The first medium by which Jay Gould transferred many millions of dollars to his ownership was by his looting and wrecking of the Erie Railroad. If physical appearance were to be accepted as a gauge of capacity none would suspect that Gould contained the elements of one of the boldest and ablest financial marauders that the system in force had as yet produced. About five feet six inches in height and of slender figure, he gave the random impression of being a mild, meek man, characterized by excessive timidity. His complexion was swarthy and partly hidden by closely-trimmed black whiskers; his eyes were dark, vulpine and acutely piercing; his forehead was high. His voice was very low, soft and insinuating.
The Erie Railroad, running from New York City to Buffalo and thence westward to Chicago, was started in 1832. In New York State alone, irrespective of gifts in other States, it received what was virtually a gift of $3,000,000 of State funds, and $3,217,000 interest, making $6,217,000 in all. Counties, municipalities and towns through which it passed were prevailed upon to contribute freely donations of money, lands and rights. From private proprietors in New York State it obtained presents of land then valued at from $400,000 to $500,000, [Footnote: Report on the New York and Erie Railroad Company, New York State Assembly Document, No. 50, 1842. See also, Investigation of the Railroads of the State of New York, 1879, I: 100.] but now worth tens of millions of dollars. In addition, an extraordinary series of special privileges and franchises was given to it. This process was manifolded in every State through which the railroad passed. The cost of construction and equipment came almost wholly from the grants of public funds. [Footnote: "The Erie railway was built by the citizens of this State with money furnished by its people. The State in its sovereign capacity gave the corporation $3,000,000. The line was subsequently captured, or we may say stolen, by the fraudulent issue of more than $50,000,000 of stock." … "An analysis of the Erie Reorganization bill, etc., submitted to the Legislature by John Livingston, Esq., counsel for the Erie Railway Shareholders, 1876."]
Confiding in the fair promises of its projectors, the people credulously supposed that their interests would be safeguarded. But from time to time, Legislature after Legislature was corrupted or induced to enact stealthy acts by which the railroad was permitted to pass without restriction into the possession of a small clique of exploiters and speculators. Not only were the people cheated out of funds raised by public taxation and advanced to build the road—a common occurrence in the case of most railroads—but this very money was claimed by the capitalist owners as private capital, large amounts of bonds and stocks were issued against it, and the producers were assessed in the form of high freight and passenger rates to pay the necessary interest and dividends on those spurious issues.
Not satisfied with the thefts of public funds, the successive cliques in control of the Erie Railroad continually plundered its treasury, and defrauded its stockholders. So little attention was given to efficient management that shocking catastrophies resulted at frequent intervals. A time came, however, when the old locomotives, cars and rails were in such a state of decay, that the replacing of them could no longer be postponed. To do this money was needed, and the treasury of the company had been continuously emptied by looting.
The directors finally found a money loaner in Daniel Drew, an uncouth usurer. He had graduated from being a drover and tavern keeper to being owner of a line of steamboats plying between New York and Albany. He then, finally, had become a Wall street banker and broker. For his loans Drew exacted the usual required security. By 1855 he had advanced nearly two million dollars—five hundred thousand in money, the remainder in endorsements. The Erie directors could not pay up, and the control of the railroad passed into his hands. As ignorant of railroad management as he was of books, he took no pains to learn; during the next decade he used the Erie railroad simply as a gambling means to manipulate the price of its stocks on the Stock Exchange. In this way he fleeced a large number of dupes decoyed into speculation out of an aggregate of millions of dollars.
Old Cornelius Vanderbilt looked on with impatience. He foresaw the immense profits which would accrue to him if he could get control of the Erie Railroad; how he could give the road a much greater value by bettering its equipment and service, and how he could put through the same stock-watering operations that he did in his other transactions. Tens of millions of dollars would be his, if he could only secure control. Moreover, the Erie was likely at any time to become a dangerous competitor of his railroads. Vanderbilt secretly began buying stock; by 1866 he had obtained enough to get control. Drew and his dummy directors were ejected, Vanderbilt superseding them with his own.
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The change was worked with Vanderbilt's habitual brusque rapidity. Drew apparently was crushed. He had, however, one final resource, and this he now used with histrionic effect. In tears he went to Vanderbilt and begged him not to turn out and ruin an old, self-made man like himself. The appeal struck home. Had the implorer been anyone else, Vanderbilt would have scoffed. But, at heart, he had a fondness for the old illiterate drover whose career in so many respects resembled his own. Tears and pleadings prevailed; in a moment of sentimental weakness—a weakness which turned out to be costly—Vanderbilt relented. A bargain was agreed upon by which Drew was to resume directorship and represent Vanderbilt's interests and purposes.
Reinstated in the Erie board, Drew successfully pretended for a time that he was fully subservient. Ostensibly to carry out Vanderbilt's plans he persuaded that magnate to allow him to bring in as directors two men whose pliancy, he said, could be depended upon. These were Jay Gould, demure and ingratiating, and James Fisk, Jr., a portly, tawdry, pompous voluptuary. In early life Fisk had been a peddler in Vermont, and afterwards had managed an itinerant circus. Then he had become a Wall street broker. Keen and suspicious as old Vanderbilt was, and innately distrustful of both of them, he nevertheless, for some inexplicable reason, allowed Drew to install Gould and Fisk as directors. He knew Gould's record, and probably supposed him, as well as Fisk, handy tools (as was charged) to do his "dirty work" without question. He put Drew, Gould and Fisk on Erie's executive committee. In that capacity they could issue stock and bonds, vote improvements, and generally exercise full authority.
* * * * * * *
At first, they gave every appearance of responding obediently to Vanderbilt's directions. Believing it to his interest to buy as much Erie stock as he could, both as a surer guarantee of control, and to put his own price upon it, Vanderbilt continued purchasing. The trio, however, had quietly banded to mature a plot by which they would wrest away Vanderbilt's control.
This was to be done by flooding the market with an extra issue of bonds which could be converted into stock, and then by running down the price, and buying in the control themselves. It was a trick that Drew had successfully worked several years before. At a certain juncture he was apparently "caught short" in the Stock Exchange, and seemed ruined. But at the critical moment he had appeared in Wall street with fifty-eight thousand shares of stock, the existence of which no one had suspected. These shares had been converted from bonds containing an obscure clause allowing the conversion. The projection of this large number of shares into the stock market caused an immediate and violent decline in the price. By selling "short"—a Wall street process which we have described elsewhere— Drew had taken in large sums as speculative winnings.
The same ruse Drew, Gould and Fisk now proceeded to execute on Vanderbilt. Apparently to provide funds for improving the railroad, they voted to issue a mass of bonds. Large quantities of these they turned over to themselves as security for pretended advances of moneys. These bonds were secretly converted into shares of stock, and then distributed among brokerage houses of which the three were members. Vanderbilt, intent upon getting in as much as he could, bought the stock in unsuspectingly. Then came revelations of the treachery of the three men, and reports of their intentions to issue more stock.
Vanderbilt did not hesitate a moment. He hurried to invoke the judicial assistance of Judge George C. Barnard, of the New York State Supreme Court. He knew that he could count on Barnard, whom at this time he corruptly controlled. This judge was an unconcealed tool of corporate interests and of the plundering Tweed political "ring"; for his many crimes on the bench he was subsequently impeached. [Footnote: At his death $1,000,000 in bonds and cash were found among his effects.] Barnard promptly issued a writ enjoining the Erie directors from issuing further stock, and ordered them to return to the Erie treasury one-fourth of that already issued. Furthermore, he prohibited any more conversion of bonds into stock on the ground that it was fraudulent.
