When the Southern Rebellion was over Congress asserted its powers and took control of reconstruction. It a unified voice it passed the 13th, 14th, and 15th amendments abolishing slavery and granting former slaves full citizenship with all its rights and privedges, in part to guarantee the war was not fought in vain. In addition, U.S. Grant the next elected President and former commander of Union forces, was in step with Congress’ idea to give full suffrage and representation to all men who were former slaves. He was alson onboard with the plan to limit the power of the former insurrectionists (who would naturally seek to reestablish their power if given the chance.) State and federal legislatures accepted the oath of office from newly elected negro representatives, a first in the nation’s history.
With the rebellion settled and reconstruction under way, financiers and enterpenuers looked west to expand business and make a fortune. The newest emerging technology was the railraod. Promising time and cost savings in shipping goods and people, the benefits of the iron horse began attracting investors even while the war was still raging and the outcome was far from certain. Beginning with the Pacific Railway Acts of 1862 and 1864 railroads expanded across the continent at an unprecidented rate. They had help from the federal government. By providing land and sharing the cost of construction for the first transcontinental railroad, a public-private partnership was established to move goods and people from coast to coast. Two separate companies committed to the task; the Central Pacific from Sacramento, California in the west and the Union Pacific from the east at Omaha Nebraska. Congress set the meeting point at Promontory Point, Utah. When completed in 1869 it was a technological and economic miracle that would catapult the nation into a more unified country and international prominence. Instead of months to walk across the country, transit time was reduced to about a week. The road dropped the cost of freight along the route by 85%. Almost immediately the completed route inspired additional transcontinental lines. One of those lines was a northern route going through Montana, the Dakotas and ending on the Pacific coast in either Oregon or Seattle. The failure of that route in 1873 and the money lost chasing the dream led to the countries first depression. Based on the funds raised selling bonds during the war, selling Northern Pacific Railroad bonds looked easy.
Armies don’t run on hope or political speeches, they need uniforms, rifles, artillery, and men, men who get paid and fed. Lincoln used war bonds as one of the tools to pay for the Union’s actions to supress the rebellion. Jay Cooke was good at selling government bonds. You could say the success of the Union wasn’t possible without him. He took his success into the post war period. With his skills and connections built during the war he convinced investors to buy stock in the new technology of the day, the railroad. His banking house, Jay Cooke and Company, attracted foreign and domestic investors. In one successful venture after the war, bonds for the Lake Erie railroad were oversubscribed by ten times! With that much money and interest in building out the country with new rail lines, and building on his success at selling war bonds, he was a credible agent for a new transcontinental project.
Investment in a any new technology carries potential for growth; and of course there is the ever present greedy investors. The balance between those two extremes can result in a healthy change or a spectacular economic crash. Unlike the British and other European railroads that connected towns, an American train across the prairie would create new towns and with them additional opportunities for investors. American railroads were unique: they helped create a country, bridging vast tracks of land and binding the citizens, newly arrived immigrants and long settled Americans, into a single, unified entity.
Having won the war, the Union, now a settled single entity, put its eyes on the conquest of the territory between the Mississippi and California. Fueled by innovation, immigration, and mining, a growing industrial base would transform the country from primarily and agricultural economy to the world’s largest supplier of oil, steel, and other manufacured goods. However, linking all this growth together in a more effecientand economical system was needed. There was plenty of capital looking to build out the country and investors, then and now, knew the biggest profit goes to the early adopters. While the country had built 30,000 miles of track from 1830-1860, in the seven year period from 1866-1873 another 35,000 miles would be laid. Smart money was on the construction and operation of the railroad. Cooke’s ability to raise capital held the duel promises to complete a second transcontinental route and make its investors wealthy.
Cooke certainly had the confidence to attract investors, he said of his own actions raising funds for the Union cause, “Like Moses and Washington and Lincoln and Grant, I have been, I firmly believe, God’s chosen instrument, especially in the financial work of saving the union.” Perhaps because he been passed over for the post of Secretary of the Treasury in 1869 by the Grant administration, and even though he was extremely wealthy, he decided to throw his hat in the ring to build the Northern Pacific Railway through Montana, the Dakota territory and on to Seattle.
