24 FINANCIAL HISTORY | Fall 2016 | www.MoAF.org , the 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 . 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 War and 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 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 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 and Jim Fisk to resources to compete with Vanderbilt on even Gould’s patience. Through a series of outmaneuver 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 “” 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. From them also emerged the the only rail line from the Missouri River annual growth rate (price-weighted) of the steady stream of abuse from the press that to the Pacific Coast. Like the Erie, it New York Stock Exchange over the same would do so much to shape his reputation was a grandiose, oversold property with general time period. It is important to note in the coming years as the most hated man a tarnished past tainted by the Credit that the US economy was both in a major on Wall Street. Mobilier scandal of 1873 and a history of depression and generally deflationary from To a greater extent than anyone real- inept management that culminated in 1871 October 1873 — following the infamous ized, that reputation was undeserved. when Oliver Ames left the presidency. financial panic — to March 1879. Unlike many, if not most, Wall Street Tom Scott of the Pennsylvania Railroad Gould used the proceeds from the sale men (then and since), Gould lived a quiet, gained control but left after a year. In 1872, of his UP stock to put together a new extremely private life unmarred by any Horace Clark, Vanderbilt’s son-in-law, southwestern rail system built around the form of personal excess. He shunned the became president and the road seemed Missouri Pacific Railroad, which ran from trappings of high society, was devoted firmly connected to the Vanderbilt sys- St. Louis to Kansas City. This new system to his wife and six children, created an tem. But Clark died suddenly in June 1873, played a major role in the economic devel- extensive personal library of books he leaving the road once again in managerial opment of the Southwest. He stayed with actually read and loved flowers so much and financial limbo. that work, expanding the system and its that he built the largest privately-owned In winning the trust of the suspicious territory through construction and acqui- greenhouse in the nation. major stockholders of the UP, Gould sitions, until his death in 1892. During the Contrary to the image of him as a lone promised that he would restore the road’s 1880s he also gained control of two other wolf, he formed close associations with financial credibility, improve its opera- major properties, Western Union and colleagues that lasted throughout his life tions, formulate its strategy and boost its Manhattan Elevated. Domination of them and rarely worked any large operation stock price. To their astonishment, he put Gould astride the two most significant alone. Collis Huntington, one of Gould’s did all this and more. Within a year, hav- industries in late 19th century America: bitterest rivals, was not alone in praising ing rescued its finances from the brink of transportation and communications. That Gould’s reliability. I (Klein) quoted him as disaster, he cleared up the floating debt fact alone rendered him one of the most follows in my earlier biography of Gould: and refunded its income bonds. important business figures of his era.

26 FINANCIAL HISTORY | Fall 2016 | www.MoAF.org Exhibit 1: Select UP Stock Prices from 1873 to 1881

Note: The data source for this graph is the The Commercial and Financial Chronicle, https://catalog.hathitrust.org/Record/000548353 for the years 1873–1881 (thanks to Bob Wright and Kristin Aguilera of the Museum of American Finance for referring us to this source). The dotted rectangle encloses the years that Jay Gould controlled the UP, i.e., 1874 to 1880. The chart illustrates one stock price for each month of the years profiled (every-other-month is labeled on the x-axis). No one consistent date is used, so the chart should only be considered representative of UP performance over the profiled timeframe.

To generate the kind of returns that he continually “strung together” strategic the teeth of a depression. Gould delivered Gould did at the UP — in a troubled econ- moves, each of which exhibited, more often what he promised, and he accomplished omy no less — required a broad set of than not, a positive net present value. much of it within one year. He accom- integrated skills. Modern financial strat- Investment: In addition to speculation/ plished this through a combination of egy encompasses four disciplines: strategy, trading, Gould was an expert investor; hard-nosed negotiation, innovative finan- investment, finance and operational man- in other words, he invested at price lev- cial structuring (which included Gould agement. Gould excelled in each of them. els which, over time, increased in value. assuming some of the debt himself) and Strategy: Gould seemed hard-wired to be For example, his aforementioned gold leveraging the relationships across his flexible when it came to strategy, switching speculation earned him a fair bit of noto- wide financial network. gears quickly when a particular strategy did riety, but his investment in the Erie Rail- Operational Management: Gould was not prove itself and/or a better one pre- road was timed perfectly from both the incredibly detail oriented as an operating sented itself. This approach was consistent buy- and sell-sides which, as one astute executive, which is a trait that contin- with his speculating/trading background observer noted at the time, enabled him to ues to define top performing executives. and, interestingly, it is also consistent with invest in the UP at depressed price levels Like Gould, such executives demonstrate modern “complexity economics.” following the . This power- shorter-term expertise by generating rev- According to a popular book on that fully enabled the generation of abnormal enue and tightly managing expenses, and subject, no strategy is sustainable. Such a (or well in excess of market) returns. in the longer-term through investment position necessarily “changes our defini- Finance: Gould also exhibited a level expertise by positioning their firms stra- tion of an excellent company from one of financial expertise that rivaled the top tegically to grow profitably over time. that has continuous high performance for bankers of his day, especially the leg- Moreover, these executives tend to have very long periods of time (an achievement endary J.P. Morgan. For example, and another trait in common, one described that is almost non-existent) to one that can as noted above, the UP was debt-heavy by legendary investor Phil Fisher as, “the string together a series of temporary advan- when Gould assumed control of it, but he general term of integrity and encompasses tages over time.” This quote summarizes proposed to restore the credit and boost both the honesty and general decency of well Gould’s strategic success at the UP: the earnings of a dishonored railroad in those who are » continued on page 39

