The following is Methods of Prosperity newsletter number 9. It was originally deployed August 17, 2023. As of April 25, 2024, original subscribers have received up to issue number 45.
Last week on Methods of Prosperity:
John Jacob Astor was a German-American businessman who made a fortune in the fur trade and real estate. In 1808, Astor founded the American Fur Company, which became the largest fur trading company in the United States. When the fur trade started to decline, he sold his fur trading business in 1834 and invested in real estate. He acquired a large amount of land in Manhattan. Astor died in 1848 at the age of 81. He was one of the wealthiest men in the United States at the time of his death. His only regret was that he didn’t buy every inch of Manhattan. On his deathbed in 1848, he is said to have exclaimed, “Could I begin life again, knowing what I now know, and had no money to invest, I would buy every foot of land on the island of Manhattan.”
Part 9. Cornelius Vanderbilt.
TL;DR
Cornelius Vanderbilt, a formidable businessman of the 19th century, issued a stark warning to Charles Morgan and C. K. Garrison, whom he accused of cheating him while they managed his Accessory Transit Company (ATC) during his brief vacation. His threat, encapsulated in a terse letter dated February 1, 1853, was not empty. Vanderbilt decisively crushed their endeavor by establishing a rival company, rendering the ATC obsolete and financially devastating Morgan and Garrison by 1857. Vanderbilt’s journey to prominence began modestly. Born in 1794 in Staten Island, New York, he launched his maritime empire with a $100 loan from his mother, which he invested in his first boat. His astute business acumen and strategic foresight allowed him to amass significant wealth, initially through the shipping industry. Vanderbilt crushed his competition. His involvement in the landmark case Gibbons v. Ogden in 1824 helped dismantle state monopolies and bolster interstate commerce regulations. Vanderbilt’s empire expanded with his entry into the railroad business, acquiring and merging several small railroads into the profitable New York Central Railroad. When all of a sudden, his nemesis, Daniel Drew resurfaced in the Erie Railroad acquisition attempts, leading to the notorious Erie War. Drew conspired with two other shady characters against Vanderbilt, to rug his stonks. That’s when Vanderbilt nearly faced bankruptcy. Not to worry, because Vanderbilt pulled an UNO Reverse card, leaving Drew rekt. Vanderbilt secured the bag with railroads, but oil was trending.
“Gentlemen: You have undertaken to cheat me. I won’t sue you, for the law is too slow. I’ll ruin you. Yours truly, Cornelius Vanderbilt.”
That was the entirety of a letter written to Charles Morgan and C. K. Garrison, the men who Cornelius Vanderbilt left in charge of his business during the one time in his life that he took a vacation. The letter was written on February 1, 1853, after Garrison accepted a two-year contract to serve as the San Francisco agent of the Accessory Transit Company, a firm which provided transportation from New York to San Francisco, via Nicaragua. Garrison formed a business partnership with Charles Morgan, and Vanderbilt accused them of cheating him in this partnership.
Vanderbilt followed through on his threat to ruin Morgan and Garrison. After accusing them of cheating him, Vanderbilt formed a rival company to the Accessory Transit Company (ATC) and managed to put the ATC out of business within two years. By December of 1857, Vanderbilt's threat had become a reality, and Morgan and Garrison were hemorrhaging money in every direction. This would not be the last time Vanderbilt crushed his enemies.
Indentured servitude was common practice in the early colonial period. Cornelius Vanderbilt’s grandfather, Jan Aertson was born in the Netherlands in 1620 and immigrated to New Amsterdam (later New York City) in 1650. He agreed to work for a period of time in exchange for passage to the New World. When he arrived in New Amsterdam, he took the name of his master, Jacob Van der Bilt. The name Vanderbilt is a Dutch name that means "from the village of Bilt.” Jan Aertson's son, Cornelius Vanderbilt I, used the name Vanderbilt on all of his legal documents. And his grandson, Cornelius Vanderbilt II, became one of the wealthiest men in the United States.
Born in May 1794 on Staten Island, New York, Vanderbilt was sixteen years old when he borrowed $100 from his mother to buy his first boat. As legend has it, she made a deal with him. In order for her to fund his purchase, the lad was required to clear a field of rocks so it could be farmed. Naturally, instead of completing the job alone, Cornelius outsourced the labor. Making a deal with other local youths, he promised to give them free rides on his boat in exchange for their help. His employees successfully finished the job, he got the loan, and eventually turned that $100 into over $100 million at the end of his life, which was more money than the US Treasury had in 1877.
Using that boat Vanderbilt started his own transport and freight service that carried goods between Staten Island’s farmlands and New York City’s Manhattan, an emerging center of commerce. In time he repaid his mother the amount of that first loan plus an extra $1,000. During the War of 1812, Vanderbilt profited during the three-year conflict after winning a government contract to carry supplies to the numerous military forts along New York. With the money he earned from that project, he invested in a bigger ship which serviced the communities located on the shore of the Long Island Sound on the Atlantic Ocean. By 1817 he had saved up $9,000 (approximately equivalent to just over $352,048.85 today) and earned the nickname “The Commodore.”
One trait common to many captains of industry is the uncanny awareness to pivot at the right time. That is, having a knack for knowing what’s next and taking action. He was convinced that steamships were about to dominate the shipping industry going forward. In 1818 Vanderbilt sold all of his boats. He approached Thomas Gibbons, a steamboat ferry operator. Gibbons’s boat ran between New Brunswick, New Jersey and New York City. Vanderbilt promised to increase its profits in exchange for a salary of just $1,000 a year. At the time, Robert Fulton and his partner Robert Livingston had a monopoly on steamboats on the Hudson River. A generation earlier, states commonly granted monopolies in an effort to encourage commerce. Granting monopolies in certain industries and sectors was one way to promote business and innovation for entrepreneurs without sufficient financial backing. That’s great if it benefits your business. If regulation like that hurts your business, that’s worth going to battle over.