Unlike the central route from Omaha to Sacramento, the northern route was fraught with a few big obstacles. The terrain was much difficult, sometimes boggy and pocked with arroyos and uneven terrian; the seasonal weather complicated not only construction but the day to day operation of the completed road. Possibly the most challenging aspect of building the Northern Pacific was the residents along the way. The Lakota, Dakota, Sioux and other nations in the northern Midwest had learned the Americans were not to be trusted. Over fifty years’ experience with the US from the initial meeting with the Lewis and Clark expedition in the first decade of the 19th century had shown them the US government had a propensity to do what it wanted, regardless of what it said or what treaties it made. The only thing the white man understood was force. The locals decided to attack the workers and destroy or prevent any part of the rail from being built. Even locomotive itself was a threat to their way of life. With a thick bulbeous nose and a big plow on the front, the train killed and mutilated the heards of buffalo that were essential to the way of life on the plains. Every part of the buffalo was used for life on the northern plains from food, to clothing and tent material, and cooking and eating objects. For the indians, allowing the railroad was committing suicide. The indians, extremely proficient horsemand and good with a rifle and a bow, made fighting between the two sides fierce. At one point Cooke used his connetions to bring in the army for protection as they tried to build the route. With each setback Cooke doubled down and added more money to the loosing venture.
Inspite of the barriers Cooke thought the project should work. He agreed to buy $100 million worth of stock at a 12% discount (his commission for selling the shares). The bonds paid 7.3%, a very good return in the day but not so high as to put up red flags about being too risky. He also agreed to front the company $500,000. Everything looked good. But the principal players in the venture were not good businessmen and soon Cooke found that to contiue the venture he needed to add more money, so he doubled down on the railroad. Construction was litterally bogged down in a war and poor, boggey land in building the right of way.
Cooke wasn’t the only investor in the market. Profits were soaring and fear of missing out on huge profits for those who waited or didn’t join in led to speculators borrowing money to purchase railroad bonds during the boom. If this sounds familiar, borrowing “on the margin” in the 1920’s led to the crash when loans were called and borrowers couldn’t come up with the cash to pay the debt.
All of this unplanned expense led to a liquidity problem. In the fall of 1873, when banks typically extended loans to farmers bringing in the harvest, (at this time the US was mainly an agricultural economy) Cooke was unable to meet his expenses. To stop the massive withdrawals his New York managers decided to close the doors and prevent any more activity. Instead of suppressing the run the closure accelerated it. His inability to pay his obligations resulted in a run on the bank. Unable to access more cash, Cooke’s only recourse was to declare bankruptcy and close the bank. According to the Finacial Times, Cooke was like the JP Morgan of his day, wealthy and influencial resulting in a domino effect on other banks. Cooke’s bank had attracted investors from Britian and Germany in additon to Americans. Closing the bank coincided with a crisis already under way in Austria earlier in the year.Tthat crisis already had European investors cautious. They pulled out of the American market, and everyone lost their shirts. How bad was it? The depression lasted six years ending by 1879, although some historians say it contined well into the 1880s. By 1875 120 railroads and $550 millions of bonds went bust. Unemployment went to 14% overall. By 1877 workers strikes to halt layoffs or restore wages but Presidents Grant and Hayes both supported business over the workers in the strikes leaving the workers in dire straights. Between 1873-1878 bankrupcy doubled to 10,000 cases. Without a central bank to control the amount of currency and set interest rates, a deflationary period was only settled by tieing the greenback to hard money (gold and silver). Lastly, the depression contributed to the end of reconstruction, the re-establishment of white supremacy and rise of Jim Crow and the growth of the KKK.
The American economy is a robust thing, and it eventually righted itself. Railroads made a rebound and by 1890 the US had as much track as the rest of the world combined. The infamous Robber Barrons went on to refine and distribute oil and steel. New discoveries of gold and silver pumped a lot of money and capital into the economy.
The Depression of 1873 was followed by another crisis in 1890 and again in 1907. Together they led to the creation of the Federal Reserve Bank. The Fed’s responsibility to prevent this kind of thing from happening by controllng the overnight interest rate between banks and trying to keep the economy from overheating and causing a feeding frenzy/bubble. Ultimately, this is the purpose of the 2% inflation target.
New technology and the investment bubble it usually creates seems to be cyclical and the fear of missing out combined with greed usually result in a crash of some sort. The Panic of 1873 can serve as a caution when we approach another promising technology with dreams of changing the world.
