by T. J. Stiles
On the afternoon of September 18, Vanderbilt drove out behind his fast trotters on his daily race through upper Manhattan. He whipped the team back into his stables at seven o'clock, and went up to his bedroom to change. A maid came up to tell him that a reporter from the New York Herald wished to see him. Vanderbilt received him in his second-floor sitting room, where Fisk and Gould had waited five years before. “Rising from his chair with the dignity of an old courtier, he politely invited the reporter to be seated. He then threw himself back in his capacious easy chair and turned his bright and penetrating eyes upon him,” the reporter wrote. “You have heard today, Mr. Vanderbilt, I suppose,” the journalist asked, “of the Wall Street panic?”
“No. I have only just come in from driving, and it is all news to me; but, after dinner, I shall see what the evening papers say.”
The reporter explained that Jay Cooke & Co., one of the leading financial firms in the country, had fallen, crushed by the weight of millions in unmarketable Northern Pacific securities. It was autumn; the moving of the crops had begun; and the year's tight money market had turned anaconda. House after house had collapsed in Cooke's wake. Vanderbilt said he doubted things were really that bad. The reporter added, “I forgot to tell you… that Mr. Richard Schell has also had to suspend payment.”
That brought Vanderbilt up short. “Well, there was no reason why Schell should have failed—wanted to be too rich too quick I suppose,” he said. He asked if there was a rumor about the Pennsylvania (there was), and fell into thought. The reporter broke the silence by asking about “the cause of the rottenness in Wall Street.” The Commodore, “giving one of his keen glances over his spectacles and speaking deliberately,” delivered an astute impromptu lecture.
I'll tell you what's the matter—people undertake to do about four times as much business as they can legitimately undertake.… There are a great many worthless railroads started in this country without any means to carry them through. Respectable banking houses in New York, so called, make themselves agents for sale of the bonds of the railroads in question and give a kind of moral guarantee of their genuineness. The bonds soon reach Europe and the markets of their commercial centres, from the character of the endorsers, are soon flooded with them.…
When I have some money I buy railroad stock or something else, but I don't buy on credit. I pay for what I get. People who live too much on credit generally get brought up with a round turn in the long run. The Wall street averages ruin many a man there, and is like faro.60
Vanderbilt was clearly focused as he faced the greatest financial disaster of the century. He would need all his wits to survive.
“Vanderbilt is the only man who can come to our rescue and reestablish confidence,” a broker remarked that evening. “I hope from the bottom of my heart that he will come down tomorrow, as he did on the occasion of Black Friday.… At the present moment there is a similar fight going on to break Vanderbilt's stocks—Lake Shore, New York Central, and Western Union.” The failure of Richard Schell, long associated with the Commodore, gave the downward plunge added momentum. Almost instantly, New York Central dropped from 99½ to 94¾, Harlem from 126½ to 125, Lake Shore from 90½ to 86, Western Union from 88½ to 78. And they kept falling. Two days later, they would hit 89, 85, 79½, and 55¼ respectively. An enormous percentage of Vanderbilt's net worth evaporated. As of October 15, the New York Central's market value would shrink from its pre-panic level by $19 million, the Lake Shore's by $17.5 million, and Western Union's by $16.5 million.61
The crisis soon found its center in the Union Trust Company, the financial agent of Vanderbilt's railroads. Like other banks, it suffered a run—a sudden rush of depositors who demanded their money—which forced it to close its doors. Its president was in Europe and its secretary disappeared with an undetermined amount of cash. The bank's trustees called in the $1.75 million loan to the Lake Shore. But Vanderbilt and Amasa Stone had not had time to restore the railroad's finances, and it could not pay. The disastrous entanglements that Clark, Schell, and Banker had arranged between the Union Trust and the Lake Shore threatened both companies with bankruptcy.62 If either went down, it would drag still more firms and financiers into failure, exacerbating the panic. The result might ruin Vanderbilt himself.
