The Panic of 1873 - Meet Jay Cooke (Part 1)

DBF

Sergeant Major
Joined
Aug 6, 2016
So how did a boy from Sandusky, Ohio grow up to be dubbed
the First Investment Banker in America?


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Jay Cooke
circa 1840
(Public Domain)

He was born on Augusts 10, 1821 the son of an attorney, railroad investor and real estate speculator. Jay Cooke attended local schools until he was fourteen at which time he began to work. First he was a clerk in a local hometown store and at the tender age of fifteen he moved to St. Louis, Missouri. He was there until the Panic of 1837 when he lost his job and returned to Ohio. So at sixteen he saw first hand how economic panics influence economic markets.

The 1837 panic lasted well into the mid-1840’s. The worst area hurt was the South when cotton prices bottomed out. Markets were depressed world-wide but by 1843 the American economy was slowly rebounding and by 1850 the United States was experiencing a boom.

During these years Jay Cooke moved to Philadelphia and worked at various companies. In 1839 he was employed by a brokerage and banking company “E.W. Clark”. He proved to have great monetary success while working during the Mexican-American war where he guided the company collaborating with the federal government (through bonds), in providing the railroad companies their financing. Jay Cooke was to experience his second Panic - the Panic of 1857, but unlike the previous panic, Cooke was a thirty-six year old wealthy man.

Making Money During the War

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circa 1863
(Public Domain)

On New Year’s Day 1861 Jay Cooke formed his own banking firm. He called it “Jay Cooke & Company” headquartered in Philadelphia. Cooke borrowed $3 million as his “seed” money from the state of Pennsylvania and went to work. The Philadelphia based company had an aggressive style and became important in President Lincoln’s desire to keep the Union together. In 1862 the Treasury Department selected his company in the sale of $500 million worth of bonds to finance the war. {7} Jay Cooke made a tremendous commission from this deal. His ability to raise funds labelled him as the “Financier of the Civil War”.

In 1865 the Union emerged a victor of the war with a stable currency yet deeply in debt. According to the Secretary of the Treasury as of October 31, 1865, the debt of the United States without deducting the Treasury cash balance amounted to $2,808,549,437 (or in today’s dollars $43,208,452,876). Despite the debt the country carried a strong reputation among foreign countries. The United States was seen as maintaining an ability of financial stability and considered a good investment with the Jay Cooke Company as the go-to company to handle any and all foreign transactions.

Storm Clouds on the Horizon

As with most economic crashes there are several crisis that happened to build up to a perfect storm.
  • Black Friday September 24, 1869 (when two investors Jay Gould and James Fisk along with Abel Cordin (the brother-in-law of President Grant) formed the Gold Ring to corner the gold market.
  • The Chicago Fire in 1871 (estimate damage $200 million)
  • The Great Boston Fire of 1872 (estimate damage $73.5 million)
  • America’s economy was tied to European markets. The German government in 1873 made a monetary decision to use a currency backed only by gold instead of a combination with gold and silver. In May 9, 1873 the Austria stock market crashed and a ripple was building and heading west.
  • Lastly (and is addressed in Part 2) the Federal Government’s monetary policy during the Civil War.
After the Civil War the United States was enjoying a robust period of economic growth spurred by the exploding railroad industry. The country was connecting east and west through a series of rail lines making the industry the second highest employer in the country following agriculture. To build these rail lines required cash and lots of it. The Transcontinental Railroad was complete and now Jay Cooke & Company looked to create a northern Transcontinental line starting at Duluth with a final destination in Seattle. Jay Cooke had been cautioned by Henry E. Johnston that this was not the time to take on such an expensive venture for he was concerned with problems brewing in the financial markets. Unfortunately for Jay Cooke timing is everything and his time was not now. The bonds he planned to sell had no market. Europe was sliding into their panic and the United States was not far behind.

On Thursday September 18, 1873 the New York Stock Exchange announced the suspension of Jay C. Cooke and Company. It was said when this was announced:

“a brief silence ensued. Then there was ‘an uproar,' said a journalistic eye witness, ‘such as has scarcely filled the Exchange since it was built. Messengers fled every way with the story of ruin, and down came the stocks all along the line.’ Western Union lost ten points in ten minutes; fractions were not recognized in the haste to sell, and the Exchange became a mob, the members jostling each other, and screeching their commands in the midst of pandemonium.” {*}

"A financial thunderbolt"

