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Russell Sage

11/05/03 03:36:55 PM PST
by James Maccaro

There's a "Money King" in every generation. Ruthless, conniving, thieving -- yet eventually, falling to ruin. Russell Sage was one of the biggest Wall Street operators during the Gilded Age, and he managed to play such names as Vanderbilt and Gould against one another.

Russell Sage was one of the most ruthless and successful stock market operators of the Gilded Age, which spanned from the aftermath of the Civil War to the early part of the 20th century. Described by a contemporary as "somber, crafty, reclusive," he was extremely successful and hailed by the newspapers of his day as the "Money King." Sage, a pioneer in the use of put and call options, flourished at the top ranks of Wall Street, outsmarting many of its most cunning operators.


Born in a covered wagon in sparsely populated Oneida County, New York, on August 4, 1816, Sage later remarked, "The only thing I made up my mind to early was that I would not be a poor man. I would succeed in whatever I undertook. I saw poverty around me and dreaded it."

Sage became a successful horse trader while he was still a teenager. By the time he was 21, he also ran a successful general store and shipping service. Nor did his ambitions end there; in 1852, at 36, he was elected to the US House of Representatives, where he became known for his bipartisan willingness to extend loans to fellow Congressmen. He served two terms but then lost reelection.

He made the transition from politician to Wall Street operator while he was still in Washington, where he learned through government contacts that the New York Central Railroad, which was then a small local operation, was planning to bid for the Troy and Schenectady Railroad. Sage used this inside information to buy the debt-ridden Troy and Schenectady for $200,000 (using a front company) and then "flipped" it to the New York Central for $900,000.

Sage became famous for his maxims, which were widely reported by the newspapers of the time. He commented, "I made my millions from [following] maxims, chief of which was the one my father favored, which went, 'Any man can earn a dollar, but it takes a wise man to keep it.' "

Perhaps his most famous saying was: "Buy straw hats in the winter, when nobody wants them, and sell them in the summer when everybody needs them." He also said, "If you take care of the pennies, the dollars will take care of themselves." By this, he meant that he was willing to take smaller profits that were guaranteed or at least close, rather than take great risks in search of a big payoff.

Sage was a pioneer in the use of options. He bought calls to protect short sales and he bought puts to lock in profits when he was long. He was a pioneer in the use of what later became known as "covered options." He also sold puts and calls independent of his interest in the underlying security (which became known as naked options), but only when he had inside information or was manipulating the stock. Likewise, although he publicly asserted that "if a stock is high enough to be sold, it is high enough to be sold short," he would only sell short without covering his bet with a call option when he had inside information or was manipulating the stock.

In 1869, Sage was convicted of usury, granting loans at unlawfully high interest rates as high as an annualized rate of 80%. He agreed to plead guilty but only after using his political contacts to guarantee he would not receive a prison sentence.

As lending money to other stock market operators was a major source of earnings for Sage, he quickly developed a method to work around New York state's usury laws. Instead of allowing customers to borrow cash to buy stock, Sage would buy the stock in his own name and sell the customer a call option at an inflated price. This allowed the customer to benefit from a price rise using Sage's capital, but instead of paying interest subject to state usury laws, he paid a premium for the option, which was unregulated. If the stock price sank below the call option's strike price, the customer would not exercise it, leaving Sage with a depreciating asset, so he would also buy a put option. The cost of this was passed on to the purchaser of the call option.

In his use of options to mask loans beginning in 1869, Sage was presaging the use of derivatives and other "off-balance sheet" transactions to mask loans that companies such as Enron and Worldcom most recently used to disastrous results in the 1990s. But while today's supposedly more-sophisticated investment bankers created a recipe for a debacle, Sage created a "one-way bet" for himself: He made a quick fat profit whether the stock price increased or decreased and did not have to worry about regulators.

Sometimes, rival groups of manipulators would attack the same stock; one group, the bears, would try to manipulate the price down, while the other, the bulls, would attempt to manipulate it up. Onlookers who wanted to profit would then have to guess which group of manipulators would prevail. It was hard to predict whether the bears would force the stock price to collapse or the bulls would inflate it to higher levels. To take advantage of this situation, Sage sold combinations of puts and calls, which became known as a straddle. This way, the speculator would profit whether the stock price advanced or declined and lose money only if the stock price stayed stagnant.


Russell Sage is linked to two Wall Street names: Vanderbilt and Gould. Surprisingly, he maintained a profitable relationship with both, even when Vanderbilt and Gould were in bitter conflict with each other.

In the early 1860s, Cornelius Vanderbilt reluctantly agreed with his son William Henry Vanderbilt that the future basis of the family's wealth should be railroads, not the steamship lines that were the foundation of their great fortune. The Vanderbilt family therefore sold their shipping interests and purchased a chain of railroads, forming the world's richest railway.

