermediation of the Philadelphia Stock Exchange: you no longer needed to be there physically to get quotes and market news etc. Also the telegraph made capital much more mobile as well.
70ff On the panic of 1857 and the outbreak of Civil War; on the incredible bull market during the Civil War which brought a lot of wealth into New York.
74ff Discussion of how pools work: rumoring stock up or down and arranging purchases between pool members; the other claims that they were "seldom very profitable."; on "corners": basically a temporary monopoly of supply in a commodity market, usually, but you can also have a corner in a stock when someone is short and can't cover: a short squeeze. "[T]he first corner in New York was in 1666 when Frederick Philipse, the colony's richest citizen, cornered the wampum market." "There has not been a true corner on the New York Stock Exchange since the early 1920s."
75ff On the New York and Harlem Railroad; interesting blurb here on how residents in midtown got a limit for steam power set at 42nd street in 1858, which is why Grand Central terminal sits there. On how the Harlem and Long Island railroads "invented New York's suburbia." Harlem Railroad was a mediocre investment, but Vanderbilt was steadily buying the stock; people were wondering whether he "was beginning to slip." Vanderbilt saw great possibilities in this railroad: it was never well managed, and Vanderbilt would probably run it better. Also on a little-known paragraph in the charter that allowed New York City to grant streetcar franchises to the Harlem Railroad.
78ff "The idea that [Vanderbilt] was buying it [the Harlem Railroad] for investment seemed intensely funny to the brokers." Vanderbilt succeeded in building streetcar routes, fought off legal challenges from George Law's competing streetcar company, and the stock went up sixfold in just a few months.
80ff Also there was a wave of shortselling, led by New York's councilmen and aldermen, with the participation of Daniel Drew, who was actually one of Harlem's own directors; Vanderbilt warned them against it; they put on their shorts and then rescinded the streetcar franchise, making the stock collapse; but then the price rebounded from 72 to 97 the next day and then to 106 the day after that. Now the council was short and in deep trouble, so they agreed to "cancel the cancelling" of the grant for streetcar access; Vanderbilt let the council members cover their shorts at 94, but then he did his best to destroy all the professionals who were also short, taking the stock up to 180. "The first Harlem corner was over."
82ff On the Hudson Railroad line: once a bridge was finally built across the Hudson River in Albany this route had a huge advantage in that it was mostly flat alongside the river's edge; by contrast, the Harlem Line had many grades. Vanderbilt begins buying the Hudson Railroad stock steadily and "by 1863 he was on the board and one of the principal stockholders."
83 Discussion here of selling and buying via seller's options or buyer's options; these are different from modern standardized puts and calls (which did exist then, but weren't such important tools of stock speculation in those days). If you bought stock "buyer thirty" meaning a 30-day buyer's option, you were required to take title within 30 days regardless of any strike price or relative movement of the stock; thus you could buy up all the seller's options that were offered, which is what Vanderbilt did here; it looked like he was intending the corner of the stock but he had "invented a new move in the game." In fact Vanderbilt acted like he didn't quite have enough cash to finance the corner and even helped to spread rumors of this.
84ff On "turning" a stock, which can achieve a corner with a minimum of cash, where the "cornerer" buys stock from outsiders and then turns it around and sells it to another party, but buys back from that party a buyer's option at a slight premium [this sort of looks like buying call options in the modern era but without a strike price and other aspects of calls]. Essentially Vanderbilt was encouraging people to take these buyers options and sell them, going naked short essentially, because everybody thought this deal was going to fail; the seller's options (the people on the other side of the buyer's option trade) started to come due in 1863, and those sellers had to go to the open market to acquire Hudson stock in order to deliver shares, but there was none to be had because the Commodore owned all of the floating supply plus a lot more; it turned out that as he called the stock away from those other people, he was the only seller and he moved the stock "from 112 to 180 virtually overnight." This was a "double envelopment of the bears."
85 Another good story here of a reporter asking the Commodore, "What do you say about the panic, Commodore?"
"I don't say anything about it."
"What do you think about it, then?"
"I don't think about it at all..."
Vanderbilt ultimately tells the reporter, "see here, young man, you don't mean to go away till I say something. Very well, I'll say something. Don't you never buy anything you don't want, nor sell anything you hain't got!"
86ff On Vanderbilt wanting to build things; doing speculative stuff in order to consolidate control over enterprises he wanted to build and grow and made better; note that Vanderbilt he never took a salary, he was perfectly aligned with other shareholders and his enterprises. The author contrasts this with Daniel Drew, who was just a pure speculator and manipulator. "The Vanderbilt philosophy for running a railroad was as simple as it was effective: '1, I 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 the stock; 6, make it pay a large dividend.'"
87-88 Note also the very interesting discussion here about "watering stock" which has a negative connotation thanks to Daniel Drew, but in reality is just issuing fresh shares, the idea here is that you're diluting other shareholders without telling them basically; but in this case Vanderbilt was the dominant shareholder and he announced these share issuances and distributed them to everyone [basically this was what we would call today a stock dividend]; and the dilution served to keep the stock price from going monstrously high [you could also think of it as sort of a fractional share split]; and he also paid "lavish cash dividends." [You really have to marvel at a guy who ran his enterprises with absolutely no agency problems, with true alignment between himself and other shareholders, something lamentably rare with most public company managements today.]
89 A hard-to-believe story here where Daniel Drew actually persuaded the New York State Legislature to get involved in a short scheme on the Harlem Railroad when the Legislature was debating whether to grant further streetcar franchises to the Harlem Railroad [it's as if they didn't remember what happened to New York city councilmen just the year before!]. Note however here at this time the Commodore was much less liquid as most of his capital was tied up in the Harlem and Hudson railroads.
