Dark Genius of Wall Street

by Edward J Renehan Jr

  But negotiations collapsed in September, and then in December Jay himself collapsed, retreating to his bed for a month with a recurrence of his old typhoid fever. When he rose like a phoenix in January of 1876, it was to reignite his rate war: a move that caused the Western Union, uncharacteristically, to miss its April dividend. Subsequently Gould recruited John W. Garrett, proprietor of the Baltimore & Ohio (B&O)–at that time engaged in a bitter war with the New York Central for through traffic to the Iowa pool of railroads–to renounce the B&O’s Western Union agreement and ally with the A&P. Such was the situation in January 1877 when the Commodore died, leaving William H. Vanderbilt, more of a compromiser, to oversee the family interests.

  Gould continued to pressure the Western Union throughout the first half of 1877, succeeding in getting it bounced from various roads in Utah, where the Mormon elites who made the corporate decisions also controlled the courts. As well, Gould leaked to the press that he, as representative of the A&P, was engaged in talks with the Erie, the Northwestern, and the Rock Island. Turning up the heat on William Vanderbilt still more, Jay mounted a series of bear raids on Western Union stock. Conveniently, as Jay had hoped, Western Union’s earnings dropped, along with its stock price, while Vanderbilt also confronted a serious profitability problem on his eastern trunk lines due to his ongoing price competition with Garrett.

  Vanderbilt’s interests were further jeopardized by news in April 1877 that Gould had assumed seats on the Northwestern and Rock Island boards. Soon after, Gould put himself into a position to take control of the Michigan Central. Running parallel to Vanderbilt’s Lake Shore & Michigan Southern from Chicago to Detroit, the Michigan Central could pose formidable competition for the Vanderbilt road under the right management, that is, Gould management. But Gould procrastinated in executing the takeover. He dawdled; no one quite understood why. Subsequently, in August, few observers realized what was going on when the Western Union announced it would purchase 72,502 shares of the A&P, mostly from Gould, at 25, a bit higher than the going price on the Street. Less than a year later, Gould allowed Vanderbilt to control the board election for the Michigan Central and become the president of that road.

  The result, though it made Gould a tidy sum and solved his problem of what to do with the A&P after he realized he could not grow it to compete significantly with the Western Union, nevertheless left him without what he’d been after all along: a significant interest in the telegraph industry. Shortly after the consolidation, William Vanderbilt stoutly refused Gould’s request that he be put on the Western Union’s board.

  At the same time that he struggled against the Western Union, Jay continued to build up and acquire more railroad properties in the West. Initially, his first interest after the UP was in the Kansas Pacific. Whereas the UP operated from Omaha west through Cheyenne to Ogden (the terminus where traffic interchanged to and from the Central Pacific), the Kansas Pacific ran south of the UP, traversing rich farmland from Kansas City to Denver and then traveling via the Denver Pacific spur line (of which it owned 75 percent) to Cheyenne. At Cheyenne, the Kansas Pacific fed into the track of the UP, on which it depended for outlets to points west and east. When Gould first eyed the Kansas Pacific in late 1874, the line was in poor financial condition. The railroad had defaulted on interest payments during the first stage of the 1873 panic. Early in 1874 this debt was refunded with long-term bonds, but problems continued. In April 1875, Gould proposed to the receptive Kansas Pacific president, Robert E. Carr, a St. Louis banker, that the overcapitalized and debt-ridden Kansas Pacific be merged with the Denver Pacific and another line, the unprofitable Colorado Central, running from Denver to Longmont, to form a new entity. This firm would in turn be managed by the now-profitable UP, which would own half the stock in the concern. Soon, however, the deal collapsed because of exorbitant demands by William A.H. Loveland, promoter of the Colorado Central. A number of months later, in November 1876, the Kansas Pacific went into receivership. One year later, Gould made peace with Loveland and extended the Colorado Central from Longmont to the UP terminus at Cheyenne, while renewing his overtures to the Kansas Pacific. Carr remained receptive but now had little power. He was required to obey the dictates of court-appointed receivers, of which there were two. Carlos S. Greeley, a successful St. Louis grocer, had been charged to look after the interests of a minority group of St. Louis investors holding a substantial block of the road’s junior secondary securities. Greeley’s counterpart representing the majority first-mortgage bondholders, most of these being German investors, was Henry Villard: a formidable individual with whom Gould would have significant dealings from this time forward.

