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Cornelius Vanderbilt

born: 27 May 1794
died: 4 January 1877

Entrepreneurs and American Economic Growth

Cornelius (Commodore) Vanderbilt

  1. Youth and Early Career
    1. Political Entrepreneurs vs. Market Entrepreneurs (Folsom, p.1)
      1. Political Entrepreneur – One who tries to succeed through "federal aid, pools, vote buying, stock speculation"
      2. Market Entrepreneur – One who tries to succeed by creating and marketing a superior product at a low cost.
    1. Cornelius Vanderbilt was a classic Market Entrepreneur (using Folsom’s terminology) and an Agent of Creative Destruction – a true Schumpeteran Entrepreneur. He was a key figure in breaking the steamboat monopoly granted to Robert Fulton and Robert Livingston in the waters around New York City; in the transatlantic steamship business; in the east coast to west coast steamship business; and the builder of the New York Central system which, in effect, replaced the Erie Canal. When he died he was the richest man in America ($105m) and he left a high quality quadrupled track railroad that played a key role in the development of the Midwestern United States.
    2. Vanderbilt: Youth. He was born 27 May 1794 on Staten Island, New York. His father was a farmer who would sail his produce to the New York market across the harbor.
      1. Entered business at the age of 16 in 1810. He was paid $100.00 by his Mother to clear and plant an 8-acre field. He used the $100 to buy a small two-masted (sailing) flat-bottomed vessel (a periauger) and used to carry freight and passengers between Manhattan and Staten Island. (He had a minor accident just after he bought it and it almost sank. This was his only accident as an owner of boats – as an owner, he never fell victim to fire, explosion, or shipwreck.)
      2. He was called "Cornele, the boatman" and he catered primarily to commuters because he quickly built a reputation for reliability and fearlessness. He would undertake any job -- even in stormy weather -- and he consistently charged lower rates than his competitors.
      3. During the War of 1812 Vanderbilt’s reputation for reliability resulted in his being awarded an Army contract to supply six posts around New York Bay in addition to his regular business. He also made additional money by bringing food down to New York City from the farms along the Hudson. (The British blockaded NYC during the War.) His profits allowed him to buy an interest in two other boats.
      4. After the War in 1815, Vanderbilt goes into the coastal trade carrying oysters, watermelons, whale oil, shad, and many other items, between Chesapeake Bay and New York. In his spare time, he sold beer, cider, and provisions to ships anchored in the harbor. By 1818 (age 24) he had saved $9,000 and owned interests in several other boats.
      5. Summary: His business style established very early in life: 1) hard working; 2) fiercely competitive, willing to cut prices to get business; 3) reliable (repeat customers!); 4) frugal.
  1. Vanderbilt: Steamboat Period
    1. In 1807 Robert Fulton piloted his steamboat Clermont up the Hudson river from New York to Albany against the current at the blazing speed of 4 miles per hour. Fulton – a classic example of a political entrepreneur -- and Robert R. Livingston were subsequently granted a monopoly on all steamboat traffic in New York for 30 years.
    2. In 1817 Vanderbilt’s Staten Island – NYC was invaded by steamboats and his income began to fall. Vanderbilt responded by selling his sailing vessels and went to work for Thomas Gibbons who owned a small steamboat. Once he learned how to operate the steamboat, he persuaded Gibbons to build a steamboat that he himself designed -- the Bellona. Vanderbilt began ferrying passengers from New Jersey to Manhattan in violation of the monopoly. He charged $1 – which was below cost -- rather than the monopoly price of $4, but made up his losses by raising the price of food and drink in the steamboat’s bar. At one point, he went 60 straight days evading New York City police trying to arrest him for violating the monopoly.
    3. In the 1824 Gibbons vs. Ogden Supreme Court decision, the Fulton-Livingston monopoly was declared illegal as it violated the U.S. Constitution’s commerce clause – only the U.S. government could regulate interstate commerce. Vanderbilt’s employer, Gibbons, won a suit filed against him by Aaron Ogden a New Jersey steamboat operator who had purchased a license from the monopoly and who had brought suit against Gibbons for his violations (Daniel Webster was Gibbons’ attorney).
    4. The collapse of the monopoly resulted in: 1) immediate drop in prices for freight and passengers; 2) new entrants into the business; 3) introduction of new technology – specifically, tubular boilers and the use of anthracite coal (plentiful in nearby Pennsylvania) for fuel rather than wood. {Aside: In a North & Thomas sense, the structure of incentives was dramatically shifted – with private property rights ensured, investors were now willing to try new technology in the hopes of gaining a competitive edge. See Schmokler paper in Topic 6.} Gibbons and Vanderbilt who were used to running lower rates and trying innovative services, quickly adopted the new technologies and earned large profits.
    5. In 1829 (age 35) Vanderbilt had saved $30,000 and went into the steamboat business for himself beginning with the New York to Philadelphia run. Passengers were taken from New York City to New Jersey by steamboat, then across N.J. by stagecoach to Trenton, then down the Delaware river by steamboat. He immediately cut rates, which threatened a rate war with the established steamboat lines. Believing that he still was working for Gibbons (who had sold out and retired), the existing carriers got together and paid him handsomely to leave the market.
