(While researching the topic of corporate corruption, Stanford University historian Richard White consulted several manuscript collections at Harvard Business School's Baker Library, including the Henry Villard Collection. The remarkably complete Villard Collection includes letters, photographs, account books, and documents that record Villard's life as a businessman and investor. Collection materials also trace the development of transportation networks in the West and Pacific Northwest, with the bulk of the material relating to the development of the Northern Pacific Railroad Company.
Villard (1862-1928), a German born financier, was one of the leading entrepreneurs of the Gilded Age. Noted for promoting the development of the Pacific Northwest, Villard was a key figure in the burgeoning railroad industry. He also funded many of Thomas Edison's experiments and financed the first electronic trolley system in the United States.—Ed.)
The history of the transcontinental railroads, particularly the Kansas Pacific, Northern Pacific, Texas and Pacific, Central Pacific, and Union Pacific, as well as the Southern Pacific Railroad, exemplifies the linkage between information, markets, and corruption in the Gilded Age. Neither the importance of information to financial markets nor the manipulation of that information was new in the 1870s. The brokering of credit between parties who did not know each other (by notaries in pre-revolutionary France and by scriveners and lawyers in Britain) existed before either banks or financial markets. 14 What was new was the scale of the markets and of the private corporations that manipulated them, the rapidity of the dissemination of information and the size of the audiences it reached, and the new technologies that made all this possible. The Gilded Age did not replace local, face-to-face markets with an international market dealing with security issues in the tens or hundreds of millions of dollars; rather, it layered those markets and forged connections between them.
Culture as much as money knit the markets together, and as paradoxical as it might seem, the culture of corruption initially began with character, which was essential for trust. This was as true on Wall Street as it was in the assessments of local bankers or agents of the credit-rating firm R. G. Dun and Company. Few in the 1870s would have failed to understand Henry Villard's refusal to resign as receiver of the Kansas Pacific, appointed by a court to run the bankrupt road, as long as his character was under attack. Corporate leaders often claimed to be honest. Collis P. Huntington attributed his own and his fellow Associates' success to their obtaining "a national reputation not only as railroad builders but as honest men that watch over and protect the interest of all [the company's] stock holders however small their interest." Character among 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 therefore said a lot about many people. Huntington thought the financier Jay Gould and the railwayman Tom 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 "underrate the power of Tom Scott" of the Texas and Pacific and Pennsylvania railroads, who had come "from a very small beginning by his own forces of character" to head the Penn Central, "one of the largest R[ailroad] organizations in the world." 15
|Culture as much as money knit the markets together, and as paradoxical as it might seem, the culture of corruption initially began with character, which was essential for trust.|
Decisions on character were a matter of information, and they were linked to other information in judgments of creditworthiness. The smaller the financial community, the greater the ability to obtain such information. Every time the Associates of the Central Pacific had to borrow money at the ornate office of the Bank of California in San Francisco, for example, they revealed information because as Huntington, by far the shrewdest of the Associates, noted, "we are but a small community there." Whenever the Central Pacific bought locally on credit and merchants discounted the railroad's notes, they gave away intelligence to the "ring" of men surrounding the bank, who, as Huntington's partner, Mark Hopkins, complained, "know all about our business here." They knew what the Associates owed, whom they owed it to, and what rates they were paying. There was "nothing but the perplexities of it" that they did not know. Lending on both discounted notes and accommodation loans—short-term notes endorsed by a borrower and by other endorsers—was pre-corporate; the endorsers and their estates bore the responsibility, rather than a corporation. Members of the ring did not invest in Central Pacific securities and would not take them as collateral, supplying only short-term capital. They knew too much about the large floating, or unsecured, debt of the Central Pacific. As late as 1877, Colton found that San Francisco bankers would not lend the Central Pacific or the Southern Pacific money without the personal notes of the Associates behind the loan. 16
When financiers moved into national markets, issues of character and information went with them. The center of long-term capital markets was New York City, and Collis P. Huntington moved there in the 1860s because the Central Pacific could not survive unless he, or someone like him, was present. Wall Street could seem local. When not traveling, Huntington came to work six days a week at an office at 9 Nassau Street, just off Wall Street. At 20 Nassau Street were the original offices of the Union Pacific. At 5 Nassau Street were the offices of Fisk and Hatch, the Central Pacific's bankers. The New York house of Jay Cooke and Company, the Northern Pacific's bankers, was at Broadway and Nassau Street. Henry Villard, receiver of the Kansas Pacific and eventual owner of the Northern Pacific, would join them on Nassau Street in 1876. 17