90 Cute story here about John Tobin who Vanderbilt had hired to run the Staten Island Ferry and instructed him that the ferry should always leave on the dot and never be delayed; Tobin actually dispatched the ferry the next morning when "the Commodore himself was strolling down the hill toward it." This impressed Vanderbilt.
91 "Put it to a thousand!" Vanderbilt bellowed, as he wanted to screw over all the shorts in the New York State Legislature who tried to screw him over; but when he learned that half the houses on Wall Street would fail in a market panic if this happened, he let the stock go at 285. "We busted the whole legislature." "The second Harlem corner was over" giving rise to the Wall Street phrase "short of Harlem" which meant up the creek.
Chapter 5: The New-York and Erie Railroad
93ff On Daniel Drew, basically wiped out by the Harlem corner; he grumbles to the Commodore and begs him for help; then, Daniel Drew, "to repair his fortunes," turned to the Erie Railway. On the Erie Railway being "the scarlet woman," "born a bastard" although in 1851 it was briefly the longest railroad in the world; it was financed and planned based on political, not economic, considerations; it was designed to be a trunk line that ran from the Great Lakes to New York City through the New York State's Southern Tier; initially built by Eleazar Lord and Benjamin Loder, "two major figures of early American railroading." Many decisions made in the construction of this railroad haunted it for 100 years and drove it again and again into bankruptcy.
94 On the Southern Tier of New York wanting either a toll road or a railway to compete with the Erie Canal further north; the terrain was too rugged for a canal, also political wrangling by supporters in the New York State and New York City legislatures, the "canal ring," to protect the advantages of the canal; a charter was granted for a Southern Tier rail line, but with various rules that made it almost impossible to finance and build: the gauge was wrong, it didn't permit interconnection with other states' railroads, etc.; finally the railroad managed to get an amended charter from New York State after trying (and failing) to get relief from the Federal government, as president Jackson was essentially supported the canal ring, persuaded by then-vice president Martin Van Buren.
97ff "The New York and Erie Railroad was to extend 483 miles from a town of no importance whatever on the shores of Lake Erie to a town of equal obscurity on the shores of the Hudson, running the whole way between them through territory that was among the least populated in New York State. It was an economic undertaking, in other words, that could only have been planned by politicians." [Good example here of the author's solid writing style.] At the same time, however, good transportation can "induce spectacular growth." The original estimate to build was for about $4.7 million with completion of the construction within about 5 years; it turned out to ultimately cost $23 million and take 17 years. [Yet another example of the "whatever your budget and timeframe is, triple it" heuristic!]
98ff Note the use of subscriptions to raise equity money: this is different from an equity offering when you get all the money up front; instead, you get people to sign a commitment and then pay to maintain their percentage ownership in the enterprise. The New York and Erie Railroad used this technique, but then there was a great fire in Manhattan in 1835 and many of the stockholders were not able to pay up in full. Then the panic of 1837 happened, and so the railroad needed still more state aid. Part of the route was constructed from Piermont to Goshen in Orange County, and then some luck happened: see here the story about "swill milk" and the milk industry in New York, which was of terrible quality, a source of cholera and other milk-borne diseases; but the idea of bringing higher quality dairy milk from Goshen, NY to Piermont by train gave people a better option than swill milk. Quickly there were lines a block long to meet the steamboats bringing this milk from the Piermont terminal (since the train didn't run directly to New York City); this milk actually cost less than swill milk, it was better, far safer and it was "wrought through the agency of the New York and Erie Rail Road." Later also this railroad was shipping berries into the city as well.
101 Brief comment here on a huge missed opportunity that the railroad had to potentially connect up with the Harlem Line.
102ff The Erie defaults, goes into liquidation in 1842; various state backings of bonds, various restructurings, change in management as the leader, Eliazar Lord, was old, stubborn and tired; Benjamin Loder took over with a very capable board. Loder, in order to get some buy-in with other elite New York investors, committed his entire fortune to the purchase of new Erie stock; one of the other board members warned him "it will ruin you." But the stock issue sold out. Details here on the engineering challenge of getting across the lower Catskills; the company ran through their initial capital again and needed to issue another $4 million in junior bonds convertible into stock [interesting to note here that these were issued to brokers at a 10-15% discount to par, the brokers then resold them at par, and per the author this was one of the first instances of modern underwriting]; two more series of these bonds, totaling another $7 million, were issued before the full railroad was completed; this mountain of debt "would haunt the railroad for the rest of its corporate life."
Chapter 6: Uncle Daniel's One-Stringed Chinese Lyre
108ff 1841: this was the first year where the company had revenue; over the next fifteen years annual average revenue growth was 49.6%, with similar growth in operating earnings; the line then built connections to Buffalo, to Patterson and Ramapo NJ; on the rapid economic growth of the territory that the Erie served; on the milk trade; on anthracite coal, which favored Erie, Pennsylvania; on the use of the telegraph system to organize train right-of-ways, because the Erie was a single track road; the company was not that well managed; also on the Railroad Act of 1850, this law only permitted the railroads to finance expansion by bonds, not by stock, and so this created a fragility for the company.
110 Daniel Drew taking an interest in the stock and bonds of Erie, also back then stockholders could sell their voting proxies to someone else, he used this method to get himself on the board.
111ff Erie's track and equipment quality wasn't that great; also unexpected damage due to ice on the Delaware River and then damage to the bridges over the Delaware when a flood came a month later; the company was also building additional terminals; and then the 1857 panic happened. Drew and another board member resigned, perhaps seeing what was coming; then in 1859 Erie went into bankruptcy again to be reorganized over the next three years; then emerging as a new Erie Railway with a better capital structure right before the Civil War boom.
