1. society
2. crime
3. property crime
4. bribery

Information,
Markets, and
Railroads
Transcontinental
Gilded
Age
Corruption:
in
the
RichardWhite
The corrupt,like the poor, are supposedlyalwayswith us. Corruptionis a species of
fraud that involves violation of public or private trust. A covenant of some sort,
either implied or explicit, is violated. Corruption involves betrayal,often of a third
party. The corrupt buy or sell what was not supposed to be for sale-a vote, for
example, or public property.They turn to personal advantagetheir legal status as
trusteesof persons or property.Or they grant only to a privilegedfew what is purportedlyavailableto all or availableonly throughopen and fair competition, such as
public informationor accessto politicalofficeholdersor chartersor contracts.Or, for
a price or for personaladvantage,they make public what was pledged to be private,
such as state secretsor confidentialbusinessinformation.In the Gilded Age, the corrupt explorednew frontiers:they corruptedinformation,particularlyfinancialinformation, on a scale neverbeforepossible.
The Foundersfearedthe corruptionof the Americanrepublic,as did the Jacksonians. Gilded Age reformersdecried corruption. Today, plagued by financial scandals, we seem both fearfulof corruptionand resignedto it. We seem uncertainabout
whom it hurts and what differenceit ultimatelymakes.The Republicseems perpetually corrupted,but insteadof being outraged,we are not sure it matters.1
Corruption,however,is not alwaysthe same;it has a history.The Gilded Age was
a key moment in that historynot just becausethe issue of corruptiondominatedpolitics but also because,as republicansfrom ThomasJeffersonthroughAndrewJackson
had feared, the rich, who now controlled corporations,used them to infiltrate the
state and to turn parts of it to their own purposes.They also did something equally
important:they moved to take control of the mass circulationof financialinformation in orderto manipulatefinancialmarkets.Those markets,which were supposed
to ensurethe competition that would preventthe riseof economic units largeenough
RichardWhite teachesAmerican history at StanfordUniversity.
4141 Gordon Wood, The Creationofthe AmericanRepublic,1776-1787 (New York, 1969), 32-36, 107-17,
25; HarryWatson, Libertyand Power:ThePoliticsofJacksonianAmerica(New York, 1990), 46, 62, 65-66, 82-85,
101; Mark Summers, TheEra of GoodStealings(New York, 1993); John J. Wallis, "Constitutions, Corporations,
and InternalImprovements:American States, 1842-1852," paperdeliveredat StanfordUniversity,April 2002 (in
RichardWhite's possession), 21-22.
The Journalof AmericanHistory
June 2003
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19
20
TheJournalof AmericanHistory
June2003
to corruptthe Republic,provedto be themselvesopen to corruption.Even today,as
the politicalscientist SusanRose-Ackermanhas written, the models of modern economists are "deeplyembedded in a set of often unstated assumptionsabout human
values, and many of the normativeclaims for the marketare fundamentallydependent upon the assumptionthat economic actorswill not breakthe law."But, as the
misdeeds of Enron and other current financial scandals demonstrate, economic
actorsdo breakthe law.2
Financial corruption provoked outrage and concern. "Our whole system rests
upon the sanctity of fiduciaryrelations,"Henry Adams and CharlesFrancisAdams
Jr. wrote in ChaptersofErie. "Whoeverbetraysthem, a directorof a railroadno less
than a member of Congress..., is the common enemy of every man, woman, and
child who lives under representativegovernment.The unscrupulousdirector is far
less entitled to mercy than the ordinarygambler,combining as he does the character
of a traitorwith the acts of the thief."3
But corruptionwas not simply a breakdownin morality.The laissez-faireenthusiasms of the Gilded Age did not eliminate nineteenth-centurymoral constraints.It
was funny when HenryAdamsdescribedcorruptcharactersin his novel Democracyas
"morallunatics"who "talkedabout virtue and vice as a man who is colorblind talks
about red and green."But outside of novels, most of the corporatecorruptwere less
amoralthan immoral.J. GregorySmith, a presidentof the Northern PacificRailroad
who was eased out becauseof, among other things, suspicions concerninghis rectitude, claimed that he would "neverretainor countenancean immoralman if I know
it." Smith and other corporateleadersemployed the same moral vocabularyas their
critics. Nineteenth-centuryAmerican thinking about economics, as the historian
Herbert Hovenkamp has argued,joined economic rights with "moraland religious
rights."4
It is easy to see only hypocrisyin the combination of dubious businesspractices
and Protestantreligiosityof the financierJay Cooke or Harvey Fisk, the Central
PacificRailroad'sbanker.But it was the cultivationof public characterthat led both
men into personalcorruption.Not deeply reflectiveto begin with, they,like Collis P.
Huntington of the CentralPacificor Thomas Scott of the PennsylvaniaRailroad,reconciled moralityand actionsby embracinga moralityof consequences.Like business,
moralityreducedto a bottom line that reflectedan increasein wealth. Bad men were
bears. Good men were bulls. Bad men lied and manipulatedinformation to drive
down values.They hurt investorsto help themselves.Good men lied and manipulated
informationto maintainor increasevalues. In helping themselves,they helped investors. Men of characterconsideredthemselvesthe finaljudgesof theirown rectitude.5
A Studyin Political
28-29, 300-306; SusanRose-Ackerman,
Corruption:
Z Summers,Eraof GoodStealings,
(NewYork,1978), 189-90.
Economy
CharlesFrancisAdamsJr.andHenryAdams,Chapters
ofErie(1871;Ithaca,1956),8.
HenryAdams,Democracy
(1880;NewYork,1961), 182;J. GregorySmithto JayCooke,March8, 1872,Jay
CookePapers,HSP148 (HistoricalSocietyof Pennsylvania,
Pa.);HerbertHovenkamp,Enterprise
Philadelphia,
andAmerican
Law,1836-1937 (Cambridge,
Mass.,1991),74.
' ThomasC. Cochran,Railroad
Mindin Action(Cambridge,
1845-1890: TheBusiness
Leaders,
Mass.,1953),
122-25.
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in the GildedAge
Information,
Markets,andCorruption
21
Gilded Age financial corruption consisted of quotidian faults-lying, deception,
and dishonesty-played out largely on paper and along telegraphlines, but on a
nationaland internationalscale. Peopledid not have to grow more corrupt;old faults
yielded new results.Altering a few words or numbers on a page could bring great
wealth. When relativelyvenial sins in a virtualworld of financialinformationcould
accomplish more than mortal sins in a local world, why bother to be truly evil?
Asymmetriesin informationallowed financialcorruptionto flourish. The financial
marketsmagnifiedthe resultsof relativelysmall actions and yielded disproportionate
results.When AlfredA. Cohen, a San Franciscolawyerand businessman,ridiculed
CharlesCrockerof the CentralPacificas "aliving, breathing,waddlingmonument of
the triumph of vulgarity,viciousness, and dishonesty,"his ridicule also conveyed a
sense that the increasedscale and movement-the girth and waddle-of the old arts
of lying and deceit had made Crockera figureto reckonwith.6
The possibilitiesfor corruptionwere supposedto have dwindledwhen Jacksonian
reformerssought to diminish the centralstate and to center developmentefforts on
states and localities.The shift from specialincorporationlaws towardgeneralincorporation law was supposed to make the corporationa tool of reform by increasing
competition and eliminating favoritism,thus diminishing corruption.If a national
governmentor nationalmarketwas not strongenough to be worth corruptingand if
no economic unit was big enough to corrupt either one, then corruption could be
contained.'
The historicalconsensusfrom RobertH. Wiebe throughStephen Skowronekwas
that antebellumreformershad succeededin denationalizingthe state and society,but
more recently RichardFranklinBensel has persuasivelyargued that state authority
increaseddramaticallyduringthe Civil Warto createa YankeeLeviathan.Sven Beckert has found the emergence of a national bourgeoisie based in New York that
replacedregional elites. Central authoritymay have shrunk in other regions in the
1870s, but it remained disproportionatelystrong in the West. Elsewhere, that
authorityleft behind new overlappingcentersof information,new financialmarkets,
a nationalbourgeoisie,the AssociatedPress(AP), and powerfulnew corporationssubsidized and regulatedby the centralstate.All were criticalto the corruptionthat was
a part of Gilded Age life, and all are still criticalto corporatecorruptiontoday.8
At the centerof nationalcorruption,both financialand political,were particularcorporations:the railroads.They were the majorcorporateconsumersof capitaland the
6 Central
Pacific Railroad Companyvs. Alf4edA. Cohen.Argumentof Mr. Cohen, the defendant,in person....
SanMarino,Calif.).
(SanFrancisco,1876),49, pamphlet,67742 (HuntingtonLibrary,
JournalofAmeri7RichardL. McCormick,"ThePartyPeriodandPublicPolicy:An Exploratory
Hypothesis,"
canHistory,
66 (Sept.1979),286.
8 Robert H. Wiebe, TheSearch
for Order,1877-1920 (New York, 1967), 32-33; Stephen Skowronek,Building
a New AmericanState: The Expansionof National AdministrativeCapacity(New York, 1982), 8, 23-31; Richard
Franklin Bensel, YankeeLeviathan: The Origins of CentralState Authorityin America, 1859-1877 (New York,
1990), 1-17; Sven Beckert, TheMoniedMetropolis:New YorkCityand the Consolidationof theAmericanBourgeoisie, 1850-1896 (New York,2001), 3-13.
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22
TheJournalof AmericanHistory
June2003
leading corporateobjects of both regulationand aid. An importantsubgroupof the
railroads-the transcontinentalscharteredto cross the western United States-were
particularlyopen to corruption.They operatedon the national stage, and they were
political from birth. The federal governmentprovided indirect subsidies to many
railroads,but the transcontinentalsreceiveddirect ones. Most such subsidiescame as
land grants,but outside of providingcollateralfor bonds, they contributedlittle initial capital. The key subsidy,grantedonly to the Pacific road (primarilythe Union
PacificRailroadand the CentralPacificRailroad)but sought by other roads,was the
loan of governmentcredit in the form of bonds. The Union Pacificand the Central
Pacificsold the bonds, and the governmentpaid the interest.The roadswould repay
both interest and principalto the governmentwhen the bonds came due in thirty
years.Until then, the governmenthad a second mortgageon the road.9
Federalaid was, however,neversufficientto build the transcontinentals,nor could
they be financed in the same way as most antebellum roads. Before the Civil War,
local investorsbuilt local roads, and capitalistscombined local roads into systems;
but askinglocal investorsto build a transcontinentalwas like bringingan elephantto
a horse fair.It was a differentbeast, and no one was buying. That was the argument
for federalsubsidiesin the first place.1"
Federalsubsidiesallowedtranscontinentalsto join other railroadsin raisingmoney
on national and internationalfinancial markets,which, like the transcontinentals
themselves,were products of federal actions. The federal government created the
modern bond marketin order to finance the Civil War,and it used key elements of
the existing system-urban banking houses-to do so. With the refinancingand
retirementof the government'sCivil Wardebt in the 1870s, railroadbonds took over
a largerand largerspacein financialmarkets.The bonded debt of Americanrailroads
rose from $416 million in 1867 to $2.230 billion in 1874 and $5.055 billion in
1890. The majorityof the funds came from investorswithin the United States, but
there was significantinvestmentfrom partiesin GreatBritain,the Netherlands,and
Germany.11
The early transcontinentalswere speculativeendeavors run by men who were
essentiallyfinanciers.Earlyowners usuallyhoped for a quick gain. Even the longest
lasting of them-the "Associates"of the Central Pacific: Collis P. Huntington,
9Maury Klein, The Union Pacific:Birth ofa Railroad,1862-1893 (Garden City, 1987), 14-15, 31, 514-15;
David Maldwyn Ellis, "The Forfeitureof RailroadLand Grants, 1867-1894," MississippiValleyHistoricalReview,
33 (June 1946), 27-60. For land grantsas of 1873, see Henry V. Poor,Manual of theRailroadsofthe UnitedStates
for 1875-76 (New York, 1876), 818-22. Henry V. Poor,Manual of the Railroadsof the United Statesfor 1878-79
(New York, 1878), 986.