|On Wall Street a man's reputation, his associations, and his money all had to be evaluated before anyone put any confidence in his paper.|
Wall Street was, in fact, a hybrid. A tightly knit world, it was also the nexus between local financial worlds and the emerging virtual world of financial information, which was both national and international. Many of the same bankers who negotiated government war bonds would later undertake the marketing of railroad bonds. Jay Cooke and Company, who eventually took over the sale of Northern Pacific securities, had overseen the Union bond sales. Fisk and Hatch, one of Cooke and Company's agents, became the Central Pacific's bankers. During the Civil War those houses had not only reaped considerable financial profit but also accrued dividends of patriotic regard and trust. 18
Soliciting funds on international markets involved the production of information about the railroads themselves and about the trustworthiness of the men who offered and sold the bonds. Railroads and bankers produced information in the form of bond prospectuses, stock and bond market quotations, corporate reports, and financial news. As the scale of the financial markets increased, such information grew more asymmetric: Insiders had a lot of it and outsiders relatively little. 19
On Wall Street a man's reputation, his associations, and his money all had to be evaluated before anyone put any confidence in his paper, precisely because men adept at producing financial information knew how unreliable it was. The men who financed the railroads lived 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 afraid of him." Villard was not always so sanguine; he eventually suffered a nervous breakdown. He was not alone. Wall Street was inhabited by worried and harried men who could not sleep, could not digest their food, and could not avoid each other. Their lives were a series of judgments about each other, shadowed by the nagging suspicion that those judgments were wrong. They often were. Collis P. Huntington balanced on a high wire and nearly tumbled off. Jay Cooke did tumble. Fisk and Hatch, the Central Pacific's bankers, accepted deposits only from "Banks, Savings Banks, or other well known corporations, or of individuals or firms whose character and standing are already known to us." They nonetheless suspended business in the panic of 1873, in part because Huntington betrayed them. 20
To sell bonds, corporations had to project information and character beyond Wall Street. The character of railroad promoters was initially hard to assess at a distance, and the railroads were thus unable to market their bonds without the assistance of intermediaries. When the Central Pacific turned to Fisk and Hatch or the Northern Pacific to Jay Cooke and Company to market railroad bonds, they benefited from the trust that had rubbed off on those firms from their role in financing the Civil War. In advertising Central Pacific bonds, Fisk and Hatch told potential investors that it sold "First-Class Railroad Securities which we can recommend with confidence." Cooke wrote the president of the Northern Pacific, "You must remember, that my responsibility is greater than that of all the rest put together, as the money thus to be expended comes in ninety cases out of a hundred from those who purchase simply on my word, not on the word of Jay Cooke & Co. in this case so much as my personal reputation." 21
The transcontinentals were hardly the only speculative ventures seeking capital on European financial markets, and that made the aid of reputable European houses even more necessary. Speyer and Company, whose parent and associated firms were the Speyer Brothers of London and Lazard Speyer-Ellissen of Frankfurt, played the same role in Europe as Fisk and Hatch did in the United States: they vouched for the corporate borrower's character and solvency. The Northern Pacific initially considered Europe the "great market for their bonds," but it was "flooded with bonds offered by every little Dutch house," and so the railroad needed "a great house whose recommendation would give them preference." But the Northern Pacific never secured that great house. First, the Franco-Prussian War disrupted what looked like successful European negotiations. Then, when negotiations over reparations due to the United States for British complicity in the activities of the Confederate raider the Alabama threatened to bring on a war with Great Britain, a second Northern Pacific negotiation fell apart. So powerful was the Rothschild name, however, that reports—premature, as it turned out—of the family's participation with Jay Cooke in the funding of a new U.S. Treasury issue in 1872, an enterprise that had nothing to do with the Northern Pacific, was enough to advance the sale of Northern Pacific bonds. 22
An investor without independent knowledge who found himself in a virtual world of financial statements, prospectuses, newspaper accounts, and market values that at once stood in for and was inseparable from the actual world of a developing nation had to trust someone. The problem of trusting strangers was as old as long-distance trade. A German banker whose client had inherited a note signed by the Central Pacific Associates, and who then tried to ascertain "the responsibility and financial ability of said parties" through American intermediaries, was a part of the older world. 23 The bond market, however, overwhelmed that world of individual promissory notes with millions of pieces of printed paper. This virtual world was, then as now, temptingly easy to corrupt. Numbers and words that were supposed to stand in for certain things could be changed and still maintain their influence; news could be altered or withheld; reports could 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-life universe.