113 Interesting blurbs here on the hours of the stock exchange: there were morning, afternoon and evening sessions in different buildings hosted by different organizations; at this time (right around the outbreak of the Civil War) it was possible to trade securities 24 hours a day in New York City. [!!]
116ff It was against this speculative backdrop that Daniel Drew "began a campaign of manipulation in Erie." The price between 1864 and 1868 moved up and down between 40 and 120, these price moves weren't correlated with the market or with the fortunes of the railway itself; everyone knew Daniel Drew was maneuvering the stock around; there's a story here about how he tricked two short sellers who were trying to corner it; On Vanderbilt being outvoted on the board, he had had enough and resigned his seat, although he maintained his investment in the company.
120 Now moving on to Vanderbilt, who had shifted his attention to the Hudson River Railroad, which ran alongside the Erie Canal and as a result had idle rolling stock for most of each year, as it was most busy during the winter when the canal was frozen.
121 On a track- and rolling stock-sharing agreement with the New York Central Railroad, which was broken by new management at the New York Central, and so Vanderbilt had the Hudson River Railroad stopp carrying passengers and freight from the Central Line to New York; right away there was a really fierce winter and so the New York Central capitulated completely, it was only a four-day dispute.
123 One great takeaway about Commodore Vanderbilt is he didn't fuck around; he wouldn't take things to court if he could do something about them himself [and he usually had situations where he could do something himself. He dealt from strength and didn't depend on the kindness of strangers.] "I for one will never go to a court of law when I have got the power in my own hands to see myself right."
123 Vanderbilt then consolidates a bunch of railroads: the Harlem, Hudson and Central all came under his management as the other major stockholders of the central were happy to join underneath him.
124 Vanderbilt then starts to really raise his vision and raise his game: he starts thinking of national competition and "the consequences of railroad rate wars on a grand scale." On railroads as a volume business with a declining cost curve: also with high fixed costs but very low marginal costs; thus there are extreme economies of scale in this business.
124-5 On the erratic and irrational behavior of Erie Railroad; management wasn't particularly good or consistent; sometimes Daniel Drew wanted the stock lower so management would often behave contrary to shareholders' interests.
127 There's a fight over the New England rail line between Boston and Hartford; on a battle of control over this road; it's not exactly clear to me how this played out, but ultimately Vanderbilt made a mistake and decided to not eliminate Drew from the board of this particular railroad. He would later come to regret it. Note also that two other "nobodies" had been elected to the board: Jay Gould and James Fisk, Jr. "They would not be nobodies for long," and "both the Commodore and Drew had made the biggest mistakes of their lives."
Chapter 7: A Formidable Pair
130ff On Jim Fisk, who was excellent at getting attention in the media, but who also had a first-class mind, great executive ability and good speculative instincts; Jay Gould, on the fruitful relationship between the two: Gould was Fisk's opposite, instead of boyish, it was if as if Gould were born middle-aged, he also died possessing "the most malignant reputation of any major figure in Wall Street history." A reputation the author considers "undeserved."
133ff Backgrounder on Jim Fisk: he was the life of the party, his father was a town peddler; Fisk ultimately bought him out and employed his father, telling him "I don't want you to put on any of your damned airs," then expanding the business beyond his father's dreams. At 19 he married a 15-year-old girl who was plain-looking, they rarely lived under the same roof together as he traveled all over the place, but they seemed to genuinely love each other.
137ff Fisk starts wholesaling, but his sales style didn't work; he was then more or less bailed out by the Civil War boom where demand for the wholesale good were off the charts; also the firm he worked for actually delivered quality goods, unlike most other war materiel suppliers of the day. As the war wound down this wholesaling firm bought out Fisk's interest; Fisk then shows up on to Wall Street with a small fortune in his pocket, around the same time that Jay Gould arrived.
140ff Background on Jay Gould: he grew up on a farm in Delaware County, NY, helping with chores, not having much money; then his father exchanged his farm for a hardware store and Gould clerked for him there; then he went to work for a surveyor--the surveyor cheated him out of payment and also room and board; Gould also made various draftsman maps of the Delaware County region, per the author these maps are beautiful, rare and very valuable; Gould also wrote a history of Delaware County, the manuscript was destroyed in a fire at the publishing house, he rewrote it; Gould saved $5,000 in three years of surveying and writing, a substantial sum at the time; he then got involved in the tannery business, had a couple falling outs with co-owners in the late 1850s and early 1860s; after this, interestingly, there's not much of a clear record of what happened between his tannery conflicts and when he was elected to the Erie railway board in 1867.
148 Gould moves to New York, marries Helen Miller, the daughter of a wealthy New Yorker; this was a great catch for him, he had a happy family life and six children, who very much love their father, despite all the vilification that came from the world to him.
149 Gould buys Rutland and Washington Railroad bonds at ten cents on the dollar, a dilapidated and nearly bankrupt road "typical of the short lines of the early railroad era," and he learned the business on the fly and turned around the company; at the same time Gould was learning what life on Wall Street was like, and in 1865 or 1866 he first met Jim Fisk, who around this time had tried to open a brokerage firm, but was ruined by it and lost every cent of the modest fortune he had garnered during the Civil War. "Damn 'em! They'll learn to know Jim Fisk yet!" [You can't help but love the guy's pluck.]
150 Fisk meets Daniel Drew and arranges to negotiate the sale of Drew's steamboat business, and then Drew helps set Fisk up again on Wall Street in a new firm: Fisk, Belden and Company. Fisk then learns speculation from Drew, now that he was "inside" the industry.
