The First Tycoon: The Epic Life of Cornelius Vanderbilt (107 page)

On April 1, 1873, in a further step to put his empire in order, he leased the Harlem to the New York Central & Hudson River for an annual payment of 8 percent of the par value of its stock, the Harlem's now-customary dividend. It exemplified Vanderbilt's pattern: a slow but inexorable advance from financial control to coordination to centralization of the different components of his realm. Of all the Commodore's railroad vassals, only Clark's Lake Shore still ran its own affairs. As Vanderbilt Allen, Commander of the Order of the Mejidie, could have explained, it occupied a place rather like Egypt in the Ottoman Empire—owing allegiance to the sultan, but functionally independent. Not for long.
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NOW THAT THE CENTRAL
had issued £2 million in bonds, they had to be sold to English investors. On March 3, 1873, Vanderbilt gave the job to James Banker. He had confidence in Banker's abilities, of course. He bombarded Banker with personal instructions for the disposition of millions of dollars worth of securities up to the moment of his departure for London. But Vanderbilt may have wished to banish Banker in order to halt the growing stock operations he conducted with Clark and Schell.
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His frustration with Clark in particular only had grown in the weeks following the Northwestern corner. In January, Vanderbilt again found his own name dragged into one of Clark's Wall Street operations, involving Western Union. Trading through George B. Grinnell & Co. (a firm in which Clark was a special partner), Clark's circle bulled the telegraph stock in January and February. That circle included Banker, Augustus and Richard Schell, and George A. Osgood. Osgood, too smart for his own good, told a reporter that “he would not allege that the Commodore was acting as the bone and sinew of the clique, for even if he were, it would not be wise to have the fact published as coming from him.” The journalist reported the conversation to Vanderbilt, who became “indignant.” Leaning back in his chair, the Commodore stretched out his arm and said, “My son, when the gang of stock speculators in Wall Street tell you a story about my connection to any enterprise but New York Central, Hudson, or Harlem, don't believe them. I have all I can do to tend to what I have on hand now, and if I had the Western Union Telegraph line I wouldn't want to be bothered with it.” Vanderbilt was being a bit disingenuous himself; he may have had a large, perhaps even controlling, stake in Western Union, though he did not take part in its management, let alone in this attempted corner. More ominously, he now condemned his own sons-in-law as “the gang of stock speculators.”
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“It is well known that several months ago Commodore Vanderbilt quarreled with his son-in-law, Mr. Horace F. Clark,” the
New York Herald
reported that spring. “The reason of this was stated to be that the Commodore objected to his relative's speculating in Western [railroad] stock, particularly when they were fancy stocks.”
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This was more than a matter of personal pique. A subtle but profound shift in the economic winds could be felt, especially by so experienced an observer as Vanderbilt. In the judgment of English bankers, American railroads had overexpanded. As Junius S. Morgan wrote to Andrew Carnegie from England that spring, “Our market is at the moment over-supplied with American securities.… On the continent it is still worse.” In London, Banker found it impossible to sell the Central's bonds, a matter of regret to Morgan's son in America, J. P. Morgan, precisely because the future of U.S. railroads looked so doubtful. “The kinds of bonds which I want to be connected with are those which can be recommended without a shadow of doubt, and without the least subsequent anxiety, as to payment of interest,” J. P. Morgan wrote to his father on April 16. “I did feel exceedingly disappointed that we could do nothing with the New York Central.… It would do us all far more good to be connected with such a negotiation, even had the profit been small, than anything I have heard of for a long time.”
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On the day that Morgan wrote these lines, the first tremor of the coming shock hit Wall Street—and it brought down the house of Barton & Allen. A squeeze in the money market led to a panic. When banks called in loans to Samuel Barton and Vanderbilt Allen, they could not pay. They had embroiled themselves too deeply in Clark and Schell's operations, especially in the Union Pacific, and Vanderbilt refused to save them. A reporter for the
Herald
asked Barton outright whether they were doing business for the Commodore. “None whatever, lately,” he replied. Still, he felt wounded, after the long years in which Vanderbilt had taken a special interest in both himself and Allen. “If Mr. Vanderbilt had stuck by us, we shouldn't have failed,” he said. “But he would not.”