So pronounced a victory was this considered for Vanderbilt, that the market price of Erie stock went up thirty points. But the plotters had a cunning trick in reserve. Pretending to obey Barnard's order, they had Fisk wrench away the books of stock from a messenger boy summoned ostensibly to carry them to a deposit place on Pine street. They innocently disclaimed any knowledge of who the thief was; as for the messenger boy, he "did not know." These one hundred thousand shares of stock Drew, Gould and Fisk instantly threw upon the stock market. No one else had the slightest suspicion that the court order was being disobeyed. Consequently, Vanderbilt's brokers were busily buying in this load of stock in million-dollar bunches; other persons were likewise purchasing. As fast as the checks came in, Drew and his partners converted them into cash.
It was not until the day's activity was over that Vanderbilt, amazed and furious, realized that he had been gouged out of $7,000,000. Other buyers were also cheated out of millions. The old man had been caught napping; it was this fact which stung him most. However, after the first paroxysm of frenzied swearing, he hit upon a plan of action. The very next morning warrants were sworn out for the arrest of Drew, Fisk and Gould. A hint quickly reached them; they thereupon fled to Jersey City out of Barnard's jurisdiction, taking their cargo of loot with them. According to Charles Francis Adams, in his "Chapters of Erie," one of them bore away in a hackney coach bales containing $6,000,000 in greenbacks. [Footnote: "Chapters of Erie": 30.] The other two fugitives were loaded down with valises crammed with bonds and stocks.
Here in more than one sense was an instructive and significant situation. Vanderbilt, the foremost blackmailer of his time, the plunderer of the National Treasury during the Civil War, the arch briber and corruptionist, virtuously invoking the aid of the law on the ground that he had been swindled! Drew, Gould and Fisk sardonically jested over it. But joke as they well might over their having outwitted a man whose own specialty was fraud, they knew that their position was perilous. Barnard's order had declared their sales of stock to be fraudulent, and hence outlawed; and, moreover, if they dared venture back to New York, they were certain, as matters stood, of instant arrest with the threatened alternative of either disgorging or of a criminal trial and possibly prison. To themselves they extenuated their thefts with the comforting and self-sufficient explanation that they had done to Vanderbilt precisely what he had done to others, and would have done to them. But it was not with themselves that the squaring had to be done, but with the machinery of law; Vanderbilt was exerting every effort to have them imprisoned.
How was this alarming exigency to be met? They speedily found a way out. While Vanderbilt was thundering in rage, shouting out streaks of profanity, they calmly went ahead to put into practice a lesson that he himself had thoroughly taught. He controlled a sufficient number of judges; why should not they buy up the Legislature, as he had often done? The strategic plan was suggested of getting the New York Legislature to pass an act legalizing their fraudulent stock issues. Had not Vanderbilt and other capitalists often bought up Congress and Legislatures and common councils? Why not now do the same? They well knew the approved method of procedure in such matters; an onslaught of bribing legislators, they reckoned, would bring the desired result.
Stuffing $500,000 in his satchel, Gould surreptitiously hurried to Albany. Detected there and arrested, he was released under heavy bail which a confederate supplied. He appeared in court in New York City a few days later, but obtained a postponement of the action. No time was lost by him. "He assiduously cultivated," says Adams, "a thorough understanding between himself and the Legislature." In the face of sinister charges of corruption, the bill legalizing the fraudulent stock issues was passed. Ineffectually did Vanderbilt bribe the legislators to defeat it; as fast as they took and kept his money, Gould debauched them with greater sums. One Senator in particular, as we have seen, accepted $75,000 from Vanderbilt, and $100,000 from Gould, and pocketed both amounts.
A brisk scandal naturally ensued. The usual effervescent expedient of appointing an investigating committee was adopted by the New York State Senate on April 10, 1868. This committee did not have to investigate to learn the basic facts; it already knew them. But it was a customary part of the farce of these investigating bodies to proceed with a childlike assumption of entire innocence.
Many witnesses were summoned, and much evidence was taken. The committee reported that, according to Drew's testimony, $500,000 had been drawn out of the Erie railroad's treasury, ostensibly for purposes of litigation, and that it was clear "that large sums of money did come from the treasury of the Erie Railroad Company, which were expended for some purpose in Albany, for which no vouchers seem to have been filed in the offices of the company." The committee further found that "large sums of money were expended for corrupt purposes by parties interested in legislation concerning railways during the session of 1868."
But who specifically did the bribing? And who were the legistators bribed? These facts the committee declared that it did not know. This investigating sham resulted, as almost always happened in the case of similar inquisitions, in the culpability being thrown upon certain lobbyists "who were enriched." These lobbyists were men whose trade it was to act as go-betweens in corrupting legistators. Gould and Thompson—the latter an accomplice—testified that they had paid "Lon" Payn, a lobbyist who subsequently became a powerful Republican politician, $10,000 "for a few days' services in Albany in advocating the Erie bill"; and it was further brought out that $100,000 had been given to the lobbyists Luther Caldwell and Russell F. Hicks, to influence legislation and also to shape public opinion through the press. Caldwell, it appeared, received liberal sums from both Vanderbilt and Gould. [Footnote: Report of the Select Committee of the New York Senate, appointed April 10, 1868, in Relation to Members Receiving Money from Railway Companies. Senate Document No. 52, 1869:3-12, and 137, 140-146. ] A subsequent investigation committee appointed, in 1873, to inquire into other charges, reported that in one year of 1868 the Erie railroad directors, comprising Drew, Gould, Fisk and their associates, had spent more than a million dollars for "extra and legal services," and that it was "their custom from year to year to spend large sums to control elections and to influence legislation." [Footnote: Report of the Select Committee of the Assembly, Assembly Documents, 1873, Doc. No. 98: xix.] [Footnote: "What the Erie has done," the Committee reported, "other great corporations are doubtless doing from year to year. Combined as they are, the power of the great moneyed corporations of this country is a standing menace to the liberties of the people.
"The railroad lobby flaunts its ill-gotten gains in the faces of our legislatures, and in all our politics the debasing effect of its influence is felt" (p. 18).]
Vanderbilt later succeeded in compelling the Erie Railroad to reimburse him for the sums that he thus corruptly spent in fighting Drew, Gould and Fisk. [Footnote: Railroad Investigation of the State of New York, 1879, ii: 1654.]
Their huge thefts having been legalized, Drew, Gould and Fisk returned to Jersey City. But their path was not yet clear. Vanderbilt had various civil suits in New York against them; moreover they were adjudged in contempt of court. Parleying now began. With the severest threats of what the courts would do if they refused, Vanderbilt demanded that they buy back the shares of stock that they had unloaded upon him.
Drew was the first to compromise; Gould and Fisk shortly afterward followed. They collectively paid Vanderbilt $2,500,000 in cash, $1,250,000 in securities for fifty thousand Erie shares, and another million dollars for the privilege of calling upon him for the remaining fifty thousand shares at any time within four months. Although this settlement left Vanderbilt out of pocket to the extent of almost two million dollars, he consented to abandon his suits. The three now left their lair in Jersey City and transferred the Erie offices to the Grand Opera House, at Eighth avenue and Twenty-third street, New York City. In this collision with Vanderbilt, Gould learned a sharp lesson he thereafter never overlooked; namely, that it was not sufficient to bribe common councils and legislatures; he, too, must own his judges. Events showed that he at once began negotiations.