154ff "Jay Gould and Jim Fisk were the most unlikely of friends, for to the outside world they seemed to have nothing in common. But they shared one attribute at the very least, a ferocious determination to be masters of the game; Jim Fisk to assuage his powerful thirst for life at its fullest and Jay Gould to make a great fortune. Each was more than smart enough and self-honest enough to realize that the other had what he himself lacked."
Chapter 8: The War Breaks Out
158 An arrangement among the New York Central, the Pennsylvania and the Erie to pool their New York City business, dividing the pie evenly to prevent a rate war, but Drew manipulated other board members to vote down the arrangement, shocking Vanderbilt, who felt he was being sabotaged. Vanderbilt then sought to buy out the Erie.
160 Drew ran a side deal to help Erie with some financing needs, creating an unusual convertible bond that was re-convertible into stock, but could also then be re-converted again into bonds; in this way Drew could expand or contract the float of Erie's stock by more than 20% if and when he needed to. Drew was still Erie's treasurer at this time.
161ff Side thread here on the New York State Supreme Court, its corruption, how it was subject to political influence; on David Dudley Field, who created the "Field Code" of law which was adopted by 26 States and the Federal government, and even adopted as the basis for reforming the legal code of England. Hardly anyone remembers Field for his influence on the law, he "is remembered now, when he is remembered at all, for using his mastery of the code he created to defend and advance the interests of his two most famous clients: James Fisk, Jr., and Jay Gould."
165 On conducting lawfare in an era where litigants would retain "a judge as well as a lawyer." [!!!]
167ff Vanderbilt got his own court and judge too, attempted to get ahead of Drew's ability to issue new stock; Vanderbilt thought he had Drew hogtied and then went into the market to buy all the Erie stock he could get, showing a "profound ignorance" of his opponents; while Drew was converting bonds into stock regardless of Vanderbilt's injunctions, Drew was also issuing brand new bonds and converting them into stock as well, so the floating supply of the stock Vanderbilt was trying to corner increased by 20%.
168 Drew also pulls a banana republic move, getting another Supreme Court judge in Cortland, NY, two hundred miles away, to place an injunction against any proceedings in the original court, and also to get one of Vanderbilt's allies kicked off the board [this is getting hilarious, and hard to believe]. And then a third court gets involved, so we have three co-equal judges issuing conflicting injunctions, all equally binding. "There was more to come."
169 Bankers refuse to lend to Vanderbilt based on his stock collateral, but then he dispatches Richard Schell to the Street to tell them that the Commodore will sell New York Central's stock down to 50 and "break half the houses on the Street" if they were to deny him. "The bankers caved in at once, and Vanderbilt had his money. He went on buying Erie steadily."
170 The judges issued more conflicting rulings; here's a hilarious quote from the American Law Review "whose contempt for the New York State judiciary bordered on the total, noted that 'the New York community is not apparently unaccustomed to seeing one justice of its Supreme Court enjoining another on the ground that his respected associate has entered into a conspiracy to use his judicial power in a stock-jobbing operation.'" Drew, Fisk and Gould were in a perfect situation because they were forbidden to convert bonds into stock and then forbidden by another judge to refuse to do... so they could just do what they wanted!
171 Fisk supposedly said "If this printing press don't break down, I'll be damned if I don't give the old hog all he wants of Erie." The Commodore kept buying: he and his allies held almost 200,000 shares, but nobody knew how many shares there were in total. Basically here Drew, Gould and Fisk had cleared $7 million of Vanderbilt's money, which they probably converted to dollars, this ended up actually draining much of New York City if its money supply, which caused short-term interest rates to go up; and all Vanderbilt had was for his trouble was another 100,000 shares of fresh Erie stock that had just diluted the company further; worse, he was made of fool of in the court system.
172ff Next Vanderbilt got a court to issue punishment for contempt; there was a risk that police would come and arrest Drew, Gould and Fisk, and what follows here is a scene that quite literally beggars belief for a major publicly traded company, where employees were leaving company headquarters with packages of greenbacks, literally walking out of HQ with bags of physical cash. Many of this gang then took a ferry across the Hudson into New Jersey, including Drew, although Gould and Fisk stayed behind as well as a few other directors. Three of them would be caught and arrested for contempt. "That night Gould and Fisk dined at Delmonico's with lookouts posted in all directions. In the middle of dinner they learned that arresting officers were on the way. Fleeing the restaurant, the pair hailed a carriage and took it to the foot of Canal Street, where the steamer St. John was docked. After brief negotiations a boat was lowered and two seamen engaged to row them across to New Jersey." "...the first battle of the Erie Wars was over. In a sense it was a standoff."
Chapter 9: Fort Taylor
174ff Fisk and his team set up a headquarters at Taylor's Hotel in Jersey City right near the Erie railway depot, Fisk he also installs his mistress Josie Mansfield in the hotel too. The war over this company actually pushed Andrew Johnson's impeachment proceedings off the front page in the news. [Also very interesting to think how much things have changed when you could go to New Jersey and be totally outside the jurisdiction of New York law... as long as you stayed there.] Fisk and his team actually posted a three-and-a-half pound cannon [!] and fifteen New Jersey police officers around the hotel. "The government of Jersey City was anxious to be as helpful as possible to the Erie Railway. The Erie dominated the economy of the town..."
178 Among this pirate management there was a concern that Drew might make a separate peace with Vanderbilt to protect himself.
179 One of the judges, Judge Gilbert, voided his injunction, requiring conversion of the bonds into stock, the judge claimed he was deceived.
180ff The next phase of the war was fought in the legislatures of New York and New Jersey, an even less ethical realm than the courts. [Very, very little has changed.] The New Jersey legislature made the Erie a New Jersey corporation by law, and then on the next day the New York State Assembly passed a bill that gave the company carte blanche to do anything it wanted basically, ignoring the interests of stockholders.