10Robert Fogel, The Union Pacific Railroad:A Case in PrematureEnterprise(Baltimore, 1960), 58-60, 97;
Jonathan B. Baskin, "The Development of CorporateFinancialMarketsin Britain and the United States, 16001914: Overcoming Asymmetric Information,"BusinessHistoryReview,62 (Summer 1988), 210-11.
" Bensel, YankeeLeviathan, 243-62; Richard Eugene Sylla, The American Capital Market, 1846-1914: A
Study of the Effectsof Public Policy on EconomicDevelopment(New York, 1975), 155-61; Vincent P. Carosso,
InvestmentBankingin America:A History(Cambridge,Mass., 1970), 15-17. For the amounts of bonded debt of
railroads,with figuresfor 1867 including elevated railwaysand figures for 1890 excluding them, see U.S. Bureau
of the Census, HistoricalStatisticsofthe UnitedStates,ColonialTimesto 1970 (2 vols., Washington, 1975), II, 734,
series Q 346-55. Lance E. Davis and Robert E. Gallman, EvolvingFinancial Marketsand InternationalCapital
Flows:Britain, theAmericas,andAustralia, 1865-1914 (New York,2001), 5-6, 32, 234, 238, 249-52, 333.
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in the GildedAge
Markets,andCorruption
Information,
23
CharlesCrocker,Mark Hopkins, and LelandStanford-had hoped to sell out in the
early 1870s, soon afterthe completion of the road.The bureaucraticorganizationof
the modern corporationappearedin railroadsin the 1880s, but before then, and to
an extent even afterward,profit came less from selling goods and servicesthan from
financialmaneuveringinvolvingthe securitiesof the firms.That is the site wherecorruption appeared.
The transcontinentalsconnected the two major strainsof Gilded Age corporate
corruption:financialand political. Although political corruptionis not the focus of
this article,it was the twin of financialcorruption.It differedfrom the more familiar
corruptionassociatedwith nineteenth-centurypolitical machinesin severalrespects.
It was, first of all, nonpartisan.The railroadssought friendsin both parties.Second,
it was not focused on democraticelections, which were expensiveand hard to control. Third, it depended as much on lobbyistsas on elected officials.Lobbyistswere
common enough, but the Washingtonlobbies of the Central Pacificand Texasand
Pacific railroadsoperatedon a scale far greaterthan that of most of their counterparts. The railroadstook up a kind of politics that the Jacksonianshad associated
with the Second Bankof the United States.They sought to influencethe people who
could regulate and control the bottlenecks and choke points of legislation and
administration.The more the playing field narrowed,the more potent the transcontinentals became. The transcontinentalswere least effective in manipulatingdemocratic elections; more effective in influencing nominations and arrangingwhom
legislaturespicked as senators;more effectivestill in making their interestsfelt when
legislaturesand congressesstaffedkey committees;and most effectivein influencing
the work of those committees. Friends of the railroadsworked best when they
workedquietly,in committeesand in cloakrooms.12
Railroadpolitics were most often concerned with regulationand subsidies, but
such concerns blended seamlesslyinto attempts to influence financialmarkets.The
goal of a public battle in Congresswas not necessarilyto get legislationpassed. In
1877 John P. Usher,the KansasPacificRailroad'slawyerand formerlyAbrahamLincoln'ssecretaryof the interior,suggestedthat the KansasPacificpush legislation in
Congress,as well as pursuelawsuits,in its battlewith the Union Pacific-an effort to
force that road to grant the Kansas Pacific a fair proportion of the revenue from
jointly carriedtraffic. Usher did not really think the KansasPacific would obtain
either new laws or a favorablecourt decision. The Union Pacificwas probablystrong
enough to prevent that. His intent was to drive down the price of Union Pacific
stocks and bonds and thus threaten the financial stability of a large but wobbly
enemy.The goal, in short, was to produceinformationthat could influencefinancial
markets.13
12Mark Wahlgren Summers, "'To Make the Wheels Revolve We Must Have Grease':Barrel Politics in the
Gilded Age,"JournalofPolicyHistory,14 (no. 1, 2002), 49-72; Klein, UnionPacific,370, 465, 532, 538; C. Vann
Woodward,Reunionand Reaction(New York, 1956), 120-29.
13
John P. Usher to Henry Villard, Nov. 5, 1877, f. 23, box 3, Henry Villard Business Papers, 1862-1900
(BakerLibrary,HarvardBusiness School, Boston, Mass.).
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TheJournalof AmericanHistory
June2003
The history of the transcontinentalrailroads,particularlythe Kansas Pacific,
Northern Pacific,Texasand Pacific,CentralPacific,and Union Pacific,as well as the
SouthernPacificRailroad,exemplifiesthe linkagebetweeninformation,markets,and
corruption in the Gilded Age. Neither the importanceof information to financial
marketsnor the manipulationof that informationwas new in the 1870s. The brokering of credit betweenpartieswho did not know each other (by notariesin prerevolutionaryFranceand by scrivenersand lawyersin Britain)existedbeforeeitherbanksor
financialmarkets.14What was new was the scaleof the marketsand of the privatecorporations that manipulatedthem, the rapidityof the disseminationof information
and the size of the audiencesit reached,and the new technologiesthat made all this
possible. The Gilded Age did not replacelocal, face-to-facemarketswith an international marketdealingwith securityissues in the tens or hundredsof millions of dollars;rather,it layeredthose marketsand forgedconnectionsbetweenthem.
Culture as much as money knit the markets together, and as paradoxicalas it
might seem, the culture of corruption initially began with character,which was
essentialfor trust. This was as true on Wall Streetas it was in the assessmentsof local
bankersor agents of the credit-ratingfirm R. G. Dun and Company. Few in the
1870s would have failed to understandHenry Villard'srefusalto resignas receiverof
the KansasPacific, appointed by a court to run the bankruptroad, as long as his
characterwas under attack. Corporateleadersoften claimed to be honest. Collis P.
Huntington attributedhis own and his fellowAssociates'successto theirobtaining "a
national reputationnot only as railroadbuildersbut as honest men that watch over
and protectthe interestof all [the company's]stock holdershoweversmall theirinterest." Characteramong Gilded Age financiers,however,was not synonymous with
honesty; it had as much or more to do with honor, dependability,forcefulness,and
strength. If Huntington thought a man reliable, he said little about him, and he
thereforesaid a lot about many people. Huntington thought the financierJay Gould
and the railwaymanTom Scott were "two of the worst men in the country,"but
because being a bad man did not mean being without character,he warned David
Colton not to "underratethe powerof Tom Scott"of the Texasand Pacificand Pennsylvaniarailroads,who had come "froma very small beginning by his own forces of
character"to head the Penn Central, "oneof the largestR[ailroad]organizationsin
the world.""5
14 Philip T. Hoffman, Gilles Postel-Vinay,and Jean-LaurentRosenthal, "Informationand Economic History:
How the Credit Marketin Old Regime ParisForcesUs to Rethink the Transitionto Capitalism,"AmericanHistorical Review, 104 (Feb. 1999), 69-94; Naomi Lamoreaux,InsiderLending:Banks, PersonalConnections,and EconomicDevelopmentin IndustrialNew England(New York, 1994), 1-7.
'~ On Henry Villard, see "In the U.S. Circuit court for the District of Kansas,Adolphus Meier et as. vs. KPRR
Bondholdersstatements,Villard Papers.Collis P. Huntington to
... New York,Sept. 28, 1878," f. 7, box 1, KPRR
Mark Hopkins, Aug. 29, 1869, 1: 93, box 20, Mark Hopkins Correspondence,Timothy Hopkins Transportation
Collection, 1816-1942, M 97 (Special Collections, StanfordUniversity Library,Stanford,Calif.); C. P. Huntington to Leland Stanford, May 10, 1870, in Lettersfrom Collis P Huntington to Mark Hopkins, Leland Stanford,
CharlesCrocker,E. B. Crocker,CharlesE Crocker,and D. D. Coltonby Collis P. Huntington et al. (3 vols., New
York, 1892-1894), II, 145-46; C. P. Huntington to David Colton, May 18, 1874, in The OctopusSpeaks:The
ColtonLetters,ed. SalvadorRamirez(Carlsbad,Calif., 1982), 29. For Huntington'sopinions, see C. P. Huntington
to Hopkins, April 29, 1876, 9: 11, box 24, Hopkins Correspondence;and C. P. Huntington to Colton, April 12,
1875, May 17, 1877, in OctopusSpeaks,ed. Ramirez,98, 363.
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in theGildedAge
andCorruption
Markets,
Information,
25
Decisionson characterwere a matterof information,and they werelinkedto
The smallerthe financialcomotherinformationin judgmentsof creditworthiness.
munity,the greaterthe abilityto obtainsuchinformation.Everytime theAssociates
of the CentralPacifichadto borrowmoneyat the ornateofficeof the Bankof Californiain SanFrancisco,forexample,theyrevealedinformationbecauseas Huntington, by far the shrewdestof the Associates,noted, "wearebut a smallcommunity
there."Wheneverthe CentralPacificboughtlocallyon creditand merchantsdiscountedthe railroad's
notes,they gaveawayintelligenceto the "ring"of men surroundingthe bank, who, as Huntington'spartner,Mark Hopkins,complained,
"knowall aboutourbusinesshere."TheyknewwhattheAssociatesowed,whomthey
owedit to, andwhatratestheywerepaying.Therewas"nothingbut the perplexities
of it" thattheydid not know.Lendingon both discountednotesand accommodation loans-short-termnotesendorsedby a borrowerand by otherendorsers-was
ratherthana corandtheirestatesborethe responsibility,
theendorsers
precorporate;
poration.Membersof the ringdid not investin CentralPacificsecuritiesandwould
not takethemas collateral,supplyingonly short-termcapital.Theyknewtoo much
aboutthe largefloating,or unsecured,debt of the CentralPacific.As late as 1877,
ColtonfoundthatSanFranciscobankerswouldnot lend the CentralPacificor the
SouthernPacificmoneywithout the personalnotes of the Associatesbehindthe
loan.16
andinformation
Whenfinanciersmovedinto nationalmarkets,issuesof character
went with them.The centerof long-termcapitalmarketswas New YorkCity,and
CollisP.Huntingtonmovedtherein the 1860sbecausethe CentralPacificcouldnot
surviveunlesshe, or someonelike him, was present.WallStreetcouldseem local.
