The First Tycoon

by T. J. Stiles

  Neither Strong nor any other wealthy and respectable diarist is known to have recorded a visit to 10 Washington Place, to the parlor of Sophia Vanderbilt. That was her husband's fault. When the Mercantile Agency the nation's first credit bureau, first reported on Vanderbilt in 1853, it examined his character as much as his finances (since it reported on businessmen, not consumers, it attempted to assess the general trustworthiness of its subjects). The result says much about the attitude of New York's establishment toward the self-made Vanderbilt. “Started early in life as master of a [small] sailing craft between Staten Island & New York City. Manifested great ability & enterprize, & was taken hold of by the [late] Wm. [sic] Gibbons of New Jersey,” observed its reporter. “From this position Vanderbilt has risen to great prosperity in his way. He has a [large] fortune.” These words were honest, respectful, and only slightly snide. Unfortunately for Vanderbilt, it was a long report. After the commercial judgment came the social, and it was blunt: “He is illiterate & boorish, [very] austere & offensive & has made himself [very] unpopular with the inhabitants of Staten Island, so much so that his leaving there is subject of great rejoicing by the inhabitants & was manifested by a public jubilee.” Among the Astors and Aspinwalls, the Schuylers and Grinnells, Cornelius Vanderbilt did not belong. He had no place in their traditions.5

  Outwardly, Vanderbilt seemed impervious to the snickers from those who drove their carriages past his new home on their way to the Astor Place Opera House.6 In many ways, he was destroying tradition as rapidly as possible. His career had disrupted ancient ways of life by facilitating a new mobility in society, breaking down barriers between markets, and introducing a fierce competitiveness that had become central to American culture. Now he had taken in hand the most important kind of business of the nineteenth century, the railroad.

  In 1840, he had prophesied to the chief engineer of the Stonington, “If I owned the road, I'd know how to make it profitable.” As president of the line he brought his prediction to fruition. He expanded local traffic and dramatically improved its financial position. On May 1, 1848, he completed a new set of tracks that eliminated the ferry in Providence that had been such a bottleneck. In June, the railroad hosted a party for the leading businessmen of Boston to herald a new junction with the Boston & Providence. In December, the Stonington won lavish praise in the press. “This route is, without question, the shortest, directest, and easiest now in use” between Boston and New York, commented the Independent. “The cars are comfortable, and their motion equable and noiseless. The boats to Stonington are magnificent.… Throughout the whole route there is full proof of care, energy, and competency, which justify the rapidly growing popularity of this route.” Perhaps most important, under Vanderbilt's management the long-bankrupt line paid $65,000 in dividends that year.7

  “Mr. Vanderbilt, the well-known Admiral of the Sound,” in the words of one newspaper, had held on to his interests in the “magnificent” boats that steamed between Stonington and New York's teeming slips.8 As he had assured the Stonington's chief engineer, when he finally owned the road, he owned the boats, too—though they were managed by Daniel Drew through the New Jersey Steam Navigation Company.

  The year 1848 marked a high point of the partnership that Vanderbilt and Drew formed in the aftermath of their collision on the Hudson in 1831. For seventeen years each had taken a stake in the other's enterprises, neatly insuring against competition from the man he most respected. On Long Island Sound, they carried their cooperation beyond mere mutual nonaggression. With control of both trains and boats, they had eliminated the adversarial relationship between land and sea that had bedeviled the Stonington during the presidency of the hapless Courtlandt Palmer.

