The First Tycoon: The Epic Life of Cornelius Vanderbilt (97 page)

In the end, the latter intrigue would prove to be the most consequential aspect of these hostilities, for it would force Vanderbilt into yet another war of conquest. In the meantime, the public spat announced to the world that he had survived the Erie War merely to acquire a new set of enemies—the most cunning and dangerous of his career.

BESET BY EXTERNAL FOES
, Vanderbilt surely felt pressure to adopt a conservative domestic policy at the end of his first year as president of the New York Central. He did not. Instead he took two bold steps that startled contemporaries, and helped lay the foundation for the modern corporate economy.

The first revolved around the seemingly dry question of capitalization. Rumors had long circulated that he would issue new shares to existing stockholders. As early as January 9, John M. Davidson had told Corning, “I
think certain sure
, a stock dividend will be made on Central.” But months had passed without one. In early December, brokers barely blinked at whispers that John Morrissey, Vanderbilt's prizefighting friend, was madly buying Central.
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On Friday, December 18, Central treasurer Edwin D. Worcester handed Vanderbilt a report. Its contents surprised him. He consulted his trusted son-in-law Horace Clark and began to track down directors for an immediate meeting. On Saturday evening, they assembled at Clark's house. The Commodore announced that Worcester had finished a six-month review of the line's construction accounts, which showed a remarkable increase in property over the previous several years. To represent it, Vanderbilt proposed an 80 percent stock dividend. For each one hundred shares held, a stockholder would receive scrip representing eighty new shares. (Stock was customarily bought or sold in blocks of one hundred shares.) Once converted into stock, the scrip would add $20 million at par value to the Central's existing $25 million stock capitalization. Vanderbilt recused himself from the vote, but his proposal passed without opposition.

Why issue scrip, and not actual stock? As Clark later explained, they were trying to distinguish themselves from the Erie by acting lawfully. The Central treated the scrip as if it were identical to stock, but the board would await explicit authorization from the legislature before converting it into shares. The scrip served another purpose as well: Judge Barnard recently had enjoined the board from issuing new stock; the use of this instrument dodged the order but performed the same function.
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The news drove the financial community into a frenzy. Not only did the Central prepare the way for nearly doubling its stock, from $25 million to $45 million, it also declared a semiannual dividend of 4 percent on both shares and scrip (amounting to $1.8 million). On Monday morning, Central shot up from 133 to 165. But not everyone in Vanderbilt's circle was pleased. He had given no prior warning to the board, except to Clark and Chester W. Chapin, who had designed and printed the scrip in advance. Many of his closest friends and one of his sons-in-law (most likely Osgood) complained about the secrecy. Vanderbilt replied, “You shan't speculate on us.” He believed that some of his own directors had gone short on the stock; as he later explained, “I would not trust many of them.” The surprise stock dividend caught them out, and delivered a sharp lesson in trying to profit off Vanderbilt's company
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The sheer size of the issue aroused intense emotion, even among leading railroad men. James F. Joy and John M. Forbes considered it a “rascally abuse of stock dividends.”
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But why should a simple financial transaction, conducted between the railroad and its existing shareholders, arouse such outrage? The answer is that stock watering occupied the center of the national debate over the emerging new economy.

In part, the argument was pragmatic. The
New York Sun
wrote, “If the road can really earn dividends on $45,000,000, it is all right to water the stock.” But the
Chicago Tribune
countered, “Its practical effect is to swindle honest people who hold the stock as an investment.… The stock has been watered to the point where no dividends can be made.”
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The Central immediately declared a dividend, though, which seemed to refute that complaint. Furthermore, Vanderbilt apportioned the new shares evenly among the shareholders. By contrast, the Erie during its eponymous war had thrown convertible bonds on the market; when these were converted into stock, they diluted the stake of existing shareholders by reducing the relative proportion of their holdings. And yet, the Commodore suffered equally severe criticism.

