American Experiment

by James Macgregor Burns

  Financial Boston seemed to be stagnating too, by the 1870s. The “hub” had long since lost out to New York and Philadelphia as a capital market. Manhattan’s booming savings banks, insurance companies, and large and efficient investment banking and brokerage agencies had made it the real financial hub of the nation. The availability of ready “call money” in New York attracted millions of speculative dollars. Philadelphia, Baltimore, and Charleston, with their own ports and transportation facilities, shared in the expanding prosperity while Chicago, St. Louis, Cincinnati, and other “western” cities were racing ahead of the old New England centers.

  It was A. Lawrence Lowell, himself a descendant of brilliant entrepreneurs, who had the last word, remarking to his fellow Brahmin George Cabot, “I’m getting rather worried about the Lowell Family, George. There’s nobody in it making money any more.”

  Some persons seemed to have a special knack for making money—and also for losing it. These were the private bankers of New York and Philadelphia and other cities, an old-fashioned breed of men who were taking on new importance and becoming known as investment bankers. Private banking had long attracted entrepreneurs. Jacob Barker, a New York merchant and shipowner, at the age of thirty-six had founded the Exchange Bank on Wall Street with a capital investment of $250,000—a bank of which he was the sole owner—during the dying months of the War of 1812. During that war also, Stephen Girard of Philadelphia, another sea trader, became one of the nation’s first investment bankers when he helped underwrite a government loan. Following in his footsteps, Nicholas Biddle undertook a full-fledged investment banking business by contracting and negotiating securities. Some of these and other ventures flourished, some failed, but by mid-century the investment banker—essentially a middleman between corporations and governments issuing securities and those corporations, banks, and insurance companies needing long-term capital funds—had become a vital part of the financial system.

  War vastly swells the demand for big money quickly raised, and the Civil War was no exception. The need called forth the man—Jay Cooke. Son of an Ohio congressman, Cooke had left school at fourteen, probably more from ambition than need, to clerk in a general store in Sandusky, then in a wholesale house in St. Louis, a transportation company in Philadelphia, and a banking house in the same city. There, on New Year’s Day in 1861, he opened his own banking house, Jay Cooke and Co. Through old Ohio and family connections with Secretary Chase, he gained an option to sell a $2 million bond issue in Pennsylvania. He did this so successfully that he was picked to peddle war bonds for the federal government.

  Cooke soon proved to be a genius at the mass merchandising of these bonds. Immensely self-confident, still in his early forties, he used patriotic appeals, newspaper advertisements, and a large corps of field agents to sell “five-twenties”—a 6 percent loan payable between five and twenty years. He took the lead in raising half a billion dollars by 1864, and another $600 million in 1865. Perhaps a million Americans took shares in the public debt. A “creative entrepreneur,” in Fritz Redlich’s words, he vividly demonstrated the potential role in big government and business for multitudinous small pools of savings.

  Private banking mushroomed after the war, enormously expanding the pool of investment money. By the early 1870s, over five hundred private banks were established in New York City, over a hundred more in Boston, Philadelphia, and Baltimore together, and hundreds more throughout the country, with a remarkably high number in the western states. Many of these were tiny local banks, but increasingly dominant were the big investment bankers, centered in Wall Street, who alone or with other houses could float whole issues of securities. Some of these firms bore “old” names, such as Morton, Bliss & Co., with roots in ancient mercantile establishments. Others sported new names; the field seemed open to anyone with money and daring. Then there were the “Jewish” houses, as they were viewed, such as J. and W. Seligman and Co. and Kuhn, Loeb, with major foreign contacts. Attracting more and more attention in Wall Street by the 1870s was “young” J. P. Morgan, scion of the famous Junius Morgan of London, the American banker who had won world fame when he coolly placed a $50 million loan for the French during their war with Prussia, in the face of thunderous warnings by Bismarck.

  Far more typical of American firms was Morton, Bliss, which left extensive records of its week-to-week activities in the letters of junior partner George Bliss to his senior, Levi P. Morton, who liked to linger in London and Newport. Life at Morton, Bliss was one of constant vigilance—following the securities market, closely watching competitors, picking up rumors, mingling with the bigger financiers, keeping an eye cocked on Washington. The firm had major foreign connections through its English partner, Sir John Rose. Like many other financiers, Morton doubled as a politician; he ran three times for Congress and won twice, and established close ties to the Grant Administration. (He would later serve as Minister to France, Governor of New York, and Vice-President.) But Presidents were temporary conveniences, not permanent allies. When Hayes succeeded Grant, Bliss wrote a friend that “our position with the new administration” would be “not less favorable (and it should be stronger) than with the last.”

  Financiers lived day and night in the heady world of Wall and Broad Streets. After feverish bidding in the exchange, men would repair to Delmonico’s for more talk of finance, or they might thread their way through the long narrow alley that led to the plain but fashionable Dorlon’s and its oysters. When the exchange closed at four, some would move uptown for decorous carriage-riding in the new Central Park, or for spirited trotting up in Harlem Lane. But, from fear and excitement and avarice, the financiers could not escape the market; many would return around six to the “Gold Room,” a combination informal exchange and Republican party headquarters, where they kept on trading, sometimes around the clock.

