Overrated For a hundred years the armor-plate scandal of the 1890s has been offered up as a definitive example of corporate greed. In fact it’s a better example of government incompetence.
Battleships were becoming the measure of naval might at the end of the nineteenth century. As the United States began to emerge as a Great Power and started to build a significant navy, it needed a domestic source of armor plate. But the steelmakers, notably Andrew Carnegie, were reluctant to build the necessary mills. Armorplate mills couldn’t be used for other types of steel, and there was only one possible customer: the Navy. Worse, Navy bureaucrats, ignorant of the difficult realities of steel production, established specifications that were impossible to meet.
Through appeals to his patriotism, Carnegie was prevailed upon, against his better business judgment, to build a mill. But when the mill evaded the specifications, simply in order to produce good armor plate, disgruntled labor leaders informed the Navy. Without taking evidence from the company, or even informing it of the investigation, the board of inquiry fined Carnegie 15 percent of the value of the contract in question. Carnegie had no option but to pay. And, stuck with an armor-plate mill that had no other customer, he was forced to continue dealing with the Navy.
It was a scandal all right, but not one of business ethics.
Underrated By the mid-1860s, thanks to the Civil War, Wall Street had grown to be the second-largest financial market in the world. But it was utterly unregulated. The federal government had no responsibility at the time for such matters, and New York’s state and city governments were a cesspool of political corruption in which nearly every legislator and judge was for sale to the highest bidder. Moreover, there was no stock exchange large enough to enforce what rules there were. For a few years it was pure capitalism, red in tooth and claw.
In 1867 Cornelius Vanderbilt, hoping to bring a measure of order and economic rationality to New York railroading, decided to buy control of the notoriously corrupt Erie Railroad, the Scarlet Woman of Wall Street. As Vanderbilt bought more and more Erie stock in the market, however, Daniel Drew, Jim Fisk, and Jay Gould, who controlled the line, printed more and more stock to sell him. When Vanderbilt found out what was going on, he had arrest warrants issued, and Drew, Fisk, and Gould fled to New Jersey with six million dollars—in cash—of the Commodore’s money.
An orgy of bribery of elected officials ensued, as both sides tried to get the legislature and the courts to do their bidding. Finally, Vanderbilt settled for getting his money back and left the Erie to its unhappy fate. (It would go bankrupt a total of four times before finally disappearing in the 1970s.)
But while the public was vastly entertained by the Erie Wars—which commanded more press coverage than the impeachment proceedings against Andrew Johnson—New York’s business and legal communities were horrified. They saw New York’s position as the country’s leading business center threatened, and they pushed through reforms. The New York Stock Exchange soon merged with its largest rival and became powerful enough to institute and enforce such rules as open registries of stock issues and advance notice of new issues, while lawyers formed the New York Bar Association to reform the judiciary and enforce a code of ethics on lawyers.
As a result, Wall Street, if hardly a good place for fools, became a dependable capital market, able to fuel the vast expansion of American industry that by the end of the century had given the country the world’s largest economy. The Erie Wars were the first great American business scandal, and they gave us what every subsequent business scandal has given us: genuine reform.