Dark Genius of Wall Street

by Edward J Renehan Jr

  Jay would usually also stop during his inspection tours to see his brother, Abram. Starting in 1876, Abram, who’d previously worked for the Pacific Mail in San Francisco, found employment under Clark in Salt Lake as manager of the UP’s coal department. One year earlier, in September 1875, Jay had served as best man at a ceremony in Salem, New York, when Abram married German-born Sophia Kegler, sister to Fred Kegler, master mechanic for the Rutland & Washington. Sadly, Sophia was to die in 1878, leaving Abram with a small boy, Jay Fred Gould (known as Fred within the family) to raise on his own.

  Throughout Jay Gould’s tours of the UP line, and throughout his long days back at the UP business office in New York, he focused always on core business fundamentals. Memorandum after memorandum stressed essential basics of economy. Earnings had to be kept high, but prices could never rise to the point where they jeopardized the long-term interests of customers, even though the UP had a monopoly position. Only so long as freight clients remained solvent would they remain clients. Jay’s general policy was to charge the highest possible local rates for traffic on which the UP held a monopoly, to narrowly beat prices on competitive trade, and to offer steep discounts where necessary to facilitate the growth of new business. In step with all this, expenses had to be monitored constantly and closely–especially the costs of coal, labor, and capital.

  With Dillon and Clark, Gould hammered out the efficient running of the UP as a railroad. With the Boston members of the board, especially Oliver and Fred Ames, he shaped the details of finance. It was with Fred Ames, in 1878–one year after Oliver’s death in 1877–that Gould worked to craft a key loophole in the Thurman Act: federal legislation requiring the UP to set aside 25 percent of its net earnings for the retirement of debts owed the government. Thanks to lobbying by Gould and Ames, key language in the bill allowed the UP to tap this set-aside sinking fund if the remaining 75 percent of the net was insufficient to pay the interest on the firm’s bonds. As a result, the UP could continue to expand even while it declared itself unable to pay back its numerous government loans.4

  In placing Abram in charge of the UP’s coal department, Jay was expressing vast confidence. Coal was not just a commodity for the UP, but the lifeblood of the line. Before Gould controlled the railroad, the previous corrupt managers had, in 1868, leased the UP’s own coal lands in Wyoming to two Missouri businessmen, Cyrus O. Godfrey and Thomas Wardell. The UP then agreed to purchase Godfrey’s and Wardell’s coal on an inflated sliding scale ranging from three dollars to six dollars per ton over the next fifteen years, and to provide the gentlemen with a 25 percent rebate on shipments to other customers. One year later, Godfrey and Wardell–who all along had secretly acted as agents for several UP directors–assigned the contract to a Nebraska corporation called the Wyoming Coal and Mining Company, an operation 90 percent owned by the same UP directors. The end result was a system wherein the UP paid ridiculously high prices for coal mined on its own property. Some bituminous mines Jay owned at Blossburg, Pennsylvania, produced coal at a cost of just $1.25 per ton, so Gould knew substantial savings were to be had. Shortly after coming to power, he moved with typical decisiveness to end the absurdity. With the wave of a hand he abrogated the original contract with Godfrey and Wardell and seized the seven Wyoming mines, sending the executives of the Wyoming Coal and Mining Company to the courts, where their suits would eventually fail after languishing for six years.

  The mines Gould started to run in 1874–located in the towns of Rock Springs, Carbon, and Almy, Wyoming–were inefficient and riddled with labor tensions. The miners were for the most part Scandinavians who had been brought to Wyoming in 1871 to replace a previous generation of workers then in the process of unionizing. By 1874, however, it was the Norwegians and Swedes who talked of solidarity, a sentiment with which Gould, like other capitalists of his day, had no sympathy whatsoever. When these men–whom Gould already thought overpaid at $52 per month–seemed on the verge of a labor action that autumn, Jay reinforced their ranks with Chinese miners at a monthly cost of just $32.50 per head. During November, when the white miners finally did go out on strike, Jay instructed Clark to bring in more Chinese. At the same time, Gould issued orders to purchase new, modern machinery with which to maximize efficiency. These programs would continue under Abram after 1876. Between 1875 and 1880 production in the UP-controlled mines more than doubled while the cost per ton dropped a total of 65 cents to $1.35, thus laying a vital cornerstone for UP expansion. (During his first year on the job, Abram slashed the cost of the Chinese labor down to $27 a month per head, which his brother nevertheless still thought $2 too high.)

