Iron Empires

by Michael Hiltzik

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  TO MOST OUTSIDERS, Cooke & Co. seemed to be at high tide in 1872. As America’s preeminent financier, Cooke was sought after for charitable subscriptions of every kind. As a capstone, he was appointed chairman of Philadelphia’s Centennial Exposition, which in 1876 would mark the nation’s one hundredth anniversary of the signing of the Declaration of Independence. An invitation to Ogontz was treasured as validation of a guest’s position in the highest echelon of politics or business. The reelection of President Grant, with whom the Cooke family’s relations were strong, seemed assured.

  Behind the scenes, however, the Northern Pacific crisis was worsening. The railroad had borrowed more than $1.5 million from Cooke & Co. yet had virtually no prospect of raising the money to repay the loan—other than by borrowing more from Cooke. And Cooke’s chances of unloading Northern securities on investors at home or abroad were shrinking fast. Through the first half of 1873 money got tighter. That August the Ledger quoted, with evident glee, a correspondent’s report from Frankfurt that an American railroad bond would not sell in Europe “even if signed by an angel of Heaven.”

  Cooke also came under attack from a new quarter. The battleground was the government’s plan to refinance $300 million in Civil War bonds at an interest rate reduced to 5 percent, a savings of a full percentage point. Cooke regarded the refunding, like the original Civil War debt, as his personal franchise. Not this time: Pierpont Morgan, in partnership with the financier Levi P. Morton and Anthony Drexel, and with backing from the British firm Baring Brothers & Co., was determined to shatter Cooke’s monopoly on the government business, a step on his campaign to take the Philadelphian’s place at the summit of American banking.

  In January, Morgan and Drexel persuaded Treasury Secretary George Boutwell to split the $300 million refunding between their syndicate and Cooke. In financial terms the deal was not a coup for either camp, as the total commission to be divided between them was a paltry $150,000. But the bonds would not have to be delivered to buyers until the last day of 1873, which meant that if the securities could be sold promptly, the firms would have the use of the proceeds for most of the year—a lifeline, especially, for Jay Cooke & Co.

  The bond issue turned out to be a fizzle. Contemporaries conjectured that Morgan deliberately slowed sales of the bonds to place pressure on Cooke, but that is implausible—Junius Morgan was unhappy that his son had participated in the financing without his permission, so it was hardly in Pierpont’s interest to make the venture look even more ill-advised. In any case, the bonds’ failure could be ascribed to a slump in general business conditions without having to adduce an ulterior motive on Pierpont’s part.

  The developing economic weakness had several causes. One was the hangover of wartime production of crops and steel, which became overproduction as wartime demand evaporated—and intensified as farms and factories tried to preserve income in the face of falling prices. Farmers and railroad operators alike were heavily indebted, leaving them vulnerable to any tightening in interest rates. In the spring of 1873, financial panics swept through Berlin, Vienna, Paris, and London. The foundations of America’s economic expansion began to seem shaky. And that meant a loss of confidence in the main drivers of the expansion, the railroads.

  By early September, faltering railroad investments were undermining investment firms all over the financial district. On September 8, the New York Warehouse and Security Co., which traded in commercial loans, declared itself insolvent; its president blamed its loans to “railways and . . . individual railroad builders.” Five days later, Kenyon, Cox & Co.—where Daniel Drew was a partner—shut down, having tried unsuccessfully to call in a $1.5 million loan to the Canada Southern Railroad. The contagion began to spread among other firms with outstanding loans to other crippled railroads, meaning almost all of them.

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  PANIC WAS EVIDENT in the New York markets on September 17. President Grant spent that night at Ogontz after dropping off his son Jesse at a nearby private academy. At breakfast the next morning, the president spied Cooke buried under a blizzard of telegrams from New York, though the sight gave him no hint of impending disaster. Grant left to board the train back to Washington and Cooke headed for his Philadelphia office.

  The ax fell with sickening speed. In New York, Harris Fahnestock summoned bank presidents to his office and informed them that Jay Cooke & Co. was closing its doors. Cooke received a wire with the news before 11 A.M. and ordered the Philadelphia headquarters closed too. He turned his face away from his assistants as tears streamed from his eyes. No one in the office had ever seen him weep before.

  But that was nothing compared with the reaction in the exchanges. The news hit Philadelphia “like a thunderclap in a clear sky,” reported the Philadelphia Press. The New York Stock Exchange was in an “uproar,” and a pall fell on every trader on the floor. On the sidewalks of Wall Street desperate depositors mixed with curious onlookers to gawk at staggering brokers like rubberneckers at an accident scene. Among the witnesses was George Templeton Strong, a lawyer whose daily entries in his personal journal would win him fame as a diarist. On September 18, the day after Cooke’s failure, he observed “one or two gentlemen who looked like they came from the country and who probably had monies on deposit with these collapsed bankers . . . walking about in an aimless sort of way and talking loud to nobody in particular about ‘d——d infernal swindlers and thieves.’” Two days later, Strong remarked that the stock exchange had closed its doors: “A wise measure, and would that they might never be reopened,” he wrote tartly. “The failure of these great stock-gambling concerns would be a public benefit but for its probable damage to so many honest businessmen.” (Trading would remain suspended for ten days.)