www.MoAF.org | Fall 2016 | FINANCIAL HISTORY 27 HOW MUCH DO YOU KNOW Jay Gould ABOUT FINANCIAL HISTORY? continued from page 27 running the company.” Indeed, as an Joseph Calandro, Jr., is Managing Direc- operator, Gould was remarkably non-dic- tor of a global consulting firm, Fellow TRIVIA tatorial and humble. According to Klein’s of the Gabelli Center for Global Secu- By Bob Shabazian QUIZ history of the UP: rity Analysis at Fordham University and author of Applied Value Investing. He In meetings he [Jay Gould] never is the corresponding author and can be 1. On August 11, 2016, the three dominated discussion but let it drone contacted at: [email protected] major indices matched on before expressing succinctly and a record last reached in 1999. precisely the point others had been What was it? groping for. He did not command Sources 2. What legislation, passed during or dictate but suggested politely. Far the Depression era of the 1930s, from being an imperious figure, he Beinhocker, Eric. The Origin of Wealth.Bos - separated commercial banking was content to dwell in the shadows ton, MA: Harvard. 2006. from investment banking? and let others take credit. For a man Calandro, Joseph. “The ‘Next Phase’ of Strate- 3. Who was known as the “Financier consumed by ambition, he was strik- gic Acquisition.” Journal of Private Equity. of the American Revolution”? ingly unaffected by considerations of Winter 2015. pp. 27–35. ego or vanity. 4. What is a victory tax in the context ___. Applied Value Investing. New York: of the Olympic Games? Expertise in each of the above disciplines McGraw-Hill. 2009. Chapter 7. 5. Wells Fargo, the center of a recent was profiled on a standalone basis for Fischer, Philip A. Common Stocks and Uncom- banking scandal involving the explanatory purposes. However, in prac- mon Profit and Other Writings. Hoboken, opening of unauthorized accounts, tice all of the disciplines work together, NJ: Wiley. 2003 [1996]. acquired what major bank in 2009? many times simultaneously, which adds 6. Ratification in 1913 of the 16th a level of complexity to financial strategy George, Bill and Jay Lorsch. “How to Out- Amendment to the US Constitution that helps to explain why it is difficult, and smart Activist Investors.” Harvard Business gave Congress what power? rarely done well. Review. May 2014. pp. 3–9. Despite its historical context, the above 7. What companies have announced Goetzmann, William, Roger Ibbotson and framework can provide insight into “activ- plans to merge that — if Liang Peng. “A New Historical Database ist investing,” which is popular today. To completed — would create the for the NYSE 1815 to 1925: Performance and explain, corporate executives who employ world’s largest hotel company? Predictability.” Journal of Financial Mar- suboptimal strategies, allocate capital kets. 2001. pp. 1–32. 8. Nationally, women earned 72% of unwisely, manage their finances poorly what men earned in 2015. What (e.g., uneconomical stock buybacks) and/ Hudson, James. The Panic of 1857 and the Com- state had the lowest women’s or run inefficient operations over time ing of the Civil War. Baton Rouge, LA: earning percentage? invite “activism,” especially when their Louisiana State University Press. 1987. 9. What is the wage base cap on the under-performance is followed by behav- Social Security employment tax? ior such as “insider selling.” Therefore, Klein, Maury and Joseph Calandro. Jay Gould, executives should generally not try to the Union Pacific Railroad and Financial 10. What do Wells Fargo and American “outsmart” activist investors, as some Strategy. September 21, 2016. Available at: Express Co. historically have in business scholars have recommended, but http://ssrn.com/abstract=2834923 common?

rather manage their companies in accord

Klein, Maury. Union Pacific: The Birth of a companies. both

with sound strategic, investment, financial of founding the in involved were Fargo

Railroad 1862–1893. New York: Doubleday.

Henry Wells and William William and Wells Henry 10. $118,000 and operational principles over time. For 9.

1987.

54.3%. with Wyoming, 8. executives so inclined, the experiences of Worldwide.

Jay Gould offer many valuable lessons. ___. The Life and Legend of Jay Gould.Balti - Resorts & Hotels Starwood and International

Marriott Marriott 7. more, MD: Hopkins. 1986. pp. 495–497. income. on tax a collect and levy

The power to to power The 6. Bank. Wachovia 5. Maury Klein is Professor Emeritus of $9,900.

Lubetkin, M. John. Jay Cooke’s Gamble: The Business History at the University of as high as be could medal gold a winning

Northern Pacific Railroad, The Sious, and

Rhode Island and the author of 18 books for tax the applied, If competition. the during

A tax on the value of a medal won won medal a of value the on tax A 4. the Panic of 1873. Norman, OK: University Morris

including The Life and Legend of Jay

Robert Robert 3. of Oklahoma. 2006. 1999). in repealed (later 1933 of

Gould and the official history of the The Glass-Steagall Act Act Glass-Steagall The 2.

Union Pacific Railroad. He won an Sobel, Robert. The Money Manias: Tales of day. same the

Emmy award as co-writer of the 2013 Entrepreneurs and Investors During the Eras on highs all-time their at closed all Index

of Great Speculation in America. New York: Composite Nasdaq the and Index 500 S&P The Dow Jones Industrial Average, the the Average, Industrial Jones Dow The documentary, Railroad Man: The Life 1. and Legend of Jay Gould. Weybright & Talley. 1973.

www.MoAF.org | Fall 2016 | FINANCIAL HISTORY 39