The next development was characteristic. Having no longer any need for their old accomplice, Gould and Fisk, by tactics of duplicity, gradually sheared Drew and turned him out of the management to degenerate into a financial derelict. It was Drew's odd habit, whenever his plans were crossed, or he was depressed, to rush off to his bed, hide himself under the coverlets and seek solace in sighs and self-compassion, or in prayer—for with all his unscrupulousness he had an orthodox religious streak. When Drew realized that he had been plundered and betrayed, as he had so often acted to others, he sought his bed and there long remained in despair under the blankets. The whimsical old extortionist never regained his wealth or standing. Upon Drew's effacement Gould caused himself to be made president and treasurer of the Erie Railroad, and Fisk vice-president and controller.
When Gould and Fisk began to turn out more watered stock various defrauded malcontent stockholders resolved to take an intervening hand. This was a new obstacle, but it was coolly met. Gould and Fisk brought in gangs of armed thugs to prevent these stockholders from getting physical possession of the books of the company. Then the New York Legislature was again corrupted.
A bill called the Classification Act, drafted to insure Gould and Fisk's legal control, was enacted. This bill provided that only one- fifth of the board of directors should be retired in any year. By this means, although the majority of stockholders might be opposed to the Gould-Fisk management, it would be impossible for them to get possession of the road for at least three years, and full possession for not less than five years.
But to prevent the defrauded large stockholders from getting possession of the railroad through the courts, another act was passed. This provided that no judgement to oust the board of directors could be rendered by any court unless the suit was brought by the Attorney-General of the State. It was thus only necessary for Gould and Fisk to own the Attorney-General entirely (which they took pains, of course, to do) in order to close the courts to the defrauded stockholders. On a trumped-up suit, and by an order of one of the Tweed judges, a receiver was appointed for the stock owned by foreign stockholders; and when any of it was presented for record in the transfer book of the Erie railroad, the receiver seized it. In this way Gould and Fisk secured practical possesssion of $6,000,000 of the $50,000,000 of stock held abroad.
From 1868 to 1872 Gould, abetted by subservient directors, issued two hundred and thirty-five thousand more shares of stock. [Footnote: Fisk was murdered by a rival in 1872 in a feud over Fisk's mistress. His death did not interrupt Gould's plans.] The frauds were made uncommonly easy by having Tweed machine as an auxiliary; in turn, Tweed, up to 1871, controlled the New York City and State dominant political machine, including the Legislature and many of the judges. To insure Tweed's connivance, they made him a director of the Erie Railroad, besides heavily bribing him. [Footnote: "Did you ever receive any money from either Fisk or Gould to be used in bribing the Legislature?" Tweed was asked by an aldermanic committee in 1877, after his downfall.
A. "I did sir! They were of frequent occurrence. Not only did I receive money but I find by an examination of the papers that everybody else who received money from the Erie railroad charged it to me."—Documents of the Board of Aldermen, 1877, Part II, No. 8:49.] With Tweed as an associate they were able to command the judges who owed their elevation to him. Barnard, one of Tweed's servile tools, was sold over to Gould and Fisk, and so throughly did this judge prostitute his office at their behest that once, late at night, at Fisk's order, he sportively held court in the apartment of Josie Mansfield, Fisk's mistress. [Footnote: The occasion grew out of an attempt of Gould and Fisk in 1869 to get control of the Albany and Sesquehanna Railroad. Two parties contested—The Gould and the "Ramsey," headed by J. Pierpont Morgan. Each claimed the election of its officers and board of directors. One night, at half-past ten o'clock, Fisk summoned Barnard from Poughkeepsie to open chambers in Josie Mansfield's rooms. Barnard hurried there, and issued an order ousting Ramsey from the presidency. Judge Smith at Rochester subsequently found that Ramsey was legally elected, and severely denounced Gould and Fisk—"Letters of General Francis C. Barlow, Albany": 1871.
The records of this suit (as set forth in Lansing's Reports, New York Supreme Court. I:308, etc.) show that each of the contesting parties accused the other of gross fraud, and that the final decision was favorable to the "Ramsey" party. See the chapters on J. Pierpont Morgan in Vol. III of this work.] When the English stockholders sent over a large number of shares to be voted in for a new management, it was Barnard who allowed this stock to be voted by Gould and Fisk. At another time Gould and Fisk called at Barnard's house and obtained an injunction while he was eating breakfast.
It was largely by means of his corrupt alliance with the Tweed "ring" that Gould was able to put through his gigantic frauds from 1868 to 1872.
Gould was, indeed, the unquestioned master mind in these transactions; Fisk and the others merely executed his directions. The various fraudulent devices were of Gould's origination. A biographer of Fisk casually wrote at the time: "Jay Gould and Fisk took William M. Tweed into their board, and the State Legislature, Tammany Hall and the Erie 'ring' were fused together and have contrived to serve each other faithfully." [Footnote: "A Life of James Fisk, Jr.," New York, 1871.] Gould admitted before a New York State Assembly investigating committee in 1873 that, in the three years prior to 1873, he had paid large sums to Tweed and to others, and that he had also disbursed large sums "which might have been used to influence legislation or elections." These sums were facetiously charged on the Erie books to "India Rubber Account"—whatever that meant.
Gould cynically gave more information. He could distinctly recall, he said, "that he had been in the habit of sending money into various districts throughout the State," either to control nominations or elections for Senators or members of the Assembly. He considered "that, as a rule, such investments paid better than to wait until the men got to Albany." Significantly he added that it would be as impossible to specify the numerous instances "as it would be to recall the number of freight cars sent over the Erie Railroad from day to day." His corrupt operations, he indifferently testified, extended into four different States. "In a Republican district I was a Republican; in a Democratic district, a Democrat; in a doubtful district I was doubtful; but I was always for Erie." [Footnote: Report of, and Testimony Before, the Select Assembly Committee, 1873, Assembly Documents, Doc. No. 98: xx, etc.] The funds that he thus used in widespread corruption came obviously from the proceeds of his great thefts; and he might have added, with equal truth, that with this stolen money he was able to employ some of the most eminent lawyers of the day, and purchase judges.
Those writers who are content with surface facts, or who lack understanding of popular currents, either state, or leave the inference, that it was solely by bribing and trickery that Gould was able to consummate his frauds. Such assertions are altogether incorrect. To do what he did required the support, or at least tolerance, of a considerable section of public opinion. This he obtained. And how? By posing as a zealous anti-monopolist.
The cry of anti-monopoly was the great fetich of the entire middle class; this class viewed with fear the growing concentration of wealth; and as its interests were reflected by a large number of organs of public opinion, it succeeded in shaping the thoughts of no small a section of the working class.
While secretly bribing, Gould constantly gave out for public consumption a plausible string of arguments, in which act, by the way, he was always fertile. He represented himself as the champion of the middle and working classes in seeking to prevent Vanderbilt from getting a monopoly of many railroads. He played adroitly upon the fears, the envy and the powerful mainsprings of the self interest of the middle class by pointing out how greatly it would be at the mercy of Vanderbilt should Vanderbilt succeed in adding the Erie Railroad and other railroads to his already formidable list.