The headline from the New York Tribune summed up the story. “New York, September 18th, Jay Cooke and Company have suspended.” A perfect storm reached its crescendo as told in a letter from General Alvred Bayard Nettleton (1838-1911) to his wife Melissa. General Nettleton, a Union Army veteran, was serving as the agent in the construction of the Northern Pacific Railroad working directly with Jay Cooke:

“Entering my side office and sitting down at my desk, the first person I saw was our janitor William, who took pains to hand me the latest edition of the previous evening's paper. My eye at once rested on the staring head-line — " Suspension of Jay Cooke and Company ! " {*}

He continued from his front row seat in the Philadelphia office:

"As the morning wore on, the crowd in the street in front of the office, and for several blocks either way in Third and Chestnut, increased, until passage was well-nigh impossible; very few depositors or creditors of Jay Cooke and Company were present, but nearly all expected a general smash among the banks, and the excitement was astounding. . . . The members of the firm did not expect the suspension twelve hours before it occurred. The storm struck them so suddenly and the demands for money from depositors were so very large that not an hour was given in which to effect arrangements for tiding over the emergency.

When the blow fell all were stunned, and it seemed as though the ground had passed from under foot and the stars had gone from the sky. Once having ‘touched bottom’, once having fully taken in the situation in its length and breadth, all hands have rallied with magnificent pluck and faith, and gone to work like beavers to prepare a statement of assets and liabilities. This will be ready this week.”
{*}

He describes the scene on the Saturday after the suspension as:

“I went to New York to attend to matters of the house. The scene at the corner of Wall and Nassau Streets I shall never forget. For squares in every direction the streets were a solid mass of black hats, and surging back and forth, while men gesticulated, shouted and rushed to and fro. The doors of Fisk and Hatch, E. D. Randolph and Company and Jay Cooke and Company, ‘all in a row' on Nassau street, were closed, and curious crowds were coming and going and gazing at the doors and windows. A ‘run’ was in progress on the Fourth National Bank, across the way from Fisk and Hatch, and this redoubled the excitement. Long rows of anxious men, with checks in their hands, waited impatiently for their turns to come, and scores of panicky depositors constantly swelled the column. At noon all confidence in everything seemed gone, and six banks and eighteen firms had ‘gone up’, and the Clearing House and Stock Exchange finally shut up shop for the day, and advised everybody to go home till Monday.” {*}

Jay Cooke on advise from his attorney posted this announcement on all his office buildings:

"To the Public:

We regret to be obliged to announce that, owing to unexpected demands on us, our firm has been obliged to suspend payment. In a few days we will be able to present a statement to our creditors, until which time we must ask for their patient consideration. We believe our assets to be largely in excess of our liabilities.

Jay Cooke and Company" {*}

The Great Financial Panic of 1873

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Closing the door of the Stock Exchange
on its members Saturday, September 20th
(LOC Public Domain)

The New York Stock Exchange was forced to suspend all trading for the first time in it’s history of fifty-six years. It remained closed for ten days.

As the news hits the streets what comes next is frantic Americans running to the banks to get their money out. As people saw bigger banks fail every small town bank was going to be flooded with requests for their money. By the time the “panic” was over, America lost more than 100 banks with the states of New York, Pennsylvania and Virginia sharing the highest numbers of bank failures.

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A Run on National Bank
Frank Leslie’s Illustrated Newspaper - October 4, 1873 Edition
(Public Domain)

The numbers are staggering on the nation’s economy. 89 of the country’s 364 railroads crashed along with 18,000 business failures within 2 years. The unemployment rate in 1876 was 14 percent and remember the industrialization of the nation was just beginning and with the high paying railroad jobs gone and agriculture being the 2nd highest employer finding a job was non-existent. The nation looked to its leaders to climb out of this dark hole and all of this greeted President Ulysses S. Grant as he began his 2nd term (Part 2).

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“Panic”, as a health officer
sweeping the garbage out of Wall Street
(LOC Public Domain)


* * *​



Sources
1. https://ohiohistorycentral.org/w/Jay_Cooke
2. https://www.historycentral.com/rec/EconomicPanic.html
3. https://www.loc.gov/rr/business/businesshistory/September/Panic1873.htm
4. https://home.treasury.gov/about/history/freedmans-bank-building/financial-panic-of-1873
5.
https://www.historycentral.com/rec/EconomicPanic.html
6. https://biography.yourdictionary.com/jay-cooke
7. https://www.businessinsider.com/rob...man-who-financed-the-union-in-the-civil-war-3
{*} “Jay Cooke Financier of the Civil War”, by Ellis Paxson Oberholtzer, Ph.D.
 
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