Dark Genius of Wall Street

by Edward J Renehan Jr

  Early in February, Crouch left McHenry in London and returned to New York. There, on McHenry’s orders, he worked with Sickles to orchestrate a well-financed coup from within the Erie board. With the Britishers’ federal suit in progress and the repeal of the Classification Act just a matter of time now that Republicans controlled the New York State Legislature, a number of Erie board members formerly loyal to Gould sensed that Jay’s days were numbered. Thus they sought to carve a profitable surrender with McHenry. Crouch recruited Frederick Lane for a price of $67,500. He snared two other Gould partisans, Henry Thompson and John Hilton, for $67,500 and $25,000 respectively. A former Fisk protégé, M. R. Simons, settled on $40,000 to join the party. Newly appointed vice president O.H.P. Archer also received $40,000. Erie secretary H. N. Otis got $25,000, the same amount being paid Justin White. Charles Sisson, George Hall, and Homer Ramsdell (the latter a former president and current director who’d never been happy with the Gould regime) joined the revolt without charge. Meanwhile Miller and Abram Gould, incorruptible, were not approached. On 27 February, Crouch cabled McHenry in London with the word: “Majority of Erie Directors with us. Gould powerless. Have loaded up in this market at thirty.”2

  Realizing full well that, like himself, McHenry had been buying large blocks of low-priced Erie stock in order to benefit from the rebound sure to follow news of Gould’s ouster, Crouch sent another message the following day: “Have you bought all you want? . . .We have moved against the enemy in three columns. One, headed by Sickles, has been diverting him in the Legislature; another, under the Attorney-General, has been threatening a flank movement in the courts; and the third, under yours truly, . . . has succeeded in undermining the very citadel of Erie. In order to cover my mining operations, I kept up an incessant bombardment in the press.”3 Indeed, Crouch’s press bombardment–issued via the Herald, where he’d once worked–was quite shrill. “There is no citadel of fraud,” that paper shouted on 1 March, “no matter how strongly garrisoned and entrenched, that will not yield in time to the incessant and well-directed blows of an independent and powerful journal. . . . Tammany was an ulcer: Erie is a cancer. It must be rooted out, and at once, and we must make it impossible that it can ever grow again upon our body politic.”4

  On 8 March, nine Erie directors sent Gould a note demanding that he convene a meeting of the board for Monday, 11 March, in order to enact whatever measures might be necessary to counter “the growing distrust which pervades the community in regard to [the Erie’s] management.”5 This was a meeting at which, although they did not say so, they intended to fill the two board spots previously held by Tweed and Fisk with men friendly to McHenry. After that, each of the conspiring directors would resign in turn, to be replaced one-by-one with McHenry allies. Gould, however, had been tipped off to the essence of this plot by none other than Lane himself several weeks before, presumably before the Erie’s counsel had made his decision to commit to revolution. (“They are counting on me,” Lane had told Gould, “but I shall remain true to you, and they have not money enough to change me.” This assurance, Gould later commented, he’d taken with “a slight discount, knowing Lane very well.”6) Thus Gould simply refused to summon the board as requested on the morning of the 11th, at which point Vice President Archer took it upon himself to do so.

  Even though Gould quickly got an injunction against the proceedings, the conspiratorial Erie men, together with their poised replacements, gathered in the board room at noon and commenced their business. In short order, the round of carefully scripted appointments, resignations, and elections proceeded according to plan. All this resulted in Gould’s firing and the appointment of a new president, John A. Dix, distinguished former general, U.S. treasury secretary, and U.S. senator from New York. Gould arrived on the scene about 12:30, at which point he ordered that the rebelling members be locked in the boardroom and put under guard by several of Tommy Lynch’s men. Then, receiving word that Sickles was on his way with U.S. marshals intent on enforcing the dictates of the new board, Jay barricaded himself inside his office with Shearman, Morosini, and several Lynch soldiers.

