The First Tycoon: The Epic Life of Cornelius Vanderbilt (89 page)

On January 19, they agreed to a new contract. The Central committed to delivering as much through freight “from competing points” to the Hudson River as the Hudson River delivered to it. There would be no more empty cars returning from Albany. The Central also agreed to pay its share of the Hudson River's terminal charges. There would be no $100,000 payment, but William considered the Central's concessions to be worth twice that. On January 21, the
New York Herald
announced, “
END OF THE RAILROAD WAR
.” Murphy's bill died, as did the assembly inquiry
¹¹⁰

In speaking to the assembly committee, Keep noted that Vanderbilt “claims to have had everything his own way, and I am afraid he has. I am very thankful that I have not been a party to it.” This was a remarkable statement. He was president of the company, and yet he was not “a party to” its agreement? It was a sign that Vanderbilt had defeated him mentally, morally, emotionally, from the moment the great and unexpected blow fell. Keep gave Corning's committee responsibility for making peace, and then began to dump his New York Central shares. “Keep & Lockwood are large sellers. They have flooded the market with stock,” John M. Davidson wrote to Corning on January 24. Vanderbilt, he recorded, had been out “on the road” driving his fast horses, “& said that he had instructed Wm never to notice any communications from Keep, that he was unworthy of notice, etc., etc.” Tellingly, Vanderbilt advised his horse-racing friends to buy and hold Central stock.
¹¹¹

“Keep is cursed by all parties,” Davidson wrote to Corning the next day. “The swearing against him by the stockholders is
terrible
. They talk of getting up a meeting requesting him to resign. This man, Mr. Corning, is a bad one, for the interests of your road. He has a worse reputation than Vanderbilt. The difference between the two is this: Keep will throw over the stockholders' interests by twisting the stock, while Vanderbilt will sustain stocks by holding them—for instance Hudson & Harlem.” In all likelihood, Keep and Lockwood had been carrying their shares on narrow margins, and decided to cut their losses when the price fell during the blockade. As for Davidson, he joined the crowd in hurling his own Central shares into the flood.
¹¹²

He should have paid attention to what Vanderbilt told his companions on the road. The Commodore's victory turned out to be more complete than he ever could have predicted. He not only had forced the Central to acknowledge his railroad's demands for justice, he had broken the spirit of its largest stockholders. As Central shares grew cheap and abundant, Vanderbilt saw an opportunity. He took it.

*
The seminary Drew endowed is now Drew University, in Madison, New Jersey.

Chapter Sixteen

AMONG FRIENDS

O
n December 11, 1867, Cornelius Vanderbilt ascended to the presidency of the New York Central. Less than five years after he had taken control of the New York & Harlem, he presided over the state's most important railroad—one of the nation's four trunk lines—as well as the lines that connected it to Manhattan. This conquest marked the culmination of the third and most important phase of his empire building. The Central would be the bastion of his realm, much as Prussia would be to the German empire that Otto von Bismarck constructed a few years later. Only now would he move toward the creation of the gigantic corporation—and system—that would seal his place in history.

The press accordingly gave him a new title: the Railroad King.
¹
It was a rank (or insult) often handed to railway presidents, but increasingly it stuck to Vanderbilt, who was so different from his peers. Unlike Drew, he did not go into a railroad to manipulate its stock; unlike Keep, he did not go in on borrowed money and sell out when overmatched; unlike J. Edgar Thomson, he was not a professional executive, hired by the stockholders. He used his own cash to buy large blocks of shares, moved into the management to stay, and brought along his eldest son and sons-in-law. (Clark was now joined by Daniel Torrance, who took office as vice president of the Central.) Vanderbilt never liked the title of king, but it looked very much like he was building a kingdom.

And yet, historians have often erred in accounting for this conquest. It has been written that he assumed all but formal control of the Central at the conclusion of the blockade in January 1867.
²
In fact, he moved slowly and cautiously into the great trunk line over the eleven months that followed. True, the disgusted Henry Keep promptly withdrew from active management, but there is no sign that Vanderbilt simply assumed his place.
³
To the contrary: on April 30, William wrote to James F. Joy, the president of the Michigan Central, to thank him for his help in clearing up a misunderstanding between the Hudson River and the New York Central—showing that Vanderbilt did not yet have even informal control of the larger line. But signs of growing influence, and stockholding, in the Central steadily accumulated.
⁴