  One year older than Gould, Villard had been born in Bavaria. In 1853 he emigrated to the United States, married a daughter of William Lloyd Garrison, and started work as a journalist. By the time Gould encountered him, Villard had moved into railroads and steamship companies both as an individual investor and as an agent for German bankers. In 1875 he helped reorganize the Oregon and California Railroad and the Oregon Steamship Company. One year later he became president of both firms, while also taking on receiver responsibilities for the Kansas Pacific.

  Of the three classes of investors in the railroad–the stockholders, the secondary bondholders represented by Greeley, and the first-mortgage bondholders represented by Villard–the last constituted by far the largest and most significant investment in the Kansas Pacific. Thus Gould needed to deal with Villard in order to achieve genuine control. Ideally, what he wanted out of Villard was a substantial reduction in the face value and interest rate on the first-mortgage bonds as part of an overall restructuring to make the Kansas Pacific solvent. But Villard was not biting.

  The two men liked one another personally. Gould took to dropping by Villard’s office on Nassau Street in Manhattan for long discussions on topics other than finance. “They spoke,” wrote Villard’s great-granddaughter, Alexandra Villard de Borchgrave, “of Germany and Goethe, the Civil War, language acquisition, and the American economy, and each appraised the other’s weaknesses and strengths.” (De Borchgrave added that “Villard admired Gould’s daring, his skill, and the cultured opulence of his private life.”9) Of course, they also spoke of business. “I see my friend Gould frequently,” Villard wrote in 1877. “One day he talks peace and the next he threatens. But I am not afraid of him.”10 In other words, Villard had considerable backbone in the face of an onslaught.

  During the fall of 1877 Gould signed a contract with the Iowa pool (a group of independently owned railroads merged as a practical matter through a revenue-sharing agreement) to encourage the movement of freight via Omaha and away from the Kansas Pacific. Soon thereafter, during one of his friendly drop-ins at Nassau Street, Gould let slip that he was thinking of moving the bulk of the Colorado traffic under control of the Union Pacific east to Kansas City via the Atchison, Topeka & Santa Fe. All the while he also conducted a rate war against the Kansas Pacific and pursued other leads. At one point, when learning of a large block of Denver Pacific bonds held by Dutch investors, he chartered a yacht and made a two-week-long dash to Amsterdam, where he bought the securities. As he told it later, in order to acquire “$2 million of Denver Pacific [bonds] at seventy- four-cents, I went over and got to Amsterdam in the morning; washed and had my breakfast. I saw them [the bondholders] at eleven; bought them out at twelve, and started back in the afternoon.”11

  Concurrently, Gould convinced the cash-starved Kansas Pacific’s directors to refinance the road’s floating debt with a mortgage underwritten by himself, Ames, and the Union Pacific. The collateral for this note was to include the Kansas Pacific’s stock in the Denver Pacific. Thus any default would make Gould and his colleagues the de facto owners of that road. As well, Gould personally bought numerous Kansas Pacific income bonds at bargain multiples and lent the firm $85,000 from his own cash reserve. Finally, in April 1878–as Villard unblinkingly continued to defend the interests of his clients and hold out for favorable terms on
the German-owned first-mortgage bonds–Gould organized holders of Kansas Pacific junior securities (including most of the St. Louis bondholders represented by Greeley) into a pool that, as the largest holder of junior securities in the group, he immediately moved to dominate. Gould also got the Kansas Pacific’s board, led by Carr, to deposit their personal holdings in the pool by offering to assume their share of the railroad’s floating debt. Through this device, Gould achieved equity control of the Kansas Pacific. On 2 May, Gould, Dillon, and Fred Ames became members of the Kansas Pacific board. In one move, Jay had succeeded in making himself a Kansas Pacific insider while isolating Villard, to whom he subsequently, and somewhat surprisingly, offered a reorganization agreement with terms the astute Bavarian found acceptable.

