America's First Great Financial Journalist: Echoes
We live in a golden age of financial journalism. Michael Lewis, Gretchen Morgenson, James Stewart, William Cohan, Jesse Eisinger, Jake Bernstein, those fellows at Bloomberg: They’ve turned the business page and business books into required reading, and sometimes thrilling entertainment.
But this style of reporting isn't new. It began in the '60s -- the 1860s -- with the work of one man. He was a relentless investigator, a witty writer, a teller of gripping tales, America’s first great financial journalist.
And he was completely wrong. Or so we’d say now.
His name was Charles Francis Adams Jr. Perhaps you’ve heard of his grandfather, John Quincy Adams, or his great-grandfather, John Adams. In school, you might have been assigned the autobiography of his younger brother, "The Education of Henry Adams."
In the late 19th century, Charles was the Adams that Americans read most.
He had a career unimaginable to journalists today. As the son of Boston’s first family, he was expected to go to Harvard, and he did, cutting up on stage with the Hasty Pudding Club. When the Civil War began, he turned his family name into a commission as a Union cavalry officer. After the war, he became a railroad regulator, a successful investor, a less successful president of the Union Pacific Railroad, chairman of the Massachusetts Parks Commission and president of the American Historical Association.
And, for a few years between soldiering and regulating, he emerged as America’s best writer about railroads and finance.
In his photos, Charles looks at the camera with cynical eyes, set between a big, bald pate and a neatly trimmed mustache and pointy imperial-style beard. An intellectual and political aristocrat, hardened by war, he wrote witty prose with a sardonic tone.
He published his finest piece in the North American Review in July 1869. Titled "A Chapter of Erie," it described the epic battle over the stock of the giant Erie Railway between Cornelius Vanderbilt on one side, and Daniel Drew, Jay Gould and Jim Fisk on the other.
It was an outlandish episode, and Adams told it with verve and style. "The practice of piracy, it was thought, was battered and hung out of existence," he began. "But the freebooters have only transferred their operations to the land."
He vividly sketched the combatants: Though Drew was "shrewd, unscrupulous, and very illiterate," he wrote, "it is impossible to regard Vanderbilt’s methods or aims without recognizing the magnitude of the man’s ideas and conceding his abilities. He involuntarily excites feelings of admiration for himself and alarm for the public."
In late 1867 and early 1868, Vanderbilt tried to corner the market in Erie stock. Drew, Erie’s treasurer, sold his own company’s shares short, as was his custom. Drew and his allies, Gould and Fisk, bribed judges, created massive quantities of new shares to flood the market, scampered aboard a ferry to New Jersey to escape an arrest warrant and finally bought off the New York state legislature. Eventually Vanderbilt coerced Drew into selling out the others and repaying his losses, though he gave up his position in Erie stock.
Adams’s article remains a landmark, influencing the writing of history to this day. But there’s a curious thing about this and his other pieces: He relied on a theory of finance that we have now completely discarded.
Drew, Fisk and Gould defeated Vanderbilt’s corner by creating tens of thousands of new shares, a maneuver known as "stock watering." Today, we readily imagine why Adams thought this was a bad thing: The new shares diluted the market, reducing each share to a much smaller percentage of the whole. Indeed, they were created specifically to destroy share value.
But Adams condemned Vanderbilt with equal venom when he conducted an equitable split of New York Central Railroad stock later that same year (giving 80 new shares for each existing 100 shares). Vanderbilt maintained each stockholder’s proportionate stake in the company, and even paid the same $8 per-share dividend on the new stock, but Adams still attacked it as stock watering.
Adams did so based on the prevailing theory of share value. In these early days of American finance, orthodox thinkers wished to anchor securities -- really any financial instrument -- firmly to the physical world. Before the Civil War, for example, only gold or silver coin was considered real money; paper currency was seen as a marker or receipt that (in theory) could be exchanged at a bank for its face value in precious metals.
In the same way, a share of stock was thought to represent a fixed sum expended on physical capital -- land, buildings, equipment. This was its par value, usually $100 per share. Earnings, profitability, growth, market share -- none of that mattered. Of course, the market value fluctuated, and speculators gambled on changing prices, but no one expected steadily rising share value. How could it rise, since each share represented a fixed chunk of tangible stuff? The term "market capitalization" didn't exist. Although investors wanted the price to hold up, they looked for "interest on capital," better known as dividends.
Adams condemned new stock as "fictitious capital," unless it represented new investment. And maybe, in a way, he was right. One could argue that the theory was true as long as the market believed it, and priced shares accordingly.
No less a figure than Henry Poor, whose name lives on in Standard & Poor’s, wrote of railroads that issued new stock: "Such enormous additions to the capital of companies, without any increase of facilities ... threaten more than anything else to destroy the value of railway property as well as to prove most oppressive to the public."
But there’s a catch: When Vanderbilt conducted his "stock watering," the market actually drove up the price of New York Central Railroad shares. Rather than fraud, it was seen as a sign of good management and financial strength.
The market moved by its own logic, ignoring the tut-tutting of intellectuals such as Adams. In time, theory caught up to practice, and orthodox economists embraced the idea that the market best decides the real value of securities.
Adams was the brilliant, accomplished son of one of America’s foremost families. He often derided the men of Wall Street as vulgar. Yet their notions of what a share of stock was worth outlasted his. For anyone writing about business, that’s a little chilling. What we take for granted today might be completely nonsensical to a later generation.
(T.J. Stiles won the Pulitzer Prize and the National Book Award for "The First Tycoon: The Epic Life of Cornelius Vanderbilt." He is at work on a biography of George Armstrong Custer. The opinions expressed are his own.)
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