The Erie Railway War
Updated: May 15, 2022
"But the freebooters have only transferred their operations to the land, and the commerce of the world is now more severely, though far more equally, taxed through the machinery of rings and tariffs, selfish money combinations at business centers, and the unprincipled corporate control of great lines of railway, than it ever was depredations outside of the law."
Charles F. Adams, Jr, The North American Review, Vol. 109, No. 224 (Jul. 1869)
There is an old adage that goes, "there is no honor among thieves." Apparently, there is no honor in the world of business and finance either. At least not in the 19th century, when four of the time period's greatest and most ruthless financiers fought for control over a single railroad entity.
The Erie Railway began life as the New York and Erie Railroad. It was chartered in 1832 by the state of New York. The vision was to connect the burgeoning port of New York City with the growing markets of the Midwest. It was hoped that the railroad would spur settlement and economic growth along the southern tier of New York, much like the Erie Canal had done through central New York and the Mohawk River valley region. It was an ambitious project whose route would take it through rugged terrain and untouched woodlands. Construction began in 1835 at Piedmont, NY, with an estimated cost was $3 million. Funds were raised through sales of stock and through loans, New York state being the chief lender. Work proceeded at a slow pace, and construction costs soared. Within a decade of breaking ground, costs quadrupled, financial problems abounded, and the railroad was nearly insolvent. Barely half the proposed track mileage was completed. The company was given over to assignment, and New York State gave up its claim to any loans. After a brief suspension of work, construction resumed, more money was obtained, and in 1851, the railroad was completed upon reaching the town of Dunkirk on the shores of Lake Erie.
The New York and Erie Railroad, at the time it began operations, was the longest single railroad line in the United States. It was second to the Russian railway running from Moscow to St. Petersburg. The railroad soon opened a branch line to Buffalo and absorbed two smaller rail lines in New Jersey to connect with Jersey City. Before this, the port of New York was connected to upstate New York and the Great Lake region via many smaller railroads (later the New York Central). Despite the potential windfall as the main east-west carrier, the railroad continued to have financial problems. Final costs rose over $50 million. Mismanagement and the economic recession of 1857 forced the railroad into receivership, the first railroad to do so. In 1861, after defaulting on their last mortgage, the company declared bankruptcy and was reorganized as the Erie Railway Company.
Sitting on the board of directors for the Erie Railway was a long-time fixture of the New York financial scene, Daniel Drew. Drew was a self-made man, having come to New York City in the 1820s selling cattle. He then went into the steamship business, where he had his first direct competition with another man who would be prominent in New York business and politics, Cornelius Vanderbilt. Drew began speculating in stock and formed a brokerage company. His wealth and influence grew through the 1840s and into the next decade. He sat on the boards of several railroad companies besides the Erie. He had a reputation for being shrewd and unscrupulous. He devised many questionable methods of manipulating stock prices. He is credited with perfecting the short-selling of stock and introducing the concept of "watered stock." This is derived from "stock watering," a method by which cattlemen increased the weight of their livestock before being sold. Salt would be given to the cattle to make them thirsty. The cattle then would drink lots of water, thereby gaining weight. In the case of Wall Street, "watered stock" was a means to artificially inflate the price of stocks, usually by fraudulent methods. By the spring of 1866, Drew had been named treasurer of the Erie Railroad. He advanced the company $3.5 million in exchange for 28,000 shares of unissued stock and $3 million in bonds. He proceeded to sell short and reaped in a fortune as stock prices fell from $90 a share to $50.
Cornelius Vanderbilt had also been a self-made man. He began working as a ferryman transporting passengers and freight from Staten Island to Manhatten. He branched out with the advent of steamboats. By the 1840s, he dominated the steamboat business and became involved with the nascent railroad industry. With the California gold rush, Vanderbilt dabbled with several railroad ventures. At the time of the Civil War, he was a board member of several railroad companies, including the Erie Railway and the New York and Harlem Railroad. Vanderbilt eventually took control of the New York and Harlem and the New York Central (which was a consolidation of several small rail lines.) Drew's scheme at the Erie Railway occurred when Vanderbilt finalized his control over the New York Central. Vanderbilt feared the markets would become unsteady.