Whennot traveling,Huntingtoncameto worksix daysa weekat an officeat 9 Nassau Street,just off WallStreet.At 20 NassauStreetwerethe originalofficesof the
Union Pacific.At 5 NassauStreetwerethe officesof Fiskand Hatch,the Central
Pacific'sbankers.The New Yorkhouseof JayCookeand Company,the Northern
Pacific'sbankers,wasat BroadwayandNassauStreet.HenryVillard,receiverof the
KansasPacificandeventualownerof the NorthernPacific,wouldjoin themon NassauStreetin 1876.17
Wall Streetwas, in fact, a hybrid.A tightlyknit world, it was also the nexus
betweenlocalfinancialworldsand the emergingvirtualworldof financialinformation, which was both nationaland international.
Manyof the samebankerswho
the marketingof railroad
undertake
later
would
war
bonds
negotiatedgovernment
bonds.Jay Cooke and Company,who eventuallytook over the sale of Northern
16
C. P. Huntington to Charles Crocker,Aug. 21, 1874, in Lettersfrom CollisP?Huntington,by Huntington et
al., III, 164-65; Hopkins to C. P. Huntington, Dec. 29, 1872, Incoming Correspondence, CollisP Huntington
Papers, 1856-1901 (microfilm, 115 reels, Microfilming Corporation of America, 1978-1979), series 1, reel 5;
Lamoreaux,InsiderLending, 1-7; John A. James, Money and CapitalMarketsin PostbellumAmerica (Princeton,
1978), 56-57; Ira B. Cross, Financing an Empire:History of Banking in California (4 vols., Chicago, 1927), I,
259-60; Colton to C. P. Huntington, May 23, 1877, in OctopusSpeaks,ed. Ramirez,366.
17 Villard to Augustus Meir, Nov. 30, 1876, Kansas Pacific Letterbook 11, Villard Papers; Holmes to Jay
Cooke, Jan. 13, 1872, Cooke Papers;Stanfordto stockholders,Sept. 9, 1873, 5: 33, box 22, Hopkins Correspondence.
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26
TheJournalof AmericanHistory
June2003
Pacificsecurities,had overseenthe Union bond sales. Fisk and Hatch, one of Cooke
and Company'sagents, became the Central Pacific'sbankers.During the Civil War
those houses had not only reapedconsiderablefinancialprofit but also accrueddividends of patrioticregardand trust.'8
Soliciting funds on internationalmarketsinvolved the production of information
about the railroadsthemselvesand about the trustworthinessof the men who offered
and sold the bonds. Railroadsand bankersproduced information in the form of
bond prospectuses,stock and bond marketquotations,corporatereports,and financial news. As the scale of the financial markets increased,such information grew
more asymmetric:insidershad a lot of it and outsidersrelativelylittle.9
On Wall Street a man'sreputation,his associations,and his money all had to be
evaluatedbeforeanyone put any confidencein his paper,preciselybecausemen adept
at producing financial information knew how unreliable it was. The men who
financed the railroadslived in chronic uncertainty. "I see my friend Gould frequently,"Henry Villard wrote in 1877. "One day he talks peace and the next he
threatens.But I am not afraidof him."Villardwas not alwaysso sanguine;he eventually suffereda nervous breakdown.He was not alone. Wall Streetwas inhabited by
worriedand harriedmen who could not sleep, could not digest their food, and could
not avoid each other. Their lives were a seriesof judgments about each other, shadowed by the nagging suspicion that those judgmentswere wrong. They often were.
Collis P. Huntington balancedon a high wire and nearlytumbled off. Jay Cooke did
tumble. Fisk and Hatch, the Central Pacific'sbankers,accepted deposits only from
"Banks,SavingsBanks, or other well known corporations,or of individualsor firms
whosecharacterand standingare alreadyknown to us."They nonetheless suspended
businessin the panic of 1873, in part becauseHuntington betrayedthem.20
To sell bonds, corporationshad to projectinformationand characterbeyond Wall
Street.The characterof railroadpromoterswas initially hard to assessat a distance,
and the railroadswere thus unable to market their bonds without the assistanceof
intermediaries.When the CentralPacificturned to Fisk and Hatch or the Northern
Pacificto JayCooke and Company to marketrailroadbonds, they benefitedfrom the
trust that had rubbedoff on those firmsfrom their role in financingthe Civil War.In
advertisingCentralPacificbonds, Fiskand Hatch told potential investorsthat it sold
"First-ClassRailroadSecuritieswhich we can recommendwith confidence."Cooke
wrote the presidentof the Northern Pacific,"Youmust remember,that my responsibility is greater than that of all the rest put together, as the money thus to be
18
Sylla,AmericanCapitalMarket, 146-61; Carosso,InvestmentBankingin America,15-17; Henrietta M. Larson, Jay Cooke,PrivateBanker(Cambridge, Mass., 1936), 10-151; Fisk and Hatch, MemorandaConcerningGovernmentBondsfor the Informationof Investors.... (New York, 1881).
19George Stigler, The OrganizationofIndustry(Homewood, 1968), 171-90.
20
Harvey E. Fisk, "Fiskand Hatch, Bankersand Dealers in Government Securities,1862-65," JournalofBusinessand EconomicHistory,2 (Aug. 1930), 706-22; Villard to William J. Endicott, April 6, 1877, Letterbook 16,
PrivateCorrespondence,Villard Papers;AlexandraVillard de Borchgraveand John Cullen, Villard:The Life and
Timesof an American Titan (New York,2001), 338-39; "BankingDepartment,"in MemorandaConcerningGovernmentBonds,by Fisk and Hatch. Emphasisadded. C. P. Huntington to Hopkins, Sept. 23, 1873, 5: 97, box 22,
Hopkins Correspondence;Lettersof Harvey Fisk, Editedfor the Family by His Son, Harvey E. Fisk (New York,
1896), 34-37.
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in the GildedAge
Information,
Markets,andCorruption
27
expendedcomes in 90 casesout of a hundredfrom those who purchasesimply on my
word, not on the word of Jay Cooke & Co. in this case so much as my personalreputation."21
The transcontinentalswere hardlythe only speculativeventuresseekingcapitalon
European financial markets, and that made the aid of reputableEuropeanhouses
even more necessary.Speyerand Company,whose parent and associatedfirms were
the SpeyerBrothersof London and LazardSpeyer-Ellissenof Frankfurt,played the
same role in Europeas Fiskand Hatch did in the United States:they vouched for the
corporateborrower'scharacterand solvency.The Northern Pacific initially considered Europe the "greatmarket for their bonds," but it was "floodedwith bonds
offeredby everylittle Dutch house,"and so the railroadneeded "agreathouse whose
recommendation would give them preference."But the Northern Pacific never
securedthat great house. First, the Franco-PrussianWar disruptedwhat looked like
successfulEuropeannegotiations.Then, when negotiationsover reparationsdue to
the United Statesfor Britishcomplicityin the activitiesof the Confederateraiderthe
Alabamathreatenedto bring on a war with GreatBritain,a second Northern Pacific
negotiationfell apart.So powerfulwas the Rothschildname, however,that reportspremature,as it turned out-of the family'sparticipationwith Jay Cooke in the
funding of a new U.S. Treasuryissue in 1872, an enterprisethat had nothing to do
with the Northern Pacific, was enough to advance the sale of Northern Pacific
bonds.22
An investorwithout independentknowledgewho found himself in a virtualworld
of financialstatements,prospectuses,newspaperaccounts,and marketvalues that at
once stood in for and was inseparablefrom the actualworld of a developing nation
had to trust someone. The problem of trustingstrangerswas as old as long-distance
trade. A German bankerwhose client had inherited a note signed by the Central
PacificAssociates,and who then tried to ascertain"the responsibilityand financial
ability of said parties"through American intermediaries,was a part of the older
world.23The bond market,however,overwhelmedthat world of individualpromissory notes with millions of pieces of printed paper.This virtualworld was, then as
now, temptinglyeasy to corrupt.Numbers and words that were supposedto stand in
for certainthings could be changedand still maintaintheir influence;news could be
altered or withheld; reportscould claim assets that did not exist and deny trouble
that did. Altering the numbers and changing the words of the virtual world could
prompt actions in the parallel,real-lifeuniverse.
Borrowingon national and internationalbond marketsbecame the key to building and operatingthe transcontinentals,and borrowingwas, as the historianJulius
Grodinskyhas noted, Collis P. Huntington'sgreat skill. Huntington knew that bor21
"BankingHouse of Fitch & Hatch,"New-YorkDaily Tribune,Oct. 30, 1872; Larson,Jay Cooke,351.
22Harris Fahnestockto Jay Cooke, Sept. 18, 1869, B. 3, f. 3-2, Harris C. Fahnestock
Papers(BakerLibrary);
"JayCooke's Memoir,"unedited typescript,pp. 136, 148 (BakerLibrary);Pitt Cooke to Jay Cooke, Jan. 5, 1872,
Cooke Papers;Larson,Jay Cooke,359-60.
23TheNewspaperCuttingsFiles of the Councilof ForeignBondholdersin the GuildhallLibrary,London,1874-93
(microfilm, 266 reels, EP Microform Limited, 1975), reel 219; John Bonk to J. L. Worth, Feb. 3, 1876, CollisP?
HuntingtonPapers,series 1, reel 9.
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28
TheJournalof AmericanHistory
June2003
rowing was a matter of controlling information. "Capitalis alwaystimid,"he wrote
David Colton, and the "liestold and retold"in the presshurt railroadsecurities.One
way to control information was simply not to release it. Huntington appreciated
secrecy when it was practical. Harvey Fisk, his familial, religious, sanctimonious
banker,driftsghostlikethroughHuntington'sletters.Fiskwanted it that way--"Keep
your own counsels,"he advised his sons. "Tellno one of your affairs."Huntington
sneeredat the men who ran the Union Pacificbecausethey were as "looseas old colanders."Colton and Charley Crockerof the Central Pacific thought British bondholderswere entitled to no informationbeyond assurancesthat their interestwould
be paid, but Huntington was not so stupid. He had to releaseinformationboth in
orderto counter the "lyingpress"and to placatethe intermediarieshe needed to sell
bonds, who demanded it. In 1872 Philip Speyerand Company forced the Central
Pacificto issue its first stockholder'sreportwhich, as Speyer'sagent Henry Schuester
wrote, was "suchas was made by everyother R.R. in the world over fifty miles long."
Schuesterthreatenednot to "buyor recommendhis friendsto buy any of our securities."Speyerand Company had the power to demand such reportsbecausethe Central Pacificneeded its help in marketingbonds in Europe,but althoughit undertook
independent investigationsand demandedsystematicreports,it lacked the power to
ensuretheir accuracy.24
The lies and inaccuraciesof railroadaccounting cost Europeansdearly.In 1874
the Financierof London reported that for many English investors "United States
Railwayinvestmentsare only anotherterm for total loss of interestand most serious
depreciationof capital value"and that 40 percent of the American railroadbonds
held in Europewere in default,"largelydue to the disastrousinvestmentsof Germans
in Western lines." In 1876 the Bankers'Magazineand StatisticalRegisterof Boston
calculatedthat while only 14 percent of the American railroadbonds held in the
United Stateshad defaulted,65 percentof the Americanbonds held in Europehad.
