The First Tycoon: The Epic Life of Cornelius Vanderbilt (91 page)

The bail was set at $100,000. At Greeley's request, Vanderbilt stood as one of the sureties for this huge amount; since he was the recent recipient of the congressional gold medal for his gift of the
Vanderbilt
, he made a politically (as well as financially) suitable guarantor, an emblem of national reconciliation. Clark and Schell represented him on the scene and signed the bond in his name. As for Davis, he quietly passed through New York after his release, taking a Hudson River Railroad train to Canada.
²⁹

Vanderbilt as healer: the role did not fit the caricature that defined his image, yet in the end it would leave a permanent imprint on the national landscape. More familiar was Vanderbilt as competitor, a part he played to immense public satisfaction in the fall of 1867. On September 30 he raced his prize horse Mountain Boy at the Fashion Course against the “fastest horses on the trotting turf.” (Dexter, the unquestioned champion, recently had been purchased and retired from racing by Robert Bonner.) Driven by trainer Sam McLaughlin, Mountain Boy won the second heat in a best-of-five contest, but was edged out in the rest by Lady Thorn. McLaughlin insisted that the ground had worked against Mountain Boy so Vanderbilt issued a challenge for another best-of-five against Lady Thorn at the Union Course for a wager of $2,500. The two horses met again exactly seven days later. “The interest created by this match in trotting circles was very great, and the betting was unprecedentedly heavy,” the
New York Times
reported. Mountain Boy won easily
³⁰

Vanderbilt exulted in the triumph. He and McLaughlin both publicly declared that Mountain Boy could defeat even the famous Dexter. Bonner declined to accept the challenge in a public letter to “My Dear Commodore,” writing, “The good-natured contest between you and myself for the ownership of the fastest trotting horse in the world is attracting increased attention on account of the recent performances of Mountain Boy.” Vanderbilt replied with his own letter to the press, claiming that Bonner had written “in a manner not in entire conformity with the rules of propriety” He disingenuously declared, “I have not been aware, Mr. Editor, that any strife has existed between Mr. Bonner and myself for the possession of the fastest horse.” Of Mountain Boy, he said simply, “I thought him the best horse of his age I ever saw.… His performance speaks for itself. I think him the superior of Dexter.”
³¹

Newspapers nationwide reprinted this correspondence, demonstrating how famous Vanderbilt had become for his competitiveness and his horses. But Bonner offered a grim coda to the light-hearted exchange by bringing in bankrupt Corneil. “The disposition manifested in some quarters to hold the Commodore responsible for his son, where he has not signed for him, is, in our opinion, unjust,” he wrote in his newspaper, the
Ledger
. “It is only fair towards the Commodore for us to say this; and we take pleasure in saying it, notwithstanding he manifested a little want of amiability—excusable, perhaps, in a man of his years—in replying to a good natured letter from us in a horse controversy into which he recently drew us.” Corneil's bankruptcy, he noted, had left Greeley $13,905 poorer; he suggested that they stage a race between Dexter and Mountain Boy, “and offer the gate money to Mr. Greeley”
³²

On the face of it, this was a generous and reasonable suggestion, but there is no sign that the Commodore agreed. A man chooses his own friends, he believed; and when among friends, he must watch out for himself or accept the consequences.

THE GREAT ERIE WAR OF 1868
began almost invisibly. On a Sunday afternoon in the fall of 1867, Vanderbilt sat in his office with his longtime lawyer, Charles A. Rapallo, and honed a legal complaint against Daniel Drew. It laid out the details of Drew's famous 1866 bear campaign in Erie stock, and asked for an injunction to bar him from doing the same again. The papers were to be filed in the name of Frank Work, one of Vanderbilt's racing cronies. Reporters sometimes mistakenly referred to Work as Vanderbilt's nephew; he was not, though he was a partner in a brokerage house along with Samuel Barton, a real nephew who served as a director on the Hudson River and was one of Vanderbilt's favorites. But the error indicates how closely Work was identified with the Commodore.
³³