  Vanderbilt and Drew took their partnership from business operations to the stock market. The model for what they now did with the Stonington took shape no later than 1844, when Drew had joined Isaac Newton and Nelson Robinson to buy control of the Mohawk & Hudson River Railroad. They had planned to divert its passengers and freight onto the People's Line boats, and to acquire (as they would explain in court in 1848) “the profits to be derived from the purchase and sale of stock.” Once they took control of a corporation, Drew and his partners gained first access to information that would drive the price of its stock, from potential problems to impending deals to the number and disposition of its shares in the market. They could also manipulate the share price, so they could buy or sell in advance of a manufactured rise or fall in the stock. Drew's passion for insider trading (as dealing in the stock of one's own corporation came to be known) made him a good credit risk in the eyes of the Mercantile Agency. Writing a decade later, in reference to another railroad that Drew controlled, an agency reporter observed, “He is inside & knows its fluctuations & bearings, & he is shrewd [enough] to take [good] care of himself. He may therefore be regarded as reliable [for his debts].” It was all perfectly legal. When Drew had to explain his behavior in court, it was not in a criminal case, but in a civil lawsuit filed by a junior partner of Drew, Robinson & Co., who felt that he had been cheated out of his share of the profits. That junior partner was Daniel B. Allen.9

  Drew made few such revelations. He, Vanderbilt, Newton, and Robinson profited by keeping their operations and arrangements to themselves. “It would be difficult to find the real wealth of [Vanderbilt],” the Mercantile Agency observed. “It must, however, be great.” When their names came up for discussion, the same adjectives appeared again and again: “smart… shrewd… cunning.”

  Of all this cunning crowd, no one, not even Vanderbilt, was sharper than Drew's senior partner in Drew, Robinson & Co. Though both Drew and Vanderbilt understood the dynamics of the stock market exceptionally well, it was Nelson Robinson who worked “the Street,” as Wall Street was called. (“Wall Street” was itself a nickname for the stock exchange, formally called the New York Stock and Exchange Board.) There he won a reputation as “one of the shrewdest and keenest operators,” as he made trades among the crowd of unlicensed brokers who gathered on the curb outside the Merchants' Exchange and inside on the floor of the great hall where formal transactions took place. He mastered the brokers' arts—not simply buying and selling at the right price, but also managing the terms, such as the number of days allowed to close a transaction, and whether the buyer or seller would be able to select the day within that window to make payment or delivery. Perhaps most important, Robinson understood the magic of perceptions—the whispered rumor to shape the mood of the market, the daily feat of acting to fool the brokers who studied his face, the trades conducted anonymously through other brokers to mask his real movements.10

  Secrecy in such operations served a political purpose as well. Many Jacksonians had never fully reconciled themselves to corporations, let alone to “stockjobbing” and “speculation,” two of the worst insults an orator or editorialist could imagine. Even at the half century, the notion of dividing a company into shares, treating each share as property, and then allowing its value to fluctuate, just seemed wrong, even immoral to them.11

  The rabble and their rousers were not the only Americans who had difficulty grasping the abstractions of the new economy. Most of those merchants and lawyers who paid New Year's calls on Fifth Avenue—not to mention the businessmen in smaller towns and villages around the country—still worked in personal enterprises, owned by single proprietors or small partnerships. Corporations remained so few that the stock exchange traded shares—and bonds—one at a time. The vice president of the Stock and Exchange Board called each one from the chair, brokers on the floor shouted bids and offers, and clerks recorded the trades on a large blackboard. Then they had lunch. Then they ran through the entire list once again.

  As early as 1819, Chief Justice John Marshall had expounded on the corporation as “an artificial being, invisible, intangible,” but even corporate officials had difficulty with such abstract thinking. They used “company” as a plural noun, as in, “The company are in renewed trouble for their floati
ng debts.” They saw the corporation as a gathering of individuals, as a kind of partnership—which it usually was, since few were very large or had widely traded stock.12 They placed great emphasis on the “par value” of stock, usually set at $100 per share. This represented the original investment in a company; it was expected that the total value of all its shares would equal the cost of the physical capital—land, buildings, machinery, livestock. A stock certificate might be a slip of paper, but it was thought to represent something real, much as paper currency represented cold, hard gold that could be retrieved on demand from a bank's vault.