  There was widespread consensus about where to place blame for the crisis: on the railroads, especially the Northern Pacific. Cornelius Vanderbilt leveled his judgment like a biblical prophet, lecturing the New York Herald as follows:

  I’ll tell you what’s the matter. People undertake to do about four times as much business as they can legitimately undertake. . . . There are many worthless railroads started in this country without any means to carry them through. . . . Building railroads from nowhere to nowhere at public expense is not a legitimate undertaking. . . . Mistrust will be engendered till we, as a nation, do our business on a more solid basis, and pay as we go.

  In the heat of the crisis, with institutions failing all around, many on Wall Street hoped that the Commodore would step in and rescue the market with his unlimited resources, even as he was about to enter his eighth decade. But it was a forlorn hope; Vanderbilt himself was strapped. The collapse had driven down shares of his three major holdings: the New York Central; the Lake Shore & Michigan Southern, which ran between Chicago and Buffalo; and the telegraph company Western Union, by more than $50 million combined. The Union Trust Company, previously a reliable banking partner of the Vanderbilt railroads, called in a $1.75 million loan to the Lake Shore, which the road could not pay—threatening bankruptcy for the entire Vanderbilt empire and the Union Trust itself.

  Pierpont Morgan surveyed the crash with relative equanimity from a vantage point safely removed from heavy exposure to the railroads, thanks largely to his foresight that a slump was coming and undercapitalized railroads would bring down their bankers. “The kinds of bonds which I want to be connected with are those which can be recommended without a shadow of doubt, and without the least subsequent anxiety, as to payment of interest,” he had written to his father as early as April 1873. He was wise to seek out the safest possible investments, for the aftermath of what came to be known as the Panic of 1873 would stretch far beyond that year.

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  UNTIL THE EVEN vaster economic calamity of the 1930s, the Panic of 1873 and its six-year aftermath would be what Americans meant when they referred to the “Great Depression.” It was a classic bubble, born of frenzied growth in the railroad industry that had long-term financial obligations b
ut funded them with short-term debt and the issuance of grossly overvalued securities. The downturn, like its later cousin, would leave a lasting imprint on American industry, society, and politics.

  The most immediate damage could be traced in the national accounts of profits, losses, and unemployment. The economy shrank by nearly a third from 1873 through 1879; bankruptcies doubled from fifty-one hundred in 1873 to more than ten thousand five years later. Virtually every sector of the economy was stricken. Wheat prices fell from $1.78 a bushel to $1.25. Bank failures rose from 3 in 1870 to 140 in 1878. Railroad construction ground almost to a halt. The industry had added a record 7,436 miles in 1872; three years later the construction boom was scraping bottom with only 1,606 new miles. It would not exceed the previous high-water mark until 1881.

  The crisis exposed the incapacity of the government to manage the economic cycle. A few days after the stock exchange suspended trading, Grant made a pilgrimage to Wall Street with Treasury Secretary William A. Richardson, who had succeeded George Boutwell. They came to the Street as supplicants to bankers for a solution to the crisis, but the bankers themselves had no good ideas, beyond urging the government to buy in government bonds to pump inflationary funds into the economy.

  The bankers’ fear was palpable: At the Fifth Avenue Hotel, where the president and secretary were staying, Harper’s Weekly reported, “the corridors and parlors swarmed with a multitude of frenzied people, who supposed that incalculable disaster impended and that the President had the power of staying it by a word, and of saving the country from financial, as he had saved it from political, ruin.” The mob included “speculators and gamblers in railroad stocks, . . . all passionately desiring that the President would use the public money for their relief.”

  But Grant did not believe he could “establish a precedent of such momentous consequences” under the law. He ended up taking the half measure of allowing the release of $26 million in retired greenbacks—currency treated as legal tender but not backed by gold or silver, which had been issued during the Civil War and now was being bought in. This was a comparatively minuscule priming of the pump, for it amounted to less than a tenth of the greenbacks then in circulation; it was enough to help Wall Street past its immediate crisis, but did nothing to alleviate the pall enveloping the rest of the country. Unlike Franklin Roosevelt sixty years later, Grant would continue to resist inflationary measures, vetoing an “inflation bill” that would have drastically increased the money supply.

  As the depression ground into its second year, Grant acknowledged in his annual message to Congress the “prostration in business and industries such as has not been witnessed with us for many years.” He recognized that “the greater part of the burden . . . falls upon the working man.” But he reiterated his uncompromising policy of “a return to specie payments, the first great requisite in a return to prosperity.” In other words, contracting the money supply to correspond to the supply of gold and silver. Grant’s policy was similar to that followed in 1932 by Herbert Hoover, who insisted on keeping America yoked to the gold standard in the face of economic disaster. It would have a similar result politically—in Grant’s case, a drubbing suffered by his Republican Party at the midterm election in 1874.