Gibbons took Livingston to court over the monopoly rights, and the case advanced all the way to the U.S. Supreme Court. The landmark case, Gibbons v. Ogden was decided in 1824 and eliminated all state monopolies. It also gave Congress some authority over interstate commerce (commerce that crossed state lines), a legal first that would later play a significant role in a wave of regulatory laws for American corporations in the early years of the twentieth century.
Now that their competition was out of the way, Vanderbilt and Gibbons would advance. Cornelius and his first wife would drive the profits of the Gibbons ferry line. Sophia Johnson Vanderbilt, whom he had married in 1813, managed the hostel for travelers along the halfway point between Manhattan and Philadelphia. In 1829, Vanderbilt started his own steamboat line, with $30,000 earned over a decade working for Gibbons. He was about to encounter another competitor who he would crush.
Willing to lose money in the short term in order to drive his competitors out of business, Cornelius Vanderbilt was a shrewd businessman. Vanderbilt began a service that ran between New York City and Peekskill, New York, a Westchester County town on the Hudson River. His rival, Daniel Drew would be Vanderbilt’s nemesis who allegedly invented “watered stock”. More about that later. Vanderbilt undercut his competition so badly that they paid him not to compete. The Hudson River Association was a group of boat operators that set rates amongst themselves. When Vanderbilt’s fleet of more efficient steamboats operated at predatory pricing, The Hudson River Association paid him not to operate along the Hudson. Vanderbilt agreed to give up his Hudson River line for the next ten years and for $100,000 plus another $5,000 annually from the deal. By the time Vanderbilt celebrated his fortieth birthday in 1834, he possessed a fortune worth $500,000, which is equivalent to $17,772,750 today.
There were only two ways to get to San Francisco when the Gold Rush hit in 1848. One was to board a ship that sailed around Cape Horn, the southernmost tip of South America, which was known for its dangerous storms. The other involved booking passage to Panama in Central America, and then making a trek over land through the Isthmus of Panama. Neither was easy and both were perilous. Vanderbilt knew of a third way. Nicaragua was a preferred travel route due to its shorter and less treacherous path compared to the route around Cape Horn or across Panama. Not only did Vanderbilt find a shorter route, through Nicaragua, but his service charged half the price of the leading company’s rate for both legs of the journey. In 1815 he made the first trip on his new Accessory Transit Company (ATC) venture himself to oversee its smooth operation.
Charles Morgan and Cornelius K. Garrison, whom he had put in charge of ATC had betrayed him through a stock manipulation that resulted in their gaining a controlling interest in the company. Realizing that a lawsuit wouldn’t suffice, Vanderbilt decided to ruin them more efficiently and sent them the ominous letter. To ruin them, he promptly formed a rival company to the ATC and managed to put the ATC out of business within two years.
In the 1850s, transportation had evolved. Vanderbilt entered the railroad business. He acquired several small railroads and merged them into a single company, the New York Central Railroad. The New York Central Railroad became one of the most profitable railroads in the United States. He controlled the American railroads except for one crucial line. In the late 1860’s, the Erie Railroad was important to Vanderbilt for its connection from Jersey City to New York. Without control of the Erie Railroad, Vanderbilt’s railroad set wasn’t complete.
Remember his rival, Daniel Drew? When Vanderbilt purchased the New York and Harlem Railroad, Drew attempted to block Vanderbilt’s purchase. A short squeeze occurs when a heavily shorted stock (a stock that many investors have bet will decrease in value) experiences a rapid price increase, forcing short sellers to cover their positions by buying the stock. This buying pressure can lead to a further increase in the stock’s price, creating a feedback loop that results in significant price spikes. While the conditions at this time were slightly different, a similar situation occurred. In 1857, Drew was on the board of directors of the Erie Railroad and involved in manipulating railroad stocks. The exact details are nebulous, but Drew was shorting stock that Vanderbilt was buying. This created a short squeeze situation, causing the price of the shares to rise from $90 to $285 in five months. This ruined Drew’s position. He lost $500,000. But he would soon get revenge.
In 1866, Vanderbilt tried to purchase the important Erie Railroad line. Drew was the treasurer of this company, and the business rivalry between the two men became known as the Erie War. Drew conspired along with fellow directors James Fisk and Jay Gould to issue stock to keep Vanderbilt from gaining control of the Erie Railroad. Daniel Drew, along with James Fisk and Jay Gould, used the tactic of “watered stock” during the Erie War to block their arch-rival Cornelius Vanderbilt from gaining ownership of the Erie Railroad. Today, the SEC will crack down on this kind of securities fraud. Essentially, the stock was worth less than face value.
Once again Vanderbilt kept buying up as many shares as he could, but this time he nearly went bankrupt doing so. Drew, Gould, and Fisk fled to New Jersey but eventually surrendered to authorities. Vanderbilt used his political connections to have the fraudulent stock authorized as valid shares. Gould and Fisk later betrayed Drew in their own financial scheme, and Vanderbilt’s major business rival, Drew, had lost his fortune by the time he died in 1879.
Vanderbilt, whose son William H. Vanderbilt was now working with him, eventually came to control much of the railroad business in the United States. At the age of 78, Cornelius Vanderbilt was a billionaire by today’s standards. As Jeff Bezos is to e-commerce, Cornelius Vanderbilt is to transportation during America’s formative years.
We take it for granted now, but everyday luxuries such as household lighting and power grids hadn’t been invented yet. Everything was about to change. Oil was the new frontier.
There was one man who Vanderbilt wanted to make a deal with.
To be continued.
–Sean Allen Fenn