Shortly thereafter, most likely in the first week of October, Vanderbilt had occasion to explain the purpose of this planned injunction. One evening, in a private room of the Manhattan Club, he met with one of Drew's self-proclaimed enemies, the big-bearded, small-framed Jay Gould. A stock speculator as well as railroad executive, Gould told Vanderbilt that a clique had formed to seize control of the Erie Railway (as it was now formally called) and kick Drew off its board. Gould was a key, if low-profile, member of this group, assigned to obtain proxies for the cause. He had learned of the impending lawsuit against Drew, which made Vanderbilt a likely ally. Gould had come to ask for the proxy for Vanderbilt's ten thousand Erie shares.
³⁴

One of the clique's motives was obvious. During the war, Erie president Nathaniel Marsh had revitalized the recently bankrupt line. But his death in 1864 had left the railroad rudderless. Debt and mechanical breakdowns accumulated as Drew played on its weakness to manipulate the stock. The troubled line had enormous potential—if the “speculative director,” as he was known, were removed.
³⁵
And Gould's group had another purpose. The leader was a Boston financier named John S. Eldridge, president of the Boston, Hartford & Erie Railroad; Massachusetts had agreed to provide the line with $3 million to finish construction—if it could sell its bonds at 80. Eldridge wanted to take over the Erie to make the larger company buy his bonds.
³⁶

Tedious? Without a doubt. But out of such petty motives nation-shaking conflicts are born. And so are farces. The Erie War would fit both descriptions.

In that room in the Manhattan Club, the Commodore sat with Work and Richard Schell on either hand and frankly told young Gould that he didn't trust him. How could he know the clique would not “join hands” with Drew? So Gould agreed to give a bond, a financial penalty that he would pay if Drew were reelected to the board. As soon he finished the last stroke of his signature, Work handed over the proxy.

Vanderbilt then offered the reason why he “was anxious to defeat Drew,” as Gould recalled—a reason that would be overlooked by posterity but explains his role better than any other. It had nothing to do with the Erie itself, but was an indirect part of his still-unfolding campaign to take over the Central. He wished to halt the insidious effect on the money market of Drew's bear operations, an effect that destroyed credit and market values far beyond the borders of Erie stock certificates. The underlying cause was a grave weakness in the American financial system.
³⁷

As described earlier, the creation of a national bank system formalized the centralization of the U.S. financial structure in the city of New York
³⁸
With the restriction of gold to specialized uses (mostly in the import and export trade), the volume of money was ultimately pegged to the number of physical greenbacks authorized by Congress. To use the technical term, this was “high-powered money.” All bank deposits and national banknotes were redeemable in greenbacks, so national banks were obligated to maintain a minimum reserve of them. The law required “country banks” to deposit reserves with national banks in designated cities, which in turn had to deposit their own reserves in New York. All year long, money flowed from the countryside toward New York, where banks loaned this surplus to stockbrokers. This was the money that brokers used to finance the purchase of securities on margin.

What went to New York did not stay in New York; like tourists from Topeka, those greenback reserves toured Wall Street and then went home again. In the fall, the harvest and shipping of foodstuffs to the seacoast—known as “the moving of the crops”—required a countermovement of currency to the countryside to accommodate the accompanying flurry of transactions. Country banks drew down their accounts in reserve cities; those banks drew down accounts in New York; and New York banks called in their loans to brokers. Stock trading slowed; prices tended to stall or fall. For this reason, Wall Street panics almost always occurred late in the year.

Economists call this problem “currency inelasticity,” because the fixed quantity of high-powered money made it difficult to ease these seasonal fluctuations. Starting in the twentieth century, the Federal Reserve Bank would fine-tune the money supply on a daily basis, but in the nineteenth century there was no agency charged with such close supervision of the financial system. In fact, Treasury Secretary Hugh McCulloch determinedly made things worse. Believing that greenbacks were inflationary and literally an abomination—a violation of God's plan to make gold and silver the only money—he gradually withdrew greenbacks from circulation to enable the Treasury to redeem them in gold on demand. While orthodox policy by 1867 standards, it created deflationary pressure that was felt most strongly on Wall Street.

