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

by Charles R. Morris

  The American Crédit Mobilier scandal, which broke in 1872, has forever fixed the reputation of the Grant administration as equal parts farce and scandal. Letters showed that Oakes Ames had spread Crédit Mobilier shares among congressmen to win passage of critical legislation five years before. Ames, who insisted he had done nothing wrong, was outraged when one congressman after another denied having anything to do with him or with the Crédit Mobilier. So he laid his notes before the committee, with names, dates, and the amounts of money involved, forcing the panicked investigators into embarrassed retreat. It almost ruined James Garfield’s career—he had taken a $370 check from Ames—while Vice President Schuyler Colfax, who had received stock from Ames when he was speaker of the House, was dropped from the 1872 Grant reelection ticket.* Ames was eventually censured for attempting bribery, but amid much editorial guffawing, the congressmen were exonerated on the theory that they hadn’t understood Ames’s intentions—as if congressmen as a class were entitled to a defense of diminished responsibility.

  As Gould later told it, he became involved with the UP almost by accident. He had emerged from his Erie ouster as a wealthy man, and the runup in Erie shares during the market boom of 1872 and early 1873 made him wealthier still. He cooperated in some profitable railroad stock operations with the Vanderbilts, of all people, through the person of Cornelius’s sonin-law, Horace Clark. When the Vanderbilts took a position in the UP, Clark became the UP president. According to Gould, Clark told him it was an attractive stock, so he instructed his broker to buy whatever became available below 30. When Clark died after a short illness in the spring of 1873, his brokers liquidated his UP holdings, causing a sharp price drop. Gould’s broker snapped it up, and Gould unexpectedly found himself in a control position. It was only at that point, he said, that he learned that the road had serious problems, including $5 million in unsecured call debt and $10 million in bonds due in just a few months. Worse, operations were floundering from a prolonged stretch of rudderless leadership.

  The story of the stock purchase might be true, since Gould’s tall tales were always grounded in bits of truth, but it is inconceivable that he took over the road by inadvertence or without understanding its problems. Before he bought his UP shares, Gould had become a major shareholder in Pacific Mail, a freight and steamship operation that competed directly with the UP for Asian trade, so he had an excellent understanding of the competitive

  The smoothness of Gould’s takeover in early 1874 also suggests considerable behind-the-scenes preparation, for it was accomplished with the full cooperation of the key group of Boston investors. Oakes Ames had died within a year of the Crédit Mobilier flap, but Oliver Ames continued on the board, and Oakes’s son took his father’s seat. Gould did not take a title, but had a seat on the executive committee and had four additional board seats, which he filled with his brokers. Sidney Dillon was named UP president. He was from New York, but had long been involved with the Bostonians. He was an imposing, energetic sixty-one-year-old and one of the country’s most experienced railroad construction executives; for the rest of their lives, he and Gould were the closest of allies. Russell Sage, who had been president of the Pacific Mail, also grew very close to Gould. From that point, in the words of historian Maury Klein, “The surest sign that Jay had taken hold of a company was the accession to its board of Gould, Sage, and Dillon.”

  Gould’s performance at the UP quickly turned Wall Street’s forebodings into hosannahs. For most people, it was the first time they had seen his talents deployed in a constructive cause. In less than a year, in a sustained market operation that dazzled professionals, the UP’s debt problems had been cleared up, while the Pacific Mail had been brought firmly under UP control,* removing an important source of price instability. Management had been streamlined and centralized under Silas Clark, a career railroad man who became another lifelong Gould loyalist. Costs were down, and prices had been strengthened across the board. Gould worked personally with western ranchers to make the UP more cattle-friendly, while land sales, coal earnings, and other nonfare revenues were all on the upswing. Earnings jumped 27 percent in 1874 and another 30 percent in 1875. By early 1875, the UP’s bonds were closing in on par, and the stock price had quadrupled. Trading in UP shares frequently accounted for more than half of Stock Exchange activity.

