The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supercompany

by Charles R. Morris

  Q.

  Tell the committee why it was that you bought and carried that gold for these two men without their putting up any margin. Is that exactly business . . . ?

  A.

  No; that is not on business principles.

  Q.

  On what principle did you do it?

  A.

  I did it as a friendly thing.

  Q.

  Was it to interest them in establishing the policy of the country?

  A.

  I supposed that what interest they had would be thrown in that way.

  Q.

  And you considered that an anchor thrown to the windward, did you?

  A.

  Yes, sir.

  Gould began buying large quantities of gold in September, but with no visible impact on its price. As Gould, of all people, should have anticipated, speculation begets speculation. Disguise his trading as he might, everyone knew he was the one pushing up gold. The more he bought, the more exposed he looked to bear traders (who profit on a fall), so they sold short on every rise. As Gould told the congressional investigators:

  I did not want to buy so much gold. . . . but all these fellows went in and sold short, so that in order to keep it up I had to buy or else back down and show the white feather. They would sell it to you all the time. I never intended to buy more than four or five millions of gold. . . . I had no idea of cornering it.

  Reluctantly, Gould turned to Fisk. Fisk’s claim that he came in only because Gould was his friend is entirely credible. He was still skeptical, and still concerned that the government would sell gold if its price started climbing. Gould argued that he had fixed that. Fisk checked with Corbin, who told him that Grant’s wife had taken a position in gold; that was not true, but Corbin was hopeful. To confirm Grant’s steadfastness, Corbin wrote yet another letter urging the president not to intervene in the gold markets, which Fisk arranged to be hand delivered. Fisk’s messenger tracked down Grant, who was traveling through Pennsylvania, and handed him the letter (these were informal times). Grant read it through and said there was no return message. The messenger’s telegraph, “Delivered all right.” was mistakenly transmitted as “Delivered. All right.” Fisk assumed that Grant was on board.

  Fisk’s brokers started buying heavily on Monday, September 20. Through Tuesday, the bears nervously held their ground, with gold stuck stubbornly in the high 130s ($100 in gold bought $130-plus in greenbacks). Then on Wednesday, Fisk took over the floor. A resplendent and intimidating figure, he strode confidently through the Exchange, trumpeting the unlimited resources of the gold clique, bragging that the president, his wife, and White House officials were in on the play, darkly warning that settlement day was drawing nigh for the bears.

  A true corner is the slaughter of the bears. A bear who shorts by borrowing and selling a security needs to buy it, or borrow it again, when the borrowing term is up. As the week went on, the short position grew to some $200 million in gold, probably most of it owed to Gould and Fisk, who were lending out all the gold they bought. The $20 million in available gold, that is, was being borrowed and sold over and over, and as the price kept rising, the bears got into a deeper and deeper hole. As Gould disgustedly put it: “[W]hat put gold up so high is that these bears got frightened, and they commenced jumping over each other’s shoulders for it. The worst panics ever produced are bear panics.” The bears feared that Gould and Fisk would stop the merry-go-round and demand their gold back. Since the amount they were owed was far higher than the amount in circulation, the price could theoretically go to infinity.

  Gold closed Wednesday at 141½. Having spent $50–60 million in a single day, the bulls showed no signs of flagging. Fisk was offering $50,000 bets that gold would hit 145 on Thursday. Panic thickened over the Exchange like an acrid cloud. Gould’s insistence that he never intended a corner was probably truthful; but for a flamboyant subversive like Jim Fisk, its theatricality would have been irresistible. But by now, Gould’s antennae were crackling with warnings. Financial markets were in full flight, with telegraph wires to Washington pulsating with pleas for intervention. Corbin was pleading with Gould for his profits.