It was a time of all times when such arguments were bound to have an immense effect; and that they did was shown by the readiness with which the trading class excused his corruption and frauds on the ground that he seemed to be the only man who proved that he could prevent Vanderbilt from gobbling up all of the railroads leading from New York City. With a great fatuousness the middle class supposed that he was fighting for its cause.
The bitterness of large numbers of the manufacturing, jobbing and agricultural classes against Commodore Vanderbilt was deep-seated. By an illegal system of preferential freight rates to certain manufacturers, Vanderbilt put these favorites easily in a position where they could undersell competitors. Thus, A. T. Stewart, one of the noted millionaire manufacturers and merchants of the day, instead of owing his success to his great ability, as has been set forth, really derived it, to a great extent, from the secret preferential freight rates that he had on the Vanderbilt railroads. A variety of other coercive methods were used by Vanderbilt. Special freight trains were purposely delayed and run at snail's pace in order to force shippers to pay the extraordinary rates demanded for shipping over the Merchant's Dispatch, a fast freight line owned by the Vanderbilt family.
These were but a few of the many schemes for their private graft that the Vanderbilts put in force. The agricultural class was taxed heavily on every commodity shipped; for the transportation of milk, for example, the farmer was taxed one-half of what he himself received for milk. These taxes, of course, eventually fell upon the consumer, but the manufacturer and the farmer realized that if the extortions were less, their sales and profits would be greater. They were in a rebellious mood and gladly welcomed a man such as Gould who thwarted Vanderbilt at every turn. Gould well knew of this bitter feeling against Vanderbilt; he used it, and thrust himself forward constantly in the guise of the great deliverer.
As for the small stockholders of the Erie railroad, Gould easily pacified them by holding out the bait of a larger dividend than they had been getting under the former regime. This he managed by the common and fraudulent expedient of issuing bonds, and paying dividends out of proceeds. So long as the profits of these small stockholders were slightly better than they had been getting before, they were complacently satisfied to let Gould continue his frauds. This acquiescence in theft has been one of the most pronounced characteristics of the capitalistic investors, both large and small. Numberless instances have shown that they raise no objections to plundering management provided that under it their money returns are increased.
The end of Gould's looting of the Erie railroad was now in sight. However the small stockholders might assent, the large English stockholders, some of whom had invidious schemes of their own in the way of which Gould stood, were determined to gain control themselves.
They made no further attempt to resort to the law. A fund of $300,000 was sent over by them to their American agents with which to bribe a number of Gould's directors to resign. As Gould had used these directors as catspaws, they were aggrieved because he had kept all of the loot himself. If he had even partly divided, their sentiments would have been quite different. The $300,000 bribery fund was distributed among them, and they carried out their part of the bargain by resigning. [Footnote: Assembly Document No. 98, 1873: xii and xiii. The English stockholders took no chances on this occasion. The committee reported that not until the directors had resigned did they "receive their price." ] The Assembly Investigating Committee of 1873 referred carelessly to the English stockholders as being "impatient at the law's delay" and therefore taking matters into their own hands. If a poor man or a trade union had become "impatient at the law's delay" and sought an illegal remedy, the judiciary would have quickly pronounced condign punishment and voided the whole proceeding. The boasted "majesty of law" was a majesty to which the underdogs only were expected to look up to in fear and trepidation.
When the English stockholders elected their own board Gould obtained an injunction from the courts. This writ was absolutely disregarded, and the anti-Gould faction on March 11, 1872, seized possession of the offices and books of the company by physical force. Did the courts punish these men for criminal contempt? No effort was made to. Many a worker or labor union leader had been sent to jail (and has been since), for "contempt of court," but the courts evidently have been willing enough to stomach all of the contempt profusely shown for them by the puissant rich. The propertyless owned nothing, not to speak of a judge, but the capitalists owned whole strings of judges, and those whom they did not own or corrupt were generally influenced to their side by association or environment. "All of this," reported the Assembly Investigating Committee of 1873, speaking of the means employed to overthrow Gould, "has been done without authority of law." But no law was invoked by the officials to make the participants account for their illegal acts.
It seems that the entire amount, including the large fees paid to agents and lawyers, corruptly expended by the English capitalists in ousting Gould, was $750,000. Did they foot this bill out of their own pockets? By no means. They arranged the reimbursements by voting this sum to themselves out of the Erie Railroad treasury; [Footnote: Assembly Document No. 98, 1873: xii and xvi.] that is to say, they compelled the public to shoulder it by adding to the bonded burdens on which the people were taxed to pay interest.
To complete their control they bribed the New York Legislature to repeal the Classification Act. As has been shown, the Legislature of 1872 was considered a "reform" body, and it also has been brought out how Vanderbilt bribed it to give him invaluable public franchises and large grants of public money. In fact, other railroad magnates as well as he systematically bribed; and it is clear that they contributed jointly a pool of money both to buy laws and to prevent the passage of objectionable acts. "It appears conclusive," reported the Assembly Investigating Committee of 1873, "that a large amount— reported by one witness at $100,000—was appropriated for legislative purposes by the railroad interest in 1872, and that this [$30,000] was Erie's proportion." [Footnote: Ibid., xvii.] One of the lobbyists, James D. Barber, "a ruling spirit in the Republican party," admitted receiving $50,000 from the Vanderbilts. [Footnote: Ibid., 633.] While uniting to suppress bills feared by them all, each of the magnates bribed to foil the others' purposes.
What did Gould's plunder amount to? His direct thefts, by reason of his Erie frauds, seem to have reached more than twelve million dollars, all, or nearly all, of which he personally kept.
That sum, considering the falling prices of commodities after the panic of 1873, and comparable with current standards of cost and living, was equivalent to perhaps double the amount at present. Various approximations of his thefts were made. After a minute examination of the Erie railroad's books, Augustus Stein, an expert accountant, testified before the "Hepburn Committee" (the New York Assembly Investigating Committee of 1879) that Gould had himself pocketed twelve or thirteen million dollars. [Footnote: Q.—Do you think you could remember the aggregate amount of wrong-doing on the part of Mr. Gould that you have discovered?
A.—I could give an estimate throwing off a couple of millions here and there; I could say that it amounted to—that is, what we discovered—amounted to about twelve or thirteen million dollars.— Railroad Investigation of the State of New York, 1879, ii: 1765.]
This, however, was only one aspect. Between 1868 and 1873 Gould and his accomplices had issued $64,000,000 of watered stock. Gould, so the Erie books revealed, had charged $12,000,000 as representing the outlay for construction and equipment, yet not a new rail had been laid, nor a new engine put in use, nor a new station built. These twelve millions or more were what he and his immediate accomplices had stolen outright from the Erie Railroad treasury. Considerable sums were, of course, paid corruptly to politicians, but Gould got them all back, as well as the plunder of his associates, by personally manipulating Erie stock so as to compel them to sell at a great loss to themselves, and a great profit to himself. Furthermore, in these manipulations of stock, he scooped in more millions from other sources.