  When Gould declared the company’s first-ever dividend in the spring of 1875, he metamorphosed into an almost mythic figure. A railway journal commented on Gould’s “magical wand” and went on, “The truth is that one man holds almost undisputed sway over the movements of the Stock Exchange. . . . Under these extraordinary circumstances, to write of the New York Market is simply to describe the movements of Jay Gould.” Professionals gradually accepted that he was in for the long haul instead of just dressing up the UP for a quick stock sale. Even Collis Huntington, the formidable senior partner in the Central Pacific, who had long been at odds with the UP, was changing his view. He still feared that Gould “will play us false, although I am not sure that I have any good reason for thinking so.”

  But the UP was by no means out of the woods, for its obligations to the government were in a terrible tangle. The Pacific Road legislation—governing both the UP and Huntington’s CP—framed the construction subsidies as loans, paying interest at 5 percent of net earnings as soon as the road was completed. But there was no definition of “completion”—the government argued it was in 1869 when the Golden Spike was driven; the UP, not unreasonably, thought it was in 1874, when the roads qualified for their final land grants. The government also defined “net earnings” as earnings before interest was paid, while the roads assumed “net” meant after interest. While the interest was in dispute, the Treasury refused to pay its bills for mail services, an important part of the transcontinental freight.

  Grant and his cabinet signed off on a compromise in 1875 that provided for a straightforward schedule of fixed payments, but for some reason never submitted the legislation—possibly because of appeals from stock market bears who had been badly burned by the UP’s advance. The next year, the last for the Grant administration, the Pacific Road amendments got lost in a ferocious lobbying campaign by Tom Scott to rescue his bankrupt Texas & Pacific. Saving the T&P became a major plank in the notorious “Compromise of 1877”: Rutherford B. Hayes won crucial Southern support in his deadlocked presidential contest with James G. Blaine in return for ending Reconstruction, withdrawing Northern troops, and financing Scott’s railroad and some flood control projects. Collis Huntington, who should have been shoulder to shoulder with Gould, dissipated most of his energies opposing the T&P to keep Scott out of California. In the end, Hayes got the critical Southern votes, but never delivered the railroad legislation. Scott was distracted by the 1877 railroad strikes, and was ill and partially paralyzed after 1878. He retired from the Pennsylvania in 1880 and died the following year. Meanwhile, memories of Crédit Mobilier and the Gold Corner scuttled any hopes of congressional action on the Pacific Roads.

  The years 1878 and 1879 were difficult for Gould. The only railroad legislation that finally came out of Congress actually worsened the UP’s position, dashing his hopes for a reasonable compromise with the government. On top of that, he took heavy losses by shorting the stock market in anticipation of America’s return to the gold standard. (Resumption went so smoothly that it triggered a miniboom. Gould’s genius was in corporate finance; his record as a market analyst was mediocre at best.) Rumors abounded that Gould was in trouble, as he indeed may have been.

  But his enemies were mistaken if they took comfort in his woes. A decade before, he had taken control of the Erie after a devastating struggle that had decimated the Erie’s treasury, enriched his primary adversaries, and left him in an apparently hopeless competitive position. His response had been to attack, on every front, against all of his competitors, all at the same time. The year 1879 found him bedraggled and battered, but not nearly so weak as he had been in 1869. And once again he went on the
attack, and this time rewrote the nation’s railroad map and made himself the most powerful financial player in the country, very close to being the master of all he surveyed.

  Gould (Almost) Conquers All

  By about 1883, after four years of unrelenting assault on all sides, Gould emerged in control of virtually the whole center of the country’s railroad system, even as he was aggressively expanding his operations eastward and into the West, Northwest, and Southwest. He also controlled Manhattan’s rapid transportation system; he had buttressed his image by investing in newspapers; and as the primary owner of the Western Union company, he dominated the national system of telegraphy. His powers had become the stuff of legend, and deservedly so, considering the weakness of his initial position. The New York Times was reduced to helpless amazement:

  But straightaway we are assured that “JAY GOULD” is at the bottom of the whole affair, as he is said to be at the bottom of everything that goes on nowadays. We strongly suspect that he will yet be found to . . . have had something to do with the hard Winter, frozen water-pipes, and plumbers’ extravagant bills. He doubtless formed a “ring” with the plumbers sometime last Summer, and then produced the recent severe cold, so as to get all his machinery to work.