The Bankers'Magazineand StatisticalRegisterblamed this on the "recklesscredulity"
of foreign investors,and RailwayAge of Chicago seconded the opinion. Their argument went like this: Europeansbought bonds that Americanswould supposedlynot
touch and, by giving prestigeto such dubious issues, introduced"elementsof weakness and of danger"into the Americanfinancialsystem. In other words, those duped
by Americancorporationswere to blame for the financialsystemthat duped them. It
24 Julius Grodinsky, Transcontinental
Railway Strategy,1869-1893: A Study of Businessmen(Philadelphia,
1962), 2-4; C. P. Huntington to Colton, Oct. 15, 1874, in OctopusSpeaks,ed. Ramirez,50-51; C. P. Huntington
to Hopkins, March 16, 1877, 9: 161, box 24, Hopkins Correspondence;Harvey Fisk to AlexanderFisk, Sept. 11,
1883, in Lettersof HarveyFisk, 248-49; C. P. Huntington to Stanford, Sept. 22, 1874, in Lettersfrom CollisP.
Huntington,by Huntington et al., III, 179. On withholding information from bondholders, see Crocker to C. P.
Huntington, Feb. 12, 1878, CollisP HuntingtonPapers,series 1, reel 14; and Colton to C. P. Huntington, Feb. 14,
1878, in OctopusSpeaks,ed. Ramirez,468-70. Goldsmith and Hart to C. P. Huntington, Oct. 22, 1878, CollisR
HuntingtonPapers,series 1, reel 15; C. P. Huntington to Stanford,Nov. 16, 1872, 3: 37, box 21, Hopkins Correspondence; David Lavender,The GreatPersuader:TheBiographyof CollisP Huntington(Niwot, 1998), 182; John
J. Madden, BritishInvestmentin the UnitedStates(New York, 1985), 95-96; C. P. Huntington to Stanford,March
3, 1870, in Lettersfrom CollisP Huntington, by Huntington et al., III, 89-90; Edward H. Miller to Speyer and
Company, March 21, 1876, CollisP HuntingtonPapers,series 1, reel 9; Speyer Brothersto Southern Pacific,July
10, 1879, ibid., series2, reel 12; Philip Speyerand Company to C. P. Huntington, Oct. 31, 1873, 5: 163, box 22,
Hopkins Correspondence.
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in theGildedAge
andCorruption
Information,
Markets,
29
was a wonderfulGildedAge moment:the financialmarket'sequivalentof Mark
Twain'scomic denunciationof a man solicitedfor a bribeby his fictionalSenator
Dilworthyin TheGildedAge.25
The "reckless
of suchinvestorshadbeencarefullycultivatedby powerful
credulity"
Americancorporations.The transcontinental
railroadslured investorsalong the
financialgangplankone smallstep at a time. Investorsproceededfromgovernment
railroadbonds,to mortgagebondsvouchedforby the
bonds,to government-secured
samepeoplewho sold the governmentbonds,to an arrayof financialinstruments,
and fromthere,potentially,into the drink.Fiskand HatchofferedCentralPacific
bondissuesin all theirprofusionandvariety.26
All kindsof informationinfluencedinvestmentdecisions,however,and the railroadscouldneverhopeto controlallof it. Theycouldnot effectivelyconcealnewsof
wars,droughts,crop failures,or majorregulatorydecisionsthat could affecttheir
firms.They usuallycouldnot maskbasicfactsaboutthe road:its lengthor bonded
debtpermile.Theycouldmoreeffectivelycontrolinformationaboutfloatingdebts,
the financialconditionof theirfirms(includingthe amountof actualcapitalpaidin
as comparedto the totaldebtof the firm),the resultsof lawsuits,and minorregulatory decisions.Someaudienceswereharderto deceivethanothers-railroadscould
lie to investorsmuchmoreeasilythanto the bankerswho financedtheirshort-term
debts.
The exampleof JayCookeandtheNorthernPacificshowshowdeception,character,andtrustwerejoined.In the early1870sCookeattemptedto forgea moralcontractwith investors.He would sell bondsonly to investorswho promisedto hold
themfor the long termandnot to use themfor speculation.He offeredrosyassessmentsof the NorthernPacific,andhe neverlost faithin the ultimatepromiseof the
road.He did not, however,thinkthata frankassessment
of the road'sprogressneceseither
the
benefited
investors
or
railroad.
When
the
millionsinvestorsoffered
sarily
weresquandered
of the road,Cookerecklessly
advanced
by the extravagant
managers
the NorthernPacificmoneyfromhis own bank.To maintainthe moralcontract,he
becameimmoral.The houseof JayCookefailed,triggering
the panicof 1873,when
the
him
Cooke'sadvanceof fundsto
NorthernPacificmade
incapableof meetingthe
callof countrybankerswho triedto withdrawtheirfundsto financethe harvest.27
He had becomecorruptlong beforethe eventualfailure.His partner,Harris
Fahnestock,had madeit brutallyclearin 1872 that Cookewas "morallyliableto
everyman& womanholdingthe bondsforthe propereconomicalapplicationof all
the moneyreceivedandforverificationof all the statementscontainedin ourpubli25LondonFinancier,
Filesof theCouncilofForeign
reel
Bondholders,
Cuttings
Aug.4, Oct. 17, 1874,Newspaper
10 (May 1876),
219; "TheMarketfor AmericanSecuritiesAbroad,"Bankers'
Magazineand Statistical
Register,
844-46; "American
RailwayCredit,"RailwayAge,July6, 1876, p. 73; MarkTwainandCharlesDudleyWarner,
A Taleof Today
TheGildedAge:
(1878;2 vols.,New York,1915),II, 276-90.
of CorporateFinancialMarkets,"
209, 215-18; C. P.Huntingtonto Crocker,
Jan.8,
26Baskin,"Development
and
1870, in Letters
by Huntingtonet al., III, 57; JeffreyWilliamson,"Watersheds
from CollisIPHuntington,
on the Long-Term
Impactof CivilWarFinancing,"
Journalof Economic
History,34
TurningPoints:Conjectures
(Sept.1974),651.
JayCooketo GeorgeW. Cass,Oct. 25, 1872, ibid.;Larson,
27JayCooketo Lorin,Jan.7, 1873, CookePapers;
FinancialMarkets,
302.
JayCooke,376-77, 397-411; DavisandGallman,Evolving
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30
TheJournal
ofAmerican
History
June2003
on "aclassof
cations."He enumeratedthe deceptionsthat Cookehad perpetrated
Cookehad
investorswhohavebeeninfluenced[by]yourpersonalrecommendation."
assuredinvestorsof "theintelligencevigorand economyof the management.We
to the lastdegree."
knowthatit hasbeeninefficient,distracted... and extravagant
He haddescribedthelandgrantsas richandvaluable,buta largeproportionof them
and the restwere
were"practically
valuelesseitherfor cultivationor for lumbering,"
"lessvaluablethanthe publichavebeenled to believe."The publications
promoting
the bondshad promisedrapidmarketingof the landsfor the securityof investors.
The railroadhad, as of June 1872, receivedexactly$338.76 in cashfor the lands.
NorthernPacificpublicationshad claimeda comprehensive
systemwas in placeto
such
claims
were
lies.
Such
claims,Fahnestock
extravagant
promoteimmigration;
from
and
Cooke
wasselling,not to
had
deterred
wrote, actually
capitalists
investing,
to personswho relyuponourrecommendamen,"but "almostexclusively
"moneyed
if not .
tion ratherthan upon theirown judgment."Fahnestocksaw "discredit
ruin"ahead.28
For Cooke,as for otherfinanciers,informationhad becomeinstrumental.
Such
When HenryVillard
businessmenoftenassumedfinancialreportsto be inaccurate.
becamereceiverof the KansasPacific,he askedthe auditorof the roadforconfirmation of the accuracyof the statementshe obtained,sincehe "wasperfectlyawarethat
the receiptsof the Companypriorto the appointmentof the Receiverswerenot
In the bond prospectuses
that they preparedfor the
accountedfor to the letter."29
CentralPacific,FiskandHatchassuredinvestorsthatthe bondsweresafeby repeating informationprovidedby the CentralPacific.Theydisguisedthe actualdebtand
its
financialconditionof the CentralPacific,justas CollisP.Huntingtonexaggerated
resources.
The utilitarian
fictionsof capitalismareapparentwhenFiskandHatch'sreportof
to
the
CentralPacificbondholders
is comparedto the lessimaginative
1874
January
lettersexchangedamongtheAssociates.In November1873,in themidstof thepanic
MarkHopkinshadtold Huntington
thatwouldleadto six longyearsof depression,
that "itis impossibleto saveout of it (revenues)enoughto [pay]the C. P.January
In December,Hopkinshadresignedhimselfto tryingto paythe interestby
interest."
not payingworkersor taxes,by "robbingPeterto pay Paul."On January1, 1874,
however,Fiskand Hatchpublishednumbersthatassuredinvestorsthatthe Central
Pacifichada largesurplusfromearnings,morethanenoughto coverits bondeddebt
(thereportdid not mentionotherdebts).The CentralPacific,the bankersreported,
in management,
and
its accustomed
maintained"undiminished,
resources,
prosperity
revenues."The annual reportfor 1873 remainedas reassuringas ever-"the financial
and businessprospectsof your Companywere neverbrighter."It was part of a genre.
When in 1877 the New-York Daily Tribune described the annual reports of the railroads as "so vague and inexplicable as to justify the assertion that language was
invented in order to conceal ideas," it was an acknowledgment of the financial house
28 Fahnestockto Jay Cooke, June 8, 1872, B. 3, f. 3-2, FahnestockPapers;Fahnestockto Cooke and Wm. G.
[Fargo?],Sept. 7, 1872, ibid.
29
Villard to S. T. Smith, Nov. 26, 1877, Letterbook21, Villard Papers.
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in the GildedAge
Information,
Markets,andCorruption
31
of mirrors.Even the heavilypro-industryRailwayAge ran a column in 1876 describing accounting in most railroadsas "fraud"and later urgedlegislationto force financial officersto swearto the truth of their numbersunderpenaltyof law.30
Creatingplausiblefictions is an art. Lies have to be consistent. Huntington and
Hopkins could tailor information;another Associate, Leland Stanford,apparently
could not. Either from unusualhonesty or from normal carelessness,Stanfordlisted
in the 1872 annual report all the company'sdebts, including the principaland the
interestowed the federalgovernment.In a sentence in which the readercan almost
hear Huntington'slong-sufferingsigh, he wrote that "I shall strike the interest out
unless I get the reasonswhy they were put in as this reportis to help the sale of stock
and this item of say $80,000,000 is not in that direction."31
Informationwas cumulative.It did not have to be true, but it could not call attention to its own contradictionsand deficiencies.Hopkins telegraphedHuntington in
late 1872 that the New YorkStock Board made "the cost of the road about fifteen
millions more than our books show it, or can be made to show it .. .We can'tafford
to deliberatelybelie our own records."With the threatof a congressionalinvestigation into the building of the CentralPacificlooming while the CreditMobilierscandal overwhelmedthe Union Pacific, Hopkins was advocatingcircumspection,not
honesty. If there was anything in the accounts that "it would be impolitic for us to
show, then our report must make the financialstatementsin such form as will not
contradictour books, nor expose their improprieties."32
It was difficult enough for corporationsto control informationwhen they were
producing it-it was much harderto control when others were the producers.Federal commissions and congressional investigations, for example, were sources of
informationthat could play havocwith the bond market.When the NorthernPacific
needed "a prompt and generous report"in order to marketbonds, the government
commissionersin chargeof inspectingthe roadwerequick to institute,in JayCooke's
words, "abidding ... for something outside of their governmentpay."Cooke turned
to the commissioners'political sponsors, Vice President Schuyler Colfax and the
formersenatorBenjaminWade, to bring them into line. Colfax, however,was under
intense pressurefrom his involvement in the Credit Mobilier scandal and failed to
secure what Cooke termed "an honest, cordial report."Cooke resigned himself to
inducing the commissioners"in some properway to give what is due us & what will
be somewhat of service to us." The commissioners,as Cooke well knew, had indicated that the properway was bribery.33
30Hopkins to C. P. Huntington, Nov. 11, 1873, Collis1PHuntingtonPapers,series 1, reel 5; Hopkins to C. P.