184 At this time there were also growing concerns in the media about Vanderbilt having too much power if he gained control of the Erie along with the other rails he already owned. They began to side less with him despite their respect for him: "public opinion began to shift away from the Commodore."
185 Hard to believe the wholesale bribery happening with the New York Legislature here, rumors that a half a million dollars in payments were spread around a single committee to kill this bill.
187 The bribery stories here are unbelievable, this one sounds like a tall tale: there was one report of an Albany representative who received $100,000 to influence the legislation but then took $70,000 from the other side to "get lost"--which he promptly did-- he then became "a gentleman of elegant leisure."
188ff Vanderbilt decides to cut his losses; he sends a note to Drew to come see him. Vanderbilt wanted to be made whole for the stock he bought that Fisk diluted; he also wanted two other friends who had been sacrificed by one of Drew's pools the previous year to be made whole; and then third, Drew had to withdraw from management of the Erie. Drew was happy to be made more or less whole and get out of this conflict and get back to Wall Street. Vanderbilt in return withdrew his opposition to the Albany bill. Then the quantity of bribes coming into the legislature instantly plummeted, and this devastated all the legislators. [!]
192 Then Vanderbilt struck a deal with Gould and Fisk, basically more or less making Vanderbilt whole and putting Gould and Fisk in charge of what was left of the company, now "a well-plundered enterprise."
Chapter 10: The Embarrassment of Daniel Drew
194ff This settlement left the Erie company in "even greater financial disrepair than usual." The company had to issue new convertible bonds that were immediately converted into stock, and the stock went from 70 to 44 1/2. "All this was accomplished 'without a word of previous intimation to the stockholders.'" [That was how business was done back then, there were no filings, none of that silliness. Companies could just dilute shareholders as much as they wanted, any time they wanted, without even telling them.]
196 Gould and Fisk were reelected to the board, along with sufficient allies to control the company; also Gould rewriting company bylaws about rules for the shareholders to suit his convenience, and at the expense of other shareholders; for example, requiring in-person proxies which would disenfranchise any foreign or non-local stockholders.
196ff Daniel Drew tries to get back into operating, but he had lost a step, he'd lost his touch.
197 Gould wants to set a huge bear trap, much bigger than anything Drew would do: he wants to engulf New York as well as London's Lombard Street as well by manipulating down both railroad securities as well as the money market. Gould's plan was to wait until the fall harvest when cash would leave New York markets to pay farmers for their crops, and at the same time write a bunch of checks against the bank deposits of every railway he owned, have those checks certified, but instead of cashing them he would take them to other banks and use them as collateral by which to borrow still more dollars; this would remove a lot of money from the New York money supply.
200ff Drew had originally gone in with Gould on this scheme, but then panicked and pulled out, and then went short around 38 a share, assuming that Gould and Fisk would continue their plans unchanged; Gould and Fisk felt betrayed, and loosened up some of the greenbacks and the stock went much higher; Drew basically groveled in front of Gould and Fisk; "they spared Uncle Daniel no humiliation." Drew then threatens them with a lawsuit that he was working on: in the affidavits he was going to basically rat on them, disclosing the malfeasance inside the company that Gould and Fisk were guilty of.
203ff Gould had already anticipated Drew's legal efforts, he put a company in the hands of a receiver, who was Gould himself (!) and then gave that receiver the ability to buy up stock on the open market; Gould then facilitated a squeeze on Drew and his short position.
205ff Drew manages to cover at around 57, costing him $1.3 million. And then once he was covered his short, Gould then let the stock drop right back to 42. "For weeks afterward no more than a few hundred shares of Erie changed hands on the street each day, and sometimes none at all." Drew's reputation continues to collapse.
208ff [This all sounds a lot like the cryptocurrency environment now: there's no legal framework in place to create rules and behaviors and etiquette yet, it's the wild west, people can do anything and rug anybody any way they can dream up.] "So long as the law was silent and did not forbid such schemes as Gould and Drew utilized, such men would exploit the void for their own short-term profit. ...it would take sixty years and the onset of a great depression before anyone would seriously suggest that the regulation of securities markets might be a federal responsibility."
210 On how brokers always make money with transaction volumes, so the Erie Wars were good for them; but brokerage firms that had lent against share collateral would be harmed by the fact that nobody knew how many shares outstanding Erie actually had... so you don't know the value of the collateral.
211 On Jay Gould's use of "the big lie": basically he lied right in front of the press and even to the New York State Assembly; claiming that the ability to issue or retire stock at any time would be the only thing that would keep him in control and keep Vanderbilt from a large monopoly on the rail industry. Everybody believed him, except for Wall Street firms who collectively cut back significantly on lending against every railway stock.
212 November 1868: The New York Stock Exchange adopts a resolution requiring registration of all listed securities, as well as 30 days notice before issuing any new securities; the deadline to comply was January 31st, 1869; Gould finally gave in and complied with these requirements by September of that year.
212 Also on the merger of the New York Stock Exchange and the Open Board of Stock Brokers to become really the only significant single important stock exchange; this was the beginning of the Exchange exercising real power over its members.
Chapter 11: Castle Erie
215ff More court wrangling: a new receiver is put in charge of the company, and when they arrived at headquarters they were introduced to the "thugs of Erie" run by Tommy Lynch, who was providing muscle for Fisk and Gould. Still more dueling judges' orders, as people just brought in the judges that they had bought to give them the decision they wanted, "enjoining, staying, and vacating each other with regard to the same case."
217 Interesting and ironic blurb here on Judge Albert Cardozo, who was considered less unethical than many other judges, but he certainly was active in doing favors, "such as naturalizing recent immigrants by the boatload so they could vote Democratic." [Yikes. Note that Cardozo was the father of Supreme Court Justice Benjamin Cardozo.]