  Around 1 P.M., Sickles arrived with the marshals, who pounded on Gould’s door. When Gould refused to yield his chamber, the marshals opened it with a crowbar and stormed the place. Running from this onslaught, Gould holed up in yet another office–the one that had, an hour before, belonged to Lane. With him now were Morosini, a roughed-up Shearman, and a few more of Lynch’s boys. They remained there through the night until early Tuesday morning, when a peace was reached. Sickles agreed to release both Gould and Fisk’s estate from all claims the Erie might have against them. He likewise agreed to settle all outstanding accounts between Gould and the firm, and to refund loans (approximately $2 million worth) carried by Gould for the Erie. For his part, Gould promised to step down immediately, if only a new meeting might be held, with him as chairperson, to replace what Gould called the “illegal” meeting of the day before.

  When Gould finally stepped out of his office, he was, according to a Sun reporter, “very pale and scarce able to walk.” Going directly to the boardroom with directors old and new in his wake, Gould promptly brought the meeting to order. Once again, McHenry’s first two appointees were nominated and confirmed to fill the shoes of Fisk and Tweed. Once again the old directors abdicated in turn, with carefully crafted votes after each resignation slowly filling up the table with McHenry men. When the long shuffle was done, Gould announced, “Gentlemen, I herewith resign the office of President of the Erie Railroad Company.” The new board immediately voted to accept Gould’s resignation. Then, for good measure, they approved a statement endorsing immediate repeal of the Classification Act by the New York State Assembly and Senate.

  After the meeting ended, Gould walked Dix to the president’s office. “You won’t find things in very good order,” he apologized, waving his hand across the utterly trashed space.7 Next, Gould called for Tommy Lynch and told him to take his men away. Then he himself departed Castle Erie forever. Subsequent newspaper accounts of the altercation in the Erie offices emphasized Gould’s flight from men portrayed as the righteous representatives of order and justice. Cartoonists and pundits painted Gould a weasel- like physical coward–a bully whose bluff had been called–and delighted in the idea of him being cornered in the most literal sense of the word.

  Over the next days and weeks, Gould sat at home and watched his fortune soar. He remained the largest single holder of Erie shares. One day following his ouster the Erie rose from 30 to 40 on heavy orders from London. Three days after that, the stock got to 47 1/2. Two weeks later the Erie stood at 67. And by May the price was 75 7/8. Gould reaped millions from his disgrace.

  He sold gradually but steadily into each new high, for he had no illusions. He realized the market would figure out soon enough that the Erie remained a financial basket case. In time, examination of the books by the new directors revealed almost $5 million in floating debt, owed for the most part to Gould partisans who now demanded payment. At the same time, hairline cracks developed between various factions within the “new Erie.” Burt, representing the interests of the British shareholders, distrusted McHenry, whose main interest, Burt guessed, lay in manipulating Erie stock and propping up the A&GW. It was perhaps for this reason that when the repeal of the Classification Act went through on 16 March, the bill included language forbidding any director of the A&GW to sit as a director of Erie. The repeal document also required a new election of Erie board members in July. When this took place, General Dix–who’d always been seen as an interim president–found himself replaced by Peter H. Watson, an attorney noted for founding the Southern Improvement Company. In the months between repeal of the Classification Act and the election of 9 July, McHenry had made it his business to court the British shareholders, with whom he managed to maintain an uneasy peace. Thus the new president, Watson, and the balance of the Erie board remained very much McHenry partisans going into the summer. In fact, on the very day of
Watson’s election, the new board approved a $750,000 payment to McHenry for expenses he’d incurred in taking down Gould.

  Two months earlier, the old bear Drew–now a relatively small and quite obscure operator working on the periphery of the market–had shorted 50,000 shares of Erie for delivery in late December at 55. As his rationale, Drew cited a negative Erie balance sheet. One week after the elevation of Watson to the post of Erie president, the firm vacated Castle Erie (still owned by Gould and the estate of Jim Fisk) and returned to the railroad’s original, much cheaper space at Duane and West Streets. After several long nights of study at the Duane and West office, Watson announced that the Erie books for the previous six years were exercises in fiction. Then he authorized a suit against Gould for $10 million, the amount he claimed the former president had misappropriated. At the same time, Watson began proceedings to recover 650,000 shares of Erie stock that he claimed had been fraudulently issued by Gould. In embarking on both these actions, Watson repudiated the promise made Gould by Sickles four months earlier. Adding to the generally litigious atmosphere, Vanderbilt himself lodged a suit against the Erie, demanding payment of the guaranteed interest on the Boston, Hartford & Erie bonds he’d taken as part of his settlement back in 1868, the BH&E having just defaulted.

