Iron Empires
Page 9
In the event, the House quailed at the prospect of ejecting a member as an offender without documenting an offense. Knowing that the necessary two-thirds votes could not be mustered for removal, the House voted merely to censure Ames and Brooks. The two returned to their homes having avoided outright conviction but carrying the burden of vilification. Brooks, already in poor health at sixty-two, died two months later, on April 30. Five days later Ames suffered a stroke, and expired on May 8 at the age of sixty-nine.
As much as the nation’s political leadership desired to put the Crédit Mobilier affair behind it, the scandal further darkened the reputation of Grant and his administration and dismayed his supporters. One of Grant’s crestfallen followers was Walt Whitman, who added to his poem “Respondez!,” which had first appeared in the 1867 edition of Leaves of Grass, a bitter parenthetical stanza:
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(Stifled, O days! O lands! in every public and private corruption!
Smother’d in thievery, impotence, shamelessness, mountain-high;
Brazen effrontery, scheming, rolling like ocean’s waves around and upon you, O my days! my lands!
For not even those thunderstorms, nor fiercest lightnings of the war, have purified the atmosphere;)
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Whitman’s journey from exaltation of America’s industrial might to skepticism and ultimately denunciation was just beginning.
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THE POLAND AND Wilson investigations have been faulted for depicting the Crédit Mobilier arrangement as unique in the railroad industry at the time. In truth, as the historian Nelson Smith Trottman observed a few years later, the creation of a construction company to funnel profits into the hands of a railroad’s management had “become an established institution”; the Union Pacific’s version was merely one of countless examples of “uncontrolled railroad finance.”
Yet there was more to it than that. The scandal translated the railroad builders’ intricate methods of profiteering at the expense of investors into a straightforward narrative easily grasped by the ordinary newspaper reader. In this case, moreover, the cheated investors included the public itself. That brought the matter home to Americans who might have regarded earlier depredations by the builders as dramas they could enjoy at a remove, like members of a theater audience.
The corruption of lawmakers by the Union Pacific was hard to overlook, despite the Poland Committee’s effort to exonerate the graft takers. The committee was fully alive to the threat the scandal posed to Congress’s reputation:
This country is fast becoming filled with gigantic corporations, wielding and controlling immense aggregations of money, and thereby commanding great influence and power. It is notorious in many State legislatures that these influences are often controlling, so that in effect they become the ruling power of the State. Within a few years Congress has, to some extent, been brought within similar influences, and the knowledge of the public on that subject has brought great discredit on the body.
“In a free government like ours,” it warned in its report, “we cannot expect the people will long respect the laws, if they lose respect for the law-makers.”
The scandal was a painful setback for Wall Street financiers hoping that the railroad industry would finally acquire at least a veneer of respectability. Disclosures of the Crédit Mobilier’s unsavory relationships with politicians reinforced the conviction of the bankers that Washington, DC, unlike their own community, was a hive of fraud and corruption, albeit one on which they were dependent to build their fortunes. Pierpont Morgan, among others, fretted that the scandal would unsettle the financial markets to his disadvantage—a fear that would prove warranted in 1873, only a year after the Sun’s bombshell. The scandal also magnified public mistrust of the railroad industry itself, which was already becoming manifest in restiveness among shippers and employees.
Still, the scandal’s principal impact was on the Union Pacific. Because the railroad’s managers had profited from inflated construction contracts they awarded themselves via the Crédit Mobilier, they had felt no incentive to economize on construction or to make sure they got their money’s worth. “Instead of gaining by cheap construction, they profited by dear,” wrote the railroad management expert Stuart Daggett in 1908. “Instead of aiming to reduce the cost in every possible way, they schemed at making the contracts as lucrative as possible.”
The legacy of the Crédit Mobilier would be seen in the Union Pacific’s financial accounts for years. Its moral burden, moreover, would persist even longer. “The ‘Credit Mobilier’ investigation has tinged everything,” lamented the Union Pacific’s government directors in their report for 1874; the road would labor under the shame of scandal for decades. By some estimates the thievery related to the Crédit Mobilier put more than $20 million into the pockets of the insiders. The result was a capital structure that loaded the railroad with a punishing weight of debt. On the day the golden spike was struck, marking completion of the transcontinental railroad, the entire capitalization of the road was estimated at $111 million, or more than $106,000 per mile, of which 50 percent was water—capital that had never been spent on construction and had been pocketed by the promoters, but would still have to be repaid to investors.
Through the early 1870s the Union Pacific enjoyed a traffic surge. Smelting of iron ores had taken off in the mining territory around Salt Lake City, where the UP held a monopoly, and the tourist and trade boom in the West fattened its top line; had the road been capitalized at a responsible level it almost certainly would have thrived. Instead, it struggled perpetually to raise enough revenue to pay its annual interest, not to speak of funds needed for operations and maintenance. In 1873, for instance, the Union Pacific took in more than $4 million but owed $3.4 million in interest—and it earned that much only because it held a monopoly, for the moment, on transcontinental shipping in a booming economy. Upon the appearance of the first competing transcontinental line, or the first economic downturn—which was already lurking on the horizon—the road would be exposed to financial disaster.