Richard White is the Margaret Byrne Professor of American History at Stanford University. Professor White is one of the nation's leading scholars in three related fields: the American West, Native American history, and environmental history.
14. Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, "Information and Economic History: How the Credit Market in Old Regime Paris Forces Us to Rethink the Transition to Capitalism," American Historical Review, 104 (Feb. 1999), 69–94; Naomi Lamoreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (New York, 1994), 1–7.
15. On Henry Villard, see "In the U.S. Circuit court for the District of Kansas, Adolphus Meier et as. vs. KPRR ... New York, Sept. 28, 1878," f. 7, box 1, KPRR Bondholders statements, Villard Papers. Collis P. Huntington to Mark Hopkins, Aug. 29, 1869, 1: 93, box 20, Mark Hopkins Correspondence, Timothy Hopkins Transportation Collection, 1816–1942, M 97 (Special Collections, Stanford University Library, Stanford, Calif.); C. P. Huntington to Leland Stanford, May 10, 1870, in Letters from Collis P. Huntington to Mark Hopkins, Leland Stanford, Charles Crocker, E. B. Crocker, Charles F. Crocker, and D. D. Colton by 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 Octopus Speaks: The Colton Letters, ed. Salvador Ramirez (Carlsbad, Calif., 1982), 29. For Huntington's opinions, 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 Octopus Speaks, ed. Ramirez, 98, 363.
16. C. P. Huntington to Charles Crocker, Aug. 21, 1874, in Letters from Collis P. Huntington, by Huntington et al., III, 164–65; Hopkins to C. P. Huntington, Dec. 29, 1872, Incoming Correspondence, Collis P. Huntington Papers, 1856–1901 (microfilm, 115 reels, Microfilming Corporation of America, 1978–1979), series 1, reel 5; Lamoreaux, Insider Lending, 1–7; John A. James, Money and Capital Markets in Postbellum America (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 Octopus Speaks, 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; Stanford to stockholders, Sept. 9, 1873, 5: 33, box 22, Hopkins Correspondence.
18. Sylla, American Capital Market, 146–61; Carosso, Investment Banking in America, 15–17; Henrietta M. Larson, Jay Cooke, Private Banker (Cambridge, Mass., 1936), 10–151; Fisk and Hatch, Memoranda Concerning Government Bonds for the Information of Investors.... (New York, 1881).
20. Harvey E. Fisk, "Fisk and Hatch, Bankers and Dealers in Government Securities, 1862–65," Journal of Business and Economic History, 2 (Aug. 1930), 706–22; Villard to William J. Endicott, April 6, 1877, Letterbook 16, Private Correspondence, Villard Papers; Alexandra Villard de Borchgrave and John Cullen, Villard: The Life and Times of an American Titan (New York, 2001), 338–39; "Banking Department," in Memoranda Concerning Government Bonds, by Fisk and Hatch. Emphasis added. C. P. Huntington to Hopkins, Sept. 23, 1873, 5: 97, box 22, Hopkins Correspondence; Letters of Harvey Fisk, Edited for the Family by His Son, Harvey E. Fisk (New York, 1896), 34–37.
22. Harris Fahnestock to Jay Cooke, Sept. 18, 1869, B. 3, f. 3–2, Harris C. Fahnestock Papers (Baker Library); "Jay Cooke's Memoir," unedited typescript, pp. 136, 148 (Baker Library); Pitt Cooke to Jay Cooke, Jan. 5, 1872, Cooke Papers; Larson, Jay Cooke, 359–60.
23. The Newspaper Cuttings Files of the Council of Foreign Bondholders in the Guildhall Library, London, 1874–93 (microfilm, 266 reels, EP Microform Limited, 1975), reel 219; John Bonk to J. L. Worth, Feb. 3, 1876, Collis P. Huntington Papers, series 1, reel 9.