  Gould made a temperature check on Corbin early on Thursday and found the old man in a state of near-terminal terror. The rumors of official involvement in a gold corner had reached the White House, and Grant’s wife had sent her sister, Mrs. Corbin, a stinging letter demanding to know if it was true. Corbin wanted out, plus $100,000 in profits. Gould promised both, but on condition that Corbin keep quiet, for as he told Corbin, he was “undone” if that letter were known. In fact, Gould never paid, leaving an unrecompensed Corbin to marinate in the disdain of his relatives.

  Gould could tell Fisk nothing. Fisk’s performance had mesmerized the market, and if he showed a flicker of doubt, the entire enterprise would collapse. Gould seems to have felt no qualms on deserting Fisk; if nothing else, one must admire the clarity of his mind. Early on Thursday, he and his brokerage partner, Henry Smith, worked out a strategy that mixed highly visible purchases with much larger disguised sales to let Gould run off his holdings.

  Thursday’s market closed at 143¼ amid word that Fisk would demand delivery from the bears on Friday, forcing the final corner. Crowds started gathering early, as if for a spectacle in the Roman Coliseum. When pre-opening prices jumped to 145, Fisk ordered one of his brokers, Albert Speyers, to push it to 150. It was accomplished in an instant. After the opening, the price stuck for some minutes at 150, then raced past 155. Fisk told Speyers to “Go and bid gold up to 160. Take all you can get at 160.” In the meantime, Gould was telling Smith and another trusted broker, Edward Willard, to speed up their sales, for the collapse was in sight. He had visited Butterfield, who had reassured him that Washington was holding firm. But Gould was a man who maneuvered in a world of lies, and Butterfield’s soothings only screamed that he should sell faster. In truth, Butterfield was quietly dumping his own gold and peppering the Treasury with reports on the crisis.

  The telegraph informing the New York Treasury that Washington would sell gold was dispatched at 11:45; a second telegraph was sent a few minutes later by a different service just to be sure. By mistake the first was not sent in cipher. Sudden large sales by a select few brokers may have broken the corner a few minutes before the Treasury news was released to the Exchange; Fisk insisted that the early sellers had been tipped by Butterfield, leaving an intriguing loose end for future researchers. The collapse was almost instantaneous; within minutes gold was at 132. Poor Albert Speyers was still shouting out buy orders at 160—he had gone “crazy as a loon,” Fisk snorted.

  When the market first broke, Gould and Fisk made a dash for the Opera House and barricaded themselves behind armed guards. The Exchange supervisors made some estimated settlements to save illiquid brokerages, but one of Gould’s pet judges slapped them with an injunction on the grounds that they had exceeded their authority, which was arguably true. As fortune had it, freezing settlements was exactly the right remedy. When the Exchange washed its hands of the mess, brokers quickly sorted it out among themselves. Most houses just ignored the bubble prices and settled in the mid-130s. Fisk blithely repudiated his losses, producing a forged letter, allegedly from his brokerage partner, Henry Belden, representing that all of Fisk’s trading was on Belden’s account. Belden took the fall and went into bankruptcy; he later recovered his career with a position in Gould’s brokerage.

  Fascinatingly, there was never a hint from Fisk that he felt abused by Gould’s Thursday and Friday trading tactics. Both men were to-the-bone pragmatists, and Fisk would have understood immediately that Gould had no choice. Their financial positions, in any case, had hardly been affected. Fisk didn’t pay on any losses, and Gould certainly didn’t collect on his bubble-period trading windfall. Fisk delivered a hilarious version of the entire episode to a congressional investigating committee, enthusiastically spraying mud on all actual and alleged participants, from Mrs. Grant to Gould, winding up
with a long description of the Corbins’ panic on Black Friday: “His wife and he both looked like death. He was tottling just like that. (Illustrated by a trembling movement of the body.)” Henry Adams was the more impressed because so much of the performance was pure invention.

  The impact of the Gold Corner on the national economy was fleeting at worst, but it was devastating for Gould. Besides destroying his reputation, it delivered a knockout blow to his railroad strategy.

