The Capital Of Capitalism

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Before the war not many people outside the half-dozen major United States cities were interested in securities. When the firm of Jay Cooke of Philadelphia took over the marketing of northern war bonds, Cooke organized a campaign that financed the war, extolling the wisdom of investing all across the country. “A national debt is a national blessing” was oneof his mottos. The resulting widespread ownership of bonds stimulated an interest in the securities market that could be translated into buy and sell orders by means of the new network of telegraph lines. By the time the English statesman James Bryce took a hard look at the American commonwealth in 1888, he was impressed with “the prevalence of the habit of speculation.” “There are times,” he wrote, “when the whole community, not merely city people but also storekeepers in country towns, even farmers, even domestic servants, interest themselves actively in share speculations.”

The expanding network of railroads required capital from the public, either directly or indirectly through city- and state-endorsed bond issues. The men interested in railroad financing soon discovered the value of being insiders. Corporate officers in command of the voting stock could issue bonds for practically everything—stations, land damages, locomotives, and particularly track construction. Forming a separate construction company, railroad tycoons could award themselves the construction contract and pay themselves off with bonds and stock far beyond the value of the track mileage they built. They could then resell the securities to the public at a profit.

Constructing track across prairies and mountains was risky, and to a certain extent the railroad builders were justified in capitalizing expectations when commerce and industry were expanding. But many railways were built before there was enough traffic to pay the interest charges on their heavy debts. The stock was so far down the line of claims on the profits that it had no known value, merely serving as a vehicle for bull or bear operations and as the means by which control could be wrestled back and forth among contending groups. Jay Gould, presiding over the Erie Railroad, was once asked by a government investigating committee what the value of Erie common stock really was. He replied, “There is no intrinsic value to it probably; it is speculated in here and in London and it has that value.”

States and cities exerted considerable control over the railroads by the granting of charters and financial assistance. Legislators soon found out that this influence could be converted to cash. Railroad tycoons paid off and occasionally got the better of the legislators by tricks of their own. Commodore Vanderbilt scored twice. On the first occasion he wanted New York City’s permission to extend his Harlem Railway, which in 1863 ran in to Union Square from the north, right on down Broadway to the Battery. The city councilmen figured that they would approve the idea, all the while taking short positions in Harlem stock. Then they would revoke the permit, the stock would plummet, and they would reap profits. They carried out the plan, but the Commodore was a hard man to beat. Tipped off, he began buying Harlem and finally cornered the stock. The distressed councilmen saw the price run up from seventy-five dollars to $179 and had to settle their contracts at a big loss. A year later the state legislators tried the same thing. Charging that the city did not have authority to grant the extension, they pretended to favor a bill introduced with the necessary permission. They then double-crossed Vanderbilt by defeating the bill after selling the stock short. Vanderbilt was furious. Buying up all the Harlem stock in sight, he ended up owning on paper 27,000 more shares than actually existed. He wanted to make the legislators pay a thousand dollars per share to cover their commitments, but was persuaded, for the sake of future relations, to allow them to settle at $285. He liked to say that he had forced them to flee Albany without paying their board bills.

The ethics of Wall Street made a distinction between unscrupulous deals that could be draped with some legality and those that their perpetrators couldn’t or didn’t bother to legitimatize. Vanderbilt and Gould could always find a judge willing to grant an injunction or issue a restraining order, even in the middle of the night. When they wanted a law legalizing some trick, such as an overissue of stock, they simply went up to Albany loaded with cash, and legislators stood around the halls arguing about how much to hold out for. When the matter was settled, everyone got another chance at the pot. But decamping to Canada with funds fleeced from the public was considered as disgraceful as quitting a poker game while you were ahead.

While Commodore Vanderbilt had his eccentricities—he was a believer in spiritualism and set two spiritualist sisters up as Wall Street brokers —he was not a lovable character. He had a terrible temper. “Jubilee Jim” Fisk, however, another famous market operator of the sixties, delighted all New York. Fat, good-natured, freehanded, he was more like a character out of comic opera than a master of capital. After he bought the Narragansett Steamship Company and refurbished its vessels with a canary in every stateroom, he felt entitled to wear a gaudy “admiral’s” uniform. As a colonel in the National Guard he paraded around the streets in a gorgeous military costume—“the Mushroom Mars,” one newspaper called him.