24 FINANCIAL HISTORY | Fall 2016 | www.MoAF.org Jay Gould, the Union Pacific Railroad and Value Creation By Maury Klein and Joseph Calandro, Jr. Third, Gould was uncommonly suc- left home to work for a surveyor. Already cessful in investment, speculation/trading he had learned to push his stamina to the During a recent financial history pre- and business due to a variety of strategic limit and to master any skill that came sentation, the name Jay Gould was men- moves frequently so audacious and com- his way. He taught himself surveying, tioned. It was immediately followed by a plex that few, if any, of his contemporaries wrote an impressive history of Delaware discernable “gasp” from the audience. This understood what he was doing, or why. County and learned how to cultivate the apparently was the reaction the presenter Moreover, Gould did not socialize with confidence of those older than himself. He was looking for as he proceeded to deride the elite of his day, preferring instead to won the trust of a prominent tanner and Gould’s memory (Gould passed away in spend his non-working hours with his at age 20 was sent into the woods of Penn- 1892). This presenter’s criticisms were very family and his books. Over time, factors sylvania to build and run a tannery from broad and culminated with a reference such as these resulted in an information scratch. Despite his youth, older workers to Gould as an “infamous speculator.” vacuum. As the press, like nature, abhors a respected him well enough that the settle- The criticisms and comments were gener- vacuum, information was generated to fill ment was named Gouldsboro. ally inaccurate, but nevertheless in accord it whether it was factually accurate or not. Tanning occupied him until 1860, with many of the things that were written More important than historical misun- when an unfortunate partnership with about Gould during his lifetime, which derstanding for our purposes here are the les- the prominent firm of Charles M. Leupp have been carried over into the present. sons that can be learned from the years that unraveled as Leupp succumbed to men- No one in United States financial and Gould controlled the Union Pacific Railroad tal illness and committed suicide. At the business history is as misunderstood, and (UP). By “control” we mean set the direc- age of 24, Gould turned his attention to under-appreciated, as Jay Gould. There tion of the firm rather than own a majority Wall Street. Despite being an unknown are a number of reasons for this: First and interest in it. To explain, Gould exercised outsider in a world where being an insider foremost, Gould earned a reputation as control by dominating the UP governance counted for nearly everything, he not the most hated man in America. Two early structure as a major, albeit not majority, only survived but gradually mastered the episodes, the Erie Railroad War and Black shareholder. His activities at the UP helped intricacies of finance. His fertile intellect Friday, when he conceived an audacious give rise to modern financial strategy, which seemed capable of absorbing everything scheme to corner the nation’s gold supply is an integrated and interactive discipline it touched, and his capacity for growth in 1869, did much to create the image of encompassing strategy, investment, finance seemed unlimited. Unlike many Wall him as a ruthless, unprincipled Wall Street and operational management. Street denizens, his approach was quiet, renegade who seemed always to skirt the We profile our reasoning in this article subtle and self-deprecating. He learned letter of the law. Hardly anyone recognized noting that it is an all too brief profile. well the art of being underestimated. the breadth of his talents or viewed him as Maury Klein’s biography demonstrates in For seven years Gould gradually anything more than a stock manipulator detail how Gould’s entry into the manage- improved his fortunes in the shark- who played the game better than most. ment of the floundering UP marked the infested waters of 19th century Wall Street. Second, Gould was an intensely private beginning of his emergence as a business- The business style that emerged was an man who did not speak with the press man and economic developer of the first astringent one, as lean and compact as unless he wanted something specific out of rank, who went on to create his own rail- Gould himself. It was both stealthy and such interactions. Predictably, his desired road system around the modest Missouri secretive, the silent running of a loner ends were not always what members of Pacific Railroad. forging his own way through dangerous the press supposed; in other words, Gould Few men embody that most cherished territory. He formed the habit of