  With this physical, tangible basis for the price of stock, most investors did not buy in hopes that values would consistently rise, as they would in later centuries; that would have made no sense, since share prices ultimately rested on what it had cost to physically create the company, not how much it earned. They looked instead to a return on that cost in the form of dividends—often referred to as “interest on capital.” Share prices fluctuated, of course, but the most important factor driving them was the size and regularity of dividends. A price over par—above $100—was a premium paid for the certainty of a reliable return. A price below implied risk, uncertainty, even a dread conviction that dividends would never come. (Speculators did gamble on the prices of highly volatile, “fancy” stocks, but these were expected to go up and down, rather than rise steadily and permanently.)

  It is easy to dismiss Vanderbilt and Drew's stock operations as mere corruption, as corporate profiteering of a type all too familiar to later generations. Indeed, they were corrupt, even by the broad social standards of their own time. When such dealings surfaced, contemporaries scorched these men with abuse, even though no laws prohibited their behavior. Social disdain for Vanderbilt, “illiterate & boorish,” and Drew, the former cattle drover, suffused such commentary.

  But it is a mistake to simply adopt the condescension and derision of the contemporary social elite. This view ignores a critical fact: Vanderbilt and Drew's business careers, coming in the first half of the nineteenth century, were acts of imagination. In this age of the corporation's infancy, they and their conspirators created a world of the mind, a world that would last into the twenty-first century. At a time when even many businessmen could not see beyond the physical, the tangible, they embraced abstractions never known before in daily life. They saw that a group of men sitting around a table could conjure “an artificial being, invisible, intangible,” that could outlive them all. They saw how stocks could be driven up or dropped in value, how they could be played like a flute to command more capital than the incorporators could muster on their own. They saw that everything in the economy could be further abstracted into a substanceless something that might be bought or sold, that a banknote or promissory note or the right to buy a share of stock at a certain price could all be traded at prices that varied from day to day. The subtle eye of the boorish boatman saw this invisible architecture, and grasped its innumerable possibilities.13

  It is important to remember that the corporation originated in mercantilism. Legal historian Morton J. Horwitz describes it as “an association between state and private interests for public purposes.” (The mercantilist character of early corporations led Adam Smith to denounce them as “a sort of enlarged monopolies.”) Over time it changed character until, Horwitz writes, “the corporate form had developed into a convenient legal device for limiting risks and promoting continuity in the pursuit of private advantage.” Eventually it became just another way of organizing a business.14

  But not yet. In 1848, the corporation was still emerging out of a political conflict over the best way to create commercial facilities for the public good (namely banks and transportation infrastructure—turnpikes, canals, and railroads). Whigs had favored direct government action, from the Bank of the United States to state-owned railroads such as the Michigan Central, or else public-private partnerships, as in the Camden & Amboy Railroad. Jacksonians had wanted to limit government, fearing that “the money power” would capture it to enhance the advantages of the wealthy over their fellow citizens; like Adam Smith, they viewed corporations with a jealous eye. The Panic of 1837 had proved decisive in resolving this debate. In its wake, canals and railroads had failed, discrediting state-owned “internal improvements.” But the need for such public works remained. And so, for all the Jacksonian dread of “stockjobbers,” the task of building railroads and other large projects fell to privately funded business corporations. That created a paradox: the nation's public works, the carriers of commerce and means of travel, were owned by private parties, who operated them for personal gain.15 Because of this, Vanderbilt's position as a corporate executive gave him an increasingly public role, one that would grow over time until he became the foremost symbol of this public-private paradox. In the popular mind, that role began not with the Stonington Railroad, but with a far more ambitious enterprise yet to come.

