Cornelius Vanderbilt saw the trouble coming. By 1873, the 79-year-old "Commodore," as he was called, was no stranger to risk: calculated bets with steamboat and railroad companies had made him by far the richest man in America. But he was wary of overexpansion by the railroads in the West, skeptical of economic weakness abroad and loose credit at home, and disdainful of the new "gang of stock speculators in Wall Street"—which included some of his own clan. When big banks began to fall on Sept. 18, 1873, he immediately understood what was wrong. "There are a great many worthless railroads started in this country without any means to carry them through," he told a reporter that evening. "Respectable banking houses in New York, so called, make themselves agents for sale of the bonds of the railroads in question and give a kind of moral guarantee to their genuineness." Vanderbilt did not play a direct role in the unfolding of the Panic of 1873—though the president and the people alike looked to him for guidance as the leading businessman of the age. But better and quicker than most, he grasped how the economy worked, for it was, in some sense, his own invention.
"Probably no other individual made an equal impact over such an extended period on America's economy and society," T. J. Stiles writes in his long but fascinating new biography of the Commodore, "The First Tycoon: The Epic Life of Cornelius Vanderbilt." "The modern economic mind began to emerge in Vanderbilt's lifetime," Stiles writes, "amid fierce debate, confusion, and intense resistance." The Panic of 1873 takes up little space in the book, coming at the end of the Commodore's career, but its resonance with today's crisis makes it stand out, a reminder that Vanderbilt's life and times still have much to teach us.
Stiles argues that Vanderbilt's greatest achievement was not his dominance of the Northeastern railroads, nor the amassing of a stupendous fortune. It was instead grasping "the invisible architecture" of the financial system. Before Vanderbilt's time, the value of a company was considered limited to its underlying assets, and investors expected to make money in the form of dividends, not rising share prices. Vanderbilt was one of a handful who saw that value could mean something different—that economic tools could be sundered from tangible goods. Many resisted, still clinging to the connection between physical objects and value. One railroad executive scoffed that transportation "never makes one ton two." Others, however, saw how new abstract financial tools could generate fantastic wealth, especially in unregulated markets, and treated investments like card games. Vanderbilt had more foresight.
Born in a Staten Island, N.Y., farming village in 1794, Vanderbilt had little formal schooling. Until he was too rich to ignore, high society wrote him off as uncouth and illiterate. But Vanderbilt's parents passed on a shrewd and merciless business sense —his mother once foreclosed on her own widowed daughter's mortgage—and as a young man he quickly found a mentor in Thomas Gibbons, whose battle against a steamboat rival led to the landmark Supreme Court case Gibbons v. Ogden, which struck a blow for antimonopolist laissez-faire principles. From this the 29-year-old Vanderbilt learned two important lessons: first, that competition is the spur of enterprise; and second, that personal vengeance makes for good business.
Vanderbilt was soon running his own steamboats, methodically seizing every opportunity to expand his business—and crush his rivals. When railroads threatened the dominance of steamboats, he bought in (despite nearly being killed in an early train accident) and, before long, the Commodore was also the "railroad king." When the hordes began to descend upon San Francisco during the gold rush, he found a way to move people and money between California and the East Coast. He improved the nation's transportation network, contributed to the economic integration of the country and, by building corporations and consolidating businesses, he increased productivity and efficiency. Throughout his life, he championed individualism and free markets. But while he began his career fighting monopolies, he ended it by building them, and along the way he had no pity for losers—or for those who never had a chance to play.
Vanderbilt is a difficult character to capture. He wrote little, spoke little, and his relations were cool and sometimes cruel. He liked to say, "There is no friendship in trade," and he lived accordingly. Stiles clearly admires Vanderbilt's genius, but he acknowledges that his subject's legacy is complicated. Vanderbilt "freely played the competitor and the monopolist, destroyer and creator, speculator and entrepreneur, according to where his interests led him," Stiles writes. When Vanderbilt died in 1877, the nation was richer, but poor people had it harder. The unregulated economy rose higher, but it fell further, too.
The Panic of 1873 was one of the worst economic crises in the nation's history. By 1876, more than half the country's railroads were bankrupt, shops were shuttered and mills abandoned. Unemployment skyrocketed—hitting 25 percent in New York City. Not even the very wealthy escaped unscathed. "After being a rich man for over 40 years, it is hard to walk under a poor man's hat," admitted one financier to a friend. The old Commodore, of course, found a way to prosper. He always did. It is impossible to deny the tremendous benefits of his achievements, the foundation of our prosperity today. But there were also cracks in that foundation—and we would do well to acknowledge both.