Introduction

Seldom do people walk so long & hard that their shoes wear out. Calloused and bloody, Kit Carson’s journey racked up thousands of miles across the rugged North American terrain — an odyssey that captured the American spirit of Manifest Destiny. John C. Fremont hired Carson to guide his men during their four year expedition across the uncharted terrain of the “Wild West,” a directive by the expansionist President James K. Polk. This specific leg of the journey led Carson right back to Polk where on September 15, 1848, he informed the President that gold was discovered at Sutter’s Mill in California.

The timing was perfect; the Mexican-American War just ended and the United States doubled in size through the annexation of Texas, Oregon, California, Nevada, Utah, most of Arizona, parts of New Mexico, Colorado, and Wyoming. The best way to hold onto newly acquired land is to settle it and the enticement of discovering gold was just what Polk needed to distribute the American population across this terrain. Weighing the prospects of causing  economic inflation through a massive influx of gold on the market and expanding America’s might, Polk chose the latter and sparked the Gold Rush in December through his formal announcement of the discovery.

While most pioneers headed West driven by speculation of vast riches, there were a minority of opportunists who chased the pioneers, building their wealth by servicing their needs for supplies, food & lodging. Time was of the essence but getting there was neither timely nor affordable. Here lies an even smaller minority of opportunists who could transport the diaspora and take advantage of the largest American migration to ever exist. This is the monopolists, the likes of Cornelius Vanderbilt who at this point held an uncontested steamship monopoly in the East Coast.

To travel West, there were two options for transport: over land through unestablished routes & terrain or by steamship going south of the Cape and back up on a 6 month journey. It’s natural to assume the U.S. government would take charge on national infrastructure projects to facilitate easier transport, but in the 19th century the Jacksonian philosophy of minimal government intervention reigned supreme. Massive infrastructure projects were beyond the national budget and made available to private enterprises. The notion of a corporation is still in its infancy but found to be a reliable way to conjure financial resources amongst aligned parties of interest. While building roads & routes across the newly annexed terrain wasn’t the government’s focus, providing mail services for the new settlers was. Here government contracts would be provided to enterprises up to the task, which would attract entrepreneurs and grifters alike. Within 12 months of Polk’s public confirmation of gold discovered, over 762 vessels departed American ports for California. In the first four months 226 would sail from New York, the epicenter of American commerce and home to the undisputed king of steamships: Commodore Cornelius Vanderbilt.

The Nicaragua Route

Vanderbilt was not one to get caught up in the excitement of the gold rush. Always reluctant towards enterprises backed by speculation, it took him a while to warm up to playing a role in it even though he was the one man who was best-positioned, most-capitalized to engage in this game he is the master of. Instead, he began by taking a role as investor to the California Navigation Company started by his friend, Daniel Allen. Along with the shared capital of 20 others at a total capitalization of $21,630, this new enterprise would purchase a schooner called the James L. Day, and build a seventy foot steamboat named Sacramento, whose voyage would oscillate between the port of San Francisco and the Sacramento River.

Expediting the long voyage to California was still top of mind and the answer came in the form of the Isthmus in South America. In Panama, there lay the narrowest trek of land needed to be crossed in order to hop from the Atlantic Ocean over to the Pacific and in 1846 Congress and the State Department brokered a treaty with the South American republic New Granada (now Colombia) to allow free and safe passages across the province for Americans. This left two routes that could be serviced by steamboats, one for each ocean, and the government was looking to issue contracts to private enterprises who would coordinate bi-weekly voyages to transport mail among the East and West coasts. In an age of Tammany Hall and rampant government corruption, the issuance of these contracts and their special government privileges went to Albert G. Sloo for the Atlantic route, and Arnold Harris for the Pacific, two “dummies” that were planted by covert private enterprises.

These patsies immediately sold their contracts at a profit, with Sloo selling his contract valued at $290,000/year in tax payer dollars to a group headed by George Law, and Harris selling his contract to Aspinwall valued at $348,250/year. Aspinwall’s portion included the transport of mail across the Isthmus in Panama an enterprise he called the Pacific Mail Steamship Company. To expedite the passage across the Isthmus, usually done on foot or by mule, Aspinwall begins development of a railroad with the backing of a complex web of locally-bought government support. This reduces the four to six month journey it took to navigate the Cape Horn, to six to eight weeks. It is clear, there is a monopoly on the fastest route to California and Vanderbilt is not involved.

