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Vanderbilt: Stock Manipulator?

Recently a noted historian wrote an interesting review of The First Tycoon.
You can read it here

Generally speaking, this is a very positive review, even though it quibbles with my emphasis on various aspects of Vanderbilt's career. Even in these cases, the writer doesn't claim that I leave anything out; he just thinks I should have stressed the negative more forcefully.

And that's just fine. That's what we expect from critics: an informed but independent perspective, not a parroting of the book in question. But this reviewer does make one factual, not interpretive, assertion, one subject to dispute: Vanderbilt, he writes, "made most of his money by manipulating the prices of stocks."

"Most" is a quantitative modifier. If he had written "much of" or "a great deal of," then he would have left more of a gray area. But by writing "most," he is making a declaration that Vanderbilt made at least 50% of his fortune, plus one penny, by manipulating stocks. I have to ask: Really? I do not carry a torch for the Commodore as a great hero; in fact, I point out many instances of how he troubled his fellow Americans. But I don't think this particular criticism is accurate.

It all comes down to two questions: First, what was stock "manipulation"? Second, did Vanderbilt, in fact, make that 50.0000001% this way?

As to the first question: Part of the problem in answering it is that the definition of "manipulation" has changed over time. Vanderbilt carried out some large-scale stock operations that today are not considered manipulation at all, but at the time were widely condemned. The main such maneuver was, in essence, a stock split, which did nothing to change the relative ownership of a corporation, but was derided in the nineteenth century as "stock watering," a phrase unknown on Wall Street today. See my book for a full discussion on why it was thought to be bad.

To a certain extent, much of Vanderbilt's ordinary stock trading could be considered "manipulation" simply because he was so wealthy, in comparison to the total size of the market, that he could move prices in a dramatic fashion single-handedly. But let's focus on what we would call stock manipulation today: that is, inside trading.

Yes, Vanderbilt unquestionably engaged in inside trading. But I think it's fair to leave out the kind he conducted on the largest scale: the buying of shares in his own companies, with the intention of holding those shares as a long-term investment. He bought because he knew the condition of the corporations, not because he planned to drive up the price and then dump the shares. So that leaves his short-selling operations. Several times in his career he carried out short-selling campaigns to revenge himself upon a foe, often in advance of a move to injure the business of the company in question. For example, in 1852 he sold shares short in Accessory Transit, the company that carried passengers across Nicaragua, then anounced that his steamships (which provided the only connection to Accessory Transit) would stop at Panama before Nicaragua, injuring the appeal of the Nicaragua route for travelers.

He also carried out corners, which were massive purchases from short-sellers, until he sucked all the oxygen out of the market (taking total control of the floating supply of shares, depriving short sellers of the ability to obtain and deliver the shares they had contracted to sell). True, this is a kind of market manipulation, but it's important to note that his corners were defensive maneuvers against short-selling: manipulation to fight manipulation.

So we have two major categories of stock manipulation by Vanderbilt. On to the next question: Did he make most of his wealth this way?

Not a chance. It is true that he made tens, perhaps hundreds of thousands, in his short-selling campaigns, and his corners earned him millions--a healthy proportion of his $100 million estate. But the vast majority of his wealth was in stocks and bonds in his railroads. The vast majority of his income was in dividends (generally $8 per share). Let's be conservative, and say that Vanderbilt owned $50 million in Harlem and New York & Hudson River Railroad securities, paying between 6 and 8% per year. That means he earned $3 to $4 million each year in interest and dividend payments alone, which is more than any of his two great corners on Wall Street. Over the course of many years, it's clear that he earned most of his money by investing and making his companies pay, year in and year out.

Make no mistake: Vanderbilt was highly controversial at the time, and even very troubling for the historian looking back. But what made him so was not the honesty of his business practices, for he was far more honest and productive than almost any of his peers (despite his own cases of inside trading). Rather, the immense scale of his power is what worried Americans, raising questions for his contemporaries about the survival of an egalitarian society and democratic system in the new corporate economy.
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