218ff Dueling lawsuits and court cases, dueling comments in the media, etc., including one instance in which Vanderbilt was exposed telling a lie in a letter to the New York Times. Also on Jim Fisk arranging to have the editor of the Massachusetts Republican, Samuel Bowles, put in jail for libel in a creative way, the libel suit was never pursued.
222 Here the book changes tack and backs up two years in time: the book switches to the Commodore acquiring control of the New York Central in 1867, eliminating various inefficiencies to run the railroad better and more profitably.
223 Good example here in very simple math showing what happens when you take a company with steady revenues and cut expenses: here, Vanderbilt took over the New York Central, he cut expenses 13%, while the business had tepid revenue growth of 2.9%. Note that the operating profits went up 54.6% as a result! This is what can happen with solid expense management. [The author actually uses the phrase "a whopping 54.6 percent," a hilarious indicator that nobody can resist a little bombast here and there.] Note at the same time the Erie was running about the same revenue level but with basically close to zero profits on the operating line as their expenses were far higher. Further, note that Erie was less safe, with far higher number of passengers killed and injured that year compared New York Central.
224ff On Vanderbilt wanting to issue a stock dividend on New York Central stock; comments on the court system, where no matter what you did someone would try to enjoin you; it wasn't clear with the legal frameworks were here; note also Vanderbilt's famous quote "never tell them what you're going to do until you've done it." Basically, just do the thing you want to do--you're going to get sued or enjoined either way. The Central Railroad does something creative by issuing scrip paper that paid a 4% dividend until they could get approval from the stockholders to issue an 80% stock dividend.
227ff Machinations here where Vanderbilt and Gould actually were not working directly against each other, for once; Vanderbilt wanted to consolidate the Hudson River Railroad and the New York Central and thus have a route all the way to Buffalo from New York City; at the same time Gould was seeking a direct connection to Chicago through Pennsylvania, although he couldn't get control of the Pennsylvania Railroad. See also here the so-called Classification Act in the New York legislature that would put managers, not stockholders, in ultimate control of corporations [we can see here how the structure of the modern corporation is gradually being sculpted as the legal system and corporations themselves deal with the agency problem between those who have ownership (shareholders), and those who have actual control of the enterprise (big/majority shareholders), and those who are running an organization's day-to-day operations (management).]
229 Interesting tidbit here: instead of directly bribing politicians in Albany, Vanderbilt "maneuvered them into buying large amounts of Central stock" claming that it would go up if this bill passed.
230 On the evolution of railroads from local to "agglutinated" regional carriers in the 1850s, and then by around 1870 railroads were became national thoroughfares "symbolized by the race among the Eastern roads to reach Chicago." Also on Gould's desire to play the game [of stock operating] rather than run a railroad which would "cost both him and the Erie dearly."
231 Of Gould's various interests in theater and opera; Gould actually bought theater houses and opera houses; on the Erie's new corporate headquarters, rebuilt in a old theater building, Pike's Opera House, which Fisk and Gould had bought (as a theater); after it failed it was then probably purchased by Erie Railway, the company itself: they did a lavish renovation. [In retrospect this looks like another example of the HQ indicator: a company tends to run into problems shortly after building a huge new headquarters building.]
Chapter 12: The Raid on the Albany and Susquehanna
238ff This chapter discusses a rail line from Albany to Binghamton through sparsely populated territory; it required multiple financings, and although chartered in 1852 it still wasn't finished by 1868, with 22 miles to go through the worst terrain. Gould saw a strategic synergy here to get coal from Pennsylvania to New England.
240ff Albany's board was stalemated, Gould had common goals with Walter Church who was an oppositional director there; and then some crazy shit happened here: Joseph Ramsey, the founder and president rehypothecated company bonds that he didn't own in order to get collateral to buy subscriptions to shares that had not yet been issued; this was in order to get more votes for the coming board meeting. Various machinations followed including dueling judges putting the company in receivership; physical fistfights for control of locomotives involving literally hundreds of men and retainers with clubs and sticks, to the point where the New York State militia had to be called out to quell the disturbance [!]; it's unbelievable that this stuff went on.
Just another minor 19th century boardroom dispute...
251ff After the shenanigans of this battle for control, the state government sprang into action, the governor threatening to the subject the rail to martial law; then both sides the Fisk/Gould side and the Ramsey side decided to settle everything out in the courts; also New York kind of exposed itself for having a dirty judiciary and needed to clean house; also on the formation of the New York State Bar Association in 1870, with the goal to significantly limit the powers of judges in ex parte proceedings. "The Bar Association would do much to improve the standards of behavior by both lawyers and judges in the next few years and would be a major force in cleaning up the New York State judiciary and its procedures."
254 The chapter closes with a discussion of Vanderbilt, who had lost his wife the prior year; he then remarried a 30-year-old divorcee when he was 75.
Chapter 13: Black Friday
256ff On September 24th, 1869 and the leadup to it; a crash that was not equaled until 1929; on Jay Gould's idea of cornering the gold market during the six months after Grant's inauguration as president. Note that unlike England the US was not really on a gold standard thanks to "the lingering effects of the Civil War." At that time currency in circulation was in the form of banknotes that would be discounted based on trust or distance from the banks; the only money minted by the federal government in this period were coins, including gold coins valued at $20 an ounce. In 1861 the government suspended specie payment and empowered nationally chartered banks to issue notes backed by government bonds held as reserves. The national government also drove state banks out of the currency business by placing a prohibitive tax on note issuance. Finally the Treasury issued "greenbacks," its own notes, and required by law that they circulate at par with gold. When it became clear this would drive all gold coins out of circulation almost instantly this section of the Legal Tender Act was quickly repealed, but "what was not repealed was the requirement that contract specifying payment in gold could be satisfied, at par, with greenbacks. The obscure provision--obscure because it was always ignored--was one of the key elements in Gould's audacious scheme."