In one of the most painful moments of the Commodore's life, he faced the full repercussions of the greed—the treachery—of three of his most trusted lieutenants. In righteous fury, he forced them to face the consequences, demanding that Banker, Schell, and Clark's estate put in personal notes to repay the advances made to them against Lake Shore securities. Banker and Schell knew it was nearly impossible for them to pay, and Clark's brokerage house, George B. Grinnell & Co., went bankrupt. But the real problem was the $1.75 million that the Lake Shore owed the Union Trust.
Outside the Union Trust's locked doors, Wall Street chattered nervously about the consequences if it should fail. Inside, its trustees anxiously reviewed the books. On September 20, the Commodore went in person to the bank's office, the Herald reported, “looking as placid and complacent, and smoking his cigar with as much nonchalance as though Central was being quoted at 200.… He and Mr. Worcester, the treasurer of the Central road, and several of the directors of the company were closeted together during the forenoon.” The bank's trustees (including former Central director John V. L. Pruyn) had long left its affairs in the hands of Vanderbilt's lieutenants. Now they demanded that Vanderbilt personally pay the Lake Shore's debt. Pruyn—who was so distressed that he appears to have suffered a heart attack a few days later—was especially angry with the Commodore. But Vanderbilt declined to pay. He may have done that as a matter of principle, for he certainly was not individually responsible for the debt; but his refusal also may have been a sign of the precarious state of his own finances.63
On September 21, President Grant arrived in New York to assess the crisis. He set himself up in room 19 of the Fifth Avenue Hotel, where Wall Street's leaders begged him to inject liquidity into the markets by ordering the Treasury to issue the greenbacks it held in reserve. Vanderbilt sent up his card. He was conducted into room 19, where he made his own proposal. “I offered to extend relief to the financial community to the extent of $10,000,000,” the Commodore related afterward. “I offered it in this way—to give $10,000,000 in as good securities as the government could give, provided the government would give $30,000,000.” He suggested, in essence, a version of the open-market operations that the later Federal Reserve would conduct on a daily basis, in which it would fine-tune the supply of cash by buying and selling federal bonds. Grant turned down Vanderbilt's specific plan, but Treasury Secretary William A. Richardson did initiate a policy of buying bonds to nearly the amount he suggested. “I do not know what to say about the future,” Vanderbilt said that night. “You say you newspaper people are in the dark yet, and don't know what to say about the result of all this panic. I am in the same state of doubt myself. I haven't the remotest idea of what the result will be. At present the outlook is very, very gloomy indeed.”64
This public pessimism reveals how deeply the Panic of 1873 worried Vanderbilt. He had guarded his words all his life, knowing the impact they would have on friends, enemies, and the markets. Often he made a great show of unconcern, as on Black Friday in 1869 or during his recent visit to the Union Trust. But now there would be no fooling anyone about how bad the situation had become. The stock exchange shut its doors for ten days in a desperate attempt to halt the frenzy of fear. But the impact soon was felt far beyond Wall Street. “Factories and employers throughout the country are discharging hands, working half time, or reducing wages,” George Templeton Strong wrote in his diary on October 27. “There is a prospect of a hard, blue winter.”