  Shrinking the pay for non-Asian labor outside the mines would prove more difficult. In the spring of 1877, Jay briefly allied himself with the heads of other railroads (among them William H. Vanderbilt, now at the helm of the New York Central and the Lake Shore & Michigan Southern after the Commodore’s death that January) in announcing a general, across-the-board pay cut of 10 percent for all workers nationwide. Subsequently, strikes and riots erupted at railroad facilities in Pittsburgh, Baltimore, Chicago, Buffalo, and San Francisco. In the end, President Rutherford B. Hayes had to order federal troops to restore order. The Central Pacific, the Erie, and Vanderbilt’s roads absorbed considerable costs in lost traffic and damaged property.

  Late in July, before any violence afflicted the UP, Jay made some calculations and declared the pay cut a false economy. The workers he’d planned to pickpocket were capable of doing far more than 10 percent worth of damage overall. On 22 July, Gould wired Clark in Salt Lake with instructions to rescind the cut. UP workers held a mass rally the next morning at which they promised to protect the stations, yards, and rolling stock of the UP at all costs. The Herald, which had a day before castigated Gould for his mistreatment and betrayal of the working man, now criticized him for betraying his capitalist brethren. That evening, Gould gave an interview to the New York World in which he condemned the strikers at the other railroads, saying they represented a “great social revolution” that was likely to end with “the destruction of the republican form of government in this country.” Despite his grim message, the World noted Gould was “in very good spirits, and seemed to contemplate the coming of the general conflagration as serenely as if he had a complete monopoly of the trade in Lucifer matches and petroleum.”5 In fact, Jay was at the moment busily shorting the stocks of his strike-afflicted competitors, thus his cheerfulness in making the future sound as gloomy as possible.

  On another front, Gould made himself busy building up communities and businesses along the UP track. At Laramie, Wyoming, during June 1876–the same month Custer died at the Battle of the Little Big Horn–Gould made maximum use of local tax concessions, employing them to help finance a steel-rolling mill that soon became the town’s largest employer. In a stroke, Jay created a source of cheap rails for the UP while propping up Laramie’s sagging economy and inspiring the town’s growth. Meanwhile, eyeing the Big Horn Mountains and Black Hills, where gold had recently been discovered, Gould spent an hour with the geologist who’d surveyed that terrain for the federal government. Two days later he wrote a memo forecasting that the region would become profitable not only as a source of gold but as range land. When Clark balked at the danger of extending various lines north after the Custer battle, Gould shut down the debate. As usual, he saw the world with a vivid and heartless clarity: “The ultimate result [of the massacre at the Little Big Horn] will be to annihilate the Indians & open up the Big Horn & Black Hills to development & settlement & in this way greatly benefit us.”6 (Something Gould did not mention to Clark was the fact that his sister Anna and her husband were residents of the region in question. Inhabiting a one-room mud hut that became an oven in the summer and a freezer in the winter, the two suffered greatly on the barren Montana plains, where they would remain, spreading the Methodist gospel to prospectors and Indians, until Anna’s health finally broke under the burden. Jay did his best to help them, but with all his wealth
he could not revise the harsh realities of frontier living.)

  At the same time that he contemplated new branch lines, Gould helped finance a smelting firm in Omaha to handle ore and bullion from western mines, all delivered by the UP. He also micromanaged efforts to market UP lands in western Nebraska and Wyoming. These properties, lying west of the hundredth meridian, were generally not wet enough for farming. Thus Gould sold the grazing rights to ranch interests, sweetening the pot with significant discounts on UP rates for cattle shipments. With these same customers in mind he built a shipping center, a hotel, and yards adjacent to the UP line at Fort Bridger. Then, after making Fort Bridger a destination for cattle drivers and buyers, he did the same thing for the Nebraska towns of Schuyler, Kearney, and Ogallala, all with the aim of capturing northward drives.

