This is the seventh in my series of posts about the five businessmen the History Channel profiled in a terribly inaccurate and un-historical TV miniseries titled The Men Who Built America. I’m writing these posts in response to several comments and e-mails from TV viewers who have expressed interest in a more accurate version of the story. (Click here to see all Al’s columns on the program and its subjects.)
Post #7: Vanderbilt Focuses on Rail
During the late 1850’s and early ’60’s Vanderbilt shifted his attention from the shipping industry to railroads. He bought large blocks of stock in several New York area railroads, often securing positions on the boards of directors. As in all his other ventures, Vanderbilt waited until other men had proven the profit-making potential of the industry before he plunged in.
It’s no exaggeration to say that the history of the United States through the second half of the nineteenth century was largely written by the growth of the railroads. Northern superiority in transportation and communications was one of the key factors in the Union victory in the Civil War. During the war the federal government gave a dozen railroads land grants totalling 158 million acres, and when the war ended the companies were still rushing to put roads on all the land.
Great fortunes were made and lost in the railroad industry, by means fair and foul. Titans of business battled over control of strategically important routes. Even the time zones we observe today were created not by the government, but by the railroads.
The western movie image of cowboys shooting up Dodge City and having to be suppressed by a gun-slinging lawman is based in actual fact, and the gradual growth of the nation’s railroad network was the cause of the phenomenon. The roads moved west through Kansas long before they moved south to Texas, and for a period of about twenty years cowboys moved herds of Texas cattle up the Chisholm Trail to whatever town had been reached by the railroad. For a couple years tiny Dodge City was where trail met rail, and real-life policemen like Wyatt Earp and Bat Masterson struggled to keep the peace. As soon as Texas was connected to the Chicago stockyards by rail, the wild west cow-towns of Kansas ceased to be wild, because they ceased to be cow-towns.
By the mid-1850’s Vanderbilt could see that the future of the nation would be built by the railroads. As he had done in all his other ventures he did his research, gave himself a clear understanding of the fundamental issues involved, and made wise strategic moves. Then he put quality human resources in key positions and managed everything carefully. He started right at home in New York.
He bought a controlling interest in the New York and Harlem Railroad largely because it had a monopoly position in downtown Manhattan. The NY&H also held a network of steam and horse powered trolleys that carried local traffic and connected with the railroad. He bought enough shares to make himself President of the Hudson River Railroad, which ran north from Manhattan to Albany. He gained control of the New York Central, which ran west from Albany to Buffalo. Buffalo lies on Lake Erie, and when connected to his other railroads the NY Central allowed direct rail access from Manhattan to Buffalo, hence connecting the New York area to shiping traffic from all the port cities on the Great Lakes.
Over the years he bought controlling interests in other railroads throughout several Northeastern and Great Lakes states, always with an eye for strategically important links. Eventually he made the NY Central a holding company for all his railroad interests.
In 1863, the year Henry Ford was born in a Michigan farmhouse the Fords had to share with another family, Cornelius Vanderbilt promoted his son William to Vice President of the NY&H, with broad authority to control the company’s day to day operations. William by all accounts proved a more-than-capable manager. Shortly after his father put him in charge the road turned a profit for the first time in its history. As William proved his merit Cornelius gradually gave him greater and greater responsibilities in his railroad ventures. Eventually, as the elder Vanderbilt eased into retirement, William would come to be the de facto head of the Vanderbilt empire.
Vanderbilt was not the only American who could see the importance of railroading to the nation’s future. As the new technology gradually made other modes of transportation obsolete, businessmen and politicians struggled for control of the lines. Frequently the methods used were less than honest. (In his biography of Vanderbilt, Edward Renehan described the mid-ninteenth century railroad industry as a “den of vipers.”)
Shortly after Vanderbilt started investing heavily in the New York and Harlem, he spotted an opportunity to increase his holdings and strike a blow for honest governance at the same time. Politicians of that era, like politicians of today, billed themselves as “public servants” but frequently used their power to serve themselves. In 1863 most of the members of the New York City Council joined in a conspiracy to manipulate the price of the New York and Harlem for their own benefit. The cabal was led by William M. “Boss” Tweed, an utterly unscrupulous political power broker who would spend the next few decades distributing bribes and stuffing ballot boxes for New York’s Democratic Party machine.
Tweed and his cronies quietly short-sold NY&H stock when it was selling at around $100 a share, then voted to rescind the railroad’s license to lay tracks and operate horse-drawn trolleys in the city. The trolley network was so important to the company’s financial prospects that the councilmen expected their denial to send the stock price crashing down, thus allowing them to redeem their shorts for a quick profit.
Vanderbilt, who had gotten wind of the scheme, started buying up every share that came on the market. With his considerable financial resources he was able to drive the share price up to any level he chose.
In 1863, as today, every short sale involved a time limit. When time runs out the short seller has to redeem the shares he shorted, no matter how much the redeeming shares might cost. Failing to redeem the shares was a crime and the punishment was prison. As the limit for the NY&H shares approached the corrupt politicians could only beg Vanderbilt to stop buying and sell them the shares they needed. After the Council re-instated the trolley license, Vanderbilt finally agreed to sell the needed shares at $180, a loss of about eighty dollars a share. The Commodore made a five million dollar profit on the shares he sold the conspirators, and increased his holdings in a stock he wanted to own anyway.
Amazingly, in 1864 a group of New York State legislators tried the same trick that had backfired so disastrously for the City Council members the previous year. They publicly committed to grant the NY&H a license it needed, thus driving the price up to around $150 per share, then short sold the stock right before the vote on the license. They denied the license they’d been promising to grant, then waited for the shares to plummet. The legislators would pay a steep price for their hubris.
As before, Vanderbilt and a few rich friends bought NY&H shares en mass. One of the investors helping Vanderbilt bid up the shares was Leonard Jerome, whose ten year old daughter Jennie would eventually grow up, marry an English Lord, and give birth to future Prime Minister Winston Churchill.
By the time the shorts came due the poorer-but-wiser politicians had agreed to grant the road its license, and the Commodore allowed them to buy their redeeming shares at $285. Many of them lost their homes. Vanderbilt made a two million dollar profit, to go with the five million he had taken from Boss Tweed and the city councilmen.
In the middle of his battle with the state legislators the Commodore celebrated his sixtieth birthday. He had been a major power broker in New York business for decades. The son of a poor Staten Island farmer had earned so much, and learned so much, that he could get the better of a business deal even when his rivals controlled the state government.
The Union Army was well on its way toward willing the Civil War. In Cleveland a twenty-four year old John D. Rockefeller was changing his focus from the food industry to the oil industry. In Pittsburgh a twenty-eight year old Andrew Carnegie already had business interests far more lucrative than his management job with the Pennsylvania Railroad. Carnegie continued to work for the railroad purely from a sense a patriotism. He know how important efficient transportation was to the Union war effort, and wouldn’t resign until shortly after General Lee surrendered at Appomattox Courthouse.
The careers of the three men would start to intersect in important ways shortly after the end of the war.
Next week’s post will cover Andrew Carnegie’s childhood and early career.
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