On April 5, 1882, Theodore Roosevelt stood in the New York State Assembly and demanded an investigation. The indignant 23-year-old accused a clique of “swindlers,” “wealthy stock gamblers,” “men whose financial dishonesty is a matter of common notoriety,” of corruptly monopolising New York City’s elevated railroads. The plot’s mastermind, he implied, was Jay Gould.
Three cheers for the bad guy. The villain seizes control of the story, scheming, lying and betraying to get what he wants. And Jay Gould, the subject of Greg Steinmetz’s concise new biography, makes an excellent villain. Endlessly resourceful, utterly self-interested, he authored “the blackest pages in the history of American railways,” to quote his obituary in The St. Louis Post-Dispatch. Cartoonists drew him as a black-bearded spider, laying traps in the web of rails and wires that wrapped the country.
But here’s the strange thing: Roosevelt denounced Gould primarily for his use of a “fraudulent corporation,” the Manhattan Elevated Railroad. Why did he call it fraudulent? It was a holding company. It issued stock without building anything. Today, of course, holding companies are common. Corporations that build nothing are worth billions. In the chasm between his morality and ours, we find what’s really interesting about Gould’s buccaneering. The controversies surrounding him crystallised the debate over the nature of a financial order that we now take for granted.
When Gould was born on a farm in upstate New York in 1836, Americans saw corporations as a form of government intervention. By the time Gould left the farm to become a store clerk, surveyor, then tannery entrepreneur, general incorporation laws had made corporations more common, but most were small and closely held. Before the Civil War, the New York Stock Exchange traded shares and bonds one at a time. After lunch, the brokers ran through the entire list again.
“There are magicians’ skills to be learned on Wall Street, and I mean to learn them,” Steinmetz quotes Gould as writing. As Southern states seceded, the magician’s apprentice arrived in New York, propelled by a passion for wealth. That sent him toward railroads. Created to solve the problem of transportation in a vast republic, they brought bigness to the corporation.
Their hunger for capital forced them to issue large quantities of publicly traded stocks and bonds. Gould grasped how they created a financial market big enough to make a trader very rich, yet small enough to be manipulated.
In 1867, he manoeuvred onto the board of the Erie Railroad, one of the four US lines that crossed the Appalachians, connecting the Atlantic coast to the interior. He befriended another director named Jim Fisk, his flamboyant opposite. Fisk was part clown, part lion tamer and all impresario, hiding his shrewd intelligence behind flash as Gould masked his beneath a reserved manner. In 1868, the pair crafted increasingly outrageous machinations to defeat an attempt by Cornelius Vanderbilt to corner Erie stock. They illegally printed huge quantities of new shares, fled to New Jersey just ahead of the police, and finally Gould bribed the New York State Legislature en masse to legalise their stock issue. Vanderbilt accepted repayment of his losses and gave up.
In “A Chapter of Erie,” a landmark essay from 1869 about the affair, Charles Francis Adams Jr called corporations “a power created by the state,” a fact lost to later generations, which would see them merely as businesses. “And yet already our great corporations are fast emancipating themselves from the state, or rather subjecting the state to their own control,” Adams wrote. Steinmetz (a former London bureau chief for The Wall Street Journal who now works in finance) correctly calls the essay “Adams’s masterpiece,” but overlooks this crucial point: the transition of corporations, in the popular imagination, from semi-public to private entities, from bodies sponsored by government to serve the people’s needs to concentrations of unaccountable power.
Gould’s career careened down this uncertain line between public and private interests. To promote exports and boost Erie freight traffic, he and Fisk tried to drive down the price of the greenback in Wall Street’s “Gold Room” (in essence, the foreign-exchange market). They lobbied President Ulysses S Grant to stop federal sales of gold, and tried to influence him by corrupting members of his family. It ended in a financial panic known as Black Friday. Ejected from Erie management, Gould moved into Union Pacific, the first federally sponsored transcontinental railroad. He worked to put it on sound footing, but profited from it personally in ways that alarmed observers.
By then, Fisk had died, shot to death in the Grand Central Hotel by a rival for a mistress. Gould’s worst sin, to some contemporaries, was how he exploited the troubling abstraction of finance. Americans accepted that market prices fluctuated, but placed great importance on a share’s par value, usually $100, which was supposed to represent an expenditure on real capital — rails, rolling stock, depots. To issue stock in excess of spending on facilities was fraud — “watered stock.” That’s why Gould’s Erie share issues were unlawful, and why Roosevelt denounced his holding company. Gould believed this kind of thinking was ridiculous. It’s not for us to say Roosevelt was wrong. But New Jersey soon legalised holding companies, and the emphasis on par value and tangible assets faded. The law followed actual practice — Gould’s practice. Finance has grown ever more abstract since.
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