    6. In 1830 Vanderbilt entered the Hudson River market competing against the Hudson River Steamboat Association. He cut fares from $3 to $1 and then to $0! He made up part of his losses by increasing the price of food aboard his two boats. The Steamboat Association threw in the towel and bought him out. For $100,000 and an annual payment of $5,000 for ten years, Vanderbilt agreed to withdraw from the Hudson River market. He then turned to the Long Island Sound market and coastal trade and soon dominated both.
    7. By the mid 1840s Commodore Vanderbilt operated a fleet over 100 steamboats, employed more men than any other business in the country, and was worth several million dollars.
    8. Summary: In addition to those qualities exhibited in his early business career -- 1) hard working; 2) fiercely competitive, willing to cut prices to get business; 3) reliable (repeat customers!); 4) frugal – this stage shows Vanderbilt’s skill as a business strategist. His methods may not pass muster in today’s legal environment, but wherever he competed – regardless of whether he was paid to leave the market or not – prices were lower in his wake.
  1. Vanderbilt: Steamship Line via Nicaragua to California
    1. The discovery of gold in California in 1848 set off a stampede of adventurers heading for California from the East Coast. Initially the California bound adventurers went by Clipper Ship around Cape Horn. The Clippers were built for speed – long, narrow amidships, with very tall masts and large sails. They could make the journey from NYC in 90 days compared to an average of 159 days for a conventional sailing vessel. However, they were designed for speed and not for cargo so passage was very expensive.
    2. Consequently, New York steamship operators organized a route via Panama using steamships – two weeks to Panama, a week’s portage across the Isthmus to the Pacific, and then two more weeks aboard a second steamship to San Francisco (35 days).
    3. Vanderbilt, who studied maps of Central American for many hours thought he had a better solution – Nicaragua. The San Juan River runs along the border with Costa Rica for 119 miles and then empties into Lake Nicaragua. One Hundred miles long and 50 miles wide, the western shore of Lake Nicaragua is only 12 miles from the Pacific Ocean. Why not shorten the route to California by using Lake Nicaragua and the San Juan River?
    4. In 1851 he formed the Accessory Transit Company and paid the Nicaraguan government $10,000 for a charter to cross the country. Vanderbilt personally piloted a small steamboat up the San Juan River to test the route (which many locals said couldn’t be done). He had the river cleared of obstacles, placed a steamboat on Lake Nicaragua, and built a road from the west shore of the lake to San Juan del Sur – a port he constructed on the Pacific coast.
    5. Vanderbilt’s route was 600 miles and 2 days shorter to California and cheaper – he immediately slashed the prevailing fare of $600 to $400. His two competitors were subsidized by the U.S. government to the tune of $500,000 to carry the mail to California. Vanderbilt not only cut fares, he offered to carry the mail for free! Eventually the fare dropped to $150 and Vanderbilt still made money.
    6. After some political machinations involving some crooked subordinates and the American adventurer William Walker, Vanderbilt lost control of his Accessory Transit Company, switched his steamships to the Panama route, regained his Nicaraguan interests, and, finally, was paid by his subsidized rivals a fee of $672,000 (of the $900,000 subsidy) a year not to operate a steamship line on the California route.
  1. Vanderbilt: Steamship Line Across the Atlantic
    1. In 1855 Commodore Vanderbilt entered the steamship business on the Atlantic. Their respective governments heavily subsidized Cunard, a British line, and Collins, an American line. After failing to obtain a subsidy himself, Vanderbilt enters the business.
    2. As was his practice, Vanderbilt cut fares for both passengers and mail. He focussed on 2nd and 3rd class passenger to get a volume business. He did not insure his ships because he only used well built vessels with first class crews. Even so, he barely broke even.
    3. Consequently, Vanderbilt spent $600,000 building the Vanderbilt which was the largest vessel ever to float on the Atlantic ocean to that time. It was 335 feet long with a beam of 46 feet and weighed 4,500 tons. It was built of the best materials and used an advanced power plant so that it was very fast and set the speed record at 9 days 1 hour from Sandy Hook to the Isle of Wight.
    4. By 1858 Congress revoked the subsidy to the Collins line (which quickly went bankrupt). Vanderbilt’s only competition became an unsubsidized British Line – the William Inman Line.
    5. Folsom (p.11) argues that the subsidies had the effect of delaying innovation. In particular, the use of iron hulled ships with screw propellers. Cunard and Collins used wooden ships with paddle wheels. It is no accident that the winners – Vanderbilt and Inman – used iron-hulled ships. {Aside: Once again, North & Thomas’s fundamental argument about poorly defined property rights.}
  1. The Railroad Period: 1863 – 1877
    1. From 1862 – 1864 Vanderbilt sold or leased most of his vessels to the Union government at a good profit. Vanderbilt’s fortune rose to around $40,000,000 by 1863.
    2. New York & Harlem – Vanderbilt became a director of the RR in 1857 after an initial small investment and did not take an active part in the affairs of the RR. The Harlem was the only RR to enter Manhattan from the North and East. It crossed the Harlem River at 135th Street and then went south through Manhattan along Fourth (later Park) Avenue to 26th Street where it connected to its horse car lines. It was built on the east side of the Hudson and inland because the original builders figured that they could never compete with the steamboat traffic along the Hudson itself!