For critics, the issue was not fairness, but the very nature of the corporate economy as envisioned on January 1, 1869—the date when the
North American Review
published “Railroad Inflation,” by Charles F. Adams Jr. Though written prior to the December 19 meeting at Clark's house, this essay made an argument against stock watering that reveals the persistence of a tangible understanding of the economic universe and a continuing resistance to abstractions.

To Adams, if a thing wasn't a thing, it was nothing. Wealth consisted only of physical objects—goods, not services. “Transportation cannot add to wealth,” he wrote. For all the merchandise the railroad system carried, “it never makes one ton two.” Therefore, railroad revenue “constitutes a tax on consumption”—essential, perhaps, but to be jealously watched.

Adams saw railroad dividends as a necessary evil. Like virtually everyone else, he did
not
consider them the simple division of profits among stockholders. Rather, they were “interest on capital,” a due return on the amount originally invested in construction. Americans discussed the par value of a railroad share as if it were money deposited in a savings account, an account from which all interest must be drawn, and never allowed to compound. Even the market value of the railroad's physical assets—its “book value,” or what it would bring if its property were sold—did not enter into it; only the cost of construction mattered. And on this capital an interest of about 6 to 10 percent was politically acceptable—indeed, expected by investors and the broader public alike.

In this light, any increase of stock was a fraud unless it directly reflected money expended on new construction, and any dividend paid on those fraudulent shares was theft, fake interest paid on “fictitious capital.” It was widely believed that stock watering caused railroad companies to raise their rates to pay the expected dividends on the excess stock, bleeding the public for the benefit of those who were in on this paper-certificate magic trick. Many railroad men feared that stock watering would call into question the validity of all corporate shares. Henry V. Poor, the leading chronicler of the industry, wrote, “Such enormous additions to the capital of companies, without any increase of facilities… threaten more than anything else to destroy the value of railway property as well as to prove most oppressive to the public.”
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Did Vanderbilt argue against this logic? Did he make a case that share price should reflect earnings or growth or other factors, rather than initial construction costs? Did he declare that dividends should represent a division of profits—that competition determined his rates, not his need to pay dividends on “fictitious capital”? No, he emphatically did not. He
did
believe that the Central was worth far more than its existing par value; but he justified his actions by releasing a letter from major stockholders (ranging from Frank Work to John Jacob Astor II) that pleaded with him to increase the stock in order to represent prior real estate purchases and construction, made with money that should have been paid out as dividends. Whether Vanderbilt created the letter himself as political cover is irrelevant; the point is, he defended himself in terms that matched those of his critics. Indeed, Worcester testified that, at Vanderbilt's request, he had indeed conducted a six-month investigation of such prior expenditures. The Commodore pronounced himself “astonished” at how large a figure Worcester found. His insistence on the justice of all this would lead him into a bitter fight with the U.S. Treasury, in which his sincerity would become all too apparent.
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The future is made by those in the present. The acts that Vanderbilt performed out of the orthodox logic of his times undermined that very logic. A day was coming when the economic mind would relinquish the physical basis of stock price, the insistence on par value. A day was coming when the price of a share would be released to flap into the air, its height determined strictly by the market—the uplifts and downdrafts created by millions of buyers and sellers. A day was coming when dividends simply would mean the division of profits. Vanderbilt prepared the way for this time, and in practice he operated on many of its principles, though only on a subconscious level. He did not “concoct” a justification of the stock dividend, as one writer claims; he believed it. But sometimes actions really are more potent than words.
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The second dramatic step that the Commodore took as president of the Central needed more time to mature, but its significance would be far more apparent to the public and historians alike. It would give his name to an era—the era of consolidations.