Had it not been for his intense greed and his constitutional inability to remain true to his confederates, Gould might have been allowed to retain the proceeds of his thefts. His treachery to one of them, Henry N. Smith, who had been his partner in the brokerage firm of Smith, Gould and Martin, resulted in trouble. Gould cornered the stock of the Chicago and Northwestern Railroad; to put it more plainly, he bought up the outstanding available supply of shares, and then ran the price up from 75 to 250. Smith was one of a number of Wall Street men badly mulcted in this operation, as Gould intended. Seeking revenge, Smith gave over the firm's books, which were in his possession, to General Barlow, counsel for the Erie Railroad's protesting stockholders. [Footnote: Railroad Investigation, etc., v:531] Evidence of great thefts was quickly discovered, and an action was started to compel Gould to disgorge about $12,000,000. A criminal proceeding was also brought, and Gould was arrested and placed under heavy bonds.
Apparently Gould was trapped. But a wonderful and unexpected development happened which filled the Wall Street legion with admiration for his craft and audacity. He planned to make his very restitution the basis for taking in many more millions by speculation; he knew that when it was announced that he had concluded to disgorge, the market value of the stock would instantly go up and numerous buyers would appear.
Secretly he bought up as much Erie stock as he could. Then he ostentatiously and with the widest publicity declared his intension to make restitution. Such a cackling sensation it made! The price of Erie stock at once bounded up, and his brokers sold quantities of it to his great accruing profit. The pursuing stockholders assented to his offer to surrender his control of the Erie Railroad, and to accept real estate and stocks seemingly worth $6,000,000. But after the stockholders had withdrawn their suits, they found that they had been tricked again. The property that Gould had turned over to them did not have a market value of more than $200,000. [Footnote: Railroad Investigation, etc. 1879, iii: 2503. One of the very rare instances in which any of Gould's victims was able to compel him to disgorge, was that described in the following anecdote, which went the rounds of the press: "An old friend had gone to Gould telling him that he had managed to save up some $20,000, and asking his advice as to how he should invest it in such a manner as to be absolutely safe, for the benefit of his family. Gould told him to invest it in a certain stock, and assured him that the investment would be absolutely safe as to income, and, besides, its market value would shortly be greatly enhanced.
"The man did as advised by Gould, and the stock promptly started to go down. Lower and lower it went, and seeing the steady depreciation in the price of the stock, and hearing stories to the effect that the dividends were to be passed, the man wrote to Gould asking if the investment was still good. Gould replied to his friend's letter, assuring him that the stories had no foundation in fact and were being circulated purely for market effect.
"But still the stock declined. Each day the price went to new lower figures on the Stock Exchange, and finally the rumors became fact, and the Directors passed the dividend. The man had seen the savings of years vanish in a few months and realized that he was a ruined man.
"Goaded to an almost insane frenzy, he rushed into Gould's office the afternoon the Directors announced the passing of the dividend, and told Gould that he had been deliberately and grossly deceived and that he was ruined. He wound up by announcing his intention of shooting Gould then and there.
"Gould heard his quondam friend through. There could be no mistaking the man's intent. He was evidently half crazed and possessed of an insane desire to carry out his threat. Gould turned to him and said: 'My dear Mr.—-' calling him by name, 'you are laboring under a most serious misapprehension. Your money is not lost. If you will go down to my bank tomorrow morning, you will find there a balance of $25,000 to your credit. I sold out your stock some time ago, but had neglected to notify you.' The man looked at him in amazement and, half doubting, left the office.
"As soon as he had left the office Gould sent word to his bank to place $25,000 to this man's credit. The man spent a sleepless night, torn by doubts and fears. When the bank opened for business he was the first man in line, and was nearly overcome when the cashier handed him the sum that Gould had named the previous afternoon.
"Gould had evidently decided in his own mind that the man was determined to kill him, and that the only way to save his life and his name was to pay the man the sum he had lost plus a profit, in the manner he did. But as a sidelight on the absolutely cold-blooded self-possession of the man, it is interesting."]
Gould's thefts from the Erie railroad were, however, only one of his looting transactions during those busy years. At the same time, he was using these stolen millions to corner the gold supply. In this "Black Friday" conspiracy (for so it was styled) he fradulently reaped another eleven million dollars to the accompaniment of a financial panic, with a long train of failures, suicides and much disturbance and distress.
The "gold conspiracy" as plotted and consummated by Gould was in its day denounced as one of the most disgraceful events in American history. To adjudge it so was a typical exaggeration and perversion of a society caring only about what was passing in its upper spheres. The spectacular nature of this episode, and the ruin it wrought in the ranks of the money dealers and of the traders, caused its importance to be grossly misrepresented and overdrawn.
It was not nearly as discreditable as the gigantic and repulsive swindles that traders and bankers had carried on during the dark years of the Civil War. The very traders and financiers who beslimed Gould for his "gold conspiracy" were those who had built their fortunes on blood-soaked army contracts. Nor could the worst aspects of Gould's conspiracy, bad as they were, begin to vie in disastrous results with the open and insidious abominations of the factory and landlord system. To repeat, it was a system in which incredible numbers of working men, women and children were killed off by the perils of their trades, by disease superinduced and aggravated by the wretchedness of their work, and by the misery of their lot and habitations. Millions more died prematurely because of causes directly traceable to the withering influences of poverty.
But this unending havoc, taking place silently in the routine departments of industry, and in obscure alleyways, called forth little or no notice. What if they did suffer and perish? Society covered their wrongs and injustices and mortal throes with an inhibitive silence, for it was expected that they, being lowly, should not complain, obtrude grievances, or in any way make unpleasant demonstrations. Yet, if the prominent of society were disgruntled, or if a few capitalists were caught in the snare of ruin which they had laid for others, they at once bestirred themselves and made the whole nation ring with their outcries and lamentations. Their merest whispers became thunderous reverberations. The press, the pulpit, legislative chambers and the courts became their strident voices, and in all the influential avenues for directing public opinion ready advocates sprang forth to champion their plaints, and concentrate attention upon them. So it was in the "gold conspiracy."
After the opening of the Civil War, gold was exceedingly scarce, and commanded a high premium. The supply of this metal, this yellow dross, which to a considerable degree regulated the world's relative values of wages and commodities, was monopolized by the powerful banking interests. In 1869 but fifteen million dollars of gold was in actual circulation in the United States.
Notwithstanding the increase of industrial productive power, the continuous displacement of obsolete methods by the introduction of labor-saving machinery, and the consecutive discovery of new means for the production of wealth, the task of the worker was not lightened. He had, for the most part, after great struggles, secured a shorter workday, but if the hours were shorter the work was more tense and racking than in the days before steam-driven machinery supplanted the hand tool. The mass of the workers were in a state of dependence and poverty. The land, industrial and financial system, operating in the three-fold form of rent, interest and profit, tore away from the producer nearly the whole of what he produced. Even those factory-owning capitalists exercising a personal and direct supervision over their plants, were often at the mercy of the clique of bankers who controlled the money marts.
Had the supply of money been proportionate to the growth of population and of business, this process of expropriation would have been less rapid. As it was, the associated monopolies, the international and national banking interests, and the income classes in general, constricted the volume of money into as narrow a compress as possible. As they were the very class which controlled the law- making power of Government, this was not difficult.