Huntington, Dec. 4, 1873, ibid., reel 6; Fisk and Hatch to the holders of Central Pacific Railroadbonds, Jan. 1,
1874, 6: 45, box 22, Hopkins Correspondence;L. Von Hoffman and Company to C. P. Huntington, Nov. 24,
1873, ibid.;Annual Reportof the Boardof Directorsof the CentralPacificRailroadCo. to the Stockholders
for the Year
Ending Dec. 31, 1873 (San Francisco, 1874), 7; "RailroadSecurities,"New-YorkDaily Tribune,March 19, 1877,
copy in 9: 165, box 24, Hopkins Correspondence;Journal, "Importanceof Accounting Department of Railroads,"RailwayAge, Aug. 24, 1876, p. 204; "AnEnglish Opinion," ibid., April 18, 1878, p. 206.
31C. P. Huntington to Hopkins, Dec. 19, 1872, 3: 177, box 21, Hopkins Correspondence;Goldsmith and
Hart to C. P. Huntington, Oct. 22, 1878, CollisP HuntingtonPapers,series 1, reel 15.
32Hopkins to C. P. Huntington, Nov. 30, Dec. 12, 1872, CollisP HuntingtonPapers,series 1, reel 5.
33Jay Cooke to BrotherHarry,Dec., Dec. 4, 1872, Cooke Papers.
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32
TheJournalof AmericanHistory
June2003
There were other sourcesof information,seemingly independent of the corporations and their agents.Investorsseekingoutside informationcould go to Poor'sManual of Railroads,which, according to Henry V. Poor, was by 1873 regardedas "a
standardauthorityin Europe."Poor'sinformationwas, however,no more independent than that of Fisk and Hatch. He too got it from the railroads,and he depended
on the patronageof those railroadsto sell his manual (he asked Huntington to buy
fifty copies). Although he claimedto "presentan accuratestatementof the condition
of each railroadin the United States ... to supply the best and reallyonly means of
forming a correctopinion as to the value of their securities,"he could only rearrange
the information that the railroadsor their bankersprovided. Poor'sManual served
best as a guide to which roadswere alreadyin defaultor bankrupt.34
There were state requirementsfor the public listing of information about chartered corporationsas well as requirementsimposed by the New YorkStock Board,
but they were easily evaded. Collis P. Huntington approved the Central Pacific's
reportsto the Californiasecretaryof state as "wellenough, or bad enough, to file."In
preparinga submission to the Stock Board, Huntington had made sure that Mark
Hopkins doctored the lists to conceal the fact that the Associatesor companiesthey
controlledowned virtuallyall of the CentralPacificstock.35
More difficult to control were newspapers.In November 1872 an exasperatedJay
Cooke practicallywhined to his partnerHarrisFahnestockthat "somefellow in the
Associate press has permitted a dispatch to go all over the country which is interpretedby some to mean that the N.P. has failed to pay something.We have emphatically denied this by telegraph and are preparing a circular for our agents. Mr.
Simonton ought to see how cruel this is to us, & if he can find out who did it, make
an example of him." Cooke redoubled his efforts to control the news. The next
month he wrote to his brotherHarry,"Youwill have to keep an eye on the editorial
fraternityand see that nothing antagonisticto the Northern Pacificgoes out."36
Simonton was JamesSimonton, managerof the AssociatedPress,and he haunted
Huntington as much as he did Cooke, because he had power beyond any single
newspapereditor or publisher.The Associatesof the Central Pacific believed that
Simonton, who was also part owner of the San FranciscoBulletin,hated them. Most
of Californiahated them; what distinguishedSimonton was that his hatred could
cost them money. He could have articlesunfavorableto the CentralPacificpublished
in the Bulletin;he could then have them selectedfor the APdigest that went out over
WesternUnion at specialratesto all the newspapersthat were membersof the Associated Press. Such articles hurt Huntington's ability to borrow. "We have large
amounts to pay and it is very difficult to get money here and then such articlesas was
4 HenryV. Poorto C. P.Huntington,Aug. 5, 1873, CollisP. Huntington
Papers,series1, reel6; HenryV.
Poor,ManualofRailroads
oftheUnitedStates,
for 1872-73 (NewYork,1872),xxxi.
-1C. P.Huntingtonto Stanford,March3, 1870,in Letters
fromCollisP Huntington,
by Huntingtonet al., III,
New-York
March19, 1877,copyin 9: 165, box24, HopkinsCorrespon89; "Railroad
Securities,"
DailyTribune,
dence;C. P.Huntingtonto Crocker,Sept. 16, 1875, Letters
by Huntingtonet al., III,
from CollisP Huntington,
374; C. P.Huntingtonto Hopkins,Aug.30, 1873,5: 9-11, box22, HopkinsCorrespondence.
36 The
Nov.2, 1872,
dispatchconcernedan injunctionagainsttheNorthernPacific.JayCooketo Fahnestock,
CookePapers;
JayCooketo Bro.Harry,Dec. 1872,ibid.;New YorkTimes,Nov.2, 1872,p. 3.
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in the GildedAge
Information,
Markets,andCorruption
33
publishedin the S.E bulletin of Jan. 19. ... arerepublishedin the New YorkSun and
then that paper sent every where by Simonton hurts our borrowing money here
(N.Y.) no doubt more than there (San Francisco)."By 1871 Huntington was convinced that the Western Union operatorshad orders not to send any information
favorableto the CentralPacific.37
With the abilityof local news to become nationalovernight,everysmall-townand
county newspaperalong a railroad'slines, as well as the regionaldailiesand the New
Yorkand Washingtonpapers,became a potential source of harm. It drove Huntington to exasperation.In August 1869 an article from Silver Bend, Nevada, and
another from Gold Hill, California,that Huntington "wouldmuch rathernot see"
appearedin the East, hurting the sale of CentralPacificsecurities."I do not suppose
you can keep all the Damned bohemians'Quiet,"he wrote Hopkins, using the common colloquialismfor reporters,"butI wish you would come as nearit as you can."38
The key to this new system was the Associated Press,and its rise had immense
consequences for both capitalists and corporations. The AP transformedthe old
American newspaperpractice of reprintingin one paper articles from another. A
small antebellum newspaper might seem nothing but a compendium of articles
clipped from other newspapers.The process took time and was the result of innumerablechoices by separateeditors,so therewas no telling how far or where a particular piece of news would spread. It relayedinformation more slowly than private
correspondence.
The creationof a telegraphnetwork allowed the rapid transmissionof news over
long distances,but the capacityof the networkwas initiallylimited and createdissues
of accessand priority.The New YorkAParoseto streamlinethe gatheringof news and
to eliminate the problem of numerous reportersfighting for access to the telegraph
lines. Although the AP had its own reporters,its major role was to collect and cull
news published elsewhere.AP agents read West Coast newspapersand selected the
items that would go into the digest sent to subscribingnewspapers.The powerof the
APagents and of the Western Union operatorswho transmittedthe news over the
lines at night was limited but real.Majornews items alwayswent through,but there
was significantdiscretionabout minor news items that might affectsecurities,such as
lawsuits against or political attacks on the railroads.The speed with which news
could spreadmade capitalistsextraordinarilyattentivereaders.39
A newspaperwas able to make or ruin, deflate or inflate the value of securities.
The measureof a newspaper'sinfluence was in the pocketbooks of capitalists.The
men who ran the transcontinentalscared nearlyas much about newspapersas they
37Hopkins to C. P. Huntington, Nov. 28, 1872, CollisP HuntingtonPapers,series 1, reel 5; Menahem Blondand the Flow of Public Informationin America,1844-1897 (Cambridge,
heim, News overthe Wires:The Telegraph
Mass., 1994), 149, 165, 175; C. P Huntington to Hopkins, March 31, 1876, 8: 135, box 23, Hopkins Correspondence; C. P. Huntington to Stanford,Jan. 30, 1874, 6: 121, box 22, ibid.; C. P Huntington to Stanford,Dec.
5, 1870, Jan. 11, 1871 (dated 1870), Lettersfom CollisP Huntington,by Huntington et al., III, 219, 235.
38C. P Huntington to Hopkins, Aug. 29, 1869, 1: 93, box 20, Hopkins Correspondence.
39Blondheim, News overthe Wires,27-28, 47-67, 132, 169-73, 184; Menahem Blondheim, "'Public Sentiment Is Everything':The Union's Public Communications Strategyand the Bogus Proclamationof 1864,"Journal
ofAmericanHistory,89 (Dec. 2002), 876-77, 880, 887-88; C. P. Huntington to Hopkins, Sept. 15, 1873, 5: 59,
box 22, Hopkins Correspondence.
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34
TheJournal
ofAmerican
History
June2003
did abouttheirsecuritiesbecausenewspapers
and financialpaperswereconnected.
WilliamMahl,who in the 1880sbecameCollisP.Huntington's
man,said
right-hand
thatHuntingtonclaimedhe avoidedthetypewriter
andhadall of hiscorrespondence
writtenout in longhandbecauseprintedpagesremindedhim of newspapers,
and
to
make
an
"failed
What
always
newspapers
impression."
Huntingtonsaid,however,
wasneveran infallibleguideto whathe did. He readnewspapers
verycarefully.40
Because,to takea cynicalview,one set of liescouldaffectthe valueof anotherset
of lies, newspapers
matteredregardless
of the accuracyof theirinformation,just as
mattered
of
corporatereports
regardless the accuracyof theirinformation.Sophisticatedreadersreadwith an eye, not towardtruth,but towardconsequences.
When
read
the
he
asked
three
the
about
information
papers,
questions
they
Huntington
contained:Who providedit? Whoseendswould it serve?How would it affecthis
companies'securities?
In March1877 Huntingtoncarefullyclippedan articlefromthe New-York
Daily
in railroadsecuritiesandthe instaa scathingindictmentof thedepreciation
Tribune,
of the railroads.It attackedboth railroadmanagerswho
bilityand mismanagement
had renderedhalf the capitalinvested"profitless,
dead"and
barren,and practically
to
recentcourtdecisionsthatopenedthe railroads
"wild
meaand
semi-barbarous
up
to regulatethem. The articlequotedrespected
sures"adoptedby statelegislatures
sources-Poor'sManualofRailroads
andRailwayAge.41
comments
on
the
article
werebriefandto the point.Who wroteit?
Huntington's
If notJayGould,thenwritersin Gould'spay."GouldcontrolstheTribune,"
he wrote
Whose
interests
it
serve?
of
some
did
"and
other
Gould's,
course,
Hopkins.
parties
here [who]seem to be endeavoringto breakall the R.R. roadsin the country,of
coursesellingstockshortbeforecommencingtheirattack."How did it affecthim
Theirsecuritieswouldsufferalongwith the restbecause
and the otherAssociates?