  All of this news conspired to knock the price of Erie back down to size. In August, the stock fell into the 40s. Drew seized upon this drop to close his short, buying 50,000 units at 40 to cover his contracts for sales at 55, thus making himself a quick $750,000. Parlaying this windfall in September, Drew went long in Erie, achieving a brief corner. Drew’s trap ensnared none other than Jay Gould himself. Gould and his old brokerage partner Henry Smith had recently been engaged in short speculations concerning both the Erie and the Pacific Mail, a West Coast steamship company. The two had to cough up $400,000 apiece to cover their shorts with relation to the Erie. To Gould the loss of $400,000 was annoying but not, at this stage of his career, devastating. The same could not be said for Smith, who had not done quite so fabulously as Gould after the breakup of Smith, Gould & Martin in August 1870. When Gould refused to cover Smith’s losses for him, the latter reportedly closed out their relationship with a threat: “I’ll get good and even with you before another year.”8

  Reformist Republican housecleaning swept up Gould’s judicial protégés Cardozo and Barnard. Cardozo resigned his office in July rather than face impeachment. He would go on to practice law successfully until his death in 1885. Barnard refused to resign. Instead, he surrendered himself to a brief trial before New York’s High Court of Impeachment, comprising the State Senate and the Court of Appeals combined. At Saratoga Springs in late August, the High Court voted unanimously to remove Barnard from the bench. He died six years later. As for Tweed, his first trial for embezzlement resulted in a hung jury. At the end of his second trial, in November, Tweed stood convicted and received a twelve-year prison sentence, a sentence later reduced by a higher court. Tweed wound up serving one year. Upon his release, New York State immediately sued him for $6 million and confined him to a debtor’s prison until he could come up with half that amount for bail. During December 1875, while enjoying a brief parole to visit his family, Tweed escaped to Spain. There the fugitive worked as a common seaman for a year until, ironically, he was recognized because of his likeness to a Nast cartoon. Extradited to the United States, Tweed died in New York’s Ludlow Street Jail on 12 April 1878. On the day of Tweed’s funeral, thousands gathered to pay their respects in front of his daughter’s house on East Seventy-seventh Street. At the Tweed family plot in Brooklyn’s Green-Wood Cemetery, newspaper reporters noted that most of the nearly 1,500 mourners present for the burial were poor New Yorkers, many probably past recipients of Tammany charities. No elected official of importance showed up for Tweed’s final rites. Neither did Gould.

  As he had done when shorting Erie and Pacific Mail shares in his expensive collaboration with Henry Smith, Jay Gould would transact virtually all of his Wall Street business for the balance of his short life through a series of special partnerships with a variety of brokerage firms. This device allowed him the luxury of trading anonymously whenever he cared to, and of trading on both sides of a speculation through different brokers. Eventually, Jay would spread his business over so large a network of Wall Street houses that he became something of a phantom: ever present, but frequently invisible and always inscrutable.

  At the time he severed relations with Smith in late September, the latter had seemed intent on hanging tough with his short positions on the Pacific Mail, even though the Pacific Mail’s management had just orchestrated a bill in Albany allowing a reduction of the steamship company’s capital stock by half. Looking at the situation objectively, Gould saw that with the Pacific Mail buyback afoot, the stock was inevitably bound up and not down. Thus he cut his losses, covered his short positions, and got out. More annoying for the still-short Smith, however, was the fact that Jay then promptly started buying Pacific Mail at market, doggedly bulling up the stock in collaboration with the company’s board. During October, Pacific Mail rose from 73 to 103, almost ruining Smith, who came out of the affair even more bitterly incensed by what he saw as Gould’s duplicity and malevolence.