  The Panic of 1873 sharpened the divide in America between the working class and its increasingly corporatized employers. The depression that followed also dramatically changed the internal dynamics of the railroad industry and the relationship between the roads and their workers. Prior to 1873 the roads existed in a sort of paradise of serene mutual cooperation, with “official” rates based on the value of freight and adhered to generally, despite secret or even overt rebates here or there. Railroad employment was strong, and an entire cadre of workers entered the industry with the expectation of long-term employment. During the depression, these informal harmonies came to an end. “With the increasingly desperate search for traffic, rate agreement collapsed,” observed the business historian Alfred Chandler. Competition among large, sprawling, powerful enterprises—especially those with high fixed costs to cover—was a new phenomenon in American business. By 1876, cutthroat competition for diminishing traffic would send more than half of America’s railroads into bankruptcy, their workers cast into the cold.

  Before then, the wealthy Americans who had contributed to the crash had launched themselves upon an era of unprecedented conspicuous consumption. The action driving The Gilded Age, the acerbic 1873 novel by Mark Twain and Charles Dudley Warner, was its characters’ efforts to seek their fortunes in railroad speculation. But the title soon came to signify more generally the ostentation and amorality of the “robber barons,” to use the label first applied in the United States to Cornelius Vanderbilt by the German-born political reformer Carl Schurz. In popular usage, that label itself broadened to signify all the railroad, steel, and banking magnates who were thought to control the nation’s wealth, with the “insinuation that pernicious conduct was typical of all big businessmen.”

  These new aristocrats increasingly settled in New York. By the end of the 1870s, reckoned the stock trader and social observer Henry Clews, the city had “more wealth than thirteen of the States and Territories combined. . . . The great metropolis attracts by its restless activity, its feverish enterprise, . . . its imperial wealth, its Parisian, indeed almost Sybaritic luxury, and its social splendor. It is really the great social center of the Republic, and its position as such is becoming more and more assured.”

  In New York, the frenzy of conspicuous spending fed on itself, slowed only temporarily by financial panics such as that of 1873. The colonization of a few blocks of Manhattan facilitated the trading of suspect railroad paper; the financiers were all neighbors who could pop into each others’ homes of an evening to execute their deals or accomplish their mutual betrayals out of the eyesight of the public and their small investors. Proximity also facilitated the contest of ostentation. The robber barons competed to build the biggest mansions and throw the most lavish parties. According to the gossipy boulevardier Ward McAllister, who assiduously chronicled the era’s excesses (and had coined the term “the Four Hundred” for the crème de la crème of nouveau riche society, supposedly to denote the largest crowd that could be accommodated in Caroline Astor’s ballroom), the premier venue for these events was Delmonico’s on Fourteenth Street, which was “admirably adapted” for balls of seven or eight hundred guests. “Certainly one could not have found better rooms for such a purpose” in this “era of great extravagance and expenditure,” McAllister reported in his book Society As I Have Found It (issued in a deluxe edition limited, somewhat mischievously, to four hundred copies).

  The new tycoons had not only established New York as the social and financial center of the nation, but established the railroads as the focus of banking and finance. Railroad “financiering,” which was not at first considered a salubrious practice, became a profession—indeed, for many investment houses the principal source of income.

  Few contemporaries judged the industrial princes of the era to be paragons of cultural sophistication. Charles Francis Adams left an especially acerbic assessment. “Money-getting,” he wrote in his autobiography,

  comes from a rather low instinct. Certainly, so far as my observation goes, it is rarely met with in combination with the finer or more interesting traits of character. I have known, and known tolerably well, a good many “successful” men—“big” financially . . . and a less interesting crowd I do not care to encounter. Not one that I have ever known . . . is associated in my mind with the idea of humor, thought or refinement. A set of mere money-getters and traders, they were essentially unattractive and uninteresting.

  Writing just two years before the end of his life, he counted himself lucky to have survived his encounters with this stratum of society free of contamination.

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  THE HAVOC WREAKED throughout the American economy by the Panic of 1873 would not fully dissipate until the end of the decade. The pace of ba
nkruptcies did not peak until 1878, when businesses worth more than a quarter-billion dollars went under. Farm debt was driven ever higher by a collapse in crop prices, giving rise to a movement for the inflationary coinage of silver that would roil American politics virtually to the end of the century.

  The panic also profoundly affected the fortunes of some of America’s leading tycoons. Vanderbilt survived the carnage, but in a temporarily humbled state. His near failure inspired him to reorganize his empire into a more integrated and manageable system, which would continue past his death in 1877 as one of the major railroad networks in the country.

  Jay Cooke was virtually wiped out, never to regain his position at the summit of financial affairs during the final three decades of his life. Cooke’s departure from the scene left the future open for Pierpont Morgan. Having detected signs of economic weakness in advance, Morgan had strengthened his firm’s financial position sufficiently to ride out the storm, though he was shaken by the collapses around him. Not yet having reached a position where he could take direct part in resolving the panic, he drew from it the lesson that when the government’s ability to address serious downturns came into question, it would be up to responsible individuals to step in. Come the next major panic, in 1893, he would take on that role.

  The one notable survivor of the panic was Jay Gould, who was able to pick over the wreckage for bargains during the long aftermath. In the next few years he would accumulate railroad lines across the Midwest, the Western Union Telegraph Company, and what may have been the grandest prize of all: the Union Pacific.