The resulting scarcity of money produced high rates of interest. These, on the one hand, facilitated usury, and, on the other, exacted more labor and produce for the privilege of using that money. Staggering under burdensome rates of interest, factory owners, business men in general, farmers operating on a large scale, and landowners with tenants, shunted the load on to the worker. The producing population had to foot the additional bill by accepting wages which had a falling buying power, and by having to pay more rent and greater prices for necessities. Such conditions were certain to accelerate the growth of poverty and the centralization of wealth.
Gould's plan was to get control of the outstanding fifteen millions of dollars of gold and fix his own price upon them. Not only from what was regarded as legitimate commerce would he exact tribute, but he would squeeze to the bone the whole tribe of gold speculators—for at that time gold was extensively speculated in to an intensive degree.
With the funds stolen from the Erie Railroad treasury, he began to buy in gold. To accommodate the crowd of speculators in this metal, the Stock Exchange had set apart a "Gold Room," devoted entirely to the speculative purchase and sale of gold. Gould was confident that his plan would not miscarry if the Government would not put in circulation any part of the ninety-five million dollars in gold hoarded as a reserve in the National Treasury. The urgent and all- important point was to ascertain whether the Government intended to keep this sum entirely shut out from circulation.
To get this inside information he succeeded in corruptly winning over to his interests A. R. Corbin, a brother-in-law of President Grant. The consideration was Gould's buying of two million dollars' worth of gold bonds, without requiring margin or security for Corbin's account [Footnote: Gold Panic Investigation, House Report: No 32, Forty-first Congress, Second Session, 1870:157. Corbin's venality in lobbying for corrupt bills was notorious; he admitted his complicity before a Congressional Investigating Committee in 1857.] Thus Gould thought he had surely secured an intimate spy within the authoritative precincts of the White House. As the premium on gold constantly rose, these bonds yielded Corbin as much sometimes as $25,000 a week in profits. To insure the further success of his plan, Gould subsidized General Butterfield, whose appointment as sub-treasurer at New York Corbin claimed to have brought about. Gould testified in 1870 that he had made a private loan to Butterfield, and that he had carried speculatively $1,500,000 for Butterfield's benefit. These statements Butterfield denied. [Footnote: Gold Panic Investigation, etc., 160.]
Through Corbin, Gould attempted to pry out Grant's policies, and with Fisk as an interlocutor, Gould personally attempted to draw out the President. To their consternation they found that Grant was not disposed to favor their arguments. The prospect looked very black for them. Gould met the situation with matchless audacity. By spreading subtle rumors, and by inspiring press reports through venal writers, he deceived not only the whole of Wall Street, but even his own associates, into believing that high Government officials were in collusion with him. The report was assiduously disseminated that the Government did not intend to release any of its hoard of gold for circulation. The premium, accordingly, shot up to 146. Soon after this, certain financial quarters suspected that Gould was bluffing. The impression spreading that he could not depend upon the Government's support, the rate of the premium declined, and Gould's own array of brokers turned against him and sold gold.
Entrapped, Gould realized that something had to be done, and done quickly, if he were to escape complete ruin, holding as he did the large amount of gold that he had bought at steep prices. By plausible fabrications he convinced Fisk that Grant was really an ally. Gould had bought a controlling interested in the Tenth National Bank. This institution Gould and Fisk now used as a fraudulent manufactory of certified checks. These they turned out to the amount of tens of millions of dollars. With the spurious checks they bought from thirty to forty millions in gold. [Footnote: Gold Panic Investigation: 13.] Such an amount of gold did not, of course, exist in circulation. But the law permitted gambling in it as though it really existed. Ordinary card gamblers, playing for actual money, were under the ban of law; but the speculative gamblers of the Stock Exchange who bought and sold goods which frequently did not exist, carried on their huge fraudulent operations with the full sanction of the law. Gould's plan was not intricate. Extensive purchases of gold naturally—as the laws of trade went—were bound to increase constantly its price.
By September, 1869, Gould and his partners not only held all of the available gold in circulation, but they held contracts by which they could call upon bankers, manufacturers, merchants, brokers and speculators for about seventy millions of dollars more of the metal. To the banking, manufacturing and importing interests gold, as the standard, was urgently required for various kinds of interfluent business transactions: to pay international debts, interest on bonds, customs dues or to move the crops. They were forced to borrow it at Gould's own price. This price was added to the cost of operation, manufacture and sale, to be eventually assessed upon the consumer. Gould publicly announced that he would show no mercy to anyone. He had a list, for example, of two hundred New York merchants who owed him gold; he proposed to print their names in the newspapers, demanding settlement at once, and would have done so, had not his lawyers advised him that the move might be adjudged criminal conspiracy. [Footnote: Gold Panic Investigation, etc., 13.]
The tension, general excitement and pressure in business circles were such that President Grant decided to release some of the Government's gold, even though the reserve be diminished. In some mysterious way a hint of this reached Gould. The day before "Black Friday" he resolved to betray his partners, and secretly sell gold before the price abruptly dropped. To do this with success it was necessary to keep on buying, so that the price would be run up still higher.
Such methods were prohibited by the code of the Stock Exchange which prescribed certain rules of the game, for while the members of the Exchange allowed themselves the fullest latitude and the most unchecked deception in the fleecing of outside elements, yet among themselves they decreed a set of rules forbidding any sort of double- dealing in trading with one another. To draw an analogy, it was like a group of professional card sharps deterring themselves by no scruples in the cheating of the unwary, but who insisted that among their own kind fairness should be scrupulously observed. Yet, rules or no rules, no one could gainsay the fact that many of the foremost financiers had often and successfully used the very enfillading methods that Gould now used.
While Gould was secretly disposing of his gold holdings, he was goading on his confederates and his crowd of fifty or more brokers to buy still more. [Footnote: "Gould, the guiltier plotter of all these criminal proceedings," reported the Congressional Investigating Committee of 1870, "determined to betray his own associates, and silent, and imperturbable, by nods and whispers directed all."-Gold Panic Investigation: 14.] By this time, it seems, Fisk and his partner in the brokerage business, Belden, had some stray inklings of Gould's real plan; yet all that they knew were the fragments Gould chose to tell them, with perhaps some surmises of their own. Gould threw out just enough of an outline to spur on their appetite for an orgy of spoils. Undoubtedly, Gould made a secret agreement with them by which he could repudiate the purchases of gold made in their names. Away from the Stock Exchange Fisk made a ludicrous and dissolute enough figure, with his love of tinsel, his show and braggadacio, his mock military prowess, his pompous, windy airs and his covey of harlots. But in Wall Street he was a man of affairs and power; the very assurance that in social life made him ridiculous to a degree, was transmuted into a pillar of strength among the throng of speculators who themselves were mainly arrant bluffs. A dare-devil audacity there was about Fisk that impressed, misled and intimidated; a fine screen he served for Gould plotting and sapping in the background.
The next day, "Black Friday," September 24, 1869, was one of tremendous excitement and gloomy apprehension among the money changers. Even the exchanges of foreign countries reflected the perturbation. Gould gave orders to buy all gold in Fisk's name; Fisk's brokers ran the premium up to 151 and then to 161. The market prices of railroad stocks shrank rapidly; failure after failure of Wall Street firms was announced, and fortunes were swept away. Fearing that the price of gold might mount to 200, manufacturers and other business concerns throughout the country frantically directed their agents to buy gold at any price. All this time Gould, through certain brokers, was secretly selling; and while he was doing so, Fisk and Belden by his orders continued to buy.