On July 25, Keep resigned the Central presidency, and was replaced by H. Henry Baxter. Eager to appease Vanderbilt, the directors voted to reconsider the Central's relations with the Hudson River Railroad and Daniel Drew's People's Line. Two days later, Erastus Corning's son overheard Vanderbilt advise a friend to buy Central stock. In August, the
New York Times
reported that the Central's new management had forged “a close alliance with the Vanderbilt roads.” Ominously for Drew, the Central decided to “cut loose from all connection with the Hudson River steamboats.”
⁵

The latter statement would prove to be gravely portentous. The relationship between Vanderbilt and Drew had undergone a transformation of late, one that grew more dangerous with each passing month. Vanderbilt's acquisition of the Hudson River Railroad had broken their unwritten nonaggression pact—and their long-standing partnership—by pitting their interests against each other for the first time since their clash on the river three decades before. Drew's participation in the second Harlem corner had turned their rivalry into a matter of open combat. Vanderbilt's infiltration of the Central heightened tensions still further; as one newspaper reported, “Drew and Vanderbilt promise to fight it out on the Hudson River all summer.”
⁶

The summer of 1867 served as a mere skirmish before the battle to come. Vanderbilt's ascension to the presidency of the Central would spark a fight so fierce, so enormous, so outlandish, that history would record it as a formal noun: the Erie War.

EVEN BEFORE THE COMMODORE
assumed control of the New York Central, his historical legacy as a railroad king began to take shape. He would be no Leland Stanford, no James J. Hill, building transcontinental lines through thousands of miles of unsettled plains and mountains; rather, he would be a creator of the invisible world, a conjurer in the financial ether. What made him powerful—and controversial—was not his riches alone, but his mastery of the corporate golem.

For his first magic trick, he took what was one and made it two. On March 30, 1867, the Hudson River shareholders (himself foremost among them) approved his plan to nearly double the stock by issuing new shares worth $6,963,900 at par value.
⁷
Called a stock dividend, it was similar to a stock split, an operation that would become common in the twentieth century. In the nineteenth century, it sparked outrage. Charles F. Adams Jr. typified the reaction of orthodox thinkers when he called the transaction an “astounding” act of “financial legerdemain.”
⁸
It seemed to unhinge the value of stock from the world of the concrete and real. Even now, the economic mind shrank before abstractions. Economists, moralists, and financiers alike expected stock to represent the original cost of physical construction and real property, at a rate of $100 per share, the standard par value. Even the most sophisticated thinkers refused to accept that stock could be increased at will, or that the market alone should determine the value of a share. The construction-based par value provided a reassuring sense that one could indeed find the honest,
intrinsic
, value apart from day-to-day market fluctuations, much like the gold that backed pre-greenback banknotes.

Stock that did not reflect construction costs was derided as “fictitious capital,” to use the formal term—or, more commonly, “watered stock,” which called up the image of livestock encouraged to gorge on water before weighing and sale at the market. By contrast, new stock was
not
seen as diluting share value if it reflected actual construction or additional real estate. This thinking explains the curious fact that bonds were often convertible into stock: if used to buy cars and engines, purchase land, or finance construction, then they represented an increase of real capital.
⁹

Vanderbilt used this conventional wisdom to justify his stock dividend. He distributed the new shares to existing stockholders on a one-for-one basis, but required them to pay 54 percent of the par value (or $54 each). This money went to pay for the purchase of St. John's Park for $1 million and the building of a freight depot in place of its trees and flowers. The remaining 46 percent represented construction and rolling stock that had been paid for previously through the sale of bonds, now to be retired. And the Commodore and his son managed to pay 8 percent dividends even after doubling the stock, which tamped down criticism. “They have shown so much of practical ability in bringing up the [Harlem] to an 8 percent investment,” the
Times
wrote, “and of both ability and economy in making the Hudson River Road what is acknowledged to be… that this calculation was generally accepted as a sound opinion.” Cynical observers on Wall Street saw a stockjobbing ploy behind every corporate decision, but the
Times
demurred. “Mr. Vanderbilt emphatically declared that he should keep his present large holdings… to the close of his days, or so long as he is permitted to participate in the management of the property.”
¹⁰