  Besides the western railroads, Gould also had several other games in play. Not the least of these was his investment in the telegraph business and his at first frustrated interest in the Western Union.

  Founded in 1851, the Western Union came into its own during the Civil War. In the midst of the bloodletting between the states, the Western seized most of the federal government’s telegraph business and absorbed the most viable of its immediate rivals. Between 1863 and its takeover by Cornelius Vanderbilt in 1869, the well-watered Western saw the value of its stock climb from $3 million to $41 million. Of course, much of the Western’s commercial viability was tied to its close relationships with railroads. Like other telegraph firms, the Western housed the lion’s share of its 12,600 offices in railroad depots nationwide, ran its lines parallel to the tracks of the roads with which it nurtured maintenance agreements, and in return provided those same rail companies with unlimited message service. All such arrangements were made on an exclusive basis.

  The Pacific (the Union Pacific, Central Pacific, etc.) roads were among the few rail properties in which the Western did not have itself entrenched. In 1869 the Union Pacific refused to align itself with that firm and instead entered into an agreement with the smaller Atlantic & Pacific (A&P), which one year later reached terms with Huntington’s Central Pacific. The Union Pacific’s deal with the A&P gave the road 24,000 shares of A&P stock: a controlling interest that, to most observers, appeared to be nearly worthless. One industry observer noted a few years later that whereas the Western Union boasted 154,472 miles of wire, the A&P had only 7,460, not counting the capacity of the tiny, insignificant Franklin Telegraph Company, which the A&P controlled. No one believed the A&P to have much of a future in the face of the behemoth Western Union.

  It took Jay Gould, once he came into the Union Pacific, to recognize the potential of the A&P stock as a position from which to leverage influence and, in the long run, a merger with the Western. Soon after taking control of the Union Pacific, Gould induced Levi P. Morton to release recently acquired options on the Union Pacific’s A&P shares. Then, in April 1874, Jay instructed Dillon to cancel the A&P’s long-standing noncompete agreement with the Western. At the same time, he arranged to shore up the A&P’s sketchy physical condition. As well, in December, Gould approached General Thomas T. Eckert, superintendent of the Western Union, offering him the presidency of the A&P. Eckert had until recently been widely viewed as the Western Union’s president in waiting, but that changed when Vanderbilt gave the job to another appointee. Thus the disenfranchised Eckert took Gould’s offer seriously and promised to consider it carefully. While Eckert pondered his options, Jay used him to help induce Thomas A. Edison–an inept businessman recently mistreated and underpaid by Western Union president William Orton–to sell to the A&P, rather than the Western Union, his interest in the quadruplex telegraph, this capable of sending four messages simultaneously on one wire, two each way.

  Edison was not yet the “Wizard of Menlo Park.” He was instead a distracted young inventor, scraping along, hardly holding most of his own patents. What many considered his most significant inventions to date–those related to his automatic telegraph technology, which used perforated paper tape to accelerate the transmission of messages–were held in partnership with former diplomat George Harrington, who had personally financed much of Edison’s research in exchange for a two-thirds interest in Edison’s machines for a period of five years starting in 1871. Together with the Kansas Pacific Railroad’s financial agent, Josiah Reiff, Harrington also controlled the minuscule Automatic Telegraph Company, a firm designed to leverage Edison’s automatic patents. (Complicating the matter of patent rights for Edison’s quadruplex, however, was the fact that Edison had recently agreed to list the Western Union’s chief electrician, George Prescott, as co-owner in exchange for work space in the Western Union’s lab. Edison either did not realize or did not care that this agreement directly contradicted his previous contract with Harrington.)

  Disrespectful of Edison as a businessman and already believing he controlled 50 percent of the quadruplex’s patent through Prescott, Western Union president Orton dickered with the inventor in the worst of faith for the balance of the rights throughout the autumn of 1874. Then, on 10 December, Orton departed for a business trip to Chicago without concluding an arrangement with Edison, whom he incorrectly presumed to be without other options. Orton knew nothing of Edison’s arrangement with Harrington, nor that Reiff had recently struck a deal by which Gould would acquire the Automatic Telegraph Company if–as Gould insisted–Reiff could also deliver Edison’s new quadruplex.