This strikes a chord with Vanderbilt who has had run-ins with George Law as they fought for control of the Long Island Sound. It is here where Vanderbilt would devise his master strategy to break the incumbent monopoly and overtake the entire route, a strategy he has applied time and again. One he is uniquely suited for. His three-pronged approach is:

• Break the existing monopoly by stealing marketshare through cheaper and faster routes
• Create geographical advantages by crossing the Isthmus 400 miles north of Panama in Nicaragua
• Launch a price war

Vanderbilt aligned himself with the most able, corrupt politician to see a project of this scale through. Joseph L. White was chosen to broker a deal with the Nicaraguan government to grant access to the San Juan River, Lake Nicaragua, and the land routes in between. A contract was signed on August 26, 1849 that would grant Vanderbilt and White exclusive rights to build a canal and railroads across Nicaragua in exchange for $10,000 a year, 20% of annual profits and a stake in the business. By 1851 Vanderbilt launches the Accessory Transit Company (ATC), inaugurating the Nicaragua route to California through land and water that now takes four to six weeks, faster than Panama’s six to eight weeks. Vanderbilt offers cheaper routes by deploying state of the art steamships that were more economical with resources and since the route was shorter, the improved margins from less fuel consumption passed the cost savings to the customer.

Vanderbilt widens his cost advantage through vertical integration. He acquires the Simonson Shipyard to construct ship hulls and enters a partnership with T.F. Secor & Co to manufacture steam engines. He bid for both Atlantic & Pacific contracts at $250,000 a year, a steep discount to the $738,000 a year by Law and Aspinwall, but he couldn’t swing political corruption his way. The U.S. Government continued to award the Panama route the contracts even with its disjointed operations, unreliable schedules and poorly maintained infrastructure.

Political headwinds found their way in Nicaragua as the region descended into civil war (again) with the Conservatives in control of Granada and the Liberals in control of León. Business operations came to a halt in León when the Liberals claimed Accessory Transit Company “have lost the neutrality of a foreigner” because it was created with the Conservatives. Vanderbilt’s party is harassed in one instance by British port authorities in Greytown, violating a treaty by demanding port fees from Vanderbilt’s ships. Refusal to pay the fee resulted in British ships firing at Vanderbilt’s party nearly striking the hundreds of innocent civilians. Vanderbilt relents and pays the fee but not without significant backlash against the British who feared the start of a war. The British apologize for the ordeal and the diplomatic embarrassment continues to legitimize Vanderbilt’s operations in Central America.

Strengthened by the ordeal, Vanderbilt doubles down his operations by purchasing five more steamships and eighteen omnibuses for the carriage road from San Juan del Sur to Virgin Bay. He then continues to cut fares even further and improves infrastructure to continue undercutting his competitors. 19th century business disputes could take a physical form and the feud between Law and Vanderbilt made its way to the docks on Staten Island. Ownership claims on the docks resulted in mob riots where in one case three hundred workers armed with axes and crowbars razed buildings to the ground in allegiance to their boss.

In March of 1852, the steamship North America is stuck after running aground off the Mexican coast, costing Vanderbilt and his partner $400,000. Despite the loss, Vanderbilt capitalizes on the incident by maintaining passenger trust and avoiding fare hikes. This customer empathy is deceptive in this period of ruthless capitalism. Vanderbilt can choose to warn incoming fleets of this setback and prevent hundreds of passengers from being stranded for weeks in Nicaragua, exposed to diseases. Or, he could choose to do nothing but compensate them for the inconvenience in order to maintain a steady flow of passengers. He chose the latter. Profits at all cost.