  Ouster

  When the smoke cleared from Black Friday, only one major brokerage was listed among the casualties. Unfortunately for Gould, it turned out to be Lockwood & Co., a strong Gould ally, who just happened to be a major owner of railroad properties at the heart of Vanderbilt’s western connections. When Lockwood went into receivership, all of its railroad shares were thrown on the market and were snapped up by the Commodore, who easily outbid the cash-strapped Gould. Vanderbilt was not a man to twice trust luck to save his railroads; before he died in 1877, he had moved decisively to ensure that his entire web of western links was tightly within the New York Central’s control.

  With Gould’s western strategy fatally breached, and financial headlines blaring his market-wrecking Gold Corner tactics, the legislatures in Pennsylvania and Ohio quickly finished off his hopes of encircling the Pennsylvania. The Pennsylvania’s escape from Gould’s nighttime assault marked the last step in the ascendancy of Tom Scott, who succeeded J. Edgar Thomson as president in 1874. Scott, in contrast to the conservative Thomson, was an exemplar of the railroad-president-as-buccaneer, violently wrenching his board away from its narrow inward concentrations into a near-reckless program of expansion and encirclement aimed at making the Pennsylvania America’s dominant national carrier.

  From that point, the national railroad wars came to resemble the Chinese game of Go, in which players win points by outflanking and encircling an opponent’s positions. In the scramble for territorial advantage, new lines were spun out with abandon, far ahead of business demand. As freight rates were steadily cut, often to absurdly low levels, expansions were financed by watering balance sheets and defaulting on security holders. Reining in Gould’s go-for-the-throat style of competition became Pierpont Morgan’s great cause for the rest of the century. By the time he finally succeeded, the roads had already fueled the continentwide boom that marked the rest of the century.

  Gould hung on at the Erie for two more years, more or less practicing at the job of railroad president—planning some modest line extensions, investigating the advantages of steel rails, engaging in some stock market brigandage against an uncooperative affiliate. But the years of blazing notoriety, extravagant embezzlements, and ignominious reverses had exhausted the patience of even the ever-quiescent European shareholders.

  The opening wedge was planted by William Duncan, Junius Morgan’s long-time banking colleague at Duncan, Sherman, who approached Gould with the idea of replacing the Erie’s current board with one that could reassure the overseas investors. Gould turned for advice to Junius, who strongly urged him to open up the 1870 board elections. (One suspects Junius was playing a double game, giving Gould advice that he knew would sink him.) At the same time, an erstwhile Gould ally on the Erie’s western lines, James McHenry, decided to stage a coup of his own. He linked up with Bischoffheimer & Goldschmidt, an important German banking house with substantial blocks of Erie, and began scouring London and Berlin for shares to fuel an opposition drive. The Erie counsel, Franklin Lane, the third man with Fisk and Gould on the Erie Executive Committee, quietly allied with McHenry while maintaining a pretense of loyalty to Gould.

  Another blow to Gould came in the summer of 1871, when leaked memoranda exposed the enormity of the Tweed Ring’s theft from New York City. To everyone’s surprise a reform whirlwind swept the machine out of office in the fall elections. Tweed fled the country, and Gould’s puppet judges were forced off the bench.

  Then Gould lost Jim Fisk. A messy love triangle among Fisk, Josie Mansfield, and Ned Stokes, another lover of Mansfield, erupted into the courts and the press. Fisk was clearly the wronged party—Mansfield was diverting his money to Stokes and both were trying to blackmail Fisk. Stokes had initiated legal action against Fisk, but when the case turned against him, he waylaid Fisk in his hotel in January 1872 and fatally shot him. Onlookers were amazed to see Gould sobbing uncontrollably by the deathbed. No one has claimed to understand the relationship between the two, but after Fisk’s death Gould seemed oddly passive against the attacks from the overseas shareholders.