Gould wanted to disguisehis actualtargets.42
A seeminglystraightforward
attackon railroadmismanagement
and financial
was
a
of
financial
itself,
deception actually
Huntingtonthought, piece
deceptionby a
manthenin controlof the UnionPacificwhowasseekingprofitby a stockmanipulation.Wasit? Gould certainlyhad financialwritersin his pay,and sometimeshe
wrotetheirarticlesfor them.He hadinterestsin New Yorknewspapers
andplanted
storiesin them.He hadbeenknownto sellshort-that is, to speculateby sellingfor
laterdeliverysecuritieshe did not own, intendingto buythemmeanwhileat a lower
priceandpocketthe difference-andthento drivedownvaluesto ensurehis profit.
In the latewinterand springof 1877, however,he took advantageof the breakin
railwaysecuritiesto buy railroadstocks ratherthan sell them. Rock-bottompricesfor
KansasPacific securitiesallowed him to move toward gaining control of that road,
40 C. P. Huntington to Hopkins, Aug. 25, 1873, 4: 162, box 21, Hopkins Correspondence;E. L. Godkin to
Villard,June 7, 1893, in The GildedAge LettersofE. L. Godkin,ed. William A. Armstrong (Albany, 1974), 44648; Mahl Memoirs, Huntington J-3, p. 8, box aE461, Collis P. Huntington, 1882-1900, William Mahl Papers
(ManuscriptCollections, Center for American History, Universityof Texas,Austin).
41 "RailroadSecurities,"New-YorkDaily Tribune,March 19, 1877, copy in 9: 165, box 24, Hopkins Correspondence.
42 C. P.
Huntington to Hopkins, March 19, 1877, ibid.
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intheGildedAge
andCorruption
Information,
Markets,
35
andhe boughtstockin midwesternroadsas partof a convolutedstrugglewithWilliamVanderbiltthatinvolvedboth the WesternUnion andthe Atlanticand Pacific
telegraphsystems.Huntingtonwas probablyrightto see Gould'shandin the story,
but thesecretof Gould'ssuccesswasthatdiscerninghis movementswasno guarantee
of discerninghis target.43
Huntingtonreadlikea capitalist,andcapitalistsoftenreadwith moresophistication thando historians.He did not assumethatthe contentof a storypointedto its
end anymorethanhe assumedthatthe purposeof a lawsuitwasto win a victoryin
court.Bothcouldbe aimedat influencingvalueson financialmarkets.The combination of local lawsuitswith a nationalnews networkcould be lethal.The railroads
often won only Pyrrhicvictoriesin court;accusationsmadein lawsuitscould play
havocwith a railroad's
securitiesand constrainits abilityto borrow.In 1870 Leland
Stanfordmadeone of his manyexpensivemistakeswhenSamBrannantriedto sell
backhis twohundredsharesof CentralPacificstockat par:$100 a share.He brushed
Brannanoff. Brannansued, demandinga full financialaccountingof the Central
Pacific.Fearof whatthe BrannansuitmightrevealterrifiedtheAssociates,
who hurriedto suppressthe suitwhilebuyingup as muchoriginalstockas theycouldto preventothersuits.Mrs.Brannansavedthe CentralPacific.Shegot herhusband's
stock
in a divorcesettlement,andtheAssociatesboughtit fromherat $850 a share,effectively quashingthe suit.44
But the news of the "blackmail"
suit, as the Associatescalledit, did substantial
articles
on
the
suit
appearedin theNew YorkTimes.Newsof the
damage.Unfriendly
suit threatenedto torpedoa $2 millionCaliforniaand OregonRailroadbond sale
being negotiatedin Europe.The suit and its claimshad a long life. The charges
andrepeatedly
surfacedin Europe.45
appearedin congressional
investigations
In his moreinnocentdays,Huntingtonhadthoughtthe solutionto persistently
badpresswasto own the papers."Itis a wonderto me,"he wroteCharlesCrockerin
'Union'and the Stockton
1870, "thatyou do not controlthe Sac. [Sacramento]
in
And
the
the
Associates
did
1870s
acquirepapers,but by the late 1870sit
papers."
was clearthat openlyowninga newspaperlessenedits value.It was expensive.It
assuredattacksfromrivalnewspapers
eagerto assertrailroadinfluenceoverthe news.
with importunateeditorswho thoughtthat insideinforIt involvedentanglements
mationon stocksandbondsalwayspaidandbegged,as E. L. Godkindid of Henry
And
Villard,to be relievedof debtwhenit did not. It involveda thousandirritations.
not
the
a
did
desired
After
Crocker
and
alwaysguarantee
owning paper
coverage.
43 Maury Klein, The Life and Legendof ay Gould (Baltimore, 1986), 135-36; C. P Huntington to Hopkins,
March 4, 1875, 7: 101, box 23, Hopkins Correspondence;Julius Grodinsky,Jay Gould:His BusinessCareer,186792 (Philadelphia, 1957), 138-39, 154-55.
44Will Bagley, ed., Scoundrel'sTale:The Samuel Brannan Papers(Spokane, 1999), 264-81; Lavender,Great
Persuader,260-61, 280, 301; David Stewart, vs. CollisP Huntington,Depositionsof Leland Stanfordand Charles
Crocker,Takenon the Part ofthe Defendants(New York, 1881), 90-125, bound in "CentralPacific RailroadPamphlets, 1882-1887" (Stanford University Library);David Stewart, vs. Collis P Huntington, Depositionsof David
Stewart,E. H Miller,Jr, MosesG. Cobb,and G. FrankSmith, Takenon the Part of the Plaintiffi (New York, 1882),
56-59, ibid.
45 C. P. Huntington to Stanford,July 7, 1870, in Lettersfrom CollisP Huntington, by Huntington et al., III,
180-81; C. P. Huntington to Hopkins, Aug. 22, 1873, 4: 157, box 21, Hopkins Correspondence.
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36
TheJournalof AmericanHistory
June2003
Record-Union
still occasionally
Mark Hopkins obtainedcontrol, the Sacramento
attackedthe CentralPacific'sfriendsin Congress."IfI ownedthe paper,"Huntington grumbledto DavidColton,"Iwouldcontrolit or burnit."46
In tryingto controlinformation,railroadmen corruptedthe news.Theyplanted
storiesandboughtjournalists
everythroughoutthe 1870sand 1880s.The railroads'
but theyalsorecruitednewspapermen
dayweaponswerefreepassesandadvertising,
as agentsandlobbyistsandloanedthemmoney.Bothwereprophylactics
againstbad
but
their
value
news.Huntingtonoftenwroteor commissioned
articles,
dependedon
disguisingthe source;the valueof a lie dependedon the rectitudeanddisinterestedwasa railroadorganwasto damageits
nessof theliar.Evento claimthata newspaper
credibility.47
The AssociatedPressand the WesternUnion, by creatinga nationalmarketfor
informationandby centeringthatmarketin New York,magnifiedthe dangersnewsof informationalso
but theirverycentralization
paperspresentedto corporations,
Union combinationcould
presentedopportunities.The AssociatedPress/Western
informationrailroad.If anAPagent
serveas a bottleneckon the nineteenthcentury's
did not selectan item for the digest,then it eitherwould not traveloverWestern
as to minimizebothits damageand
Unionorwouldtravelso slowlyandsporadically
suitagainstA. A. Cohenturnedinto an embarrassits benefit.WhentheAssociates'
ment,Huntingtonactedto confinethe publicity."Ihaveno doubt,"he wroteHopkins, that if "theA.P. agent was seen much of this stuff could be kept back."
Huntington'slobbyist,RichardFranchot,succeededin gettingthe AP reporterin
Washingtonon the CentralPacificpayroll.JamesSimontonsuspectedas muchfrom
there
the changingtenorof his stories.And if a localAP agentprovedincorruptible,
wasalwaysthe WesternUnionoperatorwho forwardedthe nightlydigest.WhenJ.
R. Robinsonfileda stockholder's
suit in 1876, the reportsin the easternpresshurt
in
theAssociates'
standing Congress.Huntingtonkneweverythingcouldnot be conof $50 permonthto the right
tained,but he thoughtthat"ajudiciousexpenditure
the Associatesunsucof
it
back."
At
their
most
much
would
ambitious,
party
keep
AP
in
to
exclusive
for
the
SanFrancisco
Chronmembership
cessfullysought 1875 get
icle,a papertheycontrolled,by offeringdoublethe goingratesand thuscuttingoff
the city'sother papers,the hated Bulletinand Call.48
46
C. P. Huntington to Crocker,Jan. 8, 1870, in Lettersfom CollisP Huntington,by Huntington et al., III, 56;
C. P. Huntington to Hopkins, March 16, 1872, 2: 51, box 20, Hopkins Correspondence;Godkin to Villard,Aug.
9, 1883, in GildedAgeLettersofE. L. Godkin,ed. Armstrong,301; C. P. Huntington to Colton, April 27, 1876, in
OctopusSpeaks,ed. Ramirez,240.
47William Mills to C. P Huntington, Dec. 21, 1879, CollisP HuntingtonPapers,series 1, reel 18; J. Johnson
to C. P. Huntington, May 28, 1878, ibid., reel 16; J. A. Slye to C. P. Huntington, April 10, 1878, ibid., reel 14;
John P. Young to Richard T. Colburn, Aug. 9, 1876, ibid., reel 10; H. Schiller to C. P. Huntington, Sept. 25,
1877, ibid., reel 13; E. P. Howell to C. P. Huntington, April 24, 1878, ibid., reel 14; Mary Fields to C. P
Huntington, April 4, 1878, ibid.; Crockerto C. P. Huntington, Jan. 11, 1878, ibid., reel 13; C. P. Huntington to
Hopkins, March 15, 1876, May 8, 1870, in Lettersfom CollisP Huntington,by Huntington et al., III, 473, 14950; Mark WahlgrenSummers, The PressGang:Newspapersand Politics,1865-78 (Chapel Hill, 1994), 110, 113;
RichardFranchotto C. P Huntington, Jan. 11, 1872, 2: 19, box 20, Hopkins Correspondence;C. P. Huntington
to Hopkins, March 19, 1872, 2: 59, ibid.; C. P. Huntington to Hopkins, Nov. 19, 1875, 8: 85, box 23, ibid.; C. P
Huntington to Colton, March 18, 1875, in OctopusSpeaks,ed. Ramirez,88.
48 C. P. Huntington to Hopkins, May 12, 1876, 9: 19, box 24, Hopkins Correspondence;C. P. Huntington to
Colton, Dec. 8, 1876, in OctopusSpeaks,ed. Ramirez, 325; James Simonton to George Kenyon Fitch, Jan. 21,
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in the GildedAge
Markets,andCorruption
Information,
37
The rise and fall of securitiesmeasuredthe impact of information,but that rise
and fall was itself information that could be manipulated. If falling bond prices
hinted that an investmentwas risky,promotersintervenedsecretlyin the marketto
buttressbond prices so that their bonds seemed to shout security."The news from
Cal as published in this morning papersis not very satisfactory,"Huntington wrote
Hopkins in September1873, "andit will all be telegraphedby Simonton to Europe
in hopes of hurting our securitiesin that market."Huntington counteredby buying
CentralPacificsecurities:"todaysomethingover 100,000 of cp bonds and the market
closed 100 1/8 bid and none offered.This will go by Reutersnews agency over the
cable tonight and an advanceof 7/8 since yesterdayon the C. P. in this marketwill
more than counter balanceany political news from Cal that they can send."49Investors seeking to gauge the truth of bad financial news by watching how the market
respondedcould not alwaystrust the numbers.