  With visible relief after a long struggle, Villard turned his authority in the Kansas Pacific over to Dillon on 20 June. But later that same day–just as Villard was preparing for a long-delayed trip to Europe with his family–word came that the Kansas Pacific board, meeting in Lawrence, Kansas, had decided to revise the settlement with the German bondholders on terms much less attractive than those originally agreed to. Canceling his trip, Villard explained to his wife that “the scamp Gould” and “the rascally St. Louis people . . . have formed a regular conspiracy in the West to break the contract and cheat the bondholders.”12

  Eventually, after Villard made it clear he would stick to his guns, Gould masterminded a successful coup, having him removed as receiver. Nevertheless, at the German bondholders’ direct request, Villard remained in control of those securities. Villard refused to settle even after Gould offered him, in Villard’s words, “a profitable participation in the syndicate to be formed for the reorganization of the Kansas Pacific.”13 This stalemate went on for another year and a half. Then, in early 1879, amid the first great Wall Street boom after the panic of 1873, Gould finally realized that Villard would never bend. “Gould appeared in Villard’s office,” writes de Borchgrave, “. . . declared himself weary of fighting, and agreed to comply with all the concessions and conditions that Villard’s bondholders required. This time Gould kept his word.”14

  As usual, in his surrender Gould made yet another fortune and improved his strategic position overall. Kansas Pacific stock rose immediately and dramatically upon news of the settlement with Villard. Gould’s own personal stock profits soon amounted to approximately $10 million. Some of this Gould used as leverage to help acquire a small feeder, the Central Branch, in the autumn of 1879 and, later that same year, the property that was to become the hub of his personal railroad empire, the Missouri Pacific, running from St. Louis to Kansas City. (This road included among its subsidiaries the Kansas Central and another small Kansas road.) Around this same time, Gould also acquired the Wabash and the Kansas City. Of course Villard joined Gould in profiting from the Kansas Pacific transaction, and like Gould he was destined for even more success. In the coming years Villard would come to own both The Nation magazine and the New York Evening Post (both acquired in 1881). Villard would also control and complete the Northern Pacific Railroad on its challenging course through the Northern Rockies before losing the road in ’83 and reacquiring it in ’89. The year 1889 would likewise see Villard cobble together the Edison General Electric Company from two smaller firms.

  Not one of Gould’s ancillary roads–neither the Missouri, the Kansas, the Denver Pacific, nor any of the smaller properties–was acquired as a subsidiary of the UP. Gould and his closest allies (men such as Dillon, Fred Ames, Sage, and Cyrus Field) controlled these routes not as officers of the UP but as individual investors. Just as Gould used his dominant position with the Pacific Mail to effect changes favorable to the UP, so did he use his status in the Kansas Pacific, Denver Pacific, and Missouri Pacific, as well as other smaller feeder roads, to complement and accommodate the functioning of the UP. At the same time, however, the holdings Gould controlled independent of the UP gave him an extra power base: an avenue for potential competition with which to threaten any members of the UP directorate (and there were a few of these) hesitant to follow his lead in key matters. Gould and his closest associates, in turn, also controlled, separate from the UP, various branch lines in development through Colorado, Utah, and elsewhere. Their reason for independently administering the lines under construction, however, was less opportunism than necessity. The UP’s narrow federal charter expressly forbade construction of branches, although the firm was allowed to acquire them once they’d been built.

  Gould’s careful amalgamation of rival lines came to a head at the very end of 1879, when he proposed to his fellow UP directors that his Kansas Pacific–Denver Pacific combination be merged with the UP. Gould’s proposal called for the stocks of the two firms (the Kansas Pacific and the UP) to be swapped at par ($1 face value per share) regardless of the fact that the Kansas Pacific (selling at $13 per share) was earning nothing while the Union Pacific (selling at $60 per share) earned and paid 6 percent a year. As a carrot, Gould offered to throw in all the capital of the Denver Pacific. As a stick, Gould threatened–should his fellow UP directors turn down his offer–to extend the Kansas Pacific as far as Ogden, where it would link with the Central Pacific and gain an independent connection to the West Coast. After a few weeks of consideration (during which time most UP directors loaded up on as many shares of the Kansas Pacific as they could buy), the UP directorate agreed to Gould’s terms. A contract was signed on 4 January 1880. Gould, who held close to half the Kansas Pacific’s stock, later estimated that he had personally netted $40 million on this one transaction, so long in the making. He was not yet forty-four. As Grodinsky noted, “In these negotiations, Gould resumed the trading position he had so often occupied on the Erie–that of representing both buyer and seller.”15

  Gould maintained independent control of the Missouri Pacific, as well as such feeder lines as the Kansas Central and the Central Branch. He told intimates he planned to use these properties as the foundation for a new and vital railroad combination. His Missouri Pacific was free of the governmental restrictions that hindered the UP. It was free as well of the crushing debt that, thanks to Villard’s shrewd negotiating, still afflicted the Kansas Pacific. Jay was to follow through on this vision. On the day of his death in 1892 the Missouri Pacific would remain the jewel in the crown of the Gould system of railroads.