The Stock Exchange, according to the descriptions of many eye- witnesses, was an extraordinary sight that day. On the most perfunctory occasions the scenes enacted there might have well filled the exotic observer with unmeasured amazement. But never had it presented so thoroughly a riotous, even bedlamic aspect as on this day, Black Friday; never had greed and the fear born of greed, displayed themselves in such frightful forms.
Here could be seen many of the money masters shrieking and roaring, anon rushing about with whitened faces, indescribably contorted, and again bellowing forth this order or that curse with savage energy and wildest gesture. The puny speculators had long since uttered their doleful squeak and plunged down into the limbo of ruin, completely engulfed; only the big speculators, or their commission men, remained in the arena, and many of these like trapped rats scurried about from pillar to post. The little fountain in the "Gold Room" serenely spouted and bubbled as usual, its cadence lost in the awful uproar; over to it rushed man after man splashing its cooling water on his throbbing head. Over all rose a sickening exhalation, the dripping, malodorous sweat of an assemblage worked up to the very limit of mental endurance.
What, may we ask, were these men snarling, cursing and fighting over? Why, quite palpably over the division of wealth that masses of working men, women and children were laboriously producing, too often amid sorrow and death. While elsewhere pinioned labor was humbly doing the world's real work, here in this "Gold Room," greed contested furiously with greed, cunning with cunning over their share of the spoils. Without their structure of law, and Government to enforce it, these men would have been nothing; as it was, they were among the very crests of society; the makers of law, the wielders of power, the pretenders to refinement and culture.
Baffled greed and cunning outmatched and duplicity doubled against itself could be seen in the men who rushed from the "Gold Room" hatless and frenzied—some literally crazed—when the price of gold advanced to 162. In the surrounding streets were howling and impassable crowds, some drawn thither by curiosity and excitement, others by a fancied interest; surely, fancied, for it was but a war of eminent knaves and knavish gamblers. Now this was not a "disorderly mob" of workers such as capitalists and politicians created out of orderly workers' gatherings so as to have a pretext for clubbing and imprisoning; nay it all took place in the "conservative" precincts of sacrosanct Wall Street, the abiding place of "law and order." The participants were composed of the "best classes;" therefore, by all logic it was a scene supereminently sane, respectable and legitimate; the police, worthy defenders of the peace, treated it all with an awed respect.
Suddenly, early in the afternoon, came reports that the United States Treasury was selling gold; they proved to be true. Within fifteen minutes the whole fabric of the gold manipulation had gone to pieces. It is narrated that a mob, bent on lynching, searched for Gould, but that he and Fisk had sneaked away through a back door and had gone uptown.
The general belief was that Gould was irretrievably ruined. That he was secretly selling gold at an exorbitant price was not known; even his own intimates, except perhaps Fisk and Belden, were ignorant of it. All that was known was that he had made contracts for the purchase of enormous quantities of fictitious gold at excessive premiums. As a matter of fact, his underhand sales had brought him eleven or twelve million dollars profit. But if his contracts for purchase were enforced, not only would these profits be wiped out, but also his entire fortune.
Ever agile and resourceful, Gould quickly extricated himself from this difficulty. He fell back upon the corrupt judiciary. Upon various flimsy pretexts, he and Fisk, in a single day, procured twelve sweeping injunctions and court orders. [Footnote: Gold Panic Investigation, etc. 18.] These prohibited the Stock Exchange and the Gold Board from enforcing any rules of settlement against them, and enjoined Gould and Fisk's brokers from settling any contracts. The result, in brief, was that judicial collusion allowed Gould to pocket his entire "profits," amounting, as the Congressional Committee of 1870 reported, to about eleven million dollars, while relieving him from any necessity of paying up his far greater losses. Fisk's share of the eleven millions was almost nothing; Gould retained practically the entire sum. Gould's confederates and agents were ruined, financially and morally; scores of failures, dozens of suicides, the despoilment of a whole people, were the results of Gould's handiwork.
[Illustration: JAY GOULD, Who, in a Brief Period, Possessed Himself of a Vast Fortune.]
* * * * * * *
From his Erie railroad thefts, the gold conspiracy and other maraudings, Gould now had about twenty-five or thirty million dollars. Perhaps the sum was much more. Having sacked the Erie previous to his being ousted in 1873, he looked out for further instruments of plunder.
Money was power; the greater the thief the greater the power; and Gould, in spite of abortive lawsuits and denunciations, had the cardinal faculty of holding on to the full proceeds of his piracies. In 1873 there was no man more rancorously denounced by the mercantile classes than Gould. If one were to be swayed by their utterances, he would be led to believe that these classes, comprising the wholesale and retail merchants, the importers and the small factory men, had an extraordinarily high and sensitive standard of honesty. But this assumption was sheer pretense, at complete variance with the facts. It was a grim sham constantly shattered by investigation. Ever, while vaunting its own probity and scoring those who defrauded it, the whole mercantile element was itself defrauding at every opportunity.
* * * * * * *
One of the numberless noteworthy and conclusive examples of the absolute truth of this generalization was that of the great frauds perpetrated by the firm of Phelps, Dodge and Company, millionaire importers of tin, copper, lead and other metals.
So far as public reputation went, the members of the house were the extreme opposites of Gould. In the wide realm of commercialism a more stable and illustrious firm could not be found. Its wealth was conventionally "solid and substantial;" its members were lauded as "high-toned" business men "of the old-fashioned school," and as consistent church communicants and expansive philanthropists. Indeed, one of them was regarded as so glorious and uplifting a model for adolescent youth, that he was chosen president of the Young Men's Christian Association; and his statue, erected by his family, to-day irradiates the tawdry surroundings of Herald Square, New York City. In the Blue Book of the elect, socially and commercially, no names could be found more indicative of select, strong-ribbed, triple-dyed respectability and elegant social poise and position.
In the dying months of 1872, a prying iconoclast, unawed by the glamor of their public repute and the contemplation of their wealth, began an exhaustive investigation of their custom house invoices. This inquiring individual was B. G. Jayne, a special United States Treasury agent. He seems to have been either a duty-loving servant of the people, stubbornly bent upon ferreting out fraud wherever he found it, irrespective of whether the criminals were powerful or not, or he was prompted by the prospect of a large reward. The more he searched into this case, the more of a mountainous mass of perjury and fraud revealed itself. On January, 3, 1873, Jayne set the full facts before his superior, George S. Boutwell, Secretary of the Treasury.
". . . Acording to ordinary modes of reckoning," he wrote, "a house of the wealth and standing of Phelps, Dodge and Company would be above the influences that induce the ordinary brood of importers to commit fraud. That same wealth and standing became an almost impenetrable armor against suspicion of wrong-doing and diverted the attention of the officers of the Government, preventing that scrutiny which they give to acts of other and less favored importers." Jayne went on to tell how he had proceeded with great caution in "establishing beyond question gross under-valuations," and how United States District Attorney Noah Davis (later a Supreme Court Justice) concurred with him that fraud had been committed.
* * * * * * *
The Government red tape showed signs at first of declining to unwind, but further investigation proved the frauds so great, that even the red tape was thrilled into action, and the Government began a suit in the United States District Court at New York for $1,000,000 for penalties for fraudulent custom-house under-valuations. It sued William E. Dodge, William E. Dodge, Jr., D. Willis James, Anson Phelps Stokes, James Stokes and Thomas Stokes as the participating members of the firm.