Daniel Drew

  1. First Stock Corner: Dec. 1862 Harlem directors applied for permission to lay rails down Broadway south of Union Square to the Battery. (This would have been a horse car line.) The line was approved by the City government in April 1863. Daniel Drew, a director of the NY&H then conspired with City officials to withdraw their approval in a scheme to sell the NY&H stock short. Vanderbilt learned of the scheme and began to purchase all the stock that came on the market and all the short sales. By August 1863 the stock hit $179 and Vanderbilt and his group controlled it all – the entire stock capitalization of the company, $4,217,100. The politicians then reversed their reversal and re-approved the extension of Harlem down Broadway.

      1. Second Stock Corner: Because of legal entanglements the NY&H needed a bill passed by the NY State Legislature to given the NY&H corporation the authority to do the construction. The Bill was introduced early in 1864. Once again Daniel Drew and others hatched a short selling scheme on the NY&H stock. They conspired with state legislators to defeat the bill to drive down the price of the stock. And, once again, Vanderbilt and his group – who were short of cash – pooled their resources and began buying up the NY&H stock. By the end of April, 1864 the stock hit $235 and Vanderbilt and his group had bought the equivalent of the entire capitalization and some 27,000 shares besides. Scores of legislators were financially ruined.

    1. Hudson River Railroad: Built despite the opposition of both the Harlem RR and the steamboat interests, the HRRR was constructed on the east bank of the Hudson river and reached east Albany in 1851. The main passenger depot was located at Tenth Avenue and 30th Street on the West Side of Manhattan.
      1. By the summer of 1863 Vanderbilt owned a substantial block of stock in the Hudson but was still primarily interested in the Harlem. This changed when a group of traders began selling the Hudson short. Vanderbilt then participated in a scheme (which he suggested) to convince the "shorts" that the supporters of the Hudson were lacking in cash. Supporters sold large blocks of stock to the "shorts" for cash with an option to buy back the stock within 30 days at a slightly higher price. Instead of holding the stock, the "shorts" immediately sold it. The "Supporters" then quietly bought the stock the "shorts" sold along with all other shares on the market. By July, 1863, the stock of the Hudson was cornered and the "shorts" took a bath.
      2. Vanderbilt and his allies took control of the board of directors of the Hudson in 1864 and Vanderbilt became President of the railroad in 1865.
      3. In 1866 Vanderbilt built a wooden truss bridge 2000 feet long over the Hudson River at Albany. Both the Hudson and Harlem RRs now came all the way into Albany using the station of the New York Central.
      4. During the summer months the New York Central would transfer all lot of its freight to steamboats for the trip to New York City rather than shipping the freight over the Hudson. However, Vanderbilt began buying NYC stock in 1863-64 and was able to influence the election of Erastus Corning as President in 1864. From 1864-66 Vanderbilt and the New York Central cooperated. In December 1866 interests hostile to Vanderbilt gained control of the NYC and the cooperative relationship ended. On 14 January 1867 Vanderbilt retaliated by announcing that the terminus of the Hudson River RR would henceforth be East Albany. East bound freight piled up in Albany because the river was frozen over. East bound Passengers had to walk across the ice to catch the train down to New York.
      5. The NYC quickly capitulated because it was under great competitive pressure from the other Trunk Line Railroads -- especially the Erie and the Pennsylvania.