  At fifty-four, Vanderbilt could look back on a career of breathtaking leaps of imagination. Steamboats and railroads, fare wars, market-division agreements, and corporations: all were virtually unknown in America when he mastered them. He understood the emerging invisible world far better than those who condescended to him. And this knowledge was about to serve him better than he could have dreamed. He was about to imagine a work of global significance—to create a channel of commerce that would help make the United States a truly continental nation. In the process, a most perplexing collision of public and private interests would embroil him in great-power diplomacy, international finance, and a bitter war between a half-dozen sovereign nations. And it was all because of a frenzy that now began three thousand miles from 10 Washington Place.

  IN APRIL 1848, in the northeastern corner of the great peninsula that extended like a thumb to enclose San Francisco Bay, some two hundred buildings could be counted in the village of Yerba Buena. They included some 145 houses, a dozen stores, and perhaps thirty-five shanties. Clustered in a sandy basin beneath steep hills and ridges, the town formed a convenient port close to the Golden Gate, with the promise of steady growth as Americans trickled into California. To assist that growth, the leading citizens had decided to change Yerba Buena's name to that of the bay—San Francisco. Already the population had risen from around two hundred in 1846 to as much as a thousand.

  By the end of May, they were gone. Sand blew through deserted streets. Ships sailed through the Gate, rounded the northeastern corner of the peninsula, and dropped anchor in front of those two hundred empty buildings; then their crews scurried overboard, never to return. Over the previous few weeks, visitors from the upper country had brought rumors of gold near Sutter's settlement of New Helvetia; then men who had panned and dug for gold themselves had brought the yellow evidence to town. “The inhabitants began gradually, in bands and singly, to desert their previous occupations, and betake themselves to the American River,” wrote a resident. “Soon all business and work, except the most urgent, was forced to be stopped.… About the end of May we left San Francisco almost a desert place.”16

  The craze soon struck Monterey. “As the spring and summer of 1848 advanced,” William T. Sherman recalled, “the reports came faster and faster from the gold-mines at Sutter's saw-mill. Stories reached us of fabulous discoveries, and spread throughout the land. Everybody was talking of ‘Gold! gold!!’ until it assumed the character of a fever. Some of our soldiers began to desert; citizens were fitting out trains of wagons and pack-mules to go to the mines.”17

  Nothing could have been more predictable than the rush to the “diggings,” as they were called. Gold was not simply worth money—it was money. Anyone could take refined gold (and refining was a relatively simple process) to the United States Mint and have it poured into coin. The earth was spitting up cash. Who wouldn't have gone?

  In late June, Lieutenant Sherman convinced Colonel Mason that they must visit the diggings in order to report on the find. With four soldiers, Mason's black servant, “and a good
outfit of horses and pack-mules,” they journeyed up to the mines. “I recall the scene as perfectly today as though it were yesterday,” Sherman wrote decades later. “In the midst of a broken country, all parched and dried by the hot sun of July, sparsely wooded with live-oaks and straggling pines, lay the valley of the American River, with its bold mountain stream coming out of the snowy mountains to the east.” Along a gravel floodplain adjacent to the river, “men were digging, and filling buckets with the finer earth and gravel,” which they poured into roughly made sifters. Sherman estimated that about four men worked each sifter, and each man earned an average of an ounce of gold—$16—per day, though they often pulled in twice as much. “The sun blazed down on the heads of the miners with tropical heat, the water was bitter cold, and all hands were either standing in the water or had their clothes wet all the time; yet there were no complaints of rheumatism or cold.”

  When Mason and Sherman returned to Monterey, they learned that the Mexican War had ended, and California would remain American territory. The troops began to desert by the company, riding to the mountains to take raw money out of the water and the dirt. “Nearly all business ceased,” Sherman wrote, “except that connected with gold.”18

  It soon became clear just how much business could be connected with gold. Well before the end of the year, men began trickling back to San Francisco to start businesses to serve the thousands who poured off ships that sailed in growing numbers through the Golden Gate. California was one of the most remote parts of the new American empire—as much as six months' voyage from the Atlantic coast around Cape Horn—yet already its residents could see that something enormous had started there, something that would have repercussions far beyond the mountains and the bay.