The paradoxof Gilded Age financial corruptionwas that its goal was to accrue
debt; how, then, did the corruptturn debt into riches?The firstway is well known.
Its most famous manifestationwas the insidercontractsthat funneled money, in the
case of the Union Pacific,from stockholdersand lendersinto the pocketsof the inner
clique who controlledthe Cr6ditMobilier,which systematicallyoverchargedto build
the roadwhile selling sharesin the companyat below-marketpricesto leadingpoliticians to securetheir friendship.In the case of the CentralPacific,which had few outside stockholders,the same techniques funneled money from bond sales into the
Contractand FinanceCompany.That such techniqueswere common does not make
them any less corrupt.The whole scandalof the Cr6ditMobilierwas based, afterall,
on the widespreadconviction that insidershad corruptedboth the corporationand
Congress. Insidersat the Contract and Finance Company admitted both implicitly
and explicitly that its transactionswere corrupt. When congressionalinvestigators
threatenedto examine the books of the Contract and Finance Company that built
the Central Pacific, Mark Hopkins apparentlyfelt he had no choice but to destroy
them. The Contract and Finance Company was, as Huntington later told his
nephew, "asrotten a corporationas everlived."50
A second, even more obvious, way was simply to pocket the money and evade the
legal penalties. Bond salesmen for the Memphis, El Paso and Pacific Railroad,a
transcontinentalwhose president was John C. Fremont, lied to French investors,
bilking them of a reported $5 million. Convicted of fraud in absentia, Fremont
avoided France.5'
1873, C-B 761, box 1, George Kenyon Fitch Papersand Correspondence,H. H. Bancroft Collection (Bancroft
Library,Universityof California,Berkeley);Franchotto C. P. Huntington, Jan. 11, 1872, 2: 19, box 20, Hopkins
Correspondence;C. P. Huntington to Hopkins, March 16, 1876, 8: 115, box 23, ibid.; Fitch to Simonton, Dec.
8, 1875, C-B 761 box 1, Fitch Papers.
49 C. P. Huntington to Hopkins, Sept. 5, 1873, 5: 19, box 22, Hopkins Correspondence.
50Klein, Union Pacific,79-81, 194-99, 285-305; Lavender,GreatPersuader,292; C. P. Huntington to H. E.
Huntington, Jan. 5, 1898, HEH4168, box 62, Henry E. Huntington Papers(Huntington Library);Colton Case.
Testimony,lst-83d Day, Nov. 13, 1883-Aug. 1, 1884 (19 vols., Santa Rosa, 1883-1884), XI, 5048-59.
51Tom Chaffin, Pathfinder:John CharlesFrdmontand the CourseofAmericanEmpire(New York,2002), 28184.
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38
TheJournal
ofAmerican
History
June2003
A third,farmoreimpressive,
way to turndebt into profitinvolvedcorruptinga
over
a
without
corporation
actuallydestroyingit. HeretheAssociatesof
longperiod
the CentralPacificweremasters.The Coltontrialrevealedhow thiskindof endemic
corruptionworkedandhowhardit wasto contain.
Whenthe Coltontrialopenedin SantaRosa,California,on November14, 1883,
it sharedthe headlinesin the SanFrancisconewspapers
thatdaywith the captureof
BlackBart,"thenotoriousstagerobber,"
who had robbedhis laststagea few miles
from Copperopolis,California,on November3. The sharedheadlineswerea nice
coincidencebecauseEllenColton,thewidowof DavidColton,one of theAssociates,
contendedthat LelandStanford,Collis P. Huntington,CharlesCrocker,and the
MarkHopkinshad betrayedherand left her "in the
estateof the by-then-deceased
As it turnedout,
conditionof a manattackedby a highwayman
uponthe roadside."
DavidColtonhadembezzledfromhis fellowAssociates,andtheyhadrespondedby
takingfromhis widowsecurities-stocksand bonds-leaving her,like the doggerel
worthlessnotefora milliondollars.52
verseBlackBartleftbehind,herdeadhusband's
The accountsof the trialfocusedon corruption:Colton'sdefalcation(to use the
word),the remainingAssociates'response,and the widespread
nineteenth-century
officials
thatsurfacedin the Colton/Huntington
to
correspondence
payments public
thatEllenColton'slawyerssubmittedasevidence.Butburieddeeperin thetrialwasa
wasthe sucmorerevealingcorruption.The WesternDevelopmentCompany(WDC)
cessorto the Contractand FinanceCompany.It was a constructionand banking
and
companythat performedfeats of financialmagic.It concealed,transformed,
could
assetsso thatdebtsincurredby theAssociates'
end
transferred
properties
up as
in
of
The
the
the
the
Associates.
were
screens
to
obscure
companies
money
pockets
activitiesof the men who ran the CentralPacificand the SouthernPacificfrom
andbankers.The Associateskeptall the stockforthemselves,although
bondholders
often
they
put it in otherpeople'snames.53
yieldedfortunesbecausethe valueof stocksand
Heavilyindebtedcorporations
bondswas not necessarilydeterminedby what peoplewould pay for them on an
open market.The Associates,seeminglysuch ordinary,bulkyVictorianmen, were
chimerasableto changeformat will, andby changingform,theycreatedvalue.As
EllenColton'slawyersargued,the CentralPacific,the SouthernPacific,theWDC,
and
others"werebut convertibletermswith thesefouror five moversin them,and they
werefusedconstantlyone into the other,andtherewasno distinction.The corporaThe Associtionswas the individuals,and the individualswerethe corporations."54
ates proffereda deal, went to the other side of the table, put on anotherset of hats,
and accepted the deal. In the books and ledgers of these companies, trades that
appearedto involve a wide varietyof entitieswere not what they seemed.
Ellen Colton'slawyerssought to demonstratehow businesswas conducted in an
internalhouse of mirrorsthat was but a miniatureversionof the largerhouse of mir52
San FranciscoDaily Examiner,Nov. 14, 1883, p. 1; ColtonCase. Testimony,
VI, 2568-69, 2818, 2822, 2872.
53Colton to C. P. Huntington, Aug. 8, 1877, in OctopusSpeaks,ed. Ramirez,401; C. P. Huntington to Colton, Aug. 16, 1877, ibid., 403; Lavender,GreatPersuader,300, 308, 328.
III, 1002.
54ColtonCase. Testimony,
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intheGildedAge
andCorruption
Markets,
Information,
39
rorsin the financialmarkets.In 1871 the CentralPacificbeganto makedepositsinto
varioussinkingfunds,as requiredby law,to pay off its bondeddebt. To keepthe
depositsfrom sittingidle until the bonds came due, the CentralPacificin 1872
beganlendingthe WDCmoneyfromthe sinkingfund at 10 percentper year.The
loanswent into the individualaccountsof the Associates.As collateralfor the loans,
accounts17,577sharesof Central
fromtheirWDC
theAssociatesin 1875 transferred
Pacificstock.Subsequentloansin 1876, 1877, and 1878 followedthe sametrajectory. By the end of its own corporatecareerin 1879, the WDChad borrowed
$3,086,259.72fromthe sinkingfunds.Most of the debtwas settledby lettingthe
CentralPacifickeepthe collateral(the unsaleablestock).55"Nowas to the sinking
fund,"HuntingtonwroteColton,"weverylikelyhavedonewhatwasbestfor us up
to this time ... ; but whatwe havedone is not a thingto talkabout,and I do not
think thereis a carefulbusinessman in the worldoutsideof our five selveswho
wouldsayit waswellinvested,whilewe knowit is."56
wasthattheAssociatesgot cashforsecuritiesthat
The beautyof thesetransactions
could not be sold on the open market,and afterreceivingthe cash,they still controlledthe securitiesbecausetheyownedthe CentralPacific.JayGouldtestifiedthat
therewasno marketforeitherCentralPacificstocksor SouthernPacificbondsin the
late 1870s, but that a limitedmarketmight havebeen establishedby a syndicate
formedto buythe bondsandthuscreatea valueforthem.The publicofferof a large
a panicin thosesecurities."57
numberof them,however,wouldhave"created
"Itmaybe a transaction
Who washarmedby sucha maneuver?
open to censure
Hall
the
Associates'
"Itmightbe
admitted.
McAllister,
attorney,
by properparties,"
verypertinentwith referenceto partieswho areinterestedin the SinkingFundin
callingthesedefendantsto account."Butwhilebondholdersmighthavehad reason
rolein
to complain,EllenColtondid not. DavidColtonhadplayedan instrumental
wasnot the issuein the Colthe transactions.
Betrayalof the bondholders
arranging
ton case.58
Such corruptiondrainedfunds from the CentralPacific,but it also showsthe
complicationsand contradictionsthat arosewithin corporationsas they tried to
ordertheirinternalaffairswhileobfuscating
andconandbureaucratically
rationalize
financial
and
their
dealings.Managers,accountants, bookkeepersquickly
cealing
werenot necessarily
interested
realizedthatthe men who headedsuchcorporations
in the welfareof otherstockholdersor bondholders.W. MilnerRoberts,the chief
conengineerof the NorthernPacific,complainedof the suspiciousandextravagant
tractsnegotiatedto build the road. "If contractsare to be made from 'policy,'that is
one thing,"he wroteJayCooke, "butI can do it betterundersuch a systemas would
be best for the pecuniaryinterestsof the stockholdersand bondholders."In similar
situations, corporateemployees saw their own opportunities. Before closing down
55Ibid., III, 1011, I, 98-99, 228-33, III, 1015-16, 1022-31, VI, 2632-33.
56 Ibid., III, 1011, 1015-16, 1022-31, I, 98-99, 228-33, VI, 2632-33; C. P. Huntington to Colton, Nov. 16,
1877, in OctopusSpeaks,ed. Ramirez,432.
57ColtonCase.Depositions(2 vols., [SantaRosa], 1883-1884) I, 3-12.
58Co/tonCase. Testimony,III, 998-99; "Findings,"in ColtonCase.Depositions,II, 16.
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40
TheJournalof AmericanHistory
June2003
the Contract and Finance Company in the early 1870s, Huntington sent J. O'B.