Drew had brought onto the Erie Railway two up-and-coming financiers, Jay Gould and Jim Fisk. Gould started his career in the leather and tanning industry. Since 1859, he had been investing in small railroad firms, especially in New York. Like Drew, Gould was beginning to gain a reputation for unscrupulous practices and would find himself in the middle of many of the financial scandals of the latter half of the 19th century. Fisk, known as "Diamond Jim" or "Jubilee Jim," had been a circus member and a hotel waiter. He was a textile salesman and made money in army contracts during the Civil War. He is believed to have been involved in cotton smuggling, and when he heard of the Confederate defeat at Petersburg, he made a fortune short-selling Confederate bonds in England.
Jim Fisk Jay Gould
Vanderbilt made a deal with Jay Gould to force Drew out from the Erie Railway. Drew, suspecting a potential coup, personally called on Vanderbilt and changed his mind. Gould drafted up a new proposal, along with Fisk, that would keep Drew off the railroad board. Vanderbilt agreed, but another board member conveniently resigned, and Drew took his place. Vanderbilt immediately began buying up Erie stock through dummy agents. He filed and won an injunction barring Drew from the stock market and the board of the railroad. This left Vanderbilt in control, something he was loathed to do. The timing was unfavorable as he was in the middle of consolidating his control over the New York Central. It would be too much all at once. Gould and Fisk didn't realize this. They had not kicked out Drew just for Vanderbilt to replace him. Thus, they turned to Daniel Drew.
The plan was to flood the stock market with "watered stock." In 1867. Fisk and Gould printed off thousands of stock certificates that were not legally certifiable. Unsuspecting brokers of Vanderbilt's bought up the stock as fast as Fisk and Gould could print them. Fisk is reported to have said, "if this printing press don't break down, I'll be damned if I don't give the old hog all he wants." "The old hog" Vanderbilt caught onto the ruse but kept buying in the hopes of outlasting Gould and the others. But his financial resources were not bottomless, and Fisk, Gould, and Drew were able to draw upon the finances of the troubled Erie Railway. Vanderbilt bought himself a judge from the New York City political machine of Tammany Hall. The judge authorized the arrest of the Erie Railway directors for contempt. The trio of Fisk, Gould, and Drew fled to New Jersey, bringing with them all the corporate records and $7 million. Entrenched in Jersey City, the directors hired police and bodyguards.
The battlefront moved to the courts and the New York state legislature. New Jersey had declared the Erie Railway a New Jersey corporation and therefore protected from New York legal action. Judges, bought by both Drew and Vanderbilt, issued injunctions and citations. Newspapers and their readers closely followed the contest between the great financial giants. Meanwhile, Gould and company had agents in Albany introduce legislation that would make the stock already sold legal and prevent Vanderbilt from merging the New York Central and the Erie Railway. Both sides of the dispute opened their wallets and engaged in vote-buying. Legislators switched back and forth at the whims of the highest bidder. Vanderbilt lost the battle, and the legislation passed.
In the end, the two old-time rivals had enough. Vanderbilt met Drew in secret. What transpired is uncertain. Drew, ready to sell out his younger partners, offered a deal. If Vanderbilt would drop the lawsuits and allow the trio to return to New York, Drew would arrange to buy back a large portion of the watered stock sold. This meant leaving the railroad bankrupt. Vanderbilt accepted the terms. The railroad was left to Gould and Fisk, whose directorship meant the railroad never was on stable financial footing. They continued to loot it for all its worth. Drew retired, his many decades of stock manipulation caught up to him, and he died impoverished. Cornelius Vanderbilt, affectionately known as the "Commodore," remained a rich man, but his reputation suffered. He was labeled a monopolist, a term that haunted him until his death. Fisk would be killed over a love affair, and Gould was left to become one of the most notorious of the "robber barons."
The Scarlet Woman of Wall Street: Jay Gould, Jim Fisk, Cornelius Vanderbilt, and the Erie Railway Wars: John Steele Gordon
Iron Empires: Robber Barons, Railroads, and the Making of Modern America: Michael Hiltzik
The Railroad Scrimmage: The Drama of the Erie War: F.L. Light