    1. The New York Central System: On 12 November 1867 the major stockholders of the NYC offered Vanderbilt control of the railroad. On 11 December 1867 Vanderbilt was elected President of the railroad and picked his own board of directors.
      1. By 1869 Vanderbilt merged the New York Central and Hudson River railroads and doubled the capitalization of the combined lines to some $90,000,000. His philosophy was to adjust the capitalization – his critics called it "stock watering" – based upon the anticipated earnings. NYC stock paid a consistent 8% dividend under the Commodore.
      2. In contrast to many other railroads of the era, the NYC was truly managed by its stockholders. Vanderbilt steadily increased his share of the stock.
      3. In 1868 Vanderbilt faced two problems. First, he became convinced that he had to extend his system all the way to Chicago to be competitive with the other major lines – the PA, Erie, and B&O – who were also casting about for connections. Second, he wanted to gain control of the Erie (technically, the New York & Erie) to end the competition for New York City Freight.
      4. Vanderbilt’s efforts to gain control of the Erie led to the infamous "Erie War" in which the Commodore was outwitted by his old rival Daniel Drew and Drew’s two young collaborators, Jim Fisk and Jay Gould. Vanderbilt bought up larger and larger amounts of Erie stock in order to gain majority control but Drew, Fisk, and Gould simply kept issuing more stock and dumping it onto the market. Eventually Drew and Vanderbilt made a deal that allowed Vanderbilt to extricate himself with "only" about $1.5 million in losses and Fisk and Gould ended up controlling an almost completely bankrupted Erie railroad.
      5. Vanderbilt was much more successful in gaining control of the lines he needed to Chicago – the Lake Shore, and the Michigan Southern and Northern Indiana railroads. By the summer of 1869 he controlled a consolidated railroad system from New York City to Chicago.
      6. Vanderbilt made major improvements throughout his consolidated system. In 1868 he built a new and much larger freight yard on the West Side of Manhattan. In 1871 the first Grand Central Terminal was opened at 42nd Street. Throughout the period he steadily upgraded the right-of-ways, the track, and the rolling stock of his railroads. Installing steel rails on the most heavily traveled routes. Finally, in 1874, in what many thought a foolish and "impractical" action, but turned out to be a visionary action, Vanderbilt quadrupled tracked (2 lines for passenger, 2 lines for freight) the New York Central from Albany to Buffalo. This vastly improved the productivity of the core of his railroad system and made the system enormously profitable.
    1. Summary: The Railroad phase of Vanderbilt’s career exhibits the same qualities of his early career and his steamboat period -- 1) hard working; 2) fiercely competitive, willing to cut prices to get business; 3) reliable (repeat customers!); 4) frugal; 5) skilled business strategist and something more -- 6) the ability to master the details of a new business (which shows exceptional insight) and to act boldly when necessary. (The first Harlem corner was his first foray into the stock market.) Also, the sheer size of the NYC showed other skills: 7) He picked skilled managers to run his railroad properties. On the debit side, Vanderbilt was not an "Empire Builder" as James J. Hill was (the areas his railroads ran through were largely settled). He built very little new railroad mileage and the "vision" of a great system linking New York with Chicago occurred very late in his career.

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