Financial History Issue 119 (Fall 2016) | Page 28

wasted on those who failed, he learned its lessons well, showing himself willing to employ bribery and other shady tactics to gain his objective. As an outsider who relied on trading as his only source of capital, Gould recognized the game of business for what it was at the time and played with few illusions or pretenses. He entered Wall Street on the eve of the Civil War, a time when the rules soon became unsettled and malleable amid the opportunities afforded by wartime. Since the Panic of 1857 a younger, brasher, more aggressive breed of brokers had come to dominate the Street, and Gould adapted quickly to their coarser form of financial combat. In time, he proved himself to be superior to them all. Two episodes that became Wall Street legends catapulted Gould from obscurity to notoriety. During 1867 and 1868, he joined forces with Daniel Drew and Jim Fisk to outmaneuver Cornelius Vanderbilt in the “Erie War” that ended with Gould and Fisk in control of that railroad. In 1869, he conceived an audacious scheme to corner the nation’s gold supply that culminated in the “Black Friday” panic on the Street. Together these episodes both enhanced and blackened Gould’s reputation, elevating him to the status of one whose words and deeds were always to be watched and never to be trusted. From them also emerged the steady stream of abuse from the press that would do so much to shape his reputation in the coming years as the most hated man on Wall Street. To a greater extent than anyone realized, that reputation was undeserved. Unlike many, if not most, Wall Street men (then and since), Gould lived a quiet, extremely private life unmarred by any form of personal excess. He shunned the trappings of high society, was devoted to his wife and six children, created an extensive personal library of books he actually read and loved flowers so much that he built the largest privately-owned greenhouse in the nation. Contrary to the image of him as a lone wolf, he formed close associations with colleagues that lasted throughout his life and rarely worked any large operation alone. Collis Huntington, one of Gould’s bitterest rivals, was not alone in praising Gould’s reliability. I (Klein) quoted him as follows in my earlier biography of Gould: “I know there are many people who do not like him… I will say that I always found that he would do just as he agreed to do.” Having earned a formidable reputation as a speculator/trader on Wall Street, Gould longed above all else to excel as a businessman. From his first encounter with railroads he applied his uncanny grasp of finance to the problems posed by running a large enterprise. Even as the public dismissed the Erie War as a financial circus, Gould devised a competitive strategy so bold and original that it forced Commodore Vanderbilt to revise his handling of the New York Central Railroad. Confronted by Gould’s policy of making alliances with other roads to outflank the New York Central, Vanderbilt abandoned his conservative approach and expanded his rail empire westward to Chicago and elsewhere. Gould lacked the financial resources to compete with Vanderbilt on this widened battlefield, but his daring changed the course of railroad history. After being ousted from the Erie in 1872, Gould pursued his career on Wall Street while awaiting a suitable opportunity to take hold of another railroad. It came at the end of 1873, when Gould bought heavily into the UP. Part of the first transcontinental road completed in May 1869, the Union Pacific-Central Pacific remained the only rail line from the Missouri River to the Pacific Coast. Like the Erie, it was a grandiose, oversold property with a tarnished past tainted by the Credit Mobilier scandal of 1873 and a history of inept management that culminated in 1871 when Oliver Ames left the presidency. Tom Scott of the Pennsylvania Railroad gained control but left after a year. In 1872, Horace Clark, Vanderbilt’s son-in-law, became president and the road seemed firmly connected to the Vanderbilt system. But Clark died suddenly in June 1873, leaving the road once again in managerial and financial limbo. In winning the trust of the suspicious major stockholders of the UP, Gould promised that he would restore the road’s financial credibility, improve its operations, formulate its strategy and boost its stock price. To their astonishment, he did all this and more. Within a year, having rescued its finances from the brink of disaster, he cleared up the floating debt and refunded its income bonds. 26    FINANCIAL HISTORY  |  Fall 2016  | www.MoAF.org Observers had expected him to milk the UP for all it was worth and depart, leaving a financial wreck in his wake. Instead, he turned it into a stable, profitable enterprise through close attention to the details of every aspect of its operation. The former speculator/trader had become a successful businessman, and he remained one for the rest of his career. Gould stayed with the UP for six years, leaving only when it became clear that he could not solve one financial albatross: the government debt. Contrary to popular belief, the government bonds issued to help construct the road were not a subsidy but a loan. To make matters worse, the UP was one of a very few railroads with a federal, rather than state, charter. This made it something of a plaything of Congress. The task of trying to reach a settlement on the debt with venal Congressmen taxed even Gould’s patience. Through a series of brilliant maneuvers, he sold his UP shares. To illustrate the value creating impact of Gould’s activities while he controlled the UP, consider Exhibit 1. The compound annual growth rate of the UP’s stock price from December 24, 1874 to December 24, 1880 (Jay Gould controlled the UP from 1874 to 1880) is 19%, which is impressive in-and-of-itself, but all the more so relative to the 7.5% compound annual growth rate (price-weighted) of the New York Stock Exchange over the same general time period. It is important to note that the US economy was both in a major depression and generally deflationary from October 1873 — following the infamous financial panic — to March 1879. Gould used the proceeds from the sale of his UP stock to put together a new southwestern rail system built around the Missouri Pacific Railroad, which ran from St. Louis to Kansas City. This new system played a major role in the economic development of the Southwest. He stayed with that work, expanding the system and its territory through construction and acquisitions, until his death in 1892. During the 1880s he also gained control of two other major properties, Western Union and Manhattan Elevated. Domination of them put Gould astride the two most significant industries in late 19th century America: transportation and communications. That fact alone rendered him one of the most important business figures of his era.