A man as cunning as Drew could see the vulnerabilities of this system, and he did not hesitate to deliberately manipulate it for personal gain. In early l868, the
New York Evening Post
estimated the banks that belonged to the city's clearinghouse (including all the important ones) possessed a total greenback reserve of only $12 million, just 5 percent of their deposits and circulating notes. It was disturbingly easy for a few wealthy individuals to siphon much of that $12 million out of the system and cripple its ability to provide credit. This was done through a maneuver known as the “lockup.” A man (better yet, a group of men) with a large amount on deposit would draw certified checks against this sum. The bank was now obliged to keep those funds out of use until the checks were presented for payment. Then the perpetrator would take the checks to other banks and use them as collateral for loans, which he would take in the form of actual greenbacks; these he would lock up in a safe. Now he had removed from circulation far more money than was in his original account—and it was high-powered money. Banks, short of greenbacks, would call in loans to brokers, who would curtail trading on margin on Wall Street, causing stock prices to fall. A self-reinforcing credit crunch could ensue, as falling share values caused further reductions in loans against stock. The lock-up was a sawed-off shotgun of a financial weapon—devastating, imprecise, and likely to injure innocent bystanders.
³⁹

Vanderbilt accused Drew of carrying out a lock-up during his bear campaign of 1866, when he laid Erie low with his secret 58,000 shares. The chance that he might do it again posed a grave threat to Vanderbilt's campaign to conquer the Central.
⁴⁰
The Commodore could afford to buy Central stock for cash, but he needed the support of a wide array of friends and allies who bought on margin and needed an easy money market to finance their purchases. More than that, Vanderbilt needed the perception that his rise to power was good for stockholders. If Drew sent the market tumbling, it would weaken the Commodore's reputation, one of his most valuable assets. And Vanderbilt faced one more worry: it was autumn. The moving of the crops was under way, and money was already tight. He had to forestall Drew's bear operations.

The explanation satisfied Gould, who went his silent way after the exchange of bond for proxy. With Vanderbilt's votes in hand, the Eldridge party looked certain to win the annual election on October 8, 1867. Drew knew he was beaten. On October 6, he called on Vanderbilt at home to beg for mercy. What Drew said is unknown, but the tight-lipped former cattle drover must have been at his most eloquent that night. Perhaps he cited their decades of friendship, the millions they had made together. Perhaps he reminded Vanderbilt of their bull campaign in Erie in 1854. They could do it again; and a rising market would help Vanderbilt conclude his operations in the Central.
⁴¹
Whatever he said, it worked.

Vanderbilt dispatched Richard Schell to fetch Eldridge and Gould and bring them to his house that evening. The Commodore explained that he had changed his mind—he wanted Drew to remain. “Some rather plain talk ensued,” Gould dryly recalled. Finally they all settled on a deal. On October 8, Eldridge, Gould, and Work went onto the new Erie board along with a little-known broker named James Fisk Jr.; Drew was not elected. But one of the new directors promptly resigned, and the board named Drew to his place. Friendship had triumphed, with the help of a little trade.
⁴²

For Vanderbilt, everything seemed to work exactly as Drew promised in the days that followed. “These manipulators of Erie talk of putting the stock much higher,” the
New York Herald
commented skeptically. The paper found Central's rising price to be still more remarkable—“ridiculous,” to use the exact quote. “It is said that a certain would-be railway monopolist aspires to control it, and that he and his friends hold a large amount of the stock; but it is against the public interests that any one person should constitute himself a railway king.” Drew led a pool to drive up the price of Erie, managing money contributed by Work, Richard Schell, Banker, and Steward. With the market rising, the Commodore duly conquered the New York Central in December. He little realized what treachery was in store for him.
⁴³

With Drew seemingly well in hand, Vanderbilt focused on reforming the management of the Central. “If I take possession of a railroad today,” he explained a year later, “I send my men over it to examine it in every particular and all over. They report to me its condition, and then it is my business to see that it is kept up, equal in every respect to what it is then.” This was a precise description of what he did upon taking command of the Central. On February 1, 1868, he dispatched Banker on an inspection tour with orders to examine the machine shops, ticket offices, and books kept by every office—“in fact look to every department of the company's property along its whole line.” He wanted to save every shilling. As he told the treasurer, “Mr. Worcester, do everything just as you would do it if it was your own business. Vary from this only so far as the peculiar demands incidental to a corporation demand.”
⁴⁴