Thursday, June 12, 2014

Erie War: Watered Stocks and Unregulated Capitalism

A caricature of the Erie War
He started as a ferry tycoon. But from the flames of the Civil War, a new booming industry emerged – the railroad industry. A man with tenacity and ruthlessness, Cornelius Vanderbilt entered the rising industry to get a share of the profits. In 1860’s he managed to take a hold of the important New York Central Line that connected New York City to the western part of New York State. However, this was not enough. He wanted as well take control of the second line that went farther to Chicago, which was held by Erie Line. His attempt to grab the line would spark what would be known as the Erie War.

During the Civil War, the railroad industry boomed. Its strategic significance during the war led to the discovery of faster transportation modes. And one of the most famous investors on the industry was a ferry businessman, “Commodore” Cornelius Vanderbilt. Vanderbilt had dominated the ferry service industry for decades. Clashed with several competitors in merciless rate wars. Bold, ruthless, and opportunistic, he already saw the potential of railroads even before the war. But after the war, he even wanted more piece of action in the railway industry. In 1867, he acquired the New York Central Railroad.

But for a man who aimed high, to have one of the most important lines was not enough. Vanderbilt wanted more. He wanted to control another strategic and lucrative line. In the 1860’s, Western United States was booming with culture and, more importantly, business. One of the centers in the region was the city of Chicago. The city was connected to New York by the Erie Line. The Erie Line would then be the obsession of the Commodore.

During late 1850’s, Vanderbilt had acquired share of stocks of the Erie Line. So much so that he had been made a board member. He used this position as a leverage to add the Erie to his newly established railroad empire. In 1867, he made a proposal to the board of directors of Erie Line. He proposed a merger of the Erie and the New York Central. This, however, was turned down.

As his first plan failed, he attempted a second and a more aggressive plan. He launched a hostile takeover of the line. He began to buy as much as he can Erie stocks in the New York Stock Exchange in hope of acquiring 51% ownership.

Aggressive as usually he is, he had, however, a formidable enemy. Three man, later dubbed the Erie Ring, thwarted the plans of the Commodore. First in the ring was familiar adversary of Vanderbilt, Daniel Drew. Drew and Vanderbilt already had faced each other in the ferry business. Drew was once already bitterly defeated by Vanderbilt for a route leading to New York. Second member was Jay Gould. Jay Gould was New York native who rose to become a speculator in Wall Street. The third and last member was James Fisk. A flamboyant and cunning man, he also came from a poor background, worked in the dry good business before entering speculation in Wall Street. These terribly cunning trio would give Vanderbilt the challenge of his life time.

As Vanderbilt continued his hostile takeover, the trio made their move. Their counterattack was outright illegal and ruinous. They used the scheme called watering stocks, considered illegal today. The trio made their company’s bond transferable to stocks. This would result into creation of new stocks. Thus, whatever stocks Vanderbilt would buy would be replenished by new stocks created by the bond conversion. In other words, Vanderbilt would not be able to meet the majority stock ownership required to take control of the Erie Line.

The trio’s move worked. The new 100,000 stocks created from the bond conversion stopped the takeover of Vanderbilt. By early 1868, Vanderbilt lose an estimated $7 million. Meanwhile, the trio profited from Vanderbilt acquiring $6 million.

Being beaten in the stock market, Vanderbilt started a legal battle. Influential and wealthy, he used it to bribe a judge. Vanderbilt’s judge, George Barnard, issued an injunction against the activities of the Erie Ring. Equally rich and influential, not to mention incredibly bold to make illegal actions, also bribed a judge, Ransom Balcom, to counter the injunction of Vanderbilt’s. Vanderbilt then took one step further. He made his judge to issue an arrest warrant for the three crooks.

Sensing of danger, the Erie decided to flee. Drew already fled to across the Hudson to New Jersey. Meanwhile, Gould and Fisk were still in New York. They heard of the arrest warrant and also began to flee New York City. They carry on hand a bag with almost $million in cash. They then persuaded a boatman to ferry them to the choppy waters of the Hudson. They luckily crossed the river to New Jersey. The felons then hid in a hotel named Taylor’s Castle. Having a flare for dramatics, they christened it as Fort Taylor. To secure further their haven, they hired armed thugs to surround the hotel and stand on guard.

Following the legal battle, the next theater was the state Senate of New York.  This time, the trio made the first move. They asked help from their close associate and well known corrupt legislator, William “Boss” Tweed. They forwarded a bill that would allow the conversion of bonds to stocks, thus making their actions legal. Misunderstanding on the bribe prices and with Vanderbilt’s influence, the bill faced defeat. However, several weeks later, a news broke out that a similar bill was passed by the New State Senate.

The battle was becoming weary to both sides. Drew, who was starting to lose his wealth wanted a settlement. He convinced the two to make a settlement with Vanderbilt as well. Vanderbilt was by then only interested to get his money back. And so a settlement was reached by mid-1868.  Vanderbilt was to sell his stocks back to Erie Line in a price of $70 per share of stocks. Vanderbilt sold 50,000. All in all, from the agreement, Vanderbilt took back $5 million from the trio. The trio on the other hand, would have the Erie securely theirs.

One thing was certain from the Erie, nobody was the clear winner. Vanderbilt lost his money and his invincibility. Daniel Drew lost more. The war drained his wealth and lost further when Gould and Fisk betrayed him and bought him out of the Erie Line. He died a poor man a decade later. Gould and Fisk were not also spared. Years after the railroad war, the two was kicked out from the Erie Line because of their corrupt practices. But the most losers in the war was the small stock holders of Erie Line. Because of the watered stocks, the company became overvalued. It suffered a lot of problems and took decades before it was repaired. The Erie War was nothing but a legacy of a period of unregulated stock market and capitalism. 

See also: 
Cornelius Vanderbilt 
Daniel Drew
Jay Gould
Jim Fisk

Conlin, J. The American Past: A Survey of American HistoryMassachusetts: Wadsworth, 2010. 

Derbyshire, W. Six Tycoons: The Lives of Jacob Astor, Cornelius Vanderbilt, Andrew Carnegie, John D. Rockefeller, Henry Ford, and Joseph Kennedy. London: Spiramus Press Ltd., 2011. 

Giroux, G. Business Scandals, Corruption, and Reform: An Encyclopedia. California: ABC-CLIO, 2013. 

Kohn, G. The New Encyclopedia of American Scandal. New York: Facts on File, Inc., 2000. 

1 comment:

  1. this is very helpfull and very informative. THanks!