Meanwhile, White and Orville Childs were tasked with securing over $13,000,000 in funding from prominent bankers in London for the canal and railroad in Nicaragua. Before departing for London, White decided to profit off of his efforts by manipulating the stock price of the canal "rights." Generating enough buzz to excite speculators, the price rose from $1,800 to $3,600, and upon his return, it spiked further to $4,000. Then the price suddenly collapsed to $750. White orchestrated a pump-and-dump scheme by selling off 1,500 of the 38,700 shares before notifying his business partners and the public that their fundraising efforts were fruitless. White secured a large fortune at the expense of Vanderbilt who faced significant losses.

With the canal rights being worthless, Vanderbilt shifted his focus on ruining White, even if it meant losing money. First, he engineered a deliberate stock squeeze, where Vanderbilt would tank the share price of ATC, which is the source of the majority of White’s wealth. Vanderbilt was aware that White, like many investors of the time, purchased stocks on margin. By forcing the price to collapse, Vanderbilt triggered a margin call for White, effectively forcing him to pay back what he borrowed or having his assets forcibly sold. The only way out for White is if the stock price increases, he injects more cash into his holdings, he pays back the lenders, or he sells his equity.

This wasn’t an easy task as ATC had high profit margins, but Vanderbilt was able to execute by announcing that his ships would dock in Panama before proceeding to Nicaragua. He effectively made the Nicaragua route the slowest option for travelers and caused the stock price to plummet from $40 to $24. “I would rather sink my ships at the dock than allow White to make money,” said Vanderbilt. As the price dropped, Vanderbilt and his family sold off significant portions of their ATC shares on the open market to amplify the downward pressure. White panicked and began offloading his shares at steep losses to meet his margin obligations.

In a strategic turn, within four days, Vanderbilt began buying back shares at a fraction of their original value. This left White financially ruined, while Vanderbilt regained control and profited from the discounted shares, effectively holding White in a "bear crunch" or short squeeze. By exploiting the widespread use of margin trading, Vanderbilt’s strategy dealt a decisive blow to White. The incident underscored Vanderbilt’s ruthlessness and financial acumen, cementing his reputation as a master of both shipping and market manipulation.

To continue securing his longterm control over ATC, Vanderbilt sells his steamships to the ATC on highly favorable terms, including a commission-based management contract. On Christmas Eve 1852, he offered his ships to the ATC for “the sum of $1,350,000; payable $1,200,000 in cash, and $150,000 in the bonds of your company, payable in one year from the date of the bills of sale. All the coal bulks, and all other fixtures, your Company to take at cost, paying for them from the first earnings of the vessels.” Within 3 days the board accepted the terms and so they issued 40,000 new shares of stock to pay for the ships, to be sold to the directors themselves at $30/share. Vanderbilt would be the agent, managing the ships from his New York office, with a 20% commission on each transit ticket for the Nicaragua crossing. He would also take a 2.5% commission of the entire gross receipts.

News of this deal sent the stock soaring, which meant for bears they have been cornered and for Vanderbilt, they made even more profit off of these newly-created shares before they have even been issued. Vanderbilt’s queen’s gambit  defeats the U.S. Mail and Pacific Mail Steamship Companies, further consolidating his dominance in transcontinental transportation. The profits just off of his boats are at least $1,150,000 at the end of 1852. Then he sold his ships on his terms, and at his price at a much higher markup. His stock market campaigns then added even more to his fortune while he also seized control of the ATC from White.

Hostile Takeover

Vanderbilt never took a family vacation believing his business empire would be at risk. Almost sixty years old, he challenged that belief in mid-1853 by taking his family to Europe only to find his suspicions validated.

Immediately after Vanderbilt’s steamship departs, his business partners Cornelius Garrison and Charles Morgan stage a coup by consolidating their power within the ATC and leverage their positions to exclude Vanderbilt from key decisions and financial operations. With the help of White they began acquiring shares for majority control of the company and held an emergency meeting to elect a new board of directors on July 18 while White resumed his former seat and Morgan would take office as president, pushing Vanderbilt out. Considered one of the earliest examples of a hostile takeover emblematic of the 1980s, they seize control of ATC’s books, assets, and operational authority.

Garrison and Morgan’s emotions run high but on top of a deeper fear of what will happen when Vanderbilt finds out. They think they’ve finally overthrown Vanderbilt who they foolishly assume is past his prime. They are wrong.