The Panic of 1873 started one of the longest depressions in American history—sixty-five straight months of economic contraction. In the next year, half of America's iron mills would close; by 1876, more than half of the railroads would go bankrupt. Unemployment, hunger, and homeless-ness blight
ed the nation. “In the winter of 1873–74, cities from Boston to Chicago witnessed massive demonstrations demanding that authorities ease the economic crisis,” Eric Foner writes. The irony is that the fall was far more severe because of the rapid rise of the previous decade. The expanding, increasingly efficient railroad network had created a truly national market. The fates of farmers, workers, merchants, and industrialists across the landscape were tied together as never before. New York had cast its financial net across the country, which meant that credit flowed to remote regions far more easily than before—but also that financial panics affected the entire nation. As Vanderbilt pointed out, railroad overbuilding was an underlying economic problem, and it was exacerbated by Wall Street's craze for railway securities. When the bubble burst, the consequences were felt across the country with devastating suddenness and severity65
Even worse, the long boom had brought hundreds of thousands of workers into the industrial workforce without giving them any kind of cushion against a downturn. Even before the Panic, many had lived miserable lives. In New York, twenty-five thousand ironworkers lived close to their riverside foundries; lacking sufficient income to commute from healthier locations, they and their families jammed into the tenements that made Manhattan infamous. “Admixed with foundries and factories were reeking gasworks, putrid slaughterhouses, malodorous railyards, rotting wharves, and stinking manure piles,” write two historians of New York, “which gave the working-class quarters their distinctively fetid quality” Diseases such as cholera swept Five Points, Corlears Hook, and other impoverished neighborhoods, leading to death rates as high as 195 out of every thousand. The closing of factory doors and slashing of wages in the Panic made a bad situation impossible for many. A “Work or Bread” movement swept the working poor; it would culminate in a protest by seven thousand unemployed workers in Tompkins Square in New York on January 13, 1874. The police broke it up with ruthless force. Homeless and hopeless, many of the unemployed took to the road, giving birth to a new creature on the American landscape: the tramp.66
The tidal wave threatened to engulf even the mightiest of the mighty: the Pennsylvania Railroad and its gifted managers. After a period of rapid expansion, the railroad had accumulated a floating debt of $16 million, with a cash balance of only $4.4 million. J. Edgar Thomson personally made advances to save the company, but he himself was overextended. The disaster ruined his friendship with Scott, who was embroiled in the troubled Texas & Pacific. Scott's protégé Carnegie refused to help Scott, accusing him of “having acted upon his faith in his guiding star, instead of sound discretion.” Many businessmen were guilty of just that crime in 1873.67
The storm swept away many of those closest to the Commodore. His son-in-law Osgood went bankrupt and was expelled from the Union Club. James Banker failed to pay his debts, amounting to some $750,000; Vanderbilt covered them (lest they drag the Lake Shore and the Union Trust down farther), in return for Banker's Fifth Avenue home and other real estate that would have brought $1.5 million in ordinary times. On October 27, Banker resigned the vice presidency of the Bank of New York in disgrace. Augustus Schell felt certain that he, too, would go under. Years later, Chauncey Depew would remember how he walked out the door of the Union Trust with Schell, who “had his hat over his eyes, and his head was buried in the upturned collar of his coat.” As they walked past Trinity Church, Schell said, “Mr. Depew, after being a rich man for over forty years, it is hard to walk under a poor man's hat.”68
In this deluge, it was all Vanderbilt could do to survive. The trustees of the Union Trust talked openly of forcing the Lake Shore into receivership. If that happened, it might start a chain reaction that would have potentially dire consequences for Vanderbilt's empire. Even though the Lake Shore was a separate corporation from the New York Central, both were strongly identified with the person of the Commodore. Should he fail to rescue the Lake Shore, the value of his other shares would sink still lower. Even worse, the Central's credit would likely suffer. Even a highly profitable railroad needed to borrow money on a regular basis to cover its immense expenses; if the Central found itself unable to sell its bonds, it might have to curtail operations, suspend dividends, and skip interest payments, spinning into a self-feeding cycle.
But the Union Trust needed Vanderbilt. For all the trustees' bluster, they knew as well as he did that bankrupting the Lake Shore would accelerate the economy's decline and gain them little in return. In the end, only Vanderbilt could save them, and only they could save Vanderbilt. The Commodore saw his leverage. He applied all his force on that point, patiently negotiating as the weeks went by, waiting for the emotional tide of fear to subside. On October 24, he finally convinced the trustees to accept the railroad's notes, maturing at three, six, and nine months, to settle the loan.