258ff On the "Gold Room" right next to the stock exchange in New York, where brokers transacted in greenbacks versus gold on miniscule margins and with tremendous leverage; Gould thought there was some $14 million in gold certificates outstanding but only about $3-4 million in gold coin available to the market on the day of the panic; in other words, the actual gold in circulation was nowhere near the amount of paper claims on that gold.
258 "There are always lots of old fogies who keep gold to look at." --Gould
259 Also Gould had control of the 10th National Bank, which would provide certified checks without Gould having to provide cash back to them; so this gave him some $25 million in capital to play with. Another fact a play here: foreign trade was all settled in gold, and so New York merchants involved in foreign commerce were always "short" of gold; likewise they would hedge by shorting gold during the time between concluding a transaction and when they received payment in gold, this was to hedge away a potential decline in the gold price. These guys who were respectable and deep-pocketed companies, which would want to settle up quietly rather than be involved in a public default if there was ever a run-up in the gold price.
260 The final problem was to make sure that the $100 million worth of gold stored in the government vaults in New York City would not be brought in to break any attempt at a corner. Gould approach this problem by approaching Able Rathbone Corbin, who had married Grant's middle-aged spinster sister, basically Gould offered to buy $1.5 million in gold on his behalf, presumably to ride along on his play. Gould continue to work on Grant to the point where Grant didn't want to see him, complaining to his wife that "Gould was always trying to get something out of him." Also Gould got a friendly candidate, General Daniel Butterfield, put into place to run the New York subtreasury, someone who would alert him ahead of time if the US government came to market to sell gold. Butterfield also accepted a $10,000 loan with no collateral from Gould.
265ff Gould also planted an editorial in the New York Times, using a British writer, making it seem like the Grant administration was in favor of higher gold prices.
266 By the middle of September the buying pool had gold contracts amounting to many times the total of quantity of gold physically present in New York City (not in government hands).
271ff The author struggles to convey the energy of the climactic day, and it doesn't even seem like the price of gold went that high actually: it peaked at $160 and then sold right back off to $140, and that was it; this comes off as nothing at all like Bunker Hunt and his silver corner (or at least the author struggles to present it to the reader with sufficient drama). Finally it isn't even clear if the buying clique even made money! Plus there were lawsuits for years afterwards.
278 Ultimately it made a full transition to hard money politically very easy thereafter.
Chapter 14: President Gould and Colonel Fisk
279ff Discussion here of LeGrand Lockwood and his brokerage firm Lockwood and Company, which was caught up in the gold corner; it also owned the Lake Shore and Michigan Southern Line which had acquired the Buffalo and Erie Railroad, which ran between Buffalo and Erie and was a desirable link on the way to Chicago; he thought he could play Vanderbilt off using Gould, also at this time a lot of the railroad stocks fell in the aftermath of the gold corner. Lockwood was over-levered and his firm had to suspend business; the stock of Lake Shore fell from 98 to 76, and this is when Vanderbilt bought 20% of it, enough for control. "The Commodore and the New York Central were through to Chicago, and he had done it in the fire sale prices that had resulted from Jay Gould's speculations in gold."
281ff On St. John's Park, West of Broadway and south of Canal Street, where Vanderbilt bought the park and put a depot there to handle the Hudson River Railroad's freight business; ultimately this area became the Manhattan approach to the Holland Tunnel.
286ff Discussion here of George Crouch, a reporter for the New York Herald who Fisk and Gould hired (possibly while he was still a reporter at Herald) to write positive press about them, the first example of a PR flack.
288ff On the Erie Railroad's 1870 yearend report, the first full year under Gould and Fisk's management, written by Crouch and exaggerating the company's condition, but keep in mind this is long before accounting standards and audited financials.
290 Good example here of a typical scam that management and company owners could do anytime they wanted in these days: in 1868, Gould and Fisk shorted the stock of the United States Express Company [I guess this is a shipping company] and then they announced that the company would have to pay an extra $500,000 a year to use Erie's facilities, when the company refusal, Erie then canceled US Express Company's lease, saying it would handle its own express business, disintermediating them; Expres fell from 59 to 43, allowing Gould and Fisk to cover, then they went long and then struck a compromise deal with the company, announcing a settlement publicly, sending the stock into the 60s.
294 On the Claflin sisters: Tennessee Claflin and Victoria Woodhull, who, with Vanderbilt's backing them $7,500, they opened a brokerage office, the first women to do anything of the sort; these two women were ardent feminists: one was a candidate for president, they were both advocates of free love, scandalizing conservative Victorian culture at the time; Vanderbilt probably did the did the thing to please his young wife who was likewise a feminist; surrounded by gawkers they put up a sign saying "All Gentlemen Will Please State Their Business and Then Retire at Once," and per the author, "to the astonishment of many, they were making a success of it."
294ff A new rate war breaks out between the Erie and Pennsylvania and New York Central Railroad; Vanderbilt starts cutting pricing, and then the Erie cut their freight rate to $1 a carload from Buffalo New York, a suicidal rate; Vanderbilt's Central matched this rate, and then Gould and Fisk had bought up all the cattle in Buffalo and shipped them via Vanderbilt's train lines at his discounted rate!
Chapter 15: God's Expressman
299ff A battle with English shareholders in the Erie; these shareholders wanted to vote their proxies, but Gould refused to transfer their shares, this was so he could stack the board with his men.
