POLITICS: In 1868, a Wild Fraud to Dwarf Today’s Political Sleaze.

Photo from Library of Congress, Prints and Photographs Division.

Thanks again to our friends at the Bloomberg "Echoes" financial history blog for running this item first on June 14, 2012.  Check them out for a great daily history fix.

Do big corporations really control U.S. politicians through money and contributions? Is the system more corrupt today than ever before?
It often seems that way. U.S. corporations spent about $3.32 billion in 2011 to lobby officials in Washington, according to OpenSecrets.org. This, plus billions more in newly liberated campaign contributions and other practices have combined to create a system many describe as “legalized bribery.”

Still, lobbying is protected by the First Amendment and, if anything, decades of reforms designed to increase transparency have made today’s abuses mild by comparison.

How bad was it?

Probably the low point for corporate-influence peddling in the U.S. came in 1868, when the New York state legislature decided a contest over control of the Erie Railroad, then one of America’s premier corporations.

The battle pitted the venerable Cornelius Vanderbilt, the owner of the New York Central Railroad, against Daniel Drew of Erie and his two young proteges, Jay Gould and James Fisk Jr.

Vanderbilt’s goal was simple: With Erie in his pocket, he could control all rail links from New York City to the Great Lakes, an immensely profitable monopoly. But Drew, who had grown rich manipulating Erie stock prices as company treasurer (before insider-trading bans), had no intention to let go.

The so-called Erie War took place during one of the most corrupt periods in American history. Historians call it the “Era of Good Stealings,” the years just after the Civil War when William “Boss” Tweed ruled New York City, Ulysses S. Grant sat in the White House, and scandals -- from the Whiskey Ring to Credit Mobilier to postal frauds to Reconstruction to Indian agent frauds -- all bubbled just beneath the surface. The New York Stock Exchange was an unregulated frontier of booms, busts and manipulations.

The complex contest between Vanderbilt and Drew -- involving bribed judges, stock fraud, dueling injunctions and corporate piracy -- reached its climax in March 1868. Decades before the existence of rules governing tender offers, stock registration, disclosures or other such niceties, all Vanderbilt had to do was buy Erie stock as fast as he could until he owned enough to control the company -- what was known as a “raid.”

But Drew cheated. Tipped off to Vanderbilt’s plan, he secretly authorized and printed thousands of new Erie shares, turning the market into a quicksand pit.

Furious, Vanderbilt responded by finding a friendly New York judge to declare Drew, Gould, and the other Erie directors in contempt, forcing them all to flee across the Hudson River to New Jersey to avoid arrest.

Drew, in turn, responded by sending Gould to Albany to persuade the state Legislature to approve a bill legitimizing the large block of new stock issued to thwart Vanderbilt’s raid. Tweed, as a state senator (among other titles), personally represented Vanderbilt in the fight.

It’s difficult today to conceive the scale of the ensuing contest between Gould and Tweed for the hearts and minds of the state Legislature. Gould brought along a suitcase full of cash and set up shop in Parlor 57 of Albany’s Delavan House hotel, tending bar and doling out largess -- in thousand-dollar bills. Tweed was equally generous. Nobody knows the true totals, but the two men reportedly distributed close to $1 million apiece (worth about $50 million or more today) to Albany lawmakers as they debated the Erie legislation.

It wasn’t just a senator or two they were trying to buy, but the entire statehouse.

The lawmakers, in turn, played both sides for suckers. For years, a group of about 20 assemblymen calling themselves the Black Horse Cavalry had specialized in blackmailing businesses with what they called “strike bills” -- proposed laws designed to cripple businesses that refused to pay bribes. For them, the Erie War would be the richest payday ever. Instead of directly taking sides, most simply bid the two against each other.

One state senator, A.C. Matoon, reportedly took Erie’s side after receiving $15,000 from Gould, switched to Vanderbilt’s after taking $20,000 from Tweed, then supported Erie on the final vote.

“The wealth of Vanderbilt seemed pitted against the Erie treasury,” wrote Charles Francis Adams Jr. in his classic expose, “Chapters of Erie.” At one point, when a Vanderbilt agent arrived from New York with fresh cash, Gould reportedly paid him $70,000 to disappear.

Vanderbilt steamed at the spectacle. “It never pays to kick a skunk,” he said. He then ordered Tweed to cut off the bribes.

The legislators realized their fountain of easy money had run dry. Senators and assemblymen who had demanded a thousand dollars for their vote days earlier now offered their support for a mere hundred. To Adams, the mood among lawmakers was reminiscent “of the dark days of the war when tiding came of some great defeat.”

The legislators passed the Erie bill -- which made the secretly issued Erie stock legitimate and thus secured Drew’s hold on the company -- by a vote of 101 to 6. They had rejected it 83 to 32 when Vanderbilt money was being offered.

Vanderbilt and Drew ultimately settled their battle with a backroom deal that made them both much richer at the expense of Erie stockholders, in effect paying them both “golden parachutes” long before that term became common. At the same time, it left Gould and Fisk in charge of the company -- Gould’s first big step in building one of the great American fortunes.

How does this compare with today’s big corporations attempting to influence Congress on issues close to their pocketbooks? There’s still plenty of money in politics, and plenty of favoritism by politicians toward big donors and high- powered lobbyists. But today the system is far more public and regulated -- even with its flaws and gaps. And sunlight, as Justice Louis D. Brandeis famously told us, is the best disinfectant.


(Kenneth D. Ackerman is the author of four books, including “Boss Tweed: The Corrupt Pol Who Conceived the Soul of Modern New York.” The opinions expressed are his own.)