The Commodore also paid attention to the physical dimensions of his budding railroad system. In mid-1867, he realized that new construction would be necessary to integrate his two lines into Manhattan, to make the most efficient use of the strengths of each. The Hudson River had a level, double-tracked route with easy curves, allowing locomotives to pull more cars, use less fuel, and increase speed relative to other lines. It had access to the slips on the west side, convenient for freight handling. The Harlem possessed a portal in the center of Manhattan, which best served passengers. Vanderbilt planned a link between them close to the city: the Spuyten Duyvil Railroad, a short line that would curve along the Harlem River. The legislature chartered the company on April 24, and Vanderbilt took virtually all of the five thousand shares (later increased to a total of ten thousand, representing an investment of $1 million). Work would not begin until 1870, after a long struggle to secure the right of way, but the little line would prove to be an essential piece of Vanderbilt's kingdom.
¹¹

Of course, both these tangible and intangible creations remained within the parochial confines of New York. It was the presidency of the Central that would make Vanderbilt a national figure again, by giving him control of one of the four trunk lines that crossed the Appalachians. But the very success of the railroads over the past decade presented the trunk lines with a conundrum: the center of population and commerce had drifted far beyond their western termini (Buffalo for the Central, for example, and Pittsburgh for the Pennsylvania). They now depended heavily on connecting lines to such cities as Detroit, Cleveland, St. Louis, and Chicago. Managing their relations with these often quarrelsome connections posed a serious problem.

When it became clear to Vanderbilt that he would gain control of the Central at its annual election in December, he began to address this delicate matter of railroad statecraft. The Central had two routes to Chicago: the North Shore and the South Shore, named for their relationship to Lake Erie. On the North Shore, the Central connected via the Suspension Bridge over the Niagara River to the Great Western Railway of Canada, which used a ferry at Detroit to tie into the Michigan Central, which ran through to Chicago. On the South Shore, a chain of roads ran from Buffalo to Toledo; from there the Michigan Southern & Northern Indiana extended to Chicago. Vanderbilt invested in some of the South Shore lines and placed men on their boards of directors as these companies began a process of consolidation with each other that would not be complete for another two years. When he prepared a list of directors for the Central election coming in December, he included Amasa Stone Jr., an important South Shore railroad man from Cleveland.
¹²

These steps worried the North Shore men, namely James F. Joy and the New England investors who had hired him to manage the Michigan Central. They believed that Vanderbilt, as president of the New York Central, probably would discriminate in favor of his South Shore connections, since that was where he had invested his own money. “I had seen by the NY papers that Vanderbilt probably had the control of the NY Cenl,” Nathaniel Thayer, a Boston financier, wrote to Corning on November 26. “Two weeks ago Joy was in NY when Comodore [sic] V. sent for him.” Vanderbilt had reassured Joy that he could “depend upon a perfectly fair course being taken, and that he knew we could injure the NY Cenl. more than they could us. We shall soon see however what course they will take—and must act accordingly”
¹³

Joy shared Thayer's suspicions, even after his conference with the Commodore. William hurried to reassure him. “I think you have in some way received an impression that the management of this & NY Cent roads desire to run their trains regardless of the connecting roads,” he wrote to Joy, under the letterhead of the Hudson River Railroad, “and I am most anxious to dispel any such ideas. I think we are fully aware of the importance of maintaining the most friendly relations with our connexions.”
¹⁴

The words speak for themselves. As always, the Commodore relied first on diplomacy. Aware of the intricately interwoven web of railroad interests, he carefully avoided alienating his partners, even at the expense of some of his own investments. In the end, the Michigan Central's executives would admit that he remained fair and impartial with them. It may well be that he invested in the South Shore lines because that route was more troublesome than the North Shore (in which he would have to deal with only two well-run companies). That persistent problem in the railroad system—fragmentation—created complications on the South Shore that would grow into a crisis, one that would force Vanderbilt to conquer yet again. But not until after he had gone to war with Daniel Drew one last time.

JOY AND THAYER'S WORRIES
spoke to the paradoxical nature of Vanderbilt's reputation at this critical moment. On the eve of his ascension to power in the New York Central, he already stood as an icon of the best and the worst in the new corporate economy. R. G. Dun & Co. summed up the contradiction on July 2, 1867, in that five-word description quoted previously: “Good as gold but sharp.” Good as gold, because none could deny Vanderbilt's “great skill, energy, experience, and business tact,” as a Buffalo newspaper wrote. “He is a shrewd, far-seeing, and far-reaching man.” Wall Street marveled at his accomplishment in turning the Harlem into a profitable, dividend-paying railroad. He won particular praise for his economical management. In the Harlem, he claimed to have reduced expenses by $1.6 million per year. In the Hudson River, he gave instructions to a similar end: “If we can do this business as cheaply as the boats, let us do it, and do it just as cheap as we can.”
¹⁵