ON MARCH 3, 1869
, a committee of the New York State Assembly settled into chairs in a private parlor on the third floor of the Fifth Avenue Hotel in Manhattan. They gathered to hear testimony regarding the New York Central's stock dividend. But the proceedings seemed peculiar to Hudson C. Tanner, the stenographer. “Everything was on the dead quiet,” he wrote. No one was allowed in except the witnesses. They heard from Edwin Worcester, then Horace Clark. During Clark's testimony, the Commodore strode in, “wearing his traditional white choker, and appearing as innocent as a little, white lamb,” Tanner snidely recorded. “All the members of the Committee were introduced to him, instead of his being introduced to the members of the Committee. That was, of course, due entirely to the respect which the Committee had for an old steamboat captain.”

“Mr. Clark said it as he should say it,” Vanderbilt told the committee when his turn to speak came. “I can do no better than he has done on that subject, only he talks a little too much! That is all the trouble. That is a general fault with lawyers.” Obviously comfortable in front of his inquisitors—if not in outright command—he defended the $20 million scrip issue at length, engaged in banter with Clark, turned aside to question Worcester, and digressed into the tale of how he and Daniel Drew had saved the Harlem in 1857—all testimony that the committee politely struck from the published record, along with his occasional “damn.”
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The committee duly reported a bill to the assembly to authorize the conversion of the scrip into stock. At the same time, a bill advanced to allow Vanderbilt to consolidate the Central with the Hudson River, to create a unified railroad from St. John's Park in Manhattan to the shores of Lake Erie. This second act would prove even more momentous than the enormous scrip dividend, for it would create a corporation on an unprecedented scale. Long envisioned as a practical matter (Dean Richmond had proposed the same thing years earlier), it promised to end the most troublesome fragmentation of the railroad system in New York, introduce greater efficiency, and reduce costs to shippers and consumers. More broadly, it represented the abandonment of the older, local purposes which had first brought railways into existence, as a truly national network emerged. No longer semipublic bodies, railroads now functioned entirely as business enterprises, operated for maximum profit, bought and sold in the market, managed as business logic would dictate. That logic led inexorably to consolidation. The day of the giant corporation had arrived.

On May 20, Governor Hoffman signed both bills into law. In one day Vanderbilt nearly doubled the capitalization of his largest company and opened the door to increase it another 50 percent by annexing the Hudson River. It would take the rest of the year before the consolidation would be complete, but the most difficult step—the political step—had been taken. And Hoffman signed another bill that would help Vanderbilt to make his mark in history: an act authorizing the Harlem Railroad to build, at Forty-second Street and Fourth Avenue, a grand, central depot.
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Vanderbilt immediately convened boards of directors and meetings of stockholders to approve the scrip dividend and the consolidation. He cast votes in his own name on 23,600 Central shares (one-tenth of the total voted). His son William voted seventeen thousand; his grandson Cornelius Vanderbilt Jr. seventeen thousand; and his grandson William K. Vanderbilt another ten thousand. Already the Commodore was laying the foundation for his dynasty, settling a large portion of his still-growing estate on the heirs of his heir.
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Indeed, his family in general prospered. Another favorite grandson, Vanderbilt Allen, went into the railroad supply business at this time, forming the partnership Haven & Allen. Even Corneil partially righted himself that spring. On March 5, Horace Greeley approached the incoming administration of President Ulysses S. Grant to request a job for Corneil in the Internal Revenue Bureau. Corneil himself went to Washington to press his case (borrowing money from Greeley of course). On May 1, he began work as superintendent of the bureau's Bonded Warehouse in New York under the collector, Joshua F. Bailey, with a salary of $175 a month.
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Everything seemed to go Vanderbilt's way. On February 1, the Harlem achieved such prosperity that he ceased to subsidize it with noncompetition payments from the Hudson River. In April, he closed a very old wound: the last reminder of Joseph L. White. Strong informed his diary “‘Settlement’ of the ancient suit of Nicaragua Transit Co. stockholders against that nefarious old Cornelius Vanderbilt, much talked of.” The lawyers who had nursed the case for a dozen years absorbed most of the more than $400,000 that Vanderbilt agreed to pay; much of the rest went to speculators who had bought stockholders' claims for a penny on the dollar.
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