Vanderbilt learns of the betrayal while still in Europe. Infuriated, he vows revenge, famously declaring, “Gentlemen, you have undertaken to cheat me. I will not sue you, for the law is too slow. I will ruin you.” History has shown this was never directly said by Vanderbilt but this myth does capture the spirit of Vanderbilt.

Upon Vanderbilt’s return, Morgan began his offensive and fed misinformation to the New York Herald, stating the ATC’s performance was doing well, pumping the stock to 27 5/8th. Here Vanderbilt lays the groundwork for a counterattack. Vanderbilt liquidates his remaining ATC stock while simultaneously shorting five thousand shares. He bet the stock would dip, which it did, thereby profiting from this sell off. Morgan fought to buy as many of those shares to keep the stock prices up, falling into Vanderbilt’s trap where on January 17, 1854 the New York Times announces “New line of steamships to San Francisco”, where Vanderbilt has now started a new venture funded with his ATC sales to directly compete with ATC, but this time he will do it through a new route going through Mexico.

Garrison and Morgan’s response show their true mindset, rather than try and dampen Vanderbilt’s announcement by making the ATC the more attractive offering, they announce operational changes within the ATC, including fare increases and reduced investment in infrastructure. This angers customers and creates dissatisfaction among employees, but it must be done if they are to compete with Vanderbilt who is planning to run their operations dry. Vanderbilt also continues to apply pressure, this time leveraging political connections to challenge ATC’s legal standing and exclusive rights in Nicaragua. He also uses his reputation to draw passengers and investors away from ATC.

Six months into Vanderbilt’s vengeance and after significant financial losses to the ATC, Vanderbilt strategically offers to “rescue” the ATC by rejoining as a partner. He positions himself as the only person capable of restoring the company’s profitability, further destabilizing Garrison and Morgan’s leadership. With profits plummeting and investor confidence eroding, Garrison and Morgan agree to negotiate with Vanderbilt. He demands full control of the company in exchange for financial and operational stability. Vanderbilt officially regains control of the ATC. Garrison and Morgan are ousted, and Vanderbilt restructures the company to solidify his authority and prevent future betrayals.

But Vanderbilt isn’t done yet, his vengeance requires deep and lasting punishment against his adversaries. To punish Garrison and Morgan further, Vanderbilt aggressively competes against their ventures independent of the ATC, effectively driving them out of the steamship business. One of Morgan’s main sources of income was the Gulf Coast steamship company, so Vanderbilt began running three competing first class steamships between Texas and New Orleans. Competing with lower prices, Vanderbilt does more than steal passengers away, he manages to receive the Gulf Mail contract from Morgan.

Morgan and Vanderbilt’s lawsuits continued on but Vanderbilt’s offenses were multi-pronged. He felt that by continuing his prices wars he would steal passengers away from the Pacific and U.S. Mail, thereby pressuring them to pressure Morgan to settle the lawsuit. From a price of 27, ATC continued to fall to 20 1/4, enough to push George Law out of the game who retired by selling his shares. By April 4, Law resigned from the board.

Soon the rest relent and Morgan, Roberts, and Aspinwall agree to buy out Vanderbilt on his terms. They purchased the steamships for $800,000 (an amount far exceeding their cost). They also paid $115,000 in compensation for various claims and interest. With ATC prices sliding even lower, Vanderbilt was able to cover his short selling contracts at a profit. He paid 16 1/4 while Morgan agreed to pay 25 whenever Vanderbilt chose to deliver them. So the outcome was that Morgan paid him in three different ways: the purchase of the steamships, cash for claims, and through the stock market.

Outcome

The end result was that in the end the Panama route gained dominance after the completion of the Panama Railroad in 1855, which made the crossing faster and more reliable than the Nicaragua route. Vanderbilt shifted his focus back to other ventures, particularly railroads, where he would blossom into a legendary tycoon. The Nicaragua route, while no longer profitable, was a testament to his ingenuity and resilience.

Key Insights

• Aggressive expansion is needed to win in a first-mover game.
• One’s reputation carries weight in competition, especially when draconian.
• Strategies are important only if they are adaptable.
• A network’s advantage is best sustained through vertical integration.