  The plot thickened in late December, with Orton still away. Edison recalled:

  One day Eckert called me into his office [at the Western Union] and made inquiries about money matters. I told him Mr. Orton had gone off and left me without means, and I was in straits. He told me I would never get another cent, but that he knew a man who would buy it. I told him of my arrangement with the electrician, and said I could not sell it as a whole to anybody; but if I got enough for it, I would sell all my interest in any SHARE I might have. He seemed to think his party would agree to this. I had a set of quadruplex over in my shop, 10 and 12 Ward Street, Newark, and he arranged to bring him over next evening to see the apparatus. So the next morning Eckert came over with Jay Gould and introduced him to me. This was the first time I had ever seen him. I exhibited and explained the apparatus, and they departed. The next day Eckert sent for me, and I was taken up to Gould’s house, which was near the Windsor Hotel, Fifth Avenue. In the basement he had an office. It was in the evening, and we went in by the servants’ entrance, as Eckert probably feared that he was watched. Gould started in at once and asked me how much I wanted. I said: “Make me an offer.” Then he said: “I will give you $30,000.” I said: “I will sell any interest I may have for that money,” which was something more than I thought I could get. The next morning I went with Gould to the office of his lawyers, Sherman & Sterling, and received a check for $30,000, with a remark by Gould that I had got the steamboat Plymouth Rock [a relic of the Fisk era] as he had sold her for $30,000 and had just received the check.

  Although Edison failed to mention it, he also received 3,000 shares of A&P stock along with the title of electrician for the firm. The transaction took place on 4 January 1875 and was oiled by Reiff ’s assurance to Gould that the Prescott patent claim was indefensible. One week later, Eckert left the Western Union and became president of the A&P. Four months after that, Gould paid Harrington $106,000 for his two-thirds interest in the quadruplex patent, and the sickly Harrington took off for southern Europe. At the same time, however, Gould reneged on his obligations to Reiff regarding payments for purchase of the Automatic, citing as his reason Reiff ’s “misrepresentation” of the patent claims held by Prescott. As Gould later pointed out in sworn testimony, the Western Union continued using the quadruplex well after his supposed assumption of exclusive rights. In doing so, the Western cited Prescott’s name on Edison’s patent: the item Reiff had assured Gould would not be a problem. While withholding payments to the old Automatic board, Gould at the same time assigned the assets of the Automatic to the A&P.
The resulting suits and countersuits would linger on this earth longer than Gould himself.

  During subsequent interactions, Edison discovered that Gould “had no sense of humor. I tried several times to get off what seemed to me a funny story, but he failed to see any humor in them. I was very fond of stories and had a choice lot . . . with which I could usually throw a man into convulsions.”7 Gould tried in turn to dazzle a blank Edison with detailed discussions of the complexities of railroad interchanges and finance. He brandished maps and lectured on for hours about his particular passion, all to no effect. The two men barely lived on the same planet. Edison soon lost interest in Gould and in perfecting the automatic technology on which both the Automatic Telegraph Company and the A&P had placed large bets.

  Unable to compete with the Western Union via exclusives on better technology, Gould turned to more reliable tools. In February 1875 he opened up a rate war. Then in May, he convinced Tom Scott of the Pennsylvania Railroad to run A&P wires along his corridors. Next, Gould arranged for the Union Pacific board to approve the sale of its shares in A&P at 25, Jay taking 16,000 units and the balance going to Sage, Ames, and others of Gould’s circle. (Around this time, buying into dips, Gould also personally acquired nearly 50,000 additional A&P shares at prices ranging from 15 to 18.) In July, while offering to discuss the sale or lease of the A&P to the Western Union, Jay bought heavily into Western Union stock as well, all the while encouraging his protégés to do the same. “I don’t think an amalgamation of the WU and A&P T. Co.’s far off,” he told Ames. “We shall carry through the consolidation of the two telegraph companies in such a way as to make Western Union an active ally of the Union Pacific.”8