There was a catch: the trustees insisted that Vanderbilt himself be responsible for repayment. Even now, after decades of economic growth and increasing financial sophistication, this one man towered above Wall Street as America's financial prince. For Vanderbilt, it was a test of his faith in his ability to save the Lake Shore. He agreed, putting up his personal Harlem shares as collateral for the railroad's notes.69
In Lake Shore board meetings, the Commodore insisted that Clark's estate and Augustus Schell settle their debts to the railroad, amounting to $1 million. Vanderbilt personally negotiated the terms, and secured full repayment over the next few months. (Because of these arrangements, Schell avoided bankruptcy) And Vanderbilt loaned more than $1 million out of his own accounts to see the Lake Shore through its crisis. On April 18, 1874, the railroad paid off the last of its notes to the Union Trust.70
“Between the panic of September and the quieter days of January 1874, the Lake Shore Company was lifted over all its embarrassments, protected in all its obligations, by the strength of one man, cajoled at eighty years of age into taking the management of a road largely involved by extravagant outlays for construction,” Railroad Gazette reflected. “At one time $6,000,000 of Mr. Vanderbilt's own private fortune in Harlem and New York Central stock was pledged for debts of the Lake Shore road. True, the road was one which could and did repay him; but his wealth was the only thing which enabled him to save it from going to protest.” It was an accomplishment that said everything about Vanderbilt's negotiating skills and iron nerve. Impromptu newspaper interviews with the Commodore, comments by those who dealt with him, and the minutes of board meetings show him in full command as others nearly broke down in fear.71
In the aftermath of the Panic, Vanderbilt did more than survive. He laid the foundation for an integrated network of railroads that would become known as the Vanderbilt System. It would emerge slowly, as his empire absorbed lines weakened by the depression. William would carry the scheme to completion, but there can be little doubt that the Commodore himself envisioned it. In 1874, for example, he would develop a plan—without William's knowledge—to lease the Lake Shore to the New York Central; though the lease was never concluded, it spoke to his independent conclusion that his railroads required integration.72
He also decided to take an active role in the management of Western Union, in which he was reputed to hold a large, even controlling, share. On October 8, he, William, and Edwin D. Worcester entered the telegraph company's board. The executive committee now consisted of Vanderbilt, Worcester, Frank Work, Augustus Schell, William K. Thorn, and the not-yet-bankrupt James Banker (along with Alonzo B. Cornell, Harrison Durkee, Norvin Green, Joseph Harker, and William Orton, who remained as president). William, interestingly, did not go into the executive committee. The synchronization of the Panic with Vanderbilt's election to the Western Union board may have been more than a coincidence. If the Commodore took real estate from Banker in return for paying his debts, then he likely took stock as well—and Banker had been speculating heavily in Western Union. It may have been Vanderbilt's followers' foolishness that made him a leading force in the telegraph monopoly73
Vanderbilt turned eighty on May 27
, 1874. After amassing the greatest personal fortune in American history, he had protected it against the greatest financial crisis in American history. Now, at last, he could take on the role he had long envisioned for himself—letting his son and Amasa Stone serve as his prime ministers as he sat back on his throne, an attentive but retiring emperor. Of course, it was never quite that simple.
“THE GRANGER MOVEMENT?” Vanderbilt asked. “What the devil is that?”
The Commodore sat in his office at 25 West Fourth Street, with only Lambert Wardell standing guard outside. It was a September afternoon just a week before the Panic. He spoke to a reporter, who found him “looking strong and healthy enough to drive bears in Central down to the lowest point of despair, and seemed to be clear-headed enough, after all the summer at Saratoga.” As usual, Vanderbilt had a cigar in his mouth and carpet slippers on his feet, wearing a linen jacket and gray pants as he leaned back in his armchair and threw a foot up on the table in front of him.
“The farmers' movement out west,” the reporter said. He had come to ask for the Commodore's opinion of the Grangers, and was surprised at his ignorance.
“Well, I don't know anything about it. Haven't paid any attention to it.” The reporter explained that the movement—formally called the Patrons of Husbandry, which sprouted thousands of lodges, or “granges,” in the Mississippi Valley in 1873—had arisen against the railroads. “They complain generally of high and exacting tariffs, too much special railroad legislation, and of various privileges enjoyed by railroads and used for purposes of extorting unfair prices from the farmers.”
“They do, eh?” the Commodore said, as he tapped the ashes loose from his cigar. “Well, as to special legislation, I agree with them. If they are in favor of making only general railroad laws, I'll be willing to back 'em. Further than that, I don't care what the devil they do. The Central can hold its own.”