telling used the press to achieve his ends, not to of American myths, the rags-to-riches no one about an operation except those advance theirs. saga, better than Jay Gould. Born in 1836 directly involved, and then only as much on a farm near Roxbury, New York, he as he wanted them to know. inherited his father’s passion for educa- To this passion for secrecy he added tion. Small, frail and somewhat sickly, a view of ethical and legal niceties that, he hated farm work, but he worked to at times, bordered on amorality, which Financier Jay Gould’s control of the Union improve himself whenever an opportunity was common at the time. In struggling to Pacific Railroad from 1874–1880 helped give rise to modern financial strategy. arose. Shortly before his 16th birthday he survive in an arena where no mercy was www.MoAF.org | Fall 2016 | FINANCIAL HISTORY 25 wasted on those who failed, he learned its “I know there are many people who do not Observers had expected him to milk the lessons well, showing himself willing to like him… I will say that I always found UP for all it was worth and depart, leaving employ bribery and other shady tactics to that he would do just as he agreed to do.” a financial wreck in his wake. Instead, he gain his objective. Having earned a formidable reputa- turned it into a stable, profitable enter- As an outsider who relied on trading as tion as a speculator/trader on Wall Street, prise through close attention to the details his only source of capital, Gould recog- Gould longed above all else to excel as a of every aspect of its operation. The for- nized the game of business for what it was businessman. From his first encounter mer speculator/trader had become a suc- at the time and played with few illusions with railroads he applied his uncanny cessful businessman, and he remained one or pretenses. He entered Wall Street on grasp of finance to the problems posed for the rest of his career. the eve of the Civil War, a time when the by running a large enterprise. Even as the Gould stayed with the UP for six years, rules soon became unsettled and malleable public dismissed the Erie War as a finan- leaving only when it became clear that he amid the opportunities afforded by war- cial circus, Gould devised a competitive could not solve one financial albatross: time. Since the Panic of 1857 a younger, strategy so bold and original that it forced the government debt. Contrary to popular brasher, more aggressive breed of brokers Commodore Vanderbilt to revise his han- belief, the government bonds issued to had come to dominate the Street, and dling of the New York Central Railroad. help construct the road were not a subsidy Gould adapted quickly to their coarser Confronted by Gould’s policy of making but a loan. To make matters worse, the UP form of financial combat. In time, he alliances with other roads to outflank the was one of a very few railroads with a fed- proved himself to be superior to them all. New York Central, Vanderbilt abandoned eral, rather than state, charter. This made Two episodes that became Wall Street his conservative approach and expanded it something of a plaything of Congress. legends catapulted Gould from obscurity to his rail empire westward to Chicago and The task of trying to reach a settlement on notoriety. During 1867 and 1868, he joined elsewhere. Gould lacked the financial the debt with venal Congressmen taxed forces with Daniel Drew and Jim Fisk to resources to compete with Vanderbilt on even Gould’s patience. Through a series of outmaneuver Cornelius Vanderbilt in the this widened battlefield, but his daring brilliant maneuvers, he sold his UP shares. “Erie War” that ended with Gould and changed the course of railroad history. To illustrate the value creating impact of Fisk in control of that railroad. In 1869, he After being ousted from the Erie in 1872, Gould’s activities while he controlled the conceived an audacious scheme to corner Gould pursued his career on Wall Street UP, consider Exhibit 1. the nation’s gold supply that culminated while awaiting a suitable opportunity to The compound annual growth rate of in the “Black Friday” panic on the Street. take hold of another railroad. It came at the UP’s stock price from December 24, Together these episodes both enhanced and the end of 1873, when Gould bought heav- 1874 to December 24, 1880 (Jay Gould con- blackened Gould’s reputation, elevating ily into the UP. Part of the first transcon- trolled the UP from 1874 to 1880) is 19%, him to the status of one whose words and tinental road completed in May 1869, the which is impressive in-and-of-itself, but all deeds were always to be watched and never Union Pacific-Central Pacific remained the more so relative to the 7.5% compound to be trusted.