300 Continued declines in relative service quality of Erie vs Vanderbilt's rail lines.
302ff Section here on Edward Stokes, quick to outrage, had a fling with Fisk's mistress Josie Mansfield.
310 Discussion of Irish Catholic/Protestant conflicts in New York, [interesting how it's evolved in NYC to a sort of "St. Patrick's Day for all Irish" now], a disputed parade/march celebrating the Battle of the Boyne, the march was guarded by militia, including Jim Fisk's Ninth Regiment, his pet regiment, a riot ensued between marchers (Protestant) and newer (Catholic) Irish immigrants to New York. This turned out to be a full-fledged riot: somebody shot at some of the soldiers who were there to enforce order, and the soldiers responded by firing into the crowd; more than 40 people were killed and the crowd actually tried to capture Fisk, who exchanged outfits with an Irishman and snuck away.
316ff On the Erie sending free freight to Chicago after the 1871 Chicago fire.
Chapter 16: The Murder of Jubilee Jim
320ff Sidebar here on Boss Tweed and the fortune he gained as mayor of New York; plus the New York Times ran a long series of articles on corruption in the so-called Tweed ring [this was when the Times actually exposed corruption, rather than acted as a regime propaganda instrument as it does today], note here the author contextualizes all this, explaining the amazing levels corruption throughout city, state and national governments during this era.
325ff Back to Edward Stokes and Fisk: basically Fisk is now no longer together with Josie Mansfield, she left him for Stokes; Fisk then arranged to have him arrested for embezzling funds from a partnership; all this went into court, it seems sort of ludicrous, ultimately it resulted in Stokes shooting Fisk in a hotel, perforating his intestine, he died shortly thereafter; his estate was less than a million dollars, he left it to his wife; she took terrible advice in managing the money and quickly lost most of it; note that Jay Gould looked after her financially afterward.
338ff Edward Stokes went through a couple different trials, one with a tampered jury that ended up with a hung jury; a second where he was convicted to be hanged, and then a third where he was found guilty only of manslaughter; he served four years at Sing Sing. Josie Mansfield ended up impoverished in Paris, dying at age 83.
Chapter 17: The Fall of Castle Erie
340ff This chapter covers a collection of both English shareholders as well as others who wanted Gould off the board, replaced with a new slate of directors; on the various legal wranglings that went into engineering this board reshuffling.
347ff Hilarious anecdote here where Gould called a meeting to order and ended the meeting immediately, so quickly that nobody could offer the resolution to change over the board.
350ff An almost unbelievable scene here of Gould's thugs and local police fighting over the company headquarters, as the two boards both try to get physical control of the building as well as the company, breaking open offices, etc.; Gould barricades himself in his office; Ulimately, Gould resigned. Ironically the stock price started going higher after this, from the 40s to 60.
Chapter 18: The End of the Erie Wars
360ff On Daniel Drew attempting to short Erie at 55, ultimately making half a million dollars on the trade; but Gould wanted to get him back; Drew closed the short and then went long trying to corner Erie, making another $800,000; this was his "last winning move" per the author.
363ff On cleaning up the New York judiciary and eliminating some of the judges that were making these ex parte orders out of court like Cardozo and Barnard, who were removed.
364ff Gould running a corner on the Chicago and Northwestern Railroad; Drew and Gould's former brokerage partner Henry Smith were short this stock; Gould executed a perfect corner and destroyed both guys, running the stock from 78 to 300. Drew was bankrupted, his positions liquidated by his brokers.
371ff The author relates a weirdly incontinent newspaper interview with Commodore Vanderbilt where he slams Jay Gould: "I consider Mr. Jay Gould a damned villain. You can't put it too strongly." Gould responded by disparaging Vanderbilt for being old and in the way: "he can no longer go around as he used to and attend to business, and he is feebly envious of those who can. There is a class of rising financiers whom the old man hates. They are young, full of energy, and possessed of modern knowledge and appliances to aid them in their business. The old Commodore is jealous of them."
372ff Vanderbilt starts to frequent Wall Street less often; he hands operations of the New York Central mostly to his son; he begins embracing philanthropy late in his life, endowing Vanderbilt University; He dies a few years later in 1877, aged 82, to laudatory articles in the media at the time.
375 Gould settles a bunch of old legal disputes with the Erie Company, giving up certain properties.
377 The Erie Railway washes through multiple cycles of incompetent management and multiple bankruptcies, finally to disappear as an entity in the early 1970s. "As Victorian moral myths demanded, the Scarlet Woman's old age would be largely largely a sad and bedraggled matter."
377 Jay Gould goes on to make a bunch more money on the Union Pacific Railroad and the Western Union Telegraph Company, he dies in 1892, of tuberculosis, age 56.
378 Daniel Drew, going through bankruptcy in 1876 (although he had transferred considerable assets to his son previously so his family was fine), then in 1879 he dies of a stroke at age 82.
Bibliography:
Here the author leaves very helpful comments on the books that he likes, the ones that he thinks are dishonest, and so on. He's particularly blunt with the famous book The Robber Barons by Matthew Josephson, calling it "a profoundly dishonest work." I love it when an author comments about his sources: the reader gets access to a much more reliable collection of future reading. Below are some of the titles that caught my eye.
To Read:
***William Worthington Fowler: Ten Years in Wall Street
L.P. Hartley: The Go-Between
***Arthur T. Hadley: Railroad Transportation
William A. Croffut: The Vanderbilts and the Story of Their Fortune
Edmund C. Stedman: The New York Stock Exchange
Edward Harold Mott: Between the Ocean and the Lakes
Clifford Browder: The Money Game in Old New York
***Charles Lockwood: Manhattan Moves Uptown
Matthew Hale Smith: Twenty Years Among the Bulls and Bears of Wall Street