Cornelius Vanderbilt on Capital Allocation

Though he had stepped down from the Stonington presidency during the gold rush, Vanderbilt spent the 1850s on several railroad boards, among them the Harlem, the Hartford and New Haven, the Central of New Jersey, and the Erie. In 1863 he took control of the Harlem in a famous stock-market corner and was elected its president, later explaining that he wanted to prove he could take a railroad widely considered worthless and make it valuable. The Harlem held a singular asset: it was the only steam railroad entering the center of Manhattan, running down Fourth Avenue to a 26th Street station, with a connection at Chatham Four Corners to the lines running east and west. He installed his eldest son Billy, once scorned and sent to a Staten Island farm after a youthful breakdown, as vice president, and in 1864 sold his last ships to concentrate on railroads.

In 1863, amid the Civil War, Vanderbilt began selling his steamship interests to buy railroad stock, and younger brokers on Wall Street mocked him, doubting the aging Commodore grasped the nation's most dynamic industry. In truth he had known railroads almost since American railroading began: his steamboats had connected with New England's earliest railways, he had seized the Stonington's presidency in 1847, and through the 1850s he had helped save the endangered Erie Railway and the Harlem by lending money and restructuring their debt. He became the era's greatest railroad tycoon almost by accident: at sixty-nine he wished to show he could turn a nearly bankrupt railroad into a thriving company. The fragmented web of local lines pulled him onward. He took the Hudson River Railroad in 1864, seized the New York Central in January 1867 by stopping trains over the Hudson River at Albany and briefly severing New York City from the country, and in 1869 gained the Lake Shore and Michigan Southern through a short-selling campaign that bankrupted his rival LeGrand Lockwood.

Stiles credits Vanderbilt's personal intervention in 1869 with saving the United States from a major financial crisis. When a group of speculators attempted to corner the nation's gold supply, the Commodore freed up sufficient capital to keep the panic from escalating into a depression, and was hailed as a hero, the savior of Wall Street. His enterprises demonstrably benefited the nation: historians Edwin Burrows and Mike Wallace calculate that roughly two hundred businesses relocated to cluster around the freight terminal he built on Manhattan's Lower West Side, drawn there like a gigantic magnet. The only thing more remarkable than his recklessness, Stiles observes, was his success. Vanderbilt seized the foundering New York and Harlem Railroad and restored it to profit, bought out railroad after railroad as an early master of modern corporate tactics, and by his death controlled many of the most important railroads in North America.

The courts ruled that the Broadway extension required a new franchise from Albany, and in early 1864 Harlem's bill was killed in a Senate committee, Drew again conspiring with legislators, this time alongside New York Central officials who wanted Harlem cheap as their own entrance to the city. The stock collapsed from 145 to 101. Vanderbilt summoned his old Staten Island friend Tobin with a proposal to teach the legislators never to go back on their word, and ran the corner a second time with a war chest of roughly five million dollars assembled from Tobin and Leonard Jerome. The bears kept selling as the stock climbed past 150 and 235; the group ultimately held the equivalent of the entire capital stock plus twenty-seven thousand shares the shorts could never deliver. Told that squeezing them to a thousand might break every house on the Street, Vanderbilt settled for less; in late June the last contracts settled at 285, with losses above a million dollars and bankruptcies to match. His verdict on the affair: they had busted the whole legislature.