The suit was a purely civil one; influential defrauders were not inconvenienced by Government with criminal actions and the prospect of prison lodging and fare; this punishment was reserved exclusively for petty offenders outside of the charmed circle. The sum of $1,000,000 sued for by the Government referred to penalties due since 1871 only; the firm's duplicates of invoices covering the period before that could not be found; "they had probably been destroyed;" hence, it was impossible to ascertain how much Phelps, Dodge and Company had defrauded in the previous years.
The firm's total importations were about $6,000,000 a year; it was evident, according to the Government officials, that the frauds were not only enormous, but that they had been going on for a long time. These frauds were not so construed "by any technical construction, or far-fetched interpretation," but were committed "by the firm's deliberately and systematically stating the cost of their goods below the purchase price for no conceivable reason but to lessen the duties to be paid to the United States."
These long-continuing frauds could not have been possible without the custom-house officials having been bribed to connive. The practice of bribing customs officers was an old and common one. In his report to the House of Representatives on February 23, 1863, Representative Van Wyck, chairman of an investigating committee, fully described this system of bribery. In summarizing the evidence brought out in the examination of fifty witnesses he dealt at length with the custom house officials who for large bribes were in collusion with brokers and merchants. "No wonder," he exclaimed, "the concern [the custom house] is full of fraud, reeking with corruption." [Footnote: The Congrssional Globe, Appendix, Thirty-seventh Congress, Third Session, 1862-3, Part ii: 118.
"During the last session the Secretary had the honor of transmitting the draft of a bill for the detection and prevention of fraudulent entries at the custom-houses, and he adheres to the opinion that the provisions therein embodied are necessary for the protection of the revenue…. For the past year the collector, naval officer, and surveyor of New York have entertained suspicions that fraudulent collusions with some of the customs officers existed. Measures were taken by them to ascertain whether these suspicions were well founded. By persistent vigilance facts were developed which have led to the arrest of several parties and the discovery that a system of fraud has been successfully carried on for a series of years. These investigations are now being prosecuted under the immediate direction of the Solicitor of the Treasury, for the purpose of ascertaining the extent of those frauds and bringing the guilty parties to punishment. It is believed that the enactment at the last session of the bill referred to would have arrested, and that its enactment now will prevent hereafter, the frauds hitherto successfully practiced."— Annual Report for 1862 of Salmon P. Chase, Secretary of the Treasury. No matter what laws were passed, however, the frauds continued, and the importers kept on bribing.]
Great was the indignation shown at the charges by the flustered members of the firm; most stoutly these "eminently proper" men asserted their innocence. [Footnote: If the degree of the scandal that the unearthing of the frauds created is to be judged by the extent of space given to it by the newspapers, it must have been large and sensational. See issues of the New York "Times" and other newspapers of January 11, 1873, January 29, 1873, March 20, 1873, and April 20, 1873. A full history of the case, with the official correspondence from the files of the Treasury Department, is to be found in the New York "Times," issue of April 28, 1873.] In point of fact (as has been shown in the chapters on the Astor fortune) several of them had long been slyly defrauding in other fields, particularly by the corrupt procuring of valuable city land before and during the Tweed regime. They had also been enriching themselves by the corrupt obtaining of railroad grants. There was a scurrying about by Phelps, Dodge and Company to explain that some mistake had been made; but the Government steadfastly pressed its action; and Secretary Boutwell curtly informed them that if they were innocent of guilt, they had the opportunity of proving so in court. After this ultimatum their tone changed; they exerted every influence to prevent the case from coming to trial, and they announced their willingness to compromise. The Government was induced to accept their offer; and on February 24, 1873, Phelps, Dodge and Company paid to the United States Treasury the sum of $271,017.23 for the discontinuance of the million-dollar suit for custom-house frauds. [Footnote: See Houses Executive Documents, Forty-third Congress, First Session, 1874, Doc. No. 124:78. Of the entire sum of $271,017.23 paid by Phelps, Dodge and Company to compromise the suit, Chester A. Arthur, then Collector of, the Port, later President of the United States, received $21,906.01 as official fees; the Naval Officer and the Surveyor of the Port each were paid the same sum by the Government, and Jayne received $65,718.03 as his percentage as informer.
One of the methods of defrauding the Government was peculiar. Under the tariff act there was a heavy duty on imported zinc and lead, while works of art were admitted free of duty. Phelps, Dodge and Company had zinc and lead made into Europe into crude Dianas, Venuses and Mercurys and imported them in that form, claiming exemption from the customs duty on the ground of their being "works of art."]
From these persistent frauds came, to a large extent, the great collective and individual wealth of the members of this firm, and of their successors. It was also by reason of these frauds that Phelps, Dodge and Company were easily able to outdo competitors. Only recently, let it be added, they formed themselves into a corporation with a capital of $50,000,000. With the palpably great revenues from their continuous frauds, they were in an advantageous position to buy up many forms of property. Beginning in 1880 the mining of copper, they obtained hold of many very rich mining properties; their copper mines yield at present (1909) about 100,000,000 pounds a year. Phelps, Dodge and Company also own extensive coal mines and lines of railroads in the southwest Territories of the United States. Ten thousand employees are directly engaged in their copper and coal mines and smaller works, and on the 1,000 miles of railroad directly owned and operated by them.
So greatly were the members of the firm enriched by their frauds that when D. Willis James, one of the partners sued by the Government for fraudulent undervaluations, died on September 13, 1907, he left an estate of not less than $26,967,448. John F. Farrel, the appraiser, so reported in his report filed on March 28, 1908, in the transfer tax department of the Surrogate's department, New York City. But as the transfer tax has been, and is, continuously evaded by ingenious anticipatory devices, the estate, it is probable, reached much more.
James owned (accepting the appraiser's specific report at a time when panic prices prevailed) tens of millions of dollars worth of stock in railroad, mining, manufacturing and other industries. He owned, for instance, $2,750,000 worth of shares in the Phelps-Dodge Copper Queen Mining Company; $1,419,510 in the Old Dominion Company, and millions more in other mining companies. His holdings in the Great Northern Railway, the history of which is one endless chain of fraud, amounted to millions of dollars—$3,840,000 of preferred stock; $3,924,000 of common stock; $1,715,000 of stock in the Great Northern iron ore properties; $1,405,000 of Great Northern Railway shares in the form of subscription receipts, and so on. He was a large holder of stock in the Northern Pacific Railway, the development of which, as we shall see, has been one of incessant frauds. His interest in the "good will" of Phelps, Dodge and Company was appraised at $180,000; his interest in the same firm at $945,786; his cash on deposit with that firm at $475,000. [Footnote: At his death he was eulogistically described as "the merchant philanthropist." On the day after the appraiser's report was filed, the New York "Times," issue of March 29, 1908, said: "Mr. James was a senior member of the firm of Phelps, Dodge & Co., of 99 John Street. His interest in educational and philanthropic work was very deep, and by his will he left bequests amounting to $1,195,000 to various charitable and religious institutions. The residue of the estate, amounting to $24,482,653, is left in equal shares to his widow and their son." On the same day that the appraiser's report was filed a large gathering of unemployed attempted to hold a meeting in Union Square to plead for the starting of public work, but were brutally clubbed, ridden down and dispersed by the police.]