  Despite Gould’s steadfast and detail-oriented management of the Union Pacific and the other roads in which he was interested, the press and the public continued to view him as nothing more than a supremely talented, and ultimately villainous, corporate raider. Jay said nothing to dissuade them. If people believed he was spending all his hours rigging Wall Street, laying bear traps, pilfering corporate treasuries, and defrauding widows and orphans, then they were distracted from his real agenda.

  Not only did the press of Jay’s own era presume Gould to have no entrepreneurial devotion to the firms with which he was concerned, but several generations of scholars–relying on contemporary newspaper accounts for their research–were to adopt the same view. “Few properties on which this man laid his hand escaped ruin in the end. . . . He was not a builder, he was a destroyer.” So wrote Alexander D. Noyes in his 1909 book Forty Years of American Finance.16 Robert Reigel, commenting in The Story of the Western Railroads (1926), pronounced a similar verdict: “Gould was the type of man who would not have been content in the development of his properties and the waiting of dividends. He wanted more action and larger returns.” Reigel added that Gould’s “control was always exercised from the East, and it is probable that he never saw some of his properties, owing to his infrequent western trips. . . . Gould made a fortune, but the roads he touched never quite recovered from his lack of knowledge and interest in sound railroading.”17 In his 1965 book Burlington Route, railroad historian Richard C. Overton insisted that “Gould was first, last, and always a trader. His special talent, amounting to a compulsion, was for detecting opportunities to seize control. . . . His countless deals involving t
he Union Pacific are legendary; he nearly ruined the road.”18 Elsewhere, Overton explained that “Gould was a speculator [who] cared little for the quality of his railroads as transportation machines, and even less for building up the territory through which they passed; his eye was continually out for quick profits.”19

  After Jay was gone, only a select few–Morosini and Ames among them–would remember the long trips across desert and mountains, Gould demanding that he be shown each and every trivial branch and spur. Only they would recall the plethora of maps stacked up on tables in Jay’s office–the maps that had so bored Edison–all of them annotated in Gould’s own hand with detailed data on mineral deposits, grades, population centers, and the like. Only they would remember his clearly enunciated vision that the creation of the Gould system of railways in the West constituted his most important life’s work, his monument, his contribution. And only they would recognize as truth the simple words Jay spoke, offhandedly and wearily, to a World reporter in 1887: “I have been interested in railroads ever since I was a boy. I now think a railroad train is one of the grandest sights in the world. I like to see the great driving-wheels fly around.”20

  Chapter 25

  EVERYTHING BUT A GOOD NAME

  BY THE WINTER OF 1879–1880 Gould, at age forty-three, already seemed old. His diminutive frame carried not a pound of extra flesh. Gould’s head was bald, his beard speckled with gray, and his frail body always poised to betray him, as when he’d lain abed for a month in 1875. In addition to the 1875 typhoid, he also suffered from other complaints: insomnia, and neuralgia in his face and eyes. There were times when the general impression Jay evoked was of a highly focused mind tolerating the presence of a body out of mere necessity. (“His concentration was so intense that you noticed it,” recalled his niece Alice Northrop. “When he spoke, he became perfectly oblivious of everything around him. When he listened, his eyes would never leave the speaker.”) Jay clothed the luggage of his small, skeletal arms and legs in the simplest, most basic suits of unremarkable cut, always either black or gray. During the fall, winter, and spring he wore a conventional felt hat out of doors. In summer, he sometimes became relaxed enough to don a white panama. “He never wore jewelry of any description,” Alice remembered, “unless the term could be applied to his modest watch and chain. When you looked at him your impression was that of a small, dark, yet somehow strikingly powerful man who, unlike many commanding men of slight stature, had neither the need nor taste for display.”1