Jay Gould and the Union Pacific from the Panic of 1873 to 1880
By Joseph Calandro , Jr .
Perhaps no one in United States financial and business history is as misunderstood , and under-appreciated , as Jay Gould . Even amongst some financial historians , Gould is treated harshly , including when his strengths are readily acknowledged .
The following quote is an illustrative example : “ As a finance capitalist , Gould was ahead of his time , that his rivals despised him primarily because he beat them at their own game … Gould also made a mockery of a supposedly self-regulating capitalist system .” There is a great deal wrong with this assessment ; for example , the US economy in the 19th century was not “ capitalist ” if that term is defined as a marketplace of purely voluntary transactions without any kind of governmental intervention . Then , as now , the government intervened in economic transactions , albeit a great deal less in the 19th century than today ; for example , tariffs , war financing and spending and “ internal improvements ,” such as canals and railroads , were popular forms of governmental economic activities in the 19th century .
Since the late 20th century , massive governmental bailouts of failed firms have unfortunately become commonplace . One of the rationales for bailing out failed firms during periods of financial distress is the argument that if governments do not intervene , the failures will exacerbate the distress and cause it to spread further , possibly to the point of a total economic collapse . In the 19th century , governments did not do this , and their economies obviously did not collapse ; in fact , some of the firms that were in distress during a panic were eventually turned around , and then went on to perform at more profitable levels .
One such case involves Gould ’ s distressed investment in , and subsequent managerial control of , the Union Pacific Railroad ( UP ) following the infamous Panic of 1873 . In his turnaround of the UP , Gould employed many modern techniques that are relevant to 21st century historians and executives alike .
The framework for this analysis follows the value investing-based corporate management considerations profiled in Table 1 .
1 : Strategy and the Margin of Safety
It is well known that financial panics did not begin in the late 20th century . Ever since the practice of “ fractional reserves ,”
Portrait of Jay Gould
banks have been at risk of sudden and intensive “ runs ” on their deposits . Add credit cycle dynamics to the mix , and it is fairly easy to understand why panics have been a regular financial phenomenon across the last three centuries . As such , Jay Gould in the 19th century was just as familiar with financial panics as Warren Buffett , for example , is today . And , similar to Buffett , Gould both protected himself from panics before they occurred and he positioned his portfolio to profit from panics after they did occur .
The Panic of 1873 is a case in point . Prior to this panic , Gould was famously invested in the Erie Railroad , which culminated in the well-known “ Erie Wars ”
Bain News Service / Library of Congress
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