POLI 100K, Railroads and American Politics: Topic 9, Railroads and the Rise of the New York Stock Exchange

The Erie Railroad War
  1. The Cast of Characters

    1. Daniel Drew (29 July 1797 – 18 September 1879): Born on a farm in Carmel, New York. He worked for Circuses around 1810-1812 and joined Army in 1812 at age 14 to get the $100 bonus but saw no action against the British. He became a cattle drover and bought cattle from the local farmers and drove them to market in New York City. The cattle were kept overnight near the village of Harlem where there were corrals. The "Watered Stock" and Cattle story comes from this period and it may be a myth. However, given Drew’s personality, it could very well be true. Drew was religious but his actual behavior in business was not Christian. He married in 1820 and in 1829 bought the Bull’s Head Inn (now 3rd Av. & 26th St.) and began acting as an informal banker for drovers. This is how he learns of Wall Street. In 1834 he gets into the steamboat business on the Hudson River and makes a lot of money secretly undermining the cartel he joins. (This is when he met Vanderbilt). He always dressed like a country hick. In 1853 Drew is elected to the Erie Railroad board and becomes treasurer in 1854. He becomes an adept stock manipulator – the "Great Bear" – and becomes known as the "Speculative Director".

      Daniel Drew

      1. The New York General Railroad Act of 1850 permitted railroad directors to issue bonds on their own authority to finance expansion. These bonds were convertible to Common Stock. Drew used this provision to manipulate the amount of Erie common stock and thereby the price of the stock.

      2. Trading took place on the NYSE, the Open Board (begun during the Civil War and open all day long), on the Curb, on Gallagher’s Evening Exchange, and in the Fifth Avenue Hotel. It was difficult to keep track of all the stock movement and this worked to Drew’s advantage in his schemes. Typically Drew would sell Erie short then dump stock on the markets to drive down the price and thereby make a killing on his short position.

    2. Cornelius (Commodore) Vanderbilt (27 May 1794 – 4 January 1877):

      He entered business at the age of 16 in 1810. He was paid $100.00 by his Mother to clear and plant an 8-acre field. He used the $100 to buy a small two-masted (sailing) flat-bottomed vessel (a periauger) and used it to carry freight and passengers between Manhattan and Staten Island. He was called "Cornele, the boatman" and he catered primarily to commuters because he quickly built a reputation for reliability and fearlessness. He would undertake any job -- even in stormy weather -- and he consistently charged lower rates than his competitors.

      By the Civil War Vanderbilt was known as the "Commodore" because of his vast fleet of steamboats. In 1863 he got into the Railroad Business and by the outbreak of the Erie Railroad war in 1867 he owned the New York Central and several other railroads.

      Cornelius (Commodore) Vanderbilt

    3. Jim Fisk (1 April 1835 – 8 January 1872): Born in Pownal, Vermont. His father was a peddler and he became a peddler about 1848-49. About 1855-56 he buys out his father and expands the business hiring others to do the peddling. In 1861 at the outbreak of the Civil War, he sets up a hospitality suite at the Willard Hotel in D.C. and lands many supply contracts for the Boston dry-goods firm he went to work for in 1860. In Sept. 1862 he organized in Boston a relief effort for the Antietam casualties. He was a gifted salesman and business strategist who had a flamboyant personality.

      James Fisk, Jr.

    4. Jay Gould (27 May 1836 – 2 December 1892): Born in Roxbury, New York he was a brilliant student and a voracious reader of books. He clerked in his Father’s store in 1851 and became a surveyor about 1852. In 1856 he wrote History of Delaware County. He got into the tanning business in Pennsylvania from 1857-1865. He married in 1863 and was a devoted husband and father. He was adored by his wife and children. Around 1864 he bought most of the bonds and stock of a short line railroad between Rutland, Vermont and Troy, New York and he learned the railroad business. He met Fisk sometime during 1865-66. Gould was a genius. John Steele Gordon says of Gould that he "was soon to prove the most intellectually gifted player of the great game at this time, perhaps any time, with an astonishing ability to comprehend the totality of the economic forces at work in any given situation. There is no doubt that Jay Gould could have been one of the greatest economists of the 19th century. But he was interested in applied, not theoretical, economics."

      Jay Gould

  2. The New York and Erie Railroad -- The NY&E was chartered 1832 and built 1834-51. Gov. De Witt Clinton promised the southern tier that they would get something in return for their support of the construction of the Erie Canal. The charter was very restrictive and made the success of the Erie RR unlikely – a 6 foot gauge, it had to be built entirely within New York State, no connection with an out-of-state RR, etc. It ran from Piermont, 25 miles north of New York City to Dunkirk on Lake Erie. Its first commercial success was shipping milk into the city. This milk from the country replaced "swill milk" from cows fed wretched food in the city. By the time the railroad was finished in 1851, the 469 mile road had cost $23.5m.

  3. The "Erie Wars"

    1. In October of 1867 Jay Gould and Jim Fisk were elected to the Erie board of directors.

    2. By December of 1867 Cornelius Vanderbilt controlled the New York & Harlem Railroad, the New York & Hudson Railroad, and the New York Central Railroad. This gave Vanderbilt total control over all railway lines into Manhattan from the North and East and he owned the only water level route to the Great Lakes. The only railroad he did not control was the Erie.

    3. Vanderbilt wanted the Erie to cooperate to hold up freight rates. When the Erie Board refused and threw Vanderbilt’s representative off the board he set out to buy control of the railroad. There were about 250,000 shares outstanding when Vanderbilt began his campaign but Drew could use convertible bonds to expand the total amount of common stock which he, Gould, and Fisk promptly did.

    4. By the time the dust cleared, Vanderbilt had over 200,000 Erie shares and Drew, Fisk, and Gould still had the Erie and $7m of Vanderbilt’s money.

    5. Vanderbilt then went to New York State Court to stop Drew from freely issuing stock. This prompted Drew, Fisk, and Gould to flee to New Jersey.

    6. Finally a deal was made to settle the Erie War. Drew was anxious to get back to New York City and went to Vanderbilt without telling Fisk and Gould. Fisk and Gould later found out and entered the negotiations themselves. Vanderbilt got about $3.5m in cash and $1.25m in bonds of Boston, Hartford, and Erie (this Railroad’s board had been on the Erie board). Fisk and Gould ended up with the bankrupt Erie Railroad.

  4. The Reforms Due to the "Erie Wars"

    1. Drew’s freely dumping loads of Erie stock on the exchanges without warning prompted the New York Stock Exchange to adopt a disclosure rule. Firms had to register with the NYSE and the exchange had to be informed in advance of large issues of stocks. There were to be no more surprises. In addition, the officers of firms listed on the NYSE could not be short on their own stock!

    2. Later, underwriters like J.P. Morgan required both periodic and inclusive financial reports. Many corporate charters were so loosely drawn that financial reports were almost useless.

    3. Later, the NYSE required accountants to certify these financial reports.

  5. These reforms initiated by the members of the New York Stock Exchange largely cleaned up by the early 1880s the abuses of men like Daniel Drew. This was self-regulation at its finest.