The Vanderbilts began their railway empire in 1862 by purchasing the New York and Harlem Railroad, whose stock was cheap because of competition from two other railroads: the Hudson River Railroad, which ran from New York City to Albany, the state capital, and the New York Central Railroad, which ran from Albany to Buffalo. The Vanderbilts were unconcerned by the competition because they subsequently bought out both railroads, renaming the mainline the New York Central Railroad.

In 1873, the Vanderbilts purchased the Lake Shore and Michigan Southern Railroad, which they integrated with New York Central to create a rail system that ran from New York City to Chicago. In the 1870s, they also took control of the Canada Southern Railroad, the Michigan Central Railroad, as well as lesser lines, coal mines, and other assets adjacent to the railroads.

To orchestrate many of the complicated Wall Street operations necessary to buy controlling blocks of the stock and bonds of these companies, the Vanderbilts turned to Russell Sage. Despite being perhaps the richest man of his time, the "Commodore," as Cornelius Vanderbilt was called, was subject to cash-flow problems and periodically relied on Sage for short-term credit. The rates that Sage charged, 12-14%, were about four to five times the going rate and considered outrageous at the time. Sage thus exploited the Vanderbilt family three times over. First, he profited by serving as their security broker; second, he served as their banker, charging high rates of interest; and last but certainly not least, he also used the inside information that he gained to trade on his own account, reaping staggering profits.

William Henry Vanderbilt inherited the bulk of the Vanderbilt fortune on his father's death in 1877. By that time, the Vanderbilt railroad holdings were crucial to the economy of New York state and the nation.


In 1879, William Henry Vanderbilt, by then tired of the withering scrutiny by the press and the state legislature because of his ownership of most of the stock of the New York Central Railroad, decided to take action and reduced his ownership in the New York Central to a minority interest while maintaining control behind the scenes. This delicate mission was delegated to J.P. Morgan, a young man just beginning his own fabled career. Sage was allocated a large block of shares to distribute, which he did at a great profit.

It is striking that Russell Sage was able to maintain his relationship with the Vanderbilts while choosing to ally with their great adversary, Jay Gould. Widely known as "the Mephistopheles of Wall Street," Gould was arguably the most unrestrained and ferocious of the rogues' gallery of Wall Street manipulators of the era.

In 1867, Gould fought the Vanderbilts for control of the Erie Railroad. The Vanderbilts had huge wealth on their side, but this was outweighed by Gould's guile. He linked with the notorious corrupt politician Boss Tweed and employed bribery to obtain favorable decisions from New York state courts and the legislature. He also bribed reporters to plant favorable stories in the press and used Sage's services to mercilessly manipulate the stock, alternatively selling short and then going long.

The Vanderbilts gained a majority of the Erie's shares and began legal proceedings to evict Gould from management of the corporation. In retaliation, Gould simply printed more Erie stock certificates. At one point, Gould and his cohorts, Jim Fisk and Daniel Drew, had to flee to New Jersey to avoid arrest. The fighting became so extreme that the Vanderbilts decided that enough was enough and walked away from the fight, having lost a couple of million dollars.

Jay Gould became even more infamous for his unsuccessful effort to corner the public supply of gold in 1869. To do so, he needed to prevent President Ulysses S. Grant from releasing gold from the federal stockpile, which he hoped to achieve by bringing the President's brother-in-law into the scheme. Gould managed to put on such a good show that many investors bid up the price of gold.

As soon as Grant learned what was happening, however, he released large stocks of federal gold for sale, which caused the price to return to normal. Unfortunately, many speculators, estimated to number in the thousands, purchased gold on margin and were ruined when the price collapsed. This had a cascading effect, as many investors sold stock in order to cover losses on gold, which triggered more margin calls and further selling.


The result was Black Friday, September 24, 1869, when the stock market crashed. Gould, however, acted with his typical cold calculation and reaped a fortune despite the collapse of his plot. He of course knew before anyone else that his efforts were fruitless. Before news got out, he sold gold as well as other assets short, using Russell Sage as his agent, and reaped a bonanza on Black Friday. Proving at least in his case there was no honor among thieves, Gould neglected to tell Jim Fisk, his chief coconspirator and ostensibly his closest friend, of the impending collapse of their collaboration. Gould apparently did not want to take the risk that Fisk would act indiscreetly and thereby tip his hand. Fisk lost a fortune as a result.

Sage also worked with Gould to manipulate the stock of the Union Pacific Railroad, of which Sage was a member of the board of directors. Another target was Western Union, control of which Gould, with help from Sage, grasped from the Vanderbilts. Sage and Gould repeatedly sold short, then forced the price down by spreading rumors of impending disaster. After accumulating high profits, they would go long and make even more money as the stock price recovered.