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Vanderbilt's stern refusal to rescue his relatives from their recklessness—which he had warned them against many times—split the clan. Daniel Allen took it personally, and broke off his long relationship with the Commodore. Expectations rose of a reckoning between Vanderbilt and Clark.
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But fate intervened.

On June 19, Clark dropped dead at the age of fifty-eight. He had had heart disease—“rheumatism of the heart,” as the press called it—and, after feeling unwell for some days, suffered a heart attack. On June 22, the Commodore and Frank led a parade of mourners into the Madison Square Presbyterian Church for the funeral, including William and his wife, Augustus Schell and his new spouse (married on March 25, with Clark playing a central role in the Quaker ceremony), and delegations from railroad boards from around the country. Afterward Clark was buried in Woodlawn Cemetery
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Worcester rushed back from a trip to Buffalo for the funeral, and stopped to see Vanderbilt at his office on West Fourth Street. The Commodore told him to get into a carriage, remarking, “This is Mrs. Vanderbilt's coupé, and you must be careful not to soil it with your tobacco juice.” As they drove to Grand Central, Vanderbilt became reflective. “Mr. Worcester, there's one thing you ought to inculcate upon your boys, and that is to be very economical.” The source of his mood was an investigation he had launched into the Lake Shore's books. “Clark was foolish,” Vanderbilt said. “This is a lesson teaching us to take care of ourselves.”
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The full scope of that lesson unfolded over the summer. On July 2, the Lake Shore board (led by Schell and Banker, back from London) formally asked Vanderbilt to assume the presidency. He accepted, naming Amasa Stone as managing director. Though Stone took operational control of the company, the Commodore looked closely into its affairs, even traveling down the line to Toledo to inspect its condition. He voiced admiration of the railroad, and let it be known that he was buying its stock.
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In reality, he discovered that Clark had driven the company to the brink of annihilation. Counting on a continuing economic boom, Clark had gone on a reckless spending binge. As a financial columnist later wrote, “There was not a dollar in the treasury. Contracts for construction, equipment, 20,000 tons steel rail, &c., to the amount of $7,894,845, had been made and the work all commenced, with no provision whatever for meeting the large payments.” Vanderbilt ordered an immediate halt to all construction, canceled all free passes, and ordered a new policy of frugality.
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The huge floating debt, amounting to $6,277,485, particularly worried him. Clark had paid for much of his new construction with high-interest call loans from banks, which could demand repayment at any moment. And to pay the most recent dividend—formally approved under Schell and Banker's direction on June 30, just before Vanderbilt took over—Clark had arranged for a call loan of $1,750,000 from the Union Trust Company, a financial institution in which he, Schell, and Banker were directors. “I am one of those men,” Clark had said shortly before his death, “who believe it is the duty of the managers of a railroad to give to the stockholders each and every year a return.” In following that policy, he had put at risk the Lake Shore itself.
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Worst of all, Vanderbilt discovered that Clark, Schell, and Banker had directly involved the Lake Shore in their stock speculations. The same tightening money market that brought Barton & Allen down had caught them short. Desperate to make good their margins, they, as directors of the Lake Shore, ordered themselves—as directors of the Union Trust—to transfer Lake Shore bonds, held as collateral for loans, to George B. Grinnell & Co. “As the story runs,” the
New York Tribune
later reported, “when Commodore Vanderbilt became President of the Company he insisted that the transaction on the part of the Executive Committee was improper and illegal, and that the gentleman named should shoulder the load themselves.”
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It took time to sort out such an enormous mess, so Vanderbilt followed his typical seasonal routine. He spent August in his usual haunt in Saratoga, the Congress Hall. There Frank completed her husband's long transformation from “illiterate & boorish” to “honorable and high-toned,” in the words of R. G. Dun & Co. The press summarized this evolution in one remarkable sentence: “Commodore Vanderbilt led off in the opening ball at Saratoga.” In September, he returned to New York and learned of the groundbreaking ceremony for Vanderbilt University in Nashville on September 16.
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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.
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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.
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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.
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If either went down, it would drag still more firms and financiers into failure, exacerbating the panic. The result might ruin Vanderbilt himself.