  And later:

  The yacht of Mr. JAY GOULD, it appears, ran through a tug yesterday for the purpose of hitting a schooner on the other side. The natural conjecture that Mr. GOULD had “gone short” of both of the injured vessels will, we trust, prove to be baseless . . . but he ought not to prey upon our merchant marine.

  Competitors sought safety in paranoia. A railroad executive lamenting Gould’s control of Western Union wrote to a colleague: “I am so fully convinced that Gould . . . read[s] all messages that look like R.R. messages that I dare not trust the wires except with a cypher which I change from day to day.” A more practical assessment came from an executive of the Texas & Pacific after Gould bought the line from Tom Scott in 1881:

  I never had much respect for Tom Scott’s ability to accomplish any great undertaking. He can give everybody a Pass, and get them to say he is a “big Injun” and good fellow—but he is not the man to lay down a Hundred or Two Hundred Thousand Dollars Cash, to carry a scheme of his own. . . . [Gould is] the reverse of Scott; he is a one man power; consults no one, advises with no one, confides in no one, has no friends, wants none—is bold. Can always lay down Two or Three Hundred Thousand Dollars to accomplish his plans and will do it if he thinks it will pay.

  Most railroad men in Gould’s day understood that railroads were natural monopolies, since few localities generated the traffic to support competitive lines. The conventional solution was to enter into gentlemen’s agreements to respect preestablished competitive boundaries, dividing up the traffic in a “friendly” way. Such “pooling” arrangements became standard practice in the decade after the Erie Wars—watching Scott nearly run the Pennsylvania aground in his furious reaction to Gould’s 1869 onslaught was sufficient caution on the pitfalls of unrestrained competition. The doyen of pooling was Albert Fink, who had come up the ranks at the Baltimore & Ohio before becoming a senior executive at the Louisville & Nashville, where he organized a comprehensive pool for the southeastern lines in the mid-1870s. Fink then became the first commissioner of the Eastern Trunkline Association, an even larger pool, and by dint of meticulous paperwork and proselytizing zeal, quickly signed up almost all the railroads east of the Mississippi. It was a high point of the will-o’-the-wisp pursuit of rationally ordered industrial relationships that so preoccupied late nineteenth-century businessmen, none more so than Pierpont Morgan. Fink’s lasting contribution may be as an evangelist for cost accounting, in part to support revenue and pricing agreements among his pool members.

  Gould did not think like most railroad men. Like Carnegie and Rockefeller, he regarded pools as refuges for the weak, although useful for masking predatory intentions. The solution for the fragmented state of the railroads was to consolidate, not to negotiate elaborate paper compacts. Roads that were willing to join his network would find him a fair purchaser; holdouts would find themselves under attack in the securities market. Since railroads’ enormous capital requirements could be met only by a wide distribution of securities, even the strongest roads were vulnerable. Gould chose his battles with discretion, and never engaged in pointless warfare with men as capable and as determined as himself, like Huntington. (He once did propose a local pooling arrangement to Huntington, but it was carefully designed to meet both of their interests, was quickly understood and accepted, and lasted for almost fifty years.) But he was quick to spot men like William H. Vanderbilt, whom the gods who look after market traders put on earth to be shorn. As Cornelius’s oldest son, “Willie” had assumed leadership of the family properties on his father’s death in 1877, and Gould stripped away the great railroad and telegraph holdings one by one, the way a wolf takes bites out of a running deer.

  By 1883, Gould had become the dominant owner of, or controlling shareholder in, or chief executive of, literally dozens of railroads, some of them only for brief periods of time. The blur of activity sent shock waves of alarm through competitors even as it delighted stock traders, many of whom grew wealthy divining what Gould was up to and following in his wake. It wasn’t easy, for his intentions were always veiled in clouds of misdirection. Even people who understood that he wasn’t just stock-jobbing, but wanted to run a big chunk of the rail system, were confused by his identification with the Union Pacific. But once Gould despaired of settling the government’s claims against the UP, he quietly reduced his holdings, using the profits to shift into other lines. He moved so quickly and so silently that competitors who thought they had a truce with the UP would be shocked to find themselves under siege by Gould—discovering much too late that Gould was acting for the Kansas Pacific, or the Missouri Pacific, or the Wabash.