A typical example of the cynical machinations of Sage, Gould, and their like can be provided by their activities with New York City's Manhattan Elevated Railroad in 1881. As Gould and Sage accumulated stock, they spread rumors the commuter line was going bankrupt. Gould went so far as to arrange for the railroad to retain a prominent law firm to prepare a bankruptcy petition. Once they had control, they revealed the company was profitable and financially secure. Thus, they profited by manipulating the price down and again by allowing the price to recover.

In 1884, Gould attempted a hostile takeover of Vanderbilt's Lake Shore and Michigan Southern Railroad. Sage was part of the deal because Gould needed to borrow money and also needed his services as a master stock manipulator. Sage was convinced the effort would succeed and it would increase the value of Gould's other holdings, particularly Western Union and the Union Pacific Railroad. Sage therefore sold put options for the Lake Shore and Michigan Southern railroad and for companies within the Gould system.

But this time, William Henry Vanderbilt had his revenge, holding onto control of the Lake Shore and Michigan Southern. Moreover, Gould became overextended. The result was a sharp decline in share prices for the Gould system stocks, which triggered a Wall Street crisis in May 1884. This marked the first time Sage lost a massive amount of money and there were questions whether he would honor his option contracts or try to weasel out of it. He surprised Wall Street by fulfilling all of the contracts, which had the effect of instilling confidence in the use of options. By some reports, Sage lost as much as $7 million, but there were also rumors he had offset his losses by selling shares short.


By 1885, Jay Gould's health was in steep decline and he concurrently came under increasing financial pressure. By then, he was synonymous with all that was wrong with Wall Street. Sage saw that being Gould's henchman was no longer to his advantage and deserted the Mephistopheles of Wall Street, an about-face that was revealed at a board meeting of the Union Pacific. This came as a shock to Gould, who was forced out of control, and triggered an emotional outburst that appalled and embarrassed the other board members. Gould apparently suffered an emotional breakdown.

Gould betrayed many friends and consistently acted with complete indifference about the effects of his actions upon others, but it is easy to understand his shock concerning Sage's defection, since Sage benefited greatly over many years by playing second fiddle to Gould. Nonetheless, Gould should have known better than to rely on sentiment for Sage's continued backing.

Gould staged a comeback and, with help from Sage, was able to regain control of the Union Pacific in 1890. He died in 1892 and the Union Pacific declared bankruptcy the following year.

In the years that followed, Sage slowly faded from the Wall Street scene. Although he was not financially crushed by the "Crash of 1884," he was much less active thereafter. Wall Street was changing. Coincidentally, William Henry Vanderbilt died in 1884. The new generation of Vanderbilts proved to be more interested in collecting dividends and socializing than in engaging in financial combat. In any event, the Vanderbilt fortune was so large and secure they had no need for Sage. Other Sage cronies, such as the infamous "Jubilee Jim" Fisk and Daniel Drew faded into history and lore. Further, the crisis of 1884 saw J.P. Morgan take his place in Wall Street history, marking the beginning of a new era for high finance.


Russell Sage died in 1906, worth an estimated $70-100 million. He left his fortune to his wife, Margaret Olivia Slocum Sage, who devoted the rest of her life to preserving the memory of her husband by creating a number of charitable organizations in his name. She founded the Russell Sage Foundation in 1907 to support initiatives to help the poor. She also became active in the women's suffrage movement, but began to believe that the right to vote was less important for many women than the ability to earn an independent living. With that in mind, she founded Russell Sage College in upstate New York to give women from lower-income families the opportunity to learn a profession.

The foundation and college perpetuate the name of Russell Sage by doing philanthropic work that Sage's wife originated, but certainly not Sage himself. As a result, to this day, many people know his name and think of him in a vague sense as a philanthropist, unaware that he was more of a scoundrel than a man of good will. Yet as a pioneer of Wall Street, he is worth remembering.

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, the Massachusetts Law Review, and other magazines. He can be reached at


Gordon, John Steele [1988]. The Scarlet Woman Of Wall Street, Weidenfeld & Nicolson.

Josephson, Matthew [1962]. The Robber Barons, Harcourt Brace Jovanovich.

Myers, Gustavus [1937]. History Of The Great American Fortune, The Modern Library.

Shepherd, Jack [1975]. The Adams Chronicles, Little, Brown & Co.

Sobel, Robert [1968]. Panic On Wall Street, Macmillan Co.

Current and past articles from Working Money, The Investors' Magazine, can be found at

James Maccaro

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. James A. Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. He may be reached at

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