Gunn to examine the books. The Associatesknew what they did not want Congress
to find in those books, but what Gunn found surprisedthem. It took him only a few
hours to find "where[John]Miller had stolen $300,000." It took longer to find that
between $750,000 and $900,000 (the Associatesmade variousestimates)was missing. John Miller, as it turned out, was not reallyJohn Miller-he was Ambrose
Woodruff. The Associates got back roughly $400,000, but the rest was gone for
good. The books needed to convict Miller/Woodruffwere the same books that had
the potential to convict the Associates if Congress inspected them. Since Miller/
Woodruffknew too much, the Associatesneverprosecutedhim.59
The corruption endemic to the transcontinentalsplayed its part in the panic of
1873, which within a year was being describedas a "railwaypanic" caused by the
"overconstructionof railways."The failureto recoverfrom the panic was blamed on
the paralysisof the enormous amount of capital invested in railroads.The railways,
in the South as in the West, were plannedand constructedwith borrowedfunds. The
intereston those funds was often paid by more borrowing.Bankershad realizedeven
before the panic that the ability to draw in new funds to keep this cycle going was
coming to an end. The specie shortagethat afflicted the economy in 1873 was the
resultpartlyof monetarypolicies and partlyof a largenegativetradebalancethat the
United Stateshad with GreatBritain.With the movement of much of Europeto the
gold standard,which contributedto the rising demand for and price of gold, specie
flowed out of the United States.The problemwas exacerbatedby a souringof European investorson railroad,particularlywestern railroad,investments.In December
1872 JamesLees, of the bankinghouse of Lees and Waller,issued a warning:
The enormousamountof Europeancapitalsent to this countryof late years(a
andill spentin wild catentergreatdealof whichhasbeenwastedin extravagance
nowhere
Railroads
andendingnowhere)
such
as
prises
throughdeserts-beginning
which
has
heretofore
been
reinvested
here
but
nowwillprobablybe
interest
bearing
remittedtogetherwithheavytradebalancesagainstthiscountrywill all tell on our
goldsupply.To meetthisdemandwe probablyhavelessthanat anytimewithinthe
last25 years,so thatthewholethinglooksveryseriousto me indeed.60
The CrdditMobilier scandalcompounded the difficulties.As Cooke complained,
it hurt the ability of the Northern Pacificto marketits bonds and "dampen[ed]"its
chances for the kind of government bond guaranteesthat might allow it access to
capital.Financialcorruptionwas thus an integralpart of the problemsrailroadsconfronted in 1873 and the years that followed, just as railroads were integral to the
panic. It was, after all, the collapse of the house of Jay Cooke that triggered the panic.
59W. Milner Roberts to Jay Cooke, Jan. 1, 1872, Cooke Papers;C. P Huntington to H. E. Huntington, Jan.
5, 1898, HEH4168, box 62, Henry E. Huntington Papers;Colton Case. Testimony,XI, 5048-59; "The Colton
Trial,"San FranciscoCall, May 14, 1884.
60 London Standard,Oct. 24, 1874,
NewspaperCuttingsFiles of the Councilof ForeignBondholders,reel 219;
"The Future of RailwayProperty,"National Car Builder,quoted in RailwayAge, Oct. 19, 1876, p. 343; "Capital
and RailroadExtension,"Bankers'Magazineand StatisticalRegister,10 (Oct. 1876), 279; Lees and Wallerto Mills,
Ralston, and Bell, Dec. 7, 1872, box 3,5, W. C. Ralston Papers,Mo 217 (SpecialCollections, StanfordUniversity
Library);Lees and Wallerto Bell, Dec. 9, 1872, ibid.
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in the GildedAge
Information,
Markets,andCorruption
41
In listing causes of the weakness of the railroads,the LondonStandardwrote that
"last,though not least, [was]the easewith which corruptadventurershave been able
to get possessionof railways."61
There was a sense that the 1873 crisishad revealeddeep flaws, not just in the financial system, but in a largerculturalorder.Bankers'Magazinemight attackthe "reckless credulity"of European investors, but American investors had been similarly
deceived.In the wake of the panic of 1873, the New YorkSun describedthe two most
disturbingpartsof the crisis:the failuresof trust and of information.Largenumbers
of smallinvestorshad tradedsafe U.S. bonds for riskyNorthernPacificbonds sold by
JayCooke and Company.They had trustednot only the representationsmade about
the safety of Northern Pacificsecuritiesbut also the counsel of presidentsand cashiers of banks in country towns who were paid commissions by Cooke to encourage
such exchanges. Their trust had been violated. Most disturbingly,those deceived
were "the intelligent classes,who read newspapers,mingle in affairs,and have constant accessto information."62
Journalsand newspapersraisedthe question of who had been hurt, but therewas a
connected issue. Had their losses secureda largergood: a nationalrailroadnetwork?
Had corruptionin effectworked for the benefit of the nation?
There are severalissues that must be disentangledhere. The first issue of who was
hurt cannot be determinedwith certainty,but there is suggestiveevidence that small
investorswere disproportionatelyharmed.As Jay Cooke, HarrisFahnestock,and the
New YorkSun all indicated,small investorsflockedto the NorthernPacificbecauseof
Cooke'sreputation.In the immediatewake of failure,the railroadsuspendedinterest
paymentsand the bonds plunged in value. By April 1874 they were quoted at thirtythree, but were "practicallyunsaleable."The Northern Pacifichad offered preferred
stock or land in exchangefor bonds, and in July 1876 severalinvestorswrote officers
of the road inquiringabout their investments.JamesFulton, who owned forty-nine
sharesof preferredstock, was a disabled soldier.John Moley, who had returnedto
England,was willing to exchangestock for land, but only "in a place where I could
get employment ... I have been in Americauntil work failedin Oct. 73 and I intend
going back."G. W. Porter,an Episcopalianminister "now advancedin life with a
small income,"wrote to inquirewhethertherewas an marketfor the $4,900 in stock
he had acquiredin exchange for his bonds. RailwayAge reportedthat the Kansas
Pacificinvestorswere often "peopleof small means."Bankers'Magazine
believedthat
in Europesmall investorsprovidedthe majormarketfor Americanrailroadsecurities.
Such evidenceindicatesthat this was not an affairbetween rich capitalists.63
61 Jay Cooke to A. H. Barney,Feb. 21, 1873, Cooke Papers;Jay Cooke to Cass, Jan. 7, 1873, ibid.; London
Standard,Oct. 24, 1874, NewspaperCuttingsFilesof the Councilof ForeignBondholders,reel 219.
62New YorkSun, Oct. 1873,
copy in 5: 145, box 22, Hopkins Correspondence.
63Fahnestockto Jay Cooke, April 3, 1874, f. 32, box 3, Fahnestock
Papers;James Fulton to secretary,July 18,
1876, Secretary,UnregisteredLetters Received, NorthernPacific Railway Co. Papers(microfilm, 127 reels, Saint
Paul, Minnesota Historical Society, 1979), reel 35; John Moley to president,July 22, 1876, ibid.; G. W. Porterto
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42
TheJournalof AmericanHistory
June2003
The second issuewas whethercorruptionhad been necessaryto lure investorsinto
making investmentsthat were good for the nation but that they would have shunned
had they possessedaccurateinformation.Although the irrational-choiceelement of
capitalismshould neverbe underestimated,this argumentmakestwo assumptions,at
least about the transcontinentals.First,that corruptionbuilt them and, second, that
building them was a good thing. The corruptionof the 1870s did not add a single
new route across North America. The Texas and Pacific and the Northern Pacific
defaultedand were not completed.The Memphis, El Pasoand Pacificwas a total failure, as was the Atlanticand PacificRailroad.The Union Pacific/CentralPacificnearmonopoly (supplementedby the SouthernPacific)remainedintact until the completion of the NorthernPacificin 1883.
The KansasPacific,the NorthernPacific,the Atchison, Topekaand SantaFe Railroad, and other aspiring transcontinentalroads that defaulted on their bonds did
advanceto the edge of or onto the GreatPlains, but it is an open question whether
partialsuccesswas better than total failure.CharlesHassler,whose WeeklyFinancial
Reportwas closelyfollowed by investors,wrote that "oneof the greatcauses,if not the
main cause"of the disasterin railwayaffairswas the "concealmentof truth."Only
through fraud had some of the lines been built, and it was "quitelikely"that the
countrywould "be betteroff without them.""64
The issues go beyond the immediate financial consequencesthat Hasslerhad in
mind: immobilized capital, heavy debt burdens that the roads could not sustain,
overbuildingand excess capacity,investor distrust, and what RailwayAge called a
"trulyappallingrecordof loss."The expansion onto the Great Plains that the railroadsprecipitatedbroughtboth the final slaughterof the bison herdsand brutaland
expensiveIndian wars. The cattle industry boomed, only to collapse in the 1880s.
Wheat production on the prairiesand plains contributed to a late-nineteenth-century pattern of glut and falling prices punctuated by drought and farm abandonment. The extension of the roads was not an unalloyedgood. Many western roads
went bankruptagain in the 1880s and the 1890s. If such developmentshad been
part of some socialistten-yearplan, they would have been deridedas economic and
social disasters.65
That the country needed a transcontinentalrailroadis not the issue; the question
is whether the country needed any or all the routes promoted during the 1870s or
the chaotic developmentthat corruptionhelped deliver.The argumentthat corruption was necessaryto build any transcontinentalputs the burden of proof on those
arguing for the efficacy of corruption. Since only one road was completed before
1883, the question boils down to the CentralPacificand the Union Pacific.Corruption may have been essentialto turning such men as Collis P. Huntington, Leland
Geo. Stark,July 22, 1876, ibid.; RailwayAge, Nov. 16, 1876, pp. 442-43; "The Market for American Securities
Abroad,"Bankers'Magazineand StatisticalRegister,10 (May 1876), 844.
64 For the statement by CharlesHassler,see "The Truth Needed About Railroads,"
RailwayAge, Oct. 19, 1876,
p. 372. "AmericanRailroadCredit,"ibid., Jan. 10, 1878, p. 20.
65 "RailwayForeclosure
Proceedingsin 1877," RailwayAge,Jan. 3, 1878, p. 2; RichardWhite, It'sYourMisfortune and None ofMy Own:A New Historyof theAmericanWest(Norman, 1991), 226-30.
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in theGildedAge
andCorruption
Information,
Markets,
43
but it doesnot followthatit was
Stanford,andthe otherAssociatesinto millionaires,
essentialto the buildingof the firsttranscontinental.
Corruptioncouldbe integralto
the Pacificroad, continuinglong afterthe road'scompetion,without necessarily
beingessentialto its existence.
If corruptionwas integralto the buildingand operationof the transcontinental
thenourusualwaysof understanding
thoseenterprises
failus. Yes,the railrailroads,
roadsengagedin marketcompetition;yes,theyweresubsidizedenterprises;
yes,they
eventuallybecamerationalized
productsof a visiblemanagerialhand.But market
rationalization
cannotaloneor in combinacompetition,subsidies,and managerial
tion describehow the systemactuallyworked-all leaveout corruption.Corruption
wasneverso simpleasbusinessmen
seekingto improvetheirbottomline;the corrupt
often properedat the expenseof the firmsthey ran.Corruptionproducedwinners
andlosersandtangibleresults.
In the actualworldof GildedAgepoliticsandbusiness,financialandpoliticalcorruptioncouldnot be separated.Corruptioninfluencedhow the railroads
competed
witheachotherin Congressaswellas in the financialmarkets.Railroadpoliticswere
neveras simpleas reformersversusrailroads.On issuesrangingfrom reversionof
land grantsto debt repaymentand new subsidies,corruptionsolidifiedcoalitions
betweenrailroadsand reformers
thatsecuredboth stateactionand inaction.In the
sidedwiththeTexasPacificin legislativeattackson the
1870s,forexample,reformers
CentralPacific'smonopoly,but theysidedwith the CentralPacificagainstthe Texas
Pacificin attackson new subsidies.Similarly,the Union Pacificand the Central
Pacificopposednew subsidiesto the NorthernPacificandwanteda reversionof its
in Congressas well as in the press,and
land grant.The railroadsneeded"friends"
is
were
It
the
other
side of the coin of emergingcorporate
friendships
complicated.
corruption.Butthatis anotherstory,andlikethestoryof financialcorruption,it has
an ongoingandimportanthistoryof its own.
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