  When he was at the Erie, Gould had simultaneously attacked the four major systems that stood between him and the Midwest. He forced a major restructuring of rates and system coverage, but came out the loser when he lacked the money to follow through on his initial victories. A decade later, he had plenty of money, but the position was much more complex, involving many more roads. The UP controlled the main transcontinental artery, but was surrounded by formidable combinations intent on nibbling away at its franchise. To the east stood the Iowa Pool, a collection of eight lines, with a common strategy of building westward. Charles E. Perkins, one of the more competent and determined railroad executives of the period, would prove a formidable foe, but in 1878 his fellow Iowa Pool executives were not yet heeding his warnings about Gould. To the far west, Huntington and his three partners, Mark Hopkins, Charles Crocker, and Leland Stanford, had pretty well locked up California, but the important Rocky Mountain ore trade, centered around Denver and stretching from New Mexico to Montana and eastward to the Black Hills, was still wide open, although there were a variety of ambitious contenders. Finally, the Southwest was strewn with the blasted hopes of earlier entrepreneurs, as symbolized by the sun-bleached bones of Tom Scott’s Texas & Pacific. But Gould had worked hard at cultivating cattlemen at the UP and surely understood how meat packing was transforming southwestern ranching.

  When the smoke cleared, Gould was chief executive and primary owner of one of the major Iowa Pool lines, the Wabash; had control or near-control positions in several others; and was playing havoc with the pool’s careful rate and market sharing arrangements. He had taken over the two most important Rocky Mountain lines, the Kansas Pacific and the Denver Pacific, and merged them with the UP, taking a very large payoff in UP stock. He also controlled the main gateway from the Southwest to St. Louis through the Missouri Pacific, and had used that position to win more or less total control of the southwestern roads, including a revived Texas & Pacific. Lines that he controlled by one means or another included the Northwestern; the St. Joseph & Denver City; the Denver & South Park; the Denver & Rio Grande; the Central Branch Union Pacific (no relation
to the UP); the Pueblo & St. Louis; the Bee Line; the Delaware, Lackawanna & Western; the Kansas & Texas; the Quincy; the Iowa; the Peoria; the Hannibal; the New Orleans Pacific; the Iron Mountain; the East St. Louis & Carondelet; the International Great Northern; the Wilmington; the Reading; the Central of New Jersey; plus several major bridges, including the St. Louis Bridge, which he had taken off the Morgans’ hands at a price that made Junius and Pierpont blush. And that is not a complete list.

  Almost every one of those deals was negotiated personally by Gould, which is astonishing. Rockefeller’s rollup of the refining industry was taking place at the same time, but refinery deals usually just required striking a book-value price with one or a few owner-partners. The wide distribution of railroad securities meant that even small deals could involve a large number of parties, many with conflicting interests, and many of them abroad, multiplying the burden of analytic work and legal preparation. Unlike Morgan, who built an impressive staff of senior partners to work on his railroad restructurings in the nineties, Gould did most of the work himself. He had lawyers he relied on, and he regularly took counsel with Dillon and Sage, and often the cable mogul Cyrus Field, but the heavy lifting on strategy and analytics was all his. At the same time, he somehow stayed actively involved in the strategic management of his primary roads, restructuring finances, launching major construction and extension programs, and reassuring investors. (Maury Klein, the leading Gould scholar, makes a convincing case that, contrary to legend, and with the large exception of the Erie, Gould was not a looter of roads; he was, to the contrary, a superb strategist and better than average manager, who often put more money into his roads than he took out.) Amid all this blaze of activity he was the same hunched, frail figure, keeping his counsel, speaking only on the edge of audibility, maintaining his exquisite manners.