  These were enormously self-confident men. However watchful and even fearful they were from day to day in the market, they were also confident of the system that needed only their dynamic leadership. They could take pride, if they paid attention, in the tributes of old adversaries as well as new. “The bourgeoisie,” the Communist Manifesto had proclaimed, “during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?”

  From the perspective of a half-century later, Joseph Schumpeter would picture, as the true economic leaders, the entrepreneurs of this creative period of capitalism. They had to overcome environmental resistances ranging from simple refusal to finance a new thing to “physical attack” on the man who tried to produce it. “To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function,” Schumpeter said. “This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.”

  The investors got things done. In particular, they largely financed the expanded “forces of production” that Marx celebrated. But did they innovate better products, or better ways to make products? Critics charged that the investors were reluctant to subsidize innovation, that they preferred the safe old ways. The trend toward bigger businesses, Thorstein Veblen said later, and toward control by men with commercial rather than technical skills had led to a failure to innovate. Others disputed this view. But what does seem clear is that investment in innovative industry was on the whole safer than many of the entrepreneurs realized. The individual investor did run risks; but collecti
vely the bankers and other investors could hardly fail in late nineteenth-century America.

  One reason for this was the tariff, which was designed particularly to protect “infant industries.” Another was the patent system. Hardly an entrepreneur operated in this period save in a flurry of patent applications, patent claims, and patent suits. Patents, to be sure, were also a source of uncertainty, with some judges defining patents held without use as deserving little recognition in law and none in equity, and others defining them as an inviolable property right whether the discovery was used or not. But the patent system at least set up rules of the game that gave some protection to capitalists financing innovation. What primarily made risk-taking safe in post-Civil War America, however, was the enterprise system itself and the environment in which it operated. That system established multiple channels for investors: if one venture failed, another would succeed. And the environment minimized “interference risks” from a government that largely kept hands off, a labor force that was largely passive, and consumers who were largely unorganized.

  Railroad issues continued to fuel the speculative market during this period, and “western” railroads in particular called forth all that was best and worst in the American entrepreneurial spirit—its daring, imagination, ability to get things actually done, along with its greed, lack of scruples, capacity to tarnish and corrupt everything it touched.

  The extra-wide rails of the Erie, twisting and winding their way through the southern tier of New York, epitomized Americans’ bittersweet romance with the railroad. Built with an unusual six-foot gauge in order to hinder interchange of traffic with the rival Pennsylvania and Baltimore roads, the Erie swallowed millions of dollars from American and foreign investors—and from New York taxpayers—before reaching Dunkirk on Lake Erie, then Buffalo, and finally Chicago, on the eve of the Civil War. During the 1850s, following one of the Erie’s periodic money crises, Daniel Drew had taken control of the railroad’s finances. An old-time Hudson Valley cattle driver and horse trader, Drew combined sharp wits and a lack of scruples with a “sanctimonious devotion to Methodism.” “Shrewd, unscrupulous, and very illiterate,” Charles Francis Adams, Jr., later described him—“a strange combination of superstition and faithlessness, of daring and timidity.” Promptly living up to his reputation, Drew began to manipulate the Erie stock.

  His competitive instincts had long before pitted Drew against an even more formidable figure, Cornelius Vanderbilt. As pleasure-loving and calculating as Drew was somber and bold, the “Commodore” had spent most of his sixty-odd years operating sailing ships, ferries, and steamboats on waterways ranging from New York Harbor and the Hudson to the Atlantic and Pacific routes to gold-feverish California. He first came into competition with Drew when the onetime horse trader ran “antimonopoly” boats against him on the Hudson and forced down the fares. The two men squared off again after Vanderbilt bought control of the Harlem Railroad in the late 1850s. In a famous “corner” in 1864, Drew “was outwitted,” according to Allan Nevins, “went short on large commitments as the stock rose in five months from 90 to 285, and lost a half million dollars, an episode which left him eager for revenge.”

  Revenge was only a few years in coming, in what would be known as not merely another contest among capitalists but as the “Erie War.” Both sides had prepared for combat. Using every political and financial resource he could muster, Vanderbilt had won control of the Hudson River Railroad and the New York Central; now, if he succeeded in adding the Erie to his rail network, he would monopolize the profitable grain freight from the west. His primary weapon was a long-tested one—the kind of vast financial resources he had used to buy out other lines.

  Now, however, he faced not only the small but commanding figure of Daniel Drew but two lieutenant-generalissimos—and a most remarkable pair at that. Through skill, guile, and knavery Jay Gould had worked his way up from a blacksmith’s forge and a country-store clerkship to the ownership of railroads and then of a Wall Street brokerage house. The other, James Fisk, onetime hotel waiter, circus ticket seller, traveling salesman, and dry-goods jobber, was a comic-opera figure in behavior and appearance—a plump, brassy, jovial voluptuary who wore the garish uniform of a purchased national guard colonelcy, sported diamond bosom pins and lavender gloves, and liked to parade around Manhattan in a four-in-hand flanked by footmen in livery. He had the “instincts of fourteen,” Henry Adams wrote. Fisk was not a buffoon, though, but rather a canny and unscrupulous showman who believed it was a duty of the rich to provide entertainment to the poor.