  The details of Gould’s overthrow suggest that the Erie was cursed by some demon of sordidness. Bischoffheimer organized a bribery operation to buy out the Gould loyalists on the board. Two different agents competed as bribery go-betweens, and a menagerie of slippery characters scrambled for the crumbs from the anticipated food fight. Simon Stevens, the patriot who, along with the youthful Pierpont Morgan, sold the government its own Hall rifles during the Civil War, somehow bobbed up as an important intermediary. When pressed by a state legislative committee on the reasons for the shareholder revolt, Stevens answered simply: “They had heard most fabulous accounts, that the controlling officers of the road had made enormous fortunes out of it, and they wanted to get their friends into it.” For its part, Bischoffheimer ended up with an extraordinary investment banking contract with the post–Gould Erie—a fifty-year agency with the assurance of very high fees with no obligation actually to do anything. The firm made no secret that the contract was in recognition of its heavy bribery expenses.

  Gould resigned from the Erie in March 1872, later negotiating a full release from possible shareholder claims in exchange for repaying $9 million to the Erie. The actual payment was a fraction of that amount: it included $50,000 in cash; $5.2 million in wildly overvalued stock in Erie subsidiaries; the Opera House and surrounding properties (like Josie Mansfield’s former house), allegedly worth $3 million, probably twice their actual value; plus a grab bag of various releases and rent forbearances from Gould. There was little comment on why such properties were in Gould’s name in the first place.

  Contemporaries may be forgiven for believing that they had finally drawn Gould’s fangs. He was now once more just a lone stockbroker, with no corporate base and no access to a security-printing machine like the Erie. His reputation was thoroughly blasted. A representative of the English shareholders said that whenever McHenry or Bischoffheimer ran into opposition they would just “raise the cry of ‘Jay Gould’” and English investors would rush to their banner. But discounting Gould was to vastly underestimate the little man’s resilience. Time and again through a long career he absorbed fearsome blows, stoically regathered himself, and plunged back into the fray. Scandalous though his reign at the Erie was, he had forever changed the nature of American railroad competition, and he would return again and again to teach new lessons in how the game was played.

  The Erie experience generated other tendrils. McHenry, as it turned out, did not quite win control after Gould’s departure, and Peter Watson was elected as the new president. Watson was a lawyer and a competent railroad man; a detailed state legislative inquiry into events at the Erie proved him to be one of the few people on either side of the table with a consistent grasp of railroad accounting. His lasting claim to fame, however, was as one of the original promoters of the South Improvement Company, a nefarious construction supposedly at the root of John D. Rockefeller’s takeover of the American oil industry. There was also a history between Gould and Rockefeller; one Rockefeller muckraker, indeed, declared that the whole Standard Oil Trust “must be regarded as the gigantic offspring of the Erie ring.”

  Jay Gould was finally ousted from the Erie Railroad in 1872. The three plunging figures, from the top, are George Barnard, a pet Gould judge; David Dudley Field, the Erie and Tweed ring’s lawyer (and, incongruously, a famous legal reformer); and Gould.

  The First Oil Baron

  The notion that John Rockefeller might somehow be a creature of Jay Go
uld is fanciful to say the least, but there was a grain of truth in the claim—for the rise of Cleveland as an oil refining center was a direct fallout of the new Gould-written rules of railroad competition.

  On a map, Pittsburgh seemed ideally positioned to dominate the refining business. Easy river connections from the oil fields jump-started the industry during the first days of the boom, and barge shipping was gradually supplanted by a thickening network of rail lines. From Pittsburgh, refiners enjoyed high-quality, straight-shot Pennsylvania Railroad transport to the port of Philadelphia. (Even in the early days, about 70 percent of refined product was exported.) The trip from the oil region to the Atlantic ports via Pittsburgh was 355 miles, while the comparable route through Cleveland was 629 miles. As one would expect, by the end of the war, Pittsburgh was home to more than a third of the nation’s oil refining capacity, while Cleveland, with a 7 percent share, was a distinctly minor player. Yet just a few years later, it was Cleveland that was in the catbird seat. What happened?