Cornelius Vanderbilt on Corporate Governance

Public money raised through taxation, together with land contributed by public officials and private developers, had built the Erie Railway, and by the middle of the 1850s the road was mismanaged and deeply in debt. Daniel Drew, a cattle drover turned Wall Street banker and broker, first loaned the railroad two million dollars and then acquired control over it, amassing a fortune by skillfully manipulating Erie shares on the New York Stock Exchange. Vanderbilt, assembling a railroad empire, saw financial and strategic opportunity in the property and in 1866 set out to corner the market on Erie, silently scooping up the stock. Having succeeded in the accumulation, he then permitted Drew to remain on the board of directors in his former capacity as treasurer, a gesture of apparent reconciliation with his old adversary that set up one of the most spectacular betrayals in the history of American finance.

Between 1866 and 1868, Drew conspired with James Fisk and Jay Gould, whom he brought onto the Erie board, to issue spurious shares, watering down the stock, of which an unsuspecting Vanderbilt bought a large quantity, losing more than seven million dollars in his attempt to gain control. Gould later returned most of the money under threat of litigation, but Vanderbilt conceded the railroad to the trio. They were entangled with the corrupt Tammany Hall machine and made Boss Tweed a director of the railroad, and he arranged favorable state legislation in Albany legalizing the newly issued shares. The historian Gustavus Myers recorded that Vanderbilt's agents poured out money to buy legislative votes against the legalization bill while members impassively took cash from both sides: Gould appeared in Albany with a satchel holding half a million dollars in greenbacks, and one senator kept seventy-five thousand from Vanderbilt and a hundred thousand from Gould, and voted with Gould.

Vanderbilt stipulated that McTyeire serve as chairman of the Board of Trust for life. For its first forty years the institution remained under the auspices of the Methodist Episcopal Church, South, a lineage modern historians have documented unsparingly: McTyeire was born into a slave-owning family and wrote an essay defending slavery, chancellor Landon Garland owned as many as sixty enslaved people before the war, and Vanderbilt's own second wife was a Confederate sympathizer during the conflict. Tension between the board and the church over trustee selection and the place of non-Methodist faculty culminated in 1910, when the board refused to seat three Methodist bishops. After litigation, the Tennessee Supreme Court held in 1914 that the true founder of the university was the Commodore himself, not the Methodist Church, and the General Conference voted 151 to 140 to sever its ties with the institution that carried his name.

Vanderbilt's will left ninety-five percent of the estate to his son William and four grandsons, while his surviving son Cornelius Jeremiah and nine daughters received comparatively little, in some cases less than their own nephews. Three of the disappointed heirs sued, claiming their father had been of unsound mind and under William's influence and that of a corrupt spiritualist, alleging staged seances in which a spirit in the form of their dead mother endorsed William as the trustworthy heir. Rather than endure further public airing, William settled, adding two hundred thousand dollars in cash and a four-hundred-thousand-dollar trust for each challenger. Biographer T. J. Stiles credits the Commodore with vastly expanding the nation's transportation infrastructure, embracing new technologies and new forms of corporate organization, and helping create the corporate economy that defined the United States into the twenty-first century. Rankings of all-time American wealth place him second only to Rockefeller as a share of the economy.

ThoughtCo's retelling captures the Erie War's theatrical absurdity. Wall Street after the Civil War was largely unregulated, and manipulators moved stocks at will. The Erie, opened in 1851 as a rolling counterpart of the Erie Canal, was chronically unprofitable and controlled by Daniel Drew, a former cattle drover who had walked herds from upstate New York to Manhattan, deeply religious, prone to lapsing into prayer, and benefactor of the New Jersey seminary that became Drew University. Vanderbilt, who had known Drew for decades and held what observers could not explain as an abiding respect for him, began working with him in late 1867 to buy up the majority of Erie shares. When Drew, Gould, and Fisk turned to issuing watered stock against him, Vanderbilt kept buying. In March 1868 the trio fled across the Hudson and barricaded themselves in a Jersey hotel guarded by hired thugs, Drew sitting silently in prayer, Gould morose, and Fisk parading before reporters with outrageous quotes, until Albany payoffs and a buyback settlement ended the farce.

His one failed campaign was the 1868 attempt to corner the stock of the Erie Railway, launched to punish Daniel Drew for betraying him on the stock market. As Vanderbilt bought, Drew, the Erie's treasurer allied with Jay Gould and James Fisk, sold short, and the board flooded Wall Street with fresh certificates of dubious legality. The notoriously corrupt judge George Barnard issued arrest warrants; the Erie directors packed up the corporate files and funds and fled to New Jersey; Gould visited Albany with a suitcase of greenbacks, and the suddenly enriched legislators legalized the new shares. Barnard kept the warrants alive, forcing a compromise in which the company restored Vanderbilt's losses and he asked the judge to let the directors return. Stiles draws out the nuance: for all the graft surrounding Vanderbilt's career, no evidence convincingly shows that he corrupted government officials, since corruption also flowed as extortion by officeholders. The Erie War personalized the rising institutional economy, making dehumanization human.

Before the investigating committee, William Vanderbilt testified that the Hudson road kept eighty-two engines and equipment enough for two thousand tons of freight a day, yet the Central expected that capacity to stand idle through the nine months of open navigation. The Commodore conceded nothing: he had always served the public because it was his interest to do so, and as for the courts, the law went too slow for him when he held the remedy in his own hands. Historians treat this testimony as the source of the apocryphal sneer about law and power that no witness ever actually heard him utter. On the hearing's third day a telegram signed W. H. V. announced that satisfactory arrangements had been made and the trains would connect as usual that night. In November, stockholders led by Edward Cunard and John Jacob Astor Jr., representing thirteen million dollars of stock, begged him by letter to take their proxies, and at the December election his eighteen-million-dollar ballot decided control of the New York Central.