  The trio had one key weapon—possession of the Erie itself. Vanderbilt struck first, buying tens of thousands of shares of Erie stock. He knew his foes could not match his resources with money. But they could with chicanery. The trio issued to themselves $10 million of convertible bonds, changed them into stock, and dumped them on the market. After Vanderbilt replied with a New York contempt-of-court ruling against their issuing more watered stock, they made a retrograde movement across the Hudson to Newark, freed themselves from New York law, and then bribed the New Jersey legislature to legalize their stock issue. After this, Vanderbilt threw in his hand, and the Erie War ended tepidly in a division of the spoils.

  Most of the railroad investing was conducted on a far higher plane than this, but often the issuance of rail securities reeked of collusion and fraud, with railroads despoiled and bankrupted in the process. The corruption of the railroads tainted the rest of the financial and political system. Soon it would be revealed that a group of railroad leaders had in effect bribed United States senators and representatives by giving them shares of stock, in a scandal that would come to be known as Crédit Mobilier.

  Charles Francis Adams, Jr., observed all this; indeed, he wrote a searching and authoritative study, “A Chapter of Erie.” He did not hesitate to call Fisk a “damned rascal” and Gould a “moral monstrosity.” Yet Adams himself, as head of the Union Pacific, later was willing to pay $50,000 to a Kansas senator to gain his support of a Union Pacific funding bill. Feeling guilty, he blamed himself less for planning corruption than for ineptly failing to bring off the bribe. He justified his action as his duty to the stockholders; if he could not bribe the senator, he reflected, “it was questionable whether I had any right to retain my place as President.”

  The great-grandson of John Adams had indeed fastened himself not to a star but to a locomotive engine.

  Entrepreneurs: The Californians

  It was a grand sight from the valley of Lake Donner, at eventide, a traveler reported, “to look up a thousand feet upon the overhanging cliffs where the workmen were discharging their glycerine blasts.” In the dusk, great fiery blasts shook the mountainsides amid dense clouds of smoke. “Huge masses of rock and debris were rent and heaved up in the commotion; then anon came the thunders of the explosion like a lightning stroke, reverberating along the hills and canyons, as if the whole artillery of heaven were at play.”

  The time was 1868; the place, the east end of Summit Valley near Lake Donner; the occasion, the building of the Central Pacific Railroad east, through some of the most rugged mountainland in America, to meet the Union Pacific advancing west.

  The men up on the cliffs earlier had brought the railroad across the Central Valley east from Sacramento, and were now blasting and digging their way through the high Sierras. Above, men were lowered down the sheer sides of cliffs, where they drilled holes, lighted the fuses, and tried to move out fast, with the American River raging more than a thousand feet below. It was even worse in the valleys, especially during the appalling winter of 1866–67, when snow lay fifteen feet deep by Christmas and one hundred feet or more later. Workers, living in deeply buried shacks, tunneled through the snow as much as two hundred feet to reach the railroad bore they were cutting. At day’s end they dragged themselves back through their labyrinth of snow corridors to wash in powder kegs filled with hot water, dine on rice, dried fish, pork, pickled vegetables, and tea, and then perhaps to have
a turn at fan-tan and a pipe of opium before throwing themselves down for sleep. But day after day, month after month, they pressed on, at best cutting through twenty-seven inches of granite in a whole day.

  The men who were building the Central Pacific made up perhaps the most extraordinary work force in American history. They had fled from poverty, misery, and civil war in their homeland. They had traveled 8,000 miles to an American shore, but from the west, not the east. Their Taoist and Confucian beliefs were about as far from the Catholic faith and Puritan ethic of their fellow Californians as could be imagined. With their oriental appearance, costumes, language, and pigtails, they were the most harshly treated immigrant group in America. They were segregated both at work and at home, and thus formed one more caste in “classless” America.

  The Chinese had not been wanted by either the railroad builders or the labor trades. They were considered too small for the heavy work, averaging hardly one hundred pounds, and were said to be addicted to gambling and opium; good enough to be laundrymen and farmhands … but railroad laborers? Moreover, the other workers—usually summed up as “the Irish” —hotly opposed the Chinese and their lower wages. But the “Irish,” many of whom were miners of old, were prone to quit after payday, especially on news of a gold strike in the hills. At first taken on as potential strikebreakers—another red flag to union men—the Chinese proved such willing workers that several thousand were hired, many of them brought over directly from China.

  And so here in the mountain passes and later on the burning sands of Nevada the dream of a transcontinental railroad was being carried out by a strange partnership of Sacramento capitalists and pigtailed “Celestials,” as they were called. The dream was an old and grandiose one. A transcontinental railroad, it had been argued in the 1840s, would be a strategic as well as economic boon; it would place on the West Coast naval power that could dominate the Pacific and even the Chinese seas. Only the coming of the Civil War had broken the long deadlock over a northern versus a southern railroad, and it was during the war that Congress had passed the legislation, Lincoln had signed it, and the Sacramento group had laid the first rails.