  Shortly, Smith would have even more to complain about. As Gould well knew, that autumn found Smith conspicuously short in the stock of the Chicago & Northwestern Railroad. (He had, in fact, agreed to sell 30,000 shares at 75.) As Gould also knew, the same could be said for several of the Northwestern’s directors as well as Daniel Drew, who personally stood short 10,000 shares at the same price as Smith. This information became valuable to Gould when Morosini, who had followed Jay out of the Erie, brought word of great interest in the Northwestern on the part of Augustus Schell and Vanderbilt’s son-in-law Horace Clark. Both men had been buying shares in earnest for many months. Nevertheless, until they spoke to Gould, their former nemesis in Erie affairs, they’d been completely unaware of the extensive short positions in the Northwestern. Now, with Gould, they planned a corner and began bulling up the stock.

  Their bulling took a short break right after 11 November, when a large fire roared through Boston and caused markets to pause. Smith, in the meantime, increased his short position by another 10,000 shares at 75, because the year before he’d made a killing in shorts across the board after the fire in Chicago. This time, however, the markets recovered with a terrible swiftness. The Northwestern stood at 95 on Wednesday, 20 November, by which time Smith, Drew, and other bears were scouring the streets, desperate for shares to help cover their positions. But of course–as the bears soon realized–Gould, Clark, and Schell had set a brilliant bear trap and held a secure corner. “In this stock,” reported the Herald, “the corner had been so carefully and neatly and artistically built up that the victims must either gracefully consent to have their financial throats cut or make one desperate stroke for compromise or revenge.”9

  At this point Smith visited Gould and demanded that he release the stock Smith needed. When Gould refused, Smith issued an ultimatum. The Erie’s $10-million suit against Gould had recently been withdrawn for want of evidence. That evidence, Smith reminded Gould, was to be found in the old Smith, Gould & Martin account books, which had much to tell about Gould’s financial manipulations during the years he and Fisk ran the Erie. Smith threatened to turn over the relevant records to President Watson of the Erie unless Gould released his Northwestern stock. Gould, however, seemed unconcerned. “Very well,” he reportedly told Smith. “Turn them over. I have no objection.”10

  The Northwestern hit 100 on Thursday, the 21st, the same day Smith delivered his books to Watson. Later that afternoon, Watson filed a suit demanding Gould return the $9,726,541.26 Watson now said he had misappropriated from the Erie, and a judge issued an arrest warrant. Having been forewarned by Smith’s threat of Wednesday, Gould was prepared that Friday when a sheriff showed up in the office of Osborne & Chapin, 34 Broad Street, where Gould had been working. Clark and Schell
accompanied Gould to the police station. There they met Gould’s latest personal counsel, who was also Tweed’s–a very young Elihu Root, future secretary of war and secretary of state. Gould’s arrest warrant stipulated a bond amount of $1 million, which Clark and Schell supplied in short order. During the half hour Gould was in custody, the Northwestern leaped from 105 to 165. The final bid on the Exchange that afternoon was 200, and there were no takers. During after-hours trading at the Fifth Avenue Hotel, the stock went up to a bid of 210 and an ask of 300.

  The Northwestern opened at 150 the next morning, Saturday. Some presumed, mistakenly, that the drop signaled a break in the corner, perhaps precipitated by Gould’s arrest. In fact, Gould and his cohorts were simply taking pity on a few smaller operators, allowing them a brief window through which to escape at reasonable prices. Gould’s charity, as the New York Sun observed, was entirely pragmatic: “This settling with small shorts at whatever they could pay was a good thing for the brokers, and a much better thing for Mr. Gould’s party, as it averted failures, and a panic which might have robbed the bulls of the greatest fruits of their brilliant victory.”11 Larger players such as Smith and Drew, however, were on their own. Drew surrendered $1.5 million, and Smith found himself forced to settle at $200, a personal loss of some $5 million. Afterward he shook his finger in Gould’s face and ranted, “I will live to see the day, sir, when you have to earn a living by going around this street with a hand-organ and a monkey.” To which Gould answered, “Maybe you will, Henry, maybe you will. And when I want a monkey, Henry, I’ll send for you.”12 Gould and his colleagues made in excess of $20 million on the corner.