That reality could not be kept from anyone who had a chance to examine the books. Horace F. Clark, a railroad executive from Chicago who was the son-in-law of Cornelius Vanderbilt, had bought into the UP in 1872 and become its president. His goal was to combine the road with other Vanderbilt holdings and create a semi-transcontinental line from the East Coast to Utah. But upon taking office he had discovered that the UP was, financially speaking, hanging by a thread. If not for loans backed by the credit of its directors, Clark told the Wilson Committee, the railroad would be bankrupt.
In this desperate state the Union Pacific was defenseless against financial manipulation by speculators operating in the guise of rescuers. The road, the Wilson Committee found, “is now helpless and dependent,” so “weakened” as to make it an easy mark for “capitalists and powerful railroad corporations.”
The committee was prescient. Within months of its report, the leading speculator in the United States surfaced with a controlling interest in the UP that had been acquired in secret.
But before Jay Gould could make something of the “helpless” Union Pacific, he would have to steer it through a crisis it shared with all the other railroads in the United States. This was the Panic of 1873, which would trigger a five-year depression—the worst the country had suffered in its short history. Even worse, the panic was the product of a heedlessly expanding railroad industry, including a headstrong gamble by a man who had staked his fortune and his stature as the leading financier in the country on the building of a second transcontinental railroad. The road was the Northern Pacific. The man was Jay Cooke.
5
The Northern Pacific Panic
OF ALL THE transcontinental railroads built after the Civil War, the Northern Pacific had the oldest pedigree. Its route, which roughly followed the path of the Lewis and Clark expedition of 1804 to 1806, had been favored by Asa Whitney, the leading proselytizer of transcontinental rail as
an expression of America’s destiny, in the 1850s. Of the five alternatives surveyed by order of Congress in 1853, that northern route, reaching from Lake Michigan to the Columbia River and terminating on the Oregon coast or at Puget Sound, traversed the territory richest in economic potential—a treasure trove of timberlands, mineral deposits, and arable acreage.
As Whitney acknowledged, the route also crossed the homelands of bellicose Indian tribes, especially the “numerous, powerful, and entirely savage” Sioux, who “occupy and claim nearly all the lands from above latitude about 43 degrees on the Mississippi to the Rocky mountains.” This he held to be a virtue in disguise, for building the railroad offered white America the best means of taming the tribe. Efforts to “civilize” smaller tribes in the region, he explained, had been stymied by the tribes’ ability to take refuge in Sioux territory, but the incursion of the railroad and the settlers coming in its wake would close off this stratagem. “This road would put them asunder so that they cannot meet,” he wrote; “and we can then succeed in bringing the removed and small tribes to habits of industry and civilization. . . . Their race may be preserved until mixed and blended with ours, and the Sioux must soon follow them.” Thus would the whites’ sacred duty to bring “the savage, the barbarian, and the heathen” to Christianity be fulfilled.
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The four other transcontinental routes mapped by the surveyors crossed desolate wastes offering little to lure homesteaders. By 1862, moreover, when Congress began seriously debating whether to fund a transcontinental railroad, the Confederate rebellion had placed the southernmost route out of bounds. Politics and expedience argued for a middle path, the prairie route ultimately traced by the Union and Central Pacific. Congress was anxious to bind far-flung California to the Union with iron rails to quell a movement there favoring the Confederacy. And the prairie route had the virtue of familiarity, for it had carried the forty-niners west during the California gold rush.
But the dream of a northern transcontinental railroad was not dead, only slumbering. It was reawakened by a promoter named Josiah Perham, who had originally applied for the congressional charters that had been awarded instead to the Union Pacific and Central Pacific. Perham subsequently transferred his application to a route running between Maine and Oregon. For his “People’s Pacific Railway Company,” he proposed to raise a hundred dollars each from up to a million small individual investors, with a down payment of only ten dollars required.
Perham was considered a “visionary” like Asa Whitney—and as in Whitney’s case, the term described him as a man in the grip of delirium. He forswore the government bond financing that propped up the Union and Central Pacific roads, instead securing for the People’s Railroad a commitment for government land grants of 12,600 acres for every mile of completed track in the states of Wisconsin and Minnesota and twice as much in the territories of Dakota, Montana, Idaho, and Washington. Despite his conviction that the small investments of a million Americans and the resale of land to settlers would be sufficient to finance the road, the absence of a direct government subsidy would become an albatross for Perham’s enterprise. So too would the congressional mandate that the railroad begin construction within two years, complete at least fifty miles per year after that, and be entirely finished by the Fourth of July, 1876.
Within a year of obtaining his charter, Perham’s vision was in a shambles. The stock subscription campaign having failed miserably, he was unable to begin surveys of the right of way, much less start construction, so no land grants were forthcoming and there were no land sales to generate income. Perham was pushed out of the company by a clique of New Eng-landers hoping to revive its fortunes by appealing to Congress for a direct government loan. Perham would die destitute in 1868, another railroad pioneer broken and embittered by dashed dreams.
The new owners soon discovered that congressional taste for advancing millions of dollars to speculative railroad ventures had soured after the handouts to the Union Pacific and Central Pacific. The northern road’s land grants were deemed useless as collateral by would-be investors, who recognized that forty-seven million additional acres of northern prairie could only overfill a homesteading market struggling to absorb the millions of arable acres in Missouri, Iowa, Nebraska, and Kansas already granted to railroad builders.
Casting about desperately for a financial lifeline, the Northern’s promoters soon turned, inevitably, to Jay Cooke. The most eminent financier in the country, widely regarded as the savior of the government during its gravest financial crisis, Cooke would put their dream on a realistic footing over the next five years—and then ride it to his ruin, taking the national economy with him.
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WHEN THE CIVIL War began, Jay Cooke was an obscure banker who had just opened his firm’s doors in Philadelphia. He was born in Sandusky, Ohio, on August 10, 1821, the son of a prominent lawyer and state legislator. The region was still mostly wilderness; Eleutheros Cooke, Jay’s father, had erected the first stone house in town, choosing a site on the shore of Lake Erie where Ogontz, the burly local Wyandot chief, had built his wigwam before the tribe was removed to a reservation forty miles inland. The tribe still remained part of the community, regularly returning to the lakeside to pick fruit from the trees they had planted in years past and to collect their federal stipend. “Old Ogontz did himself and us the honor of occasionally sojourning for a few days on the spot where he had once dwelt in his wigwam,” Cooke would recall in the memoirs he scribbled by hand in the last years of his life. “He was allowed to camp in our barn. . . . I was his favorite and occasionally was mounted on his shoulders for a ride.”
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Jay Cooke, the nation’s preeminent financier at the end of the Civil War, was ruined in the Panic of 1873 by his investment in the Northern Pacific Railroad.
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While still in his teens, Cooke was invited by a brother-in-law to join his shipping company in Philadelphia. The business failed in the Panic of 1837, but young Cooke’s diligence had been noticed by a local banker, Enoch Clark, who brought him into his firm as a clerk. Cooke was a quick study with a native talent for business and finance. Upon Clark’s death in 1856 he was appointed executor of the estate, and managed to bring the firm through another financial crisis, the Panic of 1857, “with an absolutely unruffled temper” while more established banking houses failed around him. This disposition would serve him well through some of the more challenging times to come.
The US government’s finances were at a low ebb as the country careened toward war. On July 1, 1860, John Sherman of Ohio, chairman of the House Ways and Means Committee, informed his colleagues that the government carried $64.8 million in debt but had only $3.6 million in its coffers. The dire situation did not come as a surprise to the lawmakers. “Most of the members are aware,” Sherman said, “that the Government has not been able to pay, for the last week or two, our own salaries.” He recommended borrowing $10 million. But that would be a pittance compared with the Union’s war needs over the next five years.
Cooke’s entrée into the Union financing market came via his brother Henry, who back in Ohio had been a friend and business partner of Salmon P. Chase, Abraham Lincoln’s first treasury secretary. Having a strong sense of patriotism and an abolitionist streak, Jay Cooke was determined to help the Union cause. In May 1861 Pennsylvania was struggling to place $3 million in bonds to finance its participation in the war. Cooke stepped in and by the end of June had sold out the entire issue.
“It is regarded as an achievement as great or greater than Napoleon’s crossing the Alps,” Jay boasted to Henry, who made sure it came to Chase’s attention. The treasury secretary named Cooke the exclusive agent in Philadelphia and New Jersey for a $150 million federal bond sale in 1861. Cooke perfected a sales technique based on three pillars: patriotic ballyhoo, an appeal to legions of small investors being introduced for the first time to the concept of building their nest eggs with government securitie
s, and a relentless publicity campaign. Newspaper editors were made to understand that if they desired advertising from Cooke and his partners, they would integrate his tub-thumping sales pitches for the bonds into their news columns, no questions asked. In Washington, meanwhile, Henry Cooke lavishly entertained news reporters, inviting them to his Georgetown home to be “filled full to the brim not only with edibles and bibibles, but with the glorious financial prospects of the future.”
Cooke would ultimately be credited with placing more than $1.5 billion in government debt during the war, roughly one-quarter of the total issued. His methods sometimes excited negative remark, as when he attempted to place an article in national newspapers with a headline describing the government debt as “a national blessing.” The slogan was deplored by sober investment advisers for tempting small investors into imprudence, especially since the government’s fiscal management had already come under fire. The title was eventually toned down to read “How Our National Debt May Be a National Blessing,” and the article widely distributed.
The article and its headline were the handiwork of Sam Wilkeson, a reporter on the staff of the New York Tribune with a peerless talent for spinning seductive fancies from the barest facts, or no facts at all. Cooke had hired Wilkeson at Henry’s urging to assist with publicity for a $600 million Union bond issue. “His specialty should be the manufacture of editorials, letters, notices and so forth,” Henry told Jay, with an implicit emphasis on the word “manufacture.” This marked the start of a long association between banker and publicity man, even if Wilkeson’s rhetoric sometimes went